-----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, NZPpQuYMc/vMEks6aPP1aOzcFzzHkBdBOQUgK4f1T8VvR49+kvHUZ7tb/DWNKPrS bayGYBb7rNWDmaVxvNvSlQ== /in/edgar/work/0001012870-00-005742/0001012870-00-005742.txt : 20001115 0001012870-00-005742.hdr.sgml : 20001115 ACCESSION NUMBER: 0001012870-00-005742 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXYGEN INC CENTRAL INDEX KEY: 0001068796 STANDARD INDUSTRIAL CLASSIFICATION: [8731 ] IRS NUMBER: 770449487 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28401 FILM NUMBER: 764078 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 10-Q 1 0001.txt FORM 10-Q United States Securities and Exchange Commission Washington, D.C. 20549 ___________________ Form 10-Q QUARTERLY report pursuant to section 13 or 15(D) of THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 Commission file number 000-28401 MAXYGEN, INC. (Exact name of registrant as specified in its charter) Delaware 77-0449487 (State of incorporation) (I.R.S. Employer Identification No.) 515 Galveston Drive Redwood City, California 94063 (Address of principal executive offices, including zip code) (650) 298-5300 (Registrant's telephone number, including area code) ___________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ----- As of November 1, 2000, there were 33,564,476 shares of the registrant's common stock outstanding. MAXYGEN, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2000 INDEX Part I FINANCIAL INFORMATION Item 1: Condensed Consolidated Financial Statements and Notes:
Condensed Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000.............................................. 3 Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 1999 and 2000............ 4 Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1999 and 2000..................... 5 Notes to Condensed Consolidated Financial Statements................ 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 11 Item 3: Quantitative and Qualitative Disclosures About Market Risk.......... 24 Part II OTHER INFORMATION Item 1: Legal Proceedings................................................... 25 Item 2: Changes in Securities and Use of Proceeds........................... 25 Item 3: Defaults Upon Senior Securities..................................... 26 Item 4: Submission of Matters to a Vote of Security Holders................. 26 Item 5: Other Information................................................... 26 Item 6: Exhibits and Reports on Form 8-K.................................... 26 SIGNATURES................................................................... 27
2 Part I - Financial Information Item 1 FINANCIAL STATEMENTS MAXYGEN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
December 31, September 30, 1999 2000 -------- -------- ASSETS (Note 1) (unaudited) Current assets: Cash and cash equivalents................................................... $136,343 $183,131 Short-term investments...................................................... -- 59,585 Grant and other receivables................................................. 3,038 8,230 Prepaid expenses and other current assets................................... 800 1,096 -------- -------- Total current assets....................................................... 140,181 252,042 Property and equipment, net................................................. 4,764 7,644 Goodwill and other intangible assets, net................................... -- 37,479 Long-term investments....................................................... -- 22,953 Deposits and other assets................................................... 633 897 -------- -------- Total assets............................................................... $145,578 $321,015 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................................ $ 370 $ 1,455 Accrued compensation........................................................ 393 2,945 Other accrued liabilities................................................... 1,803 3,670 Deferred revenue............................................................ 4,935 5,593 Current portion of equipment financing obligations.......................... 170 485 -------- -------- Total current liabilities.................................................... 7,671 14,148 Deferred revenue............................................................. 2,527 3,085 Non-current portion of equipment financing obligations....................... 1,664 1,439 Commitments Stockholders' equity: Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 1999 and September 30, 2000, respectively........................................... -- -- Common stock, $0.0001 par value: 70,000,000 shares and 100,000,000 shares 3 3 authorized at December 31, 1999 and September 30, 2000, respectively, 30,860,781, and 33,565,528 shares issued and outstanding at December 31, 1999 and September 30, 2000, respectively.................................. Additional paid-in capital.................................................. 176,517 385,757 Notes receivable from stockholders.......................................... (1,411) (807) Deferred stock compensation................................................. (17,216) (11,629) Accumulated other comprehensive loss........................................ -- (73) Accumulated deficit......................................................... (24,177) (70,908) -------- -------- Total stockholders' equity................................................. 133,716 302,343 -------- -------- Total liabilities and stockholders' equity................................. $145,578 $321,015 ======== ========
See accompanying notes. 3 MAXYGEN, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months ended Nine months ended September 30, September 30, --------------------------- ------------------------- 1999 2000 1999 2000 --------- --------- --------- --------- Collaborative research and development revenue...... $ 2,696 $ 3,178 $ 6,068 $ 9,419 Grant revenue....................................... 1,075 2,784 3,625 8,112 --------- --------- --------- --------- Total revenues...................................... 3,771 5,962 9,693 17,531 Operating expenses: Research and development (Including charges for stock compensation of $1,053 and $1,652 in the three months ended September 30, 1999 and 2000, respectively, and $1,564 and $7,080 in the nine months ended September 30, 1999 and 2000, respectively)..................................... 5,360 13,234 12,897 32,736 General and administrative (Including charges for stock compensation of $637 and $1,115 in the three months ended September 30, 1999 and 2000, respectively, and $1,218 and $3,790 in the nine months ended September 30, 1999 and 2000, respectively)..................................... 1,883 3,996 4,333 11,526 Acquired in-process research and development...... -- 28,047 -- 28,959 Amortization of intangible assets................. -- 1,847 -- 1,847 --------- --------- --------- --------- Total operating expenses............................ 7,243 47,124 17,230 75,068 --------- --------- --------- --------- Loss from operations................................ (3,472) (41,162) (7,537) (57,537) Interest income (expense), net...................... 421 4,415 783 10,806 --------- --------- --------- --------- Net loss............................................ (3,051) (36,747) (6,754) (46,731) Deemed dividend upon issuance of convertible preferred stock.................................... (2,200) -- (2,200) -- --------- --------- --------- --------- Net loss attributable to common stockholders........ $(5,251) $(36,747) $(8,954) $(46,731) --------- --------- --------- --------- Basic and diluted net loss per share................ $(0.63) $(1.18) $(1.15) $(1.57) Shares used in computing basic and diluted net loss per share.......................................... 8,309 31,165 7,778 29,805
