-----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, GULHKTjINxs9Q1/X6Etxnf7em31guMIGCsz+AhcdRapK6wcvcvHWnrO7AHDTwa41 R+94alJxvnMvYmHXhhRwzA== /in/edgar/work/20000808/0000912057-00-035223/0000912057-00-035223.txt : 20000921 0000912057-00-035223.hdr.sgml : 20000921 ACCESSION NUMBER: 0000912057-00-035223 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 20000808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOSAN BIOSCIENCES INC CENTRAL INDEX KEY: 0001110206 STANDARD INDUSTRIAL CLASSIFICATION: [8731 ] IRS NUMBER: 943217016 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33732 FILM NUMBER: 688059 BUSINESS ADDRESS: STREET 1: 3832 BAY CENTER PLACE CITY: HAYWARD STATE: CA ZIP: 94545 BUSINESS PHONE: 5107328400 MAIL ADDRESS: STREET 1: 3832 BAY CENTER PLACE CITY: HAYWARD STATE: CA ZIP: 94545 S-1/A 1 s-1a.txt FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 2000 REGISTRATION NO. 333-33732 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- KOSAN BIOSCIENCES INCORPORATED (Exact name of Registrant as specified in its charter) DELAWARE 8731 94-3217016 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
------------------------ 3832 BAY CENTER PLACE HAYWARD, CA 94545 (510) 732-8400 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) -------------------------- DANIEL V. SANTI, M.D., PH.D. CHAIRMAN AND CHIEF EXECUTIVE OFFICER KOSAN BIOSCIENCES INCORPORATED 3832 BAY CENTER PLACE HAYWARD, CA 94545 (510) 732-8400 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: BLAIR W. STEWART RICHARD R. PLUMRIDGE ANGELA CORSILLES DARREN R. HENSLEY JASON BRANDWENE PATRICIA A. ELIAS WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP 650 PAGE MILL ROAD 370 INTERLOCKEN BLVD., SUITE 500 PALO ALTO, CA 94304 BROOMFIELD, COLORADO 80021 (650) 493-9300 (303) 410-2000
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a) MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 8, 2000 PRELIMINARY PROSPECTUS 5,000,000 SHARES [LOGO] COMMON STOCK ------------------------------------------------------------ This is our initial public offering of shares of common stock. We are offering 5,000,000 shares. No public market currently exists for our common stock. We have applied to have our common stock listed on the Nasdaq National Market under the symbol "KOSN." We expect the public offering price to be between $14.00 and $16.00. INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 6.
Per Share Total -------- -------- Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds, before expenses, to Kosan......................... $ $
We have granted the underwriters a 30-day option to purchase up to 750,000 shares of common stock to cover any over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on or about , 2000. - -------------------------------------------------------------------------------- LEHMAN BROTHERS CIBC WORLD MARKETS SG COWEN FIDELITY CAPITAL MARKETS a division of National Financial Services Corporation ARTWORK [DESCRIPTION OF ARTWORK] [Front cover "KOSAN TECHNOLOGY PLATFORM" The art shows 4 cells (arranged diagonally), each containing a polyketide gene with modules of different color; an arrow leads from one cell to the next indicating a conversion, and each cell has an arrow to a polyketide structure, indicating the production of that polyketide. Each conversion has an explanatory caption by its side. The conversions indicated by color and size changes are over-expression, gene manipulation and chemobiosynthesis. Following are captions that will be presented with the artwork: OVER-EXPRESSION. We transfer polyketide genes from low-producing organisms to our genetically superior hosts to increase production of polyketides. GENE MANIPULATION. We change the order of, and introduce new, polyketide gene fragments to produce novel polyketides. CHEMOBIOSYNTHESIS. We disable the start of a polyketide gene and "feed" chemical fragments to incorporate them into the polyketide.] TABLE OF CONTENTS
PAGE -------- Prospectus Summary...................... 2 Risk Factors............................ 6 Forward-Looking Statements.............. 13 Use of Proceeds......................... 14 Dividend Policy......................... 14 Dilution................................ 15 Capitalization.......................... 16 Selected Financial Data................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 18 Business................................ 23
Management and Directors................ 35
PAGE -------- Related Party Transactions.............. 46 Principal Stockholders.................. 49 Description of Capital Stock............ 52 Shares Eligible for Future Sale......... 54 Underwriting............................ 56 Legal Matters........................... 59 Change in Independent Auditors.......... 59 Experts................................. 59 Where You Can Find More Information..... 59 Index to Financial Statements........... F-1
------------------------ ABOUT THIS PROSPECTUS You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of time of delivery of this prospectus or of any sale of our common stock. PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS THAT WE BELIEVE MOST IMPORTANT ABOUT THIS OFFERING AND OUR BUSINESS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY FOR A COMPLETE UNDERSTANDING OF THIS OFFERING AND OUR BUSINESS. OUR BUSINESS We are a biotechnology company using our proprietary technologies to develop drug candidates from an important class of natural product compounds known as polyketides. Polyketides are naturally made in very small amounts in microorganisms and are structurally complex and difficult to make or modify by chemical means. We have developed technologies to manipulate the natural process by which polyketides are made. These technologies give us the ability to create novel polyketides thereby providing a pipeline of potential drug candidates. Polyketides have been a source of many different pharmaceuticals including antibiotics, anticancer drugs, cholesterol-lowering drugs, immunosuppressants, and other therapeutics, as well as animal health and agricultural products. Natural or semi-synthetic polyketide pharmaceuticals represent over 20 products, with sales of approximately $10 billion per year. Using our technologies, we are able to modify and produce polyketides in ways chemists cannot. Our approach mimics, accelerates and expands the evolutionary process that gave rise to this important class of molecules. We use our technologies to: - create improved versions of currently marketed pharmaceuticals that address large markets; - modify an existing polyketide used in one therapeutic area to create a new polyketide to be used in another; - transfer the ability to make a polyketide from one organism to another to enable large-scale production; and - generate large numbers of new polyketides to provide a source of new drug candidates. OUR TECHNOLOGIES Our technology platform has five components which allow us to modify, create and produce new polyketides: - polyketide gene alteration--the creation of new polyketides using our technology to modify the genetic instructions by which polyketides are made; - chemo-biosynthesis--the creation of new polyketides by incorporating synthetic compounds into the biological processes by which polyketides are made; - heterologous over-expression--the production of polyketides in organisms that do not naturally produce them; - combinatorial biosynthesis--the rapid and efficient production of many different polyketides with related structures; and - screening libraries--large collections of many different polyketides that can be readily tested for biological activities of interest. 2 OUR STRATEGY Our strategy is to apply our technologies to create new polyketides for development as pharmaceutical products and to advance these drug candidates into clinical trials. We aim to: - maximize the value and minimize the risk associated with new drug development by focusing on new compounds with structures related to existing polyketides that have known utility, safety and significant market potential; - establish collaborative relationships with large pharmaceutical companies to advance our most complex programs through clinical trials and into the market, as well as to prepare and test our screening libraries; - expand and enhance our technologies and increase our capabilities for making new and useful polyketides; and - acquire or license complementary technologies or drug candidates from third parties. OUR PRODUCT DEVELOPMENT OPPORTUNITIES We have six primary programs for the discovery and development of new polyketides that are directed at infectious disease, gastrointestinal motility disorders, mucus hypersecretion, cancer, immunosuppression and nerve regeneration. These programs were selected because they represent opportunities where our technologies could improve existing products or fill unmet needs, and address large markets. Since September 1998, we have identified several polyketide antibiotic drug candidates that kill organisms that are resistant to existing products. We have developed these drug candidates in collaboration with The R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company. In July 2000, we signed a binding preliminary agreement with the Sloan-Kettering Institute for Cancer Research setting forth the principal terms of a collaboration and license agreement relating to anti-cancer compounds known as epothilones. 3 THE OFFERING Common stock offered by us................ 5,000,000 shares Common stock to be outstanding after this offering................................ 23,844,539 shares(1) Proposed Nasdaq National Market symbol.... KOSN Use of proceeds........................... We intend to use the net proceeds from this offering for advancing our drug candidates through preclinical and later-stage development, discovering or acquiring new drug candidates, expanding our technology platform, capital expenditures, working capital, general corporate purposes and possible future acquisitions. See "Use of Proceeds."
Unless otherwise indicated, information in this prospectus assumes: - the automatic conversion of all outstanding shares of our convertible preferred stock into 12,220,719 shares of common stock upon the closing of this offering; - no exercise of the underwriters' over-allotment option to purchase up to 750,000 shares; and - a 3-for-1 stock split which will become effective prior to the closing of this offering. - ------------------------ (1) The number of shares of common stock to be outstanding after this offering excludes: - 2,902,107 shares of common stock reserved for issuance under our 1996 stock option plan, of which 1,141,800 shares are subject to outstanding options at June 30, 2000 with a weighted average exercise price of $1.35 per share; - 300,000 shares of common stock reserved for issuance under our 2000 employee stock purchase plan approved by our board of directors in March 2000; and - 300,000 shares of common stock reserved for issuance under our 2000 non-employee director stock option plan approved by our board of directors in March 2000. Our principal executive offices are located at 3832 Bay Center Place, Hayward, California, 94545. Our phone number is (510) 732-8400. Our website is http://www.kosan.com. We do not intend for the information found on our website to be incorporated into or be a part of this prospectus. 4 SUMMARY FINANCIAL DATA The following tables summarize our financial data, and should be read together with our financial statements and the related notes, the "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The pro forma information contained in the statement of operations data gives effect to the automatic conversion of all convertible preferred stock upon the completion of this offering. The pro forma balance sheet data reflects the automatic conversion of our preferred stock into common stock on a three-to-one basis and the sale of 5,000,000 shares of our common stock at an assumed price to the public of $15.00 per share, after deducting the underwriting discounts, commissions and estimated offering expenses payable by us.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------ ---------------------------- 1997 1998 1999 1999 2000 STATEMENT OF OPERATIONS DATA: ---------- ---------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (UNAUDITED) Total revenue......................... $ 287 $ 1,236 $ 5,346 $ 3,107 $ 2,224 Total operating expenses.............. 2,379 5,021 10,400 4,650 9,414 Loss from operations.................. (2,092) (3,785) (5,054) (1,543) (7,190) Net loss.............................. $(1,994) $(3,267) $(4,401) $(1,280) $ (6,679) Deemed dividend upon issuance of Series C convertible preferred stock............................... -- -- -- -- (11,267) ------- ------- ------- ------- -------- Net loss attributable to common stockholders........................ $(1,994) $(3,267) $(4,401) $(1,280) $(17,946) Basic and diluted net loss per share............................... $ (0.49) $ (0.77) $ (0.98) $ (0.29) $ (3.57) Shares used in computing basic and diluted net loss per share.......... 4,094 4,270 4,509 4,430 5,029 Pro forma basic and diluted net loss per share (unaudited)............... $ (0.31) $ (1.12) Shares used in computing pro forma basic and diluted net loss per share (unaudited)......................... 14,318 16,056
AS OF JUNE 30, 2000 ----------------------- ACTUAL PRO FORMA BALANCE SHEET DATA: -------- --------- (IN THOUSANDS) Cash, cash equivalents and short-term investments........... $ 25,027 $ 93,527 Working capital............................................. 22,370 90,870 Long-term investments....................................... 7,235 7,235 Total assets................................................ 36,898 105,398 Capital lease and debt obligations, less current portion.... 2,099 2,099 Accumulated deficit......................................... (18,272) (18,272) Stockholders' equity........................................ 31,777 100,277
5 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF NET LOSSES AND MAY NEVER BECOME PROFITABLE. We commenced operations in 1996 and are still in an early stage of development. We have not commercialized any products and we have incurred significant losses to date. As of June 30, 2000, we had an accumulated deficit of approximately $18.3 million. To date, our revenues have been solely from collaborations and government grants. Our expenses have consisted principally of costs incurred in research and development and from general and administrative costs associated with our operations. We have incurred net losses since our inception, including a net loss of approximately $6.7 million for the six months ended June 30, 2000. We expect our expenses to increase and to continue to incur operating losses for at least the next several years as we continue our research and development efforts for our drug candidates. The amount of time necessary to successfully commercialize any of our drug candidates is long and uncertain and successful commercialization may not occur at all. As a result, we may never become profitable. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS, WE MAY NOT BE ABLE TO SUPPORT OUR OPERATIONS. Based on our current plans, we believe our cash, cash equivalents and investments, together with the net proceeds of this offering, will be sufficient to fund our operating expenses and capital requirements through at least the next 24 months. However, the actual amount of funds that we will need during or after the next 24 months will be determined by many factors, including those discussed in this section. If additional funds are required and we are unable to obtain them on terms favorable to us, we may be required to delay, scale back or eliminate some or all of our research and development programs or to license third parties to develop or market products or technologies that we would otherwise seek to develop or market ourselves. If we raise additional funds by selling additional shares of our capital stock, the ownership interest of our stockholders will be diluted. IF WE DON'T ESTABLISH AND MAINTAIN COLLABORATIONS WITH OTHER PARTIES, THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS MAY BE DELAYED OR STOPPED. Because we do not currently possess the financial and other resources necessary to develop and commercialize potential products that may result from our technologies, or the financial and other resources to complete any approval processes which may be required for these products, we must enter into collaborative arrangements to develop and commercialize many of our drug candidates. If we do not extend or renew our current collaboration with The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson companies, which expires on December 28, 2000, or if we do not enter into new collaborative agreements, then our revenues will be reduced, and our drug candidates may not be developed, manufactured or marketed. OUR POTENTIAL PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND SUBSTANTIAL ADDITIONAL EFFORT WILL BE NECESSARY FOR DEVELOPMENT AND COMMERCIALIZATION. Our technologies are new and our drug candidates are in the early stage of development. We may not develop products that prove to be safe and effective, meet applicable regulatory standards, are capable of being manufactured at reasonable costs, or can be marketed successfully. All of the potential proprietary products that we are currently developing will require significant development and investment, including extensive preclinical and clinical testing before we can submit any application for 6 regulatory approval. Before obtaining regulatory approvals for the commercial sale of any of our products, we must demonstrate through preclinical testing and clinical trials that our drug candidates are safe and effective in humans. We have not commenced clinical testing of any of our potential products, nor have we submitted any application to test any potential products in humans. Conducting clinical trials is a lengthy, expensive and uncertain process. Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the drug candidate. Our clinical trials, when commenced, may be suspended at any time if we or the U.S. Food and Drug Administration, or the FDA, believe the patients participating in our studies are exposed to unacceptable health risks. We may encounter problems in our studies which will cause us or the FDA to delay or suspend the studies. Our commencement and rate of completion of clinical trials may be delayed by many factors, including: - ineffectiveness of the study compound, or perceptions by physicians that the compound is not effective for a particular indication; - inability to manufacture sufficient quantities of compounds for use in clinical trials; - failure of the FDA to approve our clinical trial protocols; - slower than expected rate of patient recruitment; - unforeseen safety issues; or - government or regulatory delays. If any future clinical trials are not successful, our business, financial condition and results of operations will be harmed. 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 other intellectual property for our technologies and products in the United States and other countries. If we do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate our competitive advantage. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these foreign countries. The patent positions of biotechnology companies, including our patent position, involve complex legal and factual questions and, therefore, validity and enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated or circumvented. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will apply for patents covering both our technologies and drug candidates as we deem appropriate. However, we may fail to apply for patents on important technologies or products in a timely fashion or at all, and in any event, the applications we do file may be challenged and may not result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages. If the use or validity of any of our patents is ever challenged, resulting in litigation or administrative proceedings, we would incur substantial costs and the diversion of management in defending the patent. In addition, we generally do not control the patent prosecution of technology that we license from others. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we would over technology we own. 7 We rely upon trade secret protection for our confidential and proprietary information. We have taken measures to protect our proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators, and consultants. Nevertheless, employees, collaborators, or consultants may still disclose our proprietary information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets. LITIGATION OR OTHER PROCEEDINGS OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT WOULD REQUIRE US TO SPEND TIME AND MONEY AND COULD PREVENT US FROM DEVELOPING OR COMMERCIALIZING PRODUCTS. Our commercial success depends in part on not infringing the patents and proprietary rights of third parties and not breaching any licenses that we have entered into with regard to our technologies and products. The biotechnology industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may have been issued relevant patents or may have filed relevant patent applications that could affect our ability to obtain patents or to operate as we would like to in our research, development, and commercialization efforts. If we wish to use technologies claimed by third parties in issued and unexpired patents, then we may need to obtain license(s) from the owner(s) of such patent(s), enter into litigation, or incur the risk of litigation. Litigation or failure to obtain necessary licenses may impede our ability to obtain collaborations or to develop our products and could prevent us or our collaborators from developing or commercializing our products. Other biotechnology and pharmaceutical companies have filed patent applications and obtained patents, and in the future will likely continue to file patent applications and obtain patents, claiming polyketide synthase genes, gene fragments, and methods for modifying such genes or gene fragments. If these patents are valid or if these applications issue into valid patents, we will have to either circumvent the claims in these patents, or obtain licenses to use the patented technology in order to use these genes or technologies in the research, development and commercialization of our products and technologies. If we are unsuccessful in circumventing or acquiring licenses to these patents, our ability to research, develop or commercialize products may be blocked. Third parties may sue us in the future to challenge our patent rights or claim infringement of their patents. An adverse determination in litigation to which we may become a party could subject us to significant liabilities to third parties, require us to license disputed rights from third parties or require us to cease using the disputed technology. We are aware of a significant number of patents and patent applications relating to aspects of our technologies and families of compounds filed by, and issued to, third parties. If any of our competitors have filed patent applications or have been granted patents claiming inventions also claimed by us, we may have to participate in an interference proceeding declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to a patent for these inventions in the United States. Such a proceeding could result in substantial cost to us even if the outcome is favorable. Even if successful on priority grounds, an interference may result in loss of claims based on patentability grounds raised in the interference. Although patent and intellectual property disputes in the biotechnology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. Furthermore, we cannot be certain that the necessary licenses would be available to us on satisfactory terms, if at all. Third parties may obtain patents in the future and then claim that the use of our technologies infringes these patents or that we are employing their proprietary technology without authorization. 8 This is because patent applications in the United States are secret until issued into corresponding patents and the applications can be pending for several years after filing. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any of these claims or enforcing our patents against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief which could effectively block our ability to further develop, commercialize, and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to: - pay damages; - stop using our products or methods; - develop non-infringing products or methods; 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 substantial delays in product introductions while we attempt to develop alternative methods or products, which we may not be able to accomplish. IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH THROUGH RECRUITING AND RETAINING SKILLED EMPLOYEES AND EXPAND OUR MANAGEMENT AND IMPROVE OUR CONTROLS AND SYSTEMS, OUR LOSSES COULD INCREASE. We have experienced a period of rapid and substantial growth that has placed, and if this growth continues will further place, a strain on our human and capital resources. If we are unable to manage this growth effectively, then our losses could increase. The number of our employees increased from 21 on December 31, 1997 to 62 on June 30, 2000. Retaining our current employees and recruiting qualified scientific personnel to perform future research and development work will be critical to our success. Competition is intense for experienced scientists, and we may not be able to retain or recruit sufficient skilled personnel to allow us to pursue collaborations and develop our products and core technologies to the extent otherwise possible. Additionally, we are highly dependent on the principal members of our management and scientific staff, such as our two co-founders, the loss of whose services would adversely impact the achievement of our objectives. Although we maintain and are the beneficiary of $1.0 million key-man life insurance policies for the lives of each of our two co-founders, Dr. Daniel Santi, our chief executive officer, and Dr. Chaitan Khosla, a director, we do not believe the proceeds would be adequate to compensate us for their loss. Our ability to manage our operations and growth effectively requires us to continue to expend funds to expand our management and improve our controls and systems. If we are unable to successfully implement these expansions and improvements, then we may not be able to effectively manage our day-to-day operations. WE FACE INTENSE COMPETITION FROM LARGE PHARMACEUTICAL COMPANIES, BIOTECHNOLOGY COMPANIES AND ACADEMIC GROUPS. We face, and will continue to face, intense competition from organizations such as large biotechnology and pharmaceutical companies, as well as academic and research institutions and government agencies, that are pursuing competing technologies for modifying DNA. These organizations may develop technologies that are superior alternatives to our technologies. Further, our competitors in the polyketide gene engineering 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 polyketides for commercial purposes. 9 Any products that we develop through our technologies will compete in multiple, highly competitive markets. Development of pharmaceutical products requires significant investment and resources. Many of the organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staffs, facilities and capabilities, and greater experience in modifying DNA, obtaining regulatory approvals, and product manufacturing 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. IF WE FACE CLAIMS IN CLINICAL TRIALS OF A DRUG CANDIDATE, THESE CLAIMS WILL DIVERT OUR MANAGEMENT'S TIME AND WE WILL INCUR LITIGATION COSTS. We face an inherent business risk of clinical trial liability claims in the event that the use or misuse of our potential products results in personal injury or death. We may experience clinical trial liability claims if our drug candidates are misused or cause harm before regulatory authorities approve them for marketing. We currently do not maintain clinical trial liability insurance coverage. Even if we do obtain an insurance policy, it may not be sufficient to cover claims that may be made against us. Clinical trial liability insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Any claims against us, regardless of their merit, could materially and adversely affect our financial condition, because litigation related to these claims would strain our financial resources in addition to consuming the time and attention of our management. If we are sued for any injuries caused by our products, our liability could exceed our total assets. WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE, OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY. Our research and development processes involve the controlled use of hazardous materials, including hazardous chemicals and radioactive and biological materials. Some of these materials may be novel, including bacteria with novel properties and bacteria that produce biologically active compounds. Our operations also produce hazardous waste products. 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, we could be sued for injury or contamination that results from our use or the use by third parties or our collaborators 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 commercialization efforts. WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER DOCUMENTS THAT MAY RESULT IN OUTCOMES WITH WHICH YOU DO NOT AGREE. Our board of directors will have the authority to issue up to 10,000,000 shares of undesignated preferred stock and to determine the rights, preferences, privileges and restrictions of those shares without further vote or action by our stockholders. The rights of the holders of any preferred stock that may be issued in the future may adversely affect the rights of the holders of common stock. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock. Our certificate of incorporation will provide for staggered terms for the members of the board of directors and prevent our stockholders from acting by written consent. These provisions and other provisions of our bylaws and of Delaware law applicable to us could delay or make more difficult a merger, tender offer or proxy contest involving us. This could reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without these provisions. 10 SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS. After this offering, our officers, directors and principal stockholders (greater than 5% stockholders) will together control approximately 47.3% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of us and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider. RISKS RELATED TO THE OFFERING OUR STOCK PRICE COULD BE VOLATILE AND YOUR INVESTMENT COULD SUFFER A DECLINE IN VALUE. The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including: - announcements of technological developments in research by us or our competitors; - delay or failure in initiating, conducting, completing or analyzing clinical trials or unsatisfactory design or results of these trials; - achievement of regulatory approvals; - new products or services introduced or announced by us or our competitors; - changes in financial estimates by securities analysts; - announcements of departures or departures of key personnel; and - sales of our common stock. In addition, the stock market in general, and the Nasdaq National Market and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. If this type of litigation were instituted against us, we would be faced with substantial costs and management's attention and resources would be diverted, which could in turn seriously harm our business, financial condition and results of operations. WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CREATING INVESTOR LOSSES. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors which could cause our operating results to fluctuate include: - expiration of research contracts with collaborators or government research grants, which may not be renewed or replaced; - the success rate of our discovery efforts leading to milestones and royalties; 11 - the timing and willingness of collaborators to commercialize our products that 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 expect operating expenses to continue to increase in 2000. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period. Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline. FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE. The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market after the closing of this offering or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. There will be 23,844,539 shares of common stock outstanding immediately after this offering, or 24,594,539 shares if the representatives of the underwriters exercise their over-allotment option in full. The shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, except for any shares purchased by our affiliates, as defined in Rule 144 of the Securities Act. 18,844,539 shares of common stock outstanding will be restricted securities as defined in Rule 144. Of these shares, shares will be subject to a lock-up agreement providing that the stockholder will not offer, sell, or otherwise dispose of any of the shares of common stock owned by them for a period of 180 days after the date of this prospectus. These shares may be sold on the 181st day after the date of this prospectus without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. Lehman Brothers Inc. may, in its sole discretion, at any time without notice, release all or any portion of the shares subject to the lock-up agreements, which would result in more shares being available for sale in the public market at an earlier date. In addition, as soon as practicable after the date of this prospectus, we intend to file a registration statement on Form S-8 with the Commission covering 3,502,107 shares of common stock reserved for issuance under our 1996 stock option plan, our 2000 employee stock purchase plan and our 2000 non-employee director stock option plan. Sales of common stock by existing stockholders in the public market, or the availability of such shares for sale, could materially and adversely affect the market price of our common stock. See "Shares Eligible for Future Sale." AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION. If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution of $10.79 per share in pro forma net tangible book value. If the holders of outstanding options exercise those options, you will incur further dilution. To the extent we raise additional capital by issuing equity securities, our stockholders may experience additional substantial dilution. See "Dilution." 12 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that relate to future events or our future financial performance. You can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential," or "continue," or the negative of these terms or other comparable terminology. Examples of these forward-looking statements include, but are not limited to, statements regarding the following: - our technologies and programs, - our ability to realize commercially valuable discoveries in our programs, - our intellectual property portfolio, - our business strategies and plans, and - our ability to develop products suitable for commercialization. Although we believe that the predictions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual results. The safe harbor for forward-looking statements contained in the Securities Litigation Reform Act of 1995 does not apply to forward-looking disclosures in an initial public offering of securities such as this one. 13 USE OF PROCEEDS We estimate that the net proceeds from the sale of the 5,000,000 shares of common stock that we are offering will be $68.5 million after deducting estimated underwriters' discounts and commissions and estimated offering expenses and assuming an initial public offering price of $15.00 per share. If the underwriters' over-allotment option is exercised in full, we estimate that the net proceeds will be $79.0 million. We anticipate using the net proceeds from this offering for advancing our drug candidates through preclinical and later stage development, discovering or acquiring new drug candidates, expanding our technology platform, capital expenditures, working capital, general corporate purposes and possible future acquisitions. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of our product development and commercialization efforts, technological advances, the amount of proceeds actually raised in this offering and the amount of cash generated by our operations. We may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies or assets that complement our business, although we are not currently planning any acquisitions, and no portion of the net proceeds has been allocated to any particular acquisition. We have not determined the amounts we plan to spend on any of the areas listed above or the timing of these expenditures. As a result, our management will have broad discretion to allocate the net proceeds from this offering. We believe that the net proceeds of this offering, existing cash, cash equivalents and investments, will be sufficient to meet our operating expenses and capital requirements for at least the next 24 months. Pending the use of the net proceeds, we intend to invest the net proceeds in interest-bearing investment grade and U.S. government securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if any, for use in the expansion and operation of our business and do not anticipate paying cash dividends for the foreseeable future. 14 DILUTION Our pro forma net tangible book value, as of June 30, 2000, was $31.8 million, or $1.69 per share of common stock after giving effect to the automatic conversion of all outstanding shares of preferred stock into an aggregate of 12,220,719 shares of common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. After giving effect to our sale of common stock offered hereby at an assumed initial public offering price of $15.00 per share, and our receipt of the estimated net proceeds from the offering of $68.5 million, our pro forma net tangible book value as of June 30, 2000 would have been approximately $100.3 million, or $4.21 per share. This represents an immediate increase in net tangible book value of $2.52 per share to existing stockholders and an immediate dilution of $10.79 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $15.00 Pro forma net tangible book value per share before the offering................................................ $ 1.69 Increase per share attributable to new investors.......... 2.52 Pro forma net tangible book value per share after this offering.................................................. 4.21 ------ Dilution per share to new investors......................... $10.79 ======
If the underwriters' over-allotment option were exercised in full, the pro forma net tangible book value per share after this offering would be $4.50 per share, the increase in net tangible book value per share to existing stockholders would be $2.81 per share and the dilution in net tangible book value to new investors would be $10.50 per share. The following table summarizes, on a pro forma basis as of June 30, 2000, the differences between existing stockholders and the new investors with respect to the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid before deducting the underwriting discounts and commissions and our estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- -------- ------------ -------- ----------- Existing stockholders.................. 18,844,539 79% $ 46,744,000 38% $ 2.48 New investors.......................... 5,000,000 21 75,000,000 62 15.00 ---------- ----- ------------ ----- Total................................ 23,844,539 100.0% 121,744,000 100.0% ========== ===== ============ =====
The discussion and tables above assume no exercise of stock options outstanding. At June 30, 2000, there were options outstanding to purchase a total of 1,141,800 shares of common stock, with a weighted average exercise price of $1.35 per share. To the extent that any of these options are exercised, there will be further dilution to new investors. 15 CAPITALIZATION The following table shows our capitalization as of June 30, 2000: - on an actual basis; - on a pro forma basis to reflect the automatic conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering; and - on a pro forma as adjusted basis to give effect to the sale of 5,000,000 shares of common stock by us in this offering at an assumed price of $15.00 per share less the estimated discounts and offering expenses.
AS OF JUNE 30, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Capital lease and debt obligations, less current portion.... $ 2,099 $ 2,099 $ 2,099 -------- -------- -------- Stockholders' equity: Convertible preferred stock, par value $0.001; 10,000,000 shares authorized, 4,073,573 shares issued and outstanding (actual); no shares issued and outstanding (pro forma and pro forma as adjusted)................... 4 -- Common stock, par value $0.001; 200,000,000 shares authorized, 6,623,820 shares issued and outstanding, actual; 18,844,539 shares issued and outstanding, pro forma; 23,844,539 shares issued and outstanding, pro forma as adjusted....................................... 7 19 24 Additional paid-in capital.................................. 61,651 61,643 130,138 Notes receivable from stockholders.......................... (647) (647) (647) Deferred stock compensation................................. (10,906) (10,906) (10,906) Accumulated other comprehensive loss........................ (60) (60) (60) Accumulated deficit......................................... (18,272) (18,272) (18,272) -------- -------- -------- Total stockholders' equity............................ 31,777 31,777 100,277 -------- -------- -------- Total capitalization.................................. $ 33,876 $ 33,876 $102,376 ======== ======== ========
This table excludes: - 2,902,107 shares of our common stock reserved for issuance under our 1996 stock option plan, of which 1,141,800 shares are subject to outstanding options with a weighted average exercise price of $1.35 per share; - 300,000 shares available for issuance under our 2000 employee stock purchase plan approved by our board of directors in March 2000; and - 300,000 shares available for issuance under our 2000 non-employee director stock option plan approved by our board of directors in March 2000. 16 SELECTED FINANCIAL DATA The following selected historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes appearing elsewhere in this prospectus. The selected financial data set forth below with respect to our statements of operations for the years ended December 31, 1997, 1998 and 1999 and with respect to the our balance sheets at December 31, 1998 and 1999 are derived from our financial statements that have been audited by Ernst & Young LLP, which are included elsewhere in this prospectus, and are qualified by reference to such financial statements. The statement of operations data for the period from inception (January 5, 1995) to December 31, 1995 and for the year ended December 31, 1996 and the balance sheet data as of December 31, 1996 and 1997 are derived from our audited financial statements that are not included in this prospectus. The selected financial data set forth below with respect to our statements of operations for the six months ended June 30, 1999 and 2000 and the balance sheet data at June 30, 2000 are derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for these periods. The selected data in this section is not intended to replace our financial statements. Historical results are not necessarily indicative of the results to be expected in the future.
FROM INCEPTION (JANUARY 5, SIX MONTHS 1995) TO YEAR ENDED DECEMBER 31, ENDED JUNE 30, DECEMBER 31, ----------------------------------------- ------------------- STATEMENT OF OPERATIONS DATA: 1995 1996 1997 1998 1999 1999 2000 - ----------------------------- -------------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Contract revenue............................... $ -- $ -- $ 10 $ 974 $ 5,206 $ 3,027 $ 2,084 Grant revenue.................................. -- 200 277 262 140 80 140 ------ ------- ------- ------- ------- ------- -------- Total revenues............................... -- 200 287 1,236 5,346 3,107 2,224 Operating expenses: Research and development (1)................. 197 1,286 1,922 4,030 8,587 3,838 7,621 General and administrative (1)............... 281 402 457 991 1,813 812 1,793 ------ ------- ------- ------- ------- ------- -------- Total operating expenses....................... 478 1,688 2,379 5,021 10,400 4,650 9,414 ------ ------- ------- ------- ------- ------- -------- Loss from operations........................... (478) (1,488) (2,092) (3,785) (5,054) (1,543) (7,190) Other income, net.............................. -- 35 98 518 653 263 511 ------ ------- ------- ------- ------- ------- -------- Net loss....................................... $ (478) $(1,453) $(1,994) $(3,267) $(4,401) $(1,280) $ (6,679) ====== ======= ======= ======= ======= ======= ======== Deemed dividend upon issuance of Series C convertible preferred stock.................. -- -- -- -- -- -- (11,267) ------ ------- ------- ------- ------- ------- -------- Net loss attributable to common stockholders... $ (478) $(1,453) $(1,994) $(3,267) $(4,401) $(1,280) $(17,946) ====== ======= ======= ======= ======= ======= ======== Basic and diluted net loss per share........... $(0.16) $ (0.47) $ (0.49) $ (0.77) $ (0.98) $ (0.29) $ (3.57) ====== ======= ======= ======= ======= ======= ======== Shares used in computing basic and diluted net loss per share............................... 2,934 3,081 4,094 4,270 4,509 4,430 5,029 Pro forma basic and diluted net loss per share (unaudited).................................. $ (0.31) $ (1.12) ======= ======== Shares used in computing pro forma basic and diluted net loss per share (unaudited)....... 14,318 16,056 ======= ========
AS OF DECEMBER 31, ---------------------------------------------------- AS OF BALANCE SHEET DATA: 1995 1996 1997 1998 1999 JUNE 30, 2000 - ------------------- -------- -------- -------- -------- -------- -------------- (IN THOUSANDS) Cash, cash equivalents and short-term investments.... $ 31 $ 1,465 $ 2,019 $ 6,328 $ 2,022 $ 25,027 Working capital...................................... (257) 1,369 1,976 4,267 750 22,370 Long-term investments................................ -- -- -- 9,073 8,442 7,235 Total assets......................................... 62 1,965 2,757 17,201 14,157 36,898 Capital lease and debt obligations, less current portion............................... -- -- 385 1,004 1,591 2,099 Accumulated deficit.................................. (478) (1,930) (3,924) (7,192) (11,593) (18,272) Stockholders' equity................................. (226) 1,721 2,111 13,759 10,471 31,777
- ------------------------------ (1) Includes non-cash charges for stock-based compensation as follows (in thousands):
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- Research and development.................................... $ -- $ -- $ 964 $403 $2,597 General and administrative.................................. -- -- 181 -- 708 ------ ------ ------ ---- ------ $ -- $ -- $1,145 $403 $3,305 ====== ====== ====== ==== ======
17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR "SELECTED FINANCIAL DATA," OUR FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW We are a biotechnology company that has proprietary technologies to develop potential pharmaceutical products that will address large markets. We use our technologies to make new drug candidates derived from an important class of natural product compounds known as polyketides. Our product opportunities currently target the areas of infectious disease, gastrointestinal motility, mucus hypersecretion, cancer, immunology and nerve regeneration. In infectious disease, we have a collaboration with The R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company, focusing on the development of a next generation antibiotic. In cancer, we have a collaboration with Sloan-Kettering focusing on the development of anti-cancer compounds known as epothilones. We have incurred significant losses since our inception. As of June 30, 2000, our accumulated deficit was $18.3 million. We expect to incur additional operating losses over the next several years as we continue to develop our technologies and fund internal product research and development. STOCK-BASED COMPENSATION Stock-based compensation expense for the year ended December 31, 1999 and for the six months ended June 30, 2000 represents the difference between the exercise price of an option and the deemed fair value of our common stock on the date of the grant calculated in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. We recorded total deferred stock-based compensation of $11.1 million in the six months ended June 30, 2000 and $2.9 million in 1999. Such amounts are included as a reduction of stockholders' equity and are being amortized to expense using the graded vesting method over the vesting periods of the underlying options, which are generally four years. Stock-based compensation has been allocated to research and development expense and general and administrative expense, as appropriate. Based on deferred stock-based compensation recorded as of June 30, 2000, we expect to record amortization for deferred stock-based compensation approximately as follows: $3.4 million for the remaining six months in 2000, $4.1 million in 2001, $2.2 million in 2002, $1.0 million in 2003 and $206,000 in 2004. In connection with the grants of stock options and restricted stock to non-employees, we recognize compensation on a ratable basis over the related service period. We recognized other stock-based compensation for non-employees of $752,000 for the six months ended June 30, 2000 and $610,000 in 1999. In addition, we expect to recognize other stock-based compensation in connection with stock options and restricted stock granted to non-employees of $662,000 for the remaining six months in 2000, $1.3 million in 2001, $979,000 in 2002, $318,000 in 2003 and $58,000 in 2004. The measurement of stock-based compensation to our non-employees is subject to periodic adjustment as our stock price changes and as the underlying securities vest. As such, changes to these measurements could be substantial should we experience significant changes in our stock price. See Notes 1 and 9 of our financial statements. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 REVENUE. Our revenues decreased to $2.2 million for the six months ended June 30, 2000 from $3.1 million for the six months ended June 30, 1999. This decrease was due to a $1.0 million non- 18 recurring milestone payment recognized in 1999 under our collaboration with The R.W. Johnson Pharmaceutical Research Institute. Total contract revenues under this collaboration were $2.1 million for the six months ended June 30, 2000 and $2.9 million for the six months ended June 30, 1999, inclusive of the $1.0 million non-recurring milestone payment. The initial term of our collaboration with The R.W. Johnson Pharmaceutical Research Institute has been extended to December 28, 2000. If we do not further extend this agreement, our revenues will significantly decrease thereafter, unless we enter into additional collaborations. RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses consist primarily of stock-based compensation, salaries and other personnel-related expenses, facility related expenses, lab consumables and depreciation of facilities and equipment. Research and development expenses increased to $7.6 million for the six months ended June 30, 2000 from $3.8 million for the six months ended June 30, 1999. This increase was due in large part to an increase in the stock-based compensation to $2.6 million for the six months ended June 30, 2000 from $403,000 for the six months ended June 30, 1999. The remainder of the increase was primarily due to increased payroll and personnel related expenses, including recruiting and relocation expenses. We expect our research and development expenses will increase substantially to fund the expansion of our technology platform, support our collaborative research programs and advance our in-house research programs into later stages of development. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $1.8 million for the six months ended June 30, 2000 from $812,000 for the six months ended June 30, 1999. This increase was primarily due to amortization of deferred stock-based compensation of $708,000 for the six months ended June 30, 2000. No such expenses were recognized during the same period in 1999. We expect our general and administrative expenses will increase in the future to support the continued growth of our research and development efforts and to fulfill our obligations associated with being a publicly held company. INTEREST INCOME. Interest income increased to $678,000 for the six months ended June 30, 2000 from $334,000 for the six months ended June 30, 1999. This increase was due to higher average investment balances due to the $24.6 million in net proceeds received in connection with the issuance of Series C convertible preferred stock in March 2000 combined with higher yields earned on investment balances. INTEREST EXPENSE. Interest expense increased to $167,000 for the six months ended June 30, 2000 from $71,000 for the six months ended June 30, 1999. The increase resulted from additional debt financing associated with our capital purchases along with a higher cost of capital due to rising interest rates during the first half of 2000. BENEFICIAL CONVERSION FEATURE. In March 2000, we sold 804,196 shares of Series C convertible preferred stock (convertible into 2,412,588 shares of common stock at the closing of this offering) for net proceeds of approximately $24.6 million. After evaluating the fair value of our common stock in contemplation of this offering, we determined that the issuance of the Series C convertible preferred stock resulted in a beneficial conversion feature calculated in accordance with Emerging Issues Task Force Consensus No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features." The beneficial conversion feature was reflected as a deemed dividend of $11.3 million in our financial statements for the six months ended June 30, 2000. YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUE. Our revenues increased to $5.3 million in 1999 from $1.2 million in 1998. This increase primarily reflected the full year of funding under our corporate collaboration with The R.W. Johnson Pharmaceutical Research Institute which was established in September 1998. Total contract revenues 19 earned under this collaboration were $5.0 million in 1999 and $974,000 in 1998. Also included in 1999 contract revenue was $1.2 million of non-recurring milestone payments earned under this agreement. The initial term of our collaboration with The R.W. Johnson Pharmaceutical Research Institute has been extended to December 28, 2000. If we do not further extend this agreement, our revenues will significantly decrease thereafter, unless we enter into additional collaborations. RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses increased to $8.6 million in 1999 from $4.0 million in 1998. The increase was primarily due to increases in employee costs as our scientific headcount increased to 43 individuals in December 1999 from 17 in January 1998 and higher occupancy expenses associated with our move to a larger facility in March 1999. In addition, we recorded $964,000 in stock-based compensation in 1999. No such expense was recorded in 1998. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $1.8 million in 1999 from $991,000 in 1998. This increase was primarily due to additional staffing as our administrative headcount increased to 10 in December 1999 from 6 in January 1998. In addition, we recorded $181,000 in stock-based compensation in 1999. No such expense was recorded in 1998. INTEREST INCOME. Interest income increased to $679,000 in 1999 from $598,000 in 1998. This increase resulted from higher average investment balances due to contract revenue received under our collaboration with The R.W. Johnson Pharmaceutical Research Institute. INTEREST EXPENSE. Interest expense increased to $196,000 in 1999 from $80,000 in 1998. This increase resulted from additional debt financing associated with our fixed asset purchases. OTHER INCOME. For the year ended December 31, 1999, other income included a $170,000 termination fee received from the landlord of our previously occupied facility for the buy-out of the rights to our sublease agreement. YEARS ENDED DECEMBER 31, 1998 AND 1997 REVENUE. Our revenue increased to $1.2 million in 1998 from $287,000 in 1997. This increase was attributable to the initiation of our corporate collaboration with The R.W. Johnson Pharmaceutical Research Institute in September 1998. RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses increased to $4.0 million in 1998 from $1.9 million in 1997. The increase was primarily due to increases in employee related costs as our scientific headcount increased to 37 at December 1998 from 12 in January 1997. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $991,000 in 1998 from $457,000 in 1997. This increase was primarily due to higher employee and consulting costs to support our expanding research and development activities. INTEREST INCOME. Interest income increased to $598,000 in 1998 from $154,000 in 1997. This increase resulted from higher investment balances arising from our April 1998 private placement of Series B convertible preferred stock and contract revenue received under our collaboration with The R.W. Johnson Pharmaceutical Research Institute. INTEREST EXPENSE. Interest expense increased to $80,000 in 1998 from $56,000 in 1997. This increase resulted from additional debt financing associated with our fixed asset purchases. PROVISION FOR INCOME TAXES We incurred net operating losses in the years ended December 31, 1999 and 1998, and consequently did not pay federal, state or foreign income taxes. As of December 31, 1999, we had federal and state net operating loss carryforwards of approximately $9.6 million and $4.1 million, 20 respectively. We also had federal research and development tax credit carryforwards of approximately $300,000. If not utilized, the net operating losses and credit carryforwards will expire at various dates beginning in 2002 through 2019. Use of the net operating losses and credits may be subject to a substantial annual limitation due to the change in the ownership provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. See Note 10 of our financial statements. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations from inception primarily through sales of convertible preferred stock, totaling $45.6 million in net proceeds, contract payments under our collaboration agreement, equipment financing arrangements and government grants. As of June 30, 2000, we had $32.3 million in cash and investments compared to $10.5 million as of December 31, 1999. Our funds are currently invested in U.S. Treasury and government agency obligations, investment-grade asset-backed securities and corporate obligations. Our operating activities used cash of $2.9 million for the six months ended June 30, 2000 compared to $1.1 million for the six months ended June 30, 1999. Our net loss of $6.7 million for the six months ended June 30, 2000 was partially offset by non-cash expenses of $3.8 million related to stock-based compensation and depreciation expense. Cash used in operating activities was $3.9 million in the year ended December 31, 1999 compared to $1.2 million in the year ended December 31, 1998. Cash used in 1999 operating activities were primarily to fund our net operating losses. Non-cash charges of $1.8 million related to stock-based compensation and depreciation expenses were nearly offset by working capital changes of $1.3 million. The $1.2 million used for 1998 operations consisted of our $3.3 million net loss for the period, partially offset by depreciation and working capital changes of $2.1 million. Our investing activities, excluding changes in our investments, for the six months ended June 30, 2000 used cash of $808,000 compared to $1.1 million for the six months ended June 30, 1999 reflecting facility improvements and capital expenditures as we continue to enhance our laboratory capabilities. Investing activities in 1999, excluding changes in our investments, used cash of $1.8 million compared to $1.2 million in 1998 as a result of capital purchases and leasehold improvements. Cash provided by financing activities was $25.5 million for the six months ended June 30, 2000 compared to $1.2 million for the six months ended June 30, 1999. Financing activities included $24.6 million in net proceeds from the issuance of our Series C convertible preferred stock in March 2000. Cash provided by financing activities was $898,000 in 1999 compared to $15.7 million in 1998. 1998 financing activities included $14.9 million in net proceeds from the issuance of our Series B convertible preferred stock in April 1998. In January 2000, we secured a $2.0 million line of credit for facility improvements and equipment purchases. As of June 30, 2000 we had drawn down $1.3 million and had $700,000 remaining available under this credit facility. We believe our existing cash and investments, together with the proceeds of this offering, will be sufficient to meet our anticipated cash requirements for at least 24 months. Our future capital uses and requirements depend on numerous forward-looking factors. These factors include, but are not limited to the following: - Our ability to establish and the scope of any new collaborations; - The progress and number of research programs carried out by us; - The progress and success of preclinical and clinical trials of our drug candidates; 21 - Our ability to maintain our existing collaboration; - The costs and timing of obtaining, enforcing and defending our patent and intellectual rights; - The costs and timing of regulatory approvals; and - Expenses associated with unforeseen litigation. For the next several years, we do not expect our operations to generate the amounts of cash required for our future cash needs. In order to fulfill our cash requirements, we expect to finance future cash needs through the sale of equity securities, strategic collaborations and debt financing. We cannot assure you that additional financing or collaboration and licensing arrangements will be available when needed or that, if available, will be on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs, to lose rights under existing licenses or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose or may adversely affect our ability to operate as a going concern. If additional funds are obtained by issuing equity securities, substantial dilution to existing stockholders may result. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve principal while at the same time maximize the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and corporate obligations. The table below presents the principal amounts of our investments and equipment loans by expected maturity and related weighted average interest rates at December 31, 1999 (in thousands):
2000 2001 2002 2003 TOTAL FAIR VALUE -------- -------- -------- -------- -------- ---------- Debt securities: U.S. treasury........................ $ -- $1,300 $ -- $ -- $1,300 $1,290 Corporate bond....................... 1,000 -- -- -- 1,000 990 Average interest rate.................. 5.6% 5.6% -- -- 5.6% Asset-backed securities................ -- -- -- -- 7,198 7,152 Average interest rate.................. -- -- -- -- 5.9% Equipment financing.................... 447 497 616 311 1,871 1,871 Average interest rate.................. 10.8% 10.8% 10.8% 11.0% 10.8%
22 BUSINESS OVERVIEW We are a biotechnology company using our proprietary technologies to develop drug candidates from an important class of natural product compounds known as polyketides. Polyketides are naturally made in very small amounts in microorganisms and are difficult to make or modify chemically. Using our proprietary technologies we are able to create, modify and produce polyketides in ways that chemists cannot. Creating novel polyketides will provide us with a pipeline of potential drug candidates that address large markets. We can make improved versions of a known polyketide pharmaceutical product and are able to change a polyketide used in one therapeutic area to create a new polyketide used for another. We can take the genetic instructions for making a polyketide out of one microorganism and put them into another microorganism which provides a more favorable environment to grow and produce more of the polyketides. Our strategy is to use our technologies to create new polyketides for development as pharmaceutical products. We plan to produce those polyketides at the levels required to support clinical development and commercialization. We have programs to exploit all aspects of our technology. Our programs in the areas of infectious disease and immunosuppression are directed to the development of improved versions of existing products. Our programs in the areas of gastrointestinal motility, mucus hypersecretion, and nerve regeneration are directed to the development of new drugs derived from drugs developed for other indications. Our program in the area of cancer is directed to the large scale production and development of a polyketide that is produced in very low amounts naturally. All of our programs address large markets. OVERVIEW OF POLYKETIDES Polyketides are complex natural products that are produced by microorganisms. There are about 7,000 known polyketides, from which numerous pharmaceutical products in many therapeutic areas have been derived. The following table illustrates the many different uses for polyketides. SELECTED POLYKETIDE PRODUCTS AND THEIR USES
PRODUCT (TRADE NAME) USE - -------------------- -------------------- Azithromycin (Zithromax)................................. Antibacterial Clarithromycin (Biaxin).................................. Antibacterial Erythromycin............................................. Antibacterial Rifamycin (Rifampin)..................................... Antibacterial Tetracyclines............................................ Antibacterial Doxorubicin (Adriamycin)................................. Anticancer Amphotericin B........................................... Antifungal Lovastatin (Mevacor)..................................... Cholesterol-lowering Pravastatin (Pravacol)................................... Cholesterol-lowering Simvastatin (Zocor)...................................... Cholesterol-lowering Tacrolimus (FK506, Prograf).............................. Immunosuppressant Sirolimus (Rapamycin).................................... Immunosuppressant Spinosad................................................. Insecticide Avermectin............................................... Veterinary Product
23 We focus on polyketides because of their demonstrated ability to treat many different disease conditions. To understand what we do and why we believe our company can develop valuable, new polyketide pharmaceutical products, one needs to understand how polyketides are made. Unlike most classes of compounds, different polyketides often have unrelated structures. The common features that link the polyketides as a class are the sequence of reactions by which they are formed, and the intermediate compounds made in these reactions. Each polyketide is produced by a unique polyketide synthase, or PKS, which is a large enzyme composed of many component enzymes. There are two types of PKSs, modular and iterative. Modular PKSs contain many enzymes, each of which is used only once during polyketide production, while iterative PKSs may use some enzymes several times. Erythromycin is an example of a polyketide made by a modular PKS. Erythromycin is not only a valuable antibiotic product but is also used in the production of the antibiotics azithromycin and clarithromycin. A modular PKS is composed of multiple proteins. The instructions for making these proteins is contained in the DNA, or genome, of the microorganism that produces the modular PKS. Each protein has its own set of instructions, which is called the gene for the protein. The complete set of genes for a modular PKS that produces a polyketide is called a gene cluster. When any gene of a polyketide gene cluster is identified, the entire cluster can be easily obtained. We accomplish this by using recombinant DNA technology, which is a set of techniques that enable scientists to combine or alter DNA from different organisms. [GRAPH] [DESCRIPTION OF POLYKETIDE SYNTHESIS] [THE ARTWORK IS A DEPICTION OF A POLYKETIDE (PKS) GENE CLUSTER, WITH 4 MODULES INDICATED; UNDERNEATH EACH MODULE IS THE 2-CARBON UNIT BUILDING BLOCK OF POLYKETIDES IT SPECIFIES. UNDERNEATH THE 4 BUILDING BLOCKS (IN A ROW) IS THE CORRESPONDING PKS, SHOWING THE COMPONENT ENZYMES OF EACH OF THE 4 MODULES AND THE INTERMEDIATE POLYKETIDE CHAINS FORMED AT EACH MODULE. FINALLY, AT THE BOTTOM LEFT THERE IS A DEPICTION OF THE BUILDING BLOCKS USED BY THE PKS WITH AN ARROW LEADING FROM THE BUILDING BLOCKS TO THE PKS; AT THE RIGHT THERE IS A DOWNWARD ARROW LEADING FROM THE PKS TO THE POLYKETIDE SHOWN IN THE RIGHT, LOWER CORNER.] 24 To understand how we modify the gene cluster for a modular PKS to create new polyketides, an understanding of how a modular PKS actually makes or synthesizes a polyketide is necessary. The synthesis of a polyketide essentially involves the linking of a number of small building block compounds to form the larger polyketide. A modular PKS can be functionally subdivided into units called modules, each of which is responsible for a single building block used in the synthesis. Synthesis begins at the first module, called the loading module, located at one end of the PKS, and continues to the end through multiple extender modules, each of which adds and modifies another building block. This process creates a chain of building blocks that forms the polyketide; in many instances the chain is linked to itself to form a ring. Because each module codes for one building block, the number of modules in a PKS codes for the size of the polyketide. Each module contains three essential enzyme activities responsible for connecting the polyketide building blocks. One of these activities selects which building block (there are at least 4 different building blocks) is used, and the other two are involved in linking the building block to the growing chain and passing the chain to the next module. A module may also have 1, 2, or 3 additional enzymes that modify the building blocks once they are incorporated into the chain. The structure of a polyketide can therefore be viewed as being determined by the types, order and number of modules in a modular PKS. The types of modules dictate which building blocks are used, the order of the modules dictates the sequence of building blocks, and the number of modules dictates the number of building blocks in, or size of, the polyketide. Modifying, adding or deleting the modules results in specific and predictable changes to the structure of the polyketide. OUR STRATEGY Our goal is to use our technologies to create a pipeline of drug candidates that can be developed into pharmaceuticals and advanced into clinical trials. Our focus is on drug candidates that address large markets. Our strategy includes the following components: MAXIMIZE VALUE, MINIMIZE RISK. We apply our technologies to generate a pipeline of drug candidates that improve existing pharmaceutical products. By improving the properties of currently marketed pharmaceuticals, we believe we can create novel products that take advantage of the known utility, safety, development path and market for existing drugs to reduce the risk and time required for development. ESTABLISH COLLABORATIVE RELATIONSHIPS. We have entered into a collaboration with The R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company, in the area of infectious disease. We plan to establish additional collaborative relationships with large pharmaceutical companies to move our drug candidates into and through clinical trials and to the market, prepare and screen our polyketide libraries, apply our technologies to create new polyketides and develop large-scale production systems. ENHANCE LEADERSHIP POSITION OF OUR TECHNOLOGY PLATFORM. We will expand and enhance our technologies by increasing in-house research activities. We will continue to extend the reach of our technologies through strategic alliances or acquisitions. We plan to broaden and protect our intellectual property portfolio and in-license patents that complement our core technologies. ACQUIRE COMPLEMENTARY TECHNOLOGIES AND PRODUCTS. We have entered into a binding preliminary research and license agreement with Sloan-Kettering in the area of cancer therapeutics. We may acquire or license additional complementary technologies or product candidates from other third parties. 25 OUR TECHNOLOGY PLATFORM Our technology platform has five components: polyketide gene alteration, chemo-biosynthesis, heterologous over-expression, combinatorial biosynthesis, and screening libraries. Together, our technologies enable us to modify, create and produce proprietary polyketides with potential for development as valuable pharmaceutical products. POLYKETIDE GENE ALTERATION The structure of a polyketide is primarily determined by variation in the number, order and type of modules in the PKS. Our technologies enable us to make these alterations in a specific, directed manner, and thus we can control the polyketide structure. Polyketides are structurally complex compounds that are difficult to make or modify chemically. Because each building block of a polyketide is selected by a specific module of the PKS, we use our technologies to make precise structural changes by altering the module that specifies the targeted building block. We use our technologies to improve properties of known biologically active molecules. This can be done by using our technology to change a portion of the polyketide that cannot be chemically modified to one that can, allowing us to make subsequent chemical modifications not otherwise feasible. We can also make changes in the structure of existing proprietary polyketide products to create a new polyketide proprietary to us. In addition, by changing the order, type and number of modules, we can create entirely new libraries of polyketides as sources of new compounds both for screening for new activities and for improving a lead compound. CHEMO-BIOSYNTHESIS We incorporate chemically synthesized fragments into complicated polyketide structures, permitting changes in their structures and properties in ways that have not been achieved by any other process. This has enabled us to produce novel polyketides used in the production of the drug candidates in our collaboration with The R.W. Johnson Pharmaceutical Research Institute. First, we disable the loading and first extender modules in a PKS by altering the gene that contains the instructions for these modules. This prevents formation of the two-building-block intermediate that feeds the second extender module, but leaves the remainder of the PKS fully functional. Then, microorganisms containing this modified PKS are fed our chemically synthesized fragments that substitute for the natural building-block intermediate. HETEROLOGOUS OVER-EXPRESSION We can isolate a polyketide gene cluster from one organism and transfer it to another. This is important because many polyketides are produced by microorganisms that are difficult or slow to grow, or in which recombinant DNA methods have not been developed. In addition, polyketides are often produced in small amounts in organisms that naturally produce them, which can limit their commercial development. We have created microorganisms for efficient polyketide manipulation and production. Our proprietary technologies allow us to transfer polyketide genes to these microorganisms to enable easier manipulation and increased production of polyketides necessary for commercialization. COMBINATORIAL BIOSYNTHESIS We have developed a technology to produce large collections, called libraries, of polyketides rapidly and efficiently. Because the approximately 7,000 naturally occurring polyketides have yielded many pharmaceutical products, we believe that libraries of new polyketides may do likewise. To create these libraries we separate the large polyketide gene cluster into several fragments. Each of these fragments is then genetically manipulated to produce numerous variations. We then reassemble the 26 gene cluster with all possible combinations of the altered fragments to create large polyketide libraries. Because many different combinations of the altered fragments can be assembled simultaneously, our combinatorial biosynthesis technology is used to produce large polyketide libraries. For example, we believe our scientists have created the largest number of erythromycin analogs produced by genetic engineering. [GRAPH] [DESCRIPTION OF ARTWORK] [The artwork is a depiction of the process of combinatorial biosynthesis. 1) The first drawing depicts a PKS gene cluster, and underneath it are individual modules obtained from other PKS gene clusters. 2) The second drawing shows the incorporation of new individual modules into the gene cluster to make hybrid gene clusters. 3) The third drawing shows a number of cells containing individual (colored) hybrid genes. 