-----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, QZdNhOVGhYybrcbd3s7J6Pp56YbSH57Jdyyp3sKPbreihJnXPbT2lKad+VyjvTYn qgiMIbZB075BoOrKoWJvaA== 0001021408-01-505158.txt : 20010815 0001021408-01-505158.hdr.sgml : 20010815 ACCESSION NUMBER: 0001021408-01-505158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAXYGEN INC CENTRAL INDEX KEY: 0001068796 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770449487 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28401 FILM NUMBER: 1708106 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 d10q.txt QUARTERLY REPORT PERIOD ENDED JUNE 30, 2001 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 June 30, 2001 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 August 1, 2001, there were 33,898,085 shares of the registrant's common stock outstanding. MAXYGEN, INC. FORM 10-Q QUARTER ENDED JUNE 30, 2001 INDEX Part I FINANCIAL INFORMATION Item 1: Financial Statements: Condensed Consolidated Balance Sheets as of December 31, 2000 and June 30, 2001 ............................................................................... 3 Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2000 and 2001 .................................................. 4 Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2000 and 2001 ............................................................ 5 Notes to Condensed Consolidated Financial Statements ............................................ 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 9 Item 3: Quantitative and Qualitative Disclosures About Market Risk ...................................... 22 Part II OTHER INFORMATION Item 1: Legal Proceedings ............................................................................... 24 Item 2: Changes in Securities and Use of Proceeds ....................................................... 24 Item 3: Defaults Upon Senior Securities ................................................................. 24 Item 4: Submission of Matters to a Vote of Security Holders ............................................. 25 Item 5: Other Information ............................................................................... 25 Item 6: Exhibits and Reports on Form 8-K ................................................................ 25 SIGNATURES ............................................................................................... 26
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, June 30, 2000 2001 ---- ---- ASSETS (Note 1) (unaudited) Current assets: Cash and cash equivalents .............................................. $ 111,374 $ 70,390 Short-term investments ................................................. 110,805 107,023 Grant and other receivables ............................................ 8,425 7,324 Prepaid expenses and other current assets .............................. 1,180 1,649 --------- --------- Total current assets ................................................. 231,784 186,386 Property and equipment, net ............................................ 9,916 11,670 Goodwill and other intangible assets, net of accumulated amortization of $3,418 at December 31, 2000 and $7,781 at June 30, 2001 .............. 22,760 18,397 Long-term investments .................................................. 35,836 74,187 Deposits and other assets .............................................. 1,403 1,611 --------- --------- Total assets ......................................................... $ 301,699 $ 292,251 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ....................................................... $ 2,143 $ 2,124 Accrued compensation ................................................... 1,859 5,812 Other accrued liabilities .............................................. 4,633 3,632 Deferred revenue ....................................................... 6,228 8,640 Current portion of equipment financing obligations ..................... 533 586 --------- --------- Total current liabilities ............................................ 15,396 20,794 Deferred revenue .......................................................... 2,810 2,713 Non-current portion of equipment financing obligations .................... 1,295 993 Commitments Stockholders' equity: Preferred stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2000 and June 30, 2001 . -- -- Common stock, $0.0001 par value: 100,000,000 shares authorized, 33,576,736, and 33,886,335 shares issued and outstanding at December 31, 2000 and June 30, 2001, respectively .................... 3 3 Additional paid-in capital ............................................. 386,026 387,743 Notes receivable from stockholders ..................................... (776) (776) Deferred stock compensation ............................................ (19,880) (12,981) Accumulated other comprehensive income ................................. 587 134 Accumulated deficit .................................................... (83,762) (106,372) --------- --------- Total stockholders' equity ........................................... 282,198 267,751 --------- --------- Total liabilities and stockholders' equity ........................... $ 301,699 $ 292,251 ========= =========
See accompanying notes. 3 MAXYGEN, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months ended Six Months ended June 30, June 30, ---------------------- ---------------------- 2000 2001 2000 2001 -------- -------- -------- -------- Collaborative research and development revenue ......... $ 3,195 $ 5,972 $ 6,241 $ 10,997 Grant revenue .......................................... 2,960 1,704 5,328 3,609 -------- -------- -------- -------- Total revenues ......................................... 6,155 7,676 11,569 14,606 Operating expenses: Research and development ........................... 7,828 13,031 14,045 25,727 General and administrative ......................... 2,843 3,952 4,856 7,500 Stock compensation expense (1) ..................... 3,191 3,512 8,131 7,055 Acquired in-process research and development ....... 912 -- 912 -- Amortization of goodwill and other intangible assets ......................................... -- 2,182 -- 4,363 -------- -------- -------- -------- Total operating expenses ............................... 14,774 22,677 27,944 44,645 -------- -------- -------- -------- Loss from operations ................................... (8,619) (15,001) (16,375) (30,039) Interest income, net ................................... 4,275 3,455 6,391 7,429 -------- -------- -------- -------- Net loss ............................................... $ (4,344) $(11,546) $ (9,984) $(22,610) ======== ======== ======== ======== Basic and diluted net loss per share ................... $ (0.14) $ (0.35) $ (0.34) $ (0.70) Shares used in computing basic and diluted net loss per share .............................................. 30,188 32,534 29,125 32,359 - ---------- (1) Stock compensation expense related to the following: Research and development ........................... $ 1,891 $ 2,875 $ 5,456 $ 5,751 General and administrative ......................... 1,300 637 2,675 1,304 -------- -------- -------- -------- $ 3,191 $ 3,512 $ 8,131 $ 7,055 ======== ======== ======== ========
See accompanying notes. 4 MAXYGEN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Six Months ended June 30, ------------------------ 2000 2001 --------- --------- Operating activities Net loss .................................................................. $ (9,984) $ (22,610) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................................... 649 1,333 Amortization of intangible assets ..................................... -- 4,363 Deferred stock compensation amortization - employees .................. 6,093 6,899 Common stock issued and stock options granted to consultants for services rendered ................................. 2,038 360 Acquired in-process research and development .......................... 912 -- Changes in operating assets and liabilities: Grant and other receivables ....................................... (3,049) 1,101 Prepaid expenses and other current assets ......................... (351) (469) Deposits and other assets ......................................... (754) (208) Accounts payable .................................................. 524 (19) Accrued liabilities ............................................... 2,266 2,952 Deferred revenue .................................................. (649) 2,315 --------- --------- Net cash used in operating activities ..................................... (2,305) (3,983) --------- --------- Investing activities Purchases of available-for-sale securities ................................ (56,960) (121,332) Maturities of available-for-sale securities ............................... -- 87,543 Acquisition of property and equipment ..................................... (1,093) (3,348) --------- --------- Net cash used in investing activities ..................................... (58,053) (37,137) --------- --------- Financing activities Borrowings under equipment financing obligation ........................... 166 -- Repayments under equipment financing obligation ........................... (29) (249) Equity adjustment from foreign currency translation ....................... -- (972) Proceeds from issuance of common stock - net of issuance costs ............ 137,310 1,357 Payments received on promissory notes ..................................... 491 -- --------- --------- Net cash provided by financing activities ................................. 137,938 136 --------- --------- Net increase in cash and cash equivalents ................................. 77,580 (40,984) Cash and cash equivalents at beginning of period .......................... 136,343 111,374 --------- --------- Cash and cash equivalents at end of period ................................ $ 213,923 $ 70,390 ========= ========= Schedule of non-cash financing activities Shares issued to acquire technology ...................................... $ 827 --
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 consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The information as of June 30, 2001 and for the three months and six months ended June 30, 2000 and June 30, 2001 includes all adjustments (consisting only of normal recurring adjustments) that the management of 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 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, 2000. 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 payments, if any, will be recognized pursuant to collaborative agreements upon the achievement of specified research milestones or the sale of applicable products. Royalties, if any, will be recognized when earned. The Company has also been awarded Defense Advanced Research Projects Agency ("DARPA") grants and National Institute of Standards and Technology-Advanced Technology Program ("NIST-ATP") grants for various research and development projects. The terms of these grant agreements are three years with various termination dates, the last of which is September 2002 for the existing agreements. 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 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. 6 The following table presents the calculation of basic, diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):
Three Months ended Six Months ended June 30, June 30, ---------------------- ---------------------- 2000 2001 2000 2001 -------- -------- -------- -------- Net Loss ..................................................... $ (4,344) $(11,546) $ (9,984) $(22,610) ======== ======== ======== ======== Basic and diluted: Weighted-average shares of common stock outstanding ....... 32,314 33,832 31,645 33,744 Less: weighted-average shares subject to repurchase ....... (2,126) (1,298) (2,520) (1,385) -------- -------- -------- -------- Weighted-average shares used in computing basic and diluted net loss per share .............................. 30,188 32,534 29,125 32,359 ======== ======== ======== ======== Basic and diluted net loss per share ......................... $ (0.14) $ (0.35) $ (0.34) $ (0.70) ======== ======== ======== ========
The Company has excluded all 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 5,119,000 at June 30, 2000 and 8,132,000 at June 30, 2001. 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 Income (Loss) Comprehensive income (loss) is primarily comprised of net unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments. Comprehensive income (loss) for the three and six months ended June 30, 2001 includes $226,000 and $781,000, respectively, representing the net change in unrealized gains (losses) on investments. Comprehensive income (loss) for the three and six months ended June 30, 2001 also includes $(1.158) million and $(1.233) million, respectively, representing the net change in foreign currency translation adjustments. Comprehensive loss for the three and six months ended June 30, 2000 was $(44,000) and $(130,000), respectively, representing the net change in unrealized losses on investments. Accumulated other comprehensive income as at June 30, 2001 includes $1.302 million and $(1.168) million for unrealized gains on investments and foreign currency translation adjustments, respectively. Accumulated other comprehensive income as at December 31, 2000 includes $521,000 and $66,000 for unrealized gains on investments and foreign currency translation adjustments, respectively. Derivatives and Financial Instruments Effective October 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS 133 was later amended by SFAS No. 137 and SFAS No. 138. This standard requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of this standard has not had a material effect on the Company's consolidated financial position, results of operations or cash flows. At June 30, 2001, the Company had foreign currency contracts in the form of forward exchange contracts totaling $9.0 million. 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 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 June 30, 2001 are as follows (in thousands): 7
Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------- ---------- ---------- ---------- Money market funds ............................ $ 70,390 $ -- $ -- $ 70,390 Commercial paper .............................. 106,230 793 -- 107,023 Corporate bonds ............................... 73,678 509 -- 74,187 --------- ---------- ---------- ---------- Total ...................................... 250,298 1,302 -- 251,600 Less amounts classified as cash equivalents ... (70,390) -- -- (70,390) --------- ---------- ---------- ---------- Total investments ............................. $ 179,908 $ 1,302 $ -- $ 181,210 ========= ========== ========== ==========
Realized gains or losses on the sale of available-for-sale securities for the three and six month periods ended June 30, 2000 and June 30, 2001 were insignificant. At June 30, 2001, the contractual maturities of investments were as follows (in thousands): Amortized Estimated Cost Fair Value --------- ---------- Due within one year .................... $ 106,230 $ 107,023 Due after one year ..................... 73,678 74,187 --------- --------- $ 179,908 $ 181,210 ========= ========= 3. Collaborative Agreements ALK-Abello A/S In February 2001, the Company established a three-year collaboration with ALK-Abello A/S, a wholly owned subsidiary of Chr. Hansen Holding A/S, Denmark, to research and develop novel recombinant therapeutics for the treatment of specific allergies. The Company will collaborate with ALK-Abello to create therapies for treating specific allergies, including allergies to house dust mites and grass, which are the cause of many common allergies. Under the terms of the collaboration, the Company will receive license fees, technology access fees, research and development funding, and potential milestone payments. Such payments to the Company, including milestone payments, could total a maximum of $80 million. The Company will also be entitled to receive royalties on product sales, if any. ALK-Abello will receive exclusive worldwide rights to commercialize all recombinant human therapeutics developed in the collaboration. International AIDS Vaccine Initiative In February 2001, the Company established a three-year collaboration with the International AIDS Vaccine Initiative and DBLV, LLC, an entity established and funded by the Rockefeller Foundation to develop novel HIV vaccines. Under the agreement, DBLV will provide full research and development funding to the Company for at least three years to expand the Company's ongoing program in HIV vaccine development. The Company will retain all rights to commercialize the HIV vaccine candidates in all developed countries of the world, as well as in certain markets in the developing world. 4. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142. Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over the useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in a decrease in net loss of $8.7 million in 2002 and $5.3 million in 2003. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 8 ================================================================================ 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," "can," "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, 2000. 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 agriculture, pharmaceutical, petroleum, and chemical companies and from government grants. Our current collaborators are Novozymes, DuPont, Pfizer, Syngenta, DSM, Rio Tinto, Lundbeck, Chevron, Hercules, ALK-Abello and IAVI. Our government grants are from the Defense Advanced Research Projects Agency and the National Institute of Standards and Technology-Advanced Technology Program. Revenue under strategic alliances and government grants increased from $14.0 million in 1999 to $24.5 million in 2000 and was $14.6 million in the six months ended June 30, 2001. Revenues may fluctuate from period to period and there can be no assurance that these collaboration agreements will continue for their initial term or beyond. We have incurred significant losses since our inception. As of June 30, 2001, our accumulated deficit was $106.4 million and total stockholders' equity was $267.8 million. We have invested heavily in establishing our proprietary technologies. These investments have contributed to the increases in operating expenses from $26.7 million in 1999 to $99.4 million in 2000 and $44.7 million in the six months ended June 30, 2001. Our total headcount increased from 143 employees at the end of 1999 to 252 employees at the end of 2000. As of June 30, 2001 Maxygen had 287 employees, of whom 85% were engaged in research and development. We expect to incur additional operating losses over at least the next several years as we continue to expand our research and development efforts and infrastructure. Source of Revenue and Revenue Recognition Policy We recognize revenues from research collaboration agreements as earned upon achievement of the performance requirements of the agreements. Revenue related to grant agreements is recognized as related research and development expenses are incurred. Our existing corporate collaboration agreements generally provide for research funding for a specified number of full time researchers working in defined research programs. Revenue related to these payments is earned as the related research work is performed. In addition, 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 June 30, 2001, we have deferred revenues of approximately $11.4 million. Our sources 9 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. Compensation for related options granted to consultants is periodically remeasured as the underlying options vest. In connection with the grant of stock options to employees before 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 $4.9 million in 1999, $7.8 million in 2000 and $2.6 million in the six months ended June 30, 2001 related to the deferred compensation amortization on these option grants. In connection with the grant of stock options to consultants, we recorded stock compensation expense of $0.8 million in 1999, $3.0 million in 2000 and $122,000 in the six months ended June 30, 2001. Due to the acceleration of an executive stock option award, an additional $1.6 million stock compensation expense was recorded in 2000. In connection with the Maxygen ApS acquisition in August 2000, stock options were granted in exchange for outstanding warrants to purchase Maxygen ApS securities. In connection with this exchange we recorded aggregate deferred compensation totaling $1.5 million. This amount is being amortized over the remaining vesting period of the options, of which $298,000 was expensed in 2000 and $357,000 in the six months ended June 30, 2001. For the shares exchanged that had a right of repurchase, deferred compensation of $13.1 million was recorded. This amount is being amortized to expense over a three year graded vesting period. A total of $3.3 million was recognized as expense in 2000 and $4.0 million in the six months ended June 30, 2001. Results of Operations Revenues Our total revenues increased from $6.2 million and $11.6 million in the three and six months ended June 30, 2000, to $7.7 million and $14.6 million in the comparable periods of 2001. The increase in collaborative research and development revenue was due to additional strategic alliances and the expansion of existing alliances. The decline in grant revenue reflects the expiration of two government grants that began in late 1997 and early 1998. We expect our total revenues 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 $9.7 million and $19.5 million in the three and six months ended June 30, 2000, to $15.9 million and $31.5 million in the comparable periods of fiscal 2001. The increase is primarily due to our accelerated efforts in all aspects of research and development, including increased expenditures resulting from our acquisition of Maxygen ApS in August 2000, as well as investments in our technology platforms and in the development of product candidates. Also included in research and development expenses is stock compensation expense of $1.9 million and $5.5 million in the three and six months ended June 30, 2000 and $2.9 million and $5.8 million in the comparable periods of fiscal 2001. Research and development expenses represented 158% and 169% of total revenues in the three and six months ended June 30, 2000 and 207% and 216% of total revenues in the comparable periods of 2001. 