See accompanying notes. 4 MAXYGEN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Nine months ended September 30, ---------------------------- 1999 2000 -------- -------- Operating activities Net loss..................................................................... $(6,754) $(46,731) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............................................. 442 1,020 Amortization of intangible assets.......................................... -- 1,848 Deferred stock compensation amortization - employees....................... 2,578 8,107 Common stock issued and stock options granted to consultants for services rendered........................................ 1,039 2,763 Common stock issued for technology......................................... -- 958 Acquired in-process research and development............................... -- 28,959 Changes in operating assets and liabilities: Grant and other receivables.............................................. (1,108) (4,942) Prepaid expenses and other current assets................................ (153) (296) Deposits and other assets................................................ (217) (264) Accounts payable......................................................... 36 (4,402) Accrued compensation..................................................... 151 2,552 Other accrued liabilities................................................ 679 1,867 Deferred revenue......................................................... 1,970 1,216 Related party payables................................................... (92) -- Other.................................................................... -- (90) -------- -------- Net cash used in operating activities........................................ (1,429) (7,435) Investing activities Cash acquired in acquisition................................................. -- 349 Purchases of available-for-sale securities................................... -- (92,521) Maturities of available-for-sale securities.................................. 10,000 Acquisition of property and equipment........................................ (4,008) (2,503) -------- -------- Net cash used in investing activities........................................ (4,008) (84,675) Financing activities Borrowings under equipment financing obligation.............................. 1,225 166 Repayments under equipment financing obligation.............................. -- (76) Proceeds from issuance of common stock - net of issuance costs............... 63 138,204 Proceeds from issuance of convertible preferred stock - net of issuance cost.............................................................. 24,963 -- Payments received on promissory notes........................................ -- 604 -------- -------- Net cash provided by financing activities.................................... 26,251 138,898 -------- -------- Net increase in cash and cash equivalents.................................... 20,814 46,788 Cash and cash equivalents at beginning of period............................. 15,306 136,343 -------- -------- Cash and cash equivalents at end of period................................... $36,120 $183,131 ======== ======== Schedule of non-cash financing transactions Tangible and intangible assets acquired in acquisition transaction for shares of common stock, net of cash acquired and liabilities assumed... $ -- $ 37,399 Shares issued for technology................................................. $ -- $ 958 -------- --------
See accompanying notes. 5 MAXYGEN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation and Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The information as of September 30, 2000 and for the three months and nine months ended September 30, 1999 and September 30, 2000, respectively, includes all adjustments (consisting only of normal recurring adjustments) that the management of Maxygen, Inc. ("Maxygen" or the "Company") believes necessary for fair presentation of the results for the periods presented. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Report on Form 10-K for the year ended December 31, 1999, and the separate financial statements of ProFound Pharma A/S included in the Company's Current Report on Form 8-K/A filed October 24, 2000. On August 10, 2000 the Company completed its acquisition of ProFound Pharma A/S ("ProFound," now known as Maxygen ApS). The acquisition was accounted for as a purchase. See Note 6 of Notes to Condensed Consolidated Financial Statements. Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 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 has also been awarded Defense Advanced Research Projects Agency grants and National Institute of Standards and Technology-Advanced Technology Program grants 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. 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. In accordance with 6 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. The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
Three Months ended Nine months ended September 30, September 30, -------------------- -------------------- 1999 2000 1999 2000 ------- ------ ------ ------- Net Loss.............................................. $(5,251) $(36,747) $(8,954) $(46,731) ------- -------- ------- -------- Basic and diluted: Weighted-average shares of common stock outstanding.. 9,673 33,002 9,408 32,098 Less: weighted-average shares subject to repurchase.. (1,364) (1,837) (1,630) (2,293) ------- -------- ------- -------- Weighted-average shares used in computing basic and diluted net loss per share.................... 8,309 31,165 7,778 29,805 ------- -------- ------- -------- Basic and diluted net loss per share................ $ (0.63) $ (1.18) $ (1.15) $ (1.57) ------- -------- ------- --------
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 5,715,000 at September 30, 2000. 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. Comprehensive loss Comprehensive loss is primarily comprised of net unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments. There is no material difference between the reported net loss and the comprehensive net loss for all the periods presented. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through net income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative's change in fair value will be immediately recognized in earnings. SFAS 133 is effective for the Company's fiscal year beginning January 1, 2001. The Company does not currently hold any derivatives and does not expect this pronouncement to materially impact results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") that must be adopted in the quarter ended December 31, 2000. SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue in financial statements and specifically addresses revenue recognition for non-refundable technology access fees. The Company believes that its current revenue recognition principles comply with SAB 101 and thus the adoption is not expected to have any effect on results of operations. 2. Investments Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company's debt securities are classified as available-for-sale and are carried at estimated fair value in cash equivalents and short-term investments. Unrealized gains and losses are reported as accumulated other comprehensive income (loss) in stockholders' equity. The amortized cost 7 of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses on available-for-sale securities are included in interest income and expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The Company's cash equivalents and investments as of September 30, 2000 are as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------------ ---------------- ------------ ---------- Money market funds.................................. $ 75,413 $ -- $ -- $ 75,413 Commercial paper.................................... 125,579 16 -- 125,595 Corporate bonds..................................... 64,660 145 (144) 64,661 ------------ ---------------- ------------ ---------- Total.............................................. 265,652 161 (144) 265,669 Less amounts classified as cash equivalents......... (183,131) -- -- (183,131) ------------ ---------------- ------------ ---------- Total investments................................... $ 82,521 $161 $(144) $ 82,538 ============ ================ ============ ==========
Realized gains or losses on the sale of available-for-sale securities for the three and nine month periods ended September 30, 1999 and September 30, 2000 were insignificant. At September 30, 2000, the contractual maturities of investments were as follows (in thousands):
Amortized Cost Estimated Fair Value ---------------- ------------- Due within one year............................................................... $59,649 $59,585 Due after one year................................................................ 22,872 22,953 ---------------- ------------- $82,521 $82,538 ================ =============
3. Collaborative Agreements 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 in connection with the combustion of fossil fuels and for other purposes more generally for use in chemical bioprocessing and other applications. Pursuant to the agreement, TRPL agreed to provide nonrefundable research and development funding and technology advancement payments, as well as revenue sharing on certain commercialized products and processes. Lundbeck A/S In September 2000, Maxygen ApS, a wholly owned subsidiary of the Company, entered into a 3 year collaborative research and development agreement with H. Lundbeck A/S ("Lundbeck"), to develop a protein pharmaceutical product that could be used for central nervous system diseases, including multiple sclerosis. Lundbeck has licensed rights to this product for central nervous system diseases. Maxygen has retained rights for neurological indications in key Asian markets and global rights for all indications outside of central nervous system diseases, including inflammatory disease and cancer. Under the terms of the agreement, Maxygen will receive license fees and research and development funding. Maxygen will also receive milestone payments and royalties on product sales. 4. Stockholders Equity--Follow-on Offering 8 On March 24, 2000, the Company completed a follow-on public offering of its common stock. A total of 1,500,000 shares were sold by the Company at a price of $97.00 per share. The offering resulted in net proceeds to the Company of approximately $137.4 million. 