4) The fourth drawing shows cell colonies, each producing a different polyketide (color-coded)] 5) The fifth drawing shows test tubes containing individual polyketides (color-coded)]. SCREENING LIBRARIES In addition to our polyketide libraries made by combinatorial biosynthesis, we have acquired a collection of over 10,000 soil microorganisms. The collection is unusual because it has been pre-selected for bioactivities from a larger group of over 100,000 microorganisms. Our collection shows antibiotic, antiviral, and pesticidal activities, as well as activity specific to one or more of about 20 enzyme targets. We believe that the lead compounds from this library, together with our technologies, will provide new drug candidates for our product pipeline. OUR PRODUCT DEVELOPMENT OPPORTUNITIES Our primary programs are currently directed at discovery and development of polyketides for infectious disease, gastrointestinal motility disorders, mucus hypersecretion, cancer, immunosuppression and nerve regeneration. These programs were selected because they represent opportunities where our technologies could improve upon existing products or fill unmet needs, and because each addresses large markets. We are able to maintain a diverse portfolio of drug candidates because the fundamental aspects of our technology generally apply to all modular PKS gene clusters. INFECTIOUS DISEASE Clarithromycin, marketed as Biaxin, and azithromycin, marketed as Zithromax, are polyketide-derived antibiotics that show high potency, a broad spectrum of activity and few side effects. These products had revenues in 1999 of approximately $2.3 billion. However, organisms are emerging that are resistant to these two drugs. Ketolides, analogs of the polyketide erythromycin, possess the potency and 27 spectrum of activity shown by clarithromycin and azithromycin, but are effective against these resistant organisms. Aventis Pharmaceuticals has recently filed a New Drug Application with the FDA for a ketolide and Abbott Laboratories also has a ketolide in clinical trials. We have a collaborative research agreement with The R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company, to discover and develop a next-generation ketolide. Our collaboration was established in September 1998, and has already resulted in several proprietary ketolides that we believe have activities competitive with other ketolides. One of these compounds is currently undergoing preclinical evaluation. GASTROINTESTINAL MOTILITY One of the actions of erythromycin is stimulation of gastrointestinal movement, or GI motility. Therefore, erythromycin-derived compounds called motilides may be useful to treat diseases such as gastroparesis and gastroesophageal reflux disease, also known as GERD or heartburn, that are unresponsive to antacids. The leading product currently used for stimulation of GI motility is cisapride, marketed as Propulsid, which had sales of approximately $1 billion in 1999. Cisapride has been reported to have side effects, including arrhythmias and various drug interactions. Cisapride's manufacturer has announced that Cisapride will no longer be marketed in the United States and several other countries. Motilides have an entirely different mechanism of action and should not have the same side effects. Chugai Pharmaceuticals has a motilide candidate in clinical trials. Many compounds in our erythromycin library can readily be converted into motilides. In less than a year, we have prepared several proprietary motilides with IN VITRO activity comparable to the motilide in clinical trials. In addition, our technologies enable the preparation of numerous new motilides that could not easily be made chemically. We expect to have drug candidates advance into preclinical testing within a year. MUCUS HYPERSECRETION Mucus hypersecretion, or excessive production of mucus, is a major, problematic symptom of asthma, chronic obstructive pulmonary disease, or COPD, cystic fibrosis and allergic rhinitis, including hay fever. Mucus hypersecretion in these diseases results from the release of mucus from abnormally high numbers of large mucus-secreting cells called goblet cells. There is no effective treatment for this type of mucus hypersecretion from which to determine market potential, but we believe, based on disease prevalence, that the market potential is large. Our scientists, in collaboration with scientists at the University of California, San Francisco, have discovered a potential target for inhibiting mucus hypersecretion. We have prepared a non-antibiotic analog of erythromycin that inhibits this target, and are using our technologies to optimize its activity. Although this is an early-stage project, we believe we will have drug candidates to advance into preclinical testing within a year. CANCER Many cancers are treated by paclitaxel, marketed as Taxol, which had revenues in 1999 of approximately $1.5 billion. However, some tumors are resistant to Taxol. Epothilone, a polyketide with an identical mechanism of action and similar potency to Taxol, is active against Taxol-resistant tumors. A major problem with the further development of epothilone is that its sole natural source produces small amounts. Moreover, one of the most effective forms of epothilone, epothilone D, represents only about 10% of the total epothilones produced. Although epothilone has been chemically synthesized, the synthesis is not readily amenable to large-scale production. Our technology allows polyketide genes to be moved from the natural producer organism to another to produce greater quantities of the polyketide. Our scientists have cloned and 28 expressed the epothilone gene cluster in two different organisms and demonstrated production of all important forms of epothilone, including epothilone D. We believe we can increase current yields of the important types of epothilone using our technologies. We also expect to produce proprietary analogs of epothilone. In July 2000, we entered into a binding preliminary collaboration and license agreement with Sloan-Kettering to discover and develop epothilone compounds, including an epothilone compound that is in preclinical development by Sloan-Kettering. We expect to initiate clinical trials of this compound in 2001. IMMUNOSUPPRESSION Prograf, also known as FK506, is one of the most widely used immunosuppressants for organ transplantation, with 1999 worldwide revenues of approximately $259 million. Additionally, FK506 has been approved in Japan to treat atopic dermatitis and approval for this indication is pending in the United States. It is also in clinical trials to treat psoriasis and rheumatoid arthritis. The enzyme P450-3A metabolizes FK506 at a single site to destroy over 90% of the drug. A major problem is that P450-3A levels are variable among individuals and fluctuate in the presence of other drugs. As a result, FK506 metabolism is variable in different people and its dosage must be carefully individualized and monitored to avoid under- or over-dosing. If the sites at which FK506 is metabolized by P450-3A could be blocked without affecting biological activity, the variable metabolism of the drug might be avoided. The primary sites of metabolism of FK506 are different from those required for activity, so we do not expect their modification to prevent metabolism to be detrimental. These sites of metabolism cannot be protected by chemical modification, but can be protected using our technology. We are modifying these sites in an FK506 analog, FK520, to make proprietary, metabolically stable analogs. We expect to have drug candidates to advance into preclinical testing within a year. NERVE REGENERATION The immunosuppressive effect of FK506 is generated by concurrent binding to two proteins, FKBP and calcineurin. However, analogs of FK506 that bind to FKBP but not calcineurin stimulate nerve regeneration without immunosuppression. Such compounds could be used to treat peripheral and spinal cord injury, Parkinson's disease, and other diseases involving nerve degeneration. We are converting our metabolically stable FK520 analogs to compounds that can be used for nerve regeneration without immunosuppression. This conversion involves a chemical modification that prevents the compounds from binding to a protein, calcineurin, involved in immunosuppression. Our analogs may have advantages because we expect them to be orally available, have well-characterized pharmacokinetic properties, and penetrate the blood brain barrier. We expect to have drug candidates to advance into preclinical testing within a year. INTELLECTUAL PROPERTY Our intellectual property consists of patents, copyrights, trade secrets and know-how. Our ability to compete effectively depends in large part on our ability to obtain patents for our technologies and products, maintain trade secrets and operate without infringing the rights of others and to prevent others from infringing on our proprietary rights. We will be able to protect our technologies from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents, or are effectively maintained as trade secrets. Accordingly, patents or other proprietary rights are an essential element of our business. As of August 1, 2000, we owned four U.S. patents and one foreign patent (which expire beginning in 2013) and had exclusive license rights to nine U.S. patents and five foreign patents (which expire beginning in 2013) owned by Stanford University. On that date, 29 we also had 40 U.S. patent applications and 31 foreign patent applications, as well as the exclusive rights to 17 U.S. patent applications and 33 foreign patent applications. We have exclusive rights to technologies developed by Dr. Chaitan Khosla and claimed in a series of issued and pending patents filed by Stanford University beginning in 1993. These patents include claims to recombinant expression of polyketide synthase enzymes and production of polyketides using recombinantly expressed enzymes, as well as useful hosts, vectors and methods of library production. To date, nine of these patents have issued by the U.S. Patent Office. We have also entered into an agreement with Stanford University that grants us an exclusive option to license certain new technologies involving polyketides and their production developed by Dr. Khosla. We have an issued U.S. patent claiming the production of polyketide libraries using our proprietary multi-vector technology and the production of polyketides in E. COLI and yeast. We have applied for patents claiming the production of polyketides in plant cells, polyketide gene clusters cloned and expressed in heterologous hosts, and novel polyketide compounds generated in our drug discovery and development programs. Our policy is to file patent applications to protect technology, compounds and improvements commercially important to our business. We also rely on trade secrets to protect our technology, especially where patent protection is deemed inappropriate or unobtainable. We protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, collaborators and certain contractors. There can be no assurance that proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS JOHNSON & JOHNSON In September 1998, we signed a two-year collaborative agreement with The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson companies, which has been extended through December 2000. Under the terms of the agreement, we use our technologies to produce specific novel antibiotics on a best efforts basis. The agreement provides for payments, including for research and development, and for reaching certain milestones. In addition to creating a two-year collaborative research term, the agreement grants several licenses that include: - a research license, whereby we and The R.W. Johnson Pharmaceutical Research Institute grant each other a non-exclusive license, with no sublicense rights, to make and use methods and material covered under the parties' respective patents to carry out research during the term of the agreement; - a screening license, whereby we grant to The R.W. Johnson Pharmaceutical Research Institute a non-transferable exclusive license, with the right to grant sublicenses, to conduct screening for antibiotic activity; and - a development and commercialization license, whereby we grant to The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. exclusive worldwide rights to make, use, develop and sell the licensed products as defined in the agreement. The development, marketing, and sale of drugs resulting from this collaboration will be undertaken by The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. Should the development efforts result in a marketable product, we will receive royalty payments based on product sales as well as payments based on reaching research and development milestones. We recognized $2.1 million of contract revenue for the six months ended June 30, 2000, $5.0 million for the 30 year ended December 31, 1999 and $974,000 for the same period in 1998, pursuant to this agreement. Such amounts approximated research and development expenses under this collaboration. Included in 1999 contract revenue were $1.2 million of non-recurring milestone payments earned under this agreement. After the research term under this agreement ends, The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. can terminate the agreement as a whole or with respect to any pharmaceutical product upon three months' written notice and they or we may terminate the agreement upon 90 days' written notice upon a material breach of the agreement. If The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. terminate the agreement, rights to compounds developed under the agreement revert to us except for rights to compounds being commercialized by The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH In July 2000, we signed a binding preliminary agreement with the Sloan-Kettering Institute for Cancer Research setting forth the significant terms of a collaboration and license agreement relating to epothilones. Under the agreement, we will use our technologies to produce a specific epothilone compound to be tested in clinical trials and work collaboratively with Sloan-Kettering to develop new compounds and production methods and to conduct clinical trials. Under the agreement, we are required to pay to Sloan-Kettering an initial license fee and annual maintenance fees as well as payments for research and development costs, including the costs of clinical trials, and, should the development efforts result in a marketable product, royalty payments based on product sales as well as payments for reaching clinical development milestones. Based on preclinical work done by Sloan-Kettering, the agreement contemplates the initiation of Phase I clinical trials during 2001. In addition to creating a collaborative research program with at least an 18-month term, the agreement grants licenses that include: - A research license, whereby we and Sloan-Kettering grant each other a license, with the right to sublicense, to make and use methods and material covered under each of our patents to carry out research during the term of the agreement; and - A development and commercialization license, with the right to sublicense, whereby Sloan-Kettering grants us exclusive worldwide rights, with the conditional right to sublicense, to make, use, develop and sell the licensed products. At any time prior to the initiation of the Phase II clinical trials contemplated by the agreement, if we and Sloan-Kettering jointly determine that the objectives of the collaboration cannot be met, then the agreement terminates. Also, if Phase I clinical trials are completed, and we are unable to produce or otherwise provide the materials required for Phase II clinical trials within a specified time period of the conclusion of the Phase I clinical trials, Sloan-Kettering has the right to terminate the agreement. Upon termination, all rights granted by one party to the other revert to the granting party. The preliminary agreement provides that a definitive agreement incorporating the terms of the preliminary agreement and other commercially reasonable terms will be executed by us and Sloan-Kettering in August 2000. STANFORD UNIVERSITY In March 1996, we entered into an exclusive license agreement with the Board of Trustees of the Leland Stanford Junior University, or Stanford University, for certain technology and related patent rights now contained in nine issued U.S. patents and five foreign patents, as well as 45 U.S. and foreign patent applications, and materials for the recombinant production of novel polyketides. Under the terms of the agreement, we pay annual license fees to Stanford University, make milestone payments and pay royalties on net sales resulting from successful products originating from the licensed technology. In March 2000, an amendment to the agreement was signed that provides us an exclusive 31 option to acquire an exclusive license to future patents or patent applications related to certain technology developed by Dr. Khosla related to polyketides and their production. HARVARD COLLEGE In December 1998, we entered into an exclusive license agreement with the President and Fellows of Harvard College for certain technology and related patent rights for the production of polyketides. In connection with the license agreement, which gives us the exclusive license rights to the technology in five patent applications, we paid a non-refundable license fee and will pay annual maintenance fees, milestones and royalties on net sales of products originating from the licensed technology. COMPETITION The pharmaceutical and biotechnology industries are intensely competitive. Many companies, including biotechnology, chemical and pharmaceutical companies, are actively engaged in research and development of drugs for the treatment of the same diseases and conditions as our potential product candidates. Many of these companies have substantially greater financial and other resources, larger research and development staffs, and more extensive marketing and manufacturing organizations than we do. In addition, some of them have considerable experience in preclinical testing, clinical trials and other regulatory approval procedures. There are also academic institutions, governmental agencies and other research organizations that are conducting research in areas in which we are working. They may also market commercial products, either on their own or through collaborative efforts. We face significant competition from large pharmaceutical companies that are pursuing the same or similar technologies, including polyketide manipulation, as the technologies used by us in our drug discovery efforts. For example, a number of companies have cloned polyketide synthase genes and described in patents or publications technology to modify those genes or express them in heterologous hosts using recombinant DNA technology. Such companies include, for example, Abbott Laboratories (erythromycin, niddamycin); Dow Agrosciences (spinosyn); Eli Lilly and Company (tylosin, spiramycin), Novartis (soraphen, epothilone); and Merck (avermectin, lovastatin). We also face competition from biotechnology companies that engage in research similar to our own. For example, Biotica Ltd., is a biotechnology company that has published patent applications and entered into collaborations with pharmaceutical companies relating to efforts to modify polyketide synthase genes using recombinant DNA technology. We expect to encounter significant competition for any of the pharmaceutical products we plan to develop. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before their competitors may achieve a significant competitive advantage. We are aware that many other companies or institutions are pursuing development of drugs and technologies directly targeted at applications for which we are developing our drug compounds. Aventis Pharmaceuticals has filed a new drug application for a ketolide compound, and Abbott Laboratories has a ketolide compound in clinical trials. Chugai Pharmaceuticals has a motilide compound in clinical trials. We believe that two other large pharmaceutical companies have epothilone compounds in clinical trials. Because we have not yet initiated clinical trials for our own ketolide, motilide and epothilone compounds, it is likely that, even if we are successful in developing a product, one or more of these compounds of our competitors will be approved and marketed as products before our own. This could place us and our collaborators at a significant disadvantage, especially in the event our compounds do not have superior properties or cost advantages, and prevent us from realizing significant commercial benefit from such products. Developments by others may render our drug candidates or technologies obsolete or noncompetitive. We face and will continue to face intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions and for licenses to additional technologies. These 32 competitors, either alone or with their collaborative partners, may succeed in developing technologies or products that are more effective than ours. To compete successfully, we must develop proprietary positions and patented drugs for therapeutic markets that have not been satisfactorily addressed by conventional research strategies and, in the process, expand our technical expertise. Our potential products, even if successfully tested and developed, may not be adopted by physicians over other products and may not offer economically feasible alternatives to other therapies. GOVERNMENT REGULATION The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our potential products. The process required by the FDA before our products may be marketed in the United States generally involves the following: - preclinical laboratory and animal tests; - submission of an investigational new drug, or IND, application, which must become effective before clinical trials may begin; - adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use; and - FDA approval of a new drug application, or NDA, or biologics license application, or BLA. The testing and approval process requires substantial time, effort, and financial resources, and we cannot be certain that any approvals for any of our potential products will be granted on a timely basis, if at all. Prior to commencing clinical trials, which are typically conducted in three sequential phases, we must submit an IND application to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trial. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND may not result in FDA authorization to commence a clinical trial. Further, an independent institutional review board at the medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences. We may not successfully complete any of the three phases of testing of any of our potential products within any specific time period, if at all. Furthermore, the FDA or an institutional review board or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. The results of product development, preclinical studies and clinical studies are submitted to the FDA as part of a NDA or BLA. The FDA may deny a NDA or BLA if the applicable regulatory criteria are not satisfied or may require additional clinical data. Even if such data is submitted, the FDA may ultimately decide that the NDA or BLA does not satisfy the criteria for approval. Once issued, the FDA may withdraw product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. 33 Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially, based upon the type, complexity and novelty of the product or indication. Government regulation may delay or prevent marketing of potential products or new indications for a considerable period of time and to impose costly procedures upon our activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain additional regulatory approvals for any of our products would have a material adverse effect on our business. Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with good manufacturing practices, which impose certain procedural and documentation requirements upon us and our third party manufacturers. We cannot be certain that we or our suppliers will be able to comply with the good manufacturing practices regulations and other FDA regulatory requirements. Outside the United States, our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Community, or EC, registration procedures are available to companies wishing to market a product in more than one EC member state. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, a marketing authorization will be granted. This foreign regulatory approval process involves all of the risks associated with FDA clearance. LITIGATION We are not currently involved in any litigation. EMPLOYEES As of June 30, 2000 we had 62 full-time employees, 32 of whom hold Ph.D. degrees and 51 of whom were engaged in research and development activities. We believe that our relations with our employees are good. FACILITIES Our facilities consist of approximately 44,000 square feet of research and office space located in Hayward, California that is leased to us until 2003. We believe that our facility will meet our space requirements for research and development and administration functions through the year 2002, and beyond that time, that suitable additional space will be available on commercially reasonable terms. 34 MANAGEMENT AND DIRECTORS The following table provides information regarding our directors, executive officers and key employees:
NAME AGE TITLE - ---- --- ----- Daniel V. Santi, M.D., Ph.D............... 58 Chief Executive Officer and Chairman of the Board of Directors Michael S. Ostrach........................ 48 Chief Operating Officer Brian Metcalf, Ph.D....................... 54 Senior Vice President, Chief Scientific Officer Susan M. Kanaya........................... 37 Vice President, Finance and Chief Financial Officer Kevin Kaster.............................. 40 Vice President, Intellectual Property Susan B. Dillon, Ph.D..................... 47 Vice President, Pharmacological Sciences C. Richard Hutchinson, Ph.D............... 56 Vice President, New Technologies Chaitan Khosla, Ph.D...................... 35 Director Jean Deleage, Ph.D........................ 60 Director Raymond Whitaker, Ph.D.................... 52 Director Peter Davis, Ph.D......................... 56 Director Christopher Walsh, Ph.D................... 56 Director
- ------------------------ DANIEL V. SANTI, M.D., PH.D., is one of our co-founders, and has served as Chairman of the Board of Directors since our inception. In November 1998, Dr. Santi was appointed as our Chief Executive Officer. He is on leave of absence from his position as Professor of Biochemistry and Biophysics, and of Pharmaceutical Chemistry at University of California, San Francisco. Dr. Santi was one of the original members of the Scientific Advisory Boards of Chiron Corporation and Mitotix, Inc., and has served as a consultant to several large pharmaceutical companies. In 1988, Dr. Santi founded and served as Chairman of the Board of Directors of the biotechnology firm Protos, a subsidiary of Chiron Corporation, which was merged with Chiron in 1992. Dr. Santi was also founder and Chairman of Parnassus Pharmaceuticals. Dr. Santi has published over 275 scientific papers and is inventor on many patents in combinatorial chemistry and other areas. Dr. Santi received a Ph.D. in medicinal chemistry from the State University of New York, his M.D. from the University of California, San Francisco, and his B.S. in pharmacy from the State University of New York. MICHAEL S. OSTRACH has served as our Chief Operating Officer since October 1998. Prior to joining Kosan as Vice President, Corporate Development in October 1997, Mr. Ostrach worked as an independent consultant for biotechnology companies from October 1996 to October 1997. Mr. Ostrach was Executive Vice President and Chief Operating Officer of Neurobiological Technologies, Inc., a publicly-held biotechnology company from 1994 to 1996. From 1981 to 1991, he was a Senior Vice President at Cetus Corporation. In 1991, Cetus Corporation merged into Chiron Corporation and during 1992 Mr. Ostrach was a Vice President of Chiron Corporation and a founder and the President of Chiron Technologies, a Chiron business unit. Mr. Ostrach received his B.A. from Brown University and his J.D. from Stanford Law School. BRIAN W. METCALF, PH.D. has served as our Senior Vice President and Chief Scientific Officer since March 2000. From 1983 to 2000, Dr. Metcalf held a number of executive management positions with SmithKline Beecham, most recently as Senior Vice President, Discovery Chemistry & Platform Technologies worldwide. Prior to joining SmithKline Beecham, Dr. Metcalf held positions with Merrell Research Center from 1973-1983. Dr. Metcalf is a director of Argonaut Technologies, Inc. Dr. Metcalf received his B.S. and Ph.D. in organic chemistry from the University of Western Australia. 35 SUSAN M. KANAYA has served as our Vice President, Finance and Chief Financial Officer since November 1999. Prior to joining Kosan, Ms. Kanaya was most recently Vice President, Finance and Treasurer at SUGEN, Inc., a publicly-held biotechnology company that was recently acquired by Pharmacia & Upjohn, Inc. Since joining SUGEN in 1994, Ms. Kanaya held various positions in finance. Before joining SUGEN, Ms. Kanaya was the Controller at 50/50 Micro Electronics, Inc. and at Power Up Software Corporation. Ms. Kanaya received her B.S. in business administration from the University of California, Berkeley. KEVIN KASTER has served as our Vice President, Intellectual Property since August 1998. Prior to joining Kosan, he was Vice President, Intellectual Property at Geron Corporation. Prior to joining Geron in 1994, Mr. Kaster managed the patent group at Affymax N.V. between 1991 and 1994. Between 1988 and 1991, he was a Patent Attorney at Cetus Corporation. After receiving a B.S., magna cum laude, in chemistry and molecular biology from Vanderbilt University, Mr. Kaster joined Eli Lilly and Co. as an Associate Biologist, later becoming a patent technician. Mr. Kaster received his J.D. from Indiana University, Indianapolis. SUSAN B. DILLON, PH.D., has served as our Vice President, Pharmacological Sciences since May 2000. From 1988 to 2000, Dr. Dillon held a number of management positions with SmithKline Beecham, most recently as Director, Molecular Virology and Host Defense. Dr. Dillon received her B.S. in Medical Technology from State University of New York at Buffalo, her M.S. in Medical Technology from Temple University School of Medicine and her Ph.D. in Microbiology and Immunology from Thomas Jefferson University. C. RICHARD HUTCHINSON, PH.D. has served as our Vice President, New Technologies since March 2000. From 1971 to 2000, Dr. Hutchinson served on the faculty of the University of Wisconsin-Madison, most recently as Professor of Medicinal Chemistry, School of Pharmacy and Professor of Bacteriology. Dr. Hutchinson received his B.S. in pharmacy from Ohio State University and his Ph.D. in organic chemistry from the University of Minnesota. CHAITAN KHOSLA, PH.D., is one of our co-founders and has served as our director since our inception. Dr. Khosla has been Associate Professor of chemical engineering, chemistry and biochemistry at Stanford University since 1997, and has been a faculty member since 1992. Dr. Khosla is co-chairman of our Scientific Advisory Board. Dr. Khosla is the inventor of the combinatorial biosynthesis technology that we licensed from Stanford University. He is the recipient of several awards, including the 1999 Alan T. Waterman award by the National Science Foundation, the 1999 Eli Lilly Award in biological chemistry, and the 2000 ACS Award in pure science. Dr. Khosla is the author of over 90 publications and is an inventor on numerous patents. Dr. Khosla received his B. Tech. from the Indian Institute of Technology, Bombay, India and his Ph.D. from the California Institute of Technology. JEAN DELEAGE, PH.D., has served as our director since April 1996. He is a founder and managing general partner of Alta Partners, a venture capital partnership investing in information technologies and life science companies. From 1979 to 1996, Dr. Deleage was a managing partner of Burr, Egan, Deleage & Co., a venture capital firm. Dr. Deleage was the founder of Sofinnova, a venture capital firm in France, and Sofinnova, Inc., the U.S. subsidiary of Sofinnova. Dr. Deleage is a director of Flamel Technologies, S.A., Aclara BioSciences, Inc. and several privately held companies. Dr. Deleage received a Baccalaureate in France, a Masters Degree in electrical engineering from the Ecole Superieure d'Electricite, and a Ph.D. in economics from the Sorbonne. RAYMOND WHITAKER, MBA, PH.D., has served as our director since April 1998. Dr. Whitaker has been Vice President of S.R. One, Ltd., the venture investment affiliate of SmithKline Beecham, since 1997. From 1992 to 1996, he was Director, Worldwide Business Development, SmithKline Beecham Pharmaceuticals. He has over twenty-five years of international business development experience. His 36 previous appointments include Director, Corporate Development at Recordati SpA, Milan, Italy, and Director, Business Development with Laboratories Delagrange--SESIF in Paris, France. He is a member of the Board of Directors of CPBD, Inc., Electrosols Limited, OnyVax Limited and Xenogen Corporation. Dr. Whitaker received his Ph.D. in biochemistry, his M.B.A. and his B.S. in biochemistry and mathematics from the National University of Ireland, University College Dublin. PETER DAVIS, PH.D., has served as our director since April 1998. Dr. Davis has been a member of the Executive Committee of Pulsar International, S.A., an affiliate of A.G. Biotech Capital since 1993. Dr. Davis was a faculty member at the Wharton School of the University of Pennsylvania, where he was Director of the Applied Research Center and Director of Executive Education. He is a Board member of several Pulsar companies including Bionova Holdings Inc. and Seminis, Inc. He is also a Board member of Lutron Electronics, Inc., Instromedix, Inc., C.H. Werfen and Celsa S.A. Dr. Davis received his B.A. in physics from Cambridge University, his Masters Degree in operations research from the London School of Economics and his Ph.D. in operations research from the Wharton School. CHRISTOPHER WALSH, PH.D., has served as our director since April 1996. Dr. Walsh has been the Hamilton Kuhn Professor of biological chemistry and molecular pharmacology at Harvard Medical School since 1991 and formerly was President of the Dana-Farber Cancer Institute and Chairman of the Department of Biological Chemistry and Molecular Pharmacology at Harvard Medical School. He has performed extensive research in enzyme stereochemistry, reaction mechanisms and the mechanisms of action of anti-infective and immunosuppressive agents. He is co-chairman of the Kosan Scientific Advisory Board. Dr. Walsh is also a member of the board of directors of Diacrin, Inc. and Versicor Inc. Dr. Walsh received his A.B. in biology from Harvard University and Ph.D. in life sciences from The Rockefeller University, New York. In April 1998, Mr. Ostrach consented, without admitting or denying the Securities and Exchange Commission's allegations and conclusions, to the entry of a Commission administrative order requiring future compliance with Rule 102 of the Commission's Regulation M, a regulation which prohibits participants in a public stock offering from purchasing securities for their own account until the public distribution is complete. The administrative order resulted from Mr. Ostrach's purchase of 600 shares of Neurobiological Technologies, Inc., or NTI, common stock during a restricted period preceding a 1996 stock offering by NTI. SCIENTIFIC ADVISORY BOARD The following individuals are members of our Scientific Advisory Board, or SAB: CHAITAN KHOSLA, PH.D., is co-chairman of our SAB and a member of our board of directors. CHRISTOPHER WALSH, PH.D., is co-chairman of our SAB and a member of our board of directors. HOMER A. BOUSHEY, M.D., is a Professor of Medicine at the University of California, San Francisco. Dr. Boushey is an expert in clinical research on the causes and treatment of asthma and serves as Principal Investigator for UCSF's Asthma Clinical Research Center. DAVID CANE, PH.D., is Professor of Chemistry at Brown University. Dr. Cane is an expert in the biosynthesis of natural products, with particular emphasis on macrolide polyketides and terpenes. SAMUEL DANISHEFSKY, PH.D., is Professor of Chemistry at Columbia University. Dr. Danishefsky is an expert in synthetic organic chemistry. SIR DAVID A. HOPWOOD, PH.D., is Professor and Head of the Genetics Dept. at John Innes Institute, Norwich, U.K. Dr. Hopwood is an expert in Streptomyces genetics, molecular biology and the genetic manipulation of polyketide genes. 37 IVAN KOMPIS, PH.D., has an extensive background in natural products chemistry, in particular antibacterial agents. Dr. Kompis recently retired from Hoffmann-La Roche, where he held the position of Deputy Director of the Department of Infectious Diseases since 1987. MOHAMMED A. MARAHIEL, PH.D., is Professor of Biochemistry at Philipps University, Marburg, Germany. Dr. Marahiel is an expert in the field of non-ribosomal peptide biosynthesis. HARUO SETO, PH.D., is Professor of the Institute of Molecular and Cellular Biosciences, University of Tokyo, Japan. Dr. Seto has an extensive background in the structure, biosynthesis and screening of antibiotics. CHI-HUEY WONG, PH.D. is the Ernest W. Hahn Professor of Chemistry at the Scripps Research Institute, La Jolla, California. Dr. Wong's areas of expertise include chemical-enzymatic organic synthesis, mechanism-based inhibition of carbohydrate-mediated biological recognitions, enzyme inhibition and organic and bioorganic reaction mechanisms. BOARD COMPOSITION Dr. Santi is currently the chairman of the board of directors. Immediately following the sale of securities under this registration statement, our board of directors will consist of six directors divided into three classes with each class serving for a term of three years. - Drs. Khosla and Whitaker will be the Class A directors whose terms expire at the annual meeting of stockholders to be held in 2001; - Drs. Walsh and Davis will be the Class B directors whose terms will expire at the annual meeting of stockholders to be held in 2002; and - Drs. Deleage and Santi will be the Class C directors whose terms will expire at the annual meeting of stockholders to be held in 2003. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following the election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors may have the effect of delaying or preventing change in our control or management. COMMITTEES OF THE BOARD COMPENSATION COMMITTEE. The compensation committee, which is composed of Drs. Davis, Deleage and Walsh, reviews and recommends to our board of directors the compensation and benefits of all our officers and establishes and reviews general policies relating to compensation and benefits to our employees. AUDIT COMMITTEE. The audit committee, which is comprised of Drs. Whitaker, Davis and Deleage, reviews our internal accounting procedures and the services provided by our independent auditors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the compensation committee is currently, or has ever been at any time since our formation, one of our officers or employees, nor has served as a member of the board of directors or compensation committee of any entity that has one or more officers serving as a member of our board of directors or compensation committee. 38 COMPENSATION OF DIRECTORS We reimburse our non-employee directors for expenses incurred in connection with attending board and committee meetings but do not compensate them for their services as board or committee members. We have in the past granted non-employee directors options to purchase our common stock pursuant to the terms of our stock option plans, and our board continues to have the discretion to grant options to new non-employee directors. On March 14, 2000, we granted an option to purchase 15,000 shares of common stock to director Dr. Christopher Walsh. See "Management--Stock Plans--2000 Non-Employee Director Stock Option Plan" and "Related Party Transactions." EMPLOYMENT AGREEMENTS We require each of our employees to enter into confidentiality agreements prohibiting the employee from disclosing any of our confidential or proprietary information. At the time of commencement of employment, our employees also generally sign offer letters specifying basic terms and conditions of employment. In March 2000, we entered into an agreement with Brian Metcalf, Ph.D. in connection with his appointment as Senior Vice President and Chief Scientific Officer. Under the agreement, Dr. Metcalf is entitled to receive an annual salary of $280,000, a $100,000 sign-on bonus and an option to purchase 300,000 shares of our common stock at fair value. The option was subsequently granted with an exercise price of $1.00 per share. In addition, Dr. Metcalf is entitled to a housing loan up to $400,000 which will be secured by a deed of trust on Dr. Metcalf's principal residence. In addition, Dr. Metcalf is entitled to five years of monthly mortgage assistance to support up to a $400,000 mortgage. Either we or Dr. Metcalf may terminate his employment at any time for any reason. If we terminate Dr. Metcalf without cause during his first three years of employment, he will receive twelve months of salary continuation. Further, if such termination occurred after one year from his date of hire, six additional months of vesting of his stock options will be accelerated. In October 1999, we entered into an agreement with Susan M. Kanaya in connection with her appointment as Vice President, Finance and Chief Financial Officer. Under the agreement, Ms. Kanaya is entitled to receive an annual salary of $172,500, a $20,000 sign-on bonus and an option to purchase 150,000 shares of our common stock at fair value. The option was subsequently granted with an exercise price of $0.33 per share. In addition, Ms. Kanaya is entitled to a $50,000 loan to replace an existing loan arrangement with her former employer, which is forgiven on the third anniversary date of her employment with us. Either we or Ms. Kanaya may terminate her employment at any time for any reason. If we terminate Ms. Kanaya's employment without cause during the first two years of employment, she will receive six months of salary continuation and an additional six months of vesting on her stock options. If such termination occurs following a change in control, the period of salary continuation will be twelve months. In November 1998, we entered into an agreement with Daniel V. Santi, M.D., Ph.D. in connection with his appointment as our Chief Executive Officer. Under the agreement, Dr. Santi is entitled to receive an annual base salary of $250,000, adjusted annually by a minimum of a percentage change equal to the annual percentage change in the Consumer Price Index, and an option to purchase 750,000 shares of our common stock at $0.33 per share. The option was subsequently granted with an exercise price of $0.37 per share, 110% of fair value, because of a provision in our 1996 stock option plan. Either we or Dr. Santi may terminate his employment at any time for any reason. If we terminate Dr. Santi without cause, he will receive a lump sum severance payment in the amount equal to eighteen months of his then current base salary, and eighteen months accelerated vesting of the shares subject to the stock option. In July 1998, we entered into an agreement with Kevin Kaster in connection with his appointment as Vice President, Intellectual Property. Under the agreement, Mr. Kaster is entitled to receive an 39 annual base salary of $180,000 and an option to purchase 180,000 shares of our common stock at fair value. The option was subsequently granted with an exercise price of $0.33 per share. Either we or Mr. Kaster may terminate his employment at any time for any reason. If we terminate Mr. Kaster without cause during the first three and one-half years of employment, he will receive an amount equal to six months of his then current base salary and will accelerate the vesting of the lesser of (a) six months of his original stock option grant and (b) the remainder of his original stock option grant. Drs. Santi, Khosla and Metcalf, Messrs. Ostrach and Kaster and Ms. Kanaya each have stock option or stock purchase agreements which contain acceleration clauses providing for 100% vesting of the unvested shares in the event of a change in control. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation that we paid during 1999 to our Chief Executive Officer and to our four other most highly compensated executive officers who received salary and bonus compensation of more than $100,000 during 1999 on an annualized basis. All option grants were made under our 1996 stock option plan. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES ------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY BONUS OTHER OPTIONS - --------------------------- -------- -------- -------- ------------ Daniel V. Santi .................................... $250,812 -- -- -- Chairman and Chief Executive Officer Michael S. Ostrach ................................. 191,667 -- -- -- Chief Operating Officer Susan M. Kanaya(1) ................................. 26,870 $20,000 -- 150,000 Vice President, Finance and Chief Financial Officer Kevin Kaster ....................................... 190,559 -- -- 37,500 Vice President, Intellectual Property Daniel Chu(2) ...................................... 172,560 -- $46,800 -- Former Vice President, Research
- ------------------------ (1) Ms. Kanaya joined Kosan in November 1999. Her annual salary is $190,000. (2) Dr. Chu resigned as Vice President, Research, effective November 30, 1999. His other compensation represents a separation payment. OPTION GRANTS The following table sets forth summary information regarding the option grants made to our Chief Executive Officer and four of our other executive officers whose salary and bonus was in excess of $100,000 on an annualized basis during 1999. Options granted to purchase shares of our common stock under our 1996 stock option plan are generally immediately exercisable by the optionee but are subject to a right of repurchase pursuant to the vesting schedule of each specific grant. In the event that a purchaser ceases to provide service to us, we have the right to repurchase any of that person's unvested shares of common stock at the original option exercise price. The purchase price per share is equal to the deemed fair value of our common stock on the date of grant as determined by our board of directors. The percentage of total options was calculated based on options to purchase an aggregate of 40 464,100 shares of common stock granted under our 1996 stock option plan in 1999. The potential realizable value was calculated based on the ten-year term of the options and assumed rates of stock appreciation of 5% and 10%, compounded annually from the date the options were granted to their expiration date based on the fair value of the common stock on the date of grant. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represent our estimate of our future stock price. For our employees and officers, 25% of the option grant generally vests on the one-year anniversary of employment, and the remainder vest in a series of equal monthly installments beginning on the one-year anniversary of employment and continuing over the next three years of service. See "Management--Stock Plans" for a description of the material terms of these options. OPTION GRANTS IN 1999
PERCENTAGE OF POTENTIAL REALIZABLE NUMBER OF TOTAL VALUE AT ASSUMED ANNUAL SECURITIES OPTIONS RATES OF STOCK APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------- NAME GRANTED FISCAL YEAR (PER SHARE) DATE 5% 10% - ---- ---------- ------------- ----------- ---------- ------------ ------------- Daniel V. Santi................. -- -- -- -- $ -- $ -- Michael S. Ostrach(1)........... -- -- -- -- -- -- Susan M. Kanaya(2).............. 150,000 32% $0.33 11/04/09 81,363 129,557 Kevin Kaster(3)................. 37,500 8% 0.33 08/06/09 19,372 32,389 Daniel Chu...................... -- -- -- -- -- --
- ------------------------ (1) In February 2000, we granted Mr. Ostrach an option to purchase 75,000 shares of common stock at an exercise price of $0.42 per share, which was equal to the fair value of the common stock on the date of grant as determined by the board of directors. These options vest over a four-year period from the date of grant. (2) In March 2000, we granted Ms. Kanaya an option to purchase 15,000 shares of common stock at an exercise price of $1.00 per share, which was equal to the fair value of the common stock on the date of grant. These options vest over a four-year period from the date of grant. (3) In February 2000, we granted Mr. Kaster an option to purchase 37,500 shares of common stock at an exercise price of $0.42 per share, which was equal to the fair value of the common stock on the date of grant as determined by the board of directors. These options vest over a four-year period from the date of grant. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table provides summary information concerning the shares of common stock represented by outstanding stock options held by our Chief Executive Officer and four of our other most highly compensated executive officers with annualized base salaries in excess of $100,000 as of December 31, 1999. Options granted to purchase shares of our common stock under our 1996 stock option plan are generally immediately exercisable by optionees but are subject to a right of repurchase pursuant to the vesting schedule of each specific grant. The repurchase option generally lapses over a four-year period with 25% lapsing after the first year and the remainder in equal monthly installments thereafter over a three-year period. In the event that a purchaser ceases to provide service to us, we have the right to repurchase any of that person's unvested shares of common stock at the original option exercise price. Amounts shown in the value realized column were calculated based on the difference between the option exercise price and the fair value of the common stock on the date of 41 exercise, without taking into account any taxes that may be payable in connection with the transaction, multiplied by the number of shares of common stock underlying the option.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES DECEMBER 31, 1999 DECEMBER 31, 1999(2) ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ----------- ----------- ------------- ----------- ------------- Daniel V. Santi................. -- -- -- -- -- -- Michael S. Ostrach.............. -- -- 330,000 -- $4,950,000 -- Susan M. Kanaya................. -- -- 150,000 -- 2,250,000 -- Kevin Kaster.................... -- -- 217,500 -- 3,262,500 -- Daniel Chu...................... -- -- -- -- -- --
- ------------------------ (1) Based on an assumed initial public offering price of $15.00 per share, minus the per-share exercise price, multiplied by the number of shares issued upon exercise of the option. (2) The value of unexercised in-the-money options is calculated based on the difference between an assumed initial public offering price of $15.00 per share and the exercise price for these shares, multiplied by the number of shares underlying the option. STOCK PLANS 1996 STOCK OPTION PLAN Our 1996 stock option plan was adopted by our board of directors in June 1996 and approved by the stockholders in June 1996. This plan provides for the grant of incentive stock options to our employees and nonstatutory stock options to our employees, directors and consultants. The board of directors approved amendments to the stock option plan to increase the number of shares reserved under the stock option plan in October 1998, October 1999 and March 2000. The stockholders approved these amendments in October, 1998, November, 1999 and March 2000, respectively. As of June 30, 2000, 5,100,000 shares of common stock were reserved for issuance under this plan. Of these shares, 2,197,893 shares were issued upon exercise of stock options, 1,141,800 shares were subject to outstanding options and 1,760,307 shares were available for future grant. Our board of directors or a committee appointed by the board administers the stock option plan and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting of the options. The exercise price of nonstatutory options must generally be at least 85% of the fair market value of the common stock on the date of grant. The exercise price of incentive stock options cannot be lower than 100% of the fair market value of the common stock on the date of the grant and, in the case of incentive stock options granted to holders of more than 10% of our voting power, not less than 110% of the fair market value. The term of an incentive stock option cannot exceed ten years, and the term of an incentive stock option granted to a holder of more than 10% of our voting power cannot exceed five years. A participant may not transfer rights granted under our stock option plan other than by will, the laws of descent and distribution or as otherwise provided under the stock option plan. Options granted under our stock option plan are immediately exercisable. Unvested shares are subject to our right of repurchase in the event the employee, director or consultant ceases his or her employment with us. Our board of directors may not, without the adversely affected optionee's prior written consent, amend, modify or terminate the stock option plan if the amendment, modification or termination would impair the rights of optionees. Our stock option plan will terminate in 2006 unless terminated earlier by the board of directors. 42 2000 EMPLOYEE STOCK PURCHASE PLAN Our 2000 employee stock purchase plan was adopted by our board of directors in March 2000, and we expect will be approved by our stockholders prior to the closing of the offering, but it will not become effective until the closing of this offering. A total of 300,000 shares of our common stock has been reserved for issuance under the 2000 employee stock purchase plan. The 2000 employee stock purchase plan, which is intended to qualify under Section 423 of the Internal Revenue Code, contains a 6 month offering period. The offering period generally starts on the first trading day on or after June 1 and December 1 of each year, except for the first such offering period which commences on the first trading day on or after the effective date of this offering and ends on the last trading day on or before November 30. Employees are eligible to participate if they are employed by us for at least 20 hours per week and more than five months in any calendar year. However, employees may not be granted an option to purchase stock under the 2000 employee stock purchase plan if they either: - immediately after grant, own stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock; or - hold rights to purchase stock under our employee stock purchase plans which accrue at a rate which exceeds $25,000 worth of stock for each calendar year. The 2000 employee stock purchase plan permits participants to purchase our common stock through payroll deductions of up to 15% of the participant's compensation. Compensation is defined as the participant's base gross earnings but exclusive of incentive compensation and bonuses. The maximum number of shares a participant may purchase during a single purchase period is 15,000 shares. Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each purchase period. The price of stock purchased under the 2000 employee stock purchase plan is generally 85% of the lower of the fair market value of the common stock either: - at the beginning of the offering period; or - at the end of the purchase period. In the event the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, the participants will be withdrawn from the current offering period following exercise and automatically re-enrolled in a new offering period. The new offering period will use the lower fair market value as of the first date of the new offering period to determine the purchase price for future purchase periods. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us. Rights granted under the 2000 employee stock purchase plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the 2000 employee stock purchase plan. The 2000 employee stock purchase plan provides that, in the event we merge with or into another corporation or there is a sale of substantially all of our assets, each outstanding option may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set. The 2000 employee stock purchase plan will terminate in 2010. Our board of directors has the authority to amend or terminate the 2000 employee stock purchase plan, except that no such action may adversely affect any outstanding rights to purchase stock under the 2000 employee stock purchase plan. 43 2000 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN Non-employee directors are entitled to participate in our 2000 non-employee director stock option plan, or the director option plan. The director option plan was adopted by our board of directors in March 2000 and we expect will be approved by our stockholders prior to the closing of the offering, but it will not become effective until the closing of this offering. The director option plan has a term of ten years, unless terminated sooner by our board of directors. A total of 300,000 shares of our common stock have been reserved for issuance under the director option plan. The director option plan generally provides for an automatic initial grant of an option to purchase 7,500 shares of our common stock to each non-employee director on the date which the later of the following events occur: - the effective date of the director option plan; or - the date when a person first becomes a non-employee director. After the initial grant, a non-employee director will automatically be granted subsequent options to purchase 3,750 shares of our common stock each year on the date of our annual stockholder's meeting, if on such date he or she has served on our board of directors for at least six months. Each initial option grant and each subsequent option grant shall have a term of 10 years. Each initial option grant will vest as to 25% of the shares subject to the option on each anniversary of its date of grant and each subsequent option grant will vest as to 100% of the shares subject to the option on each anniversary of its date of grant. The exercise price of all options will be 100% of the fair market value per share of our common stock on the date of grant. The director option plan provides that in the event of our merger with or into another corporation, or a sale of substantially all of our assets, each option will become fully vested and exercisable for a period of thirty days from the date our board of directors notifies the optionee of the option's full exercisability, after which period the option shall terminate. Options granted under the director option plan must be exercised within three months of the end of the optionee's tenure as a director of the Company, or within 12 months after such director's termination by death or disability, but in no event later than the expiration of the option's ten year term. No option granted under the director option plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by the optionee. LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION MATTERS Our certificate of incorporation and bylaws limit the liability of our directors, officers, employees, and other agents to the fullest extent permitted by Delaware law. However, we will indemnify a person in connection with a proceeding initiated by such person only if such proceeding was authorized by our board. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for - breach of their duty of loyalty to the corporation or its stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions; or - any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal or state securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission. 44 We believe that indemnification under our bylaws and certificate of incorporation covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee, or other agent for any liability arising out of his or her actions in this capacity, regardless of whether the bylaws permit indemnification. We have entered and intend to continue to enter into agreements to indemnify our directors, in addition to the indemnification provided for in our bylaws. These agreements, among other things, indemnify our directors and officers for certain expenses (including attorneys' fees), judgments, fines, and settlement amounts incurred by any such person in any action or proceeding, including any action by or in our right arising out of such person's services as one of our directors or such person's services to any of our subsidiaries or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. See "Related Party Transactions." There is no pending litigation or proceeding involving any of our directors or officers in which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. 45 RELATED PARTY TRANSACTIONS SALES OF SECURITIES From January 1997 through March 2000, we issued the following securities in private placement transactions: - 571,429 shares of our Series A convertible preferred stock in January 1997 at a per share purchase price of $4.20 for aggregate proceeds of approximately $2.4 million, - 1,818,182 shares of our Series B convertible preferred stock in April 1998 at a per share purchase price of $8.25 for aggregate proceeds of approximately $15.0 million, - 804,196 shares of our Series C convertible preferred stock in March 2000 at a per share purchase price of $31.00 for aggregate proceeds of approximately $24.9 million, Our certificate of incorporation provides that our Series A and B convertible preferred stock will automatically convert into common stock in the event this offering results in proceeds to us of at least $15.0 million and the offering price per share is at least $7.00. Our certificate of incorporation also provides that our Series C convertible preferred stock will automatically convert into common stock in the event this offering results in proceeds to us of at least $25.0 million and the offering price per share is at least $13.43. The following executive officers, directors and holders of more than five percent of our voting securities purchased securities in the amounts as of the dates shown below.
SHARES OF CONVERTIBLE PREFERRED STOCK COMMON --------------------------------------- STOCK SERIES A SERIES B SERIES C ----------------- ----------- ----------- ----------- DIRECTORS AND EXECUTIVE OFFICERS Daniel V. Santi, M.D., Ph.D.(1)............. 2,899,494 229,761 24,244 -- Chaitan Khosla, Ph.D.(2)............. 1,763,571 7,143 -- -- Michael S. Ostrach..... 330,000 -- -- -- Susan Kanaya........... 165,000 -- -- -- Kevin Kaster........... 217,500 -- -- -- 5% STOCKHOLDERS AG Biotech Capital LLC(3)............... -- -- 484,848 16,129 Alta California Partners, L.P.(4).... 156,789 462,968 5,415 23,654 Alta Embarcadero Partners, LLC(4)..... 4,656 13,224 237,009 540 Franklin Biotechnology Discovery Fund(5).... -- -- -- 387,097 Lombard Odier & Cie(6)............... -- -- 363,636 58,065 S.R. One, Limited(7)... -- -- 303,030 16,129 Price per share........ $0.0003 to $1.00 $ 4.20 $ 8.25 $ 31.00 Date(s) of Issuance.... Jan 1995 - Apr 00 Jan 97 Apr 98 Mar 00
- ------------------------ (1) Dr. Santi received 229,761 shares of Series A convertible preferred stock in exchange for the surrender of certain shares previously held by him. See note 9 of our financial statements. All shares of convertible preferred stock owned by Dr. Santi will convert into 762,015 shares of common stock upon the closing of this offering. 46 (2) Dr. Khosla received 7,143 shares of Series A convertible preferred stock in exchange for his surrender of certain shares previously held by him. See Note 9 of our financial statements. All shares of convertible preferred stock owned by Dr. Khosla will convert into 21,429 shares of common stock upon the closing of this offering. (3) Peter Davis, one of our directors, is a member of the Executive Committee of Pulsar International, S.A., an affiliate of AG Biotech Capital LLC. All shares of convertible preferred stock owned by AG Biotech Capital LLC will convert into 1,502,931 shares of common stock upon the closing of this offering. (4) Jean Deleage, one of our directors, is a general partner of Alta Partners, an affiliate of Alta California Partners and Alta Embarcadero Partners. All shares of convertible preferred stock owned by Alta California Partners, L.P. and Alta Embarcadero Partners, LLC will convert into 2,228,430 shares of common stock upon the closing of this offering. (5) All shares of convertible preferred stock owned by Franklin Biotechnology Discovery Fund will convert into 1,161,291 shares of common stock upon the closing of this offering. (6) All shares of convertible preferred stock owned by Lombard Odier & Cie will convert into 1,265,103 shares of common stock upon the closing of this offering. (7) Raymond Whitaker, one of our directors, is Vice President of S.R. One, Limited, the venture investment affiliate of SmithKline Beecham. All shares of convertible preferred stock owned by S.R. One, Limited will convert into 957,477 shares of common stock upon the closing of this offering. OTHER TRANSACTIONS PROMISSORY NOTES. Stock options granted under our 1996 Stock Option Plan are immediately exercisable as to both vested and unvested shares, with unvested shares being subject to a right of repurchase in our favor in the event of termination of employment or consultancy prior to vesting of all shares. These individuals pay the exercise price for their outstanding options pursuant to full recourse promissory notes secured in part by the common stock underlying the options. The notes bear interest at the Applicable Mid Term Federal Rate at the time of exercise. Principal and interest is due on the earlier of the employee's or consultant's termination date or three years after the date of the promissory note. As of June 30, 2000, the original and outstanding principal amounts of each promissory note by a director or executive officer are set forth below.
ORIGINAL AND OUTSTANDING INTEREST ACCRUED DIRECTOR OR EXECUTIVE OFFICER ISSUANCE DATE NOTE AMOUNT RATE INTEREST - ----------------------------- -------------- ------------ -------- -------- Daniel V. Santi................ December 1998 $275,000 4.47% $18,854 Michael S. Ostrach............. February 2000 74,250 6.46% 1,719 Susan M. Kanaya................ February 2000 50,000 6.46% 1,157 Susan M. Kanaya................ April 2000 15,000 6.60% 179 Kevin Kaster................... February 2000 72,500 6.46% 1,678 Chaitan Khosla................. September 1999 71,500 5.89% 3,252
EXECUTIVE OFFICER LOANS. In connection with Dr. Brian Metcalf's relocation to California, we loaned Dr. Metcalf $400,000 in May 2000 and received a full recourse promissory note, which bears interest at 6.3% per year, and is secured by a deed of trust on Dr. Metcalf's principal residence. Principal and accrued interest is payable in full on the earlier of May 30, 2005 or the date on which Dr. Metcalf voluntarily terminates his employment with us. 47 In accordance with the terms of our employment agreement with Susan M. Kanaya, we loaned Ms. Kanaya $52,900 in March 2000 and received a full recourse promissory note, which bears interest at 6.35% per year, and is secured by a deed of trust on Ms. Kanaya's principal residence. Such loan and accrued interest is forgivable on November 4, 2002. In the event Ms. Kanaya voluntarily terminates her employment with us prior to November 4, 2002, principal and accrued interest is payable in full. CONSULTING AGREEMENTS. In December 1998, we entered into an amended and restated consulting agreement with our co-founder and director, Dr. Chaitan Khosla. Under the terms of this agreement, Dr. Khosla is entitled to receive consulting fees of not less than $100,000 per year and was granted an option to purchase 195,000 shares of our common stock at an exercise price of $0.37 per share which vest over a four year period. Total consulting fees paid to Dr. Khosla totaled $104,279 in 1999, $126,171 in 1998 and $61,846 in 1997. Either Kosan or Dr. Khosla may terminate his consultancy at any time for any reason. If we terminate Dr. Khosla without cause or as a result of a change in control, he will receive the greater of (i) any compensation payable during the extended term of his consulting agreement or (ii) an amount equal to two times his then-current annual compensation. Further, all of Dr. Khosla's stock options and other similar equity rights will immediately vest in full. In December 1995, we entered into a consulting agreement with our director, Dr. Christopher Walsh. Under the terms of this agreement, Dr. Walsh is entitled to receive $1,000 per day for consultations and entered into a restricted stock purchase agreement which provided for the purchase of 60,000 shares of common stock at a purchase price of $0.0007 per share, which vest over five years. In March 2000, we granted Dr. Walsh an additional option to purchase 15,000 shares of common stock at a purchase price of $1.00 per share, which vest over a four-year period. Total consulting fees paid to Dr. Walsh totaled $4,000 in 1999, $2,000 in 1998 and $4,000 in 1997. INDEMNIFICATION AGREEMENTS. We have entered into indemnification agreements with Drs. Davis, Deleage, Khosla, Santi, Walsh and Whitaker, Mr. Ostrach, Ms. Kanaya and Mr. Kaster. We intend to enter into indemnification agreements with all of our directors and officers for the indemnification of those persons to the full extent permitted by law. We also intend to execute these agreements with our future directors and officers. STOCK OPTIONS. Stock option grants to our executive officers and directors are described in this prospectus under the captions "Management--Compensation of Directors", "--Executive Compensation" and "--Option Grants". EVALUATION AGREEMENT Effective in March 1998, we entered into a 14-month evaluation agreement with Savia Corporation and DNA Plant Technologies. The evaluation program was for the development of intellectual property and technology for use in the field of production of polyketides in plants. We received revenue of approximately $90,000 upon signing the agreement for work performed to that date. The agreement was terminated effective December 31, 1999. Under the terms of the termination agreement we received approximately $160,000 for development services performed through December 31, 1999. Dr. Davis, one of our board members, is also a board member of the company that controls DNA Plant Technologies. 48 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of our common stock as of June 30, 2000, as adjusted to reflect the sale of common stock in this offering. Information is given for: - each stockholder who is known by us to beneficially own more than five percent of our common stock; - each of our directors and executive officers; and - all of our directors and officers as a group. Percentage of ownership in the following table is calculated based on 18,844,539 shares of our common stock and convertible preferred stock on an as-converted basis as of June 30, 2000 and 23,844,539 shares of common stock outstanding after completion of this offering. Beneficiary ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person are deemed outstanding. Those shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares of 49 common stock shown as beneficially owned by them, subject to community property laws, where applicable.
AMOUNT OF SHARES BENEFICIALLY OWNED AS OF JUNE 30, 2000 ----------------------------------------- PERCENTAGE OF TOTAL OUTSTANDING SHARES BENEFICIALLY OWNED ------------------- NUMBER OF SHARES BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING - ------------------------------------ ------------------- -------- -------- Daniel V. Santi, M.D., Ph.D.(1)......................... 3,645,009 19.3% 15.3% Jean Deleage (2)........................................ 2,389,875 12.7% 10.0% Alta Partners One Embarcadero Center, Suite 4050 San Francisco, CA 94111 Peter Davis, Ph.D. (3).................................. 1,502,931 8.0% 6.3% AG Biotech Capital, LLC c/o Viridian Management, LLC 686 N. DuPont Boulevard #220 Milford, DE 19963 Lombard Odier & Cie (4)................................. 1,265,103 6.7% 5.3% Sihlstrasse 20 8021 Zurich, Switzerland Kurt von Emster (5)..................................... 1,161,291 6.2% 4.9% Franklin Biotechnology Discovery Fund 777 Mariners Island Boulevard San Mateo, CA 94404 Raymond Whitaker, Ph.D. (6)............................. 957,477 5.1% 4.0% S.R. One, Limited Four Tower Bridge West Conshohoken, PA 19428 Chaitan Khosla, Ph.D. (7)............................... 1,785,000 9.5% 7.5% Christopher Walsh, Ph.D. (8)............................ 79,500 * * Michael S. Ostrach (9).................................. 405,000 2.1% 1.7% Brian W. Metcalf, Ph.D. (10)............................ 300,000 1.6% 1.2% Susan M. Kanaya (11).................................... 165,000 * * Kevin Kaster (12)....................................... 255,000 1.4% 1.1% Daniel Chu (13)......................................... 67,500 * * All current directors and executive officers as a group (10 persons)(14)...................................... 11,484,793 59.6% 47.3%
- ------------------------ * Less than one percent (1%) (1) Includes 437,499 shares that are subject to our right of repurchase as of June 30, 2000 if Dr. Santi is no longer an employee, director or consultant with us. Dr. Santi is located at 3832 Bay Center Place, Hayward, CA 94545. (2) Consists of 2,389,875 shares beneficially owned by Alta Partners including 1,632,900 shares held directly by Alta California Partners, L.P. and 756,975 shares held directly by Alta Embarcadero Partners, LLC. Dr. Deleage, one of our directors, is the managing general partner of Alta Partners and disclaims beneficial ownership of such shares except to the extent of his proportionate pecuniary interest therein. (3) Consists of 1,502,931 shares held directly by AG Biotech Capital LLC. Dr. Davis, one of our directors, is a member of the Executive Committee of Pulsar International, S.A., an affiliate of 50 AG Biotech Capital. Dr. Davis disclaims beneficial ownership of the shares held by AG Biotech Capital except to the extent of his proportionate pecuniary interest therein. (4) Lombard Odier & Cie is a private Swiss banking institution. The shares consist of shares held by Lombard Odier for the benefit of certain Swiss publicly traded mutual funds and private and institutional clients over which Lombard Odier has sole voting and dispositive power through its asset managers. No single person exercises voting and dispositive control over the shares held by Lombard Odier. (5) Kurt von Emster is Vice President, Franklin Advisors and Portfolio Manager/Analyst for Franklin Templeton Group and is deemed to share investment power with respect to the 1,161,291 shares held directly by Franklin Biotechnology Discovery Fund. Mr. von Emster disclaims beneficial ownership of such shares. (6) Consists of 957,477 shares held directly by S.R. One, Limited. Dr. Whitaker, one of our directors, is Vice President of S.R. One, Limited, the venture investment affiliate of SmithKline Beecham. Dr. Whitaker disclaims beneficial ownership of the shares held by S.R. One, Limited except to the extent of his proportionate pecuniary interest therein. (7) Includes 125,937 shares that are subject to our right of repurchase as of June 30, 2000 if Dr. Khosla is no longer an employee, director or consultant with us. Dr. Khosla is located at 3832 Bay Center Place, Hayward, CA 94545. (8) Includes the following: (i) 6,999 shares that are subject to our right of repurchase as of June 30, 2000; and (ii) 19,500 shares that are subject to option as of June 30, 2000, of which 15,840 would be subject to our right of repurchase in the event of exercise if Dr. Walsh is no longer an employee, director or consultant with us. (9) Includes the following. (i) 138,123 shares that are subject to our right of repurchase as of June 30, 2000; and (ii) 75,000 shares that are subject to option as of June 30, 2000, of which 68,748 would be subject to our right of repurchase in the event of exercise if Mr. Ostrach is no longer an employee, director or consultant with us. (10) Consists of 300,000 shares that are subject to option as of June 30, 2000, all of which would be subject to our right of repurchase in the event of exercise if Dr. Metcalf is no longer an employee, director or consultant with us. (11) Consists of 165,000 shares that are subject to our right of repurchase as of June 30, 2000. (12) Includes the following: (i) 127,185 shares that are subject to our right of repurchase as of June 30, 2000; and (ii) 37,500 shares that are subject to option as of June 30, 2000, of which 34,374 would be subject to our right of repurchase in the event of exercise if Mr. Kaster is no longer an employee, director or consultant with us. (13) Dr. Chu resigned as Vice President, Research, effective November 30, 1999. (14) Includes shares included pursuant to notes (1) through (3) and (6) through (12) above. 51 DESCRIPTION OF CAPITAL STOCK Our certificate of incorporation, the filing of which will occur at the closing of this offering, authorizes the issuance of up to 200,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share, the rights and preferences of which may be established from time to time by our board of directors. As of June 30, 2000, after giving effect to the conversion of all of our preferred stock into common stock, 18,844,539 shares of common stock were outstanding. As of June 30, 2000, we had 100 stockholders. COMMON STOCK Each holder of common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences to which holders of convertible preferred stock issued after the sale of the common stock offered hereby may be entitled, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of convertible preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and the shares of common stock offered by us in this offering, when issued and paid for, will be, fully paid and nonassessable. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock, which we may designate in the future. PREFERRED STOCK Upon the closing of this offering, the board of directors will be authorized, subject to any limitations prescribed by law, without stockholder approval, from time to time to issue up to an aggregate of 10,000,000 shares of convertible preferred stock, $0.001 par value per share, in one or more series, each of such series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the board of directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any convertible preferred stock that may be issued in the future. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. We have no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS Pursuant to the Third Amended and Restated Registration Rights Agreement entered into between us and holders of 13,226,481 shares of common stock and holders of shares of common stock issuable upon conversion of our Series A, Series B and Series C convertible preferred stock, we are obligated, under limited circumstances and subject to specified conditions and limitations, to use our reasonable best efforts to register the registrable shares. We must use our reasonable best efforts to register shares subject to such registration rights if we: - receive written notice from holders of 50% or more of the registrable shares requesting that we effect a registration with respect to at least 20% of the registrable shares then held by the holders requesting registration; - decide to register our own securities; or 52 - both receive written notice from any holder or holders of the registrable shares requesting that we effect a registration on Form S-3 (a shortened form of registration statement) with respect to the registrable shares, and are then eligible to use Form S-3 (which at the earliest could occur 12 calendar months after the closing of this offering). However, in addition to certain other conditions and limitations, if we are proposing to issue registered shares and the underwriters request to decrease the number of shares registered, we can limit the number of registrable shares included in the registration statement. The underwriters have requested that no registrable shares be registered in this offering. In addition, the holders of these registration rights have entered into lockup agreements and waived their registration rights until 180 days following the completion of this offering. DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS Certain provisions of our certificate of incorporation and bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain of these provisions will create a classified board of directors, will allow us to issue preferred stock without any vote or further action by the stockholders, require advance notification of stockholder proposals and nominations of candidates for election as directors, eliminate cumulative voting in the election of directors and eliminate shareholder action by written consent. In addition, our bylaws will provide that special meetings of the stockholders may be called only by the Chairman of the Board, the President, or board of directors and that the authorized number of directors may be changed only by resolution of the board of directors. These provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in our control. In addition, we will be subject to Section 203 of the Delaware General Corporation Law. This law prohibits a Delaware corporation from engaging in any business combination with any interested stockholder, unless any of the following conditions are met. First, this law does not apply if prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder. Second, the law does not apply if upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer. Third, the law does not apply if at or after the date of the transaction, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for our common stock is Chase Mellon Shareholder Services LLC. 53 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market could reduce prevailing market prices. Furthermore, since certain shares will not be available for sale shortly after this offering because of contractual and legal restrictions on resale as described below, sales of substantial amounts of our common stock in the public market after any restrictions on sale lapse could adversely affect the prevailing market price of the common stock and impair our ability to raise equity capital in the future. Upon completion of the offering, we will have 23,844,539 outstanding shares of common stock, assuming no exercise of the over-allotment option and no exercises of outstanding options after June 30, 2000. Of these shares, all of the shares sold in the public offering will be freely tradable without restriction or further registration under the Securities Act, unless these shares are purchased by affiliates. The remaining 18,844,539 shares of common stock held by existing stockholders are restricted securities. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration described below under Rules 144, 144(k) or 701 promulgated under the Securities Act. As a result of contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, the restricted shares will be available for sale in the public market as follows: - unless held by affiliates, the 5,000,000 shares sold in the public offering will be freely tradable upon completion of the offering; - shares will be eligible for sale upon the expiration of the lock-up agreements, described below, beginning 180 days after the date of this prospectus; and - 213,403 shares will be eligible for sale upon the exercise of vested options 180 days after the date of this prospectus. LOCK-UP AGREEMENTS We, our directors, officers, employees and other stockholders, who together hold of our securities, have entered into lock-up agreements in connection with this offering. These lock-up agreements generally provide that these holders will not offer, sell, contract to sell, grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the date of this prospectus without the prior written consent of Lehman Brothers Inc. Notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be sold until these agreements expire or are waived by Lehman Brothers Inc. RULE 144 In general, under Rule 144 as currently in effect, after the expiration of the lock-up agreements, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - one percent of the number of shares of common stock then outstanding, which will equal approximately 238,445 shares immediately after this offering; and - the average weekly trading volume of our common stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice and the availability of current public information about us. 54 RULE 144(K) Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, may sell these shares without complying with the manner of sale, public information, volume limitation or notice requirements of Rule 144. RULE 701 Rule 701, as currently in effect, permits our employees, officers, directors or consultants who purchased shares pursuant to a written compensatory plan or contract to resell such shares in reliance upon Rule 144, but without compliance with certain restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 90 days after effectiveness without complying with the holding period requirement and that non-affiliates may sell such shares in reliance on Rule 144 90 days after effectiveness without complying with the holding period, public information, volume limitation or notice requirements of Rule 144. REGISTRATION RIGHTS Upon completion of this offering, the holders of 13,226,481 shares of our common stock, or their transferees, will be entitled to rights with respect to the registration of their shares under the Securities Act. Registration of their shares under the Securities Act would result in these shares becoming freely tradeable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of such registration. STOCK OPTIONS Ninety days after the date of this prospectus, shares issued upon exercise of options that we granted prior to the date of this offering will also be available for sale in the public market pursuant to Rule 701 under the Securities Act of 1933, subject to the expiration of lock-up agreements. As of June 30, 2000, options to purchase a total of 1,141,800 shares of our common stock were outstanding, 106,950 of which were vested. Upon the closing of this offering, we intend to file a registration statement to register for resale the 3,502,107 shares of common stock reserved for issuance under our 1996 stock option plan, our 2000 employee stock purchase plan and our 2000 non-employee director stock option plan. We expect the registration statement to become effective immediately upon filing. Shares issued upon the exercise of stock options granted under these plans will be eligible for sale in the public market from time to time, subject to vesting provisions, Rule 144 volume limitations applicable to our affiliates and, in the case of some options, the expiration of lock-up agreements. 55 UNDERWRITING Under the terms of an underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below, for whom Lehman Brothers Inc., CIBC World Markets Corp., SG Cowen Securities Corporation and Fidelity Capital Markets, a division of National Financial Services Corporation, are acting as representatives, have severally agreed to purchase from us the respective number of shares of common stock opposite their names below:
UNDERWRITER NUMBER OF SHARES - ----------- ---------------- Lehman Brothers Inc. ...................................... CIBC World Markets Corp. .................................. SG Cowen Securities Corporation............................. Fidelity Capital Markets, a division of National Financial Services Corporation...................................... ----- Total..................................................... =====
The underwriting agreement provides that the underwriters are obligated to purchase all of the shares of common stock in the offering if any are purchased, other than those covered by the over-the-allotment option described below. We have granted the underwriters a 30 day option after the date of the underwriting agreement to purchase, from time to time, in whole or in part, up to 750,000 shares at the public offering price less underwriting discounts and commissions. The option may be exercised to cover over-allotments, if any, made in connection with the offering. To the extent that this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro rata portion of these additional shares based on the underwriter's percentage underwriting commitment in the offering as indicated in the preceding table. The representatives of the underwriters have advised us that the underwriters propose to offer shares of common stock directly to the public at the public offering price on the cover of this prospectus and to selected dealers, who may include the underwriters, at this public offering price less a selling concession not in excess of $___ per share. The underwriters may allow, and the selected dealers may re-allow, a discount from the concession not in excess of $___ per share to other dealers. After the completion of the offering, the representatives may change the public offering price and other selling terms. The following table summarizes the underwriting discounts and commissions we will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters' overallotment option to purchase 750,000 additional shares. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay to the Company for the shares.