10 The increase was due primarily to increased staff necessary to manage and support our growth plus increased research and development costs resulting from our acquisition of Maxygen ApS, offset in part by the growth in our total revenues. We expect research and development cost to increase during the remainder of 2001 as new projects are initiated under existing collaboration agreements and as new collaboration arrangements are consummated. 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 for at least the next several years. The acquisition of Maxygen ApS has significantly increased our research and development expenses in absolute dollars. General and Administrative Expenses Our general and administrative expenses consist primarily of personnel costs for finance, human resources, business development, legal and general management, as well as professional expenses, such as legal and accounting. General and administrative expenses increased from $4.1 million and $7.5 million in the three and six months ended June 30, 2000, to $4.6 million and $8.8 million in the comparable periods of 2001. Expenses increased primarily due to increased staffing necessary to manage and support our growth. Also included in general and administrative expenses is stock compensation expense of $1.3 million and $2.7 million in the three and six months ended June 30, 2000, and $637,000 and $1.3 million in the comparable periods of 2001. General and administrative expenses represented 67% and 65% of total revenues for the three and six months ended June 30, 2000, and 60% and 60% of total revenues for the comparable periods of 2001. The decrease was due primarily to the growth in our total revenue between periods. We expect that our general and administrative expenses will increase in absolute dollar amounts for at least the next several years as we expand our legal and accounting staff, add infrastructure and 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. We expect that general and administrative expenses as a percentage of total revenue will continue to decrease as our revenues increase and research and development activities expand more quickly than our general and administrative expenses. 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 agreement, 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. Goodwill and Other Intangible Assets In connection with the Maxygen ApS acquisition, we allocated $26.2 million to goodwill and other intangible assets and will amortize this goodwill and other intangible assets over three years, the term of expected benefit. We believe this term is reasonable given that Maxygen ApS was a development stage entity and its technology is at an early stage of development and is yet unproven. Amortization expense of $3.4 million in 2000 and $4.4 million in the six months ended June 30, 2001 was recorded on goodwill and other intangible assets. Goodwill and other intangible assets are generally evaluated on an individual acquisition or market basis whenever events or changes in circumstances indicate that such assets are impaired or the estimated useful lives are no longer appropriate. If indicators of impairment exist, we will review our long-lived 11 assets (including goodwill) for impairment based on estimated future discounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their estimated fair values. No impairment charges have been recorded in 2000 or in the six months ended June 30, 2001. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over the useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in a decrease in net loss of $8.7 million in 2002 and $5.3 million in 2003. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 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 $4.3 million and $6.4 million in the three and six months ended June 30, 2000 to $3.5 million and $7.4 million in the comparable periods of 2001. This increase was due to higher average balances of cash, cash equivalents and marketable securities. 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 $64.4 million. As of June 30, 2001, we had $251.6 million in cash, cash equivalents and investments. Our operating activities used cash of $2.3 million in the six months ended June 30, 2000 and $4.0 million in the six months ended June 30, 2001. Uses of cash in operating activities were primarily to fund net operating losses. Net cash used in investing activities was $58.1 million in the six months ended June 30, 2000 and $37.1 million in the six months ended June 30, 2001. The cash used during the six months ended June 30, 2000 and 2001 primarily represented purchases of available-for-sale securities. This was partially offset by the maturities of available-for-sale securities and the conversion of some cash and cash equivalents into longer term investments. Additions of property and equipment were $1.1 million in the six months ended June 30, 2000 and $3.3 million in the six months ended June 30, 2001 which includes a $261,000 adjustment from foreign currency translation at June 30, 2001. The increase is primarily due to the expansion of our offices and laboratories in Redwood City as well as new equipment purchased at Maxygen ApS. We expect to continue to make significant investments in the purchase of property and equipment to support our expanding operations. We may use a portion of our cash to acquire or invest in complementary businesses, products or technologies, or to obtain the right to use such complementary technologies. Financing activities provided cash of $137.9 million in the six months ended June 30, 2000 and $136,000 in the six months ended June 30, 2001. The 2000 amount primarily consists of the net proceeds received from the sale of common stock in a follow-on public offering in March 2000. The cash provided in the six months ended June 30, 2001 was primarily from the proceeds of the sale of common stock in connection with Maxygen's Employee Stock Purchase Plan, the Company's matching contribution for the 401(k) Plan, and the exercise of stock options by employees. This was partially offset by an equity adjustment from foreign currency translation of $972,000 and payments on equipment financing obligations of $249,000. Assuming our research efforts for existing collaborations are expended for the full research term, as of June 30, 2001 we have total committed funding of $118.7 million, of which approximately $91.5 million is from our collaborators and $27.2 million is from government funding. Of these committed funds, we have $54.3 million remaining to be received over the next four years. In addition, potential milestone payments from our existing collaborations could exceed $240 million based on the accomplishment of specific performance criteria, and we may earn royalties on product sales. In general, the obligation of our corporate collaborators to provide research funding cannot be terminated by either party before the end of the research term unless there has been a material breach of contract or either party has become bankrupt or insolvent. In the case of such an event, the agreement specifies the rights, if any, that each party will retain. 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 12 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. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. We Have a History of Net Losses. We Expect to Continue to Incur Net Losses and We May Not Achieve or Maintain Profitability. We have incurred net losses since our inception, including a net loss of approximately $59.6 million for the year ended December 31, 2000 and $22.6 million for the six months ended June 30, 2001. As of June 30, 2001, we had an accumulated deficit of approximately $106.4 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 acquisition of Maxygen ApS, 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 Unable 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, marketing 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 prove to be safe and efficacious, meet applicable regulatory standards, are capable of being manufactured at reasonable costs, or can be marketed successfully. 13 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 before 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. 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 continue to 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 252 at December 31, 2000 to 287 at June 30, 2001. Our revenues increased from $2.7 million in 1998 to $14.0 million in 1999 to $24.5 million in 2000 and were $14.6 million for the six months ended June 30, 2001. 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. 14 The Operation of International Locations May Increase Operating Expenses and Divert Management Attention. We are expanding internationally. We recently acquired Maxygen ApS, 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 involving 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 non-acceptance of genetic manipulation and genetic engineering; and . potentially adverse tax consequences. 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 Dilution, Operating Difficulties and Other Harmful Consequences. If appropriate opportunities present themselves, we intend to acquire businesses and technologies that complement our capabilities. 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 before acquisition had been smaller, private companies. We do not have extensive 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. Since our technologies may be applicable to numerous, diverse industries, we must 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 15 products and industries. Our decisions may not produce viable commercial products and may divert our resources from more profitable market opportunities. Public Perception of Ethical and Social Issues May Limit the Use of Our Technologies, Which Could Reduce Our Revenues. Our success will depend in part upon our ability to develop products discovered through our proprietary and non-proprietary technologies. Governmental authorities could, for social or other purposes, limit the use of genetic processes or prohibit the practice of our directed molecular evolution technologies or other technologies. Ethical and other concerns about our directed molecular evolution technologies 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 Rejects 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 and the United States, which has aroused public debate. The adverse publicity could lead to greater regulation and trade restrictions on genetic research and the resultant agricultural and other products could be subject to greater domestic or international regulation. Such regulation and restrictions 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 commercial products. Any products that we develop through our 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 16 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 positions, are generally uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will apply for patents covering our technologies and products as we deem appropriate. However, we may not obtain patents on all inventions that we seek to protect with patents, and any patents we obtain may be challenged and may be narrowed in scope or extinguished as a result of such challenges. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies. Others may independently develop similar or alternative technologies or design around our patented technologies. Furthermore, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from developing competing products. 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 or misuse 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 nor 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 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 the time and attention 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 Enchira in connection with Enchira's claim that it had developed a "new gene shuffling" technology. We alleged that 17 Enchira had breached the confidentiality provisions and certain other terms of the Development and License Agreement entered into by Enchira and Maxygen in 1997, pursuant to which we disclosed confidential information regarding our MolecularBreeding directed molecular evolution technologies to Enchira. An arbitration hearing was held in November 2000 and on March 8, 2001 we announced that the arbitrator had found that Enchira had breached three separate provisions of the Development and License Agreement. The arbitrator found that the gene shuffling technology that Enchira calls Rachitt, and claims as its own, "was derived from Maxygen's technologies and has no notable or significant distinctions from those technologies" and that "Maxygen is the exclusive owner of the gene shuffling technology contained in Rachitt". The arbitrator also found that Enchira had misused our confidential information. There will be further arbitration proceedings in 2001 to determine the remedies we will receive for Enchira's breaches of the Agreement. If We Lose 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 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 existing cash and cash equivalents and income earned thereon, together with 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 funds under various U.S. government research and technology development programs. The government may 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. 18 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 directed molecular evolution technologies for commercialization in the U.S. or elsewhere. We may not be able to, or 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. 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 or 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 apply to foods developed through traditional plant breeding. However, genetically engineered food products will be subject to pre-market 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. 19 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 develop, 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. Our Collaborations With Outside Scientists May Be Subject to Change, Which Could Limit Our Access to Their Expertise. We work with scientific advisors, consultants and collaborators at academic and other institutions. These scientists are not our employees and may have other commitments that could 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 in the future to obtain product liability insurance, we do not have such insurance currently and 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. 20 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 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 high based on conventional valuation standards such as price to earnings and price to sales ratios. These trading prices and valuations may not be sustained. Any negative change in the public's perception of the prospects of biotechnology or life science companies could depress our stock price regardless of our results of operations. Other broad market and industry factors may decrease the trading price of our common stock, regardless of our performance. Market fluctuations, as well as general political and economic conditions such as recession or interest rate or currency rate fluctuations, also may decrease the trading price of our common stock. In addition, our stock price could be subject to wide fluctuations in response to factors including the following: . announcements of new technological innovations or new products by us or our competitors; . changes in financial estimates by securities analysts; . conditions or trends in the biotechnology and life science industries; . changes in the market valuations of other biotechnology or life science companies; . developments in domestic and international governmental policy or regulations; . announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; . developments in or challenges relating to patent or other proprietary rights; . period-to-period fluctuations in our operating results; . future royalties from product sales, if any, by our strategic partners; and . sales of our common stock or other securities in the open market. In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company's securities. If a stockholder files a securities class action suit against us, we would incur substantial legal fees and our management's attention and resources would be diverted from operating our business to respond to the litigation. 21 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 the second half of 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 together control approximately 34% of our outstanding common stock, including GlaxoSmithKline plc, which owns approximately 19% of our outstanding common stock. As a result, these stockholders, if they act together, and GlaxoSmithKline plc 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. Item 3 Quantitative and Qualitative Disclosures About Market Risk We are exposed to financial market risks, including changes in interest rates and foreign currency exchange. To mitigate some of these risks, we utilize currency forward contracts. We do not use derivative financial instruments for speculative or trading purposes. 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 June 30, 2001, approximately 71% of our total portfolio will mature in one year or less, with the remainder maturing in less than two years. 22 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 June 30, 2001 (dollars in thousands): 2001 2002 ------------ ------------ Cash and cash equivalents ......... 70,390 Average interest rates ............ 4.20% Short-term investments ............ 107,023 Average interest rates ............ 5.91% Long-term investments ............. 74,187 Average interest rates ............ 5.16% We did not hold derivative instruments intended to mitigate interest rate risk as of June 30, 2001, and we have never held such instruments in the past. In addition, we had outstanding debt related to equipment financing of $2 million as of June 30, 2001, with a range of interest rates of between 11.73% and 12.78%. Foreign Currency Risk A substantial majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, beginning in 2000 we began to enter into transactions in Danish kroner. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we have established balance sheet hedging programs. Currency forward contracts are utilized in these hedging programs. Our hedging programs reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. Gains and losses on these foreign currency investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to Maxygen. At June 30, 2001 we had a total of $9.0 million committed in foreign currency cash flow forward contracts. The fair value of these forward contracts at June 30, 2001 is $858,000 which was reflected on the balance sheet as a liability. 23 ================================================================================ Part II - Other Information Item 1 Legal Proceedings Not applicable. Item 2 Changes in Securities and Use of Proceeds Recent Sales of Unregistered Securities Between May 8, 2001 and June 8, 2001 we issued a total of 16,172 shares of our common stock to a total five consultants and one employee in partial payment for consulting services rendered to us. There was no underwriter employed in connection with any of the transactions. The issuance of securities was 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 as a transaction by an issuer not involving a public offering. The recipients of the securities represented their intentions 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 issued in the transactions. The recipients either received adequate information about us or had access, through employment or other relationships, to such information. The recipients, either alone or together with their duly appointed purchaser representatives, were knowledgeable, sophisticated and experienced in making investment decisions of this kind and received adequate information about us. Application of Initial Public Offering Proceeds 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. Net proceeds to us were approximately $101.0 million. From the effective date through June 30, 2001, the proceeds were applied toward: . purchases and installation of equipment and build-out of facilities, $8.5 million; . repayment of indebtedness, $421,000; . working capital, $17.2 million; and . temporary investments in certificates of deposits, mutual funds and corporate debt securities, $74.9 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. Item 3 Defaults Upon Senior Securities Not applicable. 24 Item 4 Submission of Matters to a Vote of Security Holders We held our Annual Meeting of Stockholders on June 1, 2001. The only matter voted upon at the meeting was the election of directors wherein each nominee proposed by us was elected. The number of votes cast for and withheld for each nominee is provided below. Shares Voted For Shares Candidate Candidate Withheld Russell J. Howard ..................... 27,008,229 357,385 Isaac Stein ........................... 27,341,356 24,258 Robert J. Glaser ...................... 27,321,874 43,740 M.R.C. Greenwood ...................... 27,323,134 42,480 Gordon Ringold ........................ 27,340,744 24,870 George Poste .......................... 27,343,377 22,237 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 Form of Change of Control Agreement 10.2 Sublease between Cygnus, Inc. and Maxygen, Inc. dated March 30, 2001 10.3 1999 Nonemployee Directors Stock Option Plan, as amended, with applicable option agreement 10.4 Promissory Note dated May 7, 2001, executed by John Curd in favor of Maxygen, Inc. (b) There were no reports on Form 8-K filed during the quarter ended June 30, 2001. 