5. Acquisition of Technology On May 8, 2000, the Company acquired certain in-process technology through the acquisition of a privately held California corporation. In connection with the acquisition, the Company issued 39,600 shares of Company common stock. Pursuant to the terms of the acquisition, 18,500 shares of Company common stock are being held in escrow until such time contingencies regarding the patents related to the acquired technology are resolved. Accordingly, the Company has recorded a charge for acquired in-process research and development of $912,000 representing the fair value of the 21,100 shares delivered to the sellers at closing, plus certain transaction expenses. Shares in escrow will be valued and accounted for when, and if, the contingencies are resolved and the shares are delivered to the sellers. Had the acquisition occurred on January 1, 1999, pro forma revenue would be unchanged from amounts reported in the consolidated financial statements and the increase to pro forma net loss would be immaterial. 6. Acquisition of ProFound Pharma A/S On August 10, 2000, the Company completed its acquisition of ProFound, a Danish biotechnology company located in Copenhagen, Denmark. Prior to the acquisition, ProFound was a privately-held, development-stage company that had minimal revenues since its inception in April 1999. ProFound is focused on the development of improved second-generation protein pharmaceutical products and has developed broad preclinical development capabilities and proprietary technologies and expertise that help to address traditional shortcomings of protein pharmaceuticals such as half-life, stability and immunogenicity. The Company acquired all of the equity securities of ProFound in exchange for 1,102,578 shares of its common stock and options to purchase an aggregate of 41,812 shares of its common stock. The transaction was accounted for as a purchase; accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition as determined by an independent appraisal. The acquired in-process research and development represents the estimated fair market value, using a risk-adjusted income approach, of specifically identified technologies that had not reached technological feasibility and had no alternative future uses. The results of operations for ProFound are included in those of the Company commencing from August 10, 2000, the date of acquisition. As of August 10, 2000, the purchase price, including liabilities assumed of $5.5 million and estimated acquisition costs of $1.0 million, aggregated $70.4 million, of which $3.0 million was allocated to tangible assets, $28.0 million to acquired in- process research and development, $3.4 million to patents, $705,000 to assembled workforce and $35.2 million to goodwill. The following pro forma information reflects the results of operations for the nine months ended September 30, 1999 and 2000 as if the acquisition of ProFound had occurred as of the beginning of the periods presented, and after giving effect to certain pro forma adjustments. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the 9 acquisition actually taken place as of the beginning of such periods or what operating results may occur in the future (in thousands, except per share data).
Nine months ended September 30, ------------------------------ 1999 2000 -------- -------- Total revenues...................................................... $ 9,693 $ 27,038 Total operating expenses............................................ (56,635) (63,788) Net loss............................................................ (48,359) (25,882) Basic and diluted net loss per share................................ (2.67) (0.84)
7. Subsequent Event Collaboration Agreement with Chevron Research and Technology Co. In October 2000, the Company entered into a three-year collaborative research and development agreement with Chevron Research and Technology Co. ("Chevron"), to develop novel bioprocesses for specific petrochemical products. Pursuant to the agreement, the Company will be responsible for performing certain research and development and Chevron will have commercialization rights to the technologies developed in exchange for license fees, technology access fees, full research funding, milestones, annual fees and product royalties. 10 Forward Looking Statements This report contains forward-looking statements within the meaning of 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. Risks and uncertainties and the occurrence of other events could cause actual results to differ materially from these predictions. Factors that could cause or contribute to such differences include those discussed below under "--Risk Factors," as well as those discussed in our Annual Report on Form 10-K for the year ended December 31, 1999. 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 report or to conform these statements to actual results. Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 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, Pfizer, AstraZeneca, DSM, Rio Tinto, Lundbeck and Chevron. 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 proprietary technologies. These investments contributed to revenue increases from $2.7 million in 1998 to $14.0 million in 1999 and $17.5 million in the nine months ended September 30, 2000. Our total headcount increased from 74 employees at the end of 1998 to 143 employees at the end of 1999 and 236 employees as of September 30, 2000, of whom 78% were engaged in research and development. Research and development consisted of work for collaborators, government grant agencies and work advancing our technologies and internal projects. We have incurred significant losses since our inception. As of September 30, 2000, our accumulated deficit was $70.9 million and total stockholders' equity was $302.3 million. Operating expenses increased from $11.8 million in fiscal 1998, to $26.7 million in fiscal 1999 and to $75.1 million for the nine months ended September 30, 2000. 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. On August 10, 2000, we completed our acquisition of ProFound, a Danish biotechnology company located in Copenhagen, Denmark. ProFound is focused on the development of improved second-generation protein pharmaceutical products and has developed broad preclinical development capabilities and proprietary technologies and expertise that help to address traditional shortcomings of protein pharmaceuticals such as half-life, stability and immunogenicity. The transaction was accounted for as a purchase. We issued 1,102,578 shares of our common stock and options to purchase an aggregate of 41,812 shares of our common stock in connection with the acquisition of all the equity securities of ProFound. As of August 10, 2000, the purchase price, including liabilities assumed of $5.5 million and estimated acquisition costs of $1.0 million, aggregated $70.4 million, of which $3.0 million was allocated to tangible assets, $28.0 million to acquired in-process research and development, $3.4 million to patents, $705,000 to assembled workforce and $35.2 million to goodwill. 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 generally provide for 11 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, these collaborators generally make technology advancement payments that 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 September 30, 2000, we have deferred revenues of approximately $8.7 million. Our sources of potential revenue for the next several years are likely to be license, 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. 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 the applicable 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 ProFound acquisition in August 2000 stock options were granted in exchange for outstanding warrants to purchase ProFound securities. In connection with this exchange we recorded aggregate deferred compensation totaling $1.5 million, which is being amortized over the remaining vesting period of the options. In connection with the grant of stock options to employees prior to our initial public offering, we recorded deferred stock compensation of approximately $2.4 million in 1998 and $19.5 million in 1999. 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 recognized stock compensation expense of approximately $1.6 million in 1998, $4.9 million in 1999 and $8.1 million in the nine months ended September 30, 2000. In connection with the grant of stock options to consultants, we recorded stock compensation expense of $0.3 million in 1998, $0.8 million in 1999 and $2.8 million in the nine months ended September 30, 2000. Results of Operations Revenues Our total revenues increased from $3.8 million and $9.7 million in the three and nine months ended September 30, 1999, to $6.0 million and $17.5 million in the comparable periods of 2000. The increase was due primarily to the increased activity related to our research collaborations with AstraZeneca, DuPont/Pioneer Hi-Bred, DSM Anti-Infectives, Rio Tinto and Lundbeck, new government grants and the expansion of existing government grants. We expect our revenue to increase in 2001 as new projects are initiated under existing collaboration agreements and as new collaboration arrangements are consummated. 