PAID BY US --------------------------------------------- NO EXERCISE OF FULL EXERCISE OF OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION --------------------- --------------------- Per Share.............................. $ $ Total.................................. $ $
We estimate that the total expense of this offering, excluding the underwriting discounts and commissions, will be approximately $1,250,000. We have applied for quotation of our common stock on the NASDAQ National Market under the symbol "KOSN." We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and liabilities incurred in connection with the directed share program referred to 56 below, and to contribute to payments that the underwriters may be required to make for these liabilities. Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation between us and the underwriters. The factors that the representatives will consider in determining the public offering price include: - the history and prospects for the industry in which we compete; - the ability of our management and our business potential and earning prospects; - the prevailing securities markets at the time of this offering; and - the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Securities Exchange Act. - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specific maximum. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. The underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the issuer in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Naked short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering. Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice. 57 The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number of shares offered by them. We, our directors, officers, employees and other stockholders holding __________ shares have agreed not to offer to sell, sell or otherwise dispose of, directly or indirectly, any shares of capital stock or any securities that may be converted into or exchanged for any shares of capital stock for a period of 180 days from the date of the prospectus without the prior written consent of Lehman Brothers Inc., except that we may issue and grant options to purchase shares of common stock under our option plans. See "Shares Eligible for Future Sale." At our request, Lehman Brothers Inc. has reserved up to 250,000 shares of the common stock offered by this prospectus for sale pursuant to a directed share program to our employees, directors and friends at the initial public offering price on the cover page of this prospectus. These persons must commit to purchase no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Lehman Brothers Inc., CIBC World Markets Corp. and SG Cowen Securities Corporation intend to distribute and deliver this prospectus only by hand or mail and intend to use only printed prospectuses. Fidelity Capital Markets, a division of National Financial Services Corporation, is acting as an underwriter of this offering and will be facilitating electronic distribution through the Internet. Purchasers of the shares of common stock offered in this prospectus may be required to pay stamp taxes and other charges under the laws and practices of the county of purchase, in addition to the offering price listed on the cover of this prospectus. Any offers in Canada will be made only under an exemption from the requirements to file a prospectus in the relevant province of Canada in which the sale is made. 58 LEGAL MATTERS Wilson Sonsini Goodrich & Rosati, PC, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. The underwriters have been represented by Brobeck, Phleger & Harrison LLP. An investment partnership composed of current and former members of and persons associated with Wilson Sonsini Goodrich & Rosati, PC, beneficially owns 16,437 shares of our common stock. CHANGE IN INDEPENDENT AUDITORS Effective May 28, 1998, Ernst & Young LLP was engaged as our independent auditors and replaced Coopers & Lybrand L.L.P. (now, PricewaterhouseCoopers LLP), who were dismissed as our independent auditors in May 1998. The decision to change auditors was approved by our Board of Directors. The audit reports of PricewaterhouseCoopers LLP for the years ended December 31, 1997 and 1996 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits through December 31, 1997 and through May 1998, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statements disclosure or auditing scope or procedures, which disagreements, if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement. PricewaterhouseCoopers LLP has not audited or reported on any of the financial statements or information included in this prospectus. For purposes of this filing, the financial statements at December 31, 1997, 1996 and 1995 as well as the financial statements for the years ended December 31, 1997 and 1996 and the period from inception (January 5, 1995) to December 31, 1995 have been audited by Ernst & Young LLP. Prior to May 28, 1998, we had not consulted with Ernst & Young LLP on items that involved our accounting principles or the form of audit opinion to be issued on our financial statements. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements at December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C., a registration statement on Form S-1 under the Securities Act, with respect to the common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to us and our common stock, reference is made to the registration statement and the exhibits and schedules filed as part of the registration statement. Statements contained in this prospectus as to the contents of any contract or document filed as an exhibit to the registration statement are qualified by reference to the applicable exhibit as filed. A copy of the registration statement, and the exhibits and schedules to the registration statement, as well as reports and other information filed by us with the SEC may be inspected without charge at the public reference facilities maintained by the SEC in Room 1025, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all of any part of the registration statement may be 59 obtained from those offices upon the payment of the fees prescribed by the SEC. You can obtain information about the operation of the public reference facilities by calling the SEC at 1-800-SEC-0330. In addition, registration statements and other filings we make with the SEC through its electronic data gathering, analysis and retrieval, or EDGAR, system, including our registration statement, are publicly available through the Internet. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The SEC's web site is http://www.sec.gov. As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, will file periodic reports, proxy statements and other information with the SEC. 60 KOSAN BIOSCIENCES INCORPORATED INDEX TO FINANCIAL STATEMENTS
PAGE -------- Report of Ernst & Young LLP, Independent Auditors........... F-2 Balance Sheets as of December 31, 1998 and 1999............. F-3 Statements of Operations for the years ended December 31, 1997, 1998 and 1999....................................... F-4 Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999.......................... F-5 Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999....................................... F-6 Notes to Financial Statements............................... F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Kosan Biosciences Incorporated We have audited the accompanying balance sheets of Kosan Biosciences Incorporated as of December 31, 1998 and 1999, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kosan Biosciences Incorporated at December 31, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Palo Alto, California March 10, 2000, except for the first paragraph of Note 11, as to which the date is _______. The foregoing report is in the form that will be signed upon completion of the stock split and increase in authorized shares of common and preferred stock described in Note 11 to the financial statements. /S/ ERNST & YOUNG LLP Palo Alto, California August 7, 2000 F-2 KOSAN BIOSCIENCES INCORPORATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PRO FORMA STOCKHOLDERS' DECEMBER 31, EQUITY AT ------------------- JUNE 30, JUNE 30, 1998 1999 2000 2000 -------- -------- ----------- ------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 3,049 $ 1,032 $ 19,015 Short-term investments.................................... 3,279 990 6,012 Other receivables......................................... 168 498 112 Prepaid expenses and other current assets................. 209 325 253 ------- -------- -------- Total current assets........................................ 6,705 2,845 25,392 Property and equipment, net................................. 1,407 2,587 2,974 Long-term investments....................................... 9,073 8,442 7,235 Notes receivable from related party......................... 12 87 711 Other assets................................................ 4 196 586 ------- -------- -------- Total assets................................................ $17,201 $ 14,157 $ 36,898 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 333 $ 486 $ 750 Accrued liabilities....................................... 98 626 1,209 Deferred revenue.......................................... 1,719 409 125 Current portion of capital lease obligation............... 118 127 174 Current portion of equipment loan......................... 170 447 764 ------- -------- -------- Total current liabilities................................... 2,438 2,095 3,022 Equipment loan, less current portion........................ 700 1,424 2,046 Capital lease obligation, less current portion.............. 304 167 53 Stockholders' equity: Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized, 3,269,377 3,269,377 and 4,073,573 shares issued and outstanding at December 31, 1998 and 1999 and June 30, 2000, respectively (none pro forma) (aggregate liquidation preference of $21,095 and $46,025 at December 31, 1999 and June 30, 2000, respectively)........................................... 3 3 4 $ -- Common stock, $0.001 par value, 200,000,000 shares authorized, 5,187,951, 5,480,544 and 6,623,820 shares issued and outstanding at December 31, 1998 and 1999 and June 30, 2000, respectively, (18,844,539 shares issued and outstanding pro forma).............................. 5 5 7 19 Additional paid-in capital................................ 21,227 24,848 61,651 61,643 Notes receivable from stockholders........................ (275) (349) (647) (647) Deferred stock-based compensation......................... -- (2,377) (10,906) (10,906) Accumulated other comprehensive income (loss)............. (9) (66) (60) (60) Accumulated deficit....................................... (7,192) (11,593) (18,272) (18,272) ------- -------- -------- -------- Total stockholders' equity.................................. 13,759 10,471 31,777 $ 31,777 ------- -------- -------- -------- Total liabilities and stockholders' equity.................. $17,201 $ 14,157 $ 36,898 ======= ======== ========
See accompanying notes. F-3 KOSAN BIOSCIENCES INCORPORATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE 30, ------------------------------ --------------------------- 1997 1998 1999 1999 2000 -------- -------- -------- ------------ ------------ (UNAUDITED) Revenues: Contract revenue........................ $ 10 $ 974 $ 5,206 $ 3,027 $ 2,084 Grant revenue........................... 277 262 140 80 140 ------- ------- ------- ------- -------- Total revenues............................ 287 1,236 5,346 3,107 2,224 Operating expenses: Research and development (Including charges for stock-based compensation of $0, $0, $964, $403 and $2,597, respectively)......................... 1,922 4,030 8,587 3,838 7,621 General and administrative (Including charges for stock-based compensation of $0, $0, $181, $0 and $708, respectively)......................... 457 991 1,813 812 1,793 ------- ------- ------- ------- -------- Total operating expenses.................. 2,379 5,021 10,400 4,650 9,414 ------- ------- ------- ------- -------- Loss from operations...................... (2,092) (3,785) (5,054) (1,543) (7,190) Interest income........................... 154 598 679 334 678 Interest expense.......................... (56) (80) (196) (71) (167) Other income.............................. -- -- 170 -- -- ------- ------- ------- ------- -------- Net loss.................................. (1,994) (3,267) (4,401) (1,280) (6,679) Deemed dividend upon issuance of Series C convertible preferred stock............... -- -- -- -- (11,267) ------- ------- ------- ------- -------- Net loss attributable to common stockholders.............................. $(1,994) $(3,267) $(4,401) $(1,280) $(17,946) ======= ======= ======= ======= ======== Basic and diluted net loss per share........ $ (0.49) $ (0.77) $ (0.98) $ (0.29) $ (3.57) ======= ======= ======= ======= ======== Shares used in computing basic and diluted net loss per share........................ 4,094 4,270 4,509 4,430 5,029 Pro forma basic and diluted net loss per share (unaudited)......................... $ (0.31) $ (1.12) ======= ======== Shares used in computing pro forma basic and diluted net loss per share (unaudited).... 14,318 16,056
See accompanying notes. F-4 KOSAN BIOSCIENCES INCORPORATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED ---------------------- ------------------------- PAID-IN FROM STOCK-BASED SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION --------- ---------- ------------ ---------- ---------- ------------ ------------- BALANCES AT DECEMBER 31, 1996...... 1,215,988 $ 2 3,468,285 $ 3 $ 3,647 $ -- -- Conversion of Series A convertible preferred stock to common stock............................ (213,722) (1) 641,166 1 -- -- -- Conversion of Series B convertible preferred stock to Series A convertible preferred stock and common stock..................... (122,500) -- 367,500 -- -- -- -- Issuance of Series A convertible preferred stock, net of issuance costs of $15..................... 571,429 -- -- -- 2,384 -- -- Repurchase of common stock......... -- -- (20,400) -- -- -- -- Net loss........................... -- -- -- -- -- -- -- --------- ---------- --------- ---------- ------- ----- -------- BALANCES AT DECEMBER 31, 1997...... 1,451,195 1 4,456,551 4 6,031 -- -- Issuance of common stock upon exercise of options.............. -- -- 12,024 -- 1 -- -- Issuance of common stock upon exercise of options in exchange for promissory note.............. -- -- 750,000 1 274 (275) -- Issuance of Series B convertible preferred stock, net of issuance costs of $77..................... 1,818,182 2 -- -- 14,921 -- -- Repurchase of common stock......... -- -- (30,624) -- -- -- -- Comprehensive income (loss): Net loss......................... -- -- -- -- -- -- -- Unrealized loss on available-for-sale securities..................... -- -- -- -- -- -- -- Comprehensive loss................. -- -- -- -- -- -- -- --------- ---------- --------- ---------- ------- ----- -------- BALANCES AT DECEMBER 31, 1998...... 3,269,377 3 5,187,951 5 21,227 (275) -- Issuance of common stock upon exercise of options.............. -- -- 80,718 -- 25 -- -- Issuance of common stock upon exercise of options in exchange for promissory note.............. -- -- 211,875 -- 74 (74) -- Deferred stock compensation........ -- -- -- -- 2,912 -- (2,912) Amortization of deferred stock compensation..................... -- -- -- -- -- -- 535 Revaluation of stock options issued to non-employees................. -- -- -- -- 610 -- -- Comprehensive income (loss): Net loss......................... -- -- -- -- -- -- -- Unrealized loss on available-for-sale securities..................... -- -- -- -- -- -- -- Comprehensive loss................. -- -- -- -- -- -- -- --------- ---------- --------- ---------- ------- ----- -------- BALANCES AT DECEMBER 31, 1999...... 3,269,377 3 5,480,544 5 24,848 (349) (2,377) Issuance of common stock upon exercise of options (unaudited)...................... -- -- 146,274 1 43 -- -- Issuance of common stock upon exercise of options in exchange for promissory note (unaudited)...................... -- -- 997,002 1 297 (298) -- Issuance of Series C convertible preferred stock, net of issuance costs of $300 (unaudited)........ 804,196 1 -- -- 24,629 -- -- Deferred stock-based compensation (unaudited)...................... -- -- -- -- 11,082 -- (11,082) Amortization of deferred stock-based compensation (unaudited)...................... -- -- -- -- -- -- 2,553 Other stock-based compensation (unaudited)...................... -- -- -- -- 752 -- -- Comprehensive income (loss): Net loss (unaudited)............. -- -- -- -- -- -- -- Unrealized gain on available-for-sale securities (unaudited).................... -- -- -- -- -- -- -- Comprehensive loss (unaudited)..... -- -- -- -- -- -- -- --------- ---------- --------- ---------- ------- ----- -------- BALANCE AT JUNE 30, 2000 (UNAUDITED)...................... 4,073,573 $ 4 6,623,820 $ 7 $61,651 $(647) $(10,906) ========= ========== ========= ========== ======= ===== ======== ACCUMULATED OTHER TOTAL COMPREHENSIVE ACCUMULATED STOCKHOLDERS' INCOME (LOSS) DEFICIT EQUITY -------------- ------------ ------------- BALANCES AT DECEMBER 31, 1996...... $ -- $ (1,931) $ 1,721 Conversion of Series A convertible preferred stock to common stock............................ -- -- -- Conversion of Series B convertible preferred stock to Series A convertible preferred stock and common stock..................... -- -- -- Issuance of Series A convertible preferred stock, net of issuance costs of $15..................... -- -- 2,384 Repurchase of common stock......... -- -- -- Net loss........................... -- (1,994) (1,994) ---- -------- ------- BALANCES AT DECEMBER 31, 1997...... -- (3,925) 2,111 Issuance of common stock upon exercise of options.............. -- -- 1 Issuance of common stock upon exercise of options in exchange for promissory note.............. -- -- -- Issuance of Series B convertible preferred stock, net of issuance costs of $77..................... -- -- 14,923 Repurchase of common stock......... -- -- -- Comprehensive income (loss): Net loss......................... -- (3,267) (3,267) Unrealized loss on available-for-sale securities..................... (9) -- (9) ------- Comprehensive loss................. -- -- (3,276) ---- -------- ------- BALANCES AT DECEMBER 31, 1998...... (9) (7,192) 13,759 Issuance of common stock upon exercise of options.............. -- -- 25 Issuance of common stock upon exercise of options in exchange for promissory note.............. -- -- -- Deferred stock compensation........ -- -- -- Amortization of deferred stock compensation..................... -- -- 535 Revaluation of stock options issued to non-employees................. -- -- 610 Comprehensive income (loss): Net loss......................... -- (4,401) (4,401) Unrealized loss on available-for-sale securities..................... (57) -- (57) ------- Comprehensive loss................. -- -- (4,458) ---- -------- ------- BALANCES AT DECEMBER 31, 1999...... (66) (11,593) 10,471 Issuance of common stock upon exercise of options (unaudited)...................... -- -- 44 Issuance of common stock upon exercise of options in exchange for promissory note (unaudited)...................... -- -- -- Issuance of Series C convertible preferred stock, net of issuance costs of $300 (unaudited)........ -- -- 24,630 Deferred stock-based compensation (unaudited)...................... -- -- -- Amortization of deferred stock-based compensation (unaudited)...................... -- -- 2,553 Other stock-based compensation (unaudited)...................... -- -- 752 Comprehensive income (loss): Net loss (unaudited)............. -- (6,679) (6,679) Unrealized gain on available-for-sale securities (unaudited).................... 6 -- 6 ------- Comprehensive loss (unaudited)..... -- -- (6,673) ---- -------- ------- BALANCE AT JUNE 30, 2000 (UNAUDITED)...................... $(60) $(18,272) $31,777 ==== ======== =======
See accompanying notes. F-5 KOSAN BIOSCIENCES INCORPORATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------ --------------------- 1997 1998 1999 1999 2000 -------- -------- -------- --------- --------- (UNAUDITED) OPERATING ACTIVITIES Net loss.......................................... $(1,994) $(3,267) $(4,401) $(1,280) $(6,679) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................... 122 246 654 270 484 Amortization of stock-based compensation........ -- -- 535 98 2,553 Other stock-based compensation.................. -- -- 610 304 752 Issuance of convertible preferred stock for license fees.................................. -- -- -- -- 30 Loss on sale of investments..................... -- -- 41 -- -- Loss on disposal of property and equipment...... -- -- 10 -- -- Changes in assets and liabilities: Other receivables............................. (136) (8) (330) (76) 386 Prepaid expenses and other current assets..... (42) (156) (116) (162) 72 Other assets and notes receivable from related parties..................................... 8 28 (267) (215) (1,014) Accounts payable.............................. 8 282 153 (74) 264 Accrued liabilities........................... 46 (17) 528 327 583 Deferred revenue.............................. (8) 1,719 (1,310) (250) (284) ------- ------- ------- -------- -------- Net cash used in operating activities....... (1,996) (1,173) (3,893) $(1,058) $(2,853) ------- ------- ------- -------- -------- INVESTING ACTIVITIES Acquisition of property and equipment, net........ (111) (1,173) (1,828) (1,071) (808) Proceeds from sale of property and equipment...... 324 -- 2 -- -- Purchase of investments........................... (1,914) (21,419) (11,929) (6,030) (4,591) Proceeds from maturity of investments............. -- 10,972 14,733 7,522 719 ------- ------- ------- -------- -------- Net cash provided by (used in) investing activities................................ (1,701) (11,620) 978 421 (4,680) ------- ------- ------- -------- -------- FINANCING ACTIVITIES Proceeds from issuance of common stock............ -- 1 25 -- 44 Proceeds from issuance of convertible preferred stock, net of issuance costs.................... 2,385 14,923 -- -- 24,600 Proceeds from equipment loans..................... -- 870 1,336 1,336 1,308 Principal payments under capital lease obligations..................................... (48) (34) (128) (57) (67) Principal payments under equipment loans.......... -- (23) (335) (108) (369) ------- ------- ------- -------- -------- Net cash provided by financing activities... 2,337 15,737 898 1,171 25,516 ------- ------- ------- -------- -------- Net decrease in cash and cash equivalents........... (1,360) 2,944 (2,017) 534 17,983 Cash and cash equivalents at beginning of period.... 1,465 105 3,049 3,049 1,032 ------- ------- ------- -------- -------- Cash and cash equivalents at end of period.......... $105 $3,049 $1,032 $3,583 $19,015 ======= ======= ======= ======== ======== SUPPLEMENTAL DISCLOSURES Interest expense paid in cash....................... $56 $80 $196 $43 $161 ======= ======= ======= ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock under note receivable...... $-- $275 $74 $-- $298 Fixed assets acquired under capital lease........... 403 35 -- -- -- Deferred stock-based compensation................... -- -- 2,912 541 11,082
See accompanying notes. F-6 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OVERVIEW Kosan Biosciences Incorporated (the "Company") was incorporated under the laws of the state of California on January 6, 1995. In July 2000, the Company was reincorporated under the laws of the state of Delaware. The Company was considered to be in the development stage through December 31, 1998. The Company uses its technology to develop drug candidates from a class of natural product compounds known as polyketides by manipulating the natural process by which they are made. The Company's product opportunities currently target the areas of infectious disease, gastrointestinal motility disorders, mucus hypersecretion, cancer, immunosuppression and nerve regeneration. The Company has funded its operations primarily through sales of convertible preferred stock, contract payments under our collaboration agreement, equipment financing arrangements and government grants. Prior to achieving profitable operations, the Company intends to fund operations through the additional sale of equity securities, strategic collaborations and debt financing. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. INTERIM FINANCIAL INFORMATION The financial information at June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited but, in the opinion of management, has been prepared on the same basis as the annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for such periods. Results for the six months ended June 30, 2000 are not necessarily indicative of the results to be expected for any subsequent period. INITIAL PUBLIC OFFERING In March, 2000, the Board of Directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission to sell shares of its common stock to the public. If the initial public offering is completed under the terms presently anticipated, all of the convertible preferred stock outstanding will automatically convert into 12,220,719 shares of common stock. Unaudited pro forma stockholders' equity, as adjusted for the assumed conversion of the preferred stock, is set forth on the balance sheet. UNAUDITED PRO FORMA INFORMATION The unaudited pro forma stockholders' equity at June 30, 2000 has been adjusted for the assumed conversion of all outstanding shares of convertible preferred stock upon the completion of the Company's initial public offering. F-7 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS AND INVESTMENTS The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. The Company limits its concentration of risk by diversifying its investments among a variety of issuers. The Company classifies all investment securities as available-for-sale in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Available-for-sale investments are recorded at fair value determined based on quoted market prices, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term. REVENUE RECOGNITION The Company recognizes license and other upfront fees on a ratable basis over the term on the respective agreement. Milestone payments are recognized pursuant to the terms of the agreement upon the achievement of the specified milestones. Contract revenues related to collaborative research and development agreements and government grants are recognized on a ratable basis as services are performed. Any amounts received in advance of performance are recorded as deferred revenue. RESEARCH AND DEVELOPMENT Research and development expenses consist of costs incurred for Company-sponsored and collaborative research and development activities. These costs consist of direct and indirect internal costs related to specific projects as well as fees paid to other entities which conduct certain research activities on behalf of the Company. Research and development expenses under the government grants and collaborative agreements approximated the revenue recognized, less milestone payments received under such arrangements for the years ended December 31, 1998 and 1999 and for the six months ended June 30, 1999 and 2000. NET LOSS PER SHARE Basic and diluted net loss per common share are presented in conformity with the Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. Following the guidance given by the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock that has been issued or granted for nominal F-8 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of the basic and diluted net loss per common share as if these shares had been outstanding for all periods presented. To date, the Company has not issued or granted shares for nominal consideration. In accordance with SFAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Diluted net loss is not presented separately as the Company is in a net loss position. Pro forma basic and diluted net loss per common share, as presented in the statement of operations, has been computed for the year ended December 31, 1999 and for the six months ended June 30, 2000 as described above, and also gives effect to the conversion of the convertible preferred stock which will automatically convert to common stock immediately prior to the completion of the Company's initial public offering (using the if-converted method) from the original date of issuance. The following table presents the calculation of basic, diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------ --------------------- 1997 1998 1999 1999 2000 -------- -------- -------- --------- --------- (UNAUDITED) Net loss attributable to common stockholders.............................. $(1,994) $(3,267) $(4,401) $(1,280) $(17,946) ======= ======= ======= ======= ======== Weighted-average shares of common stock outstanding............................... 4,373 4,453 5,273 5,188 6,248 Less: weighted-average shares subject to repurchase................................ (279) (183) (764) (758) (1,219) ------- ------- ------- ------- -------- Weighted-average shares used in computing basic and diluted net loss per share............ 4,094 4,270 4,509 4,430 5,029 ======= ======= ======= ======= ======== Basic and diluted net loss per share........ $ (0.49) $ (0.77) $ (0.98) $ (0.29) $ (3.57) ======= ======= ======= ======= ======== Pro forma: Shares used above........................... 4,509 5,029 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock (unaudited)... 9,809 11,027 ------- -------- Shares used in computing pro forma basic and diluted net loss per share (unaudited)............................... 14,318 16,056 ======= ======== Pro forma basic and diluted net loss per share (unaudited)......................... $ (0.31) $ (1.12) ======= ========
The Company has excluded all convertible preferred stock, outstanding stock options and shares subject to repurchase from the calculation of diluted net 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 F-9 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) options was 104,400, 1,414,800 and 1,367,700 for the years ended December 31, 1997, 1998 and 1999, respectively and 1,560,000 and 1,141,800 for the six months ended June 30, 1999 and 2000, respectively. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share. See Note 9 for further information on these securities. STOCK-BASED COMPENSATION The Company accounts for common stock options granted to employees using the intrinsic value method and, thus, recognizes no compensation expense for options granted with exercise prices equal to or greater than the deemed fair value of the Company's common stock on the date of the grant. Stock compensation expense for options granted to non-employees has been determined in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and EITF 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying securities vest. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), at December 31, 1998. Under SFAS 130, the Company is required to display comprehensive income and its components as part of the Company's full set of financial statements. Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in equity of the Company that are excluded from net income. Specifically, SFAS 130 requires unrealized holding gains and losses on the Company's available-for-sale securities, which were reported separately in shareholders' equity, to be included in accumulated other comprehensive income. INCOME TAXES Since inception, the Company has recognized income taxes under the liability method. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. SEGMENT REPORTING The Company has adopted the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 established standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company did not have any separately reportable business segments as of December 31, 1999. F-10 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS DERIVATIVE INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through net income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of asset, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. SFAS 133 is effective for years beginning after June 15, 2000. The Company does not currently hold any derivatives and does not expect this pronouncement to materially impact the results of its operations. REVENUE RECOGNITION In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its current revenue recognition principles comply with SAB 101. SOFTWARE COSTS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. The Company has no capitalized software at December 31, 1999, therefore, the adoption of this statement did not have a significant impact on the Company's results of operations or financial condition. 2. COLLABORATIVE RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE In September 1998, the Company signed a collaborative agreement with The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson companies. Under the terms of the agreement, the Company will use its technologies to produce novel macrolide antibiotics on a "best efforts" basis. The agreement provides for certain payments, including payments for research and development costs for at least two years, and payments for reaching certain research and development milestones. The collaborative partner received exclusive worldwide rights to the products developed in the field of use as defined in the agreement. The development, marketing, and sale of drugs resulting from the collaboration will be undertaken by the partner and should the development efforts result in a marketable product, the Company will receive royalty payments based on product sales. Upon the execution of the collaborative agreement the Company received an initial up-front fee of $1.0 million which was deferred and will be recognized on a ratable basis over the term of the agreement. For the years ended December 31, 1998 and 1999 and the six months ended June 30, F-11 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 2. COLLABORATIVE RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS (CONTINUED) 1999 and 2000, the Company recognized $974,000, $5.0 million, $2.9 million and $2.1 million, respectively, of contract revenues pursuant to this agreement which represents 100%, 96%, 96% and 100% of the contract revenues for fiscal year 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively. Included in the six months ended June 30, 1999 and the year ended December 31, 1999 was $1.0 million and $1.2 million, respectively, of milestones earned under this agreement. LICENSE AGREEMENTS The Company entered into exclusive license agreements with The Board of Trustees of The Leland Stanford Junior University (Stanford) and with the President and Fellows of Harvard College (Harvard) in March 1996 and December 1998, respectively. These licenses provide the Company with certain technology and related patent rights and materials for the production of polyketides. Under the terms of the agreements, the Company pays annual license or maintenance fees and will pay milestones and royalties on net sales of products originating from the licensed technology. 3. INVESTMENTS The amortized cost and fair value of securities, with gross unrealized gains and losses, were as follows (in thousands):
1998 1999 ------------------------------------------------ ------------------------------------------------ GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Debt securities: US treasury.......... $ 2,967 $ 2 $ -- $ 2,969 $1,300 $ -- $(10) $1,290 US agency notes...... 3,298 -- (8) 3,290 -- -- -- -- Corporate bonds...... 1,000 1 -- 1,001 1,000 -- (10) 990 Asset-backed securities........... 5,096 -- (4) 5,092 7,198 1 (47) 7,152 ------- ---- ---- ------- ------ ---- ---- ------ $12,361 $ 3 $(12) $12,352 $9,498 $ 1 $(67) $9,432 ======= ==== ==== ======= ====== ==== ==== ======
The fair value of available-for-sale debt securities by contractual maturity at December 31, 1999 were as follows: Within 1 year............................................... $ 990 Greater than 1 year less than 5 years....................... 1,290 Mortgage-backed securities.................................. 7,152 ------ $9,432 ======
F-12 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):
DECEMBER 31, ------------------- JUNE 30, 1998 1999 2000 -------- -------- ----------- (UNAUDITED) Computer equipment and software.................. $ 249 $ 362 $ 403 Office furniture................................. 138 165 191 Lab equipment.................................... 1,400 2,228 2,920 Leasehold improvements........................... 42 825 874 ------ ------ ------- 1,829 3,580 4,388 Less accumulated depreciation and amortization... (422) (993) (1,414) ------ ------ ------- $1,407 $2,587 $ 2,974 ====== ====== =======
Depreciation expense was $246,000 and $636,000 for the years ended December 31, 1998 and 1999, respectively and $262,000 and $421,000 for the six months ended June 30, 1999 and 2000, respectively. Property and equipment financed under capital leases amounted to $562,000 at December 31, 1998 and 1999 and June 30, 2000. Accumulated amortization related to this property and equipment amounted to $264,000, $378,000 and $490,000 at December 31, 1998 and 1999 and June 30, 2000, respectively. 5. CAPITAL LEASES AND EQUIPMENT FINANCING The Company leases certain equipment and facility improvements under noncancelable capital leases and debt obligations. As of December 31, 1999, future minimum lease and loan payments under these obligations are as follows (in thousands):
CAPITAL LEASES EQUIPMENT LOANS -------------- --------------- Year ended December 31,......................... 2000.......................................... $ 162 $ 627 2001.......................................... 168 627 2002.......................................... 9 688 2003.......................................... -- 324 ----- ------ Total minimum lease payments.................... 339 2,266 Less amount representing interest............... (45) (395) ----- ------ Present value of net minimum lease payments..... 294 1,871 Less current portion............................ (127) (447) ----- ------ Long-term portion............................... $ 167 $1,424 ===== ======
In 1997, the Company entered into a capital lease line agreement for up to $1.0 million in aggregate borrowings. Financing under this lease line was available through June 1998, at which time approximately $569,000 had been utilized and $431,000 was allowed to expire. In August 1998, the Company entered into a $2.2 million equipment loan agreement which was fully utilized by June 1999. The terms of the lease and loan obligations are for four years. The equipment loans have a balloon payment at the end of the term. The interest rates of each of the leases and loans are fixed at F-13 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 5. CAPITAL LEASES AND EQUIPMENT FINANCING (CONTINUED) the time of the draw down, with the interest rates range from 10.55% to 10.96%. Obligations under the leases and loans are secured by the assets financed under the leases. In January 2000, the Company secured a $2.0 million line of credit which is available for draw down through December 2000. Each note will have a term of 43 months and have a balloon payment at the end of the term. The Company borrowed on this line of credit to fund equipment purchases totaling $823,000 and $485,000 in January 2000 and May 2000, respectively. 6. FACILITY LEASES In March 1999, the Company moved its facilities from Burlingame, California to Hayward, California. The Company leases its new facility under a noncancelable operating lease with no renewal options, which commenced in February 1999 and expires in 2003. Minimum annual rental commitments under the operating lease at December 31, 1999 are as follows (in thousands): Year ended December 31, 2000...................................................... $1,081 2001...................................................... 1,118 2002...................................................... 1,144 2003...................................................... 682 ------ Total minimum payments...................................... $4,025 ======
In September 1999, the Company terminated its Burlingame facility lease agreement and at the same time, the rights to the Company's sublease agreement under this facility lease was bought out by the former landlord. In connection with this buy-out, the Company received a $170,000 termination fee which was recorded as other income. Rent expense for operating leases was approximately $181,000, $204,000, $1.2 million, $577,000 and $686,000 for the years ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively. The sublease income was approximately $100,000, $14,000, $159,000, $97,000 and $0 for the years ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively. 7. ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands):
DECEMBER 31, ------------------- JUNE 30, 1998 1999 2000 -------- -------- ----------- (UNAUDITED) Facilities related.................................. $ -- $280 $ 430 Compensation........................................ 37 163 409 Professional fees................................... 40 120 87 Other............................................... 21 63 283 ---- ---- ------ $ 98 $626 $1,209 ==== ==== ======
F-14 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 8. RELATED PARTY TRANSACTIONS In December 1998 and September 1999, the Company issued promissory notes to an officer and a director totaling $346,500 for the exercise of certain stock options. These notes bear interest between 4.47% and 5.89% per annum, compounded semiannually, and the principal and accrued interest is repayable three years from the date of issuance. During the first six months of 2000, the Company received additional promissory notes from three officers and various employees totaling $298,000 for the exercise of stock options for 997,002 shares of common stock. These notes bear interest between 6.46% and 6.60% with terms of 3 years. These are full recourse notes secured in part by a pledge of the Company's common stock owned. The Company issued full recourse loans to certain employees, of which $12,000 and $87,000 were outstanding at December 31, 1998 and 1999, respectively. These loans bear interest at rates ranging from 4.47% to 5.43% with terms ranging from 4 to 5 years. The loans were issued for the purchase of the employees' residence, are secured by deeds of trust and are classified on the balance sheet as other assets. During the first six months of 2000, the Company issued additional full recourse loans to two employees and two officers totaling $190,000 and $453,000, respectively. These notes bear interest between 6.30% and 6.62% with terms ranging from 3 to 5 years. The loans are secured by deeds of trust and are classified on the balance sheet as other assets. One of the notes to an officer totaling $53,000 will be forgiven upon the third anniversary date of the officer's employment. The Company entered into a 14-month evaluation agreement with Savia Corporation and DNA Plant Technologies ("DNAP") effective March 1, 1998. The evaluation program was for the development of intellectual property and technology for use in the field. The Company received revenue of approximately $90,000 upon signing the agreement for work performed to that date. This agreement was subsequently terminated effective December 31, 1999. Under the terms of the termination agreement the Company will receive approximately $160,000 for development services performed through December 31, 1999, which is included in revenue and other receivables in 1999. A board member of the company which controls DNAP is also a board member of the Company. 9. STOCKHOLDERS' EQUITY During January 1997, the Company converted each existing share of "Original" Series A convertible preferred stock into 2.28570 shares of common stock and 0.23810 shares of Series A convertible preferred stock. Each existing share of "original" Series B convertible preferred stock was converted into 0.39285 shares of common stock and 0.86905 shares of Series A convertible preferred stock. Outstanding shares of the Company's preferred stock were converted to Series A convertible preferred stock and common stock as follows:
SHARES OF CONVERTIBLE SHARES SERIES A SHARES OF OUTSTANDING SERIES A PREFERRED COMMON STOCK COMMON STOCK BEFORE CONVERSION STOCK AFTER CONVERSION AFTER SERIES CONVERSION RATE CONVERSION RATE CONVERSION - ------ ----------- ---------- ----------- ------------ ------------ "Original" A...................... 280,512 0.23810 66,790 2.28570 641,166 "Original" B...................... 935,476 0.86905 812,976 0.39285 367,500
F-15 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) Convertible preferred stock outstanding was as follows (in thousands, except share data):
DECEMBER 31, 1999 JUNE 30, 2000 -------------------------------------------- -------------------------------------------- SHARES SHARES SHARES ISSUED AND REDEMPTION/ SHARES ISSUED AND REDEMPTION/ DESIGNATED OUTSTANDING LIQUIDATION VALUE DESIGNATED OUTSTANDING LIQUIDATION VALUE ---------- ----------- ----------------- ---------- ----------- ----------------- Convertible preferred stock: Series A................ 1,480,000 1,451,195 $ 6,095 1,480,000 1,451,195 6,095 Series B................ 1,818,182 1,818,182 15,000 1,818,182 1,818,182 15,000 Series C................ -- -- -- 1,050,000 804,196 24,930 --------- --------- ------- --------- --------- ------- Total................. 3,298,182 3,269,377 $21,095 4,348,182 4,073,573 $46,025 ========= ========= ======= ========= ========= =======
Upon the closing of an initial public offering, each of the outstanding 4,073,573 shares of convertible preferred stock will be automatically converted into three shares of common stock. SERIES A CONVERTIBLE PREFERRED STOCK On January 31, 1997, the Company completed a private placement for the sale of 571,429 shares of Series A convertible preferred stock resulting in gross proceeds of $2.4 million. The Series A convertible preferred stock is convertible at any time after the issuance date, at the option of the holder, into a number of shares of common stock equal to the stated value divided by the conversion price. Additionally, the Series A convertible preferred stock shall be automatically converted into common stock upon the closing of an initial public offering where the gross proceeds are at least $15.0 million and the offering price is not less than $7.00 per share. The conversion price of $1.40 will be adjusted for any stock split or combination, consolidation, stock dividend, and recapitalization. The Series A convertible preferred stockholders are entitled to vote together with Series B convertible preferred stockholders, Series C convertible preferred stockholders and common stockholders as a single class on all matters, except as otherwise required by law. The number of votes to which each Series A convertible preferred stockholder will be entitled will equal the maximum number of shares of common stock into which each preferred stock will be converted. In the event of liquidation, dissolution or winding up of the Company, funds available for distribution to stockholders shall be paid to the holders of Series A convertible preferred stock in an amount per share equal to $4.20 (adjusted for any stock dividend, split or combination, recapitalization, consolidation with respect to such shares) prior to any distribution to holders of common stock. If there are inadequate funds available to provide a full payment of the liquidation preference amount to the Series A, B and C convertible preferred stockholders, then the assets available for distribution shall first be paid to the Series C convertible preferred stockholders. Noncumulative annual dividends of $0.25 per share (as adjusted for any stock dividend, combination, or split with respect to these shares), payable quarterly, will be paid if and when declared by the board of directors. SERIES B CONVERTIBLE PREFERRED STOCK On April 3, 1998, the Company completed a private placement for the sale of 1,818,182 shares of Series B convertible preferred stock resulting in gross proceeds of $15.0 million. The Series B convertible preferred stock is convertible into a number of shares of common stock equal to the stated F-16 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) value divided by the conversion price. Additionally, the Series B convertible preferred stock shall be automatically converted into common stock upon the closing of an initial public offering where the gross proceeds are at least $15.0 million and the offering price is not less than $7.00 per share. The conversion price of $2.75 will be adjusted for any stock split or combination, consolidation, stock dividend, and recapitalization. The Series B convertible preferred stockholders are entitled to vote together with the Series A and Series C convertible preferred stockholders and common stockholders as a single class on all matters, except as otherwise required by law. The number of votes to which each Series B convertible preferred stockholder will be entitled will equal the maximum number of shares of common stock into which each preferred stock is convertible. In the event of a liquidation, the holders of Series B convertible preferred stock shall be paid an amount per share equal to $8.25 (adjusted for any stock split or combination, consolidation, stock dividend, and recapitalization respect to such shares) prior to any distribution to holders of common stock. If there are inadequate funds available to provide a full payment of the liquidation preference amount to the Series A, B and C preferred stockholders, then the assets available for distribution shall first be paid to the Series C convertible preferred stockholders. Noncumulative annual dividends of $0.49 per share (as adjusted for any stock dividend, combination, or split with respect to these shares), payable quarterly, will be paid if and when declared by the board of directors. SERIES C CONVERTIBLE PREFERRED STOCK On March 30, 2000, the Company completed a private placement for the sale of 804,196 shares of Series C convertible preferred stock resulting in gross proceeds of $24.9 million. The issuance of the Series C convertible preferred stock resulted in a beneficial conversion feature of approximately $11.3 million in 2000, calculated in accordance with Emerging Issues Task Force Consensus No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features." The beneficial conversion feature was reflected as a deemed dividend in the Statement of Operations of $11.3 million for the six months ended June 30, 2000. The Series C convertible preferred stock is convertible at any time after the issuance date, at the option of the holder, into a number of shares of common stock equal to the stated value divided by the conversion price. Additionally, the Series C convertible preferred stock shall be automatically converted into common stock upon the closing of an initial public offering where the gross proceeds are at least $25.0 million and the offering price is not less than $13.43 per share. The conversion price of $10.33 will be adjusted for any stock split or combination, consolidation, stock dividend, and recapitalization. The Series C convertible preferred stockholders are entitled to vote together with Series A and B convertible preferred stockholders and common stockholders as a single class on all matters, except as otherwise required by law. The number of votes to which each Series C convertible preferred stockholder will be entitled will equal the maximum number of shares of common stock into which each preferred stock will be converted. In the event of liquidation, dissolution or winding up of the Company, funds available for distribution to stockholders shall be paid to the holders of Series C convertible preferred stock in an amount per share equal to $31.00 (adjusted for any stock dividends, split or combination, recapitalization, consolidation with respect to such shares) prior to any distribution to holders of Series A and Series B convertible preferred stock and common stock. If there are inadequate funds available to provide a full payment of the liquidation preference amount to the Series A, B and C convertible preferred stockholders, then the assets available for distribution shall F-17 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) first be paid to the Series C convertible preferred stockholders. Noncumulative annual dividends of $1.86 per share (as adjusted for any stock dividend, combination, or split with respect to these shares), payable quarterly, will be paid if and when declared by the board of directors. COMMON STOCK Under the terms of the 1996 Stock Option Plan (the "1996 Plan"), options are exercisable when granted and such shares are subject to repurchase upon termination of employment or consulting agreement. Repurchase rights lapse over the vesting periods which are generally four years. Should the employment of the holders of common stock subject to repurchase terminate prior to full vesting of the outstanding shares, the Company may repurchase all unvested shares at a price per share equal to the original exercise price. At December 31, 1999, 742,659 shares were subject to such repurchase terms. 1996 STOCK OPTION PLAN In 1996, the board of directors adopted the 1996 Plan that provides for the granting of incentive stock options and nonstatutory stock options to employees, officers, directors and consultants of the Company. Incentive stock options may be granted with exercise prices not less than fair value, and nonstatutory stock options may be granted with an exercise price not less than 85% of the fair value of the common stock on the date of grant. The fair value is determined by the board of directors. Stock options granted to a stockholder owning more than 10% of voting stock of the Company may be granted with an exercise price of not less than 110% of the fair value of the common stock on the date of grant. Options expire no later than ten years from the date of the grant. The number of shares, terms, and exercise period are determined by the board of directors. Options generally vest at 25% per year over a four-year period. 2000 EMPLOYEE STOCK PURCHASE PLAN In March 2000, subject to stockholder approval, the Company adopted its 2000 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 300,000 shares of the Company's common stock have been reserved for issuance under the Purchase Plan. In addition, the Purchase Plan provides for annual increases in the number of shares available for issuance under the Purchase Plan on each anniversary date of the effective date of the offering. The number of shares reserved automatically is equal to the lesser of 150,000 shares, 0.75% of the outstanding shares on the date of the annual increase or such amount as may be determined by the board. The Purchase plan permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock on the first day of the offering or 85% of the fair market value of the Company's common stock on the purchase date. The initial offering period will commence on the effective date of the offering. 2000 NON-EMPLOYEE DIRECTORS PLAN In March 2000, subject to stockholder approval, the Company adopted the 2000 Non-Employee Directors' Stock Option Plan (the "Directors' Plan") and reserved 300,000 shares of common stock for issuance thereunder. Each non-employee director who becomes a director of the Company will be automatically granted a non-statutory stock option to purchase 7,500 shares of common stock on the date on which such person first becomes a director and will vest over four years. Beginning with the F-18 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) 2001 Annual Stockholders Meeting and each year thereafter, each non-employee director will automatically be granted a non-statutory option to purchase 3,750 shares of common stock which will vest in one year from the date of grant. The exercise price of options under the Directors' Plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the Directors' Plan is ten years. The Directors' Plan will terminate in March 2010, unless terminated in accordance with the provisions of the Directors' Plan. A summary of stock option activity is as follows:
OPTIONS OUTSTANDING ------------------------------------------------------- WEIGHTED SHARES AVAILABLE NUMBER OF EXERCISE AGGREGATE AVERAGE FOR GRANT SHARES PRICE PRICE EXERCISE PRICE ---------------- ---------- ------------ ---------- -------------- Reserved at inception......... 750,000 -- -- $ -- $ -- Granted..................... (198,000) 198,000 $0.08 16,500 $0.08 ---------- ---------- ---------- Balances at December 31, 1996........................ 552,000 198,000 16,500 $0.08 Granted..................... (86,400) 86,400 $0.08-$0.15 11,960 $0.14 Canceled.................... 180,000 (180,000) $0.08 (15,000) $0.08 ---------- ---------- ---------- Balances at December 31, 1997........................ 645,600 104,400 13,460 $0.13 Additional reserved......... 1,770,000 -- -- -- -- Granted..................... (2,085,000) 2,085,000 $0.15-$0.37 671,775 $0.32 Canceled.................... 12,576 (12,576) $0.08-$0.33 (1,978) $0.16 Exercised................... -- (762,024) $0.08-$0.37 (276,262) $0.36 ---------- ---------- ---------- Balances at December 31, 1998........................ 343,176 1,414,800 406,995 $0.29 Additional reserved......... 180,000 -- -- -- -- Granted..................... (464,100) 464,100 $0.33 154,700 $0.33 Canceled.................... 218,607 (218,607) $0.15-$0.33 (66,023) $0.30 Exercised................... -- (292,593) $0.08-$0.37 (99,127) $0.34 ---------- ---------- ---------- Balances at December 31, 1999........................ 277,683 1,367,700 396,545 $0.29 Additional reserved (unaudited)............... 2,400,000 -- -- -- -- Granted (unaudited)......... (953,700) 953,700 $0.42-$4.00 1,501,775 $1.57 Canceled (unaudited)........ 36,324 (36,324) $0.15-$2.00 (14,812) $0.41 Exercised (unaudited)....... -- (1,143,276) $0.15-$1.00 (342,008) $0.30 ---------- ---------- ---------- Balances at June 30, 2000 (unaudited)................. 1,760,307 1,141,800 $1,541,500 $1.35 ========== ========== ==========
Options vested at December 31, 1998 and 1999 and June 30, 2000 were 119,034, 392,163 and 106,950, respectively. F-19 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) The options outstanding and currently exercisable by exercise price at December 31, 1999 are as follows:
OPTIONS OUTSTANDING AND EXERCISABLE - ------------------------------------------------- NUMBER OPTIONS VESTED OUTSTANDING WEIGHTED-AVERAGE --------------------------------- WEIGHTED-AVERAGE AND REMAINING NUMBER OF WEIGHTED-AVERAGE EXERCISE PRICE EXERCISABLE CONTRACTUAL LIFE OPTIONS VESTED EXERCISE PRICE - ---------------- ----------- ---------------- -------------- ---------------- (IN YEARS) $0.08 15,000 7.02 10,938 $0.08 $0.15 303,300 7.97 163,995 $0.15 $0.33 1,049,400 9.05 217,230 $0.33 --------- ------- 1,367,700 8.79 392,163 $0.25 ========= =======
STOCK-BASED COMPENSATION The Company has elected to follow the provision of APB Opinion No. 25 and related interpretations in the accounting for the stock-based awards because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock-based awards. During the year ended December 31, 1999, in connection with the grant of stock options to employees, the Company recorded deferred stock-based compensation totaling $2.9 million, representing the difference between the deemed fair market value of the common stock on the date such options were granted and the applicable exercise prices. Such amount is included as a reduction of stockholders' equity and is being amortized using the graded vesting method over the vesting period of the individual options, which is generally four years. The Company recognized amortization of deferred stock-based compensation of $535,000 for the year ended December 31, 1999 and $2.6 million for the six months ended June 30, 2000. As of June 30, 2000, the Company has issued non-employee stock options totaling 423,750 shares with exercise prices ranging from $0.15 to $2.00 and terms of 2 to 5 years. Additionally, the Company had issued 210,000 shares of restricted stock to non-employees at a price of $0.001 per share. The restricted shares vest over 5 years. The Company records compensation related to the grants of stock options and restricted stock to non-employees in accordance with SFAS 123 and EITF 96-18 using the Black-Scholes Model with the following assumptions: risk-free interest rate of 5%; volatility of 70%, expected lives of 2 to 3 years; and a dividend yield of zero. The Company recognized other stock-based compensation for grants to non-employees of $610,000 and $752,000 for the year ended December 31, 1999 and the six months ended June 30, 2000. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying awards vest. Pro forma net loss and net loss per share information is required by SFAS 123 which also requires that the information be determined as if the Company had accounted for its employee stock options granted since inception under the fair value method of that statement. The fair value of these options was estimated at the date of grant using a minimum value option pricing model with the following assumptions: risk-free interest rate of 5.0%; a weighted-average expected life of the option of four years from the grant date for grants under the 1996 Plan; and a dividend yield of zero. F-20 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. STOCKHOLDERS' EQUITY (CONTINUED) The Company's pro forma information follows (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- Net loss: As reported..................................... $(1,994) $(3,267) $(4,401) Pro forma....................................... (1,994) (3,454) (4,772) Basic and diluted net loss per share: As reported..................................... $ (0.49) $ (0.77) $ (0.98) Pro forma....................................... (0.49) (0.81) (1.06)
10. INCOME TAXES As of December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $9.6 million and $4.1 million, respectively. The Company also had federal and California research and development tax credit carryforwards of approximately $300,000 and $200,000. The federal and state net operating loss and credit carryforwards will expire at various dates beginning in the year 2002 through 2019, if not utilized. Utilization of the federal and state net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting and the amount used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes as of December 31, are as follows (in thousands):
1998 1999 -------- -------- Deferred tax assets Net operating loss carryforwards........................ $ 2,100 $ 3,500 Research and development credits........................ 300 500 Capitalized research and development expenses........... 200 300 ------- ------- Total deferred tax assets................................. 2,600 4,300 Valuation allowance....................................... (2,600) (4,300) ------- ------- Net deferred taxes........................................ $ -- $ -- ======= =======
Due to the Company's lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $900,000 and $1.7 million during the years ended December 31, 1998 and 1999, respectively. F-21 KOSAN BIOSCIENCES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 11. SUBSEQUENT EVENTS (UNAUDITED) STOCK SPLIT Prior to the closing of the Company's initial public offering, the Company intends to split its common stock 3-for-1, subject to shareholders approval, and increase the authorized shares of common stock and preferred stock to 200,000,000 shares and 10,000,000 shares, respectively. All common stock and options to purchase common stock and per share amounts in the accompanying financial statements have been adjusted retroactively to reflect the stock split. The conversion ratios of the respective series of convertible preferred stock were automatically adjusted to reflect the stock split. SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH In July 2000, the Company signed a binding preliminary agreement with the Sloan-Kettering Institute for Cancer Research setting forth the principal terms of a collaboration and license agreement relating to epothilones. Under the agreement, the Company will use its technologies to produce a specific epothilone compound to be tested in clinical trials and work collaboratively with Sloan-Kettering to develop new compounds and production methods and to conduct clinical trials. Additionally, the Company is required to pay to Sloan-Kettering an initial license fee and annual maintenance fees as well as payments for research and development costs, including costs of clinical trials, over a term of at least 18 months. If development efforts result in a marketable product, the Company will make royalty payments based on product sales as well as payments for reaching clinical development milestones. F-22 [GRAPHIC -- BACKGROUND MAP] 5,000,000 Shares [LOGO] Common Stock ---------------- PROSPECTUS , 2000 --------------------- LEHMAN BROTHERS CIBC WORLD MARKETS SG COWEN FIDELITY CAPITAL MARKETS a division of National Financial Services Corporation Until , 2000 (25 days after commencement of the offering), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID ---------- SEC Registration Fee........................................ $ 21,120 NASD Fee.................................................... 10,000 Nasdaq Listing Fee.......................................... 9,500 Legal Fees and Expenses..................................... 350,000 Accounting Fees and Expenses................................ 350,000 Blue Sky Fees and Expenses.................................. 5,000 Transfer Agent Fees......................................... 10,000 Printing Fees and Expenses.................................. 450,000 Miscellaneous............................................... 44,380 Total..................................................... $1,250,000
- ------------------------ * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 145 of the Delaware General Corporation Law, the registrant's certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach or alleged breach of their duty of care. In addition, as permitted by Section 145 of the Delaware General Corporation Law, the bylaws of the registrant provide that: (1) the registrant is required to indemnify its directors and executive officers and persons serving in such capacities in other business enterprises (including, for example, subsidiaries of the registrant) at the registrant's request, to the fullest extent permitted by Delaware law, including in those circumstances in which indemnification would otherwise be discretionary; (2) the registrant may, in its discretion, indemnify employees and agents in those circumstances where indemnification is not required by law; (3) the registrant is required to advance expenses, as incurred, to its directors and executive officers in connection with defending a proceeding (except that it is not required to advance expenses to a person against whom the registrant brings a claim for breach of the duty of loyalty, failure to act in good faith, intentional misconduct, knowing violation of law or deriving an improper personal benefit; (4) the rights conferred in the bylaws are not exclusive, and the registrant is authorized to enter into indemnification agreements with its directors, executive officers and employees; and (5) the registrant may not retroactively amend the bylaw provisions in a way that it adverse to such directors, executive officers and employees. The registrant's policy is to enter into indemnification agreements with each of its directors and executive officers that provide the maximum indemnity allowed to directors and executive officers by Section 145 of the Delaware General Corporation Law and the bylaws, as well as certain additional procedural protections. In addition, such indemnity agreements provide that directors and executive officers will be indemnified to the fullest possible extent not prohibited by law against all expenses (including attorney's fees) and settlement amounts paid or incurred by them in any action or proceeding, including any derivative action by or in the right of the registrant, on account of their services as directors or executive officers of the registrant or as directors or officers of any other II-1 company or enterprise when they are serving in such capacities at the request of the registrant. The registrant will not be obligated pursuant to the indemnity agreements to indemnify or advance expenses to an indemnified party with respect to proceedings or claims initiated by the indemnified party and not by way of defense, except with respect to proceedings specifically authorized by the registrant's board of directors or brought to enforce a right to indemnification under the indemnity agreement, the registrant's bylaws or any statute or law. Under the agreements, the registrant is not obligated to indemnify the indemnified party (1) for any expenses incurred by the indemnified party with respect to any proceeding instituted by the indemnified party to enforce or interpret the agreement, if a court of competent jurisdiction determines that each of the material assertions made by the indemnified party in such proceeding was not made in good faith or was frivolous; (2) for any amounts paid in settlement of a proceeding unless the registrant consents to such settlement; (3) with respect to any proceeding brought by the registrant against the indemnified party for willful misconduct, unless a court determines that each of such claims was not made in good faith or was frivolous; (4) on account of any suit in which judgment is rendered against the indemnified party for an accounting of profits made from the purchase or sale by the indemnified party of securities of the registrant pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and related laws; (5) on account of the indemnified party's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct or a knowing violation of the law; (6) an account of any conduct from which the indemnified party derived an improper personal benefit; (7) on account of conduct the indemnified party believed to be contrary to the best interests of the registrant or its stockholders; (8) on account of conduct that constituted a breach of the indemnified party's duty of loyalty to the registrant or its stockholders; or (9) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. The indemnification provision in the bylaws and the indemnification agreements entered into between the registrant and its directors and executive officers, may be sufficiently broad to permit indemnification of the registrant's officers and directors for liabilities arising under the 1933 Act. Reference is made to the following documents filed as exhibits to this registration statement regarding relevant indemnification provisions described above and elsewhere herein:
EXHIBIT DOCUMENT NUMBER - -------- -------- Form of Underwriting Agreement.............................. 1.1 Certificate of Incorporation of Registrant.................. 3.1 Form of Amended and Restated Certificate of Incorporation of Registrant, to be effective upon closing of the offering.................................................. 3.2 Bylaws of Registrant, to be effective upon closing of the offering.................................................. 3.3 Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers.................................................. 4.1
II-2 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the Registrant sold an aggregate of 2,197,893 shares of unregistered common stock pursuant to the exercise of options granted by the registrant's board of directors as follows:
AGGREGATE NUMBER OF NUMBER OF RELATIONSHIP TO PURCHASE DATE SHARES SOLD INDIVIDUALS COMPANY PRICE - ---------------------------------- ----------- ----------- ----------------- --------- March 20, 1998 900 1 Employee $ 135 August 28, 1998 3,000 1 Consultant 450 December 10, 1998 8,124 1 Former employee 1,219 December 23, 1998 750,000 1 Director 275,000 July 20, 1999 16,875 1 Former employee 2,531 August 1999 57,375 3 Former employees 18,300 September 19, 1999 1,281 1 Former employee 192 September 22, 1999 195,000 1 Director 71,500 October 1, 1999 3,000 1 Former employee 250 November 12, 1999 4,062 1 Former employee 1,354 December 19, 1999 15,000 1 Former employee 5,000 January 26, 2000 15,000 1 Employee 2,250 February 21, 2000 697,500 3 Officers 196,750 February 2000 93,300 2 Employees 29,100 March 17, 2000 15,000 1 Consultant 5,000 March 2000 227,100 24 Employees 65,900 April 25, 2000 15,000 1 Officer 15,000 April 2000 63,000 2 Employees 21,000 May 2000 14,502 1 Employee 4,123 June 2000 2,874 2 Former employees 614
As to each director, officer, employee, former employee and consultant of Kosan who was issued such securities, Kosan relied upon Rule 701 of the Securities Act of 1933, as amended (the "Securities Act"). Each such person purchased securities of Kosan pursuant to a written contract between such person and Kosan; in addition, Kosan met the conditions imposed under Rule 701(b). On April 3, 1998 and April 16, 1998, the registrant sold 1,727,273 shares and 90,909 shares, respectively, of unregistered Series B convertible preferred stock at a price per share of $8.25 to certain investors for aggregate cash consideration of approximately $15 million. The registrant relied upon Section 4(2) of the Securities Act in connection with the sale of these shares. Each investor who was not an accredited investor represented to the registrant that he or she had such knowledge and experience in financial and business matters that he or she was capable of evaluating the merits and risks of the investment. On March 30, 2000, the registrant sold in the aggregate 804,196 shares of unregistered Series C convertible preferred stock at a price per share of $31.00 to certain investors for aggregate cash consideration of approximately $24.9 million. The registrant relied upon Regulation D, Rule 506, of the Securities Act in connection with the sale of these shares. The sale of the Series C preferred stock was made in compliance with all the terms of Rules 501 and 502 of Regulation D, there were no more than 35 investors (as calculated pursuant to Rule 501(e) of Regulation D), and each investor who was not an accredited investor represented to the registrant that he or she had such knowledge and experience in financial and business matters that he or she was capable of evaluating the merits and risks of the investment. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of Registrant. 3.2 Form of Amended and Restated Certificate of Incorporation of Registrant to be filed upon the closing of the offering made under the Registration Statement. 3.3 Bylaws of Registrant 3.4 Bylaws of Registrant to be effective upon the closing of the offering made under the Registration Statement. 4.1* Form of Registrant's Common Stock Certificate. 4.2** Third Amended and Restated Registration Rights Agreement, dated March 30, 2000 between Registrant and certain shareholders. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 9.1 Third Amended and Restated Voting Agreement between the Registrant and certain shareholders, dated March 30, 2000. 10.1** Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers. 10.2** 1996 Stock Option Plan, as amended. 10.3** 2000 Employee Stock Purchase Plan and related agreements. 10.4** 2000 Non-Employee Director Stock Option Plan and related agreements. 10.5 Amended and Restated Consulting Agreement between Registrant and Chaitan Khosla, Ph.D., dated December 7, 1998. 10.6 Consulting Agreement between Registrant and Christopher Walsh, Ph.D., dated December 14, 1995. 10.7+ Binding Heads of Agreement between Registrant and Sloan-Kettering Institute for Cancer Research, dated July 26, 2000. 10.8+** License Agreement between the Registrant and The Board of Trustees of The Leland Stanford Junior University, dated March 11, 1996. 10.9+** Amendment No. 1 to License Agreement with the Board of Trustees of The Leland Stanford Junior University, dated March 1996; Letter to Mona Wan to confirm the agreement between Registrant and the Board of Trustrees of The Leland Stanford Junior University, dated September 21, 1998; and Amendment No. 3 to License Agreement, dated March 10, 2000. 10.10+** License Agreement between Registrant and President and Fellows of Harvard College, dated December 2, 1998. 10.11+ Research and License Agreement between Registrant and Ortho-McNeil Pharmaceutical Corporation, and The R.W. Johnson Pharmaceutical Research Institute, dated September 28, 1998.
II-4
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.12+ Amendment No. 1 to the Research and License Agreement between the Registrant and Ortho-McNeil Pharmaceutical Corporation and The R.W. Johnson Pharmaceutical Research Institute, dated March 17, 2000. 10.13** Sublease Agreement between Registrant and Lynx Therapeutics, Inc., dated January 6, 1999. 10.14** Consent to Sublease Agreement between Spieker Properties L.P. and Lynx Therapeutics, Inc., dated September 17, 1999. 10.15** Master Equipment Lease between Registrant and Phoenix Leasing Incorporated, dated September 3, 1996. 10.16** Master Loan and Security Agreement between Registrant and Finova Technology Finance, Inc., dated August 25, 1998. 10.17** Commitment Letter between Registrant and Finova Technology Finance, Inc., dated August 24, 1998. 10.18** Commitment Letter between Registrant and Finova Capital Corporation, dated January 6, 2000 10.19** Restated Promissory Note from Shareholder by and between Registrant and Daniel V. Santi, M.D., Ph.D., dated December 23, 1998. 10.20 Promissory Note from Shareholder by and between Registrant and Chaitan Khosla, Ph.D., dated September 22, 1999. 10.21** Promissory Note from Shareholder by and between Registrant and Michael S. Ostrach, dated February 21, 2000. 10.22** Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated February 21, 2000. 10.23** Promissory Note from Shareholder by and between Registrant and Kevin Kaster, dated February 21, 2000. 10.24** Employment Agreement between Registrant and Daniel V. Santi, M.D., Ph.D., dated November 1, 1998. 10.25** Employment Agreement between Registrant and Kevin Kaster, dated July 20, 1998. 10.26** Employment Agreement between Registrant and Susan M. Kanaya, dated October 11, 1999. 10.27** Employment Agreement between Registrant and Brian W. Metcalf, Ph.D., dated March 15, 2000. 10.28 Form of Series C Stock Purchase Agreement between the Registrant and certain investors, dated March 30, 2000. 10.29 Evaluation Agreement among the Registrant, Savia Corporation and DNA Plant Technology Corporation, dated March 1, 1998. 10.30 Termination Agreement among Registrant, Savia Corporation and DNA Plant Technology Corporation, dated December 31, 1999. 10.31 Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated April 25, 2000. 10.32 Loan Agreement and Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated March 3, 2000 and March 31, 2000, respectively. 10.33 Promissory Note from Shareholder by and between Registrant and Brian Metcalf, dated May 30, 2000.
II-5
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 16.1 Letter from PricewaterhouseCoopers LLC, dated April 5, 2000 regarding a change in certified public accountants. 23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, Independent Auditors. 24.1** Power of Attorney. 27.1 Financial Data Schedule.
- ------------------------ * To be filed by amendment ** Previously filed + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment No. 1 to the registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hayward, State of California, on this 8th day of August 2000. KOSAN BIOSCIENCES INCORPORATED By: /s/ DANIEL V. SANTI -------------------------------------------- Daniel V. Santi CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURES TITLE DATE ---------- ----- ---- Chief Executive Officer and * Chairman of the Board of ------------------------------------------- Directors (Principal August 8, 2000 Daniel V. Santi Executive Officer) Vice President, Finance and * Chief Financial Officer ------------------------------------------- (Principal Financial and August 8, 2000 Susan M. Kanaya Accounting Officer) ------------------------------------------- Director August , 2000 Peter Davis ------------------------------------------- Director August , 2000 Jean Deleage * ------------------------------------------- Director August 8, 2000 Chaitan Khosla * ------------------------------------------- Director August 8, 2000 Christopher Walsh * ------------------------------------------- Director August 8, 2000 Raymond Whitaker
*By: /s/ DANIEL V. SANTI -------------------------------------- Daniel V. Santi ATTORNEY-IN-FACT
II-7 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 1.1* Form of Underwriting Agreement. 3.1 Certificate of Incorporation of Registrant. 3.2 Form of Amended and Restated Certificate of Incorporation of Registrant to be filed upon the closing of the offering made under the Registration Statement. 3.3 Bylaws of Registrant 3.4 Bylaws of Registrant to be effective upon the closing of the offering made under the Registration Statement. 4.1* Form of Registrant's Common Stock Certificate. 4.2** Third Amended and Restated Registration Rights Agreement, dated March 30, 2000 between Registrant and certain shareholders. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 9.1 Third Amended and Restated Voting Agreement between the Registrant and certain shareholders, dated March 30, 2000. 10.1** Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers. 10.2** 1996 Stock Option Plan, as amended. 10.3** 2000 Employee Stock Purchase Plan and related agreements. 10.4** 2000 Non-Employee Director Stock Option Plan and related agreements. 10.5 Amended and Restated Consulting Agreement between Registrant and Chaitan Khosla, Ph.D., dated December 7, 1998. 10.6 Consulting Agreement between Registrant and Christopher Walsh, Ph.D., dated December 14, 1995. 10.7+ Binding Heads of Agreement between Registrant and Sloan-Kettering Institute for Cancer Research, dated July 26, 2000. 10.8+** License Agreement between the Registrant and The Board of Trustees of The Leland Stanford Junior University, dated March 11, 1996. 10.9+** Amendment No. 1 to License Agreement with the Board of Trustees of The Leland Stanford Junior University, dated March 1996; Letter to Mona Wan to confirm the agreement between Registrant and the Board of Trustrees of The Leland Stanford Junior University, dated September 21, 1998; and Amendment No. 3 to License Agreement, dated March 10, 2000. 10.10+** License Agreement between Registrant and President and Fellows of Harvard College, dated December 2, 1998. 10.11+ Research and License Agreement between Registrant and Ortho-McNeil Pharmaceutical Corporation, and The R.W. Johnson Pharmaceutical Research Institute, dated September 28, 1998. 10.12+ Amendment No. 1 to the Research and License Agreement between the Registrant and Ortho-McNeil Pharmaceutical Corporation and The R.W. Johnson Pharmaceutical Research Institute, dated March 17, 2000. 10.13** Sublease Agreement between Registrant and Lynx Therapeutics, Inc., dated January 6, 1999. 10.14** Consent to Sublease Agreement between Spieker Properties L.P. and Lynx Therapeutics, Inc., dated September 17, 1999. 10.15** Master Equipment Lease between Registrant and Phoenix Leasing Incorporated, dated September 3, 1996.