25 ================================================================================ 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. August 14, 2001 By: /s/ Russell J. Howard ---------------------------------------- Russell J. Howard Chief Executive Officer August 14, 2001 By: /s/ Lawrence Briscoe ---------------------------------------- Lawrence Briscoe Chief Financial Officer EX-10.1 3 dex101.txt FORM OF CHANGE OF CONTROL AGREEMENT EXHIBIT 10.1 MAXYGEN, INC. CHANGE OF CONTROL AGREEMENT This CHANGE OF CONTROL AGREEMENT (the "Agreement"), dated __________, is made by and between MAXYGEN, INC., a Delaware corporation (the "Company"), and ___________ (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel; WHEREAS, the Board of Directors of the Company recognizes that, as is the case with many publicly-held corporations, the possibility of a Change of Control (as defined herein) exists and that such possibility, and the uncertainty and questions that it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change of Control. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive agree as follows: 1. Introduction; Purposes. ---------------------- (a) The purpose of this Agreement is to provide the Executive with protection of certain benefits in case of a termination of his or her employment with the Company in connection with a Change of Control of the Company. (b) The Company, by means of the Agreement, seeks to (i) secure and/or retain the services of the Executive and (ii) provide incentives for the Executive to exert maximum efforts for the success of the Company even in the face of a potential Change of Control of the Company. 2. Definitions. ----------- (a) "Accountants" has the meaning given thereto in Section 4. (b) "ADEA" has the meaning given thereto in Section 5(c). (c) "Agreement" means this Change of Control Agreement. (d) "Board" means the Board of Directors of the Company. (e) "Cause" means the Executive's: (i) willful and continued failure to substantially perform the Executive's duties with the Company (other than as a result of physical or mental disability) after a written demand for substantial performance is deliver to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has not substantially performed the Executive's duties and that has not been cured within fifteen (15) days following receipt by the Executive of the written demand; (ii) commission of a felony (other than a traffic-related offense) that in the written determination of the Company is likely to cause or has caused material injury to the Company's business; (iii) dishonesty with respect to a significant matter relating to the Company's business; or (iv) material breach of any agreement by and between the Executive and the Company, which material breach has not been cured within fifteen (15) days following receipt by the Executive of written notice from the Company identifying such material breach. (f) "Change of Control" means: (i) a dissolution or liquidation of the Company; (ii) a sale of all or substantially all the assets of the Company; (iii) a merger or consolidation in which the Company is not the surviving corporation and in which beneficial ownership of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors has changed; (iv) a reverse merger in which the Company is the surviving corporation but the shares of the common stock of the Company outstanding immediately before the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, and in which beneficial ownership of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors has changed; (v) an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or subsidiary of the Company or other entity controlled by the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors; or, (vi) in the event that the individuals who are members of the Incumbent Board cease for any reason to constitute at least fifty percent (50%) of the Board. (g) "Code" means the Internal Revenue Code of 1986, as amended. (h) "Committee" means the Finance Committee of the Board or such other committee as appointed by the Board to administer this Agreement. (i) "Company" means Maxygen, Inc., a Delaware corporation. (j) "Company-Paid Coverage" has the meaning given thereto in Section 3(a). (k) "Confidential Information, Secrecy and Invention Agreement" has the meaning given thereto in Section 5(b). 2 (l) "Disability" means the Executive's physical or mental disability that prevents the Executive from satisfactorily performing the normal duties and responsibilities of the Executive's office in the good faith determination of the Committee for a period of more than one hundred twenty (120) consecutive days. (m) "Effective Date" means the date first above written. (n) "Employee Agreement and Release" has the meaning given thereto in Section 5(c). (o) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (p) "Excise Tax" has the meaning given thereto in Section 4. (q) "Executive" means the person identified in the introductory paragraph of this Agreement. (r) "Good Reason" means: (i) any material reduction of the Executive's duties, authority or responsibilities relative to the Executive's duties, authority, or responsibilities as in effect immediately before such reduction, except if agreed to in writing by the Executive; (ii) a reduction by the Company in the base salary of the Executive, or of twenty-five percent (25%) or more in the Target Bonus opportunity of such Executive, as in effect immediately before such reduction, except if agreed to in writing by the Executive; (iii) the relocation of the Executive to a facility or a location more than thirty (30) miles from the Executive's then present business location, except if agreed to in writing by the Executive; (iv) a material breach by the Company of any provision of this Agreement or (v) any failure of the Company to obtain the assumption of this Agreement by any successor or assign of the Company. (s) "Incumbent Board" means the individuals who, as of the Effective Date, are members of the Board. If the election, or nomination for election by the Company's stockholders, of any new director is approved by a vote of at least fifty percent (50%) of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board. (t) "Section 16 Officer" means an "officer" of the Company, as defined in Rule 16a-1(f) promulgated under the Exchange Act, designated as such by action of the Board. (u) "Target Bonus" means the Executive's target bonus for the then current fiscal year, as set by the Board or the appropriate committee thereof. 3. Severance Benefits in the Event of a Change of Control. ------------------------------------------------------ (a) If within eighteen (18) months following the date of a Change of Control of the Company either (i) the Company terminates the Executive's employment other than for Cause, death or Disability or (ii) the Executive terminates his or her employment with 3 the Company voluntarily with Good Reason, then in each case, subject to Section 4 and Section 5: (i) the Executive shall be entitled to receive a lump sum payment equal to two times the Executive's yearly base salary in effect on the date of termination (without giving effect to any reduction in base salary subsequent to a Change of Control that constitutes Good Reason), (ii) each of the Executive's outstanding stock options, all stock subject to repurchase, restricted stock awards and restricted stock purchases, and any options, stock subject to repurchase, awards or purchases held in the name of an estate planning vehicle for the benefit of the Executive or his or her immediate family, shall have their vesting and exercisability schedule accelerate in full (or, as applicable, the corresponding repurchase right shall lapse in full) as of the date of termination; (iii) if on the date of termination the Executive is covered by any Company-paid health, disability, accident and/or life insurance plans or programs, the Company shall provide to the Executive benefits substantially similar to those that the Executive was receiving immediately prior to the date of termination (the "Company-Paid Coverage"). If such coverage included the Executive's spouse and/or dependents immediately prior to the date of termination, such spouse and/or dependents shall also be covered at Company expense. Company-Paid Coverage shall continue until the earlier of (x) two (2) years from the date of termination, or (y) the date that the Executive and his or her spouse and/or dependents become covered under another employer's health, disability, accident and/or life insurance plans or programs that provides the Executive and his or her spouse and/or dependents with comparable benefits and levels of coverage. (b) If within eighteen (18) months following the date of a Change of Control of the Company the Executive's employment with the Company is terminated as a result of death or Disability, then in each case, subject to Section 4 and Section 5: (i) each of the Executive's outstanding stock options, all stock subject to repurchase, restricted stock awards and restricted stock purchases, and any options, stock subject to repurchase, awards or purchases held in the name of an estate planning vehicle for the benefit of the Executive or his or her immediate family, shall have their vesting and exercisability schedule accelerated such that vesting (or, as applicable, the corresponding repurchase right lapsing) shall occur as if the vesting (or lapsing) had occurred on a monthly basis from the last date of vesting (or lapse) to the date of termination; and (ii) the Company will provide the Executive with health, disability, accident and/or life insurance benefits as described in Section 3(a)(iii). (c) In no event shall the Executive be obligated to seek other employment or take any other action to mitigate the amounts payable to the Executive under this Agreement. (d) The Executive's employment shall be deemed to have been terminated following a Change of Control by the Company without Cause or by the Executive with Good Reason if the Executive's employment is terminated prior to a Change of Control without Cause at the direction of a person who has entered into an agreement with the Company the consummation of which will constitute a Change of Control or if the Executive terminates his or her employment with Good Reason prior to a Change of Control if the circumstances or event that constitutes Good Reason occurs at the direction of such person. 4 4. Parachute Payments; Excise Tax. ------------------------------ In the event that the severance, acceleration of stock options and other benefits payable to the Executive as a result of a Change of Control of the Company (i) constitute "parachute payments" within the meaning of Section 280G (as it may be amended or replaced) of the Code and (ii) but for this Section 4, would be subject to the excise tax imposed by Section 4999 (as it may be amended or replaced) of the Code (the "Excise Tax"), then the Executive's benefits payable in connection therewith shall be either (a) delivered in full, or (b) delivered as to such lesser extent that would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by the Executive on an after-tax basis, of the greatest amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under the Excise Tax. Unless the Company and the Executive otherwise agree in writing, any determination required under this Section 4 shall be made in writing in good faith by the outside accounting firm responsible for auditing the Company's financial records (the "Accountants"). In the event of a reduction in benefits hereunder, the Executive shall be given the choice of which benefits to reduce. For purposes of making the calculations required by this Section 4, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 4. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4. 5. Limitations and Conditions on Benefits. -------------------------------------- The benefits and payments provided under this Agreement shall be subject to the following terms and limitations: (a) Withholding Taxes. The Company shall withhold required federal, ----------------- state and local income and employment taxes from any payments hereunder. (b) Confidential Information, Secrecy and Invention Agreement Prior to ------------------------------------------------------------------ Receipt of Benefits. The Executive shall have executed and delivered to the - ------------------- Company a standard form of the Company's confidential information, secrecy and invention agreement, a copy of the current form of which is attached as Exhibit A (the "Confidential Information, Secrecy and Invention Agreement"), prior to the receipt or provision of any benefits (including the acceleration benefits) under this Agreement. Additionally, the Executive agrees that all documents, records, apparatus, equipment and other physical property that is furnished to or obtained by the Executive in the course of his or her 5 employment with the Company shall be and shall remain the sole property of the Company. The Executive agrees not to make or retain copies, reproductions or summaries of any such property, except as otherwise necessary while acting in the normal course of business. In the event of any material breach by the Executive of the Confidential Information, Secrecy and Invention Agreement that is not cured within thirty (30) days of notice of such breach to the Executive, all benefits payable under Section 4 of this Agreement shall immediately terminate. (c) Employee Agreement and Release Prior to Receipt of Benefits. If the ----------------------------------------------------------- Executive's employment with the Company terminates involuntarily other than for Cause, death or Disability, or the Executive terminates his or her employment with the Company voluntarily with Good Reason, then prior to, and as a condition of the receipt of any benefits (including the acceleration benefits) under this Agreement on account of such termination, the Executive shall, as of the date of such termination, execute an employee agreement and release in the form attached as Exhibit B (the "Employee Agreement and Release") prior to receipt of benefits. Such Employee Agreement and Release shall specifically relate to all the Executive's rights and claims in existence at the time of such execution and shall confirm the Executive's obligations under the Company's standard form of Confidential Information, Secrecy and Invention Agreement. If and only if the Executive is covered by the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA") (currently all those 40 years of age or over on the date of termination), the Executive has twenty-one (21) days to consider whether to execute such Employee Agreement and Release and the Executive may revoke such Employee Agreement and Release within seven (7) days after execution of such Employee Agreement and Release. In the event the Executive is covered by ADEA and does not execute such Employee Agreement and Release within the twenty-one (21) days specified above, or if the Executive revokes such Employee Agreement and Release within the seven (7) day period specified above, no benefits (including the acceleration benefits) under Section 3 of this Agreement shall be payable or made available to the Executive on account of a termination. 6. Termination. Prior to a Change of Control of the Company, this ----------- Agreement shall automatically terminate on the date the Executive ceases to be a Section 16 Officer, as evidenced by action of the Board removing the Executive as a Section 16 Officer or otherwise; provided, however, that if the Executive ceases to be a Section 16 Officer prior to a Change of Control at the direction of a person who has entered into an agreement with the Company the consummation of which will constitute a Change of Control, this Agreement shall not terminate due to the change in status of the Executive. 7. At-Will Employment. The Company and the Executive acknowledge that ------------------ the Executive's employment is and shall continue to be at-will, as defined under applicable law. This Agreement shall not be construed as creating an express or implied contract of employment between the Executive and the Company. The Executive shall not have any right to be retained in the employment of the Company. 8. Notices. Any notice provided under this Agreement shall be in ------- writing and shall be deemed to have been effectively given (i) upon receipt when delivered 6 personally, (ii) one day after sending when sent by express mail service (such as Federal Express), or (iii) five (5) days after sending when sent by regular mail to the following address: In the case of the Company: Maxygen, Inc. 515 Galveston Drive Redwood City, CA 94063 Attn: General Counsel In the case of the Executive: ------------------------- ------------------------- ------------------------- ------------------------- or to such other address as the Company or the Executive hereafter designates by written notice in accordance with this Section 8. 9. Litigation/Arbitration Expenses. Reasonable litigation and/or ------------------------------- arbitration costs and expenses shall be paid by the Company, win or lose, in connection with any dispute between the Company (and its successors) and the Executive concerning this Agreement; provided, however, that if the litigation or arbitration is found to have been commenced in bad faith by the Executive, the Executive shall bear all of his or her own costs and expenses in connection with such litigation or arbitration. 10. Successors and Assigns. This Agreement is intended to bind and ---------------------- inure to the benefit of and be enforceable by the Executive, and the Company, and any surviving entity resulting from a Change of Control and upon any other person who is a successor by merger, acquisition, consolidation or otherwise to the business formerly carried on by the Company, and their respective successors, assigns, heirs, executors and administrators, without regard to whether or not such person actively assumes any rights or duties hereunder; provided, however, that the Executive may not assign any duties hereunder without the prior written consent of the Company. 11. Miscellaneous. ------------- (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing by each of the parties. (b) No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party that are not expressly set forth in this Agreement. 7 (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12. Governing Law. This Agreement shall be governed by, and construed ------------- in accordance with, the laws of the State of California, regardless of the law that might be applied under applicable principles of conflicts of law. MAXYGEN, INC. By: --------------------- Name: Title: THE EXECUTIVE ------------------------- Name: 8 Exhibit A to Change of Control Agreement MAXYGEN, INC. CONFIDENTIAL INFORMATION, SECRECY, AND INVENTION AGREEMENT This Agreement is entered into on __________, 200__ between Maxygen ("Maxygen" or "the Company"), a Delaware corporation, and ___________________ ("Employee"). In consideration of Employee's employment by Maxygen and the compensation paid to Employee, this Agreement being a condition of that employment, Employee and Maxygen agree as follows: 1. DEFINITIONS ----------- For purposes of this Agreement, the following terms have the following definitions: (a) Confidential Information means proprietary techniques and confidential information that Maxygen develops, compiles or owns, or that Maxygen receives under conditions of confidentiality from the entities with which it has business relationships. Confidential Information may be disclosed to or developed, learned or acquired by Employee in the course of Employee's employment with Maxygen, whether or not related to Employee's duties. Confidential Information is broadly defined, and includes (i) all information that has or could have commercial value or other utility in the businesses in which Maxygen is engaged or in which it contemplates engaging, and (ii) all information that, if disclosed without authorization, could be detrimental to the interests of Maxygen or the entities with which it has business relationships, whether or not this information is identified as Confidential Information. By example, and without limitation, Confidential Information includes but is not limited to Maxygen's research programs, product development, biological materials, research methods, related products, technology, inventions, patent applications, trade secrets or other products and any other information of value relating to the business affairs and/or fields of interest of Maxygen, whether communicated orally or in writing, including without limitation, concepts, techniques, processes, designs, biological materials, methods for developing or identifying novel products, cost data, and other technical know-how, financial, research, marketing and personnel information, and other business information including information with respect to which Maxygen is under an obligation of confidentiality with any third party. Confidential Information does not include information: (i) generally known in the relevant trade or industry; or (ii) known to and freely usable by Employee before Employee's employment by Maxygen; and Confidential Information shall not be deemed to be generally known (x) merely because it is embraced by more general 9 information subject to the above, or (y) merely because it is published in general terms without description of the specific Confidential Information subject to this section. (b) Invention(s) means any and all inventions, discoveries, original works of authorship, developments, improvements, formulas, techniques, concepts, data and ideas (whether or not patentable or registrable under copyright or similar statute) made, conceived, reduced to practice, or learned by Employee, either alone or jointly with others, that (i) result from work performed by Employee for Maxygen, (ii) utilize the equipment, supplies, facilities, or Confidential Information of Maxygen or are made, conceived or completed during hours in which Employee is employed by Maxygen, or (iii) are related to the business or the actual or demonstrably anticipated research or development of Maxygen. (c) Trade Secret(s) means all information, know-how, concepts, data, ideas and materials, however embodied, relating to the business of Maxygen or to entities with which Maxygen has business relationships, which have not been released publicly by an authorized representative of Maxygen or have not otherwise lawfully entered the public domain. (d) Effective Date means the date on which this Agreement will become effective. The Effective Date is the earlier of (i) the beginning of Employee's employment with Maxygen, or (ii) the date and time at which any Confidential Information was, or is, first disclosed to Employee. 