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 from $5.4 million and $12.9 million in the three and nine months ended September 30, 1999, to $13.2 million and $32.7 million in the comparable periods of fiscal 2000. The increase was due primarily to increased staffing, other personnel-related costs to support our additional collaborative and internal research efforts and the acquisition of certain intellectual property. Also included in research and development expenses is stock compensation expense of $1.1 million and $1.6 million in the three and nine months end September 30, 1999 and $1.7 million and $7.1 million in the comparable periods of fiscal 2000. We expect research and development cost to increase in 2001 as new projects are initiated under existing collaboration agreements and as new collaboration arrangements are consummated. Research and development expenses represented 142% and 133% of total revenues in the three and nine months ended September 30, 1999 and 222% and 187% of total revenues in the comparable periods of 2000. The increase as a percentage of total revenues was due primarily to increased research and development activity offset in part by the increase in our total revenue. 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. 12 The acquisition of ProFound will significantly increase our research and development expenses in absolute dollars. We expect that research and development expense as a percentage of total revenue will increase as research and development activities expand faster than general and administrative activities. 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 from $1.9 million and $4.3 million in the three and nine months ended September 30, 1999, to $4.0 million and $11.5 million in the comparable periods of 2000. Expenses increased primarily due to increased staffing necessary to manage and support our growth plus increased costs associated with being a public company. Also included in general and administrative expenses is stock compensation expense of $637,000 and $1.2 million in the three and nine months ended September 30, 1999, and $1.1 million and $3.8 million in the comparable periods of 2000. 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. We also expect that general and administrative expenses will increase in absolute dollar amounts due to the increased costs associated with integrating, operating and coordinating our recently acquired operations in Denmark. General and administrative expenses represented 50% and 45% of total revenues for the three and nine months ended September 30, 1999, and 67% and 66% of total revenues for the comparable periods of 2000. The increase as a percentage of our total revenues was due primarily to increased staffing necessary to manage and support our growth plus increased costs associated with being a public company, offset in part by the growth in our total revenues. We expect that general and administrative expenses as a percentage of total revenue will decrease as our revenue grows and research and development activities expand. In-Process Research and Development On May 8, 2000, we acquired certain in-process technology through the acquisition of a privately held California corporation. In connection with the acquisition we issued 39,600 shares of our common stock. Pursuant to the terms of the acquisition, 18,500 shares of our common stock are being held in escrow until such time contingencies regarding the patents related to the acquired technology are resolved. Accordingly, we have recorded a charge for acquired in-process research and development of $912,000 representing the fair value of the 21,100 shares delivered to the sellers at closing, plus certain transaction expenses. Shares in escrow will be valued and accounted for when, and if, the contingencies are resolved and the shares are delivered to the sellers. As opportunities present themselves, we intend to continue to acquire new technologies and companies; such acquisitions could lead to additional direct and indirect expenses that could negatively affect our results of operations. On August 10, 2000, we acquired ProFound for total consideration of approximately $70.4 million, including $5.5 million for the assumption of liabilities and $1.0 million for estimated acquisition costs. Prior to the acquisition, ProFound was a privately-held, development-stage company that had minimal revenues since its inception in April 1999. ProFound is focused on the development of improved second-generation protein pharmaceutical products and has developed broad preclinical development capabilities and proprietary technologies and expertise that help to address traditional shortcomings of protein pharmaceuticals such as half-life, stability and immunogenicity. Approximately $28.0 million of the total purchase price represented the value of in-process research and development that had not yet reached technological feasibility, had no alternative future uses and was charged to the Company's operations in the third quarter ended September 30, 2000. The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of ProFound are included in the condensed consolidated financial statements from the date of acquisition. See Note 6 of Notes to Condensed Consolidated Financial Statements. The $28.0 million in-process research and development charge represents the value determined by an independent appraiser, using a discounted cash flow methodology, to be attributable to the in-process research and development of ProFound based on a valuation analysis of such research and development. In- process technology was expensed upon acquisition as technological feasibility had not been established and no alternative future uses existed. The charge relates to specific on-going research and development. Management of Maxygen believes that the allocation of the purchase price to in-process research and development is appropriate given the future potential of this research and development to contribute to the operations of Maxygen. Assuming this research continues 13 through all stages of clinical development, we project substantial future research and development expenditures related to this technology. If we would have allocated less of the purchase price to in-process research and development, the value would have been recorded as goodwill on our balance sheet and amortized over the expected benefit period, resulting in increased amortization expense during that period. Acquisition Related Costs During the three and nine months ended September 30, 2000, we incurred direct acquisition related transaction costs of approximately $1.0 million, including $800,000 for legal and other professional consulting fees, which are included in the calculation of the ProFound acquisition purchase price. There can be no assurance that we will not incur additional charges in subsequent quarters to reflect costs associated with the transaction, including integration costs, or that we will be successful in our efforts to integrate the operations of ProFound. As opportunities present themselves, we intend to continue to acquire companies and complementary technologies; such acquisitions could lead to additional direct and indirect expenses that could negatively affect our result of operations. Net Interest Income Net interest income represents income earned on our cash, cash equivalents and marketable securities net of interest expense. Net interest income increased from $421,000 and $783,000 in the three and nine months ended September 30, 1999 to $4.4 million and $10.8 million in the comparable periods of 2000. This increase was due to higher average balances of cash, cash equivalents and marketable securities. Goodwill In connection with the ProFound acquisition, we allocated $35.2 million to goodwill and will amortize this goodwill over 3 years, the term of expected benefit. We expect quarterly amortization of approximately $3.3 million beginning the fourth quarter of 2000. Liquidity and Capital Resources Since inception, we have financed our operations primarily through private placements and public offerings of equity securities, receiving aggregate consideration from such sales totaling $302.5 million and research and development funding from collaborators and government grants totaling approximately $39.6 million. As of September 30, 2000, we had $265.7 million in cash, cash equivalents and marketable securities. Our operating activities used cash of $1.4 million in the nine months ended September 30, 1999 and $7.4 million in the comparable period of 2000. Uses of cash in operating activities were primarily to fund net operating losses. Net cash used in investing activities was $4.0 million in the nine months ended September 30, 1999 and $84.7 million in the nine months ended September 30, 2000. The cash used in the 2000 period primarily represented purchases of available-for-sale securities. Additions of property and equipment were $4.0 million in the nine months ended September 30, 1999 and $2.5 million in the comparable period of 2000. 