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.16** Master Loan and Security Agreement between Registrant and Finova Technology Finance, Inc., dated August 25, 1998. 10.17** Commitment Letter between Registrant and Finova Technology Finance, Inc., dated August 24, 1998. 10.18** Commitment Letter between Registrant and Finova Capital Corporation, dated January 6, 2000 10.19** Restated Promissory Note from Shareholder by and between Registrant and Daniel V. Santi, M.D., Ph.D., dated December 23, 1998. 10.20 Promissory Note from Shareholder by and between Registrant and Chaitan Khosla, Ph.D., dated September 22, 1999. 10.21** Promissory Note from Shareholder by and between Registrant and Michael S. Ostrach, dated February 21, 2000. 10.22** Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated February 21, 2000. 10.23** Promissory Note from Shareholder by and between Registrant and Kevin Kaster, dated February 21, 2000. 10.24** Employment Agreement between Registrant and Daniel V. Santi, M.D., Ph.D., dated November 1, 1998. 10.25** Employment Agreement between Registrant and Kevin Kaster, dated July 20, 1998. 10.26** Employment Agreement between Registrant and Susan M. Kanaya, dated October 11, 1999. 10.27** Employment Agreement between Registrant and Brian W. Metcalf, Ph.D., dated March 15, 2000. 10.28 Form of Series C Stock Purchase Agreement between the Registrant and certain investors, dated March 30, 2000. 10.29 Evaluation Agreement among the Registrant, Savia Corporation and DNA Plant Technology Corporation, dated March 1, 1998. 10.30 Termination Agreement among Registrant, Savia Corporation and DNA Plant Technology Corporation, dated December 31, 1999. 10.31 Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated April 25, 2000. 10.32 Loan Agreement and Promissory Note from Shareholder by and between Registrant and Susan M. Kanaya, dated March 3, 2000 and March 31, 2000, respectively. 10.33 Promissory Note from Shareholder by and between Registrant and Brian Metcalf, dated May 30, 2000. 16.1 Letter from PricewaterhouseCoopers LLC, dated April 5, 2000 regarding a change in certified public accountants. 23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, Independent Auditors. 24.1** Power of Attorney. 27.1 Financial Data Schedule.
- ------------------------ * To be filed by amendment ** Previously filed + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. EX-3.1 2 ex-3_1.txt EXHIBIT 3.1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF KOSAN BIOSCIENCES INCORPORATED * * * I. The name of this Corporation is Kosan Biosciences Incorporated (the "Corporation"). II. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, County of New Castle. The name of its registered agent at such office is The Corporation Trust Company. III. The nature of the business or purposes to be conducted or promoted by this Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. IV. 1. AUTHORIZATION TO ISSUE TWO CLASSES. The total number of shares of all classes of stock which the Corporation is authorized to issue is 16,348,182, consisting of 12,000,000 shares of Common Stock, par value of $0.001 per share (the "Common Stock") and 4,348,182 shares of Preferred Stock, par value of $0.001, 1,480,000 shares of which are designated "Series A Preferred Stock" (the "Series A Preferred"), 1,818,182 shares of which are designated "Series B Preferred Stock" (the "Series B Preferred") and 1,050,000 shares of which are designated "Series C Preferred Stock" (the "Series C Preferred", and together with the Series A Preferred and the Series B Preferred, the "Preferred Stock"). 2. PREFERRED STOCK. The rights, preferences, privileges and restrictions granted to and imposed upon the Preferred Stock are as follows: (a) DIVIDENDS. (i) PREFERRED STOCK. The holders of the Series A Preferred shall be entitled to receive, when and as declared by the Board of Directors, noncumulative dividends at the rate of $0.25 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series A Preferred) per annum, payable quarterly as the Board of Directors may from time to time determine out of funds legally available therefor. The holders of the Series B Preferred shall be entitled to receive, when and as declared by the Board of Directors, noncumulative dividends at the rate of $0.49 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) per annum, payable quarterly as the Board of Directors may from time to time determine out of funds legally available therefor. The holders of the Series C Preferred shall be entitled to receive, when and as declared by the Board of Directors, noncumulative dividends at the rate of $1.86 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series C Preferred) per annum, payable quarterly as the Board of Directors may from time to time determine out of funds legally available therefor. No dividend shall be declared or paid with respect to Common Stock, the Series A Preferred or the Series B Preferred until the full dividend for the applicable period has been declared and paid on the Series C Preferred. After the payment of such preferential amounts to the holders of the Preferred Stock with respect to any year, any additional dividend which the Board of Directors may declare with respect to such year shall be declared simultaneously with respect to the Preferred Stock and the Common Stock, as if the Preferred Stock were converted to Common Stock. The right to any dividends under this subsection (i) shall not be cumulative and no right shall accrue to holders of Preferred Stock by reason of the fact that dividends on said shares are not declared. If less than full dividends are paid or declared and set apart for payment to the holders of the Series A or Series B Preferred Stock, then the amount to be paid or declared and set aside for payment shall be divided as between the holders of the Series A Preferred and the holders of the Series B Preferred in the same proportion as the aggregate preferential dividend payable to the holders of the Series A Preferred bears to the aggregate preferential dividend payable to the holders of the Series B Preferred. (ii) COMMON STOCK. No dividends (other than those payable solely in the Common Stock of the Corporation) shall be paid on any Common Stock of the Corporation during any fiscal year of the Corporation until dividends in the full preferential amounts set forth in Section 2(a)(i) hereof shall have been paid to the holders of Preferred Stock or declared and set apart for payment to the holders of Preferred Stock during such fiscal year. (b) LIQUIDATION PREFERENCE. (i) SERIES A PREFERRED, SERIES B PREFERRED AND SERIES C PREFERRED LIQUIDATION PREFERENCE AMOUNT. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the outstanding shares of Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock or the holders of any other capital stock of the Corporation by reason of their ownership thereof, (x) a per share amount equal to $4.20 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series A Preferred) for each share of Series A Preferred then held by them plus an amount equal to all declared but unpaid dividends on the Series A Preferred (the "Series A Preferred Liquidation Preference Amount"), (y) a per share amount equal to $8.25 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) for each share of Series B Preferred then held by them plus an amount equal to all declared but unpaid dividends on the Series B Preferred (the "Series B Preferred Liquidation Preference Amount") and (z) a per share amount equal to $31.00 per share (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series C Preferred) for each share of Series C Preferred then held by them plus an amount -2- equal to all declared but unpaid dividends on the Series C Preferred (the "Series C Preferred Liquidation Preference Amount"). If upon the occurrence of such event, the assets and funds to be distributed among the holders of the Preferred Stock shall be insufficient to permit the full payment of the Series A Preferred Liquidation Preference Amount, the Series B Preferred Liquidation Preference Amount and the Series C Preferred Liquidation Preference Amount, then the holders of each share of Series C Preferred shall be entitled to be paid first out of the assets and funds of the Corporation legally available for distribution up to an amount equal to the Series C Preferred Liquidation Preference Amount and then all remaining assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred and the Series B Preferred (both of which shall be junior to the Series C Preferred in liquidation) in proportion to the full preferential amount each such holder is entitled to receive. (ii) ADDITIONAL DISTRIBUTIONS. After the full liquidation preference has been paid to the holders of the Preferred Stock pursuant to subsection (b)(i) above, all remaining assets shall be distributed to the holders of the Preferred Stock and Common Stock on a pro rata basis, as if such Preferred Stock was converted to Common Stock; provided, that the holders of the Series A Preferred, the Series B Preferred and the Series C Preferred shall not be entitled to receive more than two times the Series A Preferred Liquidation Preference Amount, the Series B Preferred Liquidation Preference Amount or the Series C Preferred Liquidation Preference Amount, respectively, by reason of their ownership of Preferred Stock (which includes amounts paid pursuant to subsection (i) of subparagraph (b) above). (iii) MERGER OR SALE SHALL BE A LIQUIDATION. A consolidation or merger of the Corporation with or into any other entity, an acquisition by any other entity, or a sale of all or substantially all of the assets or voting control of the Corporation, in which the prior shareholders of the Corporation do not own a majority of the outstanding shares of the surviving entity after the transaction shall be deemed to be a liquidation, dissolution or winding up within the meaning of Sections 2(b)(i) and, (ii) above. (c) VOTING RIGHTS. (i) GENERALLY. Except as otherwise required by law or by subsection (iii) of this subparagraph (c) hereof, the holder of each share of Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted pursuant to subparagraph (d) hereof, and shall have full voting rights and powers equal to the voting rights and powers of the Common Stock (voting together with the Common Stock as a single class) and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the Corporation and applicable law. In the event the Preferred Stock is convertible into a non-integral number of shares of Common Stock, the aggregate number of votes to which such shareholder is entitled shall be rounded to the nearest whole vote. (ii) BOARD OF DIRECTORS. So long as at least 435,000 shares of Series A Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series A Preferred) remain outstanding, the holders of the Series A Preferred voting as a separate class shall be entitled to elect two directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. -3- So long as at least 545,454 shares of Series B Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) remain outstanding, the holders of the Series B Preferred voting as a separate class shall be entitled to elect two directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. So long as at least 272,727 shares of Series B Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) but not more than 545,453 shares of Series B Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred) remain outstanding, the holders of the Series B Preferred voting as a separate class shall be entitled to elect one director and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director. So long as at least 157,258 shares of Series C Preferred (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series C Preferred) remain outstanding, the holders of the Series C Preferred voting as a separate class shall be entitled to elect one director and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director. The holders of the Common Stock voting together as a single class shall be entitled to elect two directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. If the holders of the Series A Preferred are no longer entitled to elect two directors voting separately as a series, the holders of the Common Stock, together with the holders of any series of Preferred Stock that are not otherwise then entitled to elect a director voting as a series pursuant to this Section, voting together as a single class on an as-if-converted to Common Stock basis, shall be entitled to elect such directors and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. If the holders of the Series B Preferred are no longer entitled to elect two directors voting separately as a series but are entitled to elect one director voting separately as a series, the holders of the Common Stock, together with the holders of the Series B Preferred, the holders of the Series A Preferred if they are not otherwise then entitled to elect two directors as a series pursuant to this Section and the holders of the Series C Preferred, if they are not otherwise then entitled to elect one director as a series pursuant to this Section, voting together as a single class on an as-if-converted to Common Stock basis, shall be entitled to elect the director previously reserved for election by the holders of the Series B Preferred as a series, and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director. If the holders of the Series B Preferred are no longer entitled to elect two directors as a series, the holders of the Common Stock, together with the holders of the Series B Preferred, the holders of the Series A Preferred, if they are not otherwise then entitled to elect two directors as a series pursuant to this Section, and the holders of the Series C Preferred, if they are not otherwise then entitled to elect one director as a series pursuant to this Section, voting together as a single class on an as-if-converted to Common Stock basis, shall be entitled to elect both directors previously reserved for election by the holders of the Series B Preferred, and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. If the holders of the Series C Preferred are no longer entitled to elect one director voting separately as a series, the holders of the Common Stock, together with the holders of any series of Preferred Stock that are not otherwise then entitled to elect a director voting as a series pursuant to this Section, voting together as a single class on an as-if-converted to Common Stock basis, shall be entitled to elect such -4- directors and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director. (iii) CERTAIN RESTRICTIONS AND LIMITATIONS. In addition to any other rights provided by law or herein: (1) So long as at least 800,000 shares of Preferred Stock (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Preferred Stock) remain outstanding, consent of the holders of at least seventy five percent (75%) of the Preferred Stock voting as a single class shall be required for any action that: (A) alters or changes the rights, preferences or privileges of the Preferred Stock; (B) creates (by reclassification or otherwise) any new class or series of shares or any other securities convertible into equity securities of the Corporation having rights, preferences or privileges senior to or on a parity with the Preferred Stock; or (C) amends, waives or repeals any provision of, or adds any provision to, the Articles of Incorporation or Bylaws of the Corporation in a manner which adversely affects the Preferred Stock. (2) Consent of the holders of at least seventy percent (70%) of the Preferred Stock voting as a single class shall be required for any action that: (A) increases or decreases the total number of authorized shares of the Common Stock or the Preferred Stock; (B) results in the redemption of any shares of Common Stock (other than pursuant to equity incentive agreements with employees, consultants, officers, directors and other service providers that give the Corporation the right to repurchase shares of Common Stock upon the termination of services); (C) results in any merger, other corporate reorganization, sale of control, or sale or other conveyance of all or substantially all of the assets of the Corporation, as a result of which the shareholders of the Corporation immediately prior to the consummation of such transaction do not hold a majority of the voting power of the resulting entity; provided, that if a holder of any equity security of the Corporation or an affiliate of such holder is a party to such transaction (other than as a shareholder of the Corporation or as an advisor to any party thereto), then the shares held by such holder shall not be deemed to be outstanding for the purposes of such approval; (D) results in the declaration or payment of any dividend on any shares of the Common Stock or the Preferred Stock of the Corporation (other than dividends on Common Stock payable in shares of Common Stock); or -5- (E) increases or decreases the size of the Company's Board of Directors. (3) Consent of the holders of at least seventy percent (70%) of the Series B Preferred shall be required for any action that: (A) increases or decreases the total number of authorized shares of the Series B Preferred; or (B) changes the rights, preferences, privileges or restrictions of the Series B Preferred in a way that adversely affects the Series B Preferred in a different manner than the Series A Preferred. (4) Consent of the holders of at least fifty percent (50%) of the Series C Preferred shall be required for any action that: (A) increases or decreases the total number of authorized shares of the Series C Preferred; or (B) changes the rights, preferences, privileges or restrictions of the Series C Preferred in a way that adversely affects the Series C Preferred. (d) CONVERSION. The holders of the Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (i) RIGHT TO CONVERT. (1) VOLUNTARY CONVERSION. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock at a rate (the "Conversion Rate") as is determined by dividing (A) $4.20 in the case of the Series A Preferred, (B) $8.25 in the case of the Series B Preferred and (C) $31.00 in the case of the Series C Preferred, in each case by the then applicable Conversion Price for such series of Preferred Stock, determined as hereinafter provided, in effect at the time of the conversion. The Conversion Price of the Series A Preferred shall initially be $4.20. The Conversion Price of the Series B Preferred shall initially be $8.25. The Conversion Price of the Series C Preferred shall be $31.00. Such initial Conversion Prices shall be subject to adjustment as hereinafter provided. (2) AUTOMATIC CONVERSION. Each share of Series A Preferred shall be automatically converted into shares of Common Stock at the then effective applicable Conversion Rate (A) upon the consent of the holders of at least seventy percent (70%) of the outstanding shares of the Series A Preferred, or (B) upon the closing of the sale of the Corporation's Common Stock in a firmly underwritten initial public offering registered under the Securities Act of 1933, as amended (the "Act"), at a public offering price equal to not less than $21.00 per share of Common Stock (as appropriately adjusted for any stock dividend, stock split or combination, recapitalization, consolidation or the like of the Common Stock) with expected aggregate proceeds to the Corporation -6- of not less than $15,000,000 before deduction of any underwriters' commissions and expenses (a "Qualified IPO"). Each share of Series B Preferred shall be automatically converted into shares of Common Stock at the then effective applicable Conversion Rate (A) upon the consent of the holders of at least seventy percent (70%) of the outstanding shares of the Series B Preferred, or (B) upon the closing of a Qualified IPO. Each share of Series C Preferred shall be automatically converted into shares of Common Stock at the then effective applicable Conversion Rate (A) upon the consent of the holders of at least a majority of the outstanding shares of the Series C Preferred, or (B) upon the closing of an initial public offering at a Common Stock per share public offering price equal to not less than $40.30 per share of Common Stock (appropriately adjusted for any stock dividend, stock split or combination, recapitalization, consolidation or the like of the Common Stock) with expected aggregate proceeds to the Corporation of not less than $25,000,000 before deduction of any underwriters' commissions and expenses. (ii) MECHANICS OF CONVERSION. (1) EFFECTING CONVERSION. In order to effect a voluntary conversion of Preferred Stock, such holder shall provide written notice to the Corporation that he or she elects to convert the same into Common Stock and deliver such notice to the office of the Corporation or of any transfer agent for such shares. Such voluntary conversion shall be deemed to have been made immediately prior to the close of business on the date of surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. In the case of an automatic conversion in connection with an underwritten offering of securities under the Act, the conversion may, at the option of any holder tendering shares of Preferred Stock for conversion, be conditioned upon the closing with the underwriter(s) of the sale of securities pursuant to such offering, in which case the person or persons entitled to receive the Common Stock issuable upon such conversion shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (2) EXCHANGE OF CERTIFICATES. Before delivery to any person of certificates representing shares of Common Stock issued upon voluntary or automatic conversion of shares of the Preferred Stock, the holder of such Preferred Stock shall surrender the certificate or certificates for such Preferred Stock, duly endorsed, at the office of the Corporation or of any transfer agent for such shares and shall provide a written declaration of the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he or she shall be entitled as aforesaid and a check payable to the holder for any cash amounts payable as the result of a conversion into fractional shares of Common Stock pursuant to subparagraph 2(d)(xii), and pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of Preferred Stock being converted. -7- (iii) ADJUSTMENT FOR SUBDIVISIONS AND CERTAIN DISTRIBUTIONS; ADJUSTMENTS FOR COMBINATIONS OR CONSOLIDATIONS OF COMMON STOCK AND STOCK DIVIDENDS. (1) In the event the outstanding shares of Common Stock shall be subdivided (by stock split or otherwise) into a greater number of shares of Common Stock, or a dividend or distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents" ) without payment of any consideration by such holder of the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), the Conversion Price of the Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase in the aggregate numbers of shares issuable with respect to Common Stock Equivalents, with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subparagraph 2(d)(vi)(1)(E). (2) In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price of the Preferred Stock shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (iv) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. In the event the Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subparagraph 2(d)(iii)(1) hereof, then in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation which they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this subparagraph 2(d) with respect to the rights of the holders of the Preferred Stock. (v) ADJUSTMENTS FOR REORGANIZATION, RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If the Common Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock or other securities or property, whether by reorganization (unless such reorganization is deemed a liquidation under subparagraph 2(b)(iii) hereof), reclassification or otherwise (other than a subdivision or combination of shares provided for above), the Conversion Price of the Preferred Stock then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock or other securities or property equivalent to -8- the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Preferred Stock immediately before such event; and, in any such case, appropriate adjustment (as determined by the Board) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the holders of the Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to change in and other adjustments of the Conversion Price of the Preferred Stock) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Preferred Stock. (vi) CONVERSION PRICE ADJUSTMENTS WITH RESPECT TO CERTAIN DILUTING ISSUANCES. The Conversion Price of each series of Preferred Stock shall be subject to adjustment from time to time as follows: (1) (A) If the Corporation shall issue or be deemed to issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price of a series of Preferred Stock in effect immediately prior to the issuance of such Additional Stock, then the Conversion Price of such series of Preferred Stock in effect immediately prior to each such issuance shall (except as otherwise provided in this clause (1)) be adjusted to: a new Conversion Price determined by dividing (X) an amount equal to the sum of (a) the product derived by multiplying the Conversion Price of such series in effect immediately prior to such issuance times the number of shares of Common Stock (including shares of Common Stock issued or issuable upon conversion of the outstanding Preferred Stock or otherwise under Section 2(d)(vi)(1)(E)) outstanding immediately prior to such issue, plus (b) the consideration, if any, received by or deemed to have been received by the Corporation upon such issuance, by (Y) an amount equal to the sum of (c) the number of shares of Common Stock (including shares of Common Stock issued or issuable upon conversion of the outstanding Preferred Stock or otherwise under Section 2(d)(vi)(1)(E)) outstanding immediately prior to such issuance, plus (d) the number of shares of Common Stock issued or deemed to have been issued in such issuance; provided, however, that if in the Corporation's next financing transaction (i) consisting of a private placement of $7,500,000 or more of equity securities led and negotiated (including the negotiation of the terms, conditions and pricing) by a financial or venture capital investor, Additional Stock is issued without consideration or for consideration per share less than the then-applicable Series C Preferred Conversion Price, the Series C Conversion Price shall be adjusted to the consideration per share received by the Corporation with respect to such Additional Stock, or (ii) consisting of a public offering, Additional Stock is issued without consideration or for consideration per share less than the then-applicable Series C Preferred Conversion Price, the Series C Conversion Price shall be adjusted to eighty percent (80%) of the consideration per share paid by the public with respect to such Additional Stock, all to be calculated as though the securities issued in the public offering were issued immediately prior to the closing of the public offering and conversion of the Series C Preferred. (B) No adjustment of the Conversion Price for any series of Preferred Stock shall be made in an amount less than one cent ($0.01) per share, provided that any -9- adjustment that is not required to be made by reason of this sentence shall be carried forward and taken into account in any subsequent adjustment to the Conversion Price for such series of Preferred Stock. Except to the limited extent provided for in Sections 2(d)(vi)(1)(E)(z) and 2(d)(vi)(1)(E)(aa), no adjustment of such Conversion Price shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of securities of the Corporation for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of securities of the Corporation for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined by the Board of Directors. (E) In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities (where the shares of Common Stock issuable upon exercise of such options or rights or upon conversion or exchange of such securities are not excluded from the definition of Additional Stock), the following provisions shall apply: (x) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 2(d)(vi)(1)(C) and 2(d)(vi)(1)(D)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (y) the aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 2(d)(vi)(1)(C) and 2(d)(vi)(1)(D)); (z) In the event of any change in the number of shares of Common Stock deliverable upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a -10- change resulting from the antidilution provisions thereof, the Conversion Price in effect at the time for each series of Preferred Stock shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment that was made upon the issuance of such options, rights or securities not converted prior to such change or the options or rights related to such securities not converted prior to such change been made upon the basis of such change, but no further adjustment shall be made for the actual issuance of Common Stock upon the exercise of any such options or rights or the conversion or exchange of such securities; (aa) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price for each series of Preferred Stock shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment which was made upon the issuance of such options, rights or securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (2) "Effective Date" with respect to each series of Preferred Stock means the first date on which shares of such series of Preferred Stock were issued. (3) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 2(d)(vi)(1)(E)) by the Corporation after the Effective Date other than: (A) Common Stock issued pursuant to a transaction described in Section 2(d)(iii). (B) Shares of Common Stock issued or issuable to employees, officers, or directors of, or consultants to, the Corporation, approved by at least sixty-five percent (65%) of the members of the Board of Directors. (C) Common Stock issued or issuable upon conversion of the shares of Preferred Stock. (vii) NO IMPAIRMENT. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this subparagraph 2(d) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (viii) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price of any series of Preferred Stock pursuant to this -11- subparagraph 2(d), the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (1) such applicable adjustments and readjustments, (2) the applicable Conversion Price at the time in effect, and (3) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of Preferred Stock. Any certificate sent to the holders of Preferred Stock pursuant to this subparagraph shall be signed by an officer of the Corporation. (ix) NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any security or right convertible into or entitling the holder thereof to receive Common Stock, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of record of Preferred Stock at least fifteen (15) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right, and the amount and character of such dividend, distribution, security or right. In addition, the Corporation shall mail to each holder of record of Preferred Stock a notice specifying that a liquidation, dissolution or winding up, or a merger, sale of assets or change of control transaction involving the Corporation is to occur (or so deemed pursuant to Section 2(b)(iii) hereof), such notice to be mailed at least fifteen (15) days prior to the date on which any such action is expected to be consummated. (x) ISSUE TAXES. The Corporation shall pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (xi) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock then, in addition to such other remedies as shall be available to the holders of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (xii) FRACTIONAL SHARES. No fractional share shall be issued upon the conversion of any share or shares of Preferred Stock. If the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value -12- of such fraction on the date of conversion (as determined in good faith by the Board of Directors of the Corporation). (e) NOTICES. The Corporation shall give each holder of Preferred Stock at least fifteen (15) days prior written notice of any date (i) for the determination of the distribution of assets in connection with any liquidation, dissolution or winding up of the Corporation, or (ii) on which automatic conversion is expected to occur. Any notice required by the provisions of these Articles to be given to the holders of shares of Preferred Stock shall be deemed given if delivered personally or deposited in the United States mail, first class postage prepaid (or, if to an international addressee, sent by express messenger specifying not more than three days' delivery), and addressed to each holder of record at his or her address appearing on the books of the Corporation. V. The Corporation is to have perpetual existence. VI. 1. The management of the business and the conduct of the affairs of the Corporation shall be vested in the Board of Directors. 2. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. 3. Elections of directors need not be by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins or unless the Bylaws of the Corporation shall so provide. VII. 1. To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. 2. The Corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer, employee or agent of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director, officer, employee or agent at the request of the Corporation or any predecessor to the Corporation. 3. Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Corporation's Certificate of Incorporation inconsistent with this Article VII, shall eliminate or reduce the effect of this Article VII, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. -13- VIII. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. IX. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. X. The name and mailing address of the incorporator are as follows: Jason Brandwene, Esq. Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 The undersigned incorporator hereby acknowledges that the foregoing Certificate of Incorporation is the act and deed of such incorporator and that the facts stated therein are true. /s/ Jason Brandwene ----------------------------- Jason Brandwene, Incorporator -14- EX-3.2 3 ex-3_2.txt EXHIBIT 3.2 Exhibit 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF KOSAN BIOSCIENCES INCORPORATED A DELAWARE CORPORATION Daniel V. Santi and Blair W. Stewart hereby certify that: 1. They are the President and Secretary, respectively, of Kosan Biosciences Incorporated, a Delaware Corporation (the "Corporation"). 2. The Certificate of Incorporation of the Corporation, filed with the Secretary of State of the State of Delaware on July 25, 2000, is hereby amended and restated in its entirety to read as follows: "FIRST: The name of the corporation is Kosan Biosciences Incorporated (the "Corporation"). SECOND: The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware, 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: This Corporation is authorized to issue two classes of shares designated Common Stock and Preferred Stock. 1. The Corporation is authorized to issue 200,000,000 shares of Common Stock, par value $0.001 per share (the "Common Stock"), and 10,000,000 shares of Preferred Stock, par value $0.001 per share (the "Preferred Stock"). 2. The shares of Preferred Stock may be issued from time to time in one or more series pursuant to a resolution or resolutions providing for such issue duly adopted by the Board of Directors. The Board of Directors of the Corporation is expressly authorized, by filing a certificate pursuant to the applicable law of the State of Delaware, to: (i) establish from time to time the number of shares to be included in each such series; (ii) fix the rights, preferences, restrictions and designations of the shares of each such series, including but not limited to the fixing or alteration of the dividend rights, dividend rate, conversion rights, conversion rate, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, voting rights and liquidation preferences of any series of Preferred Stock for which no shares have been issued and are outstanding; (iii) increase number of shares of any series at any time; and (iv) decrease the number of shares of any series prior or subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. FIFTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend, or repeal the Bylaws of the Corporation. SIXTH: Advance notice of new business and stockholder nominations for the election of directors shall be given in the manner and to the extent provided in the Bylaws of the Corporation. Election of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. SEVENTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. No action that is required or permitted to be taken by the stockholders of the Corporation at any annual or special meeting of stockholders may be effected by written consent of stockholders in lieu of a meeting of stockholders. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. The directors of the Corporation need not be elected by written ballot unless a stockholder demands election by written ballot at the meeting and before voting begins, or unless the Bylaws so provide. EIGHTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this right. NINTH: Subject to the provisions of the General Corporation Law of the State of Delaware, the number of Directors of the Corporation shall be determined as provided by the Bylaws. TENTH: The Board of Directors shall be divided into three classes consisting of as nearly equal numbers of directors as possible, and designated Class A, Class B, and Class C. The term of office of Class A shall expire at the first annual meeting of stockholders following the effectiveness of this Article, and each third annual meeting of stockholders thereafter; the term of office of Class B shall expire at the second annual meeting of stockholders following the effectiveness of this Article, and each third annual meeting of stockholders thereafter; and the term of office of Class C shall expire at the third annual meeting of stockholders following the effectiveness of this Article, and each third annual meeting of stockholders thereafter. Directors added to the board of directors between annual meetings of stockholders by reason of an increase in the authorized number of directors shall belong to the class designated by the Board of Directors; provided however that the number of board seats designated to belong to Class A, Class B and Class C must be as nearly equal in number as possible. Following the effectiveness of this Article, stockholders may effect the -2- removal of a director only for cause. This provision shall supersede any provision to the contrary in the Corporation's Bylaws. ELEVENTH: The Corporation shall indemnify and hold harmless any director, officer, employee or agent of the Corporation from and against any and all expenses and liabilities that may be imposed upon or incurred by him in connection with, or as a result of, any proceeding in which he may become involved, as a part or otherwise, by reason of the fact that he is or was such a director, officer, employee or agent of the Corporation, whether or not he continues to be such at the time such expenses and liabilities shall have been imposed or incurred, to the extent permitted by the laws of the State of Delaware, as they may be amended from time to time. TWELFTH: The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under Delaware law. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this TWELFTH Article shall be prospective and shall not affect the rights under this TWELFTH Article in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. 3. The foregoing Amended and Restated Certificate of Incorporation has been duly approved by the board of directors of the Corporation in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law. -3- 4. The foregoing Amended and Restated Certificate of Incorporation has been duly approved by the required vote of the stockholders in accordance with the Certificate of Incorporation and the provisions of Sections 242 and 245 of the Delaware General Corporation Law. The undersigned hereby acknowledges that the foregoing Amended and Restated Certificate of Incorporation is his act and deed and that the facts stated herein are true. Executed at Palo Alto, CA, this ___ day of August, 2000. - ---------------------------------- ----------------------------------- Daniel V. Santi, President Blair W. Stewart, Secretary -4- EX-3.3 4 ex-3_3.txt EXHIBIT 3.3 BYLAWS OF KOSAN BIOSCIENCE INCORPORATED ARTICLE I CORPORATE OFFICES 1.1 PRINCIPAL OFFICE The registered office of the corporation shall be fixed in the certificate of incorporation of the corporation. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 PLACE OF MEETINGS Meetings of shareholders shall be held at any place within or outside the State of Delaware designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the third Tuesday of April in each year. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the provisions of the next paragraph of this Section 2.4 any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of shareholders shall be given either (i) personally or (ii) by first-class mail or (iii) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons on the record date for the shareholders' meeting, or (iv) by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a -2- newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.6 QUORUM The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. -3- 2.8 VOTING The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 through 218 of the General Corporation Law of Delaware. The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the certificate of incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the General Corporation Law of Delaware or by the certificate of incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates' names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes -4- thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the General Corporation Law of Delaware to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the board of directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws. -5- 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the General Corporation Law of Delaware. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 212(e) of the General Corporation Law of Delaware. -6- 2.13 INSPECTORS OF ELECTION Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. -7- 3.2 NUMBER OF DIRECTORS The number of directors shall be not less than four (4) nor more than seven (7). The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the certificate of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than seven (7) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16 2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the -8- shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. -9- 3.8 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the certificate of incorporation and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.10 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. -10- 3.13 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS The corporation may, upon the approval of the board of directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the board of directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons on the date of approval by the board of directors, and (iii) the approval of the board of directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the General Corporation Law of Delaware, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; -11- (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. -12- 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence or non-existence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. -13- 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (as defined in General Corporation Law of Delaware), judgments, fines, settlements, and other amounts -14- actually and reasonably incurred in connection with any proceeding (as defined in General Corporation Law of Delaware), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the General Corporation Law of Delawre, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in General Corporation Law of Delaware), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in General Corporation Law of Delaware), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the certificate of incorporation. -15- 6.5 INSURANCE INDEMNIFICATION The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.6 CONFLICTS No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the certificate of incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation who holds at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names, addresses, and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. -16- The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of Delaware, at its principal business office in Delaware the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of Delaware and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS The accounting books and records and the minutes of proceedings of the shareholders, of the board of directors, and of any committee or committees of the board of directors shall be kept at such place or places as are designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney. The right of inspection includes the right to copy and make extracts of documents. -17- 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of changes in financial position for the fiscal year, and (iv) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or by the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. -18- 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the General Corporation Law of Delaware. If the board of directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by -19- any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 CERTIFICATES FOR SHARES A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The board of directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. -20- ARTICLE IX AMENDMENTS 9.1 AMENDMENT BY SHAREHOLDERS New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the authorized number of directors may be changed only by an amendment of the certificate of incorporation. 9.2 AMENDMENT BY DIRECTORS Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended or repealed by the board of directors. -21- CERTIFICATE OF ADOPTION OF BYLAWS OF KOSAN BIOSCIENCES INCORPORATED Adoption by Incorporator The undersigned person appointed in the Certificate of Incorporation to act as the Incorporator of Kosan Biosciences Incorporated hereby adopts the foregoing bylaws, comprising twenty-one (21) pages, as the Bylaws of the corporation. Executed this 6th day of April, 2000. /s/ Jason Brandwene ------------------------------- Jason Brandwene, Incorporator Certificate by Secretary of Adoption by Incorporator The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of Kosan Biosciences Incorporated and that the foregoing Bylaws, comprising twenty-one (21) pages, were adopted as the Bylaws of the corporation on April 6th, 2000, by the person appointed in the Certificate of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 6th day of April, 2000. /s/ Blair W. Stewart ---------------------------------- Blair W. Stewart, Secretary EX-3.4 5 ex-3_4.txt EXHIBIT 3.4 Exhibit 3.4 BYLAWS OF KOSAN BIOSCIENCES INCORPORATED (a Delaware Corporation) ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be fixed in the certificate of incorporation of the corporation. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the third Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING Except as otherwise required by law, a special meeting of the stockholders may be called only by the Board of Directors, the Chairman of the Board, or the President; provided however, that if at any time no directors remain in office, then a special meeting for the purpose of electing directors may be called in accordance with the procedure set forth in the Bylaws. No business may be transacted at such special meeting otherwise than as specified in the notice of such meeting. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 2.6 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the purpose or purposes for which the meeting is called (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, (a) nominations for the election of directors, and (b) business proposed to be brought before any stockholder meeting may be made by the board of directors or proxy committee appointed by the board of directors or by any stockholder entitled to vote in the election of directors generally if such nomination or business proposed is otherwise proper business before such meeting. However, any such stockholder may nominate one or more persons for election as directors at a meeting or propose business to be brought before a meeting, or both, only if such stockholder has given timely notice to the secretary of the corporation in proper written form of their intent to make such nomination or nominations or to propose such business. To be timely, such stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date of the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. To be in proper form, a stockholder's notice to the secretary shall set forth: (i) the name and address of the stockholder who intends to make the nominations or propose the business and, as the case may be, of the person or persons to be nominated or of the business to be proposed; -2- (ii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (v) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting shall refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders shall be given either personally or by first-class mail or by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.7 QUORUM The holders of a majority in voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stock-holders for the transaction of business except as otherwise pro-vided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting in accordance with Section 2.7 of these bylaws. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought -3- before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the certificate of incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of the question. If a quorum be initially present, the stockholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders initially constituting the quorum. 2.8 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time and place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder with respect to any matter submitted to a vote of the stockholders and stockholders shall not be entitled to cumulate their votes in the election of directors. 2.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. -4- 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors and which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the corporation after the record date. If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting, but the board of directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. The record date for any other purpose shall be as provided in Section 8.1 of these bylaws. 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, telefacsimile or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the pro-visions of Section 212(e) of the General Corporation Law of Delaware. 2.13 ORGANIZATION The president, or in the absence of the president, the chair-man of the board, or, in the absence of the president and the chairman of the board, one of the corporation's vice presidents, shall call the meeting of the stockholders to order, and shall act as chairman of the meeting. In the absence of the president, the chairman of the board, and all of the vice presidents, the stockholders shall appoint a chairman for such meeting. The chairman of any meeting of stockholders shall deter-mine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and the conduct of business. The secretary of the corporation shall act as secretary of all meetings of the stockholders, but in the absence of the secretary at any meeting of the stockholders, the chairman of the meeting may appoint any person to act as secretary of the meeting. -5- 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation and these bylaws relating to action required to be approved by the stockholders or by the out-standing shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The board of directors shall consist of nine members. The board of directors may increase or decrease the number of directors constituting the board of directors upon the approval of a majority of the directors then in office. The number of directors so determined shall be the authorized number of directors of the corporation. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Each director, including a director elected or appointed to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that -6- resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. All vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; provided, that whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware -that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. If any regular meeting day shall fall on a legal holiday, then the meeting shall be held next succeeding full business day. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not -7- specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the certificate of incorporation and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.10 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. -8- 3.13 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or any of its subsidiaries, including any officer or employee who is a director of the corporation or any of its subsidiaries, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have and may exercise all the powers and authority of the board, but no such committee shall have the power of authority to: (a) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation); -9- (b) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware; (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets; (d) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution; or (e) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. 4.3 COMMITTEE MINUTES. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and -10- such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any con-tract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be pre-scribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of -11- the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or non-existence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be pre-scribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. -12- The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation shall mean any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the Board of Directors of the corporation. The corporation shall pay the expenses (including attorney's fees) incurred by a director or officer of the corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 6.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should ultimately be determined that the director of officer is not entitled to be indemnified under this Section 6.1 or otherwise. The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the corporation's Certificate of Incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise. -13- Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, to indemnify any person (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reason-ably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books and other records of its business and properties. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose -14- reasonably related to such person's interest as a stock-holder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine (and to make copies of) the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, if any, the president, any vice president, the chief financial officer, the secretary or any assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of the stock of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 7.5 CERTIFICATION AND INSPECTION OF BYLAWS The original or a copy of these bylaws, as amended or other-wise altered to date, certified by the secretary, shall be kept at the corporation's principal executive office and shall be open to inspection by the stockholders of the corporation, at all reasonable times during office hours. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only stockholders of -15- record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the General Corporation Law of Delaware. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Certificates for shares shall be of such form and device as the board of directors may designate and shall state the name of the record holder of the shares represented thereby; its number; -16- date of issuance; the number of shares for which it is issued; a summary statement or reference to the powers, designations, preferences or other special rights of such stock and the qualifications, limitations or restrictions of such preferences and/or rights, if any; a statement or summary of liens, if any; a conspicuous notice of restrictions upon transfer or registration of transfer, if any; a statement as to any applicable voting trust agreement; if the shares be assessable, or, if assessments are collectible by personal action, a plain statement of such facts. Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.5 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, how-ever, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.6 LOST CERTIFICATES Except as provided in this Section 8.6, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. -17- 8.7 TRANSFER AGENTS AND REGISTRARS The board of directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, each of which shall be an incorporated bank or trust company -- either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the board of directors may designate. 8.8 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS 9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote or by the board of directors of the corporation. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Whenever an amendment or new bylaw is adopted, it shall be copied in the book of bylaws with the original bylaws, in the appropriate place. If any bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or the filing of the operative written consent(s) shall be stated in said book. 9.2 SUPERMAJORITY VOTE Notwithstanding anything to the contrary in the bylaws, neither Section 2.3 (special meeting), Section 2.5 (advance notice of stockholder nominees and stockholder business), nor this Section 9.2 (supermajority vote) of the bylaws shall be repealed or amended, nor shall any provision inconsistent with the aforementioned provisions be adopted and added to the bylaws except upon the affirmative vote of not less than two-thirds of the shares of the corporation issued and outstanding. Amended and Restated Bylaws adopted by the Board of Directors of the Corporation at Hayward, California, this day of August, 2000. -18- EX-9.1 6 ex-9_1.txt EXHIBIT 9.1 Exhibit 9.1 THIRD AMENDED AND RESTATED VOTING AGREEMENT THIS THIRD AMENDED AND RESTATED VOTING AGREEMENT is made as of March 30, 2000, by and among KOSAN BIOSCIENCES INCORPORATED, a California corporation (the "Company"), and the undersigned holders of the Company's Series A Preferred Stock (the "Series A Investors"), the undersigned holders of the Company's Series B Preferred Stock (the "Series B Investors") and the undersigned holders of the Company's Series C Preferred Stock (the "Series C Investors" and, collectively with the Series A Investors and the Series B Investors, the "Investors"). RECITALS -------- A. The Company and certain of the Investors entered into a Second Amended and Restated Voting Agreement dated as of April 3, 1998 (the "Prior Voting Agreement"), which, pursuant to Section 13 thereof, may be amended with the written consent of the Company and Investors (as such term is defined in the Prior Voting Agreement) holding at least 85% of the Series A Preferred Shares (as such term is defined in the Prior Voting Agreement) then outstanding and Investors holding at least 70% of the Series B Preferred Shares (as such term is defined in the Prior Voting Agreement) then outstanding. B. The Company and certain of the Investors entered into a Series C Preferred Stock Purchase Agreement dated as of March 30, 2000 (the "Purchase Agreement") providing for the purchase of shares of the Company's Series C Preferred Stock (the "Series C Preferred Shares" and, together with the Series A Preferred Shares and the Series B Preferred Shares, the "Preferred Stock") by such Investors, and the execution of this agreement is a condition to the closing of the purchases provided for in the Purchase Agreement. C. Pursuant to the terms of the Amended and Restated Articles of Incorporation of the Company filed in connection with the closing of the transactions contemplated by the Purchase Agreement (the "Articles"), (i) holders of Series A Preferred Shares, voting together as a separate class, shall be entitled to elect two of the seven members of the Board of Directors so long as at least 435,000 Series A Preferred Shares (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series A Preferred Shares) remain outstanding; (ii) holders of Series B Preferred Shares, voting together as a separate class, shall be entitled to elect two of the seven members of the Board of Directors so long as at least 545,454 Series B Preferred Shares (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred Shares) remain outstanding; (iii) holders of Series B Preferred Shares, voting together as a separate class, shall be entitled to elect one of the seven members of the Board of Directors so long as at least 272,727 Series B Preferred Shares but not more than 545,453 Series B Preferred Shares (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred Shares) remain outstanding and (iv) holders of Series C Preferred Shares, voting together as a separate class, shall be entitled to elect one of the seven members of the Board of Directors so long as at least 157,258 Series C Preferred Shares (as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series C Preferred Shares) remain outstanding. D. The parties hereto (which include Investors holding at least 85% of the Series A Preferred Shares and Investors holding at least 70% of the Series B Preferred Shares) desire to specify in this agreement how the voting rights of the Series A Preferred Shares, the Series B Preferred Shares and the Series C Preferred Shares will be exercised with respect to the election of directors of the Company, and this agreement is intended to supersede the Prior Voting Agreement in all respects. AGREEMENT --------- NOW, THEREFORE, in consideration of the benefits to the parties of the consummation of the transactions contemplated by the Purchase Agreement and to fulfill the closing condition referred to in Recital B above, the parties hereby agree as follows: 1. AGREEMENT TO VOTE SERIES A PREFERRED SHARES. During the term of this agreement and subject to Section 5, in exercising their special voting rights for the election of directors the Series A Investors agree to vote all of their respective Series A Preferred Shares at any annual, regular or special meeting of shareholders of the Company, or, in lieu of any such meeting, to give their written consents for the election to the Board of Directors of the Company (the "Board of Directors") of one person designated by Alta California Partners, L.P. ("Alta") and one person designated by Chiron Corporation ("Chiron"). The initial designee of Alta shall be Jean Deleage and the initial designee of Chiron shall be Francois L'Eplattenier. In the event Alta or Chiron designates a successor designee in accordance with Section 4, the Company and the Series A Investors agree promptly to take all such action necessary to remove the former designee as a member of the Board of Directors and to elect in his or her place such successor designee. 2. AGREEMENT TO VOTE SERIES B PREFERRED SHARES. During the term of this agreement and subject to Section 5, in exercising their special voting rights for the election of directors the Series B Investors agree to vote all of their respective Series B Preferred Shares at any annual, regular or special meeting of shareholders of the Company, or, in lieu of any such meeting, to give their written consents for the election to the Board of Directors of one person designated by S.R. One, Limited ("S.R. One") and one person designated by Ag-Biotech Capital, LLC ("Ag-Biotech"). The initial designee of S.R. One shall be Raymond Whitaker and the initial designee of Ag-Biotech shall be Peter Davis. In the event S.R. One or Ag-Biotech designates a successor designee in accordance with Section 4, the Company and the Series B Investors agree promptly to take all such action necessary to remove the former designee as a member of the Board of Directors and to elect in his or her place such successor designee. 3. AGREEMENT TO VOTE SERIES C PREFERRED SHARES. During the term of this agreement and subject to Section 5, in exercising their special voting rights for the election of directors the Series C Investors agree to vote all of their respective Series C Preferred Shares at any annual, regular or special meeting of shareholders of the Company, or, in lieu of any such meeting, to give their written consents for the election to the Board of Directors of one person designated by AP Asset Management AG. In the event AP Asset Management AG designates a successor designee in accordance with Section 4, the Company and the Series C Investors agree promptly to take all such action necessary to remove the former designee as a member of the Board of Directors and to elect in his or her place such successor designee. Should AP Asset Management AG decline to designate -2- an initial director or successor, the seat shall be filled by majority vote of the Series C Investors; however, if the Series C Investors also decline to fill the seat, the seat shall remain vacant. 4. PROCEDURE FOR SUBSEQUENT DESIGNATIONS; AGREEMENTS ON REMOVAL. (a) From time to time each of Alta and Chiron (each, a "Series A Designating Party") may designate a successor designee to serve as a representative on the Board of Directors. The person so designated must be reasonably satisfactory to the Company, and such designation shall be made by means of a writing (a "Notice") identifying and designating such representative, signed by the Series A Designating Party, and delivered to each other Series A Investor and the Company. Except as set forth in clause (e) below, on and following the 30th day after all deliveries of a Notice have been received, the person designated in such Notice by either Series A Designating Party shall be elected to the Board of Directors pursuant to Section 1. (b) From time to time each of S.R. One and Ag-Biotech (each, a "Series B Designating Party") may designate a successor designee to serve as a representative on the Board of Directors. The person so designated must be reasonably satisfactory to the Company, and such designation shall be made by means of a writing (a "Notice") identifying and designating such representative, signed by the Series B Designating Party, and delivered to each other Series B Investor and the Company. Except as set forth in clause (e) below, on and following the 30th day after all deliveries of a Notice have been received, the person designated in such Notice by either Series B Designating Party shall be elected to the Board of Directors pursuant to Section 2. (c) From time to time AP Asset Management AG (the "Series C Designating Party") may designate a successor designee to serve as a representative on the Board of Directors. The person so designated must be reasonably satisfactory to the Company, and such designation shall be made by means of a writing (a "Notice") identifying and designating such representative, signed by the Series C Designating Party, and delivered to each other Series C Investor and the Company. Except as set forth in clause (e) below, on and following the 30th day after all deliveries of a Notice have been received, the person designated in such Notice by the Series C Designating Party shall be elected to the Board of Directors pursuant to Section 3. (d) If within 60 days following the resignation of a designee as a director of the Company a new designee has not been designated in the manner specified in Section 2(a), (b) or (c) above by the applicable Series A Designating Party, Series B Designating Party or Series C Designating Party, the Board of Directors may appoint a director to fill the vacancy left by such resignation. For purposes of this agreement, the director so appointed shall be deemed to be the designee of such Designating Party, and such director shall be subject to removal upon the designation of a new designee in accordance with this Section 2. (e) The designees of either Series A Designating Party, of either Series B Designating Party or of the Series C Designating Party for election to the Board of Directors at the Company's annual meeting of shareholders will be their respective current designees unless a different person is designated by such party in accordance with Section 2(a), (b) or (c) prior to the time the Company gives notice of such annual meeting to its shareholders. The Company shall -3- notify the Investors of its intent to hold an annual meeting of shareholders at least 45 days prior to the record date for such meeting. (f) If (i) either Series A Designating Party, either Series B Designating Party or the Series C Designating Party desires to remove its designee from the Board of Directors by vote or written consent of the shareholders, or (ii) any third party attempts to cause the removal of a director designated by either Series A Designating Party, by either Series B Designating Party or by the Series C Designating Party by vote or written consent of the shareholders, then in each such instance each Series A Investor agrees to vote its Series A Preferred Shares or to give or withhold its written consent with respect thereto in the manner requested by such Series A Designating Party, in each such instance each Series B Investor agrees to vote its Series B Preferred Shares or to give or withhold its written consent with respect thereto in the manner requested by such Series B Designating Party and in each such instance each Series C Investor agrees to vote its Series C Preferred Shares or to give or withhold its written consent with respect thereto in the manner requested by such Series C Designating Party. 5. TERMINATION OF OBLIGATIONS. The obligations of the Series A Investors to vote for the election of a person designated by Alta shall automatically terminate at such time as Alta (together with its Affiliates, as such term is defined in the Purchase Agreement) owns less than 238,096 Series A Preferred Shares, as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series A Preferred Shares. The obligations of the Series A Investors to vote for the election of a person designated by Chiron shall automatically terminate at such time as Chiron owns less than ten percent (10%) of the then outstanding shares of the Company's Common Stock (assuming for this purpose the conversion of all outstanding shares of the Company's Preferred Stock, including such shares owned by Chiron, at the then applicable conversion rates). The obligations of the Series B Investors to vote for the election of a person designated by S.R. One shall automatically terminate at such time as S.R. One (together with its Affiliates) owns less than 151,515 Series B Preferred Shares, as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred Shares. The obligations of the Series B Investors to vote for the election of a person designated by Ag-Biotech shall automatically terminate at such time as Ag-Biotech (together with its Affiliates) owns less than 227,273 Series B Preferred Shares, as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series B Preferred Shares. The obligations of the Series C Investors to vote for the election of a person designated by AP Asset Management AG shall automatically terminate at such time as AP Asset Management AG (together with its Affiliates and entities or funds for which it served as advisor in the purchase of the Series C Preferred shares) owns less than 314,516 Series C Preferred Shares, as appropriately adjusted for any stock dividend, stock split, recapitalization, consolidation or the like of the Series C Preferred Shares. 6. TERMINATION OF AGREEMENT. Except for the provisions of Section 7 through Section 14, this agreement shall automatically terminate with respect to the Series A Investors upon the earlier of (a) such time as the obligations of the Series A Investors with respect to each Series A Designating Party has terminated pursuant to Section 4 hereof, or (b) such time as pursuant to the Articles the holders of the Series A Preferred Stock, voting together as a separate class, are no longer entitled to elect two of the seven members of the Board of Directors. Except for the provisions of Section 7 through Section 14, this agreement shall automatically terminate with respect to the Series -4- B Investors at such time as pursuant to the Articles the holders of the Series B Preferred Stock, voting together as a separate class, are no longer entitled to elect at least one of the seven members of the Board of Directors. Except for the provisions of Section 7 through Section 14, this agreement shall automatically terminate with respect to the Series C Investors at such time as pursuant to the Articles the holders of the Series C Preferred Stock, voting together as a separate class, are no longer entitled to elect at least one of the seven members of the Board of Directors. If not earlier terminated, this agreement, including Section 7 through Section 14, shall automatically terminate with respect to the Series A Investors, the Series B Investors and the Series C Investors upon the earlier of (a) the completion of a Qualified IPO (as such term is defined in the Articles), or (b) the ninth anniversary of the date of this agreement. 7. SUCCESSORS AND ASSIGNS. The provisions hereof including, without limitation, any amendment or waiver of the observance thereof effected in accordance with Section 14, shall inure to the benefit of, and be binding upon, the successors in interest to, and assigns of, the Series A Preferred Shares, the Series B Preferred Shares and the Series C Preferred Shares. The Company shall not permit the transfer of any Series A Preferred Shares, the Series B Preferred Shares or the Series C Preferred Shares on its books or the issuance of a new certificate representing any Series A Preferred Shares, Series B Preferred Shares or Series C Preferred Shares unless and until the person to whom such security is to be transferred shall have executed a written agreement, satisfactory in form and substance to the nontransferring parties, pursuant to which such person becomes a party to this agreement and agrees to be bound by all the provisions hereof as if such person were the transferring party hereunder. 8. LEGEND. In addition to any other legend required on each certificate representing any of the Series A Preferred Shares, the Series B Preferred Shares and the Series C Preferred Shares, each certificate shall be endorsed by the Company with the following legend: THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A SECOND AMENDED AND RESTATED VOTING AGREEMENT, A COPY OF WHICH IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF THE CORPORATION DURING ITS REGULAR BUSINESS HOURS. ANY PERSON OBTAINING, DIRECTLY OR INDIRECTLY, ANY INTEREST IN SUCH SHARES SHALL THEREBY BE DEEMED TO HAVE AGREED TO AND SHALL THEREAFTER BE BOUND BY ALL THE PROVISIONS OF SAID SECOND AMENDED AND RESTATED VOTING AGREEMENT. 9. NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be, if to a domestic address, mailed by registered or certified mail, postage prepaid, or, of to an overseas address, by international air courier or other comparable international air express service, or in any case if delivered by hand or by messenger, addressed (a) if to an Investor, at such Investor's address set forth in EXHIBIT A, or at such other address as such Investor shall have furnished to the Company in writing, or (b) if to the Company, one copy should be sent to 3832 Bay Center Place, Hayward, California 94545 and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Investors. Each such notice or other communication shall for all purposes of this agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its -5- receipt or five days after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or, if sent by international air courier or air express service, three (3) business days after shipment by the sender. 10. GOVERNING LAW. This agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts among California residents entered into and to be performed entirely within California. 11. SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. Each of the parties acknowledges and agrees that money damages would not be an adequate remedy for any breach of the provisions of this agreement and that any party may, in such party's sole discretion and in addition to or in lieu of any other remedies available to such party at law or in equity, apply to any court of competent jurisdiction for specific performance or injunctive relief in order to enforce, or prevent any violation of, the provisions of this agreement. 12. COUNTERPARTS. This agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13. INTEGRATION. This agreement embodies the complete agreement of the parties hereto on the subject matter hereof and supersedes any prior or contemporaneous understand-ings, agreements or representations by or among them that may relate to the subject of matter hereof. 14. AMENDMENTS AND WAIVERS. Any provision of this agreement that pertains to the Series A Investors may be amended, and the observance of any provision hereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Series A Investors holding at least 85% of the Series A Preferred Shares then outstanding. Any provision of this agreement that pertains to the Series B Investors may be amended, and the observance of any provision hereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Series B Investors holding at least 70% of the Series B Preferred Shares then outstanding; PROVIDED, HOWEVER, that the rights of S.R. One pursuant to Section 2, Section 4 and Section 5 hereof shall not be amended without its written consent and the rights of Ag-Biotech pursuant to Section 2, Section 4, and Section 5 hereof shall not be amended without its written consent. The failure of any party to enforce any provision of this agreement shall in no way be construed as a waiver of such provision and shall not affect the right of such party thereafter to enforce each and every provision of this agreement. Any provision of this agreement that pertains to the Series C Investors may be amended, and the observance of any provision hereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Series C Investors holding at least 50% of the Series C Preferred Shares then outstanding. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -6- IN WITNESS WHEREOF, the parties have executed this agreement as of the date first above written. "COMPANY" KOSAN BIOSCIENCES INCORPORATED By: ---------------------------- Title: ---------------------------- (Signature Page to the Third Amended and Restated Voting Agreement) EX-10.5 7 ex-10_5.txt EXHIBIT 10.5 Exhibit 10.5 KOSAN BIOSCIENCES INCORPORATED 1450 ROLLINS ROAD BURLINGAME, CA 94010 AMENDED AND RESTATED CONSULTING AGREEMENT Chaitan Khosla December 7, 1998 740 La Para Avenue Palo Alto, CA 94306 Dear Chaitan: Kosan Biosciences Incorporated ("Kosan") desires to amend and restate the Amended and Restated Consulting Agreement dated March 29, 1996 between you and Kosan concerning its engagement of you as a consultant and advisor for its scientific and business activities as follows: 1. You are the founder of Kosan and have served as a director of and as a consultant of Kosan since its inception. During the term of this Agreement Kosan will continue to retain you as a consultant, and, so long as you so desire, will use its best efforts to cause you to be elected to the Board of Directors of Kosan at each time directors are elected. In addition to your services to Kosan as a director, you will consult with officers, directors, employees and consultants of Kosan regarding Kosan's scientific and business affairs. You will devote such time to the affairs of Kosan, not to exceed one day per week, reasonably necessary to fulfill your duties to Kosan. 