2. EMPLOYEE'S PRIOR KNOWLEDGE AND RELATIONSHIPS -------------------------------------------- (a) Prior Knowledge. Except as is disclosed on Exhibit B to this --------------- --------- Agreement, Employee does not know anything about the Company's Confidential Information, other than information learned from Maxygen. (b) Prior Relationships. Employee has no other agreements, ------------------- relationships, or commitments to any other person or entity that conflict with Employee's obligations to Maxygen under this Agreement. Employee will not use or disclose to Maxygen, or induce Maxygen to use or disclose, any confidential information, trade secret, or proprietary information or material belonging to any third party. Employee represents and acknowledges that Employee's employment with Maxygen will not require Employee to violate any obligation to or confidence with another. Employee represents and warrants that Employee has returned all property and confidential information belonging to all prior employers. In the event Employee is sued for breach of any obligation or agreement to which Employee is a party or is bound, Employee agrees to indemnify Maxygen fully for all liabilities, costs, verdicts, judgments, settlements, attorneys' fees and other losses incurred by Maxygen. 3. PROTECTION OF CONFIDENTIAL INFORMATION -------------------------------------- (a) Employee acknowledges and agrees that Confidential Information constitutes a valuable asset of Maxygen, and is the sole property of Maxygen. 10 (b) At all times during and after Employee's employment with Maxygen, Employee will hold in trust, keep confidential and not disclose to any third party, or make any use of, the Confidential Information of Maxygen or of the entities with which Maxygen has business relationships, except as may be necessary in the course of Employee's employment, without the prior written consent of the Chief Executive Officer of Maxygen. Employee agrees to abide by policies established by Maxygen for the protection of Confidential Information, and to take reasonable security precautions to safeguard Confidential Information, including without limitation, the protection of documents from theft, unauthorized duplication and discovery of contents, and restrictions on access by other persons. Employee further agrees not to cause the transmission, removal, or transport of any Confidential Information from Maxygen's principal place of business, or any other place of business as specified by the Chief Executive Officer of Maxygen, except as required in the course of Employee's employment, without the prior written approval of the Chief Executive Officer of Maxygen. (c) Employee acknowledges that unauthorized use or disclosure of Confidential Information may be highly prejudicial to the interests of Maxygen or the entities with which Maxygen has business relationships, an invasion of privacy, or a misappropriation or improper disclosure of trade secrets. (d) Employee acknowledges that all documents including, but not limited to, software, computer programs, tapes, printouts, records, databases, manuals, letters, notebooks, reports, blueprints, drawings, sketches, photographs, customer lists, and other evidence of Confidential Information and other information concerning the business, operations, or plans of Maxygen or the entities with which Maxygen has strategic relationships, including copies, whether produced by Employee or others, are at all times the property of Maxygen or the entities with which Maxygen has strategic relationships, and will be treated as Confidential Information. (e) Employee acknowledges that Maxygen has received and in the future may receive confidential or proprietary information from third parties, subject to a duty on Maxygen's part to maintain the confidentiality of the information and to use it only for certain limited purposes. Employee agrees to hold all such confidential or proprietary information in the strictest confidence in compliance with the terms of any agreement Maxygen may have with such third parties, and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out Employee's duties for Maxygen, consistent with the terms of any agreement Maxygen may have with such third parties. (f) Employee acknowledges that any unauthorized use or disclosure to third parties of Confidential Information of Maxygen or the entities with which Maxygen has strategic relationships during employment will lead to disciplinary action, up to and including immediate termination, and any unauthorized use or disclosure during or after employment can lead to legal action by Maxygen. 4. EMPLOYEE'S OBLIGATIONS ON TERMINATION OF EMPLOYMENT --------------------------------------------------- 11 (a) Return of Company Property. Upon separation from employment with -------------------------- Maxygen for any reason, Employee will promptly deliver to Maxygen all Company documents and materials pertaining to (i) Employee's employment, (ii) the Confidential Information of Maxygen or the other entities with which Maxygen has strategic relationships, and (iii) Inventions of Maxygen (as defined above), whether prepared by Employee or otherwise coming into Employee's possession or control, except that Employee may retain personal copies of records relating to Employee's compensation and this Agreement. Company "documents" include, but are not limited to, drawings, sketches, photographs, charts, graphs, notebooks, customer lists, computer disks, tapes or printouts, sound recordings and other printed, type-written or handwritten documents. Company "materials" include, but are not limited to, biological materials, including cell lines, plasmids, vectors and DNA. Employee also agrees to return to Maxygen all equipment, files, software programs and other personal property belonging to Maxygen on separation from employment. Employee will not retain any written or other tangible materials (in hard copy or electronic form) that evidence, contain or reflect Confidential Information or Inventions of Maxygen. (b) Termination Certificate. Employee agrees to sign the Termination ------------------------ Certificate, a copy of which is contained in Exhibit A to this Agreement on --------- separation from employment. (c) Protection of Maxygen's Confidential Information and Inventions. If --------------------------------------------------------------- Employee's employment with Maxygen is terminated for any reason, Employee will protect the value of Maxygen's Confidential Information and Inventions and will prevent their theft or disclosure. Employee will not use or disclose Confidential Information or Inventions for Employee's benefit (or for the benefit of any third party) or to the detriment of Maxygen, at any time after separation from employment. (d) Non-Interference with Maxygen Employees. Employee agrees that, both --------------------------------------- during employment and for a period of twelve (12) months following separation from employment for any reason, Employee will not disrupt, damage, impair or interfere with Maxygen's business by recruiting, soliciting or otherwise inducing any Maxygen employee or exclusive consultant to enter into employment or an exclusive consulting relationship with any other business entity that competes with Maxygen. (e) Non-Interference with Maxygen Customers. Employee also agrees that, --------------------------------------- both during employment and for a period of twelve (12) months following separation from employment for any reason, Employee will not (i) call on, solicit, or take away (directly or indirectly), or (ii) attempt to call on, solicit or take away any Maxygen customer or potential customer whom the Company has identified during the term of Employee's employment with Maxygen, either for Employee's own benefit or for the benefit of another person or entity, nor will Employee solicit or induce any customer or potential customer to terminate a business relationship with Maxygen. (f) Legal Sanctions. Employee understands that the unauthorized taking of --------------- any of Maxygen's trade secrets could result in civil liability under the California Uniform 12 Trade Secrets Act (Civil Code ss.ss. 3436-3426.11) and other laws, and that willful misappropriation may result in an award against Employee for triple the amount of Maxygen's damages and attorneys' fees in collecting these damages. 5. INVENTIONS ---------- (a) Disclosure. Employee will promptly disclose all Inventions to Maxygen ---------- in writing. (b) Assignment. All Inventions are the sole property of Maxygen or ---------- Maxygen's designee. Employee hereby assigns to Maxygen, without royalty or further consideration to Employee, all right, title, and interest Employee may have, or may acquire, in and to all Inventions, including but not limited to, patents and copyrights. Employee agrees that Maxygen or its designee will be the sole owner of all domestic and foreign patents, patent rights, copyrights, and other rights pertaining to all these Inventions. Employee further agrees that all copyrightable materials that Employee prepares, individually or in cooperation with others, that is specifically requested by Maxygen or commissioned for use as a contribution to a collective work, or as a supplementary work, a compilation, or an instructional text, as these terms are defined by 17 U.S.C. ss.101, will be considered a "work made for hire," as that term is defined by 17 U.S.C. ss.101. (c) Execution of Documents. Whenever requested by Maxygen, Employee will ---------------------- promptly sign and deliver to Maxygen, both during and after employment, any and all applications, assignments and other documents that Maxygen considers necessary or desirable in order to apply for, obtain, and maintain letters patent of the United States and to foreign countries for these Inventions, and to assign and convey to Maxygen or its designee the sole and exclusive right, title, and interest in and to Inventions or any applications or patents thereon, or provide any other evidence of the assignment of all rights of Employee, if any, in any Inventions, and Maxygen's ownership of these Inventions, without royalty or any other further consideration to Employee. (d) Assistance to Maxygen. Whenever requested by Maxygen, both during and --------------------- after employment, Employee will assist Maxygen, at Maxygen's expense, in obtaining, maintaining, defending, registering and from time to time enforcing, in any and all countries, Maxygen's right to the Inventions and related intellectual property rights. This assistance may include, without limitation, testifying in a suit or other proceeding, executing all documents deemed by Maxygen to be necessary or convenient for use in applying for, obtaining, and enforcing patents, copyrights, or other rights, and executing all necessary assignments to Maxygen or its designee. If Maxygen requires assistance from Employee after termination of Employee's employment, Employee will be compensated for time actually spent in providing assistance at an hourly rate equivalent to Employee's salary or wages upon termination of employment. (e) Power of Attorney. If Maxygen cannot obtain Employee's signature on any ----------------- document necessary to apply for, prosecute, obtain or enforce any patent, copyright or other right or protection relating to any Invention, whether due to Employee's mental 13 or physical incapacity, or any other reason, Employee hereby irrevocably designates and appoints Maxygen and each of its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for, and on Employee's behalf, to execute and file any such document and to do all other lawfully permitted acts to further the prosecution, issuance, and enforcement of patents, copyrights, or other rights or protections, with the same force and effect as if executed and delivered by Employee. (f) Evidence. Employee agrees, whenever requested to do so by Maxygen, both -------- during and after employment, to deliver to Maxygen any evidence required for legal proceedings and to testify in any such proceedings, and otherwise to cooperate as reasonably requested by Maxygen in connection therewith. (g) Records of Inventions. Employee agrees to keep adequate and current --------------------- written records of all Inventions, in the form of notes, sketches, drawings and/or reports, which records are, and will remain, the property of Maxygen and will be available to Maxygen at all times. (h) California Labor Code ss. 2870. This Paragraph does not apply to an ------------------------------ Invention that is subject to the provisions of Section 2870 of the California Labor Code, which is reprinted in its entirety in Exhibit B to this Agreement. 6. EXCLUDED INVENTIONS ------------------- Employee represents that any inventions, original works of authorship, discoveries, concepts or ideas, if any ("Excluded Inventions"), to which Employee presently has any right, title or interest, and which were previously conceived either wholly or in part by Employee, and that Employee desires to exclude from the operation of this Agreement are identified on Exhibit C of this Agreement. Employee represents that the list contained in Exhibit C is complete to the best of Employee's knowledge, and that the exclusion of any Inventions from the list will not materially affect Employee's ability to perform all obligations under this Agreement. The Company agrees to receive and hold all disclosures in confidence. 7. INJUNCTIVE RELIEF ----------------- Employee acknowledges that it would be difficult for Maxygen to measure actual damages resulting from any breach by Employee of Paragraphs 2 through 5 of this Agreement, and that money damages alone would be an inadequate remedy for any such breach. Accordingly, Employee agrees that if Employee breaches any provision of Paragraphs 2 through 5, Maxygen will be entitled, in addition to any other remedies it may have, to specific performance, injunctions, or other appropriate orders to correct or restrain any such breach by Employee, without showing or proving any actual damage sustained by Maxygen or posting any bond or other security. 8. ATTORNEY FEES ------------- 14 If any action is necessary to enforce this Agreement, including any action under Paragraph 7, the prevailing party will be entitled to recover its reasonable costs and attorney fees, including reasonable expert witness fees. 9. NON-COMPETITION --------------- (a) Employee agrees that, during the term of employment with Maxygen, Employee will not establish or act, directly or indirectly, by way of ownership, management or otherwise, whether or not for compensation, as a consultant, employer, employee, agent, principal, partner, stockholder (other than ownership of less than 5% of the outstanding capital stock of a publicly-traded corporation), officer, director or in any other representative or individual capacity for any business that (i) is similar to, or (ii) is directly competitive with, or (iii) provides goods or services to any aspect of the business in which Maxygen is engaged or contemplates engaging. (b) Employee agrees not to enter into any agreement that contains any term that may conflict, either actually or potentially, with the terms of this Agreement. (c) Employee agrees that during the employment term, Employee will not take for Employee's own use, and will promptly notify Maxygen of, any and all business opportunities of which Employee becomes aware that relate, directly or indirectly, to the current or reasonably anticipated future business of Maxygen. 10. NON-DISPARAGEMENT ----------------- Employee agrees that, during employment with Maxygen and thereafter, Employee will not make comments, whether oral or in writing, that tend to disparage or injure Maxygen, its officers, directors, agents, employees, products and services. Nothing in this Agreement will be construed to preclude Employee from complying with the terms of a validly issued subpoena. 11. NOTIFICATION TO NEW EMPLOYER ---------------------------- In the event that Employee's employment with Maxygen terminates for any reason, Employee hereby grants consent to Maxygen to notify Employee's new employer about Employee's rights and obligations under this Agreement. 12. AT-WILL EMPLOYMENT ------------------ This Agreement expressly defines certain obligations of Employee that will apply during and after Employee's employment with Maxygen. This Agreement is not a contract of employment and does not alter the employment relationship between Employee and Maxygen, which at all times remains at will. At will employment means that Employee's employment and compensation can be terminated by either party, with or without cause and with or without advance notice. 13. GENERAL TERMS ------------- 15 (a) Employee agrees that upon the request of Maxygen, Employee will meet with representatives of Maxygen to review the terms of this Agreement and Employee's obligations under it. (b) Employee will keep Maxygen advised of Employee's home and business address for a period of three years after termination of Employment, so that Maxygen can contact Employee regarding the continuing obligations imposed by this Agreement. (c) To the extent any provision of this Agreement, or any portion thereof, is found to be illegal or unenforceable for any reason, the provision or portion will be modified or deleted in such manner so as to make the Agreement as modified legal and enforceable under the applicable laws, and the balance of the Agreement will be construed as severable and independent. (d) This Agreement will be binding upon Employee and Employee's heirs, executors, assigns, and administrators, and will inure to the benefit of Maxygen, its successors, designees, and assigns. (e) This Agreement will be governed by the laws of the State of California and will in all respects be interpreted and enforced under the laws of California, without reference to principles of conflicts of laws. (f) Employee and Maxygen specifically agree that any legal action relating to this Agreement will be instituted and prosecuted in the courts in San Mateo County, California. Each party hereby waives the right to change venue, and consents to personal jurisdiction for purposes of any action arising under this Agreement. (g) The language of all parts of this Agreement will in all cases be construed as a whole, according to its fair meaning and not strictly for or against either of the parties. (h) This Agreement may be signed in two counterparts, each of which shall be deemed an original. (i) The use of the singular in this Agreement includes the plural, as appropriate. (j) This Agreement sets forth the entire Agreement between Employee and Maxygen with respect to its subject matter, and it fully supersedes any and all previous oral or written communications, correspondences, representations, promises, or agreements between the parties relating to this subject. No party has been induced to enter into this Agreement by, nor is any party relying on, any representation or warranty outside of those expressly set forth in this Agreement. (k) This Agreement may not be supplemented, changed or otherwise modified except by an instrument in writing signed by both Employee and an authorized representative of Maxygen. 16 (l) Waiver by Maxygen of a breach of any provision of this Agreement or of another employee's agreement will not waive any other or subsequent breach by Employee. (m) The following exhibits constitute part of this Agreement and are incorporated by reference: Exhibit A - Termination Certificate --------- Exhibit B - Written Notification to Employee of California Labor --------- Codess.2870 Exhibit C - Employee Statement --------- 14. SURVIVAL OF AGREEMENT --------------------- The rights and obligations of the parties to this Agreement will survive termination of employment of Employee with Maxygen. 17 Employee has carefully read this Agreement, and understands its terms. Employee has completely filled out Exhibit B, and has received a copy of Exhibit A, Written Notification to Employee of California Labor Code ss. 2870. Employee signs this Agreement freely and voluntarily. EMPLOYEE Name: _______________________________ Date: _________________________ Signature: __________________________ MAXYGEN, INC. Name: _______________________________ Date: __________________________ Signature: __________________________ 18 EXHIBIT A --------- TERMINATION CERTIFICATION ------------------------- This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, sketches, materials, equipment, other documents or property or any reproductions of any of these items belonging to Maxygen, its subsidiaries, affiliates, successors or assigns (collectively "the Company"). I further certify that I have complied with, and will continue to comply with, all the terms of the Maxygen Confidential Information, Secrecy and Invention Agreement that I signed, including the reporting of any inventions or original works of authorship, as defined in that Agreement, conceived or made by me (jointly or with others) that are covered by that Agreement. I agree that, in compliance with the Confidential Information, Secrecy and Invention Agreement, I will preserve as confidential, and not use, any or all Confidential Information, Inventions, or other information that has or could have commercial value or other utility in the business in which Maxygen is engaged or in which it contemplates engaging. I will not use or participate in the unauthorized disclosure of information that could be detrimental to the interests of Maxygen, whether or not such information is identified as Confidential Information. I further agree that for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, I will not either directly or indirectly: (a) disrupt, damage, impair or interfere with Maxygen's business by recruiting, soliciting or otherwise inducing any Maxygen employee or exclusive consultant to enter into employment or an exclusive consulting relationship with any other business entity that competes with Maxygen; or (b) (i) call on, solicit, or take away (directly or indirectly), or (ii) attempt to call on, solicit or take away any Maxygen customer or potential customer whom the Company has identified during the term of Employee's employment with Maxygen, either for my own benefit or for the benefit of another person or entity, nor solicit or induce any customer or potential customer to terminate a business relationship with Maxygen. 