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 $26.3 million in the nine months ended September 30, 1999 and $138.9 million in the comparable period of 2000. The 2000 amount primarily consists of the net proceeds we received from the sale of common stock in a follow-on public offering in March 2000. We expect cash flows from our existing corporate collaborators for the funding of research and technology advancement to total approximately $16.7 million through fiscal 2001. The above amounts include $1.0 million annually of technology advancement funding from AstraZeneca. In lieu of making this payment, AstraZeneca can elect to purchase $3.0 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 Maxygen. Total remaining committed cash to be received for grant funding is approximately $15.8 million through fiscal 2002; however some grant programs are subject to a yearly 14 appropriations process in Congress and we may not receive funds under existing grants because of budgeting constraints of the agency administering the program. We believe that our current cash, cash equivalents, short-term investments and long-term investments together with 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 12 months. 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. Additional funding, if sought, may not 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. RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. 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. 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 and $46.7 million for the nine months ended September 30, 2000. As of September 30, 2000, we had an accumulated deficit of approximately $70.9 million. We expect to have increasing net losses and negative cash flow for at least the next several years. 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 our revenues from collaborations and grants and expect to do so for at least the next several years. 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 of our recently completed acquisition of ProFound, we expect costs to increase further due to expanded operations, integration costs associated with the acquisition and costs associated with operating in multiple international locations. 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. 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 technologies, or the resources to complete any approval processes that 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 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 proprietary technologies are new and in the early stage of development. We may not develop products that 15 prove to be safe and efficacious, 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 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. 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 rapid and substantial growth that has placed and, if this growth continues as expected, 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 74 at December 31, 1998 to 143 at December 31, 1999 to 236 at September 30, 2000. Our revenues increased from $2.7 million in 1998 to $14.0 million in 1999 and were $17.5 million for the nine months ended September 30, 2000. Our ability to manage our operations and growth effectively requires us to continue to expend funds to enhance 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 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 have access to inadequate information to manage our day-to-day operations. Failure to attract and retain sufficient numbers of talented employees will further strain our human resources and could impede our growth and ability to satisfy our obligations under collaboration agreements. This would reduce our revenue, increase our losses and harm our reputation in the marketplace. 16 The Operation of International Locations May Raise Operating Expenses and Divert Management Attention. We are expanding internationally. We recently acquired ProFound, a Danish biotechnology company, and are now operating with international business locations. Expansion into an international operational entity will require additional management attention and resources. We have limited experience in localizing our operations and in conforming our operations to local cultures, standards and policies. We may have to compete with local companies who understand the local situation better than we do. We may not be successful in expanding into international locations or in generating revenues from foreign operations. Even if we are successful, the costs of operating internationally are expected to exceed our international revenues for at least the next several years. As we continue to expand internationally, we are subject to risks of doing business internationally, including the following: . regulatory requirements that may limit or prevent the offering of our products in local jurisdictions ; . government limitations on research and/or research including genetically engineered products or processes; . difficulties in staffing and managing foreign operations; . longer payment cycles, different accounting practices and problems in collecting accounts receivable ; . cultural nonacceptance of genetic manipulation and genetic engineering; and . potentially adverse tax consequences. Some of these factors may cause our international costs to exceed our domestic costs of doing business. To the extent we expand our international operations and have additional portions of our international revenues denominated in foreign currencies, we also could become subject to increased difficulties in collecting accounts receivable and risks relating to foreign currency exchange rate fluctuations. Acquisitions Could Result in Operating Difficulties and Other Harmful Consequences. If appropriate opportunities present themselves, we intend to acquire businesses and technologies that complement our capabilities. As set forth above in this report, on August 10, 2000 we completed our acquisition of ProFound, a Danish biotechnology company. The process of integrating any acquisition may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include: . diversion of management time (both ours and that of the acquired company) from focus on operating the businesses to issues of integration and future products during the period of negotiation through closing and further diversion of such time after closing; . decline in employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects, or the direction of the business; . the need to integrate each company's accounting, management information, human resource and other administrative systems to permit effective management and the lack of control if such integration is delayed or not implemented; and . the need to implement controls, procedures and policies appropriate for a larger public company in companies that prior to acquisition had been smaller, private companies. We have almost no experience in managing this integration process. Moreover, the anticipated benefits of any or all of these acquisitions may not be realized. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could harm our business. Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all. Even if available, this financing may be dilutive. Since Our Technologies Can Be Applied to Many Different Industries, If We Focus Our Efforts on Industries That 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. 17 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 or other technologies. Governmental authorities could, for social or other purposes, limit the use of genetic processes or prohibit the practice of our MolecularBreeding or other technologies. Ethical and other concerns about our MolecularBreeding or other 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, where ProFound is based, 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 agricultural and other 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. We face, and will continue to face, intense competition from organizations such as large and small biotechnology companies, as well as academic and research institutions and government agencies that are pursuing competing technologies for modifying DNA and proteins. These organizations may develop technologies that are 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 proprietary 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 and proteins, 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 processes 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 18 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 fragments that we may wish to utilize with our proprietary technologies, or products that are similar to products developed with the use of our MolecularBreeding and other technologies or alternative methods of generating gene diversity. 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 that could effectively block our ability to further develop, commercialize and sell products, and such claims 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 or be required to cease commercializing effected 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. On April 27, 2000, we announced that we had initiated an arbitration proceeding against Echira Biotechnology (then known as Energy BioSystems Corporation) in connection with Echira's claim that it has developed a "new gene shuffling'' technology. We allege that Echira has breached the confidentiality provisions and certain other terms of the Development and License Agreement entered into by Echira and Maxygen in 1997, pursuant to which we disclosed confidential information regarding our MolecularBreeding technologies to Echira. We expect the arbitration to be held during the fourth quarter of 2000. 