2. Kosan has granted you an option to purchase 65,000 shares of its Common Stock at a purchase price of $1.00 per share with vesting commencing January 1, 1999 and continuing over a four year period. 3. Commencing January 1, 1999, you will receive compensation for your services at a mutually agreed upon rate, but not less than $100,000 per year, payable monthly on the regular paydays of Kosan. In determining your rate of compensation, Kosan will take into account, among other relevant factors the time you have devoted and will devote in the future to the funding of Kosan, including the establishment of strategic relationships, and the value you have brought to Kosan through such funding and strategic relationships. In addition, you will be eligible to receive bonus compensation in the discretion of the Board of Directors. Annual bonuses would normally be expected if Kosan is performing substantially in accordance with its operating plan. At any time during the term of this letter agreement you may, at your Consulting Agreement Chaitan Khosla December 7, 1998 Page #2 option, become an employee of Kosan. If you become a full time employee of Kosan, you shall be appointed to a senior executive position of Kosan as determined by the Board of Directors and your salary and bonus shall be commensurate with that position. You will be entitled to reimbursement of expenses incurred by you in connection with the services you render to Kosan in accordance with Kosan' expense reimbursement policies. 4. You agree that after February 26, 1996 any inventions, innovations, suggestions, ideas and reports made by you which are directly related to Kosan' business and result from services performed by you under this letter agreement or any prior consulting agreement between you and Kosan shall be promptly disclosed to Kosan and shall become the sole property of Kosan. Any patent applications or patents relating to the foregoing, and all rights pertaining thereto, are hereby assigned to Kosan. Appendix A describes items specifically excluded from this agreement. Kosan is aware that you are subject to the Patent Policy of the Stanford University which requires you to disclose to it any inventions made by you during your employment with the University. Kosan agrees that nothing contained in this agreement shall place you in conflict with your obligations under the University's Patent Policy. Kosan agrees, and you agree as well, to work cooperatively with the University to resolve any potential conflicts over rights to inventions and your obligations under the University's Patent Policy. 5. You agree that during the term of this Agreement and any subsequent extensions, and for a period of three years thereafter, you will not disclose or use, without prior written consent of Kosan, any Kosan confidential information. "Confidential information" in this context means all data, information, technology, or trade secrets (including all cell cultures, chemical materials or biological materials derived therefrom) relating to Kosan' technical programs or business plans, which you know or have reason to know is regarded as confidential by Kosan. This agreement does not apply to confidential information that (i) has become part of the public domain except by breadth of this agreement, (ii) that Kosan patented, published or otherwise disclosed, (iii) that you knew prior to its disclosure to you by Kosan, or (iv) that you learned from a source having no duty to Kosan. 6. You further agree that during the terms of this Agreement you will not disclose to Kosan any proprietary information, such as trade secrets, which is confidential to any third party or institution. 7. You agree that as a consultant you are not an employee of Kosan, but are instead, an independent contractor. Consulting Agreement Chaitan Khosla December 7, 1998 Page #3 8. You warrant that you are permitted to enter into this Agreement and that the terms are not inconsistent with present employment or other contractual agreements. 9. The term of this Agreement shall begin on the date hereof and shall continue through February 28, 2000, unless earlier terminated. The term of this agreement shall be automatically extended for an additional two year term unless either party gives written notice to the other to the contrary on or before November 30, 1999. Either party may terminate this letter agreement prior to the end of the initial term (or extended term, as applicable) upon thirty (30) days prior written notice to the other party. This letter agreement will terminate in the event of your death or permanent disability. Your permanent disability means your inability to perform any services for Kosan (including services performed away from the company's facilities) for a continuous period in excess of six months. 10. In the event that: (A)(i) Kosan enters a merger or other reorganization (as defined in Section 181 of the California Corporations Code) with or into another corporation or entity (except where California Corporations Code Section 1201(b) does not require the approval of the outstanding shares of Kosan with respect to such merger or other reorganization), (ii) Kosan sells all or substantially all of its assets, (iii) a person or entity makes a tender or exchange offer for and acquires 50% or more of the issued and outstanding voting securities of Kosan, or (iv) any person within the meaning of Section 3(a)(9) or Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires more than 50% of Kosan's issued and outstanding voting securities of Kosan, or (B)(i) you are not elected to the Board of Directors so long as you desire, (ii) Kosan is in material breach of the terms of this letter agreement and has not cured this breach within thirty days, or (iii) Kosan is bankrupt or insolvent, or (C) Kosan terminates this letter agreement without cause, then (1) Kosan will pay you the greater of (x) any remaining compensation payable during the initial term (or extended term, as applicable), or (y) an amount equal to two times your current annual compensation for the current year (the "Severance Payment") and (2) all of your stock options, stock awards and similar equity rights will immediately vest fully and become exercisable. Kosan will also be obligated to make the Severance Payment if you die or become permanently disabled and Kosan has not provided both life and disability insurance to you in the amount of $1,000,000. As used in this letter agreement, "cause" shall Consulting Agreement Chaitan Khosla December 7, 1998 Page #4 mean (i) any material breach of this letter agreement by you which is not cured within thirty days after notice of breach is provided to you by the Company, (ii) your conviction of a felony, or (iii) any action by you which in the reasonable judgment of Kosan constitutes dishonesty, larceny, fraud, deceit or gross negligence by you in the performance of your duties to Kosan or willful misrepresentation to shareholders, directors or officers of Kosan. If you are in agreement with the foregoing terms and conditions, please sign and date both original copies of this letter and return one to Kosan. Sincerely, /s/ Daniel V. Santi Kosan Biosciences Incorporated Daniel V. Santi President AGREED - ------ NAME: CHAITAN KHOSLA -------------- DATE: December 7, 1998 ---------------- APPENDIX A This Consulting Agreement between Kosan and Chaitan Khosla excludes the following U.S. patents: 1. "Enhancement of Cell Growth by Expression of a Cloned Hemoglobin Gene," filed in 1991 and owned by California Institute of Technology; and 2. "A Method of Generating Multiple Protein Variance and Populations of Protein Variance Prepared Thereby," filed in 1995 and owned by Stanford University. EX-10.6 8 ex-10_6.txt EXHIBIT 10.6 Exhibit 10.6 KOSAN Biosciences Inc. 211 Belgrave Avenue San Francisco, CA 94117 Tel: 415-665-4980 Fax: 415-665-3377 - -------------------------------------------------------------------------------- December 14, 1995 Dr. Chris Walsh Harvard Medical School Dept. of Biochemistry & Molecular Biology Boston, MA 02115 Dear Chris, KOSAN Biosciences Inc. (the "Company") desires to appoint you as a Scientific Associate effective as of January 1, 1996 under the following terms and conditions. I. EXPECTATIONS The Company is engaged in the business of, among other things, the discovery, design and development of pharmaceuticals, with the current focus in the area of Biosynthesis of Natural Products (the "Field"). As a Scientific Associate, it is anticipated that you will devote your time, intellect, and best efforts towards achieving the goals of the Company. During the term of the Agreement you may be involved in the following activities, among others, to further the goals of the Company: (a) consultation with representatives of the Company; (b) assessment or oversight of specific projects in which you have interest and expertise; (c) introduction of projects to be developed at or outside the Company; (d) assistance and advice to the Company in obtaining funding; (e) collaboration with the Company in projects of mutual interest; and (f) advice and assistance in the recruitment of personnel. Scientific Associates are more than consultants; they are partners in achieving the goal of establishing a premier and profitable Company. We expect that you will advise the Company in the areas of your professional expertise which relate or may relate to the Company. During the term of this agreement, you agree not to serve outside of KOSAN in a similar capacity as an employee, consultant, advisor, or otherwise to any other person or entity in the "Field", or with another small firm competive with business or scientific objectives of the Company (except for those relationships described in Exhibit A). You verify that your responsibilities and activities on behalf of your Employer (University or other not-for-profit institution by which you are employed on a substantially full time basis) are not circumscribed by this agreement. 1 December 14, 1995 Dr. Chris Walsh As a participating Scientific Associate, we expect that you will devote the equivalent of six to ten working days per year of service to the Company. II. COMPENSATION As full consideration for the services performed by you under this agreement, the Company agrees, subject to approval by the Board of Directors, to the following: 1. The Company will pay you a fee of $125 (one-hundred-twenty five-dollars) per hour but not to exceed $1,000 (one thousand dollars) per day for consultation at the Company's facility or at a location approved by the Company. You will not receive cash compensation for periodic telephone or other consultations not involving a significant amount of time which do not interfere with your other commitments, except as otherwise agreed upon in specific circumstances. 2. You and the Company will enter a Restricted Stock Purchase Agreement (the "Stock Agreement") providing for the purchase by you of 15,000 shares of the Company's Common Stock at a purchase price of $0.002 per share. The Stock Agreement, which includes vesting and a right of first refusal as defined in the Stock Agreement, shall govern the rights and obligations of you and the Company with respect to such stock. Of the 15,000 shares, 10,000 shares will vest monthly over a five year period so long as you remain a Scientific Associate of the Company. The remaining 5,000 shares will vest separately on a monthly basis so long as you do not serve as an employee, consultant, advisor, or otherwise to any other person or entity in the Field, or with another small firm competitive with business or scientific objectives of the Company (except for those relationships described in Exhibit A). Should you cease to be a Scientific Associate, or should you cease to be an exclusive consultant, the Company will have the right to repurchase the applicable unvested shares at your original purchase price. 3. You will be reimbursed for out-of-pocket expenses approved by the Company which you incur under the terms of this Agreement. These allowed expenses will be reimbursed in accordance with the Company's policy. 4. You agree that you are an independent contractor, not an employee of the Company. 5. The Company encourages additional participation. In addition to the 15,000 shares described above, the Company is prepared to offer you one or more options to purchase up to a total of 5,000 shares of the Company's Common Stock, as determined by the Company, in return for (a) time spent as a consultant which is substantially beyond the standard commitment of a Scientific Associate, (b) substantial involvement in the Company's efforts in areas of mutual interest, (c) the giving of substantial aid to the Company instrumental in obtaining financing. These additional areas are, of course, difficult to define and will be evaluated individually 2 December 14, 1995 Dr. Chris Walsh by the Company. However, the Company encourages your participation and seeks to acknowledge your participation with this incentive stock mechanism. Each option will vest monthly over a five year period beginning on the date the option is granted, and the exercise price will be the fair market value of the Company's Common Stock on the date of grant as determined by the board of directors. III. TERM AND TERMINATION The term of this agreement shall begin on the date first written above and shall terminate on December 31, 2000. Either party may terminate the Agreement by giving thirty (30) days written notice. This may occur, for example, if your pre-existing or future commitments prevent you from abiding with the terms of the Agreement. The Agreement can also be terminated "for cause", i.e., for misconduct or material breach of contract by you. Upon termination for any reason, you relinquish all rights to further vesting of stock and options in the Company. IV. CONFLICTS WITH PRESENT EMPLOYMENT The Company acknowledges that you are currently employed by and are a member of the faculty of a University or a non-profit research institution ("Employer"). Notwithstanding anything in this Agreement to the contrary, during the period of this Agreement, your being a member of the faculty of a University or non-profit research institution shall not be deemed a breach of your obligations under this Agreement if you do not engage in any commercial research or commercial project prohibited by the terms of this Agreement. The Company recognizes that in connection with your employment by your Employer, your primary responsibility is to the Employer. You warrant that you are permitted to enter into this agreement and that the terms are not inconsistent with your present employment or other contractual agreements. V. OTHER CONSULTING AGREEMENTS You agree that during the period in which you are retained as Scientific Associate to the Company you will not, without the Company's express written consent, except as permitted by this Section and Section IV, engage in any employment or activity (whether as an employee, consultant, adviser or otherwise) in any business competitive with the Company. The Company recognizes that you may currently have certain agreements to perform consulting services for others. You warrant that you have discussed with the Company all such obligations to third parties prior to signing this Agreement. Copies of any such agreements and/or the terms of such consulting services are attached hereto as Exhibit A. During the sixty (60) days following execution of this Agreement, the Company will review such agreements and services to determine whether they conflict wtih the terms of this Agreement. If the Board of Directors of the Company, in its sole discretion, determines that any such agreement or activity conflicts with this Agreement, you will be asked to terminate such agreement or activity to the extent you may lawfully 3 December 14, 1995 Dr. Chris Walsh do so. If you are unable to terminate or choose not to terminate such agreement or activity, the Company reserves the right to terminate this Agreement by giving you thirty (30) days written notice. The Company believes that you are most valuable to the Company as an exclusive consultant. If during the period of this Agreement you wish to enter into any additional agreement or activity which might conflict with the exclusive nature of the relationship between you and the Company or other terms of this Agreement, you agree that prior to entering into any additional agreement, you will submit the proposed terms of such additional agreement or activity to the Company for review. Within sixty (60) days of such submission, the Company will advise you whether the Board or Directors of the Company, in its sole discretion, determines that a conflict exists. If the Board of Directors so determines, you agree not to enter into such proposed agreement or activity. If you have a conflict of interest, or a potential conflict of interest, with respect to any matter presented at a meeting of the Scientific Advisory Board or in other interactions with the Company, you will state such, and excuse yourself from the discussion of such matter. VI. PATENTS AND CONFIDENTIALITY (1) You agree that any inventions, innovations, suggestions, methods, processes, improvements, ideas, and discoveries (called "Items") made or conceived, or reduced to practice, solely or jointly with others, in the course of providing services to the Company shall be promptly disclosed to the Company and shall become the sole property of the Company without obligation of the Company to pay any royalty or other consideration. You further agree that any such Items which relate to the Company's objectives made or conceived by you in other capacities, will be brought to the attention of the Company, and that you will support in good faith the Company's attempts to enter into agreements so the Company may use and obtain the rights to use such Items. The Company recognizes and will honor pre-existing agreements you may have made with your Employer or research funding agency regarding confidential information, providing such pre-existing agreements are disclosed in full to the Company prior to the signing of this Agreement. (2) You agree that during the term of this Agreement and any subsequent extensions, and for a period of five years thereafter, you will not disclose without prior written consent of the Company, any information confidential to it or its affiliate companies. "Confidential information" in this context means all data, information, or trade secrets (including all cell cultures, chemical or biological materials) relating to the Company's technical programs or business plans, which you know or have reason to know is regarded as confidential by the Company. This agreement does not apply to confidential information (i) that has become part of the public domain except by breach of the Agreement, (ii) that the Company patented or otherwise publicly disclosed, (iii) that was known by you prior to the date of its disclosure to you by the Company as shown by your written records, or (iv) that you 4 December 14, 1995 Dr. Chris Walsh received from a source having no duty of confidentiality to the Company, (v) that was a direct result of work performed in your laboratory on behalf of the Company, and regarding which you have given the Company written notice as provided in Section VII before publication or disclosure. (3) You further agree that during the term of this agreement you will not disclose to the Company any proprietary information, such as trade secrets, which is confidential to any third party. (4) At the Company's request, you will promptly return to the Company all confidential technical or business information or materials relating to the Company's business. Upon the Company's request, you will provide in writing detailed summaries of research or evaluation performed by you for the Company. (5) The Company acknowledges that you may have signed a Patent Agreement with your Employer and under that agreement you have agreed to report any inventions conceived or made by you during the term of your employment and to assign such inventions to your Employer in accordance with the terms of your Employer's policy. Nothing in this Agreement shall be construed to interfere with these obligations to your employer. A copy of your Employer's Patent Policy is attached hereto as Exhibit B and made a part of hereof by reference. VII. PUBLICATION. The Company and you anticipate that information and data resulting from any research you may perform in collaboration with the Company or on behalf of the Company will be published or otherwise disclosed when appropriate to do so. You agree to submit to the Company at least thirty (30) days prior to submission for publication or ninety (90) days before written or oral public disclosure of any and all such proposed publications or other disclosure. In a manner consistent with your Employer's policy, you further agree to delay publication of such information and data for a period not to exceed six (6) months, if the Company determines for business or proprietary reasons that such a delay is necessary. If the Company determines that such information and data contains information and data owned by the Company, you agree to remove such Company information and data from the proposed publication or disclosure upon the Company's request, whether or not such Company information and data is patentable. VIII. MODIFICATION OF THE AGREEMENT No modification of the Agreement shall be valid unless made in writing and signed by the parties hereto. 5 December 14, 1995 Dr. Chris Walsh IX. SEVERABLE PROVISIONS The provisions of this Agreement are severable, and if any one or more of the provisions of this Agreement are determined to be illegal, or otherwise unenforceable, in whole or in part, the remaining provisions and any partially enforceable provisions shall be binding and enforced. X. CAPTIONS The captions are used only for convenience and reference, and do not define, limit or describe the scopes or intent of the provisions hereof. XI. GOVERNING LAW This Agreement shall be governed and construed in accordance with laws of the State of California according to its meaning, and not in favor of or against any party. XII. ACCEPTANCE If you are in agreement with the foregoing terms and conditions, please sign and date both copies of this letter and appropriate appendixes and return one copy to KOSAN Biosciences, Inc. KOSAN BIOSCIENCES, INC. BY: /s/ DANIEL V. SANTI ----------------------------- Daniel V. Santi Chairman AGREED AND ACCEPTED Signature /s/ CHRISTOPHER WALSH ----------------------------------- Name: Christopher Walsh ----------------------------------- (Please Print) DATE: 19 Dec 1995 ----------------------------------- SOCIAL SECURITY NO.: ------------------------ 6 December 14, 1995 Dr. Chris Walsh KOSAN BIOSCIENCES INCORPORATED APPENDIX A SCIENTIFIC ASSOCIATE AGREEMENT Described below are my current employment, consulting and advisory commitments in the areas of my professional expertise. (Describe each person or entity to which a commitment has been made in the area of your professional expertise. Include name, subject matter, duration and approximate time commitment per month.) EMPLOYER(S): Harvard Medical School, Boston MA 02115 CONSULTING AND ADVISORY COMMITMENTS: 1. Hoffmann La Roche. Consulting in US & Europe on pharmaceutical research, since 1981.; 6 days/yr (0.5 days/month) 2. Idun (La Jolla, Ca). SAB member. Field: Programmed Cell Death since 1995; anticipate 6 days/yr (0.5 days/month). Discussions are underway with Venrock and Health Care Ventures for a possible advisory role to either organization for future health care investments and/or a directorship in one or more of their companies. I will advise Kosan in writing if I undertake such a commitment. /s/ CHRISTOPHER WALSH 12/19/95 - --------------------------------- --------------------- Signature of Scientific Associate Date Christopher Walsh - --------------------------------- Print Name 7 EX-10.7 9 ex-10_7.txt EXHIBIT 10.7 Exhibit 10.7 26 July 2000 HEADS OF AGREEMENT EPOTHILONE RESEARCH COLLABORATION AND LICENSE SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH & KOSAN BIOSCIENCES Whereas Kosan Biosciences ("Kosan") and Sloan-Kettering Institute for Cancer Research ("SKI") each have know-how, patents and technology relating to epothilone compounds; and Whereas Kosan and SKI desire to collaborate in the development of epothilone compounds for the treatment of cancer; Therefore, Kosan and SKI have set forth below in this Heads of Agreement the significant terms and conditions of a definitive license and collaboration agreement (the "Definitive Agreement") to be executed by them within one month of the effective date hereof. I. RESEARCH COLLABORATION Prior to signing the Definitive Agreement, the parties will agree on a written plan (the "Research Plan") describing the activities to be conducted by each party (the "Research") and the objectives thereof and budget therefor. The Research Plan shall provide that the parties will collaborate in the development of epothilone D ("EpoD") and one or more epothilone analogs proprietary to SKI (EpoD and SKI proprietary epothilone analogs are collectively referred to herein as "Collaboration Compounds") as anti-cancer agents. Neither party shall engage in research with third parties relating to Collaboration Compounds without the other party's approval. SKI will use its best efforts to continue its research efforts on Collaboration Compounds and conduct Phase I clinical trials with EpoD material produced with the support of the RAID award from NCI. Kosan shall pay all other costs for the Phase I clinical trials. Kosan will use its best efforts to develop a process for making EpoD and epothilone intermediates with the aim of establishing a process by which Collaboration Compounds can be made in quantities sufficient and at a reasonable cost for the completion of clinical trials and commercialization. Concurrently, Kosan will use its best efforts to produce EpoD or EpoD intermediates [**] to make EpoD at commercial levels. Kosan will prepare GMP-produced EpoD for Phase II clinical trials. In addition, the parties will collaborate to identify and conduct pre-clinical testing on one or more Collaboration Compounds as potential back-up development candidates for EpoD and as second-generation anti-cancer agents. Kosan may also provide its proprietary epothilone compounds to SKI for testing and clinical trials as mutually agreed by the parties. II. MANAGEMENT OF RESEARCH COLLABORATION General oversight and direction of the Research will be provided by a Joint Research Committee ("JRC") with 3 SKI members and 3 Kosan members, each of whom shall be actively engaged in managing the Research. The JRC shall meet quarterly over at least [**] of Research and at least bi-annually thereafter or as otherwise agreed by the parties. The JRC may meet by telephone conference, in person in New York at SKI or in California at Kosan or as otherwise agreed upon by the JRC. The JRC shall endeavor to make decisions on a consensus 1 [**]CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. basis. The JRC shall be responsible for making changes to the Research Plan based on the results of the Research and other factors. The JRC shall monitor the progress of the Research and shall be responsible for determining, at each quarterly meeting, whether each party is making satisfactory progress in achieving the objectives of the Research Plan. Should the JRC determine that satisfactory progress is not being made, it shall provide direction regarding the actions to be taken by either party in the following quarter to address any problems identified that impede such progress. Should the JRC determine, prior to the initiation of Phase II clinical trials using Kosan supplied materials, that such action has not been taken or that satisfactory progress cannot be made after such action has been taken, then the Definitive Agreement shall terminate. In the event of a dispute at the JRC, the matter in dispute shall be referred to the respective heads of each party, or their designee, for resolution. III. CONTRIBUTION OF THE PARTIES TO RESEARCH Kosan shall fund the Research to the extent the parties are unable to obtain grant or other funding for such activities. SKI and Kosan use best efforts to obtain funding from the NIH and other government agencies with which to support such Research and shall continue to apply any such existing funding supporting current activities that will continue as part of such Research. The Research Plan shall direct SKI to continue its efforts in the chemical synthesis of existing and new Collaboration Compounds and in the IN VITRO and IN VIVO testing of Collaboration Compounds in animals and humans. The Research Plan shall further direct the initiation and completion of a physician-sponsored Phase I clinical trial of EpoD at SKI in 2001. The Research Plan shall direct Kosan to contribute personnel, laboratory facilities, equipment, and supplies to conduct biological synthesis of Collaboration Compounds or related intermediates in amounts sufficient to conduct IN VITRO testing and IN VIVO testing in animals and humans and to manufacture any such approved epothilone product. The Research Plan shall further direct Kosan to provide EpoD in amounts sufficient to initiate Phase II clinical trials within three months of completion of the Phase I clinical trial. The parties anticipate that the Phase II clinical trials will begin [**]. IV. MANAGEMENT AND FUNDING OF DEVELOPMENT OF BACK-UP AND SECOND GENERATION COLLABORATION COMPOUNDS The parties acknowledge that EpoD may not, whether as a result of clinical trials or patent developments, be suitable for development. Kosan shall have the right to select one or more Collaboration Compounds for development as replacement or back-up candidates for EpoD and as second generation anti-cancer products. 2 [**]CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. V. COMMERCIALIZATION Kosan shall be responsible for commercialization activities relating to EpoD and any other Collaboration Compound approved for therapeutic use. Before filing an NDA, Kosan shall provide a Pre-Marketing Plan to SKI that describes its proposed commercialization activities for such compounds. Thereafter, Kosan shall provide annual reports summarizing its commercialization activities for each approved compound. Kosan shall have the right to sublicense one or more third parties to conduct marketing, sales and/or distribution activities for any such compound; provided, however, that SKI shall have the right to notify Kosan of third parties to which Kosan shall not grant sublicenses, because the activities of such third parties are incompatible with SKI's mission or inimical to its interests. VI. LICENSES Each party shall grant the other such licenses as are required for each party to conduct the Research. SKI shall grant Kosan an exclusive license, with the right to sublicense, under its patents, patent applications, and other intellectual property rights for making, using, and selling Collaboration Compounds for any use by Kosan and Kosan's sublicenses. The license granted to Kosan shall include due diligence requirements in developing a Collaboration Compound as a commercial product. In addition, if Kosan is not able to produce or otherwise provide EpoD in amounts sufficient to support clinical development pursuant to the Research Plan, then SKI will have the option to terminate the license. VII. THIRD PARTY AGREEMENTS Until the earlier of [**], SKI and Kosan shall make joint decisions regarding all third party agreements relating to EpoD or other Collaboration Compounds. After that time, Kosan has the right and sole discretion to sublicense SKI's patent and intellectual property rights to third parties; provided, however, that SKI shall have the right to notify Kosan of third parties to which Kosan shall not grants sublicenses, because the activities of such third parties are incompatible with SKI's mission or inimical to its interests. Kosan and SKI agree to negotiate in good faith with [**], to enter into a sublicense of SKI intellectual property rights under which [**] will be licensed to make, use, and sell [**] for the treatment of cancer. In such negotiations, [**] shall be required to provide to the JRC a development plan specifying the research to be conducted and a timeline for clinical trials, as well as the amounts of [**] required and the source(s) from which it will be obtained. If the JRC determines that sufficient [**] is available to conduct the [**] development plan, and that the [**] development plan does not jeopardize or pose a risk of serious delay to the Research, then the JRC shall approve the development plan. Kosan and SKI shall agree upon the business terms of a sublicense to [**] and negotiate diligently with [**] to conclude a sublicense to [**] of the date the JRC approves the [**] development plan. Such [**] sublicense shall include a timeline for the 3 [**]CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. development of the compound, with the right for Kosan to terminate such sublicense if development milestones are not met in accordance with the timeline, and such other terms and conditions as are commercially reasonable and agreed upon by SKI and Kosan. VIII. PAYMENTS In addition to funding research, development, and commercialization activities. Kosan shall make the following payments to SKI: Initial License Fee: $[**] Annual Maintenance Fees: $[**] prior to 1st commercial sale Minimum Annual Royalties: $[**] after 1st commercial sale; royalty payments, both minimum annual and on product sales, hereunder are to be paid, on a country-by-country basis, until the later of the expiration date of the last to expire SKI owned, solely or jointly with Kosan, patent claiming a Licensed Product (EpoD or any other Collaboration Compound marketed by Kosan) or its manufacture or use, or [**] years from the first commercial sale of a Licensed Product. Minimum annual royalties shall be fully creditable against royalties on product sales for the same fiscal year. Milestones: [**] Royalties: [**] of Net Sales if the Licensed Product is claimed in an issued and not expired patent owned by SKI, either solely or jointly with Kosan; 4 [**]CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 26 July 2000 [**]of Net Sales if the approved use for which the Licensed Product is marketed is claimed in an issued and not expired patent owned by SKI and the Licensed Product is not patented by a third party; [**]of Net Sales of any Licensed Product for which SKI holds an issued and not expired patent claiming the manufacture of such Licensed Product, which royalty rate shall apply in any country where the Licensed Product is sold provided the Licensed Product sold in that country was made using the patented method in the country where the patent issued; [**]of Net Sales of any Licensed Product in any country for which SKI has no patents claiming the Licensed Product or its manufacture or use, provided that the Licensed Product or its manufacture or use is patented by SKI in the US, EPO, or Japan. Sublicense For any sublicense of only SKI technology entered into prior to the earlier of [**], SKI shall receive [**] of all sublicensing proceeds, and Kosan shall receive the remainder. For any other sublicense, Kosan shall pay SKI [**] of the sublicensing proceeds, provided, however, that SKI's [**] share of any royalties shall not exceed the royalty that Kosan would have paid to SKI if Kosan marketed the Licensed Product. Sublicensing proceeds include both royalty and non-royalty income received by Kosan, including anything of value in lieu of cash payments, but excluding reimbursement for research and development, including clinical trial, expenses, equity (but not any premium thereon), and manufacturing costs (but not any profits therefrom) SKI shall have the right to audit Kosan's business records to verify that such expenses, premium, or costs reported by Kosan are accurate. In the event Kosan sublicenses SKI or Kosan technology as part of an agreement to license third party technology required to make, use, or sell a Licensed Product, then such agreement shall not be subject to the sharing of sublicensing proceeds specified hereunder. 3rd party royalties: Kosan may credit [**] royalty payments to 3rd parties for patents required to make, use, or sell a Licensed Product, provided, however, that SKI royalty or other payments shall not be reduced by [**]. Patents: Kosan shall reimburse SKI for all past and future patent expenses. Kosan shall assume primary responsibility for enforcing the patent rights. All costs of any action to enforce the patent rights shall be borne by Kosan, and Kosan shall keep any recovery of damages 5 [**]CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 26 July 2000 derived therefrom; the excess of such recovery over such costs shall be included in Net Sales. No settlement, consent judgment, or other voluntary final disposition of the suit may be entered into without the prior written consent of SKI, which consent shall not unreasonably be withheld. IX. COMMERCIALIZATION OF KOSAN EPOTHILONE TECHNOLOGY In the event that Kosan, by itself or its licensee, commercializes an epothilone product or commercializes technology for producing epothilones without utilization of SKI proprietary rights licensed hereunder ("Kosan Epothilone Technology"), then Kosan agrees to pay SKI a royalty on the sales by Kosan or its licensee of such product or any epothilone product made using such technology. If SKI performs pre-clinical and Phase I clinical testing of such epothilone product, then the royalty rate shall be [**] of such sales, regardless of whether Kosan or its licensee markets the product. If SKI does not perform such pre-clinical and Phase I clinical testing, then the royalty shall be [**] of such sales, regardless of whether Kosan or its licensee markets the product. In either event, such royalty shall be subject to the third party royalty credit set forth in Section VIII. No other payments of any type or kind shall be due SKI for the commercialization of Kosan Epothilone Technology by Kosan or its licensee. X. Use of Name Kosan and SKI agree that this Agreement and the contents therein shall be maintained in confidence by the parties and shall not be shared with any third party who is not interested in receiving a sublicense without the express written permission of both SKI and Kosan. Kosan shall not use the names of the SKI, or Memorial Sloan Kettering Cancer Center, nor any of its employees, nor any adaptation thereof in any fund-raising, advertising, promotional or sales literature without prior written consent obtained from SKI in each case. XI. FINAL AGREEMENT The foregoing terms and provisions of this Heads of Agreement shall be included in the Definitive Agreement to be negotiated and signed by the parties hereto within [**], the effective date hereof. 6 [**]CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 26 July 2000 Each party agrees to negotiate diligently to complete such Definitive Agreement within such time. Sloan-Kettering Institute for Cancer Kosan Biosciences, Inc. Research By: /s/ James S. Quirk By: --------------------------------- ------------------------------ James S. Quirk Daniel V. Santi, Ph.D. Sr. Vice President, Research Resources C.E.O. Management Date: 7/26 , 2000 Date: , 2000 ------------------------- ---------------------- 7 26 July 2000 Each party agrees to negotiate diligently to complete such Definitive Agreement within such time. Sloan-Kettering Institute for Cancer Kosan Biosciences, Inc. Research By: /s/ James S. Quirk By: /s/ Daniel V. Santi --------------------------------- ------------------------------ James S. Quirk Daniel V. Santi, Ph.D. Sr. Vice President, Research Resources C.E.O. Management Date: 7/26 , 2000 Date: 7/31 , 2000 ------------------------- ---------------------- 7 EX-10.11 10 ex-10_11.txt EXHIBIT 10.11 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 10.11 RESEARCH AND LICENSE AGREEMENT BETWEEN KOSAN BIOSCIENCES, INC. AND ORTHO-MCNEIL PHARMACEUTICAL CORPORATION AND THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE September 28, 1998 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 -- DEFINITIONS -2- ARTICLE 2 -- RESEARCH -11- ARTICLE 3 -- SCREENING BY LICENSEE -19- ARTICLE 4 -- LICENSES -24- ARTICLE 5 -- DEVELOPMENT AND COMMERCIALIZATION -29- ARTICLE 6 -- LICENSE FEES AND MILESTONE PAYMENTS -32- ARTICLE 7 -- ROYALTIES, RECORDS AND REPORTS -34- ARTICLE 8 -- SUPPLY OF PRODUCTS -37- ARTICLE 9 -- CONFIDENTIALITY -38- ARTICLE 10 -- REGULATORY MATTERS -40- ARTICLE 11 -- PATENT INFRINGEMENT -41- ARTICLE 12 -- INTELLECTUAL PROPERTY -42- ARTICLE 13 -- PUBLICITY -45- ARTICLE 14 -- WARRANTIES AND REPRESENTATIONS -45- ARTICLE 15 -- STANFORD LICENSE -47- ARTICLE 16 -- TRADEMARKS -47- ARTICLE 17 -- INDEMNIFICATION -48- ARTICLE 18 -- BANKRUPTCY -49- ARTICLE 19 -- TERM AND TERMINATION -49- ARTICLE 20 -- ASSIGNMENT -53- ARTICLE 21 -- DISPUTE RESOLUTION -54- ARTICLE 22 -- MISCELLANEOUS -57-
RESEARCH AND LICENSE AGREEMENT This RESEARCH AND LICENSE AGREEMENT (hereinafter called the "AGREEMENT"), made as of September 28, 1998 by and between KOSAN BIOSCIENCES, INC., a corporation organized under California law having its principal office at 1450 Rollins Road, Burlingame, California 94010 (hereinafter called "KOSAN"); ON THE ONE HAND, AND: ORTHO-MCNEIL PHARMACEUTICAL, INCORPORATED (hereinafter called "ORTHO"), a company organized under Delaware law, having its principal office at U.S. Route 202, Raritan, New Jersey 08869; and the R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE (hereinafter called "RWJPRI"), a division of Ortho-McNeil Pharmaceutical, Incorporated, having its principal office at U.S. Route 202, Raritan, New Jersey 08869 (ORTHO and RWJPRI hereinafter collectively called "LICENSEE") ON THE OTHER HAND, WITNESSETH: A. WHEREAS, KOSAN has an on-going RESEARCH PROGRAM in the FIELD (as defined below) and has developed certain technology useful in the FIELD to which it has the right to grant licenses; B. WHEREAS, patent applications have been filed in the name of KOSAN in the United States and other territories for the granting of letters patent relating to certain polyketides which may have activity within the FIELD; C. WHEREAS, LICENSEE has been engaged in research efforts focused on the development of new antibacterials and has certain research, development and commercialization capabilities in the FIELD; D. WHEREAS, KOSAN and RWJPRI desire to engage in collaborative research to conduct a drug discovery program as generally described in the RESEARCH PLAN attached hereto as Exhibit A; E. WHEREAS, LICENSEE is prepared to undertake a program for the development, manufacture and sale of PRODUCTS developed from the collaborative research, provided that LICENSEE is able to obtain a license under the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW (as hereinafter defined) with exclusivity to protect its investment in such program; F. WHEREAS, KOSAN recognizes that LICENSEE requires such a license in order to justify the investment in funding and personnel needed to develop and market products developed from the collaborative research and is willing to grant such rights. NOW, THEREFORE, in consideration of the premises and the performance of the covenants herein contained, IT IS AGREED AS FOLLOWS: ARTICLE 1 -- DEFINITIONS For the purposes of this AGREEMENT and solely for such purposes, the terms hereinafter set forth shall have the following respective meanings: 1.1 "AFFILIATE" or "AFFILIATES" shall mean any corporation(s) or organization(s) which directly or indirectly CONTROLS, is (are) CONTROLLED by, or is (are) under common CONTROL with LICENSEE or KOSAN. 1.2 "ANTIBIOTIC ACTIVITY" shall mean [**]. 1.3 "ANTI-INFLAMMATORY ACTIVITY" shall mean [**]. 1.4 "AROMATIC POLYKETIDE" shall mean [**]. 1.5 "BULK PRODUCT" shall mean the purified active ingredient, or purified intermediate for manufacture of any PRODUCT, as the case may be, in bulk form. 1.6 "CLOSE STRUCTURAL ANALOG" shall mean, with respect to a [**] which is designated a LICENSED COMPOUND pursuant to Section 3.5, another [**] , as the case may be, which (i) is claimed in a patent application or patent within the PATENT RIGHTS which claims the applicable LICENSED COMPOUND, and is in the same chemical genus as the applicable LICENSED COMPOUND and (ii) has activity against the same molecular target as the LICENSED COMPOUND, which activity shall be (x) if activity other than [**], at a level agreed by the parties at the time the corresponding [**] -2- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] is designated a LICENSED COMPOUND, or (y) if [**], shall be at the level specified in the RESEARCH PLAN, at the time the corresponding [**] is designated a LICENSED COMPOUND. 1.7 "COMMITTED FTEs" shall mean, with respect to a particular PROJECT, those KOSAN FTEs for which LICENSEE will provide RESEARCH FUNDING as set forth in the RESEARCH PLAN to conduct such PROJECT until the applicable DECISION POINT for such PROJECT as set forth in Section 2.6. 1.8 "CONTINGENT FTEs" shall mean, with respect to a particular PROJECT, those KOSAN FTEs for which LICENSEE will provide RESEARCH FUNDING as set forth in the RESEARCH PLAN to conduct CONTINGENT WORK for such PROJECT if the LICENSEE makes a GO DECISION at the applicable DECISION POINT(s), or otherwise elects to proceed with the CONTINGENT WORK for such PROJECT as set forth in Section 2.6. 1.9 "CONTINGENT WORK" shall mean research conducted by CONTINGENT FTEs. 1.10 "CONTRACT YEAR" shall mean any twelve (12) consecutive month period beginning with the EFFECTIVE DATE of the AGREEMENT. 1.11 "CONTROL", "CONTROL(S)" or "CONTROLLED" shall refer to direct or indirect beneficial ownership of at least fifty percent (50%) of the voting stock of a corporation or other business entity, or a fifty percent (50%) or greater interest in the income of such corporation or other business entity, or the power to direct or cause the direction of the management or policies of such corporation or other business entity whether by ownership of voting securities, by contract or otherwise, or such other relationship as, in fact, constitutes actual control. 1.12 "CPI" shall mean the Consumer Price Index, All Urban Consumers, as published by the U.S. Bureau of Labor Statistics. 1.13 "DECISION POINT(S)" shall mean with respect to a particular PROJECT, the point at which LICENSEE must elect by notice to KOSAN to provide for funding the CONTINGENT WORK for such PROJECT (a "GO DECISION"), or discontinue the PROJECT and not support further research with respect to such PROJECT (a "NO-GO DECISION"), subject to Section 2.6.3. 1.14 "DERIVATIVE" shall mean a compound which (i) results from a chemical synthesis program based on a LICENSED COMPOUND, or (ii) is based on structure-function data derived from one or more LICENSED COMPOUNDS, which data is not in the public -3- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. domain as a result of a disclosure (x) by a THIRD PARTY, (y) by KOSAN (solely or jointly with LICENSEE), or (z) in a patent application owned solely by LICENSEE, in each case prior to the time the applicable compound is synthesized or acquired, or (iii) is synthesized or acquired by LICENSEE using KOSAN KNOW-HOW or KOSAN PATENT RIGHTS or any biological materials provided to LICENSEE by KOSAN or any progeny or derivative thereof, or (iv) is claimed or contained within a chemical genus, as defined in any issued VALID CLAIM within the PATENT RIGHTS, or in a VALID CLAIM within the PATENT RIGHTS of a pending application for such a patent which application is being prosecuted in good faith, and as to which one member of such chemical genus is within (i), (ii) or (iii) above. For purposes of determining whether a given composition is a DERIVATIVE, it is understood that a compound which meets one or more of the foregoing criteria and is discovered, identified, synthesized or acquired on or before the CUTOFF DATE, shall be included as a DERIVATIVE notwithstanding whether the composition was identified by LICENSEE as being active after the end of the RESEARCH PROGRAM. For purposes of this Section 1.14, the CUTOFF DATE shall mean: (i) if the RESEARCH PROGRAM continues for at least two (2) years, the date two (2) years after the end of the NON-EXCLUSIVE SCREENING PERIOD, (ii) if the EXCLUSIVE SCREENING PERIOD and the NON-EXCLUSIVE SCREENING PERIOD terminate pursuant to Section 19.1.3, the date two (2) years after the effective date of any such termination, and (iii) if the entire AGREEMENT terminates prior to the second anniversary of the EFFECTIVE DATE, the date two years after the effective date of any such termination. "DERIVATIVE" shall include any compound synthesized based on, or derived from, another DERIVATIVE, as described in subsections (i) through (iv) above. Notwithstanding the above, DERIVATIVE shall not include any compound which is conceived and synthesized by or on behalf of LICENSEE after the CUTOFF DATE, unless such compound is within the scope of a patent within the KOSAN PATENT RIGHTS or RWJPRI PATENT RIGHTS which (i) was issued as of the CUTOFF DATE, or (ii) issued from a patent application pending as of the CUTOFF DATE (or a division or continuation of such an application), and issued after such date. 1.15 "DESIGNATION NOTICE" shall have the meaning set forth in Section 3.5. 1.16 "DEVELOPMENT" shall mean all work involved in STAGES O, I, II, and III for a PRODUCT in any country or territory. 1.17 "DEVELOPMENT PLAN" shall mean the plan for DEVELOPMENT of a PRODUCT pursuant to Article 5. 1.18 "EFFECTIVE DATE" shall mean the date at the head of this AGREEMENT. 1.19 "EXCLUDED TECHNOLOGY" shall mean any intellectual property owned or controlled by KOSAN or its AFFILIATES relating to the creation, or generation of [**] or their genes, the practice of combinatorial biosynthesis or cell-free enzymatic synthesis to make [**] -4- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**]. It is understood that EXCLUDED TECHNOLOGY shall not include intellectual property necessary for RWJPRI to make chemical modifications of the [**] prepared by KOSAN or for RWJPRI to otherwise carry out its activities pursuant to the RESEARCH PLAN during the RESEARCH TERM, to conduct process development and strain selection research with cells provided to RWJPRI by KOSAN for the production of [**], to produce LICENSED PRODUCTS for DEVELOPMENT and commercialization purposes, and to characterize, evaluate and test such LICENSED PRODUCTS. 1.20 "EXCLUSIVE SCREENING PERIOD" shall mean the period commencing on the EFFECTIVE DATE and ending one (1) year after the end of the RESEARCH PROGRAM. 1.21 "FDA" shall mean the United States Food and Drug Administration. 1.22 "FIELD" shall mean the treatment of bacterial infections for all human and animal pharmaceutical applications. 1.23 "FINISHED PRODUCT" shall mean the finished pharmaceutical form, in any formulation, of a PRODUCT packaged for sale to a THIRD PARTY. 1.24 "FTE" shall mean a full time scientific person with appropriate academic credentials and training dedicated to the RESEARCH PROGRAM or in the case of less than a full-time dedicated scientific person, a full-time, equivalent scientific person year (based upon a total of fifty-two (52) weeks or two thousand eighty (2080) hours per year, with the foregoing including all working days and vacations, paid holidays, sick days, etc., consistent with KOSAN's normal business practices) of scientific work, on or directly related to the RESEARCH, carried out by such a person. Included are research scientists (Ph.D. or equivalent) and their associates (MS or BS). Excluded are project management personnel, administrative facilities support, general information and computer support, laboratory support and other internal or external support personnel involved in the RESEARCH PROGRAM. 1.25 "IND" shall mean an Investigational New Drug Application filed pursuant to the requirements of the FDA as more fully defined in 21 C.F.R. Section 312.3 or its equivalent in any MAJOR MARKET COUNTRY or in the European Economic Community. 1.26 "JDAC" shall mean the Joint Development Advisory Committee described in Section 5.1.1 below. 1.27 "JRC" shall mean the Joint Research Committee described in Section 2.3.1 below. 1.28 "KNOW-HOW" shall mean all information, not generally known to the public, including techniques and data, including but not limited to, screens, models, methods, assays, -5- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. inventions, discoveries, trade secrets, improvements, and technical information, together with all experience, data, formulas, procedures and results, and including all chemical, pharmacological, toxicological, clinical, analytical and quality control data, in each case, which is necessary or materially useful in the development, manufacturing or use of LICENSED COMPOUNDS or PRODUCTS. Notwithstanding the foregoing, KNOW-HOW shall not include any biological materials or the subject matter covered by any published patent or patent application. 1.29 "KOSAN KNOW-HOW" shall mean all KNOW-HOW which (i) KOSAN owns as of the EFFECTIVE DATE, and which relates to the FIELD, or (ii) is developed by KOSAN in performance of the RESEARCH PROGRAM during the RESEARCH TERM. It is understood and agreed that the KOSAN KNOW-HOW shall not include any EXCLUDED TECHNOLOGY. 1.30 "KOSAN PATENT RIGHTS" shall mean (i) the patents and patent applications identified in Exhibit C hereof, and in respect of such letters patent, and patent applications, all corresponding Patent Co-operation Treaty applications, European Patent Convention applications or applications under similar administrative international conventions and corresponding national patents and patent applications, together with any divisional, continuation, (but not a continuation-in-part except to the extent described in (ii) or (iii) below), substitution, reissue, extension, supplementary protection certificate or other application based thereon; and (ii) other patents or patent applications to the extent they disclose and claim inventions made by KOSAN in performance of the RESEARCH PROGRAM, and (iii) any other patents or patent applications containing one or more claims covering the manufacture, use or sale of a PRODUCT to the extent such patents or patent applications disclose and claim inventions made by KOSAN during the EXCLUSIVE SCREENING PERIOD, in each case, which is necessary or materially useful for the development, manufacture or use of LICENSED COMPOUNDS or PRODUCTS, and which KOSAN has rights to grant licenses to (e.g., have not been developed in the course of an exclusive collaboration with a THIRD PARTY or exclusively licensed to a THIRD PARTY). It is understood and agreed that the KOSAN PATENT RIGHTS shall not include any EXCLUDED TECHNOLOGY. 1.31 "LICENSED COMPOUND" shall mean a particular [**], as the case may be, with respect to which RWJPRI has provided a DESIGNATION NOTICE and acquired an exclusive license pursuant to Section 3.5. For purposes of this AGREEMENT, each CLOSE STRUCTURAL ANALOG of any such LICENSED COMPOUND shall also be deemed to be a LICENSED COMPOUND. 1.32 "MACROLIDE(S)" shall mean [**], in each case, which are actually -6- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. utilized in connection with the RESEARCH PROGRAM that (i) exist in KOSAN's proprietary compound library as of the EFFECTIVE DATE; or (ii) are synthesized or acquired by or on behalf of KOSAN or LICENSEE in connection with the RESEARCH PROGRAM. 1.33 "MAJOR MARKET COUNTRY" shall mean each of the United States, United Kingdom, Germany, France, Italy, Spain or Japan. 1.34 "MARKETING AUTHORIZATION" shall mean all allowances and approvals (including pricing and reimbursement approvals) granted by the appropriate federal, state and local regulatory agencies, departments, bureaus or other governmental entities within a country necessary to market and SELL PRODUCT. 1.35 "MOTILIDE ACTIVITY" shall mean [**]. 1.36 "NCE" shall mean a MACROLIDE which has ANTIBIOTIC ACTIVITY in accordance with criteria set forth in the RESEARCH PLAN. 1.37 "NDA" shall mean a New Drug Application and any supplements filed pursuant to the requirements of the FDA, including all documents, data and other information concerning the PRODUCT which are necessary for or included in, FDA approval to market such PRODUCT as more fully defined in 21 C.F.R. section 314.50 ET SEQ., as well as equivalent submissions to the appropriate health authorities in other countries. 1.38 "NET SALES" shall mean the revenue billed by ORTHO or an AFFILIATE or SUBLICENSEE from the sale of PRODUCTS to independent THIRD PARTIES, less the following amounts: (i) discounts, including cash discounts, or rebates, including rebates to governmental agencies such as Medicaid rebates and the like, actually allowed or granted, (ii) credits or allowances actually granted upon claims or returns regardless of the party requesting the return, (iii) freight charges paid for delivery, (iv) taxes or other governmental charges levied on or measured by the billed amount, when included in billing, as adjusted for rebates and refunds, and (v) provisions for uncollectible amounts determined in accordance with U.S. Generally Accepted Accounting Practices, consistently applied to all products of the selling party. A "sale" shall include any transfer or other disposition for consideration, and NET SALES shall include the fair market value of all other consideration received by LICENSEE or its AFFILIATES or SUBLICENSEES in respect of any grant of rights to make, use, sell or otherwise distribute PRODUCTS, whether such consideration is in cash, payment in kind, exchange or another form. In the case of discounts on "bundles" of products or services which include PRODUCTS, ORTHO may with notice to KOSAN calculate NET SALES by discounting the bona fide list -7- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. price of a PRODUCT by the average percentage discount of all products of ORTHO and/or its AFFILIATES or SUBLICENSEES in a particular "bundle", calculated as follows: Average percentage discount on a = (1 - A/B) x 100 particular "bundle" where A equals the total discounted price of a particular "bundle" of products, and B equals the sum of the undiscounted bona fide list prices of each unit of every product in such "bundle." ORTHO shall provide KOSAN documentation, reasonably acceptable to KOSAN, establishing such average discount with respect to each "bundle." If ORTHO cannot so establish the average discount of a "bundle", NET SALES shall be based on the undiscounted list price of the PRODUCT in the "bundle." If a PRODUCT in a "bundle" is not sold separately and no bona fide list price exists for such PRODUCT, the parties shall negotiate in good faith an imputed list price for such PRODUCT, and NET SALES with respect thereto shall be based on such imputed list price. In the event that PRODUCTS are sold in the form of combination products containing one or more active ingredients other than the PRODUCT, NET SALES for such combination products will be calculated by multiplying actual NET SALES of such combination products by the fraction A/(A+B) where A is the invoice price of the PRODUCT if sold separately, and B is the total invoice price of any other active component or components in the combination, if sold separately by LICENSEE or an AFFILIATE OR SUBLICENSEE. If on a country-by-country basis the other active component or components in the combination are not sold separately in said country by the LICENSEE or an AFFILIATE or SUBLICENSEE, NET SALES, for the purpose of determining royalties on the combination products shall be calculated by multiplying actual NET SALES of such combination products by the fraction A/C where A is the invoice price of the PRODUCT if sold separately and C is the invoice price of the combination product. If on a country-by-country basis neither the PRODUCT nor the combination product is sold separately in said country by the LICENSEE or an AFFILIATE or SUBLICENSEE, NET SALES for purposes of determining royalties on the combination products shall be reasonably allocated between the LICENSED PRODUCT and the other active components based on their relative value as determined by the parties in good faith. 1.39 "NON-EXCLUSIVE SCREENING PERIOD" shall mean the period commencing on the EFFECTIVE DATE and continuing until three (3) years after the end of the EXCLUSIVE SCREENING PERIOD. -8- 1.40 "PATENT RIGHTS" shall mean all United States and foreign patents (including all reissues, extensions, substitutions, confirmations, re-registrations, re-examinations, revalidations and patents of addition) and patent applications (including, without limitation, all continuations, continuations-in-part and divisions thereof) in each case, claiming an invention which is necessary or useful for the design, development, testing, use, manufacture or sale of LICENSED COMPOUNDS or PRODUCTS. 1.41 "PHASE I", "PHASE II", and "PHASE III" shall mean Phase I (or Phase I/II), Phase II, and Phase III clinical trials, respectively, in each case as prescribed by the regulations of the applicable government agency or other regulatory entity. 1.42 "PRODUCT" shall mean any pharmaceutical product containing a LICENSED COMPOUND or a DERIVATIVE thereof which is selected for DEVELOPMENT and/or marketing by LICENSEE or its AFFILIATES or SUBLICENSEES. 1.43 "PROJECT" shall mean each of the Fast Track Project and the SAR Project. 1.44 "RESEARCH FUNDING" shall mean the funding to be paid by RWJPRI to KOSAN for the conduct of the RESEARCH PROGRAM. 1.45 "RESEARCH PLAN" shall have the meaning described in Section 2.2 hereof and shall be attached as Exhibit A. 1.46 "RESEARCH PROGRAM" shall mean all research and development performed in the course of performing the PROJECTS pursuant to the RESEARCH PLAN during the RESEARCH TERM. 1.47 "RESEARCH TERM" shall mean the period set forth in Section 2.5 hereunder, unless this AGREEMENT or the RESEARCH TERM is earlier terminated under Article 19 below. 1.48 "RESERVED COMPOUND" shall mean a [**] that is designated by RWJPRI pursuant to Section 3.5.6 below. 1.49 "RWJPRI KNOW-HOW" shall mean such KNOW-HOW which RWJPRI or ORTHO or its AFFILIATE discloses to KOSAN under this AGREEMENT. 1.50 "RWJPRI PATENT RIGHTS" shall mean any patents and patent applications, including all corresponding Patent Co-operation Treaty applications, European Patent Convention applications or applications under similar administrative international conventions, and corresponding national patents and patent applications, together with any divisional, continuation, continuation-in-part, substitution, reissue, extension, supplementary protection -9- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. certificate or other application based thereon, owned or controlled by LICENSEE or its AFFILIATES, and to which LICENSEE or its AFFILIATES has the ability to grant a license or sublicense to without violating the terms of any agreement with any THIRD PARTY. 1.51 "SELLER" shall mean one who SELLS. 1.52 "SOLD," "SALE," "SALES," "SELL," "SELLING" and "SELLS" shall refer to the act of selling or disposing of for value. 1.53 "STAGE O" shall mean that portion of the DEVELOPMENT program which starts with the selection of a LICENSED COMPOUND for development into a PRODUCT under Article 5 hereunder and which generally provides for toxicological and pharmacological studies as well as drug substance and drug product formulation and manufacturing development necessary to obtain the permission of regulatory authorities to begin and continue human clinical testing. 1.54 "STAGE I" shall mean that portion of the DEVELOPMENT program which provides for the first introduction into humans of a PRODUCT with the purpose of determining safety, metabolism, absorption, elimination and other pharmacological action in humans as well as additional development work on animal toxicity, metabolism, drug substance and drug product formulation and manufacturing development to ensure continuation of human clinical testing. 1.55 "STAGE II" shall mean that portion of the DEVELOPMENT PROGRAM which provides for the initial trials of PRODUCT on a limited number of patients for the purposes of determining dose and evaluating safety and preliminary efficacy data in the proposed therapeutic indication as well as additional development work on animal toxicity, metabolism, drug substance and drug product formulation and manufacturing development to ensure continuation of human clinical testing. 1.56 "STAGE III" shall mean that portion of the DEVELOPMENT PROGRAM which provides for continued trials of PRODUCT on sufficient numbers of patients to establish the safety and efficacy of a PRODUCT to support MARKETING AUTHORIZATION in the proposed indication. In addition, all other development work on animal toxicity, metabolism, drug substance and drug product formulation and manufacturing development will be finalized in STAGE III. 1.57 "STANFORD LICENSE" shall mean that certain License Agreement effective as of March 11, 1996, as amended March 31, 1996, entered by and between KOSAN and the Board of Trustees of Leland Stanford Jr. University. -10- 1.58 "SUBLICENSEE" shall mean, with respect to a particular PRODUCT, a THIRD PARTY to whom LICENSEE has granted a licensee or sublicense to make and sell such PRODUCT. As used in this AGREEMENT, "SUBLICENSEE" shall also include a THIRD PARTY to whom LICENSEE has granted the right to distribute such PRODUCT, provided that such THIRD PARTY is responsible for marketing or promoting such PRODUCTS within the applicable territory. 1.59 "THIRD PARTY" shall mean any party other than KOSAN or LICENSEE or AFFILIATES of either of them. 1.60 "USE," "USES" and "USED" shall refer to the act of using for any commercial purposes whatsoever. 1.61 "VALID CLAIM" shall mean a claim of an issued, unexpired patent, or a claim being prosecuted in a pending patent application, in each case, which is within the PATENT RIGHTS. A claim of an issued, unexpired patent shall be presumed to be valid unless and until it has been held to be invalid by a final judgement of a court of competent jurisdiction from which no appeal can be or is taken. For the purposes of royalty determination and payment under Article 6 hereof, any claim being prosecuted in a pending patent application for a period of up to five (5) years from the filing date of such application shall be deemed to a VALID CLAIM, provided, that each claim in such an application shall again become a VALID CLAIM when and if a patent issues thereon. ARTICLE 2 -- RESEARCH 2.1 RESEARCH PROGRAM. Subject to the terms and conditions herein, KOSAN hereby agrees to conduct the RESEARCH PROGRAM in collaboration with RWJPRI with a goal of discovering, identifying and synthesizing LICENSED COMPOUNDS for DEVELOPMENT by RWJPRI into one or more PRODUCTS for commercialization by ORTHO, an AFFILIATE or SUBLICENSEE. 2.2 RESEARCH PLAN. The RESEARCH PROGRAM shall be conducted in accordance with the overall RESEARCH PLAN attached hereto as Exhibit A, as may be amended from time to time with the agreement of the parties. 2.3 MANAGEMENT. 2.3.1 JRC. The parties shall establish a Joint Research Committee ("JRC") within thirty (30) days of the EFFECTIVE DATE to administer the RESEARCH PROGRAM. Each party shall present one consolidated view and have one vote on any issue. All decisions of the JRC must be unanimous. -11- 2.3.2 MEMBERSHIP. The JRC shall include three (3) representatives of each of LICENSEE and KOSAN, each Party's members selected by that party. KOSAN and LICENSEE may each replace its JRC representatives at any time, upon written notice to the other party. From time to time, the JRC may establish subcommittees, to oversee particular projects or activities, and such subcommittees will be constituted as the JRC agrees. 2.3.3 MEETINGS; MINUTES. During the EXCLUSIVE SCREENING PERIOD, the JRC shall meet at least quarterly, or more frequently as agreed by the parties, at such locations as the parties agree, and will otherwise communicate regularly by telephone, electronic mail, facsimile and/or video conference. With the consent of the parties, other representatives of KOSAN or LICENSEE may attend JRC meetings as nonvoting observers. Each party shall be responsible for all of its own expenses associated with attendance of such meetings. The first meeting of the JRC shall occur within forty-five (45) days after the EFFECTIVE DATE. The JRC shall prepare written minutes of each JRC meeting and a written record of all JRC decisions, whether made at a JRC meeting or otherwise. A written record shall be provided to each party by the presenting party of all materials presented at meetings of the JRC. 2.3.4 FUNCTIONS OF THE JRC. The JRC shall be responsible for managing the RESEARCH PROGRAM. In carrying out this function, the JRC will: (i) oversee directed research activities to be undertaken under the RESEARCH PROGRAM in accordance with the RESEARCH PLAN, which will specify the details by which the parties will conduct the Research; (ii) review progress of the RESEARCH PROGRAM, revise the RESEARCH PLAN as it deems appropriate, set priorities for research activities, review results achieved, and provide general guidance to assist the overall program in meeting its objective of fostering successful identification of LICENSED COMPOUNDS for DEVELOPMENT by RWJPRI; (iii) advise RWJPRI regarding the selection of LICENSED COMPOUNDS for full DEVELOPMENT under Article 5; (iv) attempt to settle disputes or disagreements between the parties regarding the performance of the RESEARCH PROGRAM hereunder; (v) approve any material agreements with THIRD PARTIES to be made by KOSAN related to performance of the RESEARCH PROGRAM under this AGREEMENT; and (vi) perform such other functions as are appropriate to further the purposes of this AGREEMENT as determined by the parties. -12- 2.3.5 DISPUTE RESOLUTION. If the JRC fails to reach unanimous agreement on any issue being considered by the JRC, and which after a reasonable amount of discussion between the JRC representatives of RWJPRI and KOSAN cannot be resolved, the issue will be referred to the Chief Executive Officer of KOSAN and the Vice President, Drug Discovery, RWJPRI, for resolution. If there is no resolution of the issue at that level, and the issue pertains to the RESEARCH PLAN, the status quo as reflected in the last previous approved RESEARCH PLAN shall remain in effect. If the issue pertains to making a Go/No-GO DECISION for a given PROJECT, RWJPRI shall make the final determination. 2.3.6 INFORMATION AND ACCESS. KOSAN and RWJPRI shall provide the JRC, its members and authorized representatives with reasonable access during regular business hours to all records and documents relating to the performance of this AGREEMENT which it reasonably may request in order to perform its obligations hereunder; provided that if such documents are under a bona fide obligation of confidentiality to a THIRD PARTY, KOSAN or RWJPRI, as the case may be, may withhold access thereto to the extent necessary to satisfy such obligation. 2.4 RESPONSIBILITIES. 2.4.1 REASONABLE EFFORTS. RWJPRI and KOSAN shall each use reasonable efforts to conduct the RESEARCH PROGRAM in a professional manner in accordance with the applicable RESEARCH PLAN within the time schedules contemplated therein. 2.4.2 RESOURCES. Each party agrees to commit the personnel, facilities, expertise and other resources necessary to perform its obligations under the RESEARCH PLAN; provided, however, that neither party warrants that the RESEARCH PROGRAM shall achieve any of the research objectives contemplated by them. 2.4.3 KOSAN RESEARCH EFFORTS. KOSAN agrees to commit to the RESEARCH PROGRAM such efforts as are specified in the RESEARCH PLAN, to maintain and utilize the scientific staff, laboratories, offices and other facilities consistent with such undertaking, and to reasonably cooperate with RWJPRI in the conduct of the RESEARCH PROGRAM. KOSAN agrees that, on average for each twelve (12) month period during the RESEARCH TERM, KOSAN shall dedicate FTEs to each phase of each PROJECT and the RESEARCH PROGRAM as specified the RESEARCH PLAN. 2.4.4 SUBCONTRACTORS. KOSAN may have work performed by THIRD PARTY collaborators as provided in the RESEARCH PLAN or otherwise approved by the JRC. 2.4.5 INFORMATION AND REPORTS. (a) DISCLOSURES. -13- (i) Each party will make available and use all reasonable efforts to disclose to the other party the information necessary to conduct the other party's responsibilities under the RESEARCH PLAN and all KNOW-HOW relating to (a) [**] which are RESERVED COMPOUNDS, and (b) all [**] that are designated as LICENSED COMPOUNDS, and (c) the activity of such [**], including information regarding compounds synthesized or discovered, initial leads, activities of leads, derivatives, results of IN VITRO and IN VIVO studies, assay techniques and new assays. Significant discoveries or advances shall be communicated as soon as practical after such KNOW-HOW is obtained or its significance is appreciated. (ii) Subject to its obligations to THIRD PARTIES, KOSAN will make available and use all reasonable efforts to disclose to RWJPRI KNOW-HOW necessary for RWJPRI to make chemical modifications of the MACROLIDE scaffolds provided by KOSAN to RWJPRI in accordance with the RESEARCH PLAN, to conduct process development and strain selection research with respect to LICENSED COMPOUNDS, to make PRODUCTS for DEVELOPMENT and commercialization purposes, to characterize, evaluate and test such PRODUCTS and to otherwise carry out its activities pursuant to the RESEARCH PLAN and DEVELOPMENT PLAN. (iii) RWJPRI will make available and use all reasonable efforts to disclose to KOSAN such RWJPRI KNOW-HOW necessary or materially useful in evaluating [**] and DERIVATIVES of the preceding. (b) REPORTS. The JRC shall periodically and not less often than semiannually during the RESEARCH TERM, request and the parties shall have the obligation to prepare and provide to the JRC, written reports summarizing the progress of the research performed by or sponsored by the parties pursuant to the RESEARCH PLAN during the preceding half-year. In addition, the parties will exchange at least quarterly verbal or written reports presenting a meaningful summary of their activities performed in connection with the RESEARCH PROGRAM. (c) PROJECT COORDINATOR. Each party shall designate a single project coordinator whose duties shall be to oversee matters arising under the provisions of this AGREEMENT and to facilitate the communication of research results. Such project coordinator shall be responsible for day-to-day worldwide coordination of the RESEARCH PROGRAM and will serve to facilitate communication between the parties relating to the RESEARCH PROGRAM. Each party may change its designated project coordinator upon notice to the other party. (d) RECORDS. Personnel working on the RESEARCH PROGRAM shall use all reasonable efforts to make accurate laboratory notebook records of the RESEARCH -14- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. PROGRAM in a manner suitable for use in United States patent prosecution and litigation. Each party shall be permitted to review such laboratory notebooks and records at any reasonable time and to obtain copies thereof for further review by the other party. Each party shall make reasonable effort to safeguard such notes and records against theft and loss by fire, flood or other damage. (e) ASSIGNMENT AGREEMENTS. To the extent permitted by applicable law, KOSAN shall require all persons, agents, contractors, and consultants employed or retained by KOSAN to work on the RESEARCH PROGRAM, prior to beginning such employment, to be bound in writing to (i) assign to KOSAN all rights, title and interest in and to any ideas, discoveries, improvements, inventions, KNOW-HOW, patents, patent applications, and the like which were made or conceived in performing the RESEARCH PROGRAM, and to sign all documents and give lawful assistance necessary for filing, and defending patents, and patent applications in all countries, whether such filing is by KOSAN, or designees or assignees thereof, and (ii) to be bound in writing to provisions of confidentiality substantially similar to those of Article 9 hereof. 2.5 RESEARCH TERM. The RESEARCH PROGRAM shall commence on the EFFECTIVE DATE and continue for two (2) years thereafter (such period and any extension thereof referred to as the "RESEARCH TERM"). The RESEARCH TERM may be extended as follows: (i) the RESEARCH TERM shall automatically be emended to include any CONTINGENT WORK undertaken by the parties pursuant to Section 2.6.4; (ii) RWJPRI shall have the one-time option, exercisable by written notice to KOSAN not later than ninety (90) days prior to the expiration of the then-current RESEARCH TERM, to extend the RESEARCH TERM for one additional period of up to six (6) months at the level of funding and FTE rate applicable to the preceding six (6) month period, unless otherwise agreed by the JRC; and (iii) the RESEARCH PROGRAM may be extended by mutual written agreement of KOSAN and LICENSEE. 2.6 GO/NO-GO DECISIONS. 2.6.1 RESEARCH FUNDING. At each DECISION POINT for each PROJECT, RWJPRI shall have the right to elect whether to proceed with the CONTINGENT WORK for such PROJECT consequent to such DECISION POINT. It is understood and agreed that RWJPRI must provide RESEARCH FUNDING as set forth in the RESEARCH PLAN until at least the second anniversary of the EFFECTIVE DATE subject to the provisions of Article 19. RWJPRI shall provide RESEARCH FUNDING (i) for the Fast Track PROJECT, until the earlier of (a) identification of a [**] as an NCE in the Fast Track PROJECT ("N1" in Exhibit A) or (b) twelve (12) months from the EFFECTIVE DATE, and (ii) for the SAR PROJECT, until the earlier of (x) identification of [**] as NCEs in the SAR PROJECT ("N2" and "N3" in Exhibit A) or (y) twenty-four (24) months from the EFFECTIVE DATE. -15- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2.6.2 DECISION POINTS. The DECISION POINTS for the PROJECTS will be as follows:
PROJECT DECISION EVENTS DECISION TIME ------- --------------- ------------- Fast Track Identification of a [**] 15 months from the as an NCE ("N1" in EFFECTIVE DATE Exhibit A) SAR Identification of a [**] 24 months from the as an NCE ("N2" in EFFECTIVE DATE for "N2" Exhibit A) Identification of [**] 36 months from the as an NCE ("N3" in EFFECTIVE DATE for N3 Exhibit A)