19 Upon the termination of my employment with Maxygen, I will be employed by ______________________________ and will be working in connection with the following projects: Dated: ---------------- ------------------------------------ [Employee Signature] ------------------------------------ [Employee Name Printed] Address for Notifications: ------------------------------------ ------------------------------------ ------------------------------------ 20 EXHIBIT B --------- WRITTEN NOTIFICATION TO EMPLOYEE OF ----------------------------------- CALIFORNIA LABOR CODE ss. 2870 ------------------------------ In accordance with California Labor Code section 2870, you are hereby notified that your Confidential Information, Secrecy and Invention Agreement does not require you to assign to Maxygen any invention for which no equipment, supplies, facility, or trade secret information of Maxygen was used, that was developed entirely on your own time, and that does not relate to the business of Maxygen or to Maxygen's actual or demonstrably anticipated research or development, or does not result from any work performed by you for Maxygen. The text of California Labor Code section 2870 is set forth below. CALIFORNIA LABOR CODE ss. 2870 INVENTION ON OWN TIME -- EXEMPTION FROM AGREEMENT. (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable. I hereby acknowledge receipt of this written notification. Dated: ----------------- ------------------------------------------ [Employee Signature] ------------------------------------------ [Employee Name Printed] 21 EXHIBIT C --------- EMPLOYEE STATEMENT ------------------ 1. Confidential Information. Except as set forth below, I ------------------------- acknowledge at this time that I know nothing about the Confidential Information of Maxygen, except information that has been disclosed to me by Maxygen. If I know of no such information, I will so state. 2. Prior Inventions. Except as set forth below, I acknowledge ----------------- at this time that I have not made or reduced to practice (alone or jointly with others) any inventions relevant to the subject matter of my employment with Maxygen. If there are no such inventions, I will so state. Dated: ----------------- ------------------------------------------ [Employee Signature] ------------------------------------------ [Employee Name Printed] 22 Exhibit B to Change of Control Agreement MAXYGEN, INC. AGREEMENT AND RELEASE I hereby confirm my obligations under the Confidential Information, Secrecy and Invention Agreement that I have previously entered into with the Company. I acknowledge that I have read and understand Section 1542 of the California Civil Code that reads as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor. I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company. Except as otherwise set forth in this Agreement and Release (the "Release") and except for obligation of the Company set forth in the Change of Control Agreement entered into between the Company and me, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and their officers, directors, agents, servants, employees, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the Effective Date of this Release (as defined below), including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; tort law; contract law; wrongful discharge; discrimination; 23 fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing; provided, however, that nothing in this paragraph shall be construed in any way to release the Company from its obligation to (i) indemnify me pursuant to any applicable indemnification agreement and to provide me with continued coverage under the Company's directors and officers liability insurance policy to the same extent that it has provided such coverage to previously departed officers and directors of the Company or (ii) provide the benefits to me set forth in the Change of Control Agreement entered into between the Company and me. I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under ADEA. I also acknowledge that the consideration given for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. If and only if I am covered by ADEA, I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise after the Effective Date of this Release; (B) I have the right to consult with an attorney prior to executing this Release; (c) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily execute this Release earlier); (D) I have seven (7) days following the execution of this Release to revoke the Release; and (E) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth day after this Release is executed by me (the "Effective Date"). If I am not covered by ADEA, I acknowledge that this Agreement shall be effective as of the date upon which this Release has been executed by me (the "Effective Date"). By: ----------------------------------------- THE EXECUTIVE Date: --------------------------------------- 24 EX-10.2 4 dex102.txt SUBLEASE, DATED MARCH 30, 2001 Exhibit 10.2 SUBLEASE -------- THIS SUBLEASE (this "Sublease") is dated for reference purposes as of March 30, 2001, and is made by and between CYGNUS, INC., a Delaware corporation ("Sublandlord"), and MAXYGEN, INC., a Delaware corporation ("Subtenant"). Sublandlord and Subtenant hereby agree as follows: 1. Recitals: This Sublease is made with reference to the fact that Seaport -------- Center Venture Phase I, a California General Partnership, as landlord, and Sublandlord, as tenant, are parties to that certain Lease dated September 27, 1988 ("Original Lease"), and all Schedules, Riders (including Rider No. 1 to Seaport Center Standard Lease) and Exhibits thereto, as such Lease has been amended by amendments dated May 15, 1992 ("First Amendment"), August 8, 1992 ("Second Amendment") and June 9, 1998 ("Third Amendment") (herein collectively referred to as the "Master Lease"), with respect to those certain "Premises" leased by Sublandlord as described in the Master Lease (herein referred to as the "Premises"), which Premises constitute 32,038 square feet of space consisting of two (2) buildings commonly known as 701 Galveston Street and 501 Chesapeake Drive, Redwood City, California, as more particularly described in the Master Lease (collectively referred to as the "Buildings" and individually referred to as a "Building"). Metropolitan Life Insurance Company, a New York corporation ("Master Landlord"), is a successor-in-interest to Seaport Venture Phase I and is currently the landlord under the Master Lease. A copy of the Master Lease is attached hereto as Exhibit "A" and Subtenant acknowledges ----------- receipt thereof. Capitalized terms used and not defined herein shall have the meaning ascribed to them in the Master Lease, whether or not such term is expressly incorporated herein pursuant to Section 18(a) of this Sublease. 2. Subleased Premises: Subject to the terms and conditions of this ------------------ Sublease, Sublandlord hereby subleases to Subtenant, and Subtenant hereby subleases from Sublandlord, a portion of the Premises agreed by the parties to be approximately 11,158 rentable square feet in the Building (the "501 Building") commonly known as 501 Chesapeake Drive, Redwood City, California (whether or not actually 11,158 rentable square feet) as more particularly described on Exhibit "B" attached hereto and incorporated herein by reference ----------- (the "Subleased Premises"). 3. Term: ---- (a) Term; Early Access: The term (the "Term") of this Sublease shall be ------------------ for the period commencing on the later of (a) May 1, 2001 or (b) the date of Master Landlord's written consent to this Sublease (the "Sublease Commencement Date") and ending December 10, 2003, unless this Sublease is sooner terminated pursuant to its terms or the Master Lease is sooner terminated for any reason (the "Expiration Date"). Subtenant shall have the right of access to the Subleased Premises during business hours, subject to all of the provisions of this Sublease other than payment of Rent (as defined in Paragraph 4(a) below), at any time between the date of Master Landlord's written consent to this Sublease and the Sublease Commencement Date solely for the purposes of performing measurements and space planning, but not for any construction of alterations, provided that Subtenant shall give Sublandlord reasonable notice in advance of accessing the Subleased Premises and shall not interfere with the activities of 1 Sublandlord within the Subleased Premises or the activities of any tenant or other occupant of the 501 Building. (b) Delay in Delivery and Acceptance; Termination: This Sublease shall --------------------------------------------- not be void or voidable nor shall Sublandlord be liable to Subtenant for any loss or damage by reason of delay in the Sublease Commencement Date or delay in Sublandlord delivering possession of the Subleased Premises to Subtenant for any reason whatsoever; provided, however, that Rent shall abate until Sublandlord delivers possession of the Subleased Premises to Subtenant and Subtenant shall have the right to terminate this Sublease by written notice to Sublandlord if Sublandlord does not deliver possession of the Subleased Premises within five (5) days after the Sublease Commencement Date. If Subtenant delivers such written notice of termination to Sublandlord within ten (10) days after the expiration of said five (5) day period, neither Sublandlord nor Subtenant shall have any further liability or obligation to the other under or by reason of this Sublease except that Sublandlord shall return to Subtenant any prepaid Base Rent and Security Deposit received by Sublandlord. Subtenant has fully inspected the Subleased Premises and is satisfied with the condition thereof. Subtenant's taking possession of the Subleased Premises shall be conclusive evidence that the Subleased Premises were in good order and satisfactory condition when Subtenant took possession. 4. Rent: ---- (a) Base Rent: Commencing on the Sublease Commencement Date and --------- continuing on the first (1st) day of each calendar month throughout the Term, Subtenant shall pay to Sublandlord base rent for the Subleased Premises in monthly installments of Thirty Six Thousand Eight Hundred Twenty One Dollars and 40/100ths Dollars ($36,821.40) ("Base Rent"); provided, however, that Subtenant shall not be required to pay the installment of Base Rent due for the first full calendar month of the Term. Base Rent, Additional Rent (as defined in Section 4(b) below) and any other charge or sum payable by Subtenant pursuant to this Sublease are collectively hereinafter referred to as "Rent". Base Rent shall be paid in advance on the Sublease Commencement Date and thereafter on or before the first (1st) day of each month during the Term. Rent for any period during the Term which is for less than one (1) full calendar month shall be a pro rata portion of the monthly installment based on a thirty (30) day month. Rent shall be payable without notice or demand and without any deduction, offset, counterclaim, or abatement, in lawful money of the United States of America. Rent shall be paid directly to Sublandlord at Cygnus, Inc., 400 Penobscot Drive, Redwood City, California 94063, Attn: Finance Department, or such other address as may be designated in writing by Sublandlord. (b) Additional Rent: Commencing on the Sublease Commencement Date and --------------- continuing throughout the Term, Subtenant shall pay to Sublandlord as additional rent ("Additional Rent"): (1) The following percentages ("Subtenant's Share") of the Operating Expenses (as defined below) payable by Sublandlord pursuant to the Master Lease: 2 Type of Expense Subtenant's Share --------------- ----------------- Building Operating Expenses for 501 Building 100% Project Operating Expenses 34.8% Phase Operating Expenses 34.8% (2) Thirty four and eight-tenths percent (34.8%) of all Utilities (as defined below) payable by Sublandlord with respect to the Project and Phase I, plus one hundred percent (100%) of the Utilities, if any, payable by Sublandlord with respect to the 501 Building. (c) Definition of Operating Expenses and Utilities: As used in this ---------------------------------------------- Sublease, Operating Expenses shall mean those "operating expenses" (including, without limitation, "Building Operating Expenses", "Project Operating Expenses", and "Phase Operating Expenses") as defined and described in Paragraph 7 of the Original Lease and Section 6 of the Third Amendment; provided, however, that Operating Expenses shall not include any Building Operating Expenses (as defined in Section 6(v) of the Third Amendment) attributable to any specific Building other than the 501 Building (unless they constitute Phase Operating Expenses). As used in this Sublease, Utilities shall mean the "utilities" as defined and described in Paragraph 8 of the Original Lease, Section 6(c) of the Second Amendment and Section 7 of the Third Amendment; provided, however, that Utilities shall not include any utilities separately metered to the Subleased Premises or any utilities attributable to any specific Building other than the 501 Building (unless they constitute Phase Operating Expenses). (d) Operating Expenses Based on Master Landlord Statements: ------------------------------------------------------ Notwithstanding Sections 4(b) or (c) above, the parties acknowledge that Master Landlord currently bills Sublandlord for Operating Expenses on a lump sum basis (i.e., without itemizing the Operating Expenses). Notwithstanding anything to the contrary in Sections 4(b) or (c) above, the parties agree that so long as the Master Landlord bills Sublandlord on a lump sum basis, Subtenant shall pay to Sublandlord as Additional Rent thirty four and eight-tenths percent (34.8%) of the amount for Operating Expenses shown on the billing statement received by Sublandlord from Master Landlord, subject to annual adjustments necessitated by the annual reconciliation of operating expenses by Master Landlord pursuant to the Master Lease. Sublandlord and Subtenant agree that should Master Landlord at any time during Term of this Sublease provide Sublandlord with a breakdown of the Operating Expenses that specifically allocates such expenses to Building Operating Expenses, Project Operating Expenses or Phase Operating Expenses or a breakdown of the Utilities that specifically allocates such Utilities to Building Utilities, Project Utilities, or Phase Utilities, then Subtenant shall pay Subtenant's Share of such Operating Expenses or Utilities as provided in Sections 4(b) and 4(c) above and, to the extent that such breakdown covers Operating Expenses or Utilities previously paid by Subtenant to Sublandlord, the parties shall credit or debit Subtenant for any over- or underpayment of Subtenant's Share. Subtenant shall promptly pay to Sublandlord any sums so debited to Subtenant. (e) Payment of Additional Rent: Subtenant shall pay Sublandlord all -------------------------- items of Additional Rent not later than the later to occur of (a) five (5) days before the date the analogous item of Additional Rent is due under the Master Lease or (b) five (5) days after Sublandlord's delivery of written demand therefor to Subtenant. Notwithstanding anything to the contrary in 3 this Sublease, Subtenant shall not be required to pay (i) any Additional Rent that is fairly allocable to any period of time prior to the Sublease Commencement Date or (ii) late charges or penalties payable to Master Landlord as a result of a default by Sublandlord of any of its obligations under the Master Lease (except to the extent such default is the result of a default by Subtenant of any of its obligations under this Sublease). 5. Security Deposit: Upon execution hereof, Subtenant shall deposit with ---------------- Sublandlord the sum of Thirty Six Thousand Eight Hundred Twenty One and 40/100ths Dollars ($36,821.40) (the "Security Deposit"), in cash, as security for the performance by Subtenant of the terms and conditions of this Sublease. If Subtenant fails to pay Rent or other charges due under this Sublease or otherwise defaults beyond applicable notice and cure periods with respect to any provision of this Sublease, then Sublandlord may draw upon, use, apply or retain all or any portion of the Security Deposit for the payment of any Rent or other charge or obligation in default, for the payment of any other sum which Sublandlord has become obligated to pay by reason of Subtenant's default, or to compensate Sublandlord for any loss or damage which Sublandlord has suffered by reason of Subtenant's default (including, without limitation, damage to the Subleased Premises). If Sublandlord so uses or applies all or any portion of the Security Deposit, then Subtenant, within ten (10) days after demand by Sublandlord therefor, shall deposit cash with Sublandlord in the amount required to restore the Security Deposit to the full amount stated above. Sublandlord may commingle the Security Deposit with its own funds and Subtenant shall not be entitled to interest on the Security Deposit. Upon the expiration or earlier termination of this Sublease and Subtenant's vacation of the Subleased Premises, Sublandlord shall return to Subtenant so much of the Security Deposit as has not been applied by Sublandlord pursuant to this paragraph or which is not otherwise required to cure Subtenant's defaults. 6. Holdover: Subtenant acknowledges that it is critical that Subtenant -------- surrender the Subleased Premises on or before the Expiration Date in accordance with the terms of this Sublease. Accordingly, Subtenant shall indemnify, defend and hold harmless Sublandlord from and against any and all losses, costs, claims, liabilities and damages resulting from Subtenant's failure to surrender the Subleased Premises on the Expiration Date in the condition required under the terms of this Sublease (including, without limitation, any and all liability or damages sustained by Sublandlord as a result of a holdover of the Subleased Premises by Sublandlord occasioned by the holdover of the Subleased Premises by Subtenant). The foregoing indemnity shall survive the expiration or sooner termination of this Sublease. Subtenant has no right to retain possession of the Subleased Premises or any part thereof beyond the Expiration Date or sooner termination of this Sublease. If Subtenant remains in possession of the Subleased Premises or any part thereof after the Expiration Date or sooner termination of this Sublease, such occupancy shall be a tenancy-at-sufferance at the Base Rent in effect during the month immediately preceding the expiration or termination, together with all other sums comprising Rent hereunder, and otherwise subject to all the provisions of this Sublease. Nothing contained herein shall be construed as consent by Sublandlord to any holding over by Subtenant or as a limitation of Subtenant's rights and remedies should Subtenant hold over. 7. "AS-IS"; Repairs: Subtenant acknowledges and agrees that Subtenant is ---------------- subleasing the Subleased Premises on an "AS-IS" basis in its current "AS-IS" condition (except that the Premises shall be delivered broom clean) inclusive of all faults and defects. Subtenant further acknowledges and agrees that except as expressly provided below, Sublandlord has made 4 no representations or warranties, express or implied, whatsoever, with respect to the Subleased Premises (including, without limitation, any representation or warranty as to fitness, habitability, or suitability for Subtenant's intended use or purposes). Sublandlord represents that it (a) has not received written notice of any building code violations applicable to the Subleased Premises, and (b) the Subleased Premises and Sublandlord's leased premises at 701 Galveston are separately metered to Pacific Gas & Electric. Sublandlord shall have no obligation whatsoever to make or pay the cost of any alterations, improvements or repairs to the Subleased Premises including, without limitation, any improvement or repair required to comply with any law, regulation, building code or ordinance (including the Americans with Disabilities Act of 1990, as amended). In addition, Sublandlord shall have no obligation to make or perform any repairs, maintenance, replacements or other obligations required to be performed by Master Landlord under the terms of the Master Lease or otherwise under the law. Sublandlord shall, however, after receipt of Subtenant's written request, promptly notify Master Landlord of any nonperformance of Master Landlord's obligations under the Master Lease that is claimed in Subtenant's written notice, and request that Master Landlord perform the same, and shall use Sublandlord's commercially reasonable efforts (not including the payment of money, the incurring of any liabilities, or the institution of legal proceedings) to obtain Master Landlord's performance (collectively, "Sublandlord's Master Lease Enforcement Obligations"). Subtenant hereby waives the provisions of Section 1932, subsection 1, and Sections 1941 and 1942 of the Civil Code of California, including any rights as may exist under Section 1942 to make repairs at the expense of Sublandlord. If by reason of casualty damage to or destruction or condemnation of the Subleased Premises during the Term Sublandlord has the right to terminate the Master Lease pursuant to Paragraphs 24 or 25 of the Master Lease and elects not to terminate the Master Lease pursuant to said Paragraphs, Subtenant shall have the right to terminate this Sublease on the same terms and conditions (and within the same time frame) that Sublandlord has to terminate the Master Lease pursuant to said Paragraphs 24 or 25 with respect to the Subleased Premises. Sublandlord shall promptly provide Subtenant with a copy of any notice of casualty damage submitted by Sublandlord to Master Landlord pursuant to Paragraph 24 of the Master Lease and with a copy of any notice received from Master Landlord pursuant to such Paragraph 24 regarding Master Landlord's architect's determinations with regard to such casualty damage. If the rent payable by Sublandlord under the Master Lease with respect to the Subleased Premises is abated by reason of Paragraphs 24 or 25 of the Master Lease, the Rent payable by Subtenant hereunder for the period of such abatement shall be abated on a proportionate basis. Subtenant shall not be entitled to any compensation or damages from Sublandlord or Master Landlord for loss of use of the whole or any part of the Subleased Premises or any improvements, fixtures or personal property of Subtenant, or for any inconvenience or annoyance occasioned by condemnation, fire or other casualty damage to the Subleased Premises or the 501 Building or any repair, reconstruction or restoration performed in connection therewith. Sublandlord and Subtenant agree that the terms of this Sublease shall govern the effect of any damage to or destruction or condemnation of the Subleased Premises or the 501 Building with respect to the termination of this Sublease and Subtenant hereby waives the provisions of any present or future statute or rule of law to the extent it is inconsistent herewith. 