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 execute fully 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 19 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 could 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. 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 from our public offerings 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 12 months. 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 our 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 that 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. The regulatory agencies of foreign governments must also approve our therapeutic products before the products can be sold in those other countries. 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 to 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 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. 20 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. 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. 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 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 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. 21 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 that 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. Our Stock Price Has Been, and May Continue to Be, Extremely Volatile. 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; 22 . 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 part- ners; 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. We Expect that Our Quarterly Results of Operations Will Fluctuate, and This Fluctuation Could Cause Our Stock Price to Decline. 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 that 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 2001. 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 likely decline. Some of Our Existing Stockholders Can Exert Control Over Us, and May Not Make Decisions that Are in the Best Interests of All Stockholders. Our executive officers, directors and principal stockholders (greater than 5% stockholders) together control approximately 34% of our outstanding common stock, including Glaxo Wellcome which owns approximately 19% of our outstanding common stock. As a result, these stockholders, if they act together, and Glaxo Wellcome by itself, are 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 that we would not otherwise consider. 23 Item 3 Quantitative And Qualitative Disclosures About Market Risk Interest Rate Risk The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short- term and long-term investments in a variety of securities, including corporate obligations and money market funds. As of September 30, 2000, approximately 91% of our total portfolio will mature in one year or less, with the remainder maturing in less than two years. The following table represents the fair value balance of our cash, cash equivalents, short-term and long-term investments that are subject to interest rate risk by year of expected maturity and average interest rates as of September 30, 2000 (dollars in thousands): 2000 2001 --------- ---------- Cash and cash equivalents........................................ $183,131 -- Average interest rates........................................... 6.62% -- Short-term investments........................................... $ 59,585 -- Average interest rates........................................... 6.98% -- Long-term investments............................................ -- $22,953 Average interest rates........................................... -- 7.14%
We did not hold derivative instruments as of September 30, 2000, and we have never held such instruments in the past. In addition, we had outstanding debt, consisting of borrowings under an equipment financing line of credit, of $1.9 million as of September 30, 2000, with a range of interest rates of between 11.73% and 12.78%. Foreign Currency Risk Currently the majority of our revenue and expenses are denominated in U.S. dollars and as a result we have experienced no significant foreign exchange gains and losses to date. As a result of our recent acquisition of ProFound and our recent collaboration with Lundbeck A/S we will be effecting transactions in foreign currencies during 2000. We do not expect that foreign exchange gains or losses will be significant. As we expand internationally, foreign currency risks will become more important. We have not engaged in foreign currency hedging to date but may choose to do so in the future. 24 Part II - Other Information Item 1 Legal Proceedings Not applicable. Item 2 Changes in Securities and Use of Proceeds c) (i) On August 4, 2000, we issued an aggregate of 16,000 shares of our common stock in connection with the acquisition of a license of certain technology. (ii) On August 10, 2000, we completed our acquisition of ProFound. We acquired all of the outstanding equity securities of ProFound from prior security holders in exchange for 1,102,578 shares of our common stock and options to purchase 41,812 shares of our common stock. (iii) On August 31, 2000 we issued 210 shares of our common stock to a consultant in partial payment for consulting services rendered to us. On June 8, 2000 we issued 185 shares of our common stock to a second consultant in partial payment for consulting services rendered to us. There were no underwriters employed in connection with any of the transactions set forth in Item 2(c). The issuances of securities described in Item 2(c) were deemed to be exempt from registration under the Securities Act of 1933, as amended (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. Each purchaser of Maxygen securities represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. 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. All recipients, either alone or with a duly appointed purchaser representative, were knowledgeable, sophisticated and experienced in making investment decisions of this kind and received adequate information about the registrant. In addition, the transactions described in paragraph (ii) above were exempt from registration under the Securities Act pursuant to Regulation S promulgated thereunder as involving securities offered and sold outside the United States. d) The effective date of our first registration statement, filed on Form S-1 under the Securities Act (No. 333-89413) relating to our initial public offering of common stock, was December 15, 1999. A total of 6,900,000 shares of our common stock were sold at a price of $16.00 per share to an underwriting syndicate led by Goldman, Sachs & Co., FleetBoston Robertson Stephens Inc. and Invemed Associates LLC. Of these 6,900,000 shares, 900,000 were issued upon exercise of the underwriters' over-allotment option. The offering commenced on December 16, 1999 and closed on December 21, 1999. The initial public offering resulted in gross proceeds of $110.4 million, $7.7 million of which was applied toward the underwriting discount. Expenses related to the offering totaled approximately $1.7 million. Net proceeds to us were approximately $101.0 million. From the time of receipt through September 30, 2000, the proceeds were applied toward: . purchases and installation of equipment and build-out of facilities, $2.5 million; . repayment of indebtedness, $76,000; . working capital, $2.7 million; and . temporary investments in certificates of deposits, mutual funds and corporate debt securities, $95.7 million. The use of the proceeds from the offering does not represent a material change in the use of the proceeds described in the registration statement. 25 Item 3 Defaults Upon Senior Securities Not applicable. Item 4 Submission of Matters to a Vote of Security Holders Not applicable. Item 5 Other Information Not applicable. Item 6 Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: 10.1 Lease Agreement between ProFound Pharma A/S and The Sciense Park in Horsholm, dated May 5, 2000. 27.1 Financial Data Schedule (EDGAR version only) (b) Reports on Form 8-K. (1) On August 15, 2000, Maxygen filed a report on Form 8-K reporting the acquisition of ProFound Pharma A/S. (2) On October 24, 2000, Maxygen filed a report on Form 8-K/A that amended the report on Form 8-K filed on August 15, 2000. 26 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MAXYGEN, INC. November 14, 2000 By: /s/ Russell J. Howard ---------------------- Russell J. Howard Chief Executive Officer November 14, 2000 By: /s/ Simba Gill --------------- Simba Gill President, Chief Financial Officer and Senior Vice Development 27 Exhibit Index ------------- 10.1 Lease Agreement between ProFound Pharma A/S and The Sciense Park in Horsholm, dated May 5, 2000. 