A DECISION POINT for a PROJECT shall occur upon the earlier of (i) the occurrence of the applicable Decision Event, or (ii) the applicable Decision Time; provided, at any time RWJPRI with notice to KOSAN may elect to proceed with the CONTINGENT WORK for either PROJECT, and in such case such election shall be deemed a GO DECISION, subject to Sections 2.6.4 and 2.7.4. Upon reaching a DECISION POINT, RWJPRI shall notify KOSAN whether RWJPRI wishes to proceed with the applicable CONTINGENT WORK. 2.6.3 EXTENSION OF DECISION POINTS. RWJPRI shall have the right to extend the DECISION POINT of the Fast Track PROJECT for [**]and/or the SAR PROJECT for [**], in each case, with at least [**] advance notice to KOSAN. In any such event, RWJPRI agrees to fund the applicable PROJECT during the extension period at the FTE level required under the RESEARCH PLAN for the [**] period preceding the applicable DECISION POINT, and any such extension shall constitute an extension of the RESEARCH TERM subject to Section 2.5. The parties may, but shall have no obligation to, agree on additional extensions of the DECISION POINT(S) for each or both PROJECTS. 2.6.4 CONSEQUENCE OF A GO DECISION. In the event that a GO DECISION is made with respect to a particular PROJECT, the parties shall immediately commence the CONTINGENT WORK with respect to such PROJECT, and RWJPRI shall fund the CONTINGENT FTEs therefore for the periods set forth in the RESEARCH PLAN. In the event of a GO DECISION in the Fast Track PROJECT, then RWJPRI will provide further RESEARCH FUNDING for the Fast Track PROJECT for an [**]. In the event of a GO DECISION with respect to the first NCE ("N2") and/or second NCE ("N3") in the SAR PROJECT, then RWJPRI will provide further RESEARCH FUNDING for the SAR PROJECT for an [**] period for each NCE with respect to which there has been a GO DECISION. -16- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2.6.5 CONSEQUENCE OF A NO-GO DECISION. In the event that a NO-GO DECISION is made with respect to a particular PROJECT at a DECISION POINT for that PROJECT, that PROJECT shall terminate and cease to be part of the RESEARCH PROGRAM. In the event of termination of both research PROJECTS, LICENSEE's rights and license to the [**] made in such PROJECTS, and the corresponding intellectual property rights shall terminate concurrently, subject to RWJPRI's non-exclusive right pursuant to Section 3.2.1 to continue screening the [**] other than [**]. In any such event, at KOSAN's request, RWJPRI shall grant to KOSAN an exclusive, worldwide, royalty-free license to RWJPRI's interest in any RWJPRI KNOW-HOW and RWJPRI PATENT RIGHTS to make, use and sell the [**] thereof conceived or reduced to practice in connection with such PROJECTS. Notwithstanding the foregoing, RWJPRI shall retain ownership of the RWJPRI PATENT RIGHTS and RWJPRI KNOW-HOW, and the right to practice the RWJPRI KNOW-HOW and RWJPRI PATENT RIGHTS to conduct internal research, and, subject to its obligations under this AGREEMENT, to make, use and sell compounds (other than the [**] that were conceived or reduced to practice in connection with the terminated PROJECTS, or their DERIVATIVES). 2.6.6 PROJECT MANAGEMENT. Each PROJECT shall be managed by the parties independently of the other PROJECT. DECISIONS impacting the continuation of any individual PROJECT (e.g., Go/No-GO DECISIONS with respect any given PROJECT) will not affect the continuation of the other PROJECT. So long as any one of the PROJECTS is on-going, the RESEARCH PROGRAM shall be deemed to be in effect. 2.7 RESEARCH PROGRAM FUNDING. 2.7.1 FTE FUNDING. For the conduct of the RESEARCH PROGRAM by KOSAN, RWJPRI shall pay KOSAN RESEARCH FUNDING on an annualized FTE basis (FTE-years). FTE positions will be paid at an annual rate of $[**] per FTE during the [**] CONTRACT YEARS of the RESEARCH PROGRAM, and thereafter shall be revised annually to reflect increases in the CPI, using 1998 as the base year, according to the following formula: [**] Where CPI is a fraction, the numerator of which is the difference between the Consumer Price Index (All Urban Consumers, U.S. City Average for All Items, with 1982-84 = 100) as of the last month of the research year immediately preceding the research year to be adjusted and the Consumer Price Index as of the last month before the EFFECTIVE DATE, and the denominator of which is the Consumer Price Index as of the last month before the EFFECTIVE DATE. -17- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2.7.2 TIMING OF PAYMENTS. Research funding shall be paid in four (4) equal quarterly installments during each Calendar Year, payable in advance on or about January 1, April 1, July 1, and October 1; provided that the first quarterly payment for the first CONTRACT YEAR shall be due ten (10) days after the EFFECTIVE DATE. Any payment for a portion of a quarter shall be made on a pro rata basis. 2.7.3 USE OF RESEARCH FUNDS. All funds provided by RWJPRI under this Section 2.7 shall be used by KOSAN in the conduct of the RESEARCH PROGRAM, except as expressly provided in Section 2.7.4. Subject to the approval of the JRC and minimum FTE commitments for each PROJECT set forth in the RESEARCH PLAN, RWJPRI-funded KOSAN FTE's may be used in either of the PROJECTS. RWJPRI shall be under no obligation to provide FTE support to KOSAN beyond the levels stated above except at RWJPRI's sole discretion. KOSAN shall have no obligation to expend any amount on the RESEARCH PROGRAM except the amounts paid by RWJPRI. 2.7.4 EARLY SUCCESS. In the event that an NCE is designated in the Fast Track Project and/or both NCEs are designated in the SAR Project, or RWJPRI elects to initiate the CONTINGENT WORK for either PROJECT prior to the applicable DECISION POINT, then within [**] RWJPRI shall pay to KOSAN any remaining FTE support allocated in the RESEARCH PLAN for such PROJECT for research which was to be conducted prior to the commencement of the applicable CONTINGENT WORK for the applicable PROJECT. KOSAN may, but shall have no obligation to, expend such amounts on the RESEARCH PROGRAM. 2.7.5 SUPPLIES AND EQUIPMENT. The purchase of any item including, but not limited to, equipment, materials and cell lines reasonably required by KOSAN to carry out the RESEARCH PROGRAM shall be paid for by KOSAN and shall be owned by KOSAN. KOSAN may, but shall not be required to, purchase items including, but not limited to, equipment, materials and cell lines that would be useful, but are not required by KOSAN to carry out the RESEARCH PROGRAM, and any such items shall be owned by KOSAN. With the approval of the JRC, such items may be purchased with RESEARCH FUNDING. RWJPRI shall inform KOSAN if it has equipment available which it believes would be useful for the conduct of the RESEARCH PROGRAM, and discuss with KOSAN the possible use of such equipment by KOSAN for such purpose. 2.7.6 THIRD PARTY LICENSES. In the event that KOSAN or LICENSEE becomes aware that it is necessary for KOSAN to acquire a license from any THIRD PARTY specifically for the conduct of the RESEARCH PROGRAM, such party shall inform the JRC, and the JRC shall discuss which party will be responsible for acquiring such license and how the costs of negotiating and preparing such license, as well as any payments thereunder, shall be allocated. Notwithstanding the above, it is understood that KOSAN shall be responsible for [**] due (i) under the STANFORD LICENSE, and (ii) to any THIRD PARTY for intellectual -18- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. property rights which are necessary for the practice by KOSAN of the KOSAN PATENT RIGHTS existing as of the EFFECTIVE DATE for the creation or preparation of [**], and which are within the scope of an issued patent or published patent application owned by a THIRD PARTY as of the EFFECTIVE DATE. 2.8 AUDIT. KOSAN will maintain complete and accurate records which are relevant to its expenditure of Research funding provided to it by RWJPRI pursuant to Section 2.7 hereof. Such records shall be open during regular business hours for a period of [**] from creation of individual records for examination at RWJPRI's expense for the sole purpose of verifying that KOSAN has devoted to the RESEARCH PROGRAM the FTE's required by Section 2.4.3 above; provided however, that such right may not be exercised more than once in any calendar year. RWJPRI shall be entitled to a credit against future research payments or a refund in the event such audit reveals that the proper FTE's were not allocated in accordance with Section 2.4.3 above. ARTICLE 3 -- SCREENING BY LICENSEE 3.1 EXCLUSIVE SCREENING. 3.1.1 ANTIBIOTIC ACTIVITY. During the EXCLUSIVE SCREENING PERIOD, RWJPRI shall have the exclusive right to screen [**] provided by KOSAN for ANTIBIOTIC ACTIVITY in accordance with the RESEARCH PLAN. Until the termination of the EXCLUSIVE SCREENING PERIOD, KOSAN agrees that during the EXCLUSIVE SCREENING PERIOD (i) it shall not grant a THIRD PARTY the right to screen or develop the [**], and (ii) except in connection with the RESEARCH PROGRAM, shall not itself screen or develop the [**]. Following the expiration of the EXCLUSIVE SCREENING PERIOD, KOSAN may screen and/or develop and allow others to screen the [**]; provided, that so long as LICENSEE retains rights hereunder to a particular LICENSED COMPOUND, KOSAN shall not grant any THIRD PARTY a license to such LICENSED COMPOUND or its CLOSE STRUCTURAL ANALOGS and, if reasonably feasible, will not provide such compounds to THIRD PARTIES for screening. 3.1.2 OTHER ACTIVITIES. On a [**] basis, KOSAN shall not (i) allow THIRD PARTIES to screen [**] provided to RWJPRI hereunder, or (ii) itself screen such [**] until [**] following the date that KOSAN delivers the applicable [**] to RWJPRI. -19- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3.2 NON-EXCLUSIVE SCREENING. 3.2.1 MACROLIDES. During the NON-EXCLUSIVE SCREENING PERIOD, RWJPRI and its AFFILIATES shall have the non-exclusive right to screen the [**] in any biological test system for any therapeutic indication; provided, however, RWJPRI may not screen the [**] until the [**] of the EFFECTIVE DATE and then only subject to the following conditions. If LICENSEE wishes to screen the [**], it shall provide KOSAN notice thereof by the [**] of the EFFECTIVE DATE, and by [**] KOSAN shall notify LICENSEE whether it has entered into an exclusive agreement with a THIRD PARTY for screening for such activities, or initiated research and development in such regard to such activities on its own behalf. If KOSAN has not entered into an exclusive agreement with a THIRD PARTY for screening for the relevant activity, or initiated research and development tin such regard to such activity on its own behalf as evidenced by prior written records, then RWJPRI may screen the [**], as the case may be, on a non-exclusive basis during the NON-EXCLUSIVE SCREENING PERIOD. To notify RWJPRI of targets relating to [**], KOSAN may periodically provide LICENSEE notice of any targets which are reported in the scientific literature to be involved in inflammation. 3.2.2 AROMATIC POLYKETIDES. During the NON-EXCLUSIVE SCREENING PERIOD, RWJPRI shall have a non-exclusive right to screen the [**] for any biological activity in any biological test system for any therapeutic indication. 3.3 DELIVERY OF EXTRACTS AND CELLS. 3.3.1 MACROLIDES. (a) During the EXCLUSIVE SCREENING PERIOD, KOSAN will deliver to RWJPRI agreed quantities of [**] sufficient to conduct IN VITRO screening for [**], as specified in the RESEARCH PLAN. (b) During the NON-EXCLUSIVE SCREENING PERIOD, at RWJPRI's request, KOSAN (or its designee) shall provide RWJPRI with agreed quantities of extracts of [**]. For expenses incurred by KOSAN in preparing such [**], RWJPRI shall pay to KOSAN a reasonable rate to be agreed to by the parties, provided, however, if the parties are unable to agree on such payments, KOSAN shall have no obligation to provide any such extracts or cells producing such [**] to RWJPRI. -20- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3.3.2 [**]. During the NON-EXCLUSIVE SCREENING PERIOD, at RWJPRI's request, KOSAN (or its designee) shall provide RWJPRI with agreed quantities of extracts of such [**]. For expenses incurred by KOSAN in preparing such [**], RWJPRI shall pay to KOSAN an amount to be agreed upon by the parties; provided, however, if the parties are unable to agree on such payments, KOSAN shall have no obligation to provide such extracts or cells producing such [**] to RWJPRI. KOSAN shall provide to RWJPRI, without charge, a set of plates containing the [**] which KOSAN has in stock as of the EFFECTIVE DATE. Exhibit B describes the estimated numbers and concentrations of the [**] in stock as of the EFFECTIVE DATE. It is understood that Exhibit B is provided for general identification of the [**] KOSAN has in stock as of the EFFECTIVE DATE, and that KOSAN makes no representations or warranties regarding the accuracy of the information contained in Exhibit B concerning [**]. 3.3.3 NO TRANSFER; LIMITED USE. Except as expressly provided herein, RWJPRI shall not (i) transfer any of the [**] supplied to LICENSEE to any THIRD PARTY other than an AFFILIATE without the express prior written consent of KOSAN, or (ii) use or permit any other person or entity to use any of the [**] supplied to LICENSEE for any purpose other than for screening or development and/or commercialization as expressly permitted in this AGREEMENT. 3.4 SCREENING RESULTS. LICENSEE shall provide KOSAN with written quarterly summary reports within thirty (30) days of the end of each calendar quarter with respect to RWJPRI's non-exclusive screening activities, identifying all assays in which any of the [**]demonstrated activity and the level of such activity for the [**], all assays in which the [**] did not demonstrate activity, and a summary of all other results of RWJPRI's non-exclusive screening activities. 3.5 DESIGNATION OF RESERVED COMPOUNDS AND LICENSED COMPOUNDS. 3.5.1 DESIGNATION NOTICE. (a) MACROLIDES. Until the end of the NON-EXCLUSIVE SCREENING PERIOD, RWJPRI may notify KOSAN with notice ("DESIGNATION NOTICE") that RWJPRI wishes to designate [**] as LICENSED COMPOUNDS by notice to KOSAN identifying the [**] and the activity thereof. It is understood that designation of a LICENSED COMPOUND shall be in RWJPRI's sole discretion. Further, all decisions concerning the selection of a LICENSED COMPOUND for DEVELOPMENT shall be in RWJPRI's sole discretion. -21- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (b) [**]. During the NON-EXCLUSIVE SCREENING PERIOD, RWJPRI may notify KOSAN that RWJPRI wishes to designate one or more [**] as LICENSED COMPOUNDS by notice to KOSAN ("DESIGNATION NOTICE") identifying the [**] and the activity thereof. 3.5.2 LICENSED COMPOUND STATUS. Within thirty (30) days following receipt of any DESIGNATION NOTICE from LICENSEE pursuant to Section 3.5.1 above, KOSAN shall notify LICENSEE if KOSAN has granted a THIRD PARTY any rights or a license with respect to the same [**] before KOSAN's receipt of such DESIGNATION NOTICE; provided, KOSAN shall have no obligation to disclose to LICENSEE the identity of the THIRD PARTY, the structure of such compound or the activity(s) with respect to which such THIRD PARTY identified such activity. Unless KOSAN has previously granted a THIRD PARTY rights to such a [**], or elected to develop such [**] itself, in each case, as shown by prior written records, upon KOSAN's receipt of DESIGNATION NOTICE from RWJPRI, such [**] shall be deemed to be a LICENSED COMPOUND for all purposes of this AGREEMENT. 3.5.3 NCE STATUS. It is understood and agreed that each [**] designated by LICENSEE in a DESIGNATION NOTICE which becomes a LICENSED COMPOUND shall be deemed to be an NCE for the purposes of Section 6.2.1 hereunder. It is further understood and agreed that a [**] which meets the criteria for an NCE shall be deemed to be an NCE for the purposes of Section 6.2.1 hereunder without any further affirmative action on the part of KOSAN or LICENSEE. 3.5.4 NOTICE TO THIRD PARTIES. Once a [**] has become a LICENSED COMPOUND pursuant to Section 3.5.2 above, KOSAN shall notify any THIRD PARTIES who attempt to subsequently designate or claim rights to such LICENSED COMPOUND of the existence of LICENSEE's prior claim with respect to such compound without disclosing LICENSEE's identity, the structure of such compound (unless earlier disclosed) or the activity(s) with respect to which LICENSEE has identified such activity. LICENSEE hereby consents to such notice. KOSAN shall promptly inform LICENSEE of such THIRD PARTY'S designation or claim; provided KOSAN shall have no obligation to disclose to LICENSEE the identity of such THIRD PARTY or the activity(s) with respect to which such THIRD PARTY identified such activity. If the THIRD PARTY desires to negotiate with LICENSEE, KOSAN shall transmit notice of such intent (including the THIRD PARTY'S identity) to LICENSEE. In addition, once a [**] has become a LICENSED COMPOUND pursuant to Section 3.5.2 above, if -22- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. reasonably feasible, KOSAN shall not provide such LICENSED COMPOUND to THIRD PARTIES for screening. 3.5.5 CLOSE STRUCTURAL ANALOGS. At the time that each [**] becomes a LICENSED COMPOUND, a non-binding, written list identifying the compounds which are CLOSE STRUCTURAL ANALOGS of such [**] will be prepared by the parties. Any compounds determined to be CLOSE STRUCTURAL ANALOGS shall remain CLOSE STRUCTURAL ANALOGS until and unless such compounds have been actually synthesized and tested and found not to have the level of activity specified in the RESEARCH PLAN or agreed by the parties at the time the compound became a LICENSED COMPOUND. In the event that either party, determines that such compound does not have the required level of activity it shall notify, the other providing the relevant data and unless the other party, disputes the validity of such data, the applicable compound shall cease to be a CLOSE STRUCTURAL ANALOG thirty (30) days thereafter. In the event of any dispute regarding the status of whether a particular compound should become, is or will remain a CLOSE STRUCTURAL ANALOG, the matter shall be settled by the dispute resolution procedure set forth in Article 21. 3.5.6 RESERVED COMPOUNDS. (a) DESIGNATION. Subject to Section 3.5.6(b) and (c), until the end of the RESEARCH TERM, RWJPRI may give KOSAN written notice that RWJPRI wishes to designate as RESERVED COMPOUNDS one or more [**], which notice shall identify, such [**]. (b) LIMITATIONS. Notwithstanding the foregoing, RWJPRI may not designate more than [**] RESERVED COMPOUNDS at any time without the written consent of KOSAN. RWJPRI may, with notice to KOSAN discontinue the RESERVED COMPOUND status of any [**], and thereafter such MACROLIDE shall no longer be a RESERVED COMPOUND. If RWJPRI has designated RESERVED COMPOUNDS such that there exist more than [**] RESERVED COMPOUNDS at any time, then RWJPRI shall pay to KOSAN, for each RESERVED COMPOUND beyond [**], a fee of [**] dollars ($[**]) per RESERVED COMPOUND, as set forth in Section 6.6. (c) EFFECT OF RESERVATION. Until the end of the RESEARCH TERM, KOSAN shall not grant a license to any THIRD PARTY with respect to any RESERVED COMPOUND except as follows: if KOSAN receives a request from a THIRD PARTY to obtain a LICENSE for any RESERVED COMPOUND, it shall notify RWJPRI and RWJPRI shall have [**] days to notify. KOSAN whether RWJPRI will designate such RESERVED COMPOUND as a LICENSED COMPOUND and pay concurrently the fee required under Section 6.3. In such event, such RESERVED COMPOUND shall become a LICENSED COMPOUND for all purposes of this AGREEMENT. If RWJPRI fails to provide such notice to -23- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. KOSAN during the [**] period, then such COMPOUND shall cease to be a RESERVED COMPOUND and KOSAN shall have the right to grant such THIRD PARTY a license to such [**] during the EXCLUSIVE SCREENING PERIOD. 3.6 SELECTION OF LICENSED COMPOUNDS. Following the expiration of the NON-EXCLUSIVE SCREENING PERIOD, all rights to [**] for which LICENSEE does not have a LICENSED COMPOUND in DEVELOPMENT or commercialization shall lapse and KOSAN shall have the right to develop, market and commercialize such [**] independently and all rights and licenses thereto shall revert to KOSAN at the conclusion of such period. 3.7 RESERVED RIGHTS. At all times, KOSAN shall have the right to use the [**] for screening of any and all activities other than [**], and for its internal research programs, including without limitation, the preparation and synthesis of [**], as intermediates and otherwise. Nothing in this AGREEMENT shall restrict or limit KOSAN from using all or any portion of any [**] which is used in connection with the RESEARCH PROGRAM in any research or development not subject to this AGREEMENT. 3.8 RIGHT OF FIRST NEGOTIATION. Until January 10, 1999, if a THIRD PARTY wishes to enter into an exclusive agreement with KOSAN to screen the [**] or develop or commercialize [**], before entering into an agreement with such a THIRD PARTY granting a license for such rights, KOSAN shall notify RWJPRI, and for a period of [**] (or such longer period as the parties may agree) from the date of such notice (the "Negotiation Period") KOSAN and RWJPRI shall negotiate the terms of such an agreement. In the event that the parties do not agree on terms within the Negotiation Period, KOSAN may grant any THIRD PARTY rights with respect to screening [**] and developing and commercializing [**]; provided, however, prior to January 10, 1999 or the end of the Negotiation Period, KOSAN shall not enter into an agreement with a THIRD PARTY on terms less favorable to KOSAN, when taken as a whole, than those last offered in writing by RWJPRI to KOSAN. It is understood and agreed that KOSAN shall have the unrestricted rights itself to screen, develop and/or commercialize [**]. ARTICLE 4 -- LICENSES 4.1 RESEARCH LICENSES. 4.1.1 TO RWJPRI. Subject to the terms and conditions of this AGREEMENT, KOSAN hereby grants RWJPRI a non-exclusive paid-up license, with no right to grant -24- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. sublicenses, under KOSAN PATENT RIGHTS and KOSAN KNOW-HOW to make and use methods and materials to carry, out the RESEARCH PROGRAM during the RESEARCH TERM. 4.1.2 TO KOSAN. Subject to the terms and conditions of this AGREEMENT, LICENSEE hereby grants KOSAN a non-exclusive paid-up license, with no right to grant sublicenses, under RWJPRI PATENT RIGHTS and RWJPRI KNOW-HOW to make and use methods and materials to carry out the RESEARCH PROGRAM during the RESEARCH TERM. 4.2 SCREENING LICENSES. KOSAN hereby grants to RWJPRI the following fully paid, non-transferable licenses, with the right to grant sublicenses to RWJPRI AFFILIATES, under the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW to conduct screening pursuant to Article 3: 4.2.1 an exclusive, worldwide license during the EXCLUSIVE SCREENING PERIOD to use the [**]; 4.2.2 a non-exclusive, worldwide license during the NON-EXCLUSIVE SCREENING PERIOD: (a) to use the [**] to conduct screening for [**]; (b) to use the [**] to conduct screening for [**]; and 4.2.3 Subject to the terms and conditions of Section 3.2.1, a non-exclusive, worldwide license during the EXCLUSIVE SCREENING PERIOD and NON-EXCLUSIVE SCREENING PERIOD to use the [**]. 4.3 DEVELOPMENT AND COMMERCIALIZATION LICENSE. 4.3.1 GRANT. Subject to the terms and conditions of this AGREEMENT, KOSAN hereby grants to LICENSEE, and LICENSEE hereby accepts from KOSAN, a worldwide, exclusive license, with the right to grant sublicenses, under the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW, to make, use and develop LICENSED COMPOUNDS, and, to make, have made, USE, import, offer for SALE, SELL and have SOLD PRODUCTS. -25- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4.3.2 TERM. Unless LICENSEE's rights are terminated earlier as provided in Section 2.6.5 or Article 19, the foregoing license in Section 4.3.1 shall remain exclusive on a LICENSED COMPOUND-by-LICENSED COMPOUND and PRODUCT-by-PRODUCT basis (i) as to the applicable KOSAN PATENT RIGHTS, for their respective lives on a country-by-country basis, and (ii) as to the KOSAN KNOW-HOW, until the termination of LICENSEE's obligation to make royalty payments under Section 7.1 hereof, at which time the license under the KOSAN KNOW-HOW shall automatically become a [**], non-exclusive license. Notwithstanding the foregoing, however, with respect to any country of the European Union, the license to the KOSAN KNOW-HOW shall remain exclusive until the earlier of (i) the date on which the KOSAN KNOW-HOW becomes published or generally known to the public through no fault on the part of LICENSEE, its AFFILIATES or SUBLICENSEES or (ii) the [**], of the first commercial sale of the first PRODUCT in any country of the European Union, at which time the license under the KOSAN KNOW-HOW shall automatically become a [**], non-exclusive license. 4.4 DELIVERY OF CELLS; LIMITED USE. For each [**] designated by LICENSEE in a DESIGNATION NOTICE which becomes a LICENSED COMPOUND pursuant to Section 3.5, and for which LICENSEE pays the amounts set forth in Section 6.2.1, KOSAN will, if available, deliver to LICENSEE a viable sample of clonal cells which produces such [**] for use in PRODUCT manufacture. Except as expressly provided herein, LICENSEE shall not (i) transfer any cells or other biological materials supplied by KOSAN (or any derivatives or progeny thereof) to any THIRD PARTY other than an AFFILIATE or SUBLICENSEE without the express prior written consent of KOSAN, or (ii) use or permit others to use any of the cells or other biological materials supplied by KOSAN (or any derivatives or progeny thereof) for research use relating to drug discovery or any other purpose, except the manufacture of LICENSED COMPOUNDS for clinical trials and commercial sale as expressly provided in this AGREEMENT. 4.5 LIMITATIONS ON LICENSES. Notwithstanding any other provision of this AGREEMENT, it is understood and agreed that nothing in this AGREEMENT grants LICENSEE the right to practice any aspect of the EXCLUDED TECHNOLOGY. 4.6 AFFILIATE LICENSES. In the event LICENSEE wishes to manufacture PRODUCT or SELL in a country where its AFFILIATE is unable to pay royalties to ORTHO or where payment of royalties to ORTHO are limited as to their tax deductibility, KOSAN hereby agrees, at the request of ORTHO, to grant direct licenses containing the same terms, conditions and provisions as this AGREEMENT to any AFFILIATE under KOSAN PATENT RIGHTS and KOSAN KNOW-HOW to make, have made use and sell PRODUCTS. Any such licensed AFFILIATE shall thereafter report NET SALES directly to KOSAN and the activities of any such AFFILIATE shall not be includable in any reports made by ORTHO to KOSAN. -26- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4.7 SUBLICENSES. RWJPRI and its AFFILIATES shall have the right to grant to THIRD PARTIES sublicenses under the licenses granted to LICENSEE in Section 4.3 (or to its AFFILIATES under Section 4.6) with respect to PRODUCTS developed by or on behalf of RWJPRI, but shall have no right to grant sublicenses to THIRD PARTIES with respect to any technology licensed by KOSAN from Stanford University without the written consent to KOSAN, which consent will not be unreasonably withheld; provided, such sublicense under the STANFORD LICENSE is necessary to develop and/or commercialize PRODUCTS pursuant to the license granted in Section 4.3 and limited to such activities. 4.8 STANFORD LICENSE. LICENSEE acknowledges that it has received a sublicense under the STANFORD LICENSE. LICENSEE has received a copy of the STANFORD LICENSE and, having read and understood the same, agrees to comply with the provisions thereof, including without limitation, Articles 4, 5.3, 8 and 10 thereof. KOSAN agrees that in the event of a termination of the STANFORD LICENSE, in accordance with the provisions of Section 14.3 of the STANFORD LICENSE, the sublicense granted LICENSEE herein shall be assigned to STANFORD. 4.9 NO COMPETING RESEARCH. During the RESEARCH TERM, KOSAN shall not knowingly conduct, have conducted or fund any research or development activity specifically directed at discovery or developing products intended for use in the FIELD derived from expression of the [**], except pursuant to this AGREEMENT. 4.10 LICENSED COMPOUND EXCLUSIVITY. During the term of this AGREEMENT, KOSAN shall not develop, commercialize or sublicense to any THIRD PARTY any LICENSED COMPOUND to which LICENSEE retains commercial license rights, without the prior written consent of LICENSEE. 4.11 MODE OF COMMERCIALIZATION. ORTHO may SELL PRODUCTS through its AFFILIATES, SUBLICENSEES or agents in any country. ORTHO agrees to be responsible and liable for the performance hereunder by its AFFILIATES, agents and SUBLICENSEES to which the license and rights hereunder shall have been extended. For the purposes of reporting and making payments of earned royalties under this AGREEMENT, the manufacture, SALE or USE of PRODUCTS by any AFFILIATE, or SUBLICENSEE to which such license rights shall have been extended shall be considered the manufacture, SALE or USE of such PRODUCT by ORTHO and any such AFFILIATE or SUBLICENSEE may make the pertinent reports and royalty payments specified in Article 7 hereof directly to KOSAN on behalf of ORTHO; otherwise, such reports and payments on account of SALES of PRODUCTS by each AFFILIATE and SUBLICENSEE shall be made by ORTHO; and, in any event, the SALES of PRODUCT by each such AFFILIATE and SUBLICENSEE shall be separately shown in the reports to KOSAN if such information is readily available to ORTHO. -27- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4.12 THIRD PARTY RIGHTS. 4.12.1 KOSAN THIRD PARRY ACTIVITIES. It is understood that KOSAN provides [**] to THIRD PARTIES, and that KOSAN will grant such THIRD PARTIES rights after the EFFECTIVE DATE to acquire licenses for compounds derived from such libraries similar to LICENSEE's rights under this Article 4, subject to the provisions of Section 3. I. Notwithstanding the licenses granted to LICENSEE under Section 4.3 above, it is possible that a THIRD PARTY may acquire rights from KOSAN with respect to one or more compounds of which KOSAN is a sole or joint owner, which compounds were made and designed independently of KOSAN's activities and knowledge gained under the RESEARCH PROGRAM; accordingly, KOSAN's grant of rights under Section 4.3 is limited to the extent that (i) a THIRD PARTY (either alone or jointly with KOSAN) has filed a patent application with respect to such a compound prior to the filing by LICENSEE (either alone or jointly with KOSAN) of a patent application with respect to such a compound, or (ii) KOSAN has previously granted a THIRD PARTY a license or other rights with respect to such a compound, and subject to any such grant of rights to a THIRD PARTY. 4.12.2 NO LIABILITY. It is understood and agreed that, even if KOSAN complies with its obligations under this AGREEMENT, compounds provided to THIRD PARTIES in the course of KOSAN's other business activities may result in THIRD PARTY patent applications and patents, including patent applications and patents owned by such THIRD PARTIES, or owned jointly by KOSAN and such THIRD PARTIES, which could conflict with patent applications and patents owned by LICENSEE, or jointly owned by LICENSEE and KOSAN hereunder. KOSAN shall use its reasonable efforts to avoid such conflict. It is understood that, unless LICENSEE is damaged as a proximate result of a material breach by KOSAN of Section 3.1 or 4.3 then KOSAN shall have no liability, under this AGREEMENT with respect to any such conflict. 4.13 RETAINED RIGHTS. It is understood and agreed that, KOSAN shall retain the exclusive right to develop (including pre-clinical and clinical development), make, have made, use and sell all products other than PRODUCTS. It is understood and agreed that KOSAN may practice and use the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW to facilitate the exercise of its rights. 4.14 NO IMPLIED RIGHTS. No other, further or different license or right, except as expressly provided in this Article 4 hereof, is hereby granted or implied. -28- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. ARTICLE 5 -- DEVELOPMENT AND COMMERCIALIZATION 5. 1 DEVELOPMENT. 5.1.1 JDAC. Promptly after selection by RWJPRI of a LICENSED COMPOUND or a DERIVATIVE for DEVELOPMENT, the parties shall establish a Joint Development Advisory. Committee (the "JDAC") to oversee the DEVELOPMENT of PRODUCTS. 5.1.2 MEMBERSHIP. The JDAC shall include three (3) representatives from each of KOSAN and RWJPRI, each Party's members to be selected by that party. KOSAN and LICENSEE may each replace its JDAC representatives at any time, upon written notice to the other party. One of the RWJPRI members of the JDAC, chosen at the sole discretion of RWJPRI, shall serve as chair of the JDAC. 5.1.3 MEETINGS; MINUTES. The JDAC shall meet at least quarterly, or more frequently as agreed by the parties, at such locations as the parties agree, and will otherwise communicate regularly by telephone, electronic mail, facsimile and/or video conference. Meetings of the JDAC shall be held at least quarterly and may be called by either party with not less than ten (10) working days notice to the other unless such notice is waived, and meetings shall be held at the office of the party not calling the meeting, unless otherwise agreed. The JDAC may be convened, polled or consulted from time to time by means of telecommunication or correspondence. Each party will disclose to the other proposed agenda items reasonably in advance of each meeting of the JDAC. With the consent of the parties, other representatives of KOSAN or LICENSEE may attend JDAC meetings as observers. Each party shall be responsible for all of its own expenses associated with attendance of such meetings. The JDAC shall prepare written minutes of each JDAC meeting and a written record of all JDAC recommendations, whether made at a JDAC meeting or otherwise. A written record shall be provided by the presenting party, to each party of all materials presented at meetings of the JDAC. 5.1.4 FUNCTIONS OF THE JDAC. The JDAC shall serve in an advisory capacity concerning the management of the DEVELOPMENT of PRODUCTS as well as related pre-market activities performed under the provisions of this AGREEMENT. In carrying out this function, the JDAC will: (a) Promptly upon selection of a PRODUCT for DEVELOPMENT, advise RWJPRI in the preparation of a written DEVELOPMENT PLAN, including appropriate timelines for DEVELOPMENT, for such PRODUCT, which DEVELOPMENT PLAN shall be provided by RWJPRI to the parties; -29- (b) review progress of the DEVELOPMENT work at least quarterly, and advise RWJPRI concerning changes or modifications to the DEVELOPMENT PLAN; (c) oversee and direct the transfer of LICENSED COMPOUNDS from KOSAN to LICENSEE; and (d) review progress reports as to the performance of the DEVELOPMENT PLAN, the first such report to be submitted by RWJPRI [**] following selection of such LICENSED COMPOUND for DEVELOPMENT and at [**] intervals thereafter until the SALE of PRODUCT is approved and PRODUCT is being marketed on a regular commercial basis in the United States and each MAJOR MARKET COUNTRY and such approval and marketing is reported in writing to KOSAN. Minutes of meetings of the JDAC may serve as such. progress reports. The parties agree to maintain information in such reports in confidence in accordance with the confidentiality, provisions of Article 9 hereof. 5.1.5 DEVELOPMENT PROGRAM. RWJPRI shall be [**] and have [**] in consultation with the JDAC, to select LICENSED COMPOUNDS which shall then be designated PRODUCTS for further DEVELOPMENT by RWJPRI and marketing by ORTHO and its AFFILIATES. RWJPRI shall provide KOSAN with written notice of its decision to select a LICENSED COMPOUND for DEVELOPMENT. Once a PRODUCT has been selected for further DEVELOPMENT, RWJPRI, with the advice of the JDAC, shall have the [**] right to develop the PRODUCT through STAGES O, I, II and III and shall have the [**] right to prepare and file, and shall be the owner of, all applications for MARKETING AUTHORIZATION throughout the world. During such DEVELOPMENT efforts, KOSAN will assist RWJPRI as may be mutually agreed, at RWJPRI's expense, in chemical development, formulation development, production of labeled material and production of sufficient quantities of material for STAGE O and initial STAGE I studies. RWJPRI shall exercise diligent efforts, commensurate with the efforts it would normally exercise for products with similar potential sales volume and consistent with its overall business strategy, in developing such PRODUCT in accordance with the DEVELOPMENT PLAN established by RWJPRI. In the course of such efforts RWJPRI shall, either directly or through an AFFILIATE or SUBLICENSEE to which the license shall have been extended, take appropriate steps including the following: (i) in consultation with the JDAC, select certain LICENSED COMPOUNDS for STAGE O DEVELOPMENT; and (ii) establish and maintain a program reasonably designed, funded and resourced to obtain information adequate to enable the preparation and filing with an appropriate and properly empowered national regulatory authority all necessary documentation, data and -30- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. other evidence required for IND non-rejection to commence and conduct human clinical trials of such PRODUCT. (iii) proceed following IND non-rejection to commence PHASE I, II, and III clinical trials, associated studies and such other work which RWJPRI reasonably deems to be required for subsequent inclusion in filings for MARKETING AUTHORIZATION; (iv) after such submissions are filed prosecute such submissions and file all reasonably necessary, reports and respond to all reasonable requests from the pertinent regulatory, authorities for information, data, samples, tests and the like. 5.2 DELIVERY. For each [**] in DEVELOPMENT, if available, KOSAN will provide to RWJPRI the clone producing the LICENSED COMPOUND or an intermediate therefor, and all information related to fermentation conditions, process development, scale-up, etc. 5.3 MARKETING AUTHORIZATION. MARKETING AUTHORIZATION applications shall be compiled by ORTHO based on information generated during the DEVELOPMENT program. Subject to Section 19.3.4, ORTHO shall own such MARKETING AUTHORIZATIONS. KOSAN shall prepare supporting documentation requested by ORTHO. At ORTHO's request and expense, KOSAN shall further assist ORTHO with the preparation of supporting data to apply for and pursue MARKETING AUTHORIZATIONS. 5.4 COMMERCIALIZATION STATUS. If LICENSEE is developing a LICENSED COMPOUND, or any PRODUCT, during the period from the end of the RESEARCH TERM to the first commercial sale of such PRODUCT, LICENSEE shall keep KOSAN informed of its development activities with respect to such LICENSED COMPOUND and PRODUCT, including without limitation, the achievement of the milestones set forth in Section 6.4 and the commercialization of such LICENSED COMPOUND and PRODUCT, by [**] providing KOSAN with a written report stating the status of development of each such LICENSED COMPOUND and PRODUCT. It is understood that the report provided to the JDAC under Section 5.1.4(d) may serve to fulfill LICENSEE's obligation to KOSAN hereunder. 5.5 COMMERCIALIZATION. Once a PRODUCT has been approved for marketing, ORTHO shall exercise reasonable efforts, commensurate with the efforts it would normally exercise for products with similar potential sales volume and consistent with its overall business strategy, in promoting, advertising and SELLING such PRODUCT under this AGREEMENT. 5.6 PERFORMANCE OBLIGATIONS. 5.6.1 LACK OF DILIGENCE. Non-performance of this Article 5, or any subparagraph thereof by LICENSEE, shall be a breach of this AGREEMENT, subject to -31- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. KOSAN's right to terminate this AGREEMENT pursuant to Section 19.2. In such event, KOSAN agrees that (except in the case of a breach of Section 5.7) subject to the terms of Section 19.3, such termination shall be KOSAN's sole and complete remedy for such a breach. 5.6.2 ACKNOWLEDGMENT. Notwithstanding any other provision hereunder, LICENSEE makes no representation or warranty, that development and marketing of PRODUCT shall be the exclusive means by which LICENSEE will participate in the FIELD. Furthermore, all business decisions concerning the DEVELOPMENT, marketing and SALES of PRODUCT(S) including, without limitation, the design, sale, price and promotion of PRODUCTS covered under this AGREEMENT shall be within the sole discretion of LICENSEE. KOSAN realizes that LICENSEE already sells products for the treatment of [**], and acknowledges that LICENSEE may now or in the future develop or acquire other products for the treatment and prevention of such conditions. 5.7 NO OTHER PRODUCTS OTHER THAN PRODUCTS. Except as otherwise agreed in writing or specifically provided in the terms of this AGREEMENT, neither LICENSEE nor its SUBLICENSEES shall commercialize any LICENSED COMPOUND or DERIVATIVE thereof; other than as a PRODUCT in accordance with this AGREEMENT. ARTICLE 6 -- LICENSE FEES AND MILESTONE PAYMENTS 6.1 INITIAL FEE. In consideration of the rights and licenses granted to LICENSEE under this AGREEMENT on EFFECTIVE DATE, ORTHO shall pay KOSAN an initial fee of [**] dollars ($[**]) to reimburse KOSAN for past research and development. Such fee shall not be refundable nor creditable against other amounts due KOSAN under this AGREEMENT. 6.2 RESEARCH MILESTONE PAYMENTS. 6.2.1 NCE IDENTIFICATION. RWJPRI shall pay the following amounts to KOSAN within [**] following accomplishment of the following Research Milestones in connection with the Research PROJECTS: $[**] Identification of a [**] in the FAST TRACK PROJECT $[**] Identification of each [**] in the SAR PROJECT 6.2.2 DELIVERY OF FIRST MACROLIDES. LICENSEE shall pay to KOSAN a [**] fee of [**] dollars ($[**]) [**]following the delivery to RWJPRI of -32- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] from the Fast Track PROJECT, provided that any such payment shall not be made prior to [**]. 6.3 LICENSED COMPOUND FEE. Within [**] after any compound becomes a LICENSED COMPOUND, RWJPRI shall pay [**]dollars ($[**]) for each such LICENSED COMPOUND (other than the [**] for which RWJPRI has already paid the $[**] set forth in Section 6.2.1). 6.4 DEVELOPMENT MILESTONE PAYMENTS. Within [**] following the occurrence of the relevant events specified below with respect to the each PRODUCT, LICENSEE shall pay to KOSAN the following amounts:
DEVELOPMENT MILESTONE PAYMENT --------------------- ------- [**] $[**]
6.5 BACKUP PRODUCTS. In the event one or more of the aforesaid milestone payments have been paid in respect of a given PRODUCT for which DEVELOPMENT or commercialization is subsequently discontinued, LICENSEE shall receive a credit for such milestone payments against milestone payments due for the next PRODUCT to meet such milestone. It is understood that in no event shall LICENSEE be obligated to make the payment due on any milestone event more than once with respect to the same PRODUCT, regardless of the number of indications for which such PRODUCT is developed. If at the time a milestone is achieved by a PRODUCT any prior milestones have not been achieved for such PRODUCT, the payments for such prior milestones for such PRODUCT shall then be due. 6.6 RESERVED COMPOUND FEE. If RWJPRI has designated more than [**] as RESERVED COMPOUNDS at any time, for each such RESERVED COMPOUND in excess of [**], RWJPRI shall pay [**] dollars ($[**]) within [**] after the date of the designation of the applicable RESERVED COMPOUND. 6.7 NO WITHHOLDING. All amounts paid to KOSAN pursuant to this Article 6 shall be made without withholding for taxes or any other charge. -33- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. ARTICLE 7 -- ROYALTIES, RECORDS AND REPORTS 7.1 EARNED ROYALTIES; ROYALTY TERM. For the rights and privileges granted under this AGREEMENT, subject to Article 19, ORTHO shall pay to KOSAN, on a country-by-country and PRODUCT-by-PRODUCT basis, earned royalties on NET SALES as follows: 7.1.1 where the manufacture, USE or SALE of the PRODUCT falls within the scope of a VALID CLAIM which is (i) owned sorely by KOSAN, (ii) owned jointly by KOSAN and LICENSEE, or (iii) filed during the RESEARCH TERM or claims priority to a patent application filed during the RESEARCH TERM and in connection with the RESEARCH PROGRAM which is owned solely by LICENSEE or its AFFILIATES or SUBLICENSEES, ORTHO shall pay to KOSAN a royalty on the NET SALES of all such PRODUCTS that are SOLD by or for ORTHO or AFFILIATES or SUBLICENSEES under this AGREEMENT until the expiration of the last to expire of such patents in the PATENT RIGHTS in such country., as follows: Annual Cumulative NET SALES/PRODUCT ROYALTY RATE ------------- ------------ [**] [**]% 7.1.2 where the manufacture, USE or SALE of the applicable PRODUCT is not within the scope of a VALID CLAIM subject to Section 7.1.1, ORTHO shall pay to KOSAN a royalty on NET SALES equal to [**] the royalties in (a) above with respect to such PRODUCTS that are SOLD by or for ORTHO or AFFILIATES or SUBLICENSEES under this AGREEMENT in such country, for a period of the longer of (i) [**] from the date of first commercial sale of such PRODUCT in such country, or (ii) so long as there is a VALID CLAIM in such country. 7.1.3 It is understood and agreed that the increased royalty rates due pursuant to Sections 7.1.1 and 7.1.2 on higher levels of NET SALES shall only be due on the incremental NTT SALES over the lower tier. 7.l.4 It is understood and agreed that regardless of any credits or offsets to which LICENSEE is entitled under the terms of this AGREEMENT, the royalty, payments due KOSAN under Article 7 shall not be less than [**] of the royalties due pursuant to Sections 7.1.1 or 7.1.2 as applicable, on NET SALES of any PRODUCT in the applicable quarter. Any such royalty credits or offsets may be carried forward until applied. 7.2 ROYALTY ON NET SALES TO THIRD PARTIES. Earned royalties shall be paid pursuant to Section 7.1 hereof on all PRODUCTS SOLD under this AGREEMENT and the -34- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. earned royalty payable on a given PRODUCT made hereunder shall not become due and owing until such PRODUCT is SOLD. Except where LICENSEE or its AFFILIATES or SUBLICENSEE is an end-user of a PRODUCT, the earned royalty for any particular PRODUCT shall be due upon the first bona fide arm's length SALE to a THIRD PARTY other than an AFFILIATE or SUBLICENSEE thereof and any subsequent SALE of such PRODUCT by a THIRD PARTY that is not an AFFILIATE or SUBLICENSEE shall be royalty-free. 7.3 THIRD-PARTY ROYALTIES. KOSAN shall be responsible for paying [**] royalties due Stanford University on PRODUCTS pursuant to the STANFORD LICENSE and for [**] THIRD PARTY royalties for which KOSAN is responsible pursuant to Section 2.7.6. Except as provided in the preceding sentence, LICENSEE shall be responsible for procuring such licenses as it deems, in its sole discretion, appropriate for the manufacture, use, marketing, sale or distribution of PRODUCTS by LICENSEE and its AFFILIATES and SUBLICENSEES, and for the payment of any amounts due THIRD PARTIES under such licenses; provided that with regard to licenses entered by RWJPRI with THIRD PARTIES for intellectual property rights which are necessary, for the practice of the KOSAN PATENT RIGHTS existing as of the EFFECTIVE DATE for the creation or preparation of MACROLIDES and/or AROMATIC POLYKETIDES, which licenses have been approved by the JRC, LICENSEE may offset against the royalties owed to KOSAN up to [**] percent ([**]%) of royalties owed such THIRD PARTY, up to a maximum of [**] percent ([**]%) of the royalty owed to KOSAN in any quarter with respect to the applicable PRODUCT. Any such amounts which are uncredited in a quarter may be carried forward until expended. 7.4 ONE ROYALTY. Notwithstanding the provisions of Section 7.2 hereof, in the case of transfers or SALES of any PRODUCT among ORTHO, AFFILIATES and SUBLICENSEE or between AFFILIATES for re-sale to THIRD PARTIES, one and only one royalty shall be payable thereon and such royalty, shall become payable upon the SALE thereof to a THIRD PARTY. 7.5 AUDIT RIGHTS. ORTHO shall keep, and shall cause its AFFILIATES and SUBLICENSEES to keep, full, true and accurate books of account containing all particulars in accordance with ORTHO's normal accounting procedures then in effect for the purpose of showing the amount payable to KOSAN by way of royalty as aforesaid or by way of any other provision hereunder. Said books of account shall be kept at ORTHO's (or if sales by a SUBLICENSEE, at the SUBLICENSEE's) principal place of business. Said books and the supporting data shall be maintained and kept open during reasonable business hours, for [**] following the end of the calendar year to which they pertain (and access shall not be denied thereafter, if reasonably available), to the inspection of an independent certified public accountant retained by KOSAN and reasonably acceptable to ORTHO or such SUBLICENSEE for the purpose of verifying ORTHO's royalty statements, or ORTHO's compliance in other respects with this AGREEMENT, but this right to inspect may not be exercised more than once in any year and once a calendar period is audited, it may not be re-audited unless a payment -35- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. discrepancy is identified. Said accountant shall disclose to KOSAN only information relating to the accuracy of the royalty reports and the royalties paid under this AGREEMENT. Names of customers and other confidential information shall not be disclosed to KOSAN by such independent accountant. Such accountant shall be retained at KOSAN's sole expense. Notwithstanding the foregoing, inspections of the records of SUBLICENSEES shall be limited to the extent that ORTHO has the right to authorize KOSAN to make such inspection; provided that if ORTHO does not have the right to authorize KOSAN to make such an inspection, upon KOSAN's request, ORTHO, at its expense, using an independent certified accountant reasonably acceptable to KOSAN, shall inspect the SUBLICENSEE's records and shall provide to KOSAN the results of such inspection. In any audit, if an underpayment of more than five percent (5%) is established for a quarter, LICENSEE shall pay the costs of the audit of such period and shall promptly pay to KOSAN any amounts due together with interest as provided in Section 7.7. 7.6 ROYALTY REPORTS. ORTHO within [**] of each year (the "Reporting Date") shall deliver to KOSAN a true and accurate report, giving such particulars of the PRODUCTS SOLD by ORTHO, AFFILIATES, and SUBLICENSEES and the NET SALES due during the [**] preceding the Reporting Date ("Accounting Period") under this AGREEMENT as are pertinent to an accounting for royalty under this AGREEMENT. Each such report shall state, separately for LICENSEE and each AFFILIATE and SUBLICENSEE, the number, description, and aggregate NET SALES, by country, of each PRODUCT sold during the calendar quarter upon which a royalty is payable under this AGREEMENT. Simultaneously with the delivery of each such report, ORTHO shall pay to KOSAN the royalty due under this AGREEMENT for the period covered by such report. If no royalties are due, it shall be so reported. 7.7 PAYMENT METHOD; LATE PAYMENTS. All amounts due KOSAN hereunder shall be paid in U.S. dollars by wire transfer in immediately available funds to a bank account designated by KOSAN. Any payments or portions thereof due hereunder which are not paid on the date such payments are due under this AGREEMENT shall bear interest at a rate equal to the lesser of [**], or the maximum rate permitted by law, calculated on the number of days such payment is delinquent, compounded monthly. This Section 7.7 shall in no way limit any other remedies available to KOSAN. 7.8 CURRENCY CONVERSION. All royalty, payments by ORTHO to KOSAN shall be converted into U.S. Dollars in accordance with ORTHO's current customary and usual procedures for calculating same which are the following: the rate of currency conversion shall be calculated using a [**], or if such rate is not available, the [**]. ORTHO shall give KOSAN prompt written notice of any changes to ORTHO's customary and usual procedures for currency conversion, which shall only apply after -36- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. such notice has been delivered and provided that such changes continue to maintain a set methodology for currency conversion. If the transfer or the conversion into U.S. Dollars in any such instance is not lawful or possible, the payment of each pan of the royalties due as is necessary, shall be made by the deposit thereof, in whatever currency is allowable, to the credit and account of KOSAN in any commercial bank or trust company of KOSAN's choice located in that country. Prompt notice of said deposit shall be given by ORTHO to KOSAN and ORTHO shall use reasonable efforts to assist KOSAN in securing the payment of such funds to KOSAN's U.S. bank account. 7.9 TAXES. Any tax required to be withheld on royalties payable to KOSAN under the laws of any foreign country shall be promptly paid by ORTHO for and on behalf of KOSAN to the appropriate governmental authority, and ORTHO shall furnish KOSAN with proof of payment of such tax together with official documents issued by the appropriate governmental authority and other appropriate evidence sufficient to enable KOSAN to support a claim for a tax credit in respect of any sum so withheld, and at KOSAN's request, provide reasonable assistance to KOSAN in recovering such amounts, if possible. 7.10 LEGAL LIMIT ON ROYALTIES. In any country where the rate of royalty is limited by applicable law, the royalty payment shall be made to KOSAN at the highest rate permitted by law in that country for licenses of the type herein granted, provided that such rate is equal to or less than the rate specified in this AGREEMENT. 7.11 RESTRICTIONS ON PAYMENTS. The obligation to pay royalties to KOSAN under this AGREEMENT shall be waived and excused to the extent that applicable statutes, laws, codes or government regulations in a particular country prevent such royalty payments; provided, however, in such event, if legally permissible, LICENSEE shall pay the royalties owed to KOSAN by depositing such amounts, to the credit and account of KOSAN or its nominee in any commercial bank or trust company of KOSAN's choice located in that country, prompt notice of which shall be given by ORTHO to KOSAN. ARTICLE 8 -- SUPPLY OF PRODUCTS 8.1 ORTHO RESPONSIBILITY. ORTHO shall be solely responsible for making or having made PRODUCTS for DEVELOPMENT and commercialization. During DEVELOPMENT or commercialization of the PRODUCTS, the parties may agree that KOSAN shall manufacture and supply to ORTHO quantities of certain compounds. 8.2 CONSIDERATION OF KOSAN. If KOSAN wishes to be responsible for production of and purification of [**] for preclinical and clinical testing and manufacture of bulk PRODUCTS for commercial sale it may notify LICENSEE and demonstrate that KOSAN (or its designee) is able to manufacture PRODUCTS meeting the relevant LICENSEE specifications with respect to cost and quality in a timely -37- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. manner, then, subject to the approval of LICENSEE, KOSAN may conduct such manufacturing. In such event, the parties shall enter into a separate supply agreement on terms to be mutually agreed by the parties. 8.3 TECHNOLOGY TRANSFER. Upon LICENSEE's request, KOSAN shall provide reasonable technical assistance, and, to the extent that KOSAN has a right to do so without incurring additional expense, licenses, as may reasonably be requested by LICENSEE to transfer such technology as needed for LICENSEE or its designee to commence or continue manufacturing under Section 8.1. All such technical assistance shall be provided at LICENSEE's expense. ARTICLE 9 -- CONFIDENTIALITY 9.1 CONFIDENTIAL INFORMATION. Except as expressly provided herein, the parties agree that, for the term of this AGREEMENT and for [**] thereafter, the receiving party, shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose except for the purposes contemplated by this AGREEMENT, any confidential information of the other party, or any data, samples, technical and economic information (including the economic terms hereof), commercialization, clinical and research strategies and KNOW-HOW and other information provided by the other party (the "Disclosing Party") during the TERM of this AGREEMENT or during the negotiation of this AGREEMENT, or in connection with the transactions contemplated thereby, or any RESEARCH PROGRAM Technology and all other data, results and information developed pursuant to the RESEARCH PROGRAM and solely owned by the Disclosing Party (collectively, the "Confidential Information") furnished to it by the Disclosing Party hereto pursuant to this AGREEMENT or the transactions contemplated thereby. Notwithstanding the above, Confidential Information shall not include information that: (i) is or hereafter becomes generally available to the public other than by reason of any default with respect to a confidentiality, obligation under this AGREEMENT; or (ii) was already known to the recipient as evidenced by prior written documents in its possession; or (iii) is disclosed to the recipient by a THIRD PARTY who is not in default of any confidentiality, obligation to the disclosing party hereunder; or (iv) is developed by or on behalf of the receiving party, without reliance on Confidential Information received from the other party hereunder; or -38- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (v) is used with the consent of the Disclosing Party (which consent shall not be unreasonably withheld) in applications for patents or copyrights under the terms of this AGREEMENT; or (vi) has been approved in writing for publication by the Disclosing Party; or (vii) is PRODUCT-related information which is reasonably required to be disclosed in connection with marketing of PRODUCT covered by this AGREEMENT. Confidential Information shall be safeguarded by the recipient, shall not be disclosed to THIRD PARTIES and shall be made available only to recipient's employees or independent contractors who agree in writing to equivalent conditions and who have a need to know the information for the purposes specified under this AGREEMENT; however, the recipient may disclose Confidential Information to the extent such disclosure is required in compliance with applicable laws or regulations in connection with the manufacture or sale of products covered by this AGREEMENT, or is otherwise required to be disclosed in compliance with applicable laws or regulations or order by a court or other regulatory body having competent jurisdiction, provided that in the event such disclosure is required, the recipient (i) shall, unless prohibited by law, give reasonable advance notice of such disclosure to the other party and (ii) shall use reasonable efforts to secure confidential treatment of such information (whether by protective order or otherwise). Notwithstanding the foregoing, Confidential Information may be provided to THIRD PARTIES under appropriate terms and conditions including confidentiality provisions equivalent to those in this AGREEMENT for consulting, manufacturing development, manufacturing, external testing and marketing trials with respect to the products covered by this AGREEMENT. 9.2 PUBLICATION. The parties shall cooperate in appropriate publication of the results of research and development work performed pursuant to this AGREEMENT, but subject to the predominating interest to obtain patent protection for any patentable subject matter. To this end, it is agreed that prior to any public disclosure of such results, the party proposing disclosure shall send the other party a copy of the information to be disclosed, and shall allow the other party [**] from the date of receipt in which to determine whether the information to be disclosed contains subject matter for which patent protection should be sought prior to disclosure, or otherwise contains Confidential Information of the reviewing party which such party desires to maintain as a trade secret. Each party shall designate a representative for receipt of proposed publications from the other party. Confidential Information of the reviewing party which such party desires to maintain as a trade secret shall not be published if the reviewing party objects in writing within such [**] period. If notification is not received during the [**] period, the party proposing disclosure shall be free to proceed with the disclosure. If due to a valid business reason or a reasonable belief by the non-disclosing party that the disclosure contains subject matter for which a patentable invention should be sought, then prior to the expiration of the [**] period, the non-disclosing party shall so notify -39- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. the Disclosing Party, who shall then delay public disclosure of the information for an additional period of up to [**] to permit the preparation and filing of a patent application on the subject matter to be disclosed or other action to be taken. The party proposing disclosure shall thereafter be free to publish or disclose the information. Notwithstanding the foregoing, if the publication discloses a LICENSED COMPOUND, either party may delay publication until such time as the applicable patent application disclosing the LICENSED COMPOUND is published in the normal course of events. The determination of authorship for any paper shall be in accordance with accepted scientific practice. 9.3 ACQUISITION. In the event a party hereto is acquired, such party shall take reasonable efforts to ensure that the Confidential information of the other party hereto is used only for the purposes of this AGREEMENT, and is not disclosed to the acquiror. ARTICLE 10 -- REGULATORY MATTERS 10.1 ADVERSE EVENT REPORTING. Each party shall promptly inform the other in writing within twenty-four (24) hours of its receipt of any information which it receives regarding or related to any serious, unexpected adverse reaction in humans to PRODUCT. Each party shall comply with each Adverse Drug Experience reporting requirement of it in the United States Federal Food Drug and Cosmetic Act, as amended (21 U.S.C. Section 301 ET SEQ.) and the similar requirements of international regulatory authorities. In addition, on an on-going basis, each party agrees to make a good faith effort to promptly provide the other party with any additional information in its possession which indicates adverse effects in humans associated with PRODUCT. The obligations of this article shall survive termination of this AGREEMENT as to PRODUCT continued to be sold by ORTHO, or its AFFILIATES or SUBLICENSEES. 10.2 REGULATORY AND OTHER INQUIRIES. In the event KOSAN is manufacturing pursuant to Article 8 hereof, then upon being contacted by the FDA or any drug regulatory Agency for any regulatory purpose pertaining to this AGREEMENT or to a PRODUCT, KOSAN and LICENSEE shall promptly (within two (2) business days) notify and consult with one another and LICENSEE shall provide a response as it deems appropriate. LICENSEE shall have sole responsibility for responding to all inquiries to LICENSEE or KOSAN regarding the benefits, side effects and other characteristics of PRODUCTS. The party which is responsible for manufacturing the BULK PRODUCT form of the pertinent PRODUCT shall have the sole responsibility for responding to all inquiries regarding the manufacture of such BULK PRODUCT after consultation with the other party. 10.3 PRODUCT RECALL. In the event that LICENSEE or KOSAN determines that an event, incident or circumstance has occurred which may result in the need for a recall or other removal of any PRODUCT, or any lot or lots thereof, from the market, it shall advise and consult with the other party with respect thereto. LICENSEE shall make the final determination to recall or otherwise remove the PRODUCT or any lot or lots thereof from the market. KOSAN shall be -40- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. responsible for the costs of any recall due to defects in BULK PRODUCTS manufactured by KOSAN, and LICENSEE shall be responsible for the costs of other recalls. ARTICLE 11 -- PATENT INFRINGEMENT 11.1 NOTICE. In the event that there is infringement on a commercial scale by a THIRD PARTY of any patent licensed to LICENSEE hereunder that covers the manufacture, USE or SALE of a PRODUCT. LICENSEE shall notify KOSAN in writing to that effect, including with said written notice evidence establishing a prima facie case of infringement by such THIRD PARTY. 11.2 SOLELY OWNED INVENTIONS. 11.2.1 KOSAN ACTION. With respect to patents solely owned by KOSAN, KOSAN shall after any such notification, at its option, take action to obtain a discontinuance of such infringement or bring suit against the THIRD PARTY infringer. KOSAN shall bear all the expenses of any suit brought by it. In the event damages or other monies are awarded or received in settlement of such suit, KOSAN shall be entitled to deduct an amount to cover its out-of-pocket expenses, including attorneys' and professional fees, and including a reasonable allocation for in-house attorney's time, incurred for such suit. The balance of any recoveries shall then be shared by the parties with KOSAN receiving [**] percent ([**]%) and [**] percent ([**]%). LICENSEE and its AFFILIATES will cooperate with KOSAN in any such suit and shall have the right to consult with KOSAN and be represented by its own counsel at its own expense. KOSAN shall incur no liability to LICENSEE and its AFFILIATES as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding KOSAN's patent invalid or unenforceable. 11.2.2 ORTHO ACTION. If, after the expiration of one hundred eighty (180) days from the date of a request by ORTHO to do so, KOSAN has not overcome the prima facie case of infringement, obtained a discontinuance of such infringement, or brought suit against the THIRD PARTY infringer, then after such one hundred eighty (180) days notice period, ORTHO shall have the right, but not the obligation, to bring suit against such infringer and join KOSAN as a party plaintiff with respect to infringements relating to patents claiming compositions of matter which are LICENSED COMPOUNDS and/or the method of commercial manufacture thereof used by ORTHO (but not with respect to patents relating to the creation or production of polyketides more generally), provided that ORTHO shall bear all the expenses of such suit. In the event ORTHO brings such suit, and damages or other monies are awarded or received in settlement of such suit. ORTHO shall be entitled to deduct an amount to cover its out-of-pocket expenses, including attorneys' and professional fees, and including a reasonable allocation for in-house attorney's time. incurred for such suit. The balance of any recoveries shall be shared by the parties with ORTHO receiving [**] percent ([**]%) and [**] percent ([**]%). KOSAN will cooperate with ORTHO in any suit for infringement of a -41- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. licensed patent brought by ORTHO against a THIRD PARTY, and shall have the right to consult with ORTHO and to participate in and be represented by independent counsel in such litigation at its own expense. ORTHO shall incur no liability to KOSAN as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding KOSAN's patent invalid or unenforceable; provided, ORTHO shall not enter into any settlement which (i) makes any admission of wrongdoing on the part of KOSAN, or (ii) admits that any of KOSAN PATENT RIGHTS are invalid, unenforceable or not infringed, without the prior written consent of KOSAN. 11.3 JOINT INVENTIONS. In the event KOSAN or LICENSEE becomes aware of any actual or threatened infringement of any PATENT RIGHT which claims a Joint Invention that party shall promptly notify the other and the parties shall promptly discuss how to proceed in connection with such actual or threatened infringement. In the event only one party wishes to participate in such proceeding, it shall have the right to proceed alone, at its expense, and may retain any recovery; provided, at the request and expense of the participating party, the other party agrees to cooperate and join in any proceedings in the event that a THIRD PARTY asserts that the co-owner of such Joint Invention is necessary or indispensable to such proceedings. 11.4 COOPERATION. In the event either party hereto shall initiate or carry on legal proceedings to enforce the PATENT RIGHTS against an alleged infringer, as provided herein, the other party hereto shall fully co-operate with the party initiating or carrying on such proceedings. ARTICLE 12 -- INTELLECTUAL PROPERTY 12.1 OWNERSHIP. 12.1.1 OWNERSHIP OF INVENTIONS. KOSAN will own any inventions, and patents claiming such inventions, conceived or reduced to practice by KOSAN personnel in connection with the performance of the RESEARCH PROGRAM, subject to the licenses granted in Article 4 above. RWJPRI will own any inventions, and patents claiming such inventions, conceived and reduced to practice solely by RWJPRI personnel in connection with the RESEARCH PROGRAM. The parties will jointly own any inventions, and patent claiming such inventions, conceived and reduced to practice jointly by RWJPRI and KOSAN personnel in connection with the RESEARCH PROGRAM ("Joint Inventions"); provided, KOSAN shall have sole ownership of all [**] transferred to LICENSEE hereunder and all EXCLUDED TECHNOLOGY and intellectual property relating thereto, and LICENSEE shall and hereby assigns to KOSAN any interest that LICENSEE may have in or to the foregoing. 12.1.2 U.S. LAW. Inventorship and rights of ownership shall be determined in accordance with U.S. patent law. The laws of the United States with respect to joint ownership -42- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. of inventions shall apply in all jurisdictions, and each party hereby waives any right (other than as set forth in this AGREEMENT) to obtain an accounting of profits or approve any license or exploitation thereof. 12.2 PATENT PROSECUTION. 12.2.1 KOSAN shall file, maintain and prosecute the patent applications within the KOSAN PATENT RIGHTS to obtain patents thereon in such countries it deems appropriate, at its own expense. KOSAN does not represent or warrant that any such patent will be obtained, and KOSAN shall, in its sole discretion, be responsible for determining whether to abandon any or all of said patent applications or any portions thereof. 12.2.2 KOSAN shall promptly notify LICENSEE in the event KOSAN decides not to file, or decides to abandon or discontinue prosecution or maintenance of any one or more patents or patent applications included in the KOSAN PATENT RIGHTS. Such notification will be given as early as possible which in no event will be less than [**] prior to the date on which said application(s) will become abandoned. LICENSEE shall have the option, exercisable upon written notification to KOSAN, to assume full responsibility for the filing, prosecution or maintenance of the affected patents or patent application(s), in LICENSEE's name, at its expense. Royalty obligations with respect to such affected patents or patent applications shall be governed by, and at the royalty rate, set forth in Section 7.1.2 hereinabove for the life of such patent. 12.2.3 LICENSEE shall file, maintain and prosecute the patent applications within the PATENT RIGHTS solely owned by LICENSEE to obtain patents thereon in such countries it deems appropriate, at its own expense. LICENSEE does not represent or warrant that any such patent will be obtained, and LICENSEE shall, in its sole discretion be responsible for determining whether to abandon any or all of said patent applications or any portions thereof. 12.3 CONSULTATION. LICENSEE shall have the right to consult with KOSAN regarding the content of said patent applications, prior art searches and correspondence, and to comment thereon. KOSAN shall consider all such comments offered by LICENSEE, it being agreed, however, that all final decisions respecting conduct of the prosecution of said patent applications shall rest solely in the discretion of KOSAN. KOSAN agrees to promptly provide LICENSEE with copies of: 12.3.1 All patent applications included in KOSAN PATENT RIGHTS which claim LICENSED COMPOUNDS; 12.3.2 All prior art searches conducted on behalf of KOSAN related to said patent applications and the subject matter of this AGREEMENT; and -43- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12.3.3 All correspondence to and from the United States Patent and Trademark Office related to said patent applications as well as all requested correspondence relating to corresponding national and international patent applications. 12.4 JOINT INVENTIONS. 12.4.1 The parties will cooperate to file, prosecute and maintain patent applications covering the Joint Invention(s) within the RESEARCH PROGRAM in the United States, Japan and the European Union (in Europe through a European Patent Convention application) (collectively, the "Core Countries") and other countries agreed by the parties. The parties will share equally all expenses and fees associated with the filing, prosecution, issuance and maintenance of any patent application and resulting patent for a Joint Invention in the Core Countries and other agreed countries. Subject to Section 12.4.3 below, it is understood that, after the termination of the RESEARCH PROGRAM, the parties shall share equally the expenses and fees associated with the filing, prosecution, issuance and maintenance of any patent application and resulting patent for a Joint Invention in the Core Countries and other agreed countries. 12.4.2 In the event that either party wishes to seek patent protection with respect to any Joint Invention outside the Core Countries, it shall notify the other party hereto. If both parties wish to seek patent protection with respect to such Joint Invention in such country or countries, activities shall be subject to Section 12.4.1 above. If only one party wishes to seek patent protection with respect to such Joint Invention in such country or countries, it may file, prosecute and maintain patent applications and patents with respect thereto, at its own expense. Whenever possible, the parties shall cooperate to obtain the benefit of international treaties, conventions and/or agreements (e.g., the Patent Cooperation Treaty.) in order to obtain the benefits afforded thereby. In any such case, the party declining to participate in such activities shall not grant any THIRD PARTY a license under its interest in the applicable joint invention in the applicable country or countries without the prior written consent of the other party, which shall not be unreasonably withheld. KOSAN agrees to provide its written consent, if necessary, for LICENSEE to sublicense any joint invention in any country pursuant to the terms of this AGREEMENT. 12.5 PATENT TERM EXTENSIONS. LICENSEE shall cooperate with KOSAN, and unless KOSAN has previously applied for such an extension on its own behalf or on behalf of a THIRD PARTY with respect to the applicable patent, KOSAN agrees to diligently seek any extension under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, the Supplementary Certificate of Protection of the Member States of the European Community or other similar measure in any other country that is available or that becomes available in respect of the term of any patent within the KOSAN PATENT RIGHTS including any patent that may issue on a patent application within the KOSAN PATENT RIGHTS. LICENSEE shall diligently advise KOSAN in a timely manner of approval by the Food and Drug Administration of the United States of America to USE, SELL or market PRODUCTS or any other governmental -44- approval obtained by or on behalf of LICENSEE or an AFFILIATE that is pertinent to any such extension and LICENSEE shall supply KOSAN with any pertinent information and data in its possession or control or that is in the possession or control of any AFFILIATE or SUBLICENSEE and shall cooperate fully in assisting KOSAN to obtain any such extension that it may seek and LICENSEE shall supply KOSAN in a timely manner with any information and data and any supporting affidavits or documents required to comply with 35 U.S.C. Section 156 Extension of Patent Term (and any successor legislation) and any administrative rules or regulation thereunder or required to comply with any corresponding laws and regulations that are or shall be in effect in any country within the KOSAN PATENT RIGHTS, all without further consideration. ORTHO shall require its AFFILIATES to comply with this Section 12.5. ARTICLE 13 -- PUBLICITY Neither party shall originate any publicity, news release or public announcement, written or oral, whether to the public or press, stockholders or otherwise, relating to this AGREEMENT, including its existence, the subject matter to which it relates, performance under it or any of its terms, to any amendment hereto or performances hereunder without the written consent of the other party save only (i) such announcements as in the opinion of counsel for the party making such announcement is required by applicable law to be made, or (ii) announcements to KOSAN's private advisors, present investors, and bona fide prospective investors so long as such disclosure is made under a binder of confidentiality wherein such advisor or investor agrees not to disclose the information contained in the announcement to any THIRD PARTY or to use the information for any purpose other than to evaluate its investment or prospective investment in KOSAN. Such announcements shall be factual and as brief as reasonable. If a party decides to make an announcement required by law or otherwise permitted under this AGREEMENT, it will give the other party [**] advance written notice of the text of the announcement so that the other party will have an opportunity to comment upon the announcement. Upon request by a party for approval of any other disclosures, such approval or disapproval shall be given in writing within [**] of its receipt. Upon request by either party, the parties agree to prepare a mutually agreed press release and related Question and Answer document with respect to this AGREEMENT. Once information has been approved for disclosure, no further consent or approval shall be required under this Article with respect to such information. ARTICLE 14 -- WARRANTIES AND REPRESENTATIONS 14.1 KOSAN warrants that as of the EFFECTIVE DATE it owns or exclusively controls by agreement, assignment or license right, title and interest in the KOSAN PATENT RIGHTS and KOSAN KNOW-HOW and that it has full power and authority to execute, deliver and perform this AGREEMENT and the obligations hereunder. 14.2 KOSAN expressly warrants and represents that it has no outstanding encumbrances or agreements, either written, oral, or implied, in connection herewith that are -45- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. inconsistent with the rights granted herein, and that it has not granted and will not grant during the term of this AGREEMENT or any renewal hereof, any rights, license, consent or privilege that conflict with the rights granted herein. 14.3 LICENSEE expressly warrants and represents that it has no outstanding encumbrances or agreements, either written, oral, or implied, in connection herewith that are inconsistent with the obligations undertaken by LICENSEE herein, and that it has not entered into, and during the term of this AGREEMENT or any renewal hereof will not enter into, any agreements, either written, oral, or implied, that conflict with the rights granted, and obligations undertaken, by LICENSEE herein. 14.4 Each party expressly represents and warrants that it has the full power and authority to enter into this AGREEMENT and to carry out the transactions contemplated hereby. 14.5 Each party hereby warrants that the execution, delivery and performance of this AGREEMENT has been duly approved and authorized by all necessary corporate or partnership actions of both parties: do not require any shareholder or partnership approval which has not been obtained or the approval and consent of any trustee or the holders of any indebtedness of either party; do not contravene any law, regulation, rules or order binding on either party, and do not contravene the provisions of or constitute a default under any indenture, mortgage, contract or other agreement or instrument to which either party is a signatory. 14.6 Each party hereby represents and warrants that to the extent the United States government has any interest in the KOSAN PATENT RIGHTS as a result of government funded research, that it will continue to make good faith efforts to comply in all respects with the applicable provisions of any applicable law, regulation, or requirement by the U.S. Government relating to the KOSAN PATENT RIGHTS and shall make reasonable efforts to ensure that such laws, regulations and requirements are fulfilled with respect to the KOSAN PATENT RIGHTS including without limitation the provisions of 35 U.S.C. Section 202. Each party agrees that it will make good faith efforts to ensure that all necessary steps are taken to comply with the requirements of 35 U.S.C. Section 202 ET SEQ. and 37 C.F.R. Section 401.1 ET SEQ. to retain the maximum rights under the KOSAN PATENT RIGHTS allowable by law. LICENSEE and KOSAN agree that it will provide the necessary reports and information required to comply with 35 U.S.C. Sec. 202 et seq. and 37 C.F.R. Section 401.1 et seq., including periodic reports on utilization or efforts at utilization of the inventions covered by the KOSAN PATENT RIGHTS. 