8. Assignment and Subletting: In addition to the provisions of Paragraph 15 ------------------------- of the Master Lease as incorporated herein (requiring, among other things, Sublandlord's consent to 5 any proposed assignment or subletting, which consent shall not be unreasonably withheld, subject to the provisions of said Paragraph 15), Subtenant shall not assign, pledge, encumber or otherwise transfer any interest in this Sublease, sublet all or any part of the Subleased Premises, transfer any interest of Subtenant therein or permit any use of the Subleased Premises by another party (collectively, "Transfer"), without the prior written consent of Master Landlord. Subtenant shall not be relieved from any of its obligations under this Sublease by reason of any Transfer. 9. Use: Subtenant shall use the Subleased Premises as a bio-processing --- scale-up facility and such other purposes as are permitted under the Master Lease and for no other purposes whatsoever. Subtenant shall observe and comply with, and cause all of its agents, employees, contractors, visitors, licensees, subtenants, invitees, and assignees (collectively "Subtenant Parties") to comply with, all Rules promulgated by Master Landlord pursuant to the Master Lease. Neither Master Landlord nor Sublandlord shall be liable for failure of any person to obey such Rules. Nor shall Master Landlord be obligated to enforce such Rules against any person. Attachment 1 to Rider No. 1 to the Original Lease is hereby replaced and superceded in its entirety by Exhibit "C" to this ---------- Sublease. Subtenant covenants and warrants that it shall not use or permit any Subtenant Party to use any Hazardous Materials (as defined in Paragraph 9 of the Original Lease and Rider No. 1 thereto) on the Subleased Premises, the 501 Building or the Project, except for the use of Permitted Hazardous Materials (as defined in Rider No. 1 to the Original Lease as modified by this Sublease) in accordance with the terms of this Sublease (including, without limitation, Rider No. 1 to the Original Lease as modified by this Sublease). 10. Effect of Conveyance: As used in this Sublease, the term "Sublandlord" -------------------- means the holder of the Lessee's interest under the Master Lease. Sublandlord may transfer and deliver (by cash or credit) any security of Subtenant to the transferee of the Lessee's interest under the Master Lease, and thereupon Sublandlord shall be discharged from any further liability with respect thereto. 11. Alterations: In addition to the requirements of Paragraph 11 of the ----------- Master Lease as incorporated herein (requiring, among other things, Sublandlord's consent, which shall not be unreasonably withheld, subject to the provisions of said Paragraph 11), Subtenant shall not make any additions, alterations, improvements or other modifications to the Subleased Premises or any part thereof except in accordance with the terms of the Master Lease and with the prior written consent of Master Landlord. Without limiting the foregoing, Subtenant shall be responsible, at its sole expense, for the installation, maintenance and repair of Subtenant's network connection to the existing network room at the Subleased Premises. Subtenant shall, at its sole cost, make all modifications, alterations and improvements to the Subleased Premises and the 501 Building that are required by any applicable local, state or federal rule, law, regulation or order because of: (i) Subtenant's particular use of the Subleased Premises or 501 Building; (ii) Subtenant's application for any building permit or other governmental approval; or (iii) Subtenant's making of any alteration or improvement to or within the Subleased Premises. 12. Insurance; Exemption of Sublandlord from Liability. -------------------------------------------------- (a) Subtenant's Liability Insurance. Subtenant, at its sole expense, ------------------------------- shall obtain and keep in full force and effect during the Term such insurance, in such amounts, as are required to be obtained and kept by Lessee under Paragraph 20 of the Master Lease. Without 6 limiting the foregoing, Subtenant shall, at its sole expense, cause Sublandlord and Master Landlord to be named as additional insureds under the liability policy(ies) required to be maintained by Subtenant. Subtenant and Sublandlord shall each obtain from their respective property insurers a waiver of all rights of subrogation as set forth in Paragraph 19 of the Master Lease. The other waivers contained in Paragraph 19 of the Master Lease shall apply as between Subtenant and Sublandlord. (b) Exemption of Sublandlord from Liability. Sublandlord shall not be --------------------------------------- liable to Subtenant or anyone else for any harm, injury (including illness and emotional distress), death or damage to (i) the person or goods, wares, merchandise or other property of Subtenant, any Subtenant Party, or any other person on or traveling to or from the Subleased Premises, or (ii) Subtenant or its business, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects or pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any variation or interruption of utility (including telecommunications) services, or from any other cause, including where the said injury or damage results from Sublandlord's or its employees', agents', or contractors' acts or omissions or from any other sources or places, but not to the extent the said injury or damage results from the gross negligence or willful misconduct of Sublandlord or its employees, agents or contractors. Sublandlord shall not be liable for any damages arising from any act or neglect of any other tenant or subtenant of the Project. Notwithstanding Sublandlord's negligence or breach of this Sublease, Sublandlord shall under no circumstances be liable for injury to Subtenant's business or for any loss of income or profit therefrom or for any other consequential damages suffered by Subtenant. 13. No Liability for Master Landlord Defaults. Sublandlord shall not be ----------------------------------------- liable to Subtenant for any defaults by Master Landlord under the Master Lease, nor shall Subtenant be entitled to terminate this Sublease or to abate Rent (except as provided in Section 7 above) for any reason including, without limitation, (a) the failure, curtailment, stoppage, suspension or interruption of any utility or service furnished to the Subleased Premises or the 501 Building, whether by Master Landlord or anyone else, or (b) the failure of Master Landlord to keep, maintain, repair or replace the Subleased Premises as may be required under the Master Lease; provided, however, if an express provision of the Master Lease gives Sublandlord the right to terminate the Master Lease upon the occurrence of any event described in (a) or (b) and Sublandlord elects not to terminate the Master Lease pursuant to such provision, Subtenant shall have the right to terminate this Sublease on the same terms and conditions (and within the same time frame) that Sublandlord has to terminate the Master Lease pursuant to such provision). 14. Self-Help: If Subtenant fails to perform any affirmative duty or --------- obligation of Subtenant under this Sublease, within ten (10) days after written notice to Subtenant, Sublandlord may, at its option (but without obligation to do so), perform such duty or obligation on Subtenant's behalf. The actual and reasonably expended costs and expenses of any such performance by Sublandlord shall be due and payable by Subtenant to Sublandlord within five (5) business days after Subtenant's receipt of Sublandlord's invoice therefor. 15. Surrender: On or before the Expiration Date or the earlier termination --------- of this Sublease, Subtenant shall remove all of its trade fixtures, furnishings, equipment and other personal property and all alterations constructed or installed by Subtenant in the Subleased 7 Premises which Sublandlord designated for removal at the time Sublandlord approved the construction or installation of such alterations in the Subleased Premises, and shall surrender the Subleased Premises to Sublandlord in (a) good condition, order and repair, reasonable wear and tear and casualty damage or destruction covered by Paragraph 24 of the Master Lease excepted, and (b) free of any Hazardous Materials used, stored, handled, manufactured, transported, released, discharged, introduced, emitted or disposed of by Subtenant or any Subtenant Party. Subtenant shall repair any damage to the Subleased Premises, the 501 Building or any other part of the Project resulting from the removal of Subtenant's trade fixtures, furnishings, equipment, personal property and alterations, and, at Sublandlord's sole election, Subtenant shall restore the Premises to a condition equivalent in all material respects to the condition that existed as of the Sublease Commencement Date (which may require Subtenant to reconstruct improvements that were in existence on the Sublease Commencement Date but that were subsequently removed by Subtenant); provided, however, that Subtenant shall not be required to reconstruct or remove any improvements unless, at the time Sublandlord approved the alteration of the Subleased Premises, Sublandlord conditioned its approval on such subsequent reconstruction or removal. Sublandlord may require the removal at any time of any or all alterations to the Subleased Premises made by or on behalf of Subtenant without the prior written consent of Sublandlord and Master Landlord. If the Subleased Premises are not surrendered as required by this Section 15, then, in addition to all other rights and remedies of Sublandlord, Subtenant shall be liable to Sublandlord for the actual and reasonably expended costs incurred by Sublandlord in returning the Subleased Premises to the required condition, plus interest thereon until paid at the prime interest rate plus four percent (4%) or, if lower, at the highest, non-usurious rate permitted by law. The provisions of this Section 15 shall survive the expiration or earlier termination of this Sublease. 16. Brokers. The parties acknowledge that Tory Corporate Real Estate ------- Advisors, Inc. (doing business as The Staubach Company) ("Sublandlord's Agent") has represented Sublandlord in this transaction and that Cresa Partners ("Subtenant's Agent") has represented Subtenant in this transaction. Sublandlord and Subtenant each represent and warrant to the other that, except for the aforementioned brokers, neither has hired or engaged a real estate broker, salesman, agent or finder who is or will be entitled to a commission, fee or other compensation by reason of the transaction contemplated under this Sublease. Sublandlord shall pay Sublandlord's Agent a real estate commission pursuant to a separate contractual agreement and not pursuant to the terms of this Sublease. Sublandlord shall have no obligation to pay Subtenant's Agent any commission or other compensation. Subtenant and Sublandlord each agree to indemnify and hold the other harmless from and against any and all claims for brokerage commissions, finder's fees or other compensation made against the indemnified party by any agent, broker, salesman or finder as a consequence of the indemnifying party's actions or dealings with such agent, broker, salesman, or finder. The provisions of this Section 16 shall survive the expiration or earlier termination of this Sublease. 17. Notices: Unless at least five (5) business days' prior written notice ------- is given in the manner set forth in this paragraph, the address of each party for all purposes connected with this Sublease shall be that address set forth below their signatures at the end of this Sublease. All notices, demands or communications in connection with this Sublease shall be properly addressed and delivered as follows: (a) personally delivered; or (b) submitted to a nationally recognized overnight courier service, charges prepaid; or (c) deposited in the mail (certified, 8 return-receipt requested, and postage prepaid). Notices shall be deemed delivered upon receipt (which shall include receipt by the front desk, mail or delivery room or other package or mail repository located at the address for delivery). All notices given to Master Landlord under the Master Lease shall be considered received only when delivered in accordance with the Master Lease. 18. Other Sublease Terms: -------------------- (a) Incorporation by Reference: Except as otherwise provided below in -------------------------- this Section 18(a), the terms and conditions of this Sublease shall include all of the terms and conditions of the Master Lease, and except as otherwise expressly provided to the contrary in this Sublease, such terms and conditions are incorporated into this Sublease as if fully set forth herein, except that: (i) each reference in such incorporated terms and conditions to "Lease" shall be deemed a reference to this "Sublease", each reference therein to "monthly base rent" shall be deemed a reference to the "Base Rent" payable under this Sublease, each reference therein to "rent" shall be deemed a reference to the "Rent" payable under this Sublease, and each reference to "term commencement date" or "commencement date" shall be deemed a reference to the "Sublease Commencement Date"; (ii) each reference in such incorporated terms and conditions to the "premises" or "Premises" shall be deemed a reference to the "Subleased Premises", each reference to the "term" of the Master Lease shall be deemed a reference to the "Term" of this Sublease, and each reference to the "building" shall be deemed a reference to the 501 Building (except where such reference is intended to refer to a building in the Project other than the 501 Building); (iii) each reference in such incorporated terms and conditions to "Lessor" and "Lessee" shall be deemed a reference to "Sublandlord" and "Subtenant", respectively; (iv) with respect to damage caused by Master Landlord and work, services, utilities, electricity, repairs, restoration, insurance, indemnities, reimbursements, representations or warranties provided or to be provided by Master Landlord, or the performance of any other obligation of Master Landlord under the Master Lease, Sublandlord shall not be required to perform such obligation(s) of Master Landlord, but Sublandlord shall perform Sublandlord's Master Lease Enforcement Obligations; (v) with respect to any obligation of Subtenant to be performed under this Sublease, wherever the Master Lease expressly grants to Sublandlord (as "Lessee") a specified number of days to perform its obligations under the Master Lease, except as otherwise provided herein, Subtenant shall have five (5) fewer days to perform the obligation including, without limitation, curing any defaults; (vi) with respect to any approval required to be obtained from the Master Landlord (as "Lessor") in connection with the Master Lease, such approval must be obtained from both Master Landlord and Sublandlord, and Sublandlord's withholding of approval shall in all events be deemed reasonable if after making commercially reasonable efforts (which shall not include the payment of money, the incurring of any liabilities, or the institution of legal proceedings) to obtain Master Landlord's approval, Sublandlord is unable to obtain Master Landlord's approval; (vii) in any case under the Master Lease where the Master Landlord (as "Lessor") reserves or is granted the right to manage, supervise, control, repair, alter, regulate the use of, enter, access or use the Subleased Premises or any areas beneath, above or adjacent thereto, such reservation or grant shall be deemed to be for the benefit of both Master Landlord and Sublandlord; (viii) in any case under the Master Lease where Sublandlord (as "Lessee") indemnifies, releases or waives claims against Master Landlord (as "Lessor") or agrees that Master Landlord shall not be liable, such indemnity, release, waiver or agreement (but only with respect to the Subleased Premises and Subtenant's use thereof) shall be deemed to run from 9 Subtenant in favor of both Master Landlord and Sublandlord; (ix) in any case under the Master Lease where Sublandlord (as "Lessee") is to execute and deliver certain documents or notices to Master Landlord (as "Lessor"), such obligation shall be deemed to run from Subtenant to both Master Landlord and Sublandlord; and (x) the following modifications shall be made to the Master Lease as incorporated herein: (1) The following provisions of the Master Lease are expressly not incorporated herein: Paragraphs 1, 2, 3, 4, 5, 6 and 7 of the Original Lease; the second sentence of Paragraph 8 of the Original Lease; the last grammatical paragraph of Paragraph 15 of the Original Lease; Paragraph 16 of the Original Lease; the last sentence of Paragraph 17 of the Original Lease; Paragraph 18 of the Original Lease; Paragraph 24 of the Original Lease, excluding the first and second grammatical paragraphs thereof; Paragraph 26(g) of the Original Lease; Paragraph 28 of the Original Lease; Paragraph 30 of the Original Lease; Paragraph 32 of the Original Lease; the words "subject to subparagraph (b) below," appearing in Paragraph 33(a) of the Original Lease; the words "and any Options", "and such Options", "or such Options", "or any Options" appearing in Paragraph 33(a) of the Original Lease; Paragraph 33(b) of the Original Lease; Paragraph 34(b) of the Original Lease; Paragraphs 35, 36 and 37 of the Original Lease; Paragraphs 38, 39, 40 and 41 of the Original Lease; Paragraphs 42(x), (xvi) and (xviii) of the Original Lease; and Exhibits A1, B, and C to the Original Lease; the First Amendment in its entirety; Paragraphs 1 and 2, the first two (2) grammatical paragraphs of Paragraph 3, and Paragraphs 4, 5, 6, 7, 9, 10 and 11 of the Second Amendment; and the entirety of the Third Amendment. (2) References to "Lessor" in the following provisions of the Master Lease shall not be deemed a reference to Sublandlord but shall mean Master Landlord only: Paragraph 12(b) of the Original Lease; the first and second grammatical paragraphs of Paragraph 24 of the Original Lease; excluding the eighth sentence of such first grammatical paragraph; Paragraph 25 of the Original Lease; the fourth sentence of the second grammatical paragraph of Paragraph 9 of the Original Lease; and Section 1.4.2 of Rider No. 1 to the Original Lease. Without limiting Sublandlord's Master Lease Enforcement Obligations, Sublandlord provides no assurance that Master Landlord will perform any of the above provisions. (3) References to "Lease" in the following provisions of the Master Lease shall not be deemed a reference to this Sublease but shall mean the Master Lease only: the first and second grammatical paragraphs of Paragraph 24 of the Original Lease; Paragraph 25 of the Original Lease; the fourth sentence of the second grammatical paragraph of Paragraph 9 of the Original Lease; Section 1.4.2 of Rider No. 1 to the Original Lease; and Section 8 of the Second Amendment. (4) References to "Lessee" in the following provisions of the Master Lease shall not be deemed a reference to Subtenant but shall mean Sublandlord only: the first grammatical paragraph of Paragraph 24 of the Original Lease, excluding the eighth and twelfth sentences of such first grammatical paragraph; Paragraph 25 of the Original Lease. (5) Any right to abate Rent provided to Subtenant through incorporation of the provisions of the Master Lease shall not exceed the rent actually abated under the Master Lease with respect to the Subleased Premises. 