27.1 Financial Data Schedule (EDGAR version only) EX-10.1 2 0002.txt LEASE AGREEMENT EXHIBIT 10.1 The following constitutes a fair and accurate English translation of the ProFound Pharma A/S lease with the Science Park in Horsholm. /s/ Christian Hansen - ---------------------------- Christian Hansen Co-President, Pharmaceuticals Lease Agreement ProFound Pharma A/S Re lease located at 1 Agern Alle Science Park in Horsholm 2 Between The independent institution The Science Park in Horsholm (hereinafter referred to as Lessor) and ProFound Pharma A/S 1, Agern Alle 2970 Horsholm (hereinafter referred to as Lessee) the following lease agreement has been made The lease (S)1 The leased property is located at 1, Agern Alle and comprises gross floor space of 2,441 m2, including shared space of 383 m2. A storage room in the basement of 40 m2 is also included in the lease. The location and arrangement of the leased property is described in greater detail in the attached plan. (Encl. 1). Use (S)2 The leased property shall only be used for research and development or communication of results originating therefrom and in connection with a limited amount of production. The leased property shall not be used as an actual production plant. The use of the leased property shall furthermore comply with any rules in force at any time for the Science Park in Horsholm. The regulations in force at the time of entering the agreement are attached to this contract (Encl. 2). Requirements of the authorities, etc. (S)3 During the lease the Lessee guarantees that the leased property as well as the use and operation thereof shall comply with the requirements stipulated at any time by any authority, and the Lessor is relieved of any such responsibility in that respect. Furthermore, the Lessor shall ensure that the use of the leased property at any time is in accordance with the liens and easements of the property. Any measures relating to fire protection, renovation and interior arrangements that may be required by the housing authorities, the Danish Working Environment Authorities or other authorities as a 3 condition for the use of the leased property as contemplated by the Lessee shall be made at the expense of the Lessee. Responsibility of the Lessee (S)4 The Lessee is under an obligation to indemnify, based on a neutral assessment, the Lessor for any claim made against Lessor for any damage caused to the leased property that is due to the Lessee's use of the leased property, including e.g. damage caused to the buildings and the site and water table due to pollution. Takeover (S)5 The Lessee shall take over the lease as from 1 May 2000. However, the Lessee shall take over a space in the basement of 483 m2 (robot room) as from 1 April 2000. The leased property consists of a newly constructed building. Lessee shall take possession of the property "as is," in the same condition as when the leased property was inspected by the Lessee. However, this does not include hidden defects, in which case the Lessee shall notify the Lessor not later than 14 days after the Lessee should have discovered any such defect exercising usual due care, otherwise the right to claim the defect will be lost. In connection with the transfer of possession, an official possession transfer meeting shall be held with the participation of a representative of the Lessor as well as the Lessee. As a result of the official possession transfer meeting a report shall be made describing the condition of the leased property at the time when possession of the leased property is transferred. Maintenance (S)6 The maintenance of the interior of the leased property, including maintenance, repair and renovation of the flooring, furniture and equipment, locks, keys, windows, water and gas outlets and taps, sanitary installations, lighting fittings and electrical switches and any heating, freezing and fume cupboards is the responsibility of the Lessee. A share of the indoor cleaning, operation and maintenance, etc. of the joint space of the property is the responsibility of the Lessee. The exterior maintenance is the Lessor's responsibility. Special installations established to be used by the Lessee for this leased property, such as venting system, gases, water processing systems, lab equipment, etc. shall be operated and maintained by the Lessee in accordance with the directions issued by the Lessor. 4 The Lessee is obliged to inspect the leased property at least once every year together with the Lessor and in connection with the inspection an agreement shall be made as to the extent to which any repair or renovation shall be carried out. In case the Lessee does not meet its obligations with regard to maintenance the Lessor shall be entitled to have the maintenance tasks carried out at the expense of the Lessee, after having made a claim towards the Lessee, and given Lessee a reasonable term to remedy the deficiency. Changes to the Building (S)7 The Lessee shall not make any changes to the building without having obtained the Lessor's prior written consent. Any changes to the building shall under any circumstances be made on the basis of a project as usual and shall be carried out by authorized artisans and furthermore be in accordance with the usual construction regulations and official requirements, etc. The size and payment of the rent (S)8 The annual rent for the year 2000 amounts to DKK 3,010,225.00, corresponding to a price per sq.m. of DKK 1,225.00 per year and DKK 500.00 per sq.m. per year for the rooms in the basement, and is calculated in accordance with the lease conditions applied by the Science Park. Value added tax is to be added to the rent. From 1 January 2001 the annual rent for the office and laboratory space will be subject to an increase of DKK 70.00 per sq.m. plus indexation. From 1 January 2002 the annual rent for the office and laboratory space will be subject to a further increase of DKK 50.00 per sq.m. plus indexation. The rent is calculated on the basis of a total of 2,481 m2. The rent shall include taxes and public duties, etc. in respect of the property as per 1 January 2000. The rent shall be paid in advance for one month at a time in accordance with the Lessor's instructions. Regulation of Rent (S)9 The rent applicable at any time is fixed every year on 1 January after the assessment of the Board of the Science Park of the conditions. However, the rent is subject to a maximum increase corresponding to the development of the net price index from October to October. If the net price index is no longer calculated, the rent regulation will be based on a similar index. In order to illustrate the consequences of the index regulation an example is shown: 5
Year Low growth High growth - -------------------------------------------------------------------------------------------------------------- Index Annual Rent Index Annual Rent - -------------------------------------------------------------------------------------------------------------- 2000 100 DKK 3,010,225.00 100 3,010,225.00 - -------------------------------------------------------------------------------------------------------------- 2001 102 DKK 3,244,716.90 104 3,308,338.80 - -------------------------------------------------------------------------------------------------------------- 2002 104 DKK 3,369,207.90 108 3,435,270.80 - -------------------------------------------------------------------------------------------------------------- 2003 106 DKK 3,436,592.06 112 3,572,681.63 - -------------------------------------------------------------------------------------------------------------- 2004 108 DKK 3,505,323.90 117 3,715,588.90 - -------------------------------------------------------------------------------------------------------------- 2005 110 DKK 3,575,430.38 122 3,864,212.45 - -------------------------------------------------------------------------------------------------------------- 2006 113 DKK 3,646,938.98 127 4,018,780.95 - -------------------------------------------------------------------------------------------------------------- 2007 115 DKK 3,719,877.76 132 4,179,532.19 - -------------------------------------------------------------------------------------------------------------- 2008 117 DKK 3,794,275.32 137 4,346,713.48 - -------------------------------------------------------------------------------------------------------------- 2009 120 DKK 3,870,160.83 142 4,520,582.02 - -------------------------------------------------------------------------------------------------------------- 2010 122 DKK 3,947,564.04 148 4,701,405.30 - -------------------------------------------------------------------------------------------------------------- 2011 124 DKK 4,026,515.32 154 4,889,461.51 - -------------------------------------------------------------------------------------------------------------- 2012 127 DKK 4,107,045.63 160 5,085,039.97 - -------------------------------------------------------------------------------------------------------------- 2013 129 DKK 4,189.186.54 167 5,288,441.57 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Low 2% per year growth - -------------------------------------------------------------------------------------------------------------- High 4% per year growth - --------------------------------------------------------------------------------------------------------------