14.7 KOSAN and LICENSEE each specifically disclaim that the RESEARCH PROGRAM or the DEVELOPMENT will be successful, in whole or part or that any clinical or other studies undertaken by it will be successful. KOSAN AND LICENSEE EXPRESSLY DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE CONFIDENTIAL INFORMATION, OR KOSAN PATENT RIGHTS OR KNOW-HOW, LICENSED COMPOUNDS, RESERVED -46- COMPOUNDS, NCEs OR PRODUCTS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF ANY INTELLECTUAL PROPERTY, PATENTED OR UNPATENTED, OR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. ARTICLE 15 -- STANFORD LICENSE 15.1 KOSAN represents that as of the EFFECTIVE DATE the STANFORD LICENSE is in full force and effect. KOSAN shall use its reasonable efforts to not cause the termination and shall not seek to terminate the STANFORD LICENSE during the term of this AGREEMENT without the express written consent of LICENSEE. 15.2 KOSAN shall use its reasonable efforts to perform all duties and obligations required under the STANFORD LICENSE. KOSAN shall notify LICENSEE within [**] of its receipt of any termination notices from STANFORD of the STANFORD LICENSE and at LICENSEE's option shall seek to avoid said termination or shall subrogate LICENSEE to KOSAN's rights under the STANFORD LICENSE to enable LICENSEE to seek to avoid such termination. 15.3 KOSAN shall inform LICENSEE of any renegotiation of the STANFORD LICENSE, and shall not modify any terms or provisions of the STANFORD License, if such renegotiation or modification will adversely affect LICENSEE's rights under this AGREEMENT, without LICENSEE's written consent. KOSAN shall promptly provide LICENSEE with a copy of such renegotiated or modified STANFORD LICENSE. 15.4 In order to provide adequate protection of LICENSEE's interest in avoiding the termination of the STANFORD LICENSE, KOSAN agrees that should KOSAN default or receive a notice from STANFORD of default under the STANFORD LICENSE for failure to timely pay royalties which KOSAN does not intend to cure within the applicable period provided by the STANFORD LICENSE, KOSAN shall notify LICENSEE within [**] of its receipt of such notice and, LICENSEE may cure any such default on KOSAN's behalf, including paying any delinquencies. LICENSEE may credit any such payments made to STANFORD to cure KOSAN's delinquency against future payments due to KOSAN hereunder. ARTICLE 16 -- TRADEMARKS 16.1 ORTHO TRADEMARKS. ORTHO, at its expense, shall be responsible for the selection, registration and maintenance of all trademarks which it employs in connection with PRODUCTS and shall own and control such trademarks. KOSAN recognizes the exclusive ownership by ORTHO of any proprietary ORTHO name, logotype or trademark furnished by ORTHO (including ORTHO's AFFILIATES) for use in connection with the PRODUCT. KOSAN shall -47- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. not, either while this AGREEMENT is in effect or at any time thereafter, register, use or attempt to obtain any right in or to any such name. logotype or trademark or in and to any name, logotype or trademark confusingly similar thereto. ARTICLE 17 -- INDEMNIFICATION 17.1 BY ORTHO. ORTHO agrees to indemnity and hold harmless, KOSAN, its AFFILIATES and their respective officers, directors, employees and agents, and The Leland Stanford Jr. University, Stanford Health Services, Brown University, Brown University Research Foundation, and their respective, trustees, officers, employees, students and agents (each a "KOSAN Indemnitee") from and against any and all liability, damages, losses, claims, suits, proceedings, demands, recoveries or expenses, including reasonable attorney's fees and expenses, incurred or rendered against such KOSAN Indemnitees which arise out of or result from the use, testing, manufacture, processing, packaging, labeling, sale or distribution of PRODUCTS by ORTHO or its AFFILIATES or SUBLICENSEE; except to the extent such liability, damages, losses, claims, suits, proceedings, demands, recoveries or expenses, incurred by or rendered against KOSAN are based upon the gross negligence or wilful misconduct by KOSAN or its AFFILIATES. 17.2 BY KOSAN. KOSAN agrees to indemnify and hold harmless, LICENSEE, its AFFILIATES, and SUBLICENSEES and their respective officers, directors, employees and agents (each a "LICENSEE Indemnitee") from and against any and all THIRD PARTY liability, damages, losses, claims, suits, proceedings, demands, recoveries or expenses, including reasonable attorney's fees and expenses, incurred or rendered against such LICENSEE Indemnitee(s) which arise out of or result from (i) the negligence or wilful misconduct by KOSAN or its AFFILIATES in carrying out the RESEARCH PROGRAM under this AGREEMENT, or (ii) personal injury to KOSAN's employees or agents or damage to KOSAN's property resulting from acts performed by, under the direction of, or at the request of LICENSEE in carrying out activities contemplated by this AGREEMENT; except to the extent such liability, damages, losses, claims, suits, proceedings, demands, recoveries or expenses, incurred by or rendered against LICENSEE are based upon the gross negligence or wilful misconduct of a LICENSEE Indemnitee. 17.3 CONTROL. A party or person (the "Indemnitee") that intends to claim indemnification under this Article 17 shall promptly notify the other party (the "Indemnitor") in writing of any loss, claim, damage, liability, or action in respect of which the Indemnitee or any of its AFFILIATES, SUBLICENSEES or their directors, officers, employees, agents or counsel intend to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume the defense thereof with counsel chosen by Indemnitor, with consent of Indemnitee, which consent shall not be unreasonably withheld. The Indemnitee shall not enter into negotiations or enter into any agreement with respect to the settlement of any claim without the prior written approval of the Indemnitor, and the indemnity -48- agreement in this Article 17 shall not apply to amounts paid in settlement of any loss, claim, damage, liability, or action if such settlement is made without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 17. At the Indemnitor's request, the Indemnitee under this Article 17, and its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any action, claim or liability covered by this indemnification and provide full information with respect thereto. ARTICLE 18 -- BANKRUPTCY All rights and licenses granted under or pursuant to this AGREEMENT by each party are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11, United States Code (the "Bankruptcy Code"), licenses of rights to "intellectual property" as defined under Section 101(60) of the Bankruptcy Code. The parties agree that LICENSEE shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. ARTICLE 19 -- TERM AND TERMINATION 19.1 TERM. 19.1.1 TERM OF AGREEMENT. This AGREEMENT shall commence upon the EFFECTIVE DATE and shall, unless sooner terminated pursuant to any other provision of this AGREEMENT, continue in full force and effect until the latest of (i) the end of the RESEARCH TERM, or (ii) the date upon which LICENSEE ceases to have one or more PRODUCTS in active DEVELOPMENT or commercialization, or (iii) for as long as royalties are payable according to the provisions of Article 7 herein. The licenses granted herein to LICENSEE shall expire on a country-by-country and PRODUCT-by-PRODUCT basis, once ORTHO has paid royalties for the full period under which such royalty payments are due under Section 7.1 hereunder, and ORTHO and its AFFILIATES shall thereafter have a [**], irrevocable, non-exclusive license under the KOSAN KNOW-HOW to make, have made, USE, SELL and HAVE SOLD PRODUCTS. 19.1.2 TERM AND TERMINATION OF RESEARCH PROGRAM. (a) TERM. Unless earlier terminated as set forth in Section 19.1.2(b), the term of the RESEARCH PROGRAM shall be as set forth in Section 2.5, above. (b) PERMISSIVE TERMINATION. With [**]prior written notice to KOSAN, LICENSEE may terminate the RESEARCH PROGRAM; provided, however, that no -49- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. such termination shall be effective prior to the date twenty-four (24) months following the EFFECTIVE DATE. (c) WIND-DOWN PAYMENT. At the end of the RESEARCH TERM, ORTHO shall pay to KOSAN a "wind-down" payment equal to [**] percent ([**]%) of the amount of RESEARCH FUNDING paid to KOSAN by LICENSEE in the twelve (12) months prior to the expiration of the RESEARCH TERM; provided, however, that if LICENSEE gave KOSAN prior written notice that the RESEARCH PROGRAM would not be extended (by exercise of the option in Section 2.5(ii) or otherwise), then the amount of the "wind-down" payment shall be reduced as follows: (i) if such prior notice was given at least [**] prior to the end of the RESEARCH TERM, then ORTHO shall not owe any "wind-down" payment, and (ii) if such notice was given less than [**] prior to the end of the RESEARCH PROGRAM, then the wind-down payment shall be reduced by [**] for each full month between the date KOSAN receives such written notice and the expiration or termination of the RESEARCH TERM. Notwithstanding the above, it is understood that if the Fast Track PROJECT is not extended beyond the first anniversary of the AGREEMENT, then payments made by RWJPRI for the Fast Track Project shall not be included in the calculation of the "wind-down" payment. It is further understood and agreed that no "wind-down" payment shall be due if the RESEARCH TERM remains in effect until the fourth anniversary of the EFFECTIVE DATE. 19.1.3 TERMINATION OF SCREENING. With [**] prior written notice to KOSAN, RWJPRI may terminate the EXCLUSIVE SCREENING PERIOD and/or the NON-EXCLUSIVE SCREENING PERIOD. In the former case, RWJPRI's right to exclusively screen the [**] shall terminate as of the effective date of such notice, and in the latter case RWJPRI's right to screen the [**] for any activity shall terminate as of the effective date of such notice. 19.2 TERMINATION OF THE AGREEMENT. 19.2.1 PERMISSIVE TERMINATION FOLLOWING RESEARCH TERM. After the end of the RESEARCH TERM, LICENSEE may (i) terminate this AGREEMENT in its entirety or (ii) terminate this AGREEMENT as to any PRODUCT, upon [**] written notice to KOSAN. At its sole discretion, KOSAN may on receipt of such notice from LICENSEE immediately accelerate such termination of this AGREEMENT or PRODUCT, as the case may be, at any time within such [**] period. 19.2.2 FAILURE TO DESIGNATE [**]. In the event that LICENSEE has not designated at least one [**] as a LICENSED COMPOUND prior to the end of the NON-EXCLUSIVE SCREENING PERIOD, then the AGREEMENT shall automatically terminate concurrently with the end of the NON-EXCLUSIVE SCREENING PERIOD. -50- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 19.2.3 MATERIAL BREACH. Notwithstanding any other provisions of this AGREEMENT either party, at its option, may terminate this AGREEMENT on [**] prior written notice served by one party should the other party fail to comply with or perform its obligations hereunder, unless such failure or non-performance is corrected within the [**] period following notification, or such extended period as may be agreed between the parties. In the event that KOSAN fails to comply with or perform its obligations hereunder during the RESEARCH TERM, LICENSEE may, at its option, terminate the RESEARCH PROGRAM, and not the AGREEMENT, on [**] prior written notice, unless such failure or non-performance is corrected within the [**] period following notification or such extended period as may be agreed by the parties. Failure to terminate this AGREEMENT following breach or failure to comply with this AGREEMENT shall not constitute a waiver of a party's defenses, rights or causes of action arising from such or any future breach or noncompliance. 19.2.4 BANKRUPTCY. If either party should be adjudicated bankrupt, file a voluntary petition in bankruptcy, have filed against it a petition for bankruptcy or reorganization unless such petition is dismissed within [**] of filing, make a general assignment for the benefit of creditors, enter into a procedure of winding up to dissolution, or should a Trustee or Receiver be appointed for its business assets or operations, the other party shall be entitled to terminate this AGREEMENT forthwith by giving written notice to the first party. 19.3 EFFECT OF TERMINATION. 19.3.1 ACCRUED RIGHTS AND OBLIGATIONS. Termination of this AGREEMENT for any reason shall not release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination, nor preclude either party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination. 19.3.2 RETURN OF CONFIDENTIAL INFORMATION. Upon any termination of this AGREEMENT, LICENSEE and KOSAN shall promptly return to the other party all Confidential Information received from the other party (except one copy of which may be retained by legal counsel solely for purposes of monitoring compliance with the provisions of Article 9 and archival purposes). 19.3.3 LICENSES. (a) In the event that the AGREEMENT terminates for any reason prior to the end of the RESEARCH PROGRAM other than pursuant to Section 19.1.2(b), the AGREEMENT and the licenses granted to LICENSEE in Sections 4.1 and 4.3 (and any license to its AFFILIATES under Section 4.6) shall terminate concurrently. -51- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (b) In the event of any termination pursuant to Section 19.1.2(b), 19.1.3 or 19.2.2, the licenses granted to LICENSEE in Sections 4.1 and 4.2.1 shall terminate concurrently, and the license granted to LICENSEE in Section 4.3 (and any license to its AFFILIATES under Section 4.6) shall terminate concurrently with respect to all [**] other than those designated as LICENSED COMPOUNDS pursuant to Section 3.5 prior to the effective date of such termination. In the event of any termination of this AGREEMENT pursuant to Section 19.2.1(ii) only with respect to one or more PRODUCTS, the licenses granted to LICENSEE shall terminate only with respect to such PRODUCT and the LICENSED COMPOUNDS and/or DERIVATIVES contained in such PRODUCTS. (c) In the event of any termination of this AGREEMENT in its entirety by LICENSEE pursuant to Section 19.2.1(i), 19.2.3 or 19.2.4, the licenses granted in Article 4 shall terminate concurrently. (d) In the event of any termination of this AGREEMENT by KOSAN pursuant to Section 19.2.3 or 19.2.4, the licenses granted to LICENSEE (and to its AFFILIATES) under this AGREEMENT shall terminate concurrently. (e) It is understood that, except as provided in Section 19.3.3(a), (c) and (d) above, the licenses granted in Section 4.2.2 and 4.2.3 shall survive until the end of the NON-EXCLUSIVE SCREENING PERIOD. (f) In the event of any termination of the RESEARCH PROGRAM (but not the AGREEMENT) by LICENSEE pursuant to Section 19.2.3 due to uncured material breach by KOSAN, or a termination pursuant to Section 19.1.3, any licenses then in effect with respect to LICENSED COMPOUNDS designated as LICENSED COMPOUNDS pursuant to section 3.5.1, or identified as CLOSE STRUCTURAL ANALOGS pursuant to Section 3.5.5, before the date of such termination shall remain in effect pursuant to the terms and conditions of this AGREEMENT, but RWJPRI shall not receive any further licenses under this AGREEMENT. 19.3.4 REVERSION. in the event that the licenses to LICENSEE (and its AFFILIATES) terminate as described in Section 19.3.3 above, then LICENSEE undertakes the following: (a) to deliver to KOSAN any KOSAN KNOW-HOW in its possession; (b) not to use the KOSAN KNOW-HOW as long as it has to be kept confidential pursuant to Article 9 hereunder; (c) at KOSAN's request, to transfer (and grant the right to access, cross-reference and use, without charge) all RWJPRI KNOW-HOW, MARKETING -52- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. AUTHORIZATIONS. pre-clinical and clinical data, and regulatory filings relating to LICENSED COMPOUNDS and PRODUCTS (including clinical studies and other supporting information, and any written communications to and with the FDA and other comparable agencies), and any data relating to reportable adverse events in respect of PRODUCTS for use in connection with developing and commercializing, and submitting regulatory filings for, PRODUCTS for which LICENSEE does not retain rights under this AGREEMENT and other products; (d) to the extent requested by KOSAN, to transfer to KOSAN responsibility for and control of ongoing DEVELOPMENT work, including contracts with THIRD PARTIES for such work, in an expeditious and orderly manner with the costs for such work assumed by KOSAN as of the date such contracts are transferred; and (e) to grant to KOSAN an irrevocable, exclusive, worldwide paid-up license under RWJPRI PATENT RIGHTS and RWJPRI KNOW-HOW owned or controlled by LICENSEE, with the right to grant and authorize sublicenses, to make, have made, USE, SELL and HAVE SOLD LICENSED COMPOUNDS and PRODUCTS, and provide KOSAN with all reasonable assistance to transfer the RWJPRI KNOW-HOW and enable KOSAN to continue DEVELOPMENT and to make, have made, USE, SELL and HAVE SOLD LICENSED COMPOUNDS and PRODUCTS. (f) It is understood that, in the event of a termination of licenses pursuant to Sections 19.3.3(b) or (f) wherein LICENSEE retains certain licenses, the foregoing provisions of Section 19.3.4 shall apply only to the terminated rights and licenses. 19.4 SURVIVAL. Sections 2.4.5(d), 2.6.5, 2.8, 3.3.3, 3.4, 3.5.5, 3.7, 4.5, 4.12, 4.13, 4.14, 7.1, 7.5, 7.6, 7.7, 7.9, 7.10, 7.11, 10.1, 11.3, 11.4, 12.1, 12.4, 14.7, 18, 19.3 and 19.4 and the last sentence of Section 4.4, and Articles 9, 13, 17, 21 and 22 shall survive the expiration and any termination of the AGREEMENT for any reason. ARTICLE 20 -- ASSIGNMENT 20.1 PERMITTED ASSIGNMENTS. This AGREEMENT or any interest herein shall not be assigned or transferred, in whole or in part, by either party hereto without the prior written consent of the other party hereto. However, without securing such prior written consent, either party may assign this AGREEMENT to an AFFILIATE or a successor of all or substantially all of its business to which this AGREEMENT relates provided, that no such assignment shall be binding and valid until and unless the assignee shall have assumed in a writing, delivered to the non-assigning party, all of the duties and obligations of the assignor, and, provided, further, that the assignor shall remain liable and responsible to the non-assigning party hereto for the performance and observance of all such duties and obligations. -53- 20.2 BINDING EFFECT. This AGREEMENT shall be binding upon, and inure to, the benefit of the parties hereto, and to the benefit of any permitted assignee or successor. LICENSEE shall also have the right, whether or not it elects to terminate this AGREEMENT, to require that all reasonable steps it may reasonably specify be taken to prevent disclosure of its confidential information to an acquiror or assignee of KOSAN in any way reasonably adverse to its interests. ARTICLE 21 -- DISPUTE RESOLUTION 21.1 DISCUSSION. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this AGREEMENT promptly by negotiations between the Chief Executive Officer of KOSAN and LICENSEE (who shall be the Chairman of RWJPRI for issues relating primarily to research and development, and the President of ORTHO for issues relating to PRODUCT commercialization), who each have authority to settle the controversy and who are at a higher level of management than the persons with direct responsibility for administration of this AGREEMENT. Any party may give the other party written notice of any dispute not resolved in the normal course of business. Within [**] after receipt of the notice, the receiving party shall submit to the other a written response. The notice and the response shall include a detailed statement of each party's position and a summary of arguments supporting that position. Within [**] after delivery of the response, Chief Executive Officer of KOSAN and LICENSEE (who shall be the Chairman of RWJPRI for issues relating primarily to research and development and the President of ORTHO for issues relating to PRODUCT commercialization) shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the dispute. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this clause will be confidential and shall be treated as compromise and settlement negotiations for the purposes of the Federal Rules of Evidence and all other evidentiary purposes. 21.2 MEDIATION. If the matter has not been resolved within [**] of the disputing party's notice, or if the Chief Executive Officer of KOSAN and LICENSEE (who shall be the Chairman of RWJPRI for issues relating primarily to research and development and the President of ORTHO for issues relating to PRODUCT commercialization) fail to meet within the time frame set forth in Section 21.1, either party may initiate mediation of the dispute as set forth in Section 21.2 of this AGREEMENT. (a) Any dispute, controversy or claim arising out of or related to this AGREEMENT, or the interpretation, application, breach, termination or validity thereof, including any claim of inducement by fraud or otherwise, shall, before submission to arbitration, first be mediated through non-binding mediation in accordance with the Model Procedures for the Mediation of Business Disputes promulgated by the Center for Public Resources ("CPR") then in effect, except where those rules conflict with these provisions, in which case these provisions control. The mediation shall be conducted in New York, New York and shall be -54- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. attended by a senior executive with authority, to resolve the dispute from each of the operating companies that are parties. (b) The mediator shall be an attorney specializing in business litigation who has at least fifteen (15) years of experience as a lawyer with a law firm of over twenty-five (25) lawyers or was a judge of a court of general jurisdiction and who shall be appointed from the list of neutrals maintained by CPR. (c) The parties shall promptly confer in an effort to select a mediator by mutual agreement. In the absence of such an agreement, the mediator shall be selected from a list generated by CPR with each party, having the right to exercise challenges for cause and two peremptory challenges within three business days of receiving the CPR list. (d) The mediator shall confer with the putties to design procedures to conclude the mediation within no more than [**] after initiation. Unless agreed upon by the parties in writing, under no circumstances shall the commencement of arbitration under Section 21.3 be delayed more than [**] by the mediation process specified herein. (e) Each party, agrees to toll all applicable statutes of limitation during the mediation process and not to use the period or pendency of the mediation to disadvantage the other party procedurally or otherwise. All negotiations pursuant to this clause will be confidential and shall be treated as compromise and settlement negotiations for the purposes of the Federal Rules of Evidence and all other evidentiary purposes. 21.3 ARBITRATION. (a) Following the mediation procedures set forth in Section 21.2, Any dispute, claim or controversy arising from or related in any way to this AGREEMENT or the interpretation, application, breach, termination or validity, thereof, including any claim of inducement of this AGREEMENT by fraud or otherwise, will be submitted for resolution to arbitration pursuant to the commercial arbitration rules then pertaining of the Center for Public Resources ("CPR"), except where those rules conflict with these provisions, in which case these provisions control. The arbitration will be held in San Francisco, California. (b) The panel shall consist of three (3) arbitrators chosen from the CPR Panels of Distinguished Neutrals each of whom (i) is a lawyer specializing in business litigation, with experience in litigation relating to development and commercialization of pharmaceutical products and whom has never represented any party hereto or any of its Affiliates and whom has at least fifteen (15) years experience with a law from of over twenty-five (25) lawyers, or (ii) was a judge of a court of general jurisdiction and who has never represented either party hereto or any of its Affiliates. -55- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (c) The parties agree to cooperate (l) to obtain selection of the arbitrators within [**] of initiation of the arbitration, (2) to meet with the arbitrators within [**] of selection and (3) to agree at that meeting or before upon procedures for discovery and as to the conduct of the hearing which will result in the hearing being concluded within no more than [**] after selection of the arbitrators and in the award being rendered within [**] of the conclusion of the hearings, or of any post-hearing briefing, which briefing will be completed by both parties within [**] after the conclusion of the hearings. In the event no such agreement is reached, the CPR will select arbitrators, allowing appropriate strikes for reasons of conflict or other cause and three (3) peremptory challenges for each side. The arbitrators shall set a date for the hearing, commit to the rendering of the award within [**] of the conclusion of the evidence at the hearing, or of any post-hearing briefing (which briefing will be completed by both sides in no more than [**] after the conclusion of the hearings), and provide for discovery according to these time limits, giving recognition to the understanding of the parties hereto that they contemplate reasonable discovery, including document demands and depositions, but that such discovery be limited so that the time limits specified herein may be met without undue difficulty. In no event will the arbitrators allow either side to obtain more than a total of [**] of deposition testimony from all witnesses, including both fact and expert witnesses. In the event multiple hearing days are required, they will be scheduled consecutively to the greatest extent possible. (d) The arbitrators shall render their award following the substantive law of California, without reference to principles of conflicts of law. The arbitrators shall render an opinion setting forth findings of fact and conclusions of law with the reasons therefor stated. A transcript of the evidence adduced at the hearing shall be made and shall, upon request, be made available to either party. (e) To the extent possible, the arbitration hearings and award will be maintained in confidence. (f) Any United States District Court having jurisdiction of the matter may enter judgment upon any award. In the event the panel's award exceeds [**] Dollars ($[**]) in monetary, damages or includes or consists of equitable relief, then the court shall vacate, modify or correct any award where the arbitrators' findings of fact are clearly erroneous, and/or where the arbitrators' conclusions of law are erroneous; in other words, it will undertake the same review as if it were a federal appellate court reviewing a district court's findings of fact and conclusions of law rendered after a bench trial. An award for less than [**] Dollars ($[**]) in damages and not including equitable relief may be vacated, modified or corrected only upon the grounds specified in the Federal Arbitration Act. The parties consent to the jurisdiction of the District Court for the enforcement of these provisions, the entry of judgment on any award, and the vacatur, modification and correction of any award as above specified. -56- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (g) Each party has the right before or during the arbitration to seek and obtain from the appropriate court provisional remedies such as attachment, preliminary injunction, replevin, etc. to avoid irreparable harm, maintain the status quo, or preserve the subject matter of the arbitration. (h) EACH PARTY HERETO WAIVES ITS RIGHT TO TRIAL OF ANY ISSUE BY JURY. (i) SUBJECT TO THE PROVISIONS OF ARTICLE 17, EACH PARTY HERETO WAIVES ANY CLAIM TO PUNITIVE, EXEMPLARY AND CONSEQUENTIAL DAMAGES FROM THE OTHER. ARTICLE 22 -- MISCELLANEOUS 22.1 ENTIRE AGREEMENT. Before signing this AGREEMENT the parties have had numerous conversations, including preliminary discussions, formal negotiations and informal conversations at meals and social occasions, and have generated correspondence and other writings, in which the parties discussed the transaction which is the subject of this AGREEMENT and their aspirations for its success. In such conversations and writings, individuals representing the parties may have expressed their judgments and beliefs concerning the intentions, capabilities, and practices of the parties, and may have forecasted future events. The parties recognize that such conversations and writings often involve an effort by both sides to be positive and optimistic about the prospects for the transaction. It is also recognized, however, that all business transactions contain an element of risk, as does the transaction contemplated by this AGREEMENT and that it is normal business practice to limit the legal obligations of contracting parties to only those promises and representations which are essential to their transaction so as to provide certainty as to their respective future rights and remedies. Accordingly, it is agreed that this AGREEMENT constitutes the entire agreement and understanding between the parties as to the legal undertakings hereunder. All prior negotiations, representations, agreements, contracts, offers and earlier understandings of whatsoever kind, whether written or oral between KOSAN and LICENSEE in respect of this AGREEMENT, are superseded by, merged into, extinguished by and completely expressed by this AGREEMENT. No aspect, part or wording of this AGREEMENT may be modified except by mutual agreement between the KOSAN and LICENSEE taking the form of an instrument in writing signed and dated by duly authorized representatives of both KOSAN and LICENSEE. 22.2 NOTICES. All communications, reports, payments and notices required by this AGREEMENT by one party to the other shall be addressed to the parties at their respective addresses set forth below or to such other address as requested by either party by notice in writing to the other. -57- If to KOSAN: KOSAN BIOSCIENCES, INC. 1450 Rollins Road Burlingame, California 94010 Attn: President Telefax No.: (650) 343-2931 With a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304 Arm: Michael S. Rabson Telefax No.: (415) 496-4006 If to RWJPRI, ORTHO or LICENSEE: ORTHO-MCNEIL PHARMACEUTICAL CORPORATION 1000 U.S. Route 202, Raritan. New Jersey 08869 Attention: President Telefax No.: (908) 218-1416 With a copy to: Chief Patent Counsel Johnson & Johnson One Johnson & Johnson Plaza New Brunswick, New Jersey 08903 Telefax No.: (908) 524-2808 AND R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE 920 U.S. Route 202 Raritan. New Jersey 08869 Attention: Chairman Telefax No.: (908) 704-9486 -58- All such notices, reports, payments and communications shall be made in writing by telefax to the numbers set forth above or by First Class mail, postage prepaid, and shall be considered made as of the date of deposit with the United States Post Office or when received by telefax. 22.3 GOVERNING LAW. All matters affecting the interpretation, validity, and performance of this AGREEMENT, including any arbitration proceeding conducted pursuant to Article 21, shall be governed by the internal laws of the State of California without regard to its conflict of law principles, except as to any issue which by California law depends upon the validity, scope or enforceability of any patent within the PATENT RIGHTS, which issue shall be determined in accordance with the applicable patent laws of the country of such patent. 22.4 SEVERABILITY. Should any part or provision of this AGREEMENT be held unenforceable or in conflict with the law of any jurisdiction, the validity of the remaining part or provisions shall not be affected by such holdings; provided that the parties shall use their best efforts to negotiate an enforceable provision that most nearly reflects the parties original intentions. 22.5 WAIVER. The waiver by either party, whether express or implied, of any provisions of this AGREEMENT, or of any breach or default of either party, shall not be construed to be a continuing waiver of such provision, or of any succeeding breach or default or of a waiver of any other provisions of this AGREEMENT. 22.6 NO REPRESENTATIONS. Notwithstanding anything to the contrary, in this AGREEMENT, nothing herein contained shall be construed as a representation by KOSAN that the PATENT RIGHTS can be or will be used to prevent the importation by a THIRD PARTY hereto of a product into or the SALE or USE by a THIRD PARTY hereto of a product in any country within the PATENT RIGHTS where such product shall have been placed in commerce under circumstances which preclude the use of the PATENT RIGHTS to prevent such importation or SALE or USE by reason of any applicable law or treaty. 22.7 FORCE MAJEURE. Notwithstanding any other provisions of this AGREEMENT, neither of the parties hereto shall be liable in damages or have the right to terminate this AGREEMENT for any delay or default in performing hereunder if such delay or default is caused by conditions beyond its control including, but not limited to acts of God, governmental restrictions, wars, or insurrections, strikes, floods, earthquakes, work stoppages and/or lack of materials, and any time for performance hereunder shall be extended for the actual time of delay caused by such occurrence; provided, however, that the party suffering such delay or default shall notify the other party in writing of the reasons for the delay or default and shall diligently seek to correct such conditions, if such reasons for delay or default continuously exist for [**], this AGREEMENT may be terminated by either party. -59- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 22.8 INDEPENDENT CONTRACTORS. It is understood that both parties hereto are independent contractors and are engaged in the operation of their own respective businesses, and neither hereto is to be considered the agent or partner of the other for any purpose whatsoever. Neither party has any authority to enter into any contracts or assume any obligations for the other party or make any warranties or representations on behalf of the other party. 22.9 ADVICE OF COUNSEL. KOSAN and LICENSEE have each consulted counsel of their choice regarding this AGREEMENT, and each acknowledges and agrees that this AGREEMENT shall not be deemed to have been drafted by one party or another and will be construed accordingly. 22.10 PATENT MARKING. LICENSEE agrees to mark and have its AFFILIATES and SUBLICENSEES mark all PRODUCTS they sell or distribute pursuant to this AGREEMENT in accordance with the applicable statute or regulations in the country, or countries of manufacture and sale thereof. 22.11 COMPLIANCE WITH LAWS. Each party, shall furnish to the other party any information requested or required by that party during the term of this AGREEMENT or any extensions hereof to enable that party, to comply with the requirements of any U.S. or foreign federal, state and/or government agency. Each party shall comply with all applicable U.S., foreign, state, regional and local laws, rules and regulations relating to its activities to be performed pursuant to this AGREEMENT, including without limitation, the United States Foreign Corrupt Practices Act, United States export regulations and such other United States and foreign laws and regulations as may be applicable, and to obtaining all necessary approvals, consents and permits required by the applicable agencies of the government of the United States and foreign jurisdictions. 22.12 FURTHER ASSURANCES. At any time or from time to time on and after the date of this AGREEMENT, each party shall at the request of the other party (i) deliver to such party such records, data or other documents consistent with the provisions of this AGREEMENT, (ii) execute, and deliver or cause to be delivered, all such consents, documents or further instruments of transfer or license, and (iii) take or cause to be taken all such actions, as the requesting party may reasonably deem necessary or desirable in order for the requesting party to obtain the full benefits of this AGREEMENT and the transactions contemplated hereby. 22.13 JOINT AND SEVERAL LIABILITY: PERFORMANCE WARRANTY. Notwithstanding any other provision of this AGREEMENT, it is understood and agreed that ORTHO and RWJPRI shall be jointly and severally liable for the obligations of ORTHO and RWJPRI under this AGREEMENT. LICENSEE hereby warrants and guarantees the performance of any and all rights and obligations of this AGREEMENT by its AFFILIATE(S) and SUBLICENSEE(S) including, without limitation, performance under any license granted pursuant to Section 4.3, 4.5, or 4.6 above. -60- 22.14 USE OF SINGULAR. As used in this AGREEMENT, singular includes the plural and plural includes the singular, wherever so required by the context. 22.15 HEADINGS. The captions to the several Sections and Articles hereof are not a part of this AGREEMENT, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. 22.16 COUNTERPARTS. This AGREEMENT may be executed in two counterparts, each of which shall be deemed an original and which together shall constitute one immanent. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and duly executed this AGREEMENT on the date(s) indicated below, to be effective the day and year first above written. For and on Behalf of KOSAN BIOSCIENCES, INC. By: /s/ Daniel V. Santi ----------------------------------------- Name: Daniel Santi --------------------------------------- Title: Chairman -------------------------------------- Date: Sept 28-98 --------------------------------------- For and on Behalf of ORTHO-MCNEIL PHARMACEUTICAL INC. By: /s/ Robert G. Savage ----------------------------------------- Robert G. Savage, President Date: 9-29-98 --------------------------------------- For and on Behalf of THE R.W. JOHNSON PHARMACEUTICALS RESEARCH INSTITUTE By: /s/ William A.M. Duncan ----------------------------------------- William A.M. DunCan, Chairman Date: 9-29-28 --------------------------------------- -61- Exhibit A Research Plan PART I. FAST -TRACK PROJECT OBJECTIVES AND SPECIFIC AIMS [**] Page 1 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 2 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] REFERENCES Jacobsen, J.R., Hutchinson, C.R., Cane, D.E., & Khosla, C. (1997) "Precursor-directed biosynthesis of erythromycin analogs by an engineered polyketide synthase," SCIENCE 277: 367-369. Zotchev, S.B., & Hutchinson, C.R. (1995) "Cloning and heterologous expression of the genes encoding nonspecific electron transport components for a cytochrome P450 system of SACCHAROPOLYSPORA ERYTHRAEA involved in erythromycin production," GENE 156: 101-106. PART II. SAR PROJECT OBJECTIVE AND SPECIFIC AIMS [**] Page 3 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 4 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 5 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 6 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 7 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] REFERENCES Andersen, J.F., Tatsuta, K., Gunji, H., Ishiyama, T., & Hutchinson, C.R. (1993) "Substrate specificity of 6-deoxyerythronolide B hydroxylase, a bacterial cytochrome P450 of erythromycin A biosynthesis," BIOCHEMISTRY 32:1905-1913. Bright, G.M., Nagel, A.A., Bordner, J., ET AL. (1988) "Synthesis, IN VITRO and IN VIVO activity of novel 9-deoxo-9a-aza-9a-homoerythromycin A derivatives; a new class of macrolide antibiotics, the azalides," J. ANTIBIOTICS 41: 1029-1047. Griesgraber, G., Or Y.S., Chu, D.T.W., Nilius, A.M., Johnson, P.M., Flamm, R.K., Henry, R.F., & Plattner, J.J. (1996) "3-keto-11,12 carbazate derivatives of 6-O-methyl erythromycin A: synthesis and IN VITRO activity," J. ANTIBIOTICS 49(5): 465-477. Jacobsen, J.R., Hutchinson, C.R., Cane, D.E., & Khosla, C. (1997) "Precursor-directed biosynthesis of erythromycin analogs by an engineered polyketide synthase," SCIENCE 277: 367-369. Kao, C.M., Luo, G., Katz, L., Cane, D.E., & Khosla, C. (1995) "Manipulation of macrolide ring size by directed mutagenesis of a modular polyketide synthase," J. AM. CHEM. SOC. 117: 9105-9106. Kealey, J.T., Liu, L., Santi, D.V., Betlach, M.C., & Barr, P.J. (1997) "Production of a polyketide natural product in non-polyketide producing prokaryotic and eukaryotic hosts," PROC. NATL. ACAD. SCI. USA, in press. Liu, L., Thamchaipenet, A., Fu, H., Betlach, M., & Ashley, G. (1997) "Biosynthesis of 2-nor-6-deoxyerythronolide B by rationally designed domain substitution," J. AM. CHEM. SOC. 119: 10553-10554. McDaniel, R., Kao, C.M., Fu, H., Hevezi, P., Gustafsson, C., Betlach, M., Ashley, G., Cane, D.E., & Khosla, C. (1997) "Gain-of-function mutagenesis of a modular polyketide synthase," J. AM. CHEM. SOC. 119: 4309-4310. Morimoto, S., Takahashi, Y., Watanabe, Y., & Omura, S. (1984) "Chemical modification of erythromycins. I. Synthesis and antibacterial activity of 6-O-methylerythromycins A," J., ANTIBIOTICS 37:187-189. Page 8 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Ruan, X., Pereda, A., Stassi, D., Zeidner, D., Summers, R.G., Jackson, M., Shivakumar, A., Kakavas, S., Staver, M.J., Donadio, S., & Katz, L. (1997) "Acyltransferase Domain substitutions in erythromycin polyketide synthase yield novel erythromycin derivatives, "J. BACTERIOLOGY 179:6416-6425. Zotchev, S.B., & Hutchinson, C.R. (1995) "Cloning and heterologous expression of the genes encoding nonspecific electron transport components for a cytochrome P450 system of SACCHAROPOLYSPORA ERYTHRAEA involved in erythromycin production," GENE 156: 101-106. PART III. CRITERIA FOR NCES [**] Page 9 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 10 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 11 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] PART IV. FTE TABLES AND TIMELINES The table below shows the number and cost of Kosan FTEs to be applied in the Fast-Track and SAR Projects though the course of the Research Program. [**] Page 12 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [**] Page 13 of 13 Confidential Information [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit B [**]
- ----------------------------------------------------- ---------------- ---------------- ---------------- KOS002 CONCENTRATION DATA - ----------------------------------------------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- WELL EXTRACT PEAK RT COMPOUND MW CONC(mM) - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A2 KE-001 7.55 KA-058 302 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A2 KE-001 11.41 KA-060 302 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A2 KE-001 11.81 KA-061 302 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A2 KE-001 14.65 KA-042 284 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 10.60 KA-100 368 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 11.90 KA-118 386 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 15.25 KA-119 386 2.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 15.44 KA-120 386 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A3 KE-007 19.17 KA-075 324 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 6.31 KA-068 318 2.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 7.52 KA-069 318 2.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 10.28 KA-056 300 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 10.93 KA-057 300 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A4 KE-014 21.75 KA-031 270 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A5 KE-023 6.37 KA-068 318 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A5 KE-023 7.57 KA-069 318 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A5 KE-023 10.33 KA-056 300 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A6 KE-030 15.32 KA-119 386 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A6 KE-030 15.78 KA-120 386 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 10.47 KA-100 368 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 11.95 KA-118 386 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 15.28 KA-119 386 4.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 15.76 KA-120 386 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A7 KE-038 25.08 KA-074 322 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 10.58 KA-100 368 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 12.93 KA-102 368 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 15.35 KA-119 386 4.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 15.83 KA-120 386 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 19.25 KA-075 324 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 23.01 KA-121 386 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 23.66 KA-122 386 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A8 KE-045 25.06 KA-108 372 3.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 11.43 KA-101 368 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 13.38 KA-005 182 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 1 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 13.88 KA-150 453 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 14.78 KA-151 453 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 15.03 KA-127 392 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 15.60 KA-125 390 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 16.18 KA-128 392 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 16.71 KA-018 236 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 18.18 KA-138 413 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 18.70 KA-136 411 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 19.76 KA-142 427 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 20.31 KA-139 413 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 20.75 KA-140 413 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 21.25 KA-129 392 2.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 22.24 KA-126 390 1.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 23.65 KA-137 411 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 25.00 KA-109 374 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A9 KE-073 26.58 KA-088 348 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A10 K005-83 26.73 KA-025 254 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- A 11 K005-92D [**] 390 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 7.82 KA-058 302 1.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 11.30 KA-059 302 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 12.05 KA-061 302 4.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 14.87 KA-042 284 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 19.57 KA-052 298 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 21.13 KA-053 298 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 21.30 KA-054 298 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 21.98 KA-064 312 8.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 22.96 KA-044 286 2.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 23.75 KA-038 283 3.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 24.53 KA-055 298 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 25.40 KA-040 283 5.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 26.76 KA-025 254 9.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 27.10 KA-050 297 2.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 28.05 KA-022 240 3.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B2 KE-002 29.21 KA-023 240 2.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 10.27 KA-100 368 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 13.71 KA-150 453 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 14.64 KA-046 290 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 15.19 KA-119 386 1.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 15.71 KA-120 386 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 16.55 KA-135 411 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 18.58 KA-136 411 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- B3 KE-060 26.28 KA-114 382 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 2 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B4 KE-016 12.78 KA-102 368 9.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B4 KE-016 15.97 KA-105 370 2.5 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B4 KE-016 16.73 KA-106 370 0.4 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B4 KE-016 21.43 KA-089 350 0.5 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 6.38 KA-068 318 1.1 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 7.59 KA-069 318 0.5 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 10.15 KA-065 315 2.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 10.33 KA-056 300 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 11.90 KA-001 166 0.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 12.26 KA-002 166 0.1 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B5 KE-064 16.58 KA-030 260 0.4 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B6 KE-031 9.83 KA-116 384 0.7 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B6 KE-031 11.86 KA-098 366 0.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B7 KE-039 8.00 KA-058 302 4.7 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B7 KE-039 11.81 302 0.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B7 KE-039 12.23 KA-061 302 4.8 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B7 KE-039 14.97 KA-042 284 3.0 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B8 KE-046 10.00 KA-115 384 2.8 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B9 KE-075 14.93 KA-148 450 1.0 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B9 KE-075 15.96 KA-153 464 0.4 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B9 KE-075 16.65 KA-146 448 0.1 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B9 KE-075 17.56 KA-154 464 0.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B10 K005-80 19.30 KA-052 298 1.0 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- B11 K005-92E [**] 924 1.0 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 13.13 KA-083 342 1.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 13.68 KA-051 298 0.7 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 14.38 KA-093 356 0.4 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 15.08 KA-095 360 0.1 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 16.30 KA-009 196 0.5 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 16.51 KA-010 196 0.9 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 16.96 KA-079 332 0.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 17.55 KA-080 332 0.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 18.98 KA-086 346 0.3 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C2 KE-058 19.41 KA-087 346 0.2 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C3 KE-062 6.15 KA-026 258 0.7 - ------------------- ---------------- ---------------- -------------------- ------------ ---------------- C3 KE-062 7.86 KA-058 302 0.8 - ------------------- ---------------- ---------------- -------------------- ------------ ----------------
Page 3 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
- ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 11.40 KA-059 302 0.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 12.07 KA-061 302 3.8 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 14.88 KA-042 284 2.6 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 16.51 KA-013 220 0.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 19.08 KA-052 298 6.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 19.51 KA-036 283 4.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 21.30 KA-037 283 2.0 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 22.85 KA-121 386 0.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 23.78 KA-038 283 1.1 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 25.00 KA-039 283 0.9 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C3 KE-062 26.76 KA-025 254 1.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C4 KE-017 9.68 KA-115 384 0.8 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C5 KE-063 6.48 KA-068 318 6.8 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C5 KE-063 7.78 KA-069 318 3.2 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C5 KE-063 10.42 KA-065 314 0.3 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C5 KE-063 14.83 KA-151 453 0.9 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C6 KE-032 10.08 KA-024 242 0.2 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C6 KE-032 15.10 KA-119 386 1.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C6 KE-032 15.58 KA-120 386 0.3 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C7 KE-068 10.28 KA-056 300 1.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C7 KE-068 10.96 KA-057 300 1.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 8.12 KA-058 302 0.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 11.48 KA-059 302 1.1 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 12.25 KA-061 302 2.0 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 14.62 KA-041 284 1.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C8 KE-047 15.01 KA-042 284 0.2 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 5.35 KA-067 318 0.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 10.95 KA-152 462 0.5 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 14.03 KA-148 450 0.4 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 15.73 KA-153 464 0.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- C9 KE-053 16.00 KA-146 448 0.7 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C10 K005-88 KA-092 354 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- C11 K005-92F erythromycin A 734 1.0 - ------------------- --------------- ------------------- --------------- --------------- ---------------- - ------------------- --------------- ------------------- --------------- --------------- ---------------- D2 KE-057 5.28 KA-067 318 0.3 - ------------------- --------------- ------------------- --------------- --------------- ---------------- D2 KE-057 5.76 KA-032 276 0.3 - ------------------- --------------- ------------------- --------------- --------------- ---------------- D2 KE-057 6.18 KA-070 319 0.9 - ------------------- --------------- ------------------- --------------- --------------- ---------------- D2 KE-057 7.43 KA-071 319 0.2 - ------------------- --------------- ------------------- --------------- --------------- ---------------- Page 4 of 10 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 12.60 KA-141 421 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 13.13 KA-083 342 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 13.73 KA-150 453 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 14.41 KA-132 407 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 14.80 KA-133 409 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D2 KE-057 18.58 KA-136 411 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 5.73 KA-016 234 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 7.62 KA-058 302 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 8.68 KA-165 302 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 11.20 KA-059 302 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 11.90 KA-061 302 1.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 12.46 KA-072 322 1.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 14.76 KA-041 284 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 17.15 KA-020 304 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 19.20 KA-052 298 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 19.65 KA-164 620 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 21.31 KA-163 618 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D3 KE-009 26.70 KA-025 254 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D4 KE-018 7.95 KA-058 302 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D4 KE-018 11.75 KA-060 302 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D4 KE-018 12.12 KA-061 302 2.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D4 KE-018 14.93 KA-042 284 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D5 KE-025 10.05 KA-115 384 4.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D5 KE-025 15.05 KA-017 234 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D5 KE-025 17.85 KA-111 380 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D6 KE-033 5.75 KA-012 210 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D6 KE-033 9.82 KA-115 384 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D6 KE-033 11.93 KA-098 366 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 6.25 KA-026 258 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 19.12 KA-052 298 5.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 19.45 KA-036 283 5.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 21.25 KA-037 283 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 23.73 KA-038 283 2.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 25.25 KA-040 283 3.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 26.88 KA-025 254 5.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 28.09 KA-022 240 4.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 29.20 KA-023 240 3.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D7 KE-042 32.00 KA-158 508 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D8 KE-048 12.03 KA-077 326 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D8 KE-048 14.63 KA-041 284 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 5 of 10 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D9 KE-074 14.91 KA-148 450 1.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D9 KE-074 15.96 KA-153 464 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D10 K003-89 KA-064 312 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- D11 K005-92G [**] 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 11.96 KA-061 302 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 18.56 KA-094 358 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 19.21 KA-052 298 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 23.75 KA-043 284 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 24.85 KA-035 282 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 25.84 KA-021 240 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 26.78 KA-025 254 2.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 28.06 KA-022 240 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E2 KE-004 29.23 KA-023 240 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 7.86 KA-058 302 0.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 12.11 KA-061 302 1.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 14.68 KA-049 291 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 14.90 KA-097 365 1.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 18.60 KA-136 411 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 19.13 KA-052 298 5.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 19.43 KA-036 283 7.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 21.25 KA-037 283 4.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 23.77 KA-038 283 4.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 24.90 KA-078 330 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 25.41 KA-040 283 3.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 26.80 KA-025 254 2.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 28.00 KA-022 240 1.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E3 KE-061 29.00 KA-023 240 1.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E4 KE-019 7.91 KA-058 302 2.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E4 KE-019 11.80 KA-060 302 0.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E4 KE-019 12.19 KA-061 302 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E4 KE-019 14.96 KA-042 284 1.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 9.80 KA-116 384 1.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 11.85 KA-098 366 2.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 12.16 KA-061 302 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 12.73 KA-117 384 2.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E5 KE-026 13.23 KA-066 314 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E6 KE-035 9.93 KA-115 384 4.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 6 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E7 KE-043 22.45 KA-082 340 2.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E7 KE-043 26.83 KA-025 254 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E8 KE-049 12.92 KA-102 368 14.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E8 KE-049 16.08 KA-105 370 2.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E8 KE-049 16.83 KA-106 370 0.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E8 KE-049 21.50 KA-089 350 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E9 KE-077 14.85 KA-148 450 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E9 KE-077 16.23 KA-153 464 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E10 K005-82 9.80 [**] 457 0.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- E11 K005-92H [**] 1.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 7.88 KA-058 302 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 11.38 KA-059 302 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 12.1 KA-061 302 2.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 14.9 KA-042 284 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 19.2 KA-052 298 3.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 19.55 KA-036 283 2.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 21.35 KA-037 283 1.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 22.85 KA-121 386 0.2 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 23.75 KA-038 283 2.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 25.43 KA-040 283 2.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 26.73 KA-025 254 6.0 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 28.06 KA-022 240 1.9 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F2 KE-005 29.23 KA-023 240 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 17.08 KA-159 512 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 19.22 KA-048 290 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 21.00 KA-062 304 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 22.40 KA-082 340 1.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 23.05 KA-157 500 0.7 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 24.60 KA-035 282 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F3 KE-010 26.76 KA-162 531 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F4 KE-020 7.94 KA-058 302 5.1 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F4 KE-020 11.75 KA-060 302 0.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F4 KE-020 12.15 KA-061 302 5.4 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F4 KE-020 14.96 KA-042 284 3.6 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F5 KE-027 9.93 KA-116 384 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F5 KE-027 11.90 KA-098 366 0.8 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F5 KE-027 12.83 KA-117 384 1.5 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- F5 KE-027 13.31 KA-073 322 0.3 - ------------------- ---------------- ---------------- ---------------- ---------------- ---------------- Page 7 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F6 KE-036 9.83 KA-115 384 1.4 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F6 KE-036 17.70 KA-111 380 0.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 7.26 KA-034 280 0.7 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 9.18 KA-028 260 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 12.91 KA-085 346 0.6 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 16.50 KA-063 310 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 18.68 KA-094 358 0,2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 20.15 KA-045 288 2.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 21.10 KA-062 304 0.4 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F7 KE-044 22.45 KA-082 340 1.7 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 10.05 KA-115 384 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 12.95 KA-102 368 9.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 13.38 KA-103 368 0.6 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 16.06 KA-105 370 1.6 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 16.83 KA-106 370 0.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F8 KE-070 26.36 KA-114 382 1.5 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F9 KE-055 none 0.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F10 K005-92A 14.80 [**] 527 1.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- F11 K005-92J [**] 1.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 5.95 KA-016 234 0.5 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 6.95 KA-084 344 0.4 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 12.08 KA-090 352 0.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 18.60 KA-047 290 0.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 19.33 KA-052 298 0.7 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 21.01 KA-062 304 0.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 22.36 KA-082 340 0.8 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G2 KE-006 26,76 KA-025 254 1.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 19.30 KA-052 298 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 22.43 KA-082 340 1.0 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 24.58 KA-076 325 0.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 25.03 KA-110 378 0.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G3 KE-012 26.78 KA-025 254 0.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 10.38 KA-100 368 0.2 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 15.23 KA-119 386 3.5 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 15.78 KA-120 386 0.9 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 23.58 KA-014 222 1.1 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- G4 KE-021 25.01 KA-074 322 3.3 - ------------------- ---------------- ---------------- ------------------ -------------- ---------------- Page 8 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 3.18 KA-006 194 2.9 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 9.96 KA-116 384 1.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 11.20 KA-098 366 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 12.86 KA-117 384 2.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 13.36 KA-066 314 0.6 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 14.76 KA-046 290 1.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G5 KE-065 25.00 KA-107 370 1.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G6 KE-037 15.26 KA-119 386 1.9 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G6 KE-037 15.76 KA-120 386 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G6 KE-037 25.06 KA-107 370 1.3 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G7 KE-069 28.28 KA-092 354 0.8 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 6.01 KA-032 276 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 10.20 KA-124 388 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 12.76 KA-027 258 1.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 14.80 KA-046 290 1.8 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 18.66 KA-136 411 0.7 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G8 KE-071 21.63 KA-155 464 1.3 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 7.05 KA-011 207 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 9.31 KA-130 398 0.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 10.23 KA-015 232 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 12.76 KA-156 486 0.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 16.16 KA-008 196 0.3 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 17.90 KA-147 448 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 21.56 KA-144 446 0.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 22.51 KA-033 276 0.3 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 23.45 KA-KA-145 446 0.2 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G9 KE-072 25.00 KA-123 386 0.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G10 K005-92B 24.15 [**] 1183 1.0 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ G11 K005-92K [**] 848 1.0 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 5.87 KA-096 362 2.0 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 6.85 KA-084 344 2.8 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 14.53 KA-019 240 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 19.28 KA-048 290 0.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 23.12 KA-043 284 0.6 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H2 KE-059 28.20 KA-091 354 1.1 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H3 KE-013 12.83 KA-102 368 5.5 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ H3 KE-013 22.95 KA-113 382 1.4 - ---------------- -------------- ----------- --------------------- ----------- ------------- ------------ Page 9 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 10.40 KA-100 368 0.7 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 11.95 KA-118 386 0.7 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 13.03 KA-102 368 1.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 15.21 KA-119 386 4.0 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 15.78 KA-120 386 2.0 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 16.90 KA-104 368 1.0 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 18.73 KA-094 358 1.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H4 KE-022 19.21 KA-099 366 1.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 5.28 KA-067 318 0.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 9.56 KA-003 168 0.5 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 11.63 KA-098 366 2.6 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 12.56 KA-117 384 1.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H5 KE-028 18.56 KA-094 358 0.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 9.77 KA-115 384 6.8 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 14.75 KA-046 290 0.4 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 17.73 KA-111 380 0.4 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 19.38 KA-112 380 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H6 KE-066 26.30 KA-114 382 0.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 16.53 KA-063 310 0.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 19.43 KA-081 340 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 23.24 KA-043 284 2.6 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 24.22 [**] 1183 1.9 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 27.50 KA-007 194 0.7 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H7 KE-106 29.75 KA-131 398 1.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 9.25 KA-134 410 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 11.43 KA-101 368 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 13.36 KA-029 260 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 16.18 KA-008 196 0.9 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 18.16 KA-149 452 0.1 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 21.23 KA-129 392 0.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 23.65 KA-004 176 0.6 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 25.05 KA-109 374 1.3 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H8 KE-050 26.56 KA-088 348 0.8 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H9 KE-054 15.20 [**] 444 1.6 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H9 KE-054 18.96 unknown 444 0.2 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H10 K005-92C [**] 1.0 - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- - --------------- --------------- ------------- -------------------- ------------ ------------ ----------- H11 K005-92L [**] 318 1.0 - --------------- --------------- ------------- -------------------- ------------ ------------ -----------