10 (6) References to "Lessor" in the following provisions of the Master Lease incorporated herein shall be not be deemed a reference to Sublandlord only but shall be deemed references to both Master Landlord and Sublandlord: the eighth and eleventh sentences of the first grammatical paragraph of Paragraph 24 of the Original Lease; the second appearance of "Lessor" in the twelfth sentence of the first grammatical paragraph of Paragraph 24 of the Original Lease; the second grammatical paragraph of Paragraph 24 of the Original Lease; Paragraph 15(a) of the Original Lease; the first sentence of Paragraph 17; the seventh grammatical paragraph of Paragraph 15; and Sections 1.6 and 1.7 of Rider No. 1. (7) The word "grossly" shall be inserted between the words "the" and "negligent" in the 18th line of the first grammatical paragraph of Paragraph 23 of the Master Lease as incorporated herein. The word "property" shall be inserted between the words "current" and "insurance" in the second line of the second grammatical paragraph of Paragraph 19 of the Original Lease. The words "or Master Landlord" shall be inserted between the words "Lessor" and "or" in the seventh line of Paragraph 42(xvii) of the Original Lease. The words "or the Original Lease (to the extent . . . of the Original Lease)" in Paragraph 26(c) of the Original Lease are hereby deleted. The reference to "Cygnus Research Corporation, a California corporation ("Cygnus")" contained in Section 1.2 of Rider No. 1 shall be deleted and replaced with "Maxygen, Inc. a Delaware corporation ("Maxygen") and each reference to "Cygnus" thereafter appearing in Rider No.1 shall be deleted and replaced with "Maxygen". The following new clause (vii) shall be added to Section 1.10.1(e) of Rider No. 1 immediately after existing clause (vi): "or (vii) any toxicological agent.". Each reference to "Paragraph 9 of the Lease" contained in Rider No. 1 shall be deemed to refer to Paragraph 9 of the Original Lease as incorporated in this Sublease. Each reference to "Paragraph 15 of the Lease" or "Paragraph 23 of the Lease" shall be deemed to refer to Paragraph 15 of the Original Lease or Paragraph 23 of the Original Lease (as applicable) as incorporated in this Sublease. Each reference to "Paragraph 28 of the Lease" contained in Rider No. 1 shall be deemed a reference to Section 15 of this Sublease. The reference to "paragraph 7 of the Lease" contained in Rider No. 1 shall be deemed a reference to Section 4(b) of this Sublease. (b) Sublease Subordinate to Master Lease; Performance: This Sublease ------------------------------------------------- and the rights of Subtenant hereunder are, and at all times shall be, subject and subordinate to the Master Lease and the rights of Master Landlord thereunder, and Subtenant shall at no time use or permit the use of the Subleased Premises so as to cause a breach, default or violation of the Master Lease. Subtenant hereby agrees to perform the "Lessee's" obligations under the Master Lease, except as expressly modified or deleted as provided in this Sublease. Subtenant agrees to be bound by all of the terms and conditions of the Master Lease. In the event of any conflict between the provisions of the Master Lease and the provisions of this Sublease, the provisions of this Sublease shall control. Termination of the Master Lease shall terminate this Sublease at Master Landlord's discretion, and such termination shall be without any liability whatsoever to Sublandlord provided that the termination is not the result of Sublandlord's material breach of the Master Lease. 19. Parking: During the Term, Subtenant shall have the non-exclusive right ------- to use with Sublandlord and other tenants and occupants of the 501 Building and the balance of the Project a pro rata share of undesignated parking spaces in the common parking areas of the Project available to Sublandlord for its use under the Master Lease and subject to the provisions 11 concerning parking set forth in the Master Lease. Subtenant's pro rata share shall be 36 undesignated spaces, which is equal to 3.3 spaces per 1,000 rentable square feet of the Subleased Premises. Subtenant agrees that Subtenant, Subtenant's employees, agents and representatives shall not use parking spaces in excess of said pro rata share of undesignated parking spaces available to Subtenant hereunder. Subtenant acknowledges that the parking spaces being made available to Subtenant hereunder are not reserved and are subject to use, on a first come first serve basis, by Sublandlord and other tenants and authorized users of the Project. 20. Signage: Subtenant shall have the right, at Subtenant's sole cost and ------- expense, to have building standard signage placed at the entry door to the Subleased Premises and in various other locations in the Subleased Premises, subject to obtaining in each instance the prior written consent thereto of Sublandlord and Master Landlord. Sublandlord agrees not to unreasonably withhold its consent to any such signage. Subtenant shall not otherwise place any signs on any part of the Subleased Premises, the 501 Building or Project. 21. Condition Precedent: Notwithstanding anything to the contrary in this ------------------- Sublease, this Sublease and the parties' obligations hereunder are conditioned upon Sublandlord's receipt of the written consent of Master Landlord to this Sublease in form and substance satisfactory to both Sublandlord and Subtenant. If Sublandlord does not receive and provide Subtenant with a copy of the Master Landlord's consent as described above within forty (40) days after execution of this Sublease by Sublandlord, then either Sublandlord or Subtenant may terminate this Sublease by giving the other written notice thereof, and upon such termination neither party shall have any further liability or obligation to the other under or by reason of this Sublease except that Sublandlord shall return the Security Deposit to Subtenant. 22. Amendment: This Sublease may not be amended or otherwise modified --------- except by the written agreement of Subtenant and Sublandlord. 23. Counterparts: This Sublease may be executed in one (1) or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one (1) and the same instrument. Signature copies may be detached from the counterparts and attached to a single copy of this Sublease physically to form one (1) document. 24. No Drafting Presumption: The parties acknowledge that this Sublease has ----------------------- been agreed to by both the parties, that both Sublandlord and Subtenant have consulted with their independent attorneys with respect to the terms of this Sublease, and that no presumption shall be created against Sublandlord because Sublandlord caused this Sublease to be drafted. 25. Successors and Assigns: Subject to the limitations described in Section ---------------------- 8 of this Sublease, this Sublease shall inure to the benefit of, and shall be binding upon, the parties' respective heirs, estates, successors and assigns. 12 IN WITNESS WHEREOF, Sublandlord and Subtenant have executed this Sublease as of the day and year first above written. SUBLANDLORD: SUBTENANT: CYGNUS, INC., a Delaware corporation MAXYGEN, INC., a Delaware corporation By: /s/ Neil R. Ackerman By: /s/ Howard Simon ------------------------------------- ---------------------------------- Print: Neil R. Ackerman Print: Howard Simon ---------------------------------- ------------------------------- Title: Sr. V.P. Title: VP HR & Administration ---------------------------------- ------------------------------- Address: 400 Penobscot Drive Address: 515 Galveston Drive Redwood City, California 94063 Redwood City, California 94063 Attn: President and CEO Attn: General Counsel Date: March 30, 2001 Date: March 30, 2001 ----------------------------------- -------------------------------- 13 EX-10.3 5 dex103.txt 1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN EXHIBIT 10.3 1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN OF MAXYGEN, INC. (amended as of June 29, 2001) 1. PURPOSES OF THE PLAN -------------------- The purposes of the 1999 Nonemployee Directors Stock Option Plan of Maxygen, Inc., a Delaware corporation, are: (a) to encourage Nonemployee Directors to accept or continue their association with the Company; and (b) to increase the interest of Nonemployee Directors in the Company's operations and increased profits through participation in the growth in value of the Common Stock of the Company. 2. DEFINITIONS ----------- As used herein, the following definitions shall apply: (a) "Administrator" shall mean the entity, either the Board or a committee ------------- appointed by the Board, responsible for administering this Plan, as provided in Section 5. (b) "Affiliate" shall mean a parent or subsidiary corporation as defined in --------- the applicable provisions of the Code. (c) "Annual Option" shall have the meaning set forth in Section 6(b). ------------- (d) "Board" shall mean the Board of Directors of the Company, as ----- constituted from time to time. (e) "Change of Control" shall mean: (i) a dissolution or liquidation of the ----------------- Company; (ii) a sale of all or substantially all the assets of the Company; (iii) a merger or consolidation in which the Company is not the surviving corporation and in which beneficial ownership of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors has changed; (iv) a reverse merger in which the Company is the surviving corporation but the shares of the common stock of the Company outstanding immediately before the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, and in which beneficial ownership of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors has changed; (v) an acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan, or related trust, sponsored or maintained by the Company or subsidiary of the Company or other entity controlled by the Company) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of securities of the Company representing at least fifty percent (50%) of the combined voting power entitled to vote in the election of directors; or, (vi) in the event that the individuals who are members of the Incumbent Board cease for any reason to constitute at least fifty percent (50%) of the Board. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (g) "Common Stock" shall mean the Common Stock of the Company. ------------ (h) "Company" shall mean Maxygen, Inc., a Delaware corporation. ------- (i) "Director Fee" shall mean the cash amount, if any, a Nonemployee ------------ Director shall be entitled to receive for serving as a director of the Company in any fiscal year. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (k) "Fair Market Value" shall mean, as of the date in question, the last ----------------- transaction price quoted by the NASDAQ National Market System on the date of grant; provided, however, that if the Common Stock is not traded on such market system or the foregoing shall otherwise be inappropriate, then the Fair Market Value shall be determined by the Administrator in good faith at its sole discretion and on such basis as it shall deem appropriate. Such determination shall be conclusive and binding on all persons. (l) "Incumbent Board" shall mean the individuals who, as of June 28, 2001, --------------- are members of the Board. If the election, or nomination for election by the Company's stockholders, of any new director is approved by a vote of at least fifty percent (50%) of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board. (m) "Initial Option" shall have the meaning set forth in Section 6(a). -------------- (n) "Nonemployee Director" shall mean any person who is a member of the -------------------- Board but is not an employee of the Company or any Parent or Subsidiary of the 2 Company and has not been an employee of the Company or any Parent or Subsidiary of the Company at any time during the preceding 12 months. (o) "Option" shall mean a stock option granted pursuant to this Plan. ------ (p) "Option Agreement" shall mean the written agreement described in ---------------- Section 6(c) evidencing the grant of an Option to a Nonemployee Director and containing the terms, conditions and restrictions pertaining to such Option. "Written agreement" shall include electronic acceptance of an electronic form of agreement. (q) "Option Shares" shall mean the Shares subject to an Option granted ------------- under this Plan. (r) "Optionee" shall mean a Nonemployee Director who holds an Option. -------- (s) "Parent" shall mean a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (t) "Plan" shall mean this 1999 Nonemployee Directors Stock Option Plan of ---- Maxygen, Inc., as it may be amended from time to time. (u) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and ---------- Exchange Commission, or any successor rule thereto. (v) "Section" unless the context clearly indicates otherwise, shall refer ------- to a Section of this Plan. (w) "Share" shall mean a share of Common Stock, as adjusted in accordance ----- with Section 7(a). (x) "Subsidiary" shall mean a "subsidiary corporation" of the Company, ---------- whether now or hereafter existing, within the meaning of Section 424(f) of the Code, but only for so long as it is a "subsidiary corporation". 3. ELIGIBLE PERSONS ---------------- Every person who at the date of grant of an Option is a Nonemployee Director is eligible to receive Options under this Plan. 3 4. STOCK SUBJECT TO THIS PLAN -------------------------- Subject to Section 7(a) of this Plan, the maximum aggregate number of Shares which may be issued on exercise of Options granted pursuant to this Plan is 300,000 Shares. The Shares covered by the portion of any grant under the Plan that expires unexercised shall become available again for grants under the Plan. 5. ADMINISTRATION -------------- (a) This Plan shall be administered by the Board, or by a committee (the "Committee") of at least two Board members to which administration of the Plan is delegated (in either case, the "Administrator"), in accordance with the requirements of Rule 16b-3. (b) Subject to the other provisions of this Plan, the Administrator shall have the authority, in its sole discretion: (i) to determine the Fair Market Value of the Shares subject to Option; (ii) to interpret this Plan; (iii) to prescribe, amend and rescind rules and regulations relating to this Plan; (iv) to defer (with the consent of the Optionee) or accelerate the exercise date of any Option; (v) to authorize any person to execute on behalf of the Company any instrument evidencing the grant of an Option; and (vi) to make all other determinations deemed necessary or advisable for the administration of this Plan. The Administrator may delegate nondiscretionary administrative duties to such employees of the Company as it deems proper. (c) All questions of interpretation, implementation and application of this Plan shall be determined by the Administrator. Such determination shall be final and binding on all persons. 6. GRANT OF OPTIONS ---------------- (a) Grant for Initial Election or Appointment to Board. Subject to the -------------------------------------------------- terms and conditions of this Plan, if any person who is not an officer or employee of the Company is first elected or appointed as a member of the Board and is otherwise considered a "Nonemployee Director" as defined herein, then the Company shall grant to such Nonemployee Director on such day an Option to purchase 20,000 Shares ("Initial Option") at an exercise price equal to the Fair Market Value of such Shares on the date of such Initial Option grant, subject to the limitation of Section 7(i). (b) Grant for Re-election to Board. Subject to the terms and conditions of ------------------------------ this Plan, on the date of the first meeting of the Board immediately following each annual meeting of stockholders of the Company (even if held on the same day as the meeting of stockholders) the Company shall grant to each Nonemployee Director then in 4 office for longer than six months, an Option to purchase 5,000 shares (the "Annual Option") at an exercise price equal to the Fair Market Value of such Shares. (c) No Option shall be granted under this Plan after ten years from the date of adoption of this Plan by the Board. Each Option shall be evidenced by a written Option Agreement, in form and substance satisfactory to the Company, executed by the Company and the Optionee. Failure by the Company, the Nonemployee Director, or both to execute an Option Agreement shall not invalidate the granting of an Option; however, the Option may not be exercised until the Option Agreement has been executed by both parties. For the purposes of this Section 6(c), execution of an Option Agreement shall include electronic acceptance of an electronic version of the Option Agreement. 7. TERMS AND CONDITIONS OF OPTIONS ------------------------------- Each Option granted under this Plan shall be subject to the terms and conditions set forth in this Section 7. (a) Changes in Capital Structure. Subject to subsection 7(b), if the Common ---------------------------- Stock is changed by reason of a stock split, reverse stock split, stock dividend, or recapitalization, or converted into or exchanged for other securities as a result of a merger, consolidation, or reorganization, appropriate adjustments shall be made in: (i) the number and class of shares of Common Stock subject to this Plan and each Option outstanding under this Plan; and (ii) the exercise price of each outstanding Option; provided, however, that the Company shall not be required to issue fractional shares as a result of any such adjustment. Each such adjustment shall be subject to approval by the Administrator in its sole discretion. (b) Time of Option Exercise. Subject to the other provisions of this Plan, ----------------------- each Option shall be for a term of ten years. Each Option shall be exercisable in full on the date of grant. At the discretion of the Administrator, the Company shall have a right of repurchase of Option Shares. The Administrator shall have the discretion to specify the times at which such right of repurchase shall lapse; provided, however, that the right of repurchase must lapse at the rate of at least 20% per year over five years from the date the option was granted. (c) Limitation on Other Grants. The Administrator shall have no discretion -------------------------- to grant Options under this Plan other than as set forth in Sections 6(a) and 6(b). (d) Nonassignability of Option Rights. No Option shall be assignable or --------------------------------- otherwise transferable by the Optionee, except by will or the laws of descent and 5 distribution. During the life of an Optionee, an Option shall be exercisable only by the Optionee. (e) Payment. Except as provided below, payment in full, in cash, shall be ------- made for all Option Shares purchased at the time written notice of exercise of an Option is given to the Company, and proceeds of any payment shall constitute general funds of the Company. Payment may also be made pursuant to a cashless exercise/sale procedure. At the time an Option is granted or exercised, the Administrator, in its absolute discretion, may authorize any one or more of the following additional methods of payment: (i) acceptance of the Optionee's full recourse promissory note for all or part of the Option price, less any par value per share, which must be paid in cash, payable on such terms and bearing such interest rate as determined by the Administrator (but in no event less than the minimum interest rate required for the Company to avoid incurring a financial accounting charge with respect to the Option and in no event more than the maximum interest rate allowed under applicable usury laws), which promissory note may be either secured or unsecured in such manner as the Administrator shall approve (including, without limitation, by a security interest in the Shares); (ii) delivery by the Optionee of Common Stock already owned by the Optionee for all or part of the Option price, provided the Fair Market Value of such Common Stock is equal on the date of exercise to the Option price, or such portion thereof as the Optionee is authorized to pay by delivery of such stock; provided, however, that if an Optionee has exercised any portion of any Option granted by the Company by delivery of Common Stock, the Optionee may not, within six months following such exercise, exercise any Option granted under this Plan by delivery of Common Stock; and (iii) any other consideration and method of payment to the extent permitted under the Delaware General Corporation Law. (f) Termination as Director. Unless determined otherwise by the ----------------------- Administrator in its absolute discretion, to the extent not already expired or exercised, an Option shall terminate at the earlier of: (i) the expiration of the term of the Option; or (ii) three months after the last day served by the Optionee as a director of the Company; provided, that an Option shall be exercisable after the date of termination of service as a director only to the extent exercisable on the date of termination; and provided further, that if termination of service as a director is due to the Optionee's death or "disability" (as determined in accordance with Section 22(e)(3) of the Code), the Optionee, or the Optionee's personal representative (or any other person who acquires the Option from the Optionee by will or the applicable laws of descent and distribution), may at any time within 12 months after the termination of service as a director (or such lesser period as is specified in the Option Agreement but in no event after the expiration of the term of the 6 Option), exercise the rights to the extent they were exercisable on the date of the termination. (g) Withholding and Employment Taxes. At the time of exercise of an Option -------------------------------- (or at such later time(s) as the Administrator may prescribe), the Optionee shall remit to the Company in cash all applicable federal and state withholding and employment taxes. If authorized by the Administrator in its sole discretion, an Optionee shall be permitted to elect, by means of a form of election to be prescribed by the Administrator, to have shares of Common Stock that are acquired upon exercise of the Option withheld by the Company (but in such event, only up to the minimum required withholding amount and in no event any more) or to tender to the Company other shares of Common Stock or other securities of the Company owned by the Optionee on the date of determination of the amount of tax to be withheld as a result of the exercise of such Option (the "Tax Date") to pay the amount of withholding taxes due. Any securities so withheld or tendered shall be valued by the Company as of the Tax Date. (h) Option Term. Each Option shall expire ten years after the date of ----------- grant. (i) Exercise Price. The exercise price of any Option granted to any person -------------- who owns, directly or by attribution under the Code currently Section 424(d), stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or of any Affiliate (a "Ten Percent Stockholder") shall in no event be less than 110% of the fair market value (determined in accordance with 2(i)) of the stock covered by the Option at the time the Option is granted. 8. MANNER OF EXERCISE ------------------ (a) An Optionee wishing to exercise an Option shall give written notice to the Company at its principal executive office, to the attention of the officer of the Company designated by the Administrator, accompanied by payment of the exercise price as provided in Section 7(e) and, if required, by payment of any federal or state withholding or employment taxes required to be withheld due to exercise of the Option. The date the Company receives written notice of an exercise accompanied by payment of the exercise price and any required federal or state withholding or employment taxes will be considered as the date such Option was exercised. Unless otherwise provided by the Administrator, Options may be exercised only twice in any calendar year. (b) Promptly after the date an Option is exercised, the Company shall, without stock issue or transfer taxes to the Optionee or other person entitled to exercise the Option, deliver to the Optionee or such other person a certificate or certificates for the 7 requisite number of shares of Common Stock or, in lieu of a certificate, electronic or paper notification of share ownership in a brokerage account. An Optionee or transferee of an Optionee shall not have any privileges as a stockholder with respect to any Common Stock covered by the Option until the date of issuance of a stock certificate or notification or ownership in a brokerage account. 9. NO RIGHT TO DIRECTORSHIP ------------------------ Neither this Plan nor any Option shall confer upon any Optionee any right with respect to continuation of the Optionee's membership on the Board or shall interfere in any way with provisions in the Company's Certificate of Incorporation, as amended, and Bylaws, as amended, relating to the election, appointment, terms of office, and removal of members of the Board. 10. FINANCIAL INFORMATION --------------------- The Company shall provide to each Optionee during the period the Optionee holds an outstanding Option a copy of the financial statements of the Company as prepared either by the Company or independent certified public accountants of the Company. Such financial statements shall be delivered as soon as practicable following the end of the Company's fiscal year during the period Options are outstanding. 11. LEGAL REQUIREMENTS ------------------ The Company shall not be obligated to offer or sell any Shares upon exercise of any Option unless the Shares are at that time effectively registered or exempt from registration under the federal securities laws and the offer and sale of the Shares are otherwise in compliance with all applicable securities laws and the regulations of any stock exchange on which the Company's securities may then be listed. The Company shall have no obligation to register the Shares covered by this Plan under the federal securities laws or take any other steps as may be necessary to enable the Shares covered by this Plan to be offered and sold under federal or other securities laws. Upon exercising all or any portion of an Option, an Optionee may be required to furnish representations or undertakings deemed appropriate by the Company to enable the offer and sale of the Shares or subsequent transfers of any interest in the Shares to comply with applicable securities laws. Certificates evidencing Shares acquired upon exercise of Options shall bear any legend required by, or useful for purposes of compliance with, applicable securities laws, this Plan or the Option Agreements. 8 12. ACCELERATION UPON CHANGE OF CONTROL ----------------------------------- In the event of a Change of Control of the Company, all unvested Option Shares shall immediately and automatically vest in full and any Company right to repurchase Option Shares under Section 7(b) shall immediately and automatically lapse in full. 13. AMENDMENTS TO PLAN ------------------ The Board may amend this Plan at any time. Without the consent of an optionee, no amendment may adversely affect outstanding Options. No amendment shall require stockholder approval unless: (a) stockholder approval is required to meet the exemptions provided by Rule 16b-3, or any successor rule thereto or under applicable state statutes; or (b) the Board otherwise concludes that stockholder approval is advisable. 14. STOCKHOLDER APPROVAL; TERM -------------------------- This Plan shall become effective upon adoption by the Board of Directors; provided, however, that no Option shall be exercisable unless and until written consent of holders of a majority of the outstanding shares of capital stock of the Company, or approval by holders of a majority of shares of capital stock of the Company present, or represented, and entitled to vote at a validly called stockholders' meeting (or such greater number as may be required by law or applicable governmental regulations or orders) is obtained within 12 months after adoption by the Board. This Plan shall terminate ten years after adoption by the Board unless terminated earlier by the Board. The Board may terminate this Plan at any time without stockholder approval. No Options shall be granted after termination of this Plan, but termination shall not affect rights and obligations under then-outstanding Options. Adopted by the Board of Directors: September 29, 1999 Approved by the Stockholders: December 14, 1999 Amended by the Board of Directors: March 1, 2001 Amended by the Board of Directors: June 29, 2001 9 MAXYGEN, INC. 1999 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN STOCK OPTION AGREEMENT This document (the "Agreement") sets forth the terms of a Stock Option (the "Option") granted by Maxygen, Inc., a Delaware corporation (the "Company"), pursuant to a Certificate of Stock Option Grant (the "Certificate") displayed at the website of AST StockPlan, Inc. The Certificate, which specifies the person to whom the Option is granted ("Optionee") and other specific details of the grant, and the electronic acceptance of the Certificate at the website of AST StockPlan, Inc., are incorporated herein by reference. THE PARTIES AGREE AS FOLLOWS: 1. Grant of Option; Vesting Base Date. ---------------------------------- 1.1. Grant. The Company hereby grants to Optionee an opportunity to ----- purchase shares of its Common Stock in accordance with the Company's 1999 Non-Employee Directors Stock Option Plan (the "Plan"), as hereinafter provided. 1.2. Vesting Base Date. The parties hereby establish the date set ----------------- forth in the Certificate as the Vesting Base Date (as defined below). 1.3. Type of Option. The Option shall be a "nonstatutory option." -------------- 1.4. Number of Option Shares. The number of shares of Company Common ----------------------- Stock underlying the Option (the "Option Shares") is as set forth in the Certificate. 2. Exercise Price. The exercise price for purchase of each share of Common -------------- Stock covered by this Option shall be the price set forth in the Certificate. 3. Term. Unless otherwise specified in the Certificate or this Agreement, ---- this Option shall expire as provided in Section 7(b) of the Plan. 4. Corporate Transactions. In the event of the proposed dissolution or ---------------------- liquidation of the Company, the Administrator (as defined in the Plan) shall notify Optionee at least 15 days before consummation of the proposed action. To the extent not previously exercised, the Option will terminate immediately before the consummation of the proposed action. In the event of a merger or consolidation of the Company with or into another entity in which the Company is not a surviving entity or in which the stockholders of the Company just before that transaction do not, by virtue of those holdings, own securities representing at least 50 percent of the ordinary voting power of the Company immediately after that transaction, or in the event of a sale of all or substantially all the assets of the Company in which the stockholders of the Company receive securities of the acquiring entity or an affiliate thereof: (a) if the successor entity so chooses, it shall assume the Option or issue equivalent options when the transaction is consummated or (b) if the successor entity chooses not to do that, then the Option shall be fully vested and exercisable for a period of 15 days after the date notice is given under this Section 4 and shall terminate upon expiration of that 15-day period. 1 5. Adjustment of Options. The Company shall adjust the number and kind of --------------------- shares and the exercise price thereof in certain circumstances in accordance with the provisions of Section 7(a) of the Plan and Section 4 hereof. 6. Exercise of Options. ------------------- 6.1 Vesting; Time of Exercise. This Option shall be exercisable in ------------------------- full on the date of grant but shall be subject to a right of repurchase in favor of the Company, at the exercise price per share, as to any unvested Option Shares. This Option shall vest according to the schedule set forth in the Certificate. Such schedule shall commence as of the date set forth in the Certificate (the "Vesting Base Date"). Notwithstanding the foregoing, the vesting schedule and right of repurchase set forth in this Section 6.1 are subject to the acceleration provisions in Section 12 of the Plan. 6.2 Termination as Director. Unless determined otherwise by the ----------------------- Administrator in its absolute discretion, to the extent not already expired, the Option shall terminate at the earlier of: (i) the expiration of the term of the Option; or (ii) three months after the last day served by Optionee as a director of the Company (the "Date of Termination"); provided, that the Option shall stop vesting on the Date of Termination and exercises thereafter shall be only for vested Option Shares; and provided further, that if termination of service as a director is due to the Optionee's death or "disability" (as determined in accordance with Section 22(e)(3) of the Internal Revenue Code), Optionee, or Optionee's personal representative (or any other person who acquires the Option from Optionee by will or the applicable laws of descent and distribution), may at any time within 12 months after the Date of Termination (but in no event after the expiration of the term of the Option), exercise the Option to the extent Option Shares were vested on the Date of Termination. The Company shall have three months after the Date of Termination to give notice of its intent to repurchase Option Shares that were unvested on the Date of Termination. The repurchase shall take place as soon as practicable after the date of such notice. 6.3 Manner of Exercise. Optionee may exercise this Option, or any ------------------ portion of this Option, by giving written notice to the Company at its principal executive office, to the attention of the officer of the Company designated by the Plan Administrator, accompanied by payment of the exercise price and payment of any applicable withholding or employment taxes. The date the Company receives written notice of an exercise hereunder accompanied by payment will be considered as the date this Option was exercised. 6.4 Payment. Except as otherwise provided in the Certificate, payment ------- of the exercise price per share is due in full upon exercise of all or any part of the Option. Optionee may elect, to the extent permitted by applicable statutes and regulations, to make payment of the exercise price under one of the following alternatives: (i) payment of the exercise price per share in cash (including check) at the time of exercise, (ii) payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of the Option Shares, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds, (iii) provided that at the time of exercise the Company's Common Stock is publicly traded and quoted regularly in the Wall Street Journal, payment by delivery of already-owned 2 shares of Common Stock, held for the period required to avoid a charge to the Company's reported earnings, and owned free and clear of any liens, claims, encumbrances or security interests, which Common Stock shall be valued at its fair market value on the date of exercise, or (iv) payment by a combination of the methods of payment permitted by subparagraphs 6.4(i) through 6.4(iii) above. The proceeds of any payment shall constitute general funds of the Company. 6.5 Delivery of Certificate/Notice of Share Ownership. Promptly after ------------------------------------------------- receipt of written notice of exercise of the Option, the Company shall instruct its transfer agent to deliver to Optionee a certificate or certificates for the requisite number of Option Shares or, in lieu thereof, paper or electronic notification of share ownership in Optionee's brokerage account. The Optionee shall not have any privileges as a stockholder of the Company with respect to any Option Shares covered by the Option until the date of issuance of the stock certificate or notice of share ownership for those Option Shares. 7. Nonassignability of Option. This Option is not, and unvested Option -------------------------- Shares are not, assignable or transferable by Optionee except by will or by the laws of descent and distribution. During the life of Optionee, the Option is exercisable only by Optionee. Any attempt to assign, pledge, transfer, hypothecate or otherwise dispose of this Option or unvested Option Shares in a manner not herein permitted, and any levy of execution, attachment, or similar process on this Option or on unvested Option Shares, shall be null and void. 8. Restriction on Issuance of Shares. --------------------------------- 8.1 Legality of Issuance. The Company shall not be obligated to sell -------------------- or issue any Option Shares pursuant to this Agreement if such sale or issuance, in the opinion of the Company or its counsel, might constitute a violation by the Company of any provision of law, including without limitation the provisions of the Securities Act of 1933, as amended (the "Securities Act"). 8.2 Compliance with Law. The Company shall not be obligated to take ------------------- any affirmative action in order to cause the grant or exercise of this Option or the issuance or sale of any Option Shares pursuant thereto to comply with any law. 9. Restriction on Transfer. Regardless of whether the sale of the Option ----------------------- Shares has been registered under the Securities Act or has been registered or qualified under the securities laws of any state, the Company may impose restrictions upon the sale, pledge or other transfer of Option Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and the Company's counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state or any other law. 10. Stock Certificate. Stock certificates evidencing Option Shares may bear ----------------- such restrictive legends as the Company and the Company's counsel deem necessary or advisable under applicable law or pursuant to this Agreement. 3 11. Assignment; Binding Effect. Subject to the limitations on assignment -------------------------- set forth in this Agreement, this Agreement shall be binding upon and inure to the benefit of the executors, administrators, heirs, legal representatives, and successors of the parties hereto. 12. Damages. Optionee shall be liable to the Company for all costs and ------- damages, including incidental and consequential damages, resulting from a disposition of Option Shares that is not in conformity with the provisions of this Agreement. 13. Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the laws of the State of California excluding those laws that direct the application of the laws of another jurisdiction. 14. Notices. All notices and other communications under this Agreement ------- shall be in writing or posted electronically on the AST Stockplan website. Unless and until Optionee is notified in writing to the contrary, all notices, communications, and documents directed to the Company and related to the Agreement shall be delivered to: Maxygen, Inc. 515 Galveston Drive Redwood City, CA 94063 Attention: General Counsel Unless and until the Company is notified in writing to the contrary, all notices, communications, and documents directed to Optionee and related to this Agreement shall be mailed to Optionee's last known address as shown on the Company's books or posted electronically on the AST Stockplan website. Notices and communications shall be delivered by hand, mailed by first class mail, postage prepaid, sent by reputable overnight courier or posted electronically on the AST Stockplan website. All mailings and deliveries related to this Agreement shall be deemed received when actually received, if by hand delivery, two business days after mailing, if by mail, the next business day after being sent by reputable overnight courier, or 30 days after the date of posting for notices posted electronically on the AST Stockplan website. IN WITNESS WHEREOF, the parties have entered into this Stock Option Agreement as of the grant date set forth in the Certificate. MAXYGEN, INC. Optionee accepts and agrees to be bound by all the terms and conditions of this Agreement and the Plan. 4 EX-10.4 6 dex104.txt PROMISSORY NOTE, DATED MAY 7, 2001 EXHIBIT 10.4 PROMISSORY NOTE $96,822 Redwood City, California May 7, 2001 FOR VALUE RECEIVED, John Curd (the "Promisor") hereby unconditionally promises to pay to the order of Maxygen, Inc. ("Maxygen") at 515 Galveston Drive, Redwood City, California 94063, or at such other place, or to such other party as Maxygen may from time to time designate in writing, the principal sum of Ninety-Six Thousand Eight Hundred Twenty-Two Dollars and Zero Cents ($96,822), together with interest thereon from the date of this Note until and including the date this Note is paid in full at the rate of the lesser of (i) 5.75% per annum and (ii) the maximum rate permissible by law (which under the laws of the State of California shall be deemed to be the laws relating to the permissible rates of interest on commercial loans), in either case compounded annually. The principal sum consists of a loan made by Maxygen to the Promisor on May 7, 2001. Interest shall be due and payable on June 30 and December 31 of each year. Unpaid principal, together with all accrued and unpaid interest, shall be due and payable in full on May 7, 2003. In the event the Promisor's employment with Maxygen terminates for any reason before the unpaid principal balance of this Note, and all unpaid interest, is paid in full, the remaining unpaid principal balance of this Note, and all unpaid interest, shall be due and payable on the Promisor's last date of employment (the "Employment Termination Date"). Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. This Note may be prepaid, in whole or in part, at any time without premium or penalty. In the event that any portion of the principal amount hereof, or interest due hereon, is not paid upon the Employment Termination Date, the Promisor hereby authorizes and directs Maxygen to deduct all amounts due under this Note from the Promisor's final paycheck. The Promisor agrees to execute any reaffirmation agreement requested by Maxygen at the time of termination, reaffirming the Promisor's authorization to deduct these sums from the final paycheck. If the Promisor's final paycheck is insufficient to offset deduction of the principal and interest owed under this Note, the Promisor agrees to pay immediately, all of the outstanding principal and interest under this Note. The Promisor also agrees to pay, upon demand, any costs and expenses of Maxygen incurred in connection with or arising out of the collection or enforcement of this Note, including without limitation, attorneys' fees and court costs (inclusive of attorneys' fees and costs on appeal or in connection with any bankruptcy proceeding relating to the Promisor). In the event that the Promisor fails to make payment on any date for payment of principal and interest specified above, the Promisor shall be deemed to be in default hereunder. In the event of default, Maxygen may, at its sole discretion, five days after giving notice of default to the Promisor, accelerate the maturity of all amounts due under this Note by giving notice of such acceleration; provided, however, that such acceleration shall not occur if the Promisor makes the required payment within five days after notice of default is given. This Note is secured by a Security Agreement of even date herewith. If any payment of principal or interest on this note becomes due on a Saturday, Sunday, or a public holiday under the laws of the State of California, such payment shall be made on the next succeeding business day and such extension of time shall be included in computing interest in connection with such payment. Upon payment in full of all principal and interest payable hereunder, this Note shall be surrendered to the Promisor for cancellation. The Promisor and any endorsers or guarantors hereof and all others who may become liable for all or part of this obligation, severally waive presentment for payment, demand and protest and notice of protest, and of dishonor and non-payment of this Note, and expressly consent to any extension of the time of payment hereof or of any sums due hereunder, to the release of any party liable for this obligation, and any such extension or release may be made without notice to any of such parties and without in any way affecting or discharging this liability. Time is expressly made of the essence with respect to every provision of this Note. All payments due under this Note shall be made in the legal currency of the United States in immediately available funds. Payments received under this Note shall be applied first to payment of accrued and unpaid interest, then to payment of Maxygen's costs and the balance to payment of principal. This Note is being delivered in and shall be governed by, and construed, enforced and interpreted in accordance with, the laws of the State of California, excluding conflict of laws principles that would cause the application of laws of any other jurisdiction. An action or proceeding for collection or enforcement of this Note may be brought by Maxygen (or its assignee) in any state or federal court in the State of California having proper jurisdiction. The Promisor freely and voluntarily accepts the terms and conditions set forth above and acknowledges receiving a completed copy of this Promissory Note. This Promissory Note is executed at the location and as of the date first set forth above. The Promisor /s/ John Curd --------------------------- John Curd 128 Reservoir Hillsborough, CA 94010 2 Payments Made ------------- Date Principal Amount Interest Received By ---- ---------------- -------- ----------- 3 -----END PRIVACY-ENHANCED MESSAGE-----