In addition to the adjustment based on the net price index (and irrespective of the Lessor not being entitled to terminate the lease) the rent may be subject to adjustments in accordance with the lease legislation existing at any time, cf. Sections 3-5 of the Danish Act on Business Leaseholds. Taxes and Duties (S)10 The Lessor may demand that the annual rent be adjusted in accordance with changes in the taxes and duties levied in respect of the property of the Science Park, including any additions or changes in new taxes and duties levied of any kind. Building taxes including service charge are shared according to the gross floor space stipulated in this Lease Agreement. The share of the lease of the building taxes and duties are calculated as the share of the gross floor space of the total gross floor space of the Science Park. Heating, Water, Electricity, etc. (S)11 The Lessor shall supply the leased space with heating from the district heating system of the Science Park. The expenses for the heating shall be reimbursed by the Lessee. The Lessee shall pay for its heating consumption in accordance with a separate meter. 6 In addition to the direct expenses for fuel, Lessee shall be responsible for its share of all other expenses incurred in connection with the Lessor's supply to the leased property of heating and hot water, including e.g. janitorial expenses, water and electricity to run the heating system, administration, technical inspection by an engineer, expenses for repair, preparation of heating accounts and write off on the system. In addition, the Lessee shall pay to the Lessor all expenses relative to the water supply of the lease, including consumption tax and fixed duties, in accordance with a meter. The fiscal year for the water and heating supply is the calendar year. The Lessor shall invoice the Lessee for the estimated share of the total expenses of the leased property for the heating and water supply, and the Lessee is obliged to pay these expenses monthly along with the rent. As of the beginning of the lease, the estimated costs of providing water and heating amounts to DKK 11,500.00 per month (exclusive of VAT). The Lessee shall pay for its consumption of electricity directly to the electricity supplying company according to a separate meter. The Lessor shall not be responsible for the sufficiency or insufficiency of the capacity of inlets, drains and outlets with regard to the needs of the Lessee. Any additionally required inlet, drains and outlets are made by the Lessor at the expense of the Lessee. Specification of expenses due in addition to the rent (S)12 The expenses that shall be paid by the Lessee in addition to the rent and that are known at the time of entering into this agreement are specified below, see also subsections 4 and 5 of Section 4 of the Danish Rent Act. 1. Heating Expenses Estimated annual fuel expenses DKK 78,000.00 Estimated annual expenses included in the heating account for operation and maintenance of the heating system DKK 30,000.00 --------------------- Total estimated annual heating Expenses DKK 108,000.00 --------------------- 7
2. Expenses for water supply Total estimated annual expenses for water supply DKK 30,000.00 -------------
The above figures are budget figures, and the real expenses may vary from the above. Deposit (S)13 As security for Lessee's total obligations in accordance with this agreement, including payment of rent, water and heating expenses, obligations in connection with moving etc. the Lessee shall pay upon signing this agreement DKK 752,556.25 corresponding to 3 months' rent. VAT shall be added to this amount. The deposit shall be adjusted each year on 1 January so that it is always equivalent to 3 months rent. Sublease and Termination of Lease (S)14 Subject to the Lessor's prior written consent the Lessee shall be entitled to sublet the whole or part of the lease on unchanged lease conditions. On the same condition as stated above the Lessee shall furthermore be entitled to waive its rights and obligations as set forth in this agreement. It is a condition for the Lessor's consent to sublease or waiver that the use of the leased property is still in accordance with the objects as set forth in the rules of the Science Park. Termination of Lease (S)15 The Lessor cannot terminate this Lease Agreement for 10 years. The Lessee cannot terminate this Lease Agreement for 5 years. The term of notice is 6 months to the first day of a month. Thus, the notice to terminate this Lease Agreement can be given at the earliest by the Lessor on 30 April 2010 for moving by 31 October 2010 and at the earliest by the Lessee on 30 April 2005 for moving by 31 October 2005. Termination (S)16 With respect to the Lessor's right to terminate this Lease Agreement reference is made to Section 93 of the Danish Rent Act, however, it is emphasized that termination as a consequence of late payment or other payment due as per this contract can only take place if the Lessee has not effected payment not later than 14 days after a written claim to that effect has been made to the Lessee. The rent or other payment due that is not paid on the due date is, from that date subject to a default interest of 1 per cent per month. 8 Moving (S)17 In connection with moving, the leased property shall be returned in the same condition as that in which it was taken over apart from deterioration due to wear and ageing and that is not comprised by Lessee's duty to maintain the leased property. In connection with moving an inspection shall be conducted by representatives of the Lessor as well as the Lessee. Based on the moving inspection a report shall be made on the state and condition of the lease at the time of moving. The reports made in connection with moving in and moving out together form the basis for any claims that may be made by the Lessor. However, the Lessee is not under an obligation to return the leased property in a state and condition better than it was at the time of taking over the leased property. The Lessee shall be obliged to re-establish any constructional changes if the Lessor so wishes. This applies no matter whether or not the Lessor consented to such changes. The Lessee shall reimburse the Lessor for all expenses incurred in connection with cleaning and clearing of the leased property as well as any renovation and reestablishment so that the leased property appears in good condition, and Lessee shall pay rent during the period of time where the renovation and reestablishment takes place. In connection with other Lessees' wishes to expand lease additional property in the Science Park, the Science Park asks Lessees that to the extent necessary they shall, after negotiation, accept moving to other leased property of the same size and standard and at the same rent. The Science Park shall contribute to the payment of necessary and reasonable moving and renovation costs, but will not cover any loss on operations as a consequence of moving. Insurance (S)18 The Lessor shall take out a comprehensive building insurance. If the Lessee's use of the rented space requires any specific insurance or an increased premium the Lessee shall pay such expenses. The Lessor shall not be obliged to insure any movable property belonging to the Lessee. Registration in the Danish Land Register (S)19 The Lessee shall pay all expenses relative to the registration of this contract. Furthermore, each party shall pay his own costs associated with entering into this agreement. 9 The Danish Rent Act (S)20 The rules of the Danish Rent Act shall apply to this lease provided that they have not been departed from in any of the preceding sections. It is emphasized that the Lessee is aware that the rules in this contract depart from the rules of the legislation, and thus, the agreement confers more extensive obligations on the Lessee and less extensive rights on the part of the Lessee as opposed to the Lessor than provided for in legislation. The general lease conditions applicable at any time for the independent institution the Science Park in Horsholm shall also apply to this lease. Special Conditions (S)21 The Lessee has an option of renting an additional space of 335 m2 (inclusive of shares space) on the ground floor and 467 m2 (inclusive of shared space) on the first floor. If the Lessee wishes to take advantage of this option the Lessor shall be notified not less than 6 months prior to the date on which the Lessee wants to take possession of the space. The space shall be reserved for the Lessee for not more than one year so that the Lessor shall be notified of any exercise of the option not later than 31 October 2000. The final rent for the space shall be negotiated in connection with the possible exercise of the option and the decoration and renovation of the space. ----------oOo---------- Horsholm, 5 May 2000 Horsholm, 1 May 2000 /s/ Preben Pamsgaard /s/ Jan Mikkelsen /s/ Niels Moller /s/ Christian Hansen The Science Park in Horsholm ProFound Pharma A/S EX-27.1 3 0003.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MAXYGEN, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 183,131 59,585 8,230 0 0 252,042 10,034 2,390 321,015 14,148 0 0 0 3 302,343 321,015 0 17,531 0 0 75,068 0 166 (46,731) 0 (46,731) 0 0 0 (46,731) (1.57) (1.57)
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