Page 10 of 10 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT C KOSAN PATENT RIGHTS [**] Confidential Information Page 1 of 2 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT C (CONT) KOSAN PATENT RIGHTS [**] Confidential Information Page 2 of 2 [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.12 11 ex-10_12.txt EXHIBIT 10.12 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 10.12 AMENDMENT NUMBER 1 TO RESEARCH AND LICENSE AGREEMENT BY AND BETWEEN KOSAN BIOSCIENCES AND R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE This Amendment dated MAR 17, 2000 is made to the RESEARCH AND LICENSE AGREEMENT (hereinafter called the "AGREEMENT"), made as of September 28, 1998 by and between KOSAN BIOSCIENCES, INC., a corporation organized under California law having its principal office at 3832 Bay Center Place, Hayward, California 94545 (hereinafter called "KOSAN"); ON THE ONE HAND, AND: ORTHO MCNEIL PHARMACEUTICAL, INCORPORATED (hereinafter called "ORTHO"), a company organized under Delaware law, having its principal office at U.S. Route 202, Raritan, New Jersey 08869; and the R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE (hereinafter called "RWJPRI"), a division of Ortho McNeil Pharmaceutical, Incorporated, having its principal office at U.S. Route 202, Raritan, New Jersey 08869 (ORTHO and RWJPRI hereinafter collectively called "LICENSEE") ON THE OTHER HAND, WITNESSETH: A. WHEREAS, KOSAN and LICENSEE have entered into the AGREEMENT providing for a collaborative research drug discovery program as generally described in the RESEARCH PLAN attached thereto as Appendix A; B. WHEREAS, the RESEARCH PLAN provided for two projects to be conducted by the parties, a [**] to be conducted over the [**], and an [**] to be conducted over the [**], each with a provision for additional CONTINGENT WORK, to be performed in the event a GO DECISION was made for the Project; C. WHEREAS, having completed the first twelve months of the RESEARCH PROGRAM, the parties wish to fund the CONTINGENT WORK on the Fast Track PROJECT and to reserve the rights to [**] under provisions of the AGREEMENT: NOW, THEREFORE, in consideration of the premises and the performance of covenants herein contained, the parties agree to amend the AGREEMENT as follows: 1. Unless otherwise defined herein, all capitalized terms used herein shall have the same meaning as set forth in the AGREEMENT. [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2. In accordance with the terms of the AGREEMENT, for Year 2 of the RESEARCH PROGRAM, RWJPRI shall fund [**] on the [**]. RWJPRI acknowledges that [**] already been provided in Year 1 with payment therefor deferred until Year 2. Thus, RWJPRI shall provide funding for [**] for the combined programs for Year 2 in accordance with the terms of the AGREEMENT. 3. [**] shall be deemed an [**] and RWJPRI has made the $[**] ([**] Dollar) payment due under Section 6.2.1. [**] shall be a reserved Compound under the provisions Section 3.5.6 until such time as it is designated a Licensed Compound under the Agreement or the end of the NON-EXCLUSIVE SCREENING PERIOD, whichever shall first occur. 4. Except as amended herein, all of the terms and conditions of the AGREEMENT shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and duly executed this Amendment AGREEMENT on the date(s) indicated below, to be effective the day and year first above written. For and on Behalf of KOSAN BIOSCIENCES, INC. By: /s/ Daniel V. Sant ----------------------------------------- Name: DANIEL V. SANT --------------------------------------- Title: Chief Executive Date: 17 MARCH 2000 --------------------------------------- For and on Behalf of THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE By: /s/ P.A. Peterson ----------------------------------------- Name: P.A. PETERSON, MD, PhD --------------------------------------- Title: President Date: MARCH 17, 2000 --------------------------------------- [**] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.20 12 ex-10_20.txt EXHIBIT 10.20 EXHIBIT 10.20 PROMISSORY NOTE $71,500 San Francisco, CA September 22, 1999 FOR VALUE RECEIVED, CHAITAN KHOSLA promises to pay Kosan Biosciences Incorporated (the "Company"), or order, the principal sum of seventy-one thousand, five hundred ($71,500), together with interest on the unpaid principal hereof from the date hereof at the rate of five and 89/100 percent (5.89%) per annum, compounded semiannually. Principal and interest shall be due and payable on September 22, 2002. Should the undersigned fail to make full payment of principal or interest for a period of 10 days or more after the due date thereof, the whole unpaid balance on this Note of principal and interest shall become immediately due at the option of the holder of this Note. Payment of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Option, dated as of October 23, 1998. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. In the event the undersigned shall cease to be an employee or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. /s/ Chaitan Khosla ----------------------------------- Signature CHAITAN KHOSLA ----------------------------------- Print Name EX-10.28 13 ex-10_28.txt EXHIBIT 10.28 EXHIBIT 10.28 KOSAN BIOSCIENCES INCORPORATED --------------- SERIES C PREFERRED STOCK PURCHASE AGREEMENT This Series C Preferred Stock Purchase Agreement (the "Agreement") is made as of March 30, 2000 among Kosan Biosciences Incorporated, a California corporation (the "Company"), with principal executive offices at 3832 Bay Center Place, Hayward, California 94545, and the persons and entities listed on the Schedule of Purchasers attached hereto as EXHIBIT A (the "Purchasers"). SECTION 1. AUTHORIZATION AND SALE OF SERIES C PREFERRED STOCK 1.1 AUTHORIZATION OF SERIES C PREFERRED STOCK. Prior to the Closing (as defined in Section 2 below), the Company will have duly adopted and filed with the California Secretary of State its Amended and Restated Articles of Incorporation (the "Articles") in the form attached hereto as EXHIBIT B, authorizing the issuance of shares of Series C Preferred Stock (the "Series C Preferred") having the rights, privileges, and preferences set forth therein, and will have authorized the issuance pursuant to this Agreement of up to 1,050,000 shares of Series C Preferred (the "Shares"). For purposes hereof, the "Conversion Stock" means the shares of the Company's Common Stock issuable or issued upon conversion of the Shares issued and sold pursuant to this Agreement. 1.2 SALE OF SERIES C PREFERRED STOCK. Subject to the terms and conditions of this Agreement, the Company will severally issue and sell to each Purchaser at the Closing, and each Purchaser will severally buy from the Company, that number of shares of Series C Preferred specified opposite such Purchaser's name in the Schedule of Purchasers attached hereto as EXHIBIT A for a purchase price of $31.00 per share. The Company's agreement with each Purchaser is a separate agreement, and the sale of the Series C Preferred to each Purchaser is a separate sale. SECTION 2 CLOSING DATES; DELIVERY 2.1 CLOSING DATES. The closing of the purchase and sale of the Series C Preferred hereunder shall take place at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California at 10:00 a.m., local time, on March 30, 2000 (the "Closing"), or at such other time and place upon which the Company and the Purchasers shall agree. The date of the Closing is hereinafter referred to as the "Closing Date." 2.2 DELIVERY. At the Closing, the Company will deliver to each Purchaser a certificate or certificates, registered in such Purchaser's name set forth on the Schedule of Purchasers, representing the number of shares of Series C Preferred designated in the Schedule of Purchasers to be purchased by such Purchaser, against delivery to the Company by such Purchaser of a check payable to the Company or a wire transfer per the Company's instructions in the amount of the purchase price therefor, as indicated in the Schedule of Purchasers. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in the Schedule of Exceptions attached hereto as EXHIBIT C, the Company represents and warrants to the Purchasers as follows: 3.1 ORGANIZATION AND STANDING. The Company is a corporation duly organized and validly existing under, and by virtue of, the laws of the State of California and is in good standing under such laws. The Company has requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as presently contemplated to be conducted. The Company is not currently qualified to do business as a foreign corporation in any jurisdiction, and the failure to be so qualified will not have a material adverse affect on the Company's business as now conducted. The Company has made available to the Purchasers copies of the Articles and the Company's Bylaws, as currently in effect. 3.2 CORPORATE POWER. The Company has and will have at the Closing Date all requisite legal and corporate power and authority to execute and deliver this Agreement, the Third Amended and Restated Registration Rights Agreement in the form attached hereto as EXHIBIT D (the "Registration Rights Agreement"), the Third Amended and Restated Voting Agreement in the form attached hereto as EXHIBIT E (the "Voting Agreement"), to sell and issue the Shares hereunder, to issue the Conversion Stock and to carry out and perform its obligations under the terms of this Agreement, the Registration Rights Agreement and the Voting Agreement. 3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association or business entity. 3.4 CAPITALIZATION. Immediately prior to the Closing, the authorized capital stock of the Company will consist of 12,000,000 shares of Common Stock and 4,348,182 shares of Preferred Stock, 1,480,000 shares of which are designated "Series A Preferred Stock" (hereinafter, the "Series A Preferred"), 1,818,182 shares of which are designated "Series B Preferred" (hereinafter the "Series B Preferred") and 1,050,000 shares of which are designated Series C Preferred. Immediately prior to the Closing, there will be issued and outstanding 2,159,148 shares of Common Stock, 1,451,195 shares of Series A Preferred 1,818,182 shares of Series B Preferred and no shares of Series C Preferred. All issued and outstanding shares of Common Stock, Series A Preferred and Series B Preferred have been duly authorized and validly issued, and are fully paid and nonassessable. The Company has reserved 1,050,000 shares of Series C Preferred for issuance hereunder. The Company has also reserved 1,451,195 shares of its Common Stock for issuance upon conversion of the Series A Preferred, 1,818,182 shares of its Common Stock for issuance upon 2 conversion of the Series B Preferred and 1,050,000 shares of Common Stock for issuance upon conversion of the Series C Preferred. The Series C Preferred shall have the rights, preferences, privileges and restrictions set forth in the Articles. The Company has reserved 1,075,000 shares of Common Stock for issuance pursuant to its 1996 Stock Option Plan, as amended. Except as set forth above, there are no options, warrants or other rights to purchase any of the Company's authorized and unissued capital stock. Except pursuant to and set forth in this Agreement and the Voting Agreement, to the Company's knowledge there are no voting trusts or agreements, shareholders' agreements, pledge agreements, buy-sell agreements, rights of first refusal, preemptive rights or proxies relating to any securities of the Company (whether or not the Company is a party thereto). Except as set forth in the agreements named on the Schedule of Exceptions, the Company has not granted any additional rights, benefits or privileges to any holder of the Series A Preferred, the Series B Preferred or to any of the Purchasers. All of the outstanding securities of the Company were issued in compliance with the registration or exemption provisions of all applicable federal and state securities laws. No stock split, dividend, other recapitalization, or similar event or act has been effected, declared, or voted since the Balance Sheet Date, as hereinafter defined. 3.5 AUTHORIZATION. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement, the Registration Rights Agreement, the Voting Agreement, the authorization, sale, issuance and delivery of the Series C Preferred and the Conversion Stock, and the performance of all of the Company's obligations hereunder and under the Registration Rights Agreement and the Voting Agreement has been taken or will be taken prior to the Closing. This Agreement, the Registration Rights Agreement and the Voting Agreement when executed and delivered by the Company, shall constitute valid and binding obligations of the Company, enforceable in accordance with their terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, will be fully paid and nonassessable; the Conversion Stock has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement and the Articles, will be validly issued, fully paid and nonassessable; and the Shares and the Conversion Stock will be free of any liens or encumbrances, other than any liens or encumbrances created by or imposed upon the holders; PROVIDED, however, that the Shares and the Conversion Stock may be subject to restrictions on transfer under state and/or federal securities laws. 3.6 FINANCIAL STATEMENTS. Attached to the Schedule of Exceptions is a copy of the Company's unaudited balance sheet as at December 31, 1999 (the "Balance Sheet Date"), unaudited statement of cash flow for December 31, 1999 and unaudited income statement for December 31, 1999 (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods indicated. The Financial Statements fairly present the financial condition and operating results of the Company as of and for the periods indicated. Except as set forth in the Financial Statements, as of the date hereof the Company has no liabilities, contingent or otherwise, which individually or in the aggregate would be material to the financial condition or operating 3 results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 3.7 CHANGES. Since The Balance Sheet Date there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Financial Statements, except changes in the ordinary course of business that have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted); (c) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company, except in the ordinary course of business and that is not material to the assets, properties, financial condition, operating results or business of the Company (as such business is presently conducted); (d) any change, except in the ordinary course of business and that is not material to the assets, properties, financial condition, operating results or business of the Company, in the contingent obligations of the Company by way of guaranty or any assurance of performance or payment, endorsement, indemnity, warranty, or otherwise; (e) any waiver by the Company of a valuable right or of a material debt owed to it; (f) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject (including any agreement set forth on the Schedule of Exceptions); (g) any material change in any compensation arrangement or agreement with any employee; (h) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (i) any resignation or termination of employment of any key officer of the Company; and the Company does not know of the impending resignation or termination of employment of any such officer; (j) receipt of notice that there has been a loss of, or material order cancellation by, any major customer of the Company; 4 (k) any mortgage, pledge, transfer of a security interest in, or lien, created by the Company, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (l) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; (m) any declaration, setting aside or payment of any dividend or other distribution in respect of any of the Company's capital stock, or any direct or indirect redemption, purchase or other acquisition of any of such stock by the Company; (n) any agreement or commitment by the Company to do any of the things described in this Section 3.7; or (o) any other event or condition of any character that has materially and adversely affected the business, prospects, condition, affairs, operations, properties or assets of the Company. 3.8 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and marketable title to its properties (both real and personal) and assets, and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable, and (ii) possible minor liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations or the proposed operations of the Company, and which have not arisen otherwise than in the ordinary course of business. 3.9 TAXES. The Company has filed all tax returns, federal, state, county and local, required to be filed by it, and the Company has paid all taxes shown to be due by such returns as well as all other taxes, assessments and governmental charges which have become due or payable, including without limitation all taxes which the Company is obligated to withhold from amounts owing to employees, creditors and third parties. 3.10 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company is not in violation of any term of the Articles or its Bylaws, or in violation in any material respect of any term or provision of any material mortgage, indebtedness, indenture, contract, agreement, instrument, judgment or decree (including any agreement set forth on the Schedule of Exceptions) (hereinafter referred to collectively as "Contracts"), and is not in violation of any order, statute, rule or regulation applicable to the Company where such violation would materially and adversely affect the Company. The execution, delivery and performance of and compliance with this Agreement, the Registration Rights Agreement, the Voting Agreement and the issuance of the Series C Preferred and the Conversion Stock, have not resulted and will not result in any violation of, or conflict with, or constitute a default under, the Articles, the Company's Bylaws or any Contract, nor result in the creation of, any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company. 5 3.11 LITIGATION, ETC. There are no actions, suits, proceedings or investigations pending against the Company or its properties before any court or governmental agency nor, to the Company's knowledge, is there any basis therefor or threat thereof. The Company is not in default with respect to any order, writ, injunction or decree known to or served upon the Company of any court or of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. There is no action, suit, proceeding, or investigation by the Company pending or threatened against others. 3.12 INTELLECTUAL PROPERTY. To the Company's knowledge, the Company owns or possesses adequate licenses or other sufficient rights to use all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, manufacturing processes, formulae, trade secrets, customer lists and know how (collectively, "Intellectual Property") necessary to the conduct of its business as now conducted and as currently contemplated to be conducted. Set forth on the Schedule of Exceptions is a list of all third party patents and patent applications of which the Company is aware that may be relevant to the Company's research. The Company has taken such precautions and measures as it believes are reasonably necessary to protect the confidentiality and value of its Intellectual Property. The Company has not received any communications alleging that the Company has violated or, by conducting its business as currently contemplated to be conducted, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. 3.13 EMPLOYEES. To the Company's knowledge, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of such employee with the Company or any other party because of the nature of the business conducted by the Company, nor is any employee of the Company subject to any judgment, decree or order of any court or administrative agency or subject with respect to any prior employer to any non-contractual obligation, that would interfere with such employee's duties to the Company or that would conflict with the Company's business as now conducted. Each current or previous employee, officer and consultant of the Company has executed agreements with the Company regarding confidentiality and assignment of inventions, forms of which are attached hereto as EXHIBIT G (each, an "Employee Proprietary Information and Invention Assignment Agreement"). The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company, except for inventions, trade secrets or proprietary information that have been validly assigned to the Company. 3.14 REGISTRATION RIGHTS. Except as set forth in the Registration Rights Agreement, the Company is not under any contractual obligation to register (as defined in the Registration Rights Agreement) any of its currently outstanding securities or any of its securities which may hereafter be issued. 3.15 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of or designation, declaration or filing with any governmental authority or any private party on the part of 6 the Company is required in connection with the valid execution and delivery of this Agreement, the Registration Rights Agreement, the Voting Agreement, or the offer, sale or issuance of the Series C Preferred (and the Conversion Stock), or the consummation of any other transaction contemplated hereby, except (a) filing of the Articles in the office of the California Secretary of State, (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Series C Preferred (and the Conversion Stock) under the California Corporate Securities Law of 1968, as amended, and other applicable securities laws, and (c) the consent of the parties to the Registration Rights Agreement and the Voting Agreement to the amendment and restatement of such agreements. 3.16 OFFERING. Subject to the accuracy of the Purchasers' representations in Section 4 hereof, the offer, sale and issuance of the Series C Preferred to be issued in conformity with the terms of this Agreement, and the issuance of the Conversion Stock, constitute transactions exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"). 3.17 MINUTE BOOKS. The minute books of the Company made available to the Purchasers contain a complete summary of all meetings of directors and shareholders since the date of incorporation and reflect all transactions referred to in such minutes in all material respects. 3.18 RELATED-PARTY TRANSACTIONS. Except as disclosed in the Financial Statements, (a) no 5% or greater shareholder of the Company nor any general partner thereof, (b) no employee, officer, or director of the Company or any 5% or greater shareholder of the Company, and (c) no member of the immediate family of any of the persons listed in (a) or (b) above, is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officer, or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. No member of the immediate family of any employee, officer or director of the Company, and no member of the immediate family of any 5% or greater shareholder of the Company nor any general partner, employee, officer or director thereof, is directly or indirectly interested in any material contract with the Company. 3.19 EMPLOYEE BENEFIT PLANS. The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974 or any employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. 3.20 REAL PROPERTY HOLDING CORPORATION. The Company is not a real property holding corporation within the meaning of Internal Revenue Code Section 897(c)(2) and any regulations promulgated thereunder. 7 3.21 INSURANCE. The Company has fire and casualty and other insurance policies with coverage customary for companies similarly situated to the Company. 3.22 LIABILITIES. The Company has no material liabilities and, to the best of its knowledge, knows of no material contingent liabilities, not disclosed in the Financial Statements, except current liabilities incurred in the ordinary course of business subsequent to the Balance Sheet Date which have not been, either in any individual case or in the aggregate, materially adverse. 3.23 FULL DISCLOSURE. This Agreement, the Schedule of Exceptions, the Exhibits hereto, the Registration Rights Agreement and the Voting Agreement do not contain any untrue statement of a material fact nor, to the Company's knowledge, omit to state a material fact required to be stated or necessary to make the statements, in light of the circumstances under which such statements were made, not misleading. Notwithstanding the foregoing, any projections provided to the Purchasers were prepared by the Company in a good faith effort to describe the Company's business as now conducted and as currently contemplated to be conducted, as well as the Company's products and currently contemplated products and the markets therefor. The assumptions underlying these projections were based upon reasonable investigation by the Company as of the date thereof; however, there is no assurance that these assumptions will prove to be valid or that the objectives reflected in such projections will be achieved. There is no fact within the knowledge of the Company (other than publicly known facts relating exclusively to political or economic matters of general applicability that will adversely affect all comparable entities) that may have the effect of preventing, delaying, making illegal or otherwise interfering with any of the transactions contemplated herein. 3.24 AGREEMENTS; ACTION. (a) Except for agreements explicitly contemplated hereby, agreements between the Company and its employees and consultants with respect to the sale of the Company's Common Stock, there are no agreements, understandings or proposed transactions between the Company and any of its officers or directors or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or to its knowledge by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000 (other than obligations of, or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business), or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase of "off the shelf" or other standard products), or (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights (other than indemnification obligations arising from purchase or sale agreements entered into in the ordinary course of business). (c) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred 8 any indebtedness for money borrowed or any other liabilities (other than with respect to dividend obligations, distributions, indebtedness and other obligations incurred in the ordinary course of business or as disclosed in the Financial Statements) individually in excess of $50,000 or, in the case of indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (d) For the purposes of subsections (b) and (c) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. 3.25 COMPLIANCE WITH LAWS; PERMITS. The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business as currently conducted or as currently contemplated to be conducted, or the ownership of its properties, which violation would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of the Company. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and the issuance of the Shares or the Conversion Stock, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which would materially and adversely affect the business, properties, prospects or financial condition of the Company and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as currently conducted. 3.26 ENVIRONMENTAL AND SAFETY LAWS. To its knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 3.27 QUALIFIED SMALL BUSINESS. The Company represents and warrants to the Purchasers that, to the best of its knowledge, the Series C Preferred qualifies as "Qualified Small Business Stock" as defined in Section 1202(c) of the Internal Revenue Code of 1986, as amended (the "Code") as of the date hereof. The Company will comply with the reporting and record keeping requirements of Section 1202 of the Code and any regulations promulgated thereunder. The Company will use reasonable efforts to not repurchase any stock of the Company if such repurchase would cause such Series C Preferred not to so qualify as "Qualified Small Business Stock" provided, however, that the Company shall not be obligated to take any action or refrain from taking any action which the Company has determined, in good faith, is not in its best business interests. 9 3.28 INVESTMENT COMPANY ACT. The Company is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 3.29 ANTI-ISRAELI BOYCOTT. The Company has not participated and is not participating in, an anti-Israeli boycott within the scope of Chapter 7 of Part 2 of Division 4 of Title 2 of the California Government Code as in effect from time to time. 3.30 SBA REPRESENTATIONS. The Company, together with its "Affiliates" (as that term is defined at Section 107.50 of Title 13 of the Code of Federal Regulations), is a "Small Business" (as that term is defined in Section 107.50 of Title 13 of the Code of Federal Regulations). SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser hereby severally represents and warrants to the Company with respect to the purchase of the Shares as follows: 4.1 INVESTMENT EXPERIENCE. Such Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that such Purchaser is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. 4.2 ACCREDITED INVESTOR. Such Purchaser is either (i) an "accredited investor" as that term is defined in Securities and Exchange Commission Rule 501 of Regulation D, as presently in effect, or (ii) has a preexisting personal or business relationship with the Company or any of its officers, directors or controlling persons, or by reason of such Purchaser's business or financial experience or the business or financial experience of such Purchaser's professional advisors who are unaffiliated with and who are not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, has the capacity to protect such Purchaser's own interests in connection with the purchase of the Series C Preferred. 4.3 INVESTMENT. Such Purchaser is acquiring the Series C Preferred and the underlying Common Stock for investment for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. Such Purchaser understands that the Series C referred to be purchased and the underlying Common Stock have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Purchaser's representations as expressed herein. 4.4 RULE 144. Such Purchaser acknowledges that the Series C Preferred and the Conversion Stock must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. Such Purchaser is aware of the 10 provisions of Rule 144 promulgated under the Securities Act which permit limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the existence of a public market for the shares, the availability of certain current public information about the Company, the resale occurring not less than one year after a party has purchased and paid for the security to be sold, the sale being effected through a "broker's transaction" or in transactions directly with a "market maker" and the number of shares being sold during any three month period not exceeding specified limitations. 4.5 NO PUBLIC MARKET. Such Purchaser understands that no public market now exists for any of the securities issued by the Company and that the Company has made no assurances that a public market will ever exist for the Company's securities. 4.6 ACCESS TO DATA. Such Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with its management. Such Purchaser also has had an opportunity to ask questions of officers of the Company, which questions were answered to its satisfaction. Such Purchaser understands that such discussions, as well as any written information issued by the Company, were intended to describe certain aspects of the Company's business and prospects but were not a thorough or exhaustive description; provided, that this representation shall not be deemed to limit the representations of the Company under Section 3. Such Purchaser's decision to enter into the transactions contemplated hereby is based on its own evaluation of the risks and merits of the purchase and the Company's proposed business activities. 4.7 AUTHORIZATION. This Agreement, the Registration Rights Agreement and the Voting Agreement, when executed and delivered by such Purchaser, will each constitute a valid and legally binding obligation of the Purchaser, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 4.8 TAX LIABILITY. Such Purchaser has reviewed with its own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. With respect to such tax consequences, such Purchaser relies solely on such advisors and not on any statements or representations of the Company or any of its agents. Such Purchaser understands and agrees that it (and not the Company) shall be responsible for any of its own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. SECTION 5 CONDITIONS TO CLOSING OF PURCHASERS The Purchasers' obligations to purchase the Shares at the Closing are, at the option of the Purchasers, subject to the fulfillment of the following conditions: 11 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Company in Section 3 hereof, as qualified by EXHIBIT C, shall have been true and correct when made and shall be true and correct as of the Closing Date. 5.2 COVENANTS. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date shall have been performed or complied with in all material respects. 5.3 NO INJUNCTION, ORDER, ETC. No preliminary or permanent injunction or other binding order, decree or ruling issued by a court or governmental agency shall be in effect which shall have the effect of preventing the consummation of the transactions contemplated by this Agreement. 5.4 OPINION OF COMPANY'S COUNSEL. The Purchasers shall have received from Wilson Sonsini Goodrich & Rosati, counsel to the Company, an opinion addressed to them, dated the Closing Date, in substantially the form of EXHIBIT G. 5.5 COMPLIANCE CERTIFICATE. The Company shall have delivered to the Purchasers a certificate of the Company, executed by the Chairman of the Board of the Company, dated the Closing Date, and certifying, among other things, to the fulfillment of the conditions specified in Sections 5.1 and 5.2 of this Agreement. 5.6 REGISTRATION RIGHTS AGREEMENT. Each contemplated party thereto shall have executed and delivered the Registration Rights Agreement in substantially the form attached hereto as EXHIBIT D. 5.7 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Series C Preferred and the Conversion Stock. 5.8 ARTICLES. The Articles shall have been filed with the California Secretary of State. 5.9 LEGAL MATTERS. All material matters of a legal nature which pertain to this Agreement and the transactions contemplated hereby shall have been reasonably approved by counsel to the Purchasers. 5.10 SUPPORTING DOCUMENTS. The Purchasers or their counsel shall have received copies of the following documents: (a) (i) the Articles, certified as of a recent date by the Secretary of State of the State of California, and (ii) a certificate of said Secretary dated as of a recent date as to the due incorporation and good standing of the Company and a certificate of the California Franchise Tax Board as to the payment of taxes by the Company; 12 (b) a certificate of the Secretary or an Assistant Secretary of the Company dated the Closing Date and certifying: (i) that attached thereto is a true and complete copy of the Bylaws of the Company as in effect on the date of such certification; (ii) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors or the shareholders of the Company authorizing the execution, delivery and performance of this Agreement, the Registration Rights Agreement, the Voting Agreement, the issuance, sale and delivery of the Series C Preferred Stock and the reservation of the Conversion Stock, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated by this Agreement, the Registration Rights Agreement and the Voting Agreement; and (iii) that the Articles have not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (a)(ii) above. 5.11 EMPLOYEE PROPRIETARY INFORMATION AGREEMENTS. The Company and all Company officers, consultants and employees shall have executed and delivered an Employee Proprietary Information and Invention Assignment Agreement in the form attached hereto as EXHIBIT F. 5.12 PURCHASE AND DELIVERY OF SHARES. Purchasers of an aggregate of at least $10,000,000 of Series C Preferred shall have paid the purchase price therefor to the Company and the Company shall have delivered to each such Purchaser at the Closing a stock certificate(s) representing the number of the Shares to be acquired by such Purchaser, as designated in EXHIBIT A. 5.13 VOTING AGREEMENT. Each party thereto and the Company shall have executed the Voting Agreement in the form attached as EXHIBIT E. 5.14 SMALL BUSINESS CONCERN DOCUMENTS. The Company shall have executed and delivered to each Purchaser who requests them, a Size Status Declaration on SBA Form 480 and an Assurance of Compliance on SBA Form 652, and shall provided to each Purchaser who so requests information necessary for the preparation of a Portfolio Financing Report on SBA Form 1031. Any information provided by the Company to any Purchaser pursuant to this Section 5.15 shall be accurate and complete. SECTION 6 CONDITIONS TO CLOSING OF COMPANY The Company's obligation to sell and issue the Shares at the Closing Date is, at the option of the Company, subject to the fulfillment as of the Closing Date of the following conditions: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Purchasers in Section 4 hereof shall be true and correct when made and shall be true and correct on the Closing Date. 13 6.2 BLUE SKY COMPLIANCE. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or have the availability of exemptions therefrom, required by any state for the offer and sale of the Series C Preferred and the Conversion Stock. 6.3 ARTICLES. The Articles shall have been filed with the California Secretary of State and shall be in full force and effect on the Closing Date. 6.4 REGISTRATION RIGHTS AGREEMENT. Each contemplated party thereto shall have executed and delivered the Registration Rights Agreement in substantially the form attached hereto as EXHIBIT D. 6.5 LEGAL MATTERS. All material matters of a legal nature which pertain to this Agreement, and the transactions contemplated hereby, shall have been reasonably approved by counsel to the Company. 6.6 COVENANTS. All covenants, agreements, and conditions contained in this Agreement to be performed by the Purchasers on or prior to the Closing Date shall have been performed or complied with in all material respects. 6.7 VOTING AGREEMENT. Each party thereto shall have executed the Voting Agreement in the form attached as EXHIBIT E. SECTION 7 COVENANTS OF THE COMPANY The Company hereby covenants and agrees as follows: 7.1 ANNUAL, QUARTERLY AND MONTHLY FINANCIAL INFORMATION. So long as a Purchaser holds at least 50,000 shares of Series C Preferred or Conversion Stock or a combination of both (as adjusted for stock splits, stock dividends and the like), the Company shall deliver to such Purchaser (i) as soon as practicable after the end of each fiscal year of the Company, and in any event within 90 days thereafter, annual financial statements (balance sheet, income statement and statement of cash flows) that have been audited by a nationally recognized firm; (ii) as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within 21 days thereafter, unaudited quarterly financial statements (balance sheet, income statement and statement of cash flows) prepared in accordance with generally accepted accounting principles consistently applied; and (iii) upon the request of any such Purchaser, as soon as practicable after the end of each month, unaudited monthly financial statements (balance sheet, income statement and cash flows), and upon the request of any Purchaser that holds at least 100,000 shares of Series C Preferred or Conversion Stock or a combination of both (as adjusted for stock splits, stock dividends and the like), a reconciliation comparing such monthly statements to the operating plan. 14 7.2 ADDITIONAL INFORMATION RIGHTS. So long as a Purchaser holds at least 100,000 shares of Series C Preferred or Conversion Stock or a combination of both (as adjusted for stock splits, stock dividends and the like), the Company will (i) furnish such Purchaser with a copy of the Company's annual operating plan within thirty (30) days prior to the beginning of the Company's fiscal year, and (ii) permit such Purchaser and its representatives to visit and inspect the Company's properties and to examine its books of account and to discuss the Company's affairs, finances and accounts with its officers and other Company designated representatives, all at such reasonable times as may be requested by such Purchaser on five days prior notice; PROVIDED, HOWEVER, that the Company will not be obligated pursuant to this Section 7.2 to provide any information on its technology which it reasonably considers to be a trade secret or similar confidential information. 7.3 TERMINATION OF ADDITIONAL INFORMATION RIGHTS. The Company's obligations under Section 7.1 and Section 7.2 shall terminate and be of no further force or effect upon a Qualified IPO (as such term is defined in the Company's Articles.) 7.4 EMPLOYEE PROPRIETARY INFORMATION AGREEMENTS. The Company shall obtain, and shall cause its subsidiaries to obtain, an Employee Proprietary Information and Invention Assignment Agreement in substantially the form of EXHIBIT F from all future officers, key employees, other employees and consultants who will have access to confidential information of the Company or any of its subsidiaries, upon their employment by the Company or any of its subsidiaries. 7.5 KEY PERSON LIFE INSURANCE. The Company will use its best efforts to obtain and maintain term life insurance under a policy or policies issued by insurers of recognized standing in the aggregate amount of $1,000,000.00 on the lives of each of Daniel V. Santi and Chaitan Khosla with the Company named as sole beneficiary of such insurance. Such policy or policies will remain in force for so long as the Board of Directors shall determine. 7.6 RESERVATION OF ADDITIONAL SHARES FOR ISSUANCE UNDER 1996 STOCK PLAN. Until the earlier of (i) six (6) months after the Closing or (ii) the effective date of the Company's initial public offering, the Company will not grant options covering more than 150,000 shares in addition to those currently authorized under the Company's 1996 Stock Plan without first obtaining the consent of the holders of at least fifty percent (50%) of the Series C Preferred. SECTION 8 RIGHT OF FIRST OFFER For so long as a Purchaser holds at least 180,000 shares of Common Stock and/or Common Stock equivalents (including, for purposes of this Section 8, shares of Common Stock issued or issuable upon the conversion of shares of Series C Preferred, subject to proportional adjustment to reflect stock splits, stock dividends and the like), such Purchaser(s) ("Investor(s)")will be entitled to the following right of first offer: 15 8.1 OFFER OF SECURITIES. Except in the case of Excluded Securities (as hereafter defined), the Company shall not issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, any (i) shares of Common Stock, (ii) any other equity security of the Company, (iii) any debt security of the Company that is a combination of debt and equity, (iv) any debt security of the Company that by its terms is convertible into or exchangeable for any equity security of the Company, or (v) any option, warrant or other right to subscribe for, purchase or otherwise acquire any equity security or any such debt security of the Company, unless in each case the Company shall have first offered to sell to such Investor(s) such securities (the "Offered Securities"), at a price and on such other terms as shall have been specified by the Company in writing delivered to the Investor(s) (the "Offer"), which offer by its terms shall remain open for a period of twenty (20) days from the date it is delivered by the Company to such Investor(s). 8.2 NOTICE OF ACCEPTANCE. Such Investor(s) shall each have the right to purchase up to that portion of the Offered Securities which is equal to the product obtained by multiplying the number of Offered Securities by a fraction, the numerator of which shall be the number of shares of the Common Stock of the Company (assuming full conversion of all issued and outstanding convertible securities) then owned by such Investor and the denominator of which shall be the total number of shares of the Common Stock of the Company (assuming full conversion of all issued and outstanding Preferred Stock) then issued and outstanding. Notice of an Investor's intention to accept an Offer shall be evidenced in writing by such Investor and delivered to the Company prior to the end of the 20-day period of such Offer, and shall set forth such portion of the Offered Securities as such Investor elects to purchase (the "Notice of Acceptance"). 8.3 OTHER PURCHASERS; CLOSING. The Company shall have 120 days from the expiration of the foregoing 20-day period to sell all or any part of such Offered Securities as to which a Notice of Acceptance has not been given by the Investor(s) (the "Refused Securities") to any other person or persons, but only upon terms and conditions, including, without limitation, unit price and interest rates, which are no more favorable, in the aggregate, to such other person or persons or less favorable to the Company than those set forth in the Offer. Upon the closing of the sale to such other person or persons of all the Refused Securities, which shall include payment of the purchase price to the Company in accordance with the terms of the Offer, the Investor(s) shall purchase from the Company, and the Company shall sell to the Investor(s), the Offered Securities, if any, in respect of which a Notice of Acceptance was delivered to the Company by the Investor(s) upon the terms specified in the Offer. The purchase by the Investor(s) of any Offered Securities is subject in all cases to the preparation, execution and delivery by the Company and the Investor of a purchase agreement relating to such Offered Securities on substantially the same terms as the Refused Securities are sold to such other person or persons. In each case, any Offered Securities not purchased by the Investor(s) or other person or persons in accordance with this Section 8.3 may not be sold or otherwise disposed of until they are again offered to the Investor(s) under the procedures specified in this Section 8. 8.4 EXCLUDED SECURITIES. The rights of the Investor(s) under this Section 8 shall not apply to the following securities (the "Excluded Securities"): 16 (i) Shares of Common Stock issuable or issued to employees, officers, directors or consultants of the Company directly or pursuant to a stock option plan or stock purchase plan or any stock option grant, stock purchase agreement or other agreement, in each case approved by at least sixty-five percent (65%) of the members of the Board of Directors of the Company; (ii) Common Stock issued as a stock dividend or upon any stock split or other subdivision or combination of shares of Common Stock; (iii) Common Stock issued upon conversion of any shares of Preferred Stock; (iv) any securities issued for consideration (other than cash) pursuant to a merger, consolidation, acquisition or similar business combination; and (v) Common Stock issued upon conversion of any other shares of convertible securities of the Company, provided that the right of first offer established by this Section 8 applied with respect to the initial sale or grant by the Company of such securities. 8.5 NON-ASSIGNMENT. Notwithstanding the provisions of Section 9.3 hereof, the rights under this Section 8 shall not be assignable except to an Affiliate of the Investor. For purposes of this Section 8.5, "Affiliate" shall mean any person controlling, controlled by or under common control with another person. "Control" shall mean the right to direct the management or policies of the person or to elect or appoint a majority of its managerial body (such as the board of directors of a corporation, the managers of a limited liability company, the general partners of a partnership, the trustees of a trust, etc.), or the ownership of more than 50% of the equity interests of the person. "Person" shall mean any individual, corporation, company, partnership, trust, association or other legal entity. 8.6 TERMINATION OF RIGHT. Notwithstanding the foregoing provisions of this Section 8, the rights of the Investors and the obligations of the Company under this Section 8 shall be inapplicable to securities offered pursuant to a Qualified IPO and the provisions of this Section 8 shall terminate upon (i) the consummation of a Qualified IPO (as such term is defined in the Articles), and (ii) a consolidation or merger of the Company with or into any other entity or entities, the acquisition of the Company by any other entity or entities, or the sale of all or substantially all of the assets or voting control of the Company in which the prior shareholders of the Company do not own at least a majority of the outstanding shares of the surviving entity. SECTION 9 MISCELLANEOUS 9.1 GOVERNING LAW. This Agreement shall be governed and construed in all respects in accordance with the laws of the State of California as applied to agreements made and performed in California by residents of the State of California. 17 9.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by any Purchaser and the closing of the transactions contemplated hereby. 9.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto; PROVIDED, HOWEVER, that the rights of a Purchaser to purchase the Series C Preferred shall not be assignable except as set forth in Section 8.5. 9.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents delivered pursuant hereto at the Closing constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; PROVIDED, HOWEVER, that holders of at least seventy percent (70%) of the Conversion Stock may, with the Company's written consent (which consent may be evidenced by execution of an amendment, waiver or other modification), waive, modify or amend on behalf of all holders, any provisions hereof. Each Purchaser acknowledges that by the operation of this Section 9.4 the holders of seventy percent (70%) of the Conversion Stock may have the right and power to diminish or eliminate all rights of such Purchaser under this Agreement. 9.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be, (i) if to a domestic address, mailed by registered or certified mail, postage prepaid, or (ii) if to an overseas address, by international air courier or other comparable international air express service specifying not more than three days' delivery, or in any case if otherwise delivered by hand or by messenger, addressed (a) if to a Purchaser, at such Purchaser's address set forth in Exhibit A, or at such other address as such Purchaser shall have furnished to the Company in writing, or (b) if to any other holder of any Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares who has so furnished an address to the Company, or (c) if to the Company, one copy should be sent to its address set forth above and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Purchasers. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or five days after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or if sent by international air courier or air express service, three business days after shipment by the sender. 9.6 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE 18 ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 9.7 EXPENSES. The Company and each Purchaser shall bear its own expenses incurred on its behalf with respect to this Agreement and the transactions contemplated hereby, except that at the Closing the Company shall pay the reasonable fees and expenses of Testa, Hurwitz & Thibeault, LLP, as special counsel to the Purchasers, in an amount not to exceed $20,000 and will also reimburse AP Asset Management for up to $20,000 in costs of intellectual property and other due diligence review. 9.8 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without such provision; PROVIDED, HOWEVER, that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 9.9 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. 9.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the Purchasers, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 9.11 BROKER'S FEES. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation of this Section 9.11 being untrue. 9.12 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it is not relying upon any person, firm, or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the Shares and Conversion Stock. [Remainder of Page Intentionally Left Blank] 19 IN WITNESS WHEREOF, the parties have executed this Series C Preferred Stock Purchase Agreement as of the date first above written. "COMPANY" KOSAN BIOSCIENCES INCORPORATED By: ------------------------------- Title: ---------------------------- (Signature Page to Series C Stock Purchase Agreement) EX-10.29 14 ex-10_29.txt EXHIBIT 10.29 EXHIBIT 10.29 EVALUATION AGREEMENT This EVALUATION AGREEMENT (the "Agreement") is made and entered into as of March 1st, 1998 (the "Effective Date"), by and between KOSAN Biosciences, Inc., a California corporation with offices at 3832 Bay Center Place, Hayward, CA 94545 ("KOSAN") and SAVIA S.A. de C.V., a Mexican corporation with offices at Plaza Commercial Las Villas, Rio Caura # 358 Ote. (Altos), Col. Del. Valle, Garza Garcia, N.L. Mexico 66220 ("SAVIA"), and its affiliate DNA Plant Technology Corporation ("DNAP") with offices at 6701 San Pablo Avenue, Oakland, CA 94608-1239. BACKGROUND A. KOSAN has expertise relating to the biosynthesis of polyketides and owns and controls certain patent rights, know-how, and other intellectual property relating thereto. B. SAVIA and DNAP have expertise relating to plant genetic engineering and own and Control certain patent rights, know-how, and other intellectual property relating thereto. C. KOSAN and SAVIA desire to evaluate the feasibility of heterologous polyketide synthesis in plants, on the terms and conditions herein. D. KOSAN and SAVIA desire to provide for the formation of a limited liability company (the "Company") to conduct research and to commercialize products based on that research and the above referenced intellectual property. Now, therefore, in consideration of the mutual promises contained herein, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 "BACKGROUND TECHNOLOGY" means all Patent Rights and Know-How that KOSAN, DNAP, or SAVIA owns or Controls, by assignment or otherwise, on the Effective Date which is necessary or useful for the conduct of the Evaluation Program to the extent that KOSAN, DNAP, or SAVIA, as the case may be, has the right to license or sublicense such rights for the conduct of the Evaluation Program and subject to any limitations under the terms of the applicable agreement(s), if any, pursuant to which KOSAN, DNAP, or SAVIA acquired such rights. 1.2 "CONTROLS" or "CONTROLLED" means possession (other than by virtue of this Agreement and the licenses granted herein) of the ability to grant licenses or sublicenses to the other party hereto without violating the terms of any agreement or other arrangement with, or the rights of, any third party. 1.3 "EVALUATION PROGRAM" means the activities conducted pursuant to the Evaluation Plan described in Section 2.1(a). 1.4 "FIELD" means the development of transgenic plants that make polyketides and applications of such plants. 1.5 "INVENTION" means any invention or discovery conceived or reduced to practice by or on behalf of KOSAN, DNAP, or SAVIA in connection with and during the Evaluation Program solely by KOSAN, DNAP, or SAVIA or jointly by KOSAN, DNAP, and SAVIA. 1.6 "KNOW-HOW" means all ideas, inventions, data, instructions, biological materials, processes, formulas, expert opinions and information not generally known or available to the public, including, without limitation, biological, chemical, pharmacological, toxicological, pharmaceutical, physical, analytical, clinical, safety, efficacy, manufacturing, and quality control information, materials, methods, processes, techniques, and data. 1.7 "MATERIALS" means the materials (including without limitation biological materials transferred from either party to the other pursuant to this Agreement or to that certain Materials Transfer Agreement between KOSAN and DNAP having an Effective Date of 1 March 1998 ("MTA"). 1.8 "PATENT RIGHTS" means patent applications disclosing and claiming inventions filed in any country worldwide, including provisionals, continuations (in whole or in part), divisionals, reissues, reexaminations and foreign counterparts thereof, and patents issued on such applications. 1.9 "PROGRAM TECHNOLOGY" means all Patent Rights and Know-How which are conceived or reduced to practice or otherwise developed by or on behalf of KOSAN, DNAP, or SAVIA, or jointly by KOSAN, DNAP, and SAVIA in the performance of the Evaluation Program. 1.10 "TERM SHEET" means the term sheet attached hereto as Exhibit A. ARTICLE 2 EVALUATION PROGRAM 2.1 EVALUATION PROGRAM. (a) EVALUATION PLAN. The parties will conduct the Evaluation Program for the development of intellectual property and technology for use in the Field in accordance with an agreed plan and budget (the "Evaluation Plan"). The purpose of the Evaluation Program is to 2 produce a polyketide(s) in plants. The Evaluation Plan shall establish: (i) the scope of the research activities which will be performed; (ii) research objectives, work plan activities, and time schedules with respect to the Evaluation Program; and (iii) the respective obligations of the parties with respect to the Evaluation Program. The Research Committee established pursuant to Section 2.2 shall review the Evaluation Plan on an ongoing basis and may make changes to the Evaluation Plan then in effect. (b) EFFORTS. KOSAN shall use reasonable efforts to conduct the Evaluation Program by conducting research activities and providing Materials to SAVIA in accordance with the Evaluation Plan and within the time schedules contemplated therein. SAVIA and DNAP shall use reasonable efforts to conduct the Evaluation Program by conducting research activities and providing Materials to KOSAN in accordance with the Evaluation Plan and within the time schedules contemplated therein. (c) CONDUCT OF EVALUATION PROGRAM. During the term of the Evaluation Program, DNAP will conduct the required plant genetic engineering research activities for SAVIA, KOSAN, DNAP, and SAVIA will provide research assistance and supervision from their scientists with respect to the technology licensed by each party to the other for purposes of conducting the Evaluation Program. Fees for all research assistance and supervision (including research performed by affiliates of the parties) will be determined on an arms-length basis. (d) FUNDING. SAVIA shall be responsible for providing funding for the performance of the Evaluation Program. SAVIA will expend four hundred seventy-six thousand one hundred and thirty-two U.S. dollars ($476,132) in funding KOSAN and DNAP scientists to conduct the Evaluation Program during the term of this Agreement, but shall have no obligation to expend more than such amount. Ninety thousand U.S. dollars ($90,000) of such amount will be paid by SAVIA to KOSAN on signing this Agreement in reimbursement of personnel expense to carry out the Evaluation Program over the term of this Agreement, and three hundred eighty-six thousand one hundred and thirty-two U.S. dollars ($386,132) will be paid by SAVIA to DNAP in reimbursement of personnel expense to carry out the Evaluation Program over the term of this Agreement. (e) MATERIALS. Materials provided by one party to another pursuant to the Evaluation Plan will be used by the receiving party solely for the purpose of conducting the Evaluation Program. The receiving party agrees not to use Materials provided to it by the other party for any other purpose, including any research that is subject to consulting, licensing, assignment, or similar obligations to any third party without the prior written consent of the party providing such Materials. Neither party shall transfer Materials received from the other party hereto to any third party without the other party's prior written consent. Unless otherwise agreed by the parties, each party agrees to return any remaining Materials received from the other party hereto to the providing party upon the expiration or termination of this Agreement. The parties acknowledge that the Materials are experimental in nature and may have unknown characteristics and therefore agree to use prudence and reasonable care in the use, handling, storage, 3 transportation, disposition, and containment of the Materials. This Agreement supercedes the MTA entered into by KOSAN and DNAP, in its entirety. (f) TERM OF EVALUATION PROGRAM. The Evaluation Program shall commence on the Effective Date and terminate upon the earlier of (i) the termination of this Agreement pursuant to Article 7, (ii) the expenditure of four hundred seventy-six thousand one hundred and thirty-two U.S. dollars ($476,132) by SAVIA under 2.1(d) above, (iii) the date of formation of the Company, (iv) May 1, 1999, or (v) such other date as the parties agree in writing. (g) THIRD PARTY LICENSES. In the event that the Research Committee determines that it is necessary to acquire a license from any third party specifically for the conduct of the Evaluation Program, the parties shall discuss which party shall acquire such license and how the costs thereof shall be shared. 2.2 RESEARCH COMMITTEE. (a) RESPONSIBILITIES. SAVIA, DNAP, and KOSAN will establish a Research Committee to oversee, review and recommend direction of the Evaluation Program. The responsibilities of the Research Committee shall include: (i) monitoring and overseeing research progress of the Evaluation Program and ensuring open and frequent exchange between the parties, and (ii) approving revisions to the Evaluation Plan. (b) MEMBERSHIP; DECISIONS. The Research Committee shall be comprised of four (4) members: two (2) representing SAVIA and DNAP and two (2) representing KOSAN. Each party may replace its Research Committee representatives at any time, with written notice to the other party. Each member shall have one vote on the Research Committee, which vote may be cast by proxy. In the event of any deadlock at the Research Committee, the parties shall continue to perform under the last Evaluation Plan approved by the Research Committee, or if such Evaluation Plan is no longer applicable, then either party may terminate this Agreement pursuant to Section 7.4. (c) MEETINGS. During the term of this Agreement the Research Committee shall meet quarterly or as the Research Committee may otherwise agree to discharge its responsibilities. The first meeting of the Research Committee shall occur within thirty (30) days of the Effective Date. Such meetings shall alternate between Burlingame or Hayward and Oakland in California or such other locations as the parties agree. Representatives of the parties that are not members of the Research Committee, and, with the consent of the parties, representatives of third parties may attend Research Committee meetings as nonvoting observers. Each party will be responsible for paying its own expenses in connection with the meetings of the Research Committee. The Research Committee shall prepare a written record of all Research Committee decisions, whether made at a Research Committee meeting or otherwise. 4 (d) REVIEW OF PROGRAM RESULTS. No less than quarterly during the Evaluation Program and within ten (10) days after the end of the Evaluation Program, the Research Committee shall meet to review the results of the Evaluation Program to determine whether any of the following were achieved in connection with the performance of the Evaluation Program: (i) demonstration of production of a functional fungal, iterative polyketide synthase in plant cells which results in production of a polyketide in the plant cells; (ii) demonstration of production of a functional modular polyketide synthase in plant cells which has activity (i.e., which is capable of producing a polyketide in plant cells in the presence of an endogenous or provided precursor); (iii) demonstration of a phenotype in plant cells attributable to the presence of a transgenic polyketide synthase gene in such plant cells. The Evaluation Program shall be deemed successful if any of (i) - (iii) above is achieved in connection therewith. (e) EFFECT OF PROGRAM RESULTS. (i) If the Evaluation Program is successful and the parties have created the Company, the documents governing the Company and its operation (the "Company Documents") shall thereafter govern the rights and obligations of the parties. (ii) If the Evaluation Program is successful and the parties have not created the Company, the parties shall form the Company in accordance with Article 6. (iii) If the Evaluation Program is not successful and the parties have created the Company, the Company Documents shall govern the rights and obligations of the parties. (iv) If the Evaluation Program is not successful and the parties have not created the Company, then (x) this Agreement shall terminate pursuant to Section 7.4 and the parties shall have no further obligation to enter into any further agreement, (y) each party will retain all rights to any Background Technology owned by it, and (z) the license provided to KOSAN by Section 3.5(a) shall become irrevocable. 2.3 RECORDS; EXCHANGE OF INFORMATION. (a) RECORDS. The parties shall maintain scientific records of the activities conducted hereunder in sufficient detail and good scientific manner as will properly reflect all work done and results achieved in the performance of the Evaluation Plan (including all data in the form required under any applicable governmental regulations). During the term of this Agreement, and for three 5 (3) years thereafter, the parties shall provide each other reasonable access to such records, upon request, during ordinary business hours. (b) REPORTS. Upon reasonable request, the parties shall give each other a detailed report of their respective activities and results obtained pursuant to this Agreement. Each party shall provide a final written report summarizing its activities during the Evaluation Program and the results thereof within thirty (30) days after the end of the Evaluation Program. 2.4 EVALUATION PROGRAM CROSS LICENSE. (a) KOSAN hereby grants SAVIA and DNAP a nonexclusive, nontransferable, worldwide, royalty free license under the Background Technology, Materials, and KOSAN's interest in the Program Technology solely to perform those acts that are reasonably necessary to enable SAVIA and DNAP to conduct the Evaluation Program. (b) SAVIA and DNAP hereby grant KOSAN a nonexclusive, nontransferable, worldwide, royalty free license under the Background Technology, Materials and SAVIA's and DNAP's interest in the Program Technology solely to perform those acts that are reasonably necessary to enable KOSAN to conduct the Evaluation Program. (c) Neither party shall have the right to sell or otherwise distribute any products by virtue of the licenses set forth in this Section 2.4, and no such sale or distribution right shall be implied. Neither party may sublicense any of the rights granted to it under this Section 2.4. The licenses set forth in Sections 2.4(a) and 2.4(b) shall expire immediately upon completion or earlier termination of the Evaluation Program. ARTICLE 3 INTELLECTUAL PROPERTY 3.1 OWNERSHIP OF INVENTIONS. (a) OWNERSHIP. All Inventions and other Program Technology shall be owned by the party that invents such Invention or other Program Technology, and Inventions and other Program Technology that are jointly invented or created by employees of SAVIA, DNAP, and KOSAN shall be jointly owned by SAVIA, DNAP, and KOSAN, except in each case, as provided in Section 3.1(b) below. (b) KOSAN OWNERSHIP. KOSAN will own provisional patent application Serial No. 60/052,211, filed 10 July 1997 by KOSAN entitled "Transformed Plants and Plants Cells that Express Polyketide Synthase;" U.S. patent application Serial No. 09/114,083, filed 10 July 1998; PCT patent application No. US98/14570, filed 10 July 1998; and any patent or patent application claiming priority to any of the foregoing. 6 3.2 CONFIDENTIALITY OF RESULTS. During the term of the Evaluation Program and for twelve (12) months thereafter, unless otherwise superceded by the Company Documents, neither party to this Agreement shall disclose the results or data from the activities conducted pursuant to this Agreement without the prior written approval of the other party hereto except pursuant to a confidentiality agreement requiring the recipient to maintain such results and/or data in confidence, provided, however, that this Section shall not preclude the inclusion by a party of such results or data in one or more patent applications, prosecution documents relating thereto, and patents issuing thereon. 3.3 FILING PATENT APPLICATIONS. (a) During the term of the Evaluation Program and for twelve (12) months thereafter, unless otherwise superseded by the Company Documents, either party hereto that desires to file a patent application claiming an Invention will provide prompt notice to the other party, such notice to include a draft of the application to be filed, and may within twenty (20) days thereafter file such patent application, giving due consideration to the comments on such draft provided by the other party. (b) SAVIA, DNAP, and KOSAN shall jointly prepare, file, prosecute and maintain the patent applications and patents claiming Inventions that are jointly invented by SAVIA, DNAP, and KOSAN in such countries as they mutually determine, using patent counsel agreed by the parties, and shall jointly conduct any interferences, reexaminations, reissues, oppositions or requests for patent term extensions relating thereto. Unless otherwise agreed, the parties shall equally share the costs thereof. SAVIA, DNAP, and KOSAN shall keep the other fully informed as to the status of Patent Rights within the Program Technology, including without limitation, by providing the other the opportunity to review and comment fully on any documents relating to each joint Invention which will be filed in any patent office at least thirty (30) days before such filing, and providing the other party copies of any documents that such party receives from such patent offices promptly after receipt including notice of all interferences, reissues, reexaminations, oppositions or requests for patent term extensions. SAVIA, DNAP, and KOSAN shall each reasonably cooperate with and assist the other at its own expense in connection with such activities, at the other party's request. (c) In the event that either party wishes to seek patent protection with respect to any Invention in any country outside the United States, it shall notify the other party hereto. If only one party wishes to seek patent protection with respect to an Invention in any such country or countries, it may file, prosecute and maintain patent applications and patents with respect thereto, at its own expense. In any such case, the party declining to participate in such activities shall not grant any third party a license under its interest in the applicable patent application and/or patent without the prior written consent of the other party. 7 3.4 ASSIGNMENT. SAVIA and DNAP hereby assign to KOSAN SAVIA's and DNAP's entire interest in all right, title and interest in and to provisional patent application Serial No. 60/052,211, filed 10 July 1997 and entitled "Transformed Plants and Plant Cells that Express Polyketide Synthase;" U.S. patent application Serial No. 09,114,083, filed 10 July 1998; PCT patent application No. US98/14570, filed 10 July 1998; and any patent or patent application claiming priority to any of the foregoing and agree to execute (or cause to be executed) such application, oaths, documents and instruments as KOSAN may request in order to perfect, confirm, or protect KOSAN's right and interest in and to the same. 3.5 LICENSE RIGHTS. (a) SAVIA and DNAP hereby grant to KOSAN an exclusive, worldwide, royalty free, fully paid-up license with respect to SAVIA's and DNAP's interest in the Program Technology for use in the area of polyketides, the production of polyketides in cells or systems other than transgenic plant cells, and the use of polyketides to make, have made, use, import, have imported, sell, and offer for sale human health care products and agree to execute (or cause to be executed) such applications, oaths, documents, and instruments as KOSAN may request to perfect, confirm or protect KOSAN's right and interest in and to such Program Technology. (b) KOSAN hereby grants to SAVIA an exclusive, worldwide, royalty free, fully paid-up license with respect to KOSAN's interest in the Program Technology for use in the area of production, use and commercialization of plants that do not produce transgenically encoded polyketides and agrees to execute (or cause to be executed) such applications, oaths, documents, and instruments as SAVIA may request to perfect, confirm or protect SAVIA's right and interest in and to such Program Technology. 3.6 EMPLOYEE OBLIGATIONS. KOSAN, DNAP, and SAVIA shall ensure that all of their respective employees, officers, researchers, any employee that conducts research in the Evaluation Program, independent contractors, and consultants have legal obligations, whether imposed by agreement or law, requiring assignment or licensing to KOSAN, DNAP, or SAVIA, as appropriate, of all (i) Background Technology owned by such party, and (ii) Inventions and other Program Technology. 3.7 PATENT AND KNOW-HOW ENFORCEMENT. (a) SOLELY OWNED PATENTS AND KNOW-HOW. Each party shall have the right, but not the obligation, at its expense, for enforcing and defending any Patent Rights and Know-How in the Background Technology or the Program Technology owned solely by it. 8 (b) JOINTLY OWNED PATENTS AND KNOW-HOW. The parties shall be jointly responsible for enforcing and defending any jointly owned Patent Rights and Know-How in the Program Technology. Unless otherwise agreed in advance in writing by the parties, if either party is notified of possible infringement of jointly owned Program Technology, it shall promptly notify the other party, and thereafter the parties shall promptly confer in good faith to determine (i) what steps, if any, should be taken to abate any infringement or misappropriation, (ii) which party shall be responsible for conducting such activities, (iii) the respective costs the parties will bear with regard to such activities, and (iv) the allocation between the parties of damages, if any, awarded with respect to such activities. In the event the parties are unable to agree on the foregoing within three (3) months after notice of an infringement or misappropriation is provided as described above, either party may, at its own expense, initiate a proceeding to abate such infringement or misappropriation with respect to the pertinent joint Patent Rights or joint Know-How, and the other party will cooperate with the initiating party, at its request and expense, including without limitation, by joining such proceeding as a party if required by applicable law. (c) NOTICE. In the event a party to this Agreement acquires information that a third party may by infringing one or more of the Patent Rights or Know-How within the Program Technology, the party acquiring such information shall promptly notify the other party to the Agreement in writing of such infringement. 3.8 REVIEW OF PUBLICATIONS. Any manuscript or presentation by KOSAN, DNAP, or SAVIA describing the results of the Evaluation Program to be published or presented during the term of this Agreement or within one (1) year thereafter shall be subject to the prior review of the other party at least sixty (60) days prior to its submission for publication. Further, to avoid loss of patent rights as a result of premature public disclosure of patentable information, the receiving party shall notify the disclosing party in writing within thirty (30) days after receipt of any disclosure whether the receiving party desires to file a patent application on any Invention disclosed in such disclosure. In the event that KOSAN, DNAP, or SAVIA determines on receipt of such disclosure that it desires to file such a patent application, the disclosing party shall withhold publication or disclosure of such document until the earlier of (i) the date a patent application is filed thereon, or (ii) the parties determine after consultation that no patentable Invention exists, or (iii) the date forty-five (45) days after receipt by the disclosing party of the receiving party's written notice of the receiving party's desire to file such patent application, or such other longer period as is reasonable for seeking patent protection. Further, if such document contains the confidential information of KOSAN, DNAP, or SAVIA that is subject to use and nondisclosure restrictions under Section 4.1, or if the parties determine after consultation that the document contains Know-How that is or will be protected as a trade secret by either party, the disclosing party agrees to remove such information of the other party from the proposed publication or presentation. 9 ARTICLE 4 CONFIDENTIALITY 4.1 CONFIDENTIAL INFORMATION AND MATERIALS. Except as expressly provided herein, the parties agree that, for the Term of this Agreement and for five (5) years thereafter, the receiving party shall not publish or otherwise disclose and shall not use for any purpose, any information or Materials furnished to it by the other party hereto, which, if disclosed in tangible form, is marked "Confidential" or with other similar designation to indicate its confidential or proprietary nature, or, if disclosed orally, is confirmed as confidential or proprietary by the party disclosing such information at the time of such disclosure or within thirty (30) days thereafter ("Confidential Information"). Oral communications between scientists conducting research under the Evaluation Plan shall be presumed to be confidential disclosures. Notwithstanding the foregoing, it is understood and agreed that Confidential Information shall not include information or material that, in each case demonstrated by written documentation: (a) was already known to the receiving party, other than under an obligation of confidentiality, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving party in breach of this Agreement; (d) is independently developed without the use of the Confidential Information of the other party; or (e) was subsequently lawfully disclosed to the receiving party by a person other than a party hereto or developed by the receiving party without reference to any Confidential Information disclosed by the disclosing party. 4.2 PERMITTED DISCLOSURES. Notwithstanding the provisions of Section 4.1, each party hereto may disclose the other's Confidential Information to the extent such disclosure is reasonably necessary in conducting its obligations under the Evaluation Program, preparing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental law, regulations, or court order, or submitting information to governmental authorities, provided, however, that if a party is required to make any such disclosure of another party's Confidential Information, then, to the extent it may legally do so, it will give reasonable advance written notice to the other party of such disclosure and will use its reasonable efforts to secure confidential treatment of such Confidential Information prior to its disclosure (whether through protective orders or otherwise). If the parties have not established the Company during the term of this Agreement, KOSAN may disclose to third parties the Confidential Information relating to the 10 Program Technology assigned or licensed to KOSAN hereunder in connection with negotiating or entering into agreements regarding such Program Technology. If the party whose Confidential Information is to be disclosed has not filed a patent application with respect to such Confidential Information, it may require the other party to delay the proposed disclosure (to the extent the disclosing party may legally do so), for up to forty-five (45) days after receipt of written notice from the disclosing party of its intent to disclose, to allow for the filing of such an application. 4.3 PUBLICITY; USE OF NAME. Except as required by law or expressly permitted under this Agreement, neither party shall use the name, trademark, or symbol of the other party or of any of its trustees, officers, employees, or agents, or reveal the existence of, or the terms of, this Agreement to any third party or in any promotional material or other public announcement or disclosure without the prior oral or written consent of the other party, provided, however, that once a particular disclosure has been approved, either party may make disclosures that do not materially differ therefrom without obtaining further approvals from the other party. The foregoing notwithstanding, each party has the right to disclose such information without the consent of the other (i) in any prospectus, offering memorandum, or other document or filing required by applicable securities laws or other application law or regulation, and (ii) to potential investors under a nondisclosure obligation. ARTICLE 5 INDEMNIFICATION 5.1 INDEMNIFICATION OF SAVIA. KOSAN shall indemnify, defend, and hold harmless SAVIA and its affiliates, including but not limited to DNAP, the directors, officers, and employees of SAVIA and its affiliates, and the successors and assigns of any of the foregoing (the "SAVIA Indemnitee(s)") from and against all claims, losses, costs, and liabilities (including, without limitation, payment of reasonable attorneys' fees and other expenses of litigation), and shall pay any damages (including settlement amounts) finally awarded, with respect to any claim, suit, or proceeding (any of the foregoing, a "Claim") brought by third party against an SAVIA Indemnitee, caused by (a) a material breach by KOSAN of its obligations under this Agreement, (b) KOSAN's conduct in performance of the Evaluation Program, or (c) the negligence or willful misconduct of KOSAN, except, in each case, to the extent caused by the negligence or willful misconduct of a SAVIA Indemnitee. 5.2 INDEMNIFICATION OF KOSAN. SAVIA and DNAP, individually and not jointly, shall indemnify, defend, and hold harmless KOSAN and its affiliates, the directors, officers, and employees of KOSAN and its affiliates, the President and Fellows of Harvard College, and the Board of Trustees of Leland Stanford Jr. University, Stanford Health Services, Brown University, BURD, and their respective trustees, officers, employees, students and agents, and the successors and assigns of any of the foregoing (the "KOSAN Indemnitee(s)") from and against all claims, losses, costs, and liabilities (including without limitation, payment of reasonable attorneys' fees and other expenses of litigation) and shall pay any damages (including settlement amounts) finally awarded, with respect to any claim, suit, or proceeding (any of the 11 foregoing, also a "Claim") brought by a third party against a KOSAN Indemnitee, arising out of or relating to (a) a material breach by SAVIA and its affiliates, including DNAP, of its obligations under this Agreement; or (b) SAVIA's and its affiliates', including DNAP's, conduct in performance of the Evaluation Program, or (c) the negligence or willful misconduct of SAVIA and its affiliates, including DNAP, except, in each case, to the extent due to the negligence or willful misconduct of a KOSAN Indemnitee. 5.3 INDEMNIFICATION PROCEDURES. An Indemnitee that intends to claim indemnification under this Article 5 shall promptly notify the other party (the "Indemnitor") in writing of any claim in respect of which the Indemnitee intends to claim such indemnification, and the Indemnitor shall have sole control of the defense and/or settlement thereof, provided, however, that the Indemnitee may participate in any such proceeding with counsel of it choice, at its own expense. The indemnity agreement in this Article 5 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 5. The Indemnitee, its employees, and its agents shall cooperate fully with the Indemnitor and its legal representatives and provide full information in the investigation of any Claim. ARTICLE 6 COMPANY FORMATION The Term Sheet attached hereto as Exhibit A sets forth the material terms agreed to by the parties for the formation of the Company and the commercialization by the Company of the Program Technology. The parties agree that, in the event the Evaluation Program is successful, as defined in Section 2.2(d) hereof, the Company shall be formed as soon as possible on terms consistent with those set forth in the Term Sheet, and this Agreement shall continue to control the rights and obligations of the parties until the Company is formed. Notwithstanding the foregoing, the parties may agree to form the Company prior to determination of the success of the Evaluation Program, in which event all sums agreed to be expended by a party in connection with the Evaluation Program shall be paid, as needed, to the Company as a contribution to the capital of the Company. In the event the Company is formed as provided in this Article 6, the Company Documents shall take precedence in the event of any conflict with the terms of this Agreement. The Company Documents will include procedures for appointing arbitrators, consequences of a party's failure to act, deadlines for conducting the arbitration, and other customary arbitration provisions. 12 ARTICLE 7 TERM AND TERMINATION 7.1 TERM OF THE AGREEMENT. The term of this Agreement shall commence on the Effective Date and continue in full force and effect until formation of the Company, unless terminated earlier pursuant to this Article 7. 7.2 TERMINATION FOR CAUSE. Either KOSAN or SAVIA may terminate this Agreement by written notice stating such party's intent to terminate in the event the other shall have breached or defaulted in the performance of any of its material obligations hereunder, and such default shall have continued for sixty (60) days after written notice thereof was provided to the breaching party by the nonbreaching party. 7.3 TERMINATION FOR BANKRUPTCY. Either party may terminate this Agreement effective upon written notice to the other party in the event the other party declares bankruptcy or becomes the subject of any voluntary or involuntary proceeding under the U.S. Bankruptcy Code or state insolvency proceeding, and such proceeding is not terminated within one hundred twenty (120) days of its commencement. 7.4 TERMINATION FOR DEADLOCK. If the parties have not yet created the Company, and the Research Committee is unable to agree on the conduct of research not covered by an agreed Evaluation Plan, then either party may terminate the Agreement with thirty (30) days notice to the other party hereto. 7.5 EFFECT OF TERMINATION. (a) RIGHTS AND OBLIGATIONS. Termination of this Agreement for any reason shall neither release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination nor preclude either party from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement. (b) RETURN OF CONFIDENTIAL INFORMATION MATERIALS. Upon any termination of this Agreement other than pursuant to Section 7.1, SAVIA, DNAP, and KOSAN shall promptly return to the other party all Confidential Information received from the other party (except one copy of which may be retained for archival purposes). Upon termination of this Agreement other than pursuant to Section 7.1, each party shall promptly return or destroy Materials provided by the other party at the other party's discretion, and all plants, plant parts, and seeds containing such Materials shall be destroyed, and an officer of each party shall provide the other party with a written certification of such return or destruction within thirty (30) days of effective date of such termination. 13 (c) LICENSES. Upon termination of this Agreement, all licenses granted in Section 2.4 shall terminate. Upon termination of this Agreement pursuant to Section 2.2(e)(iv), 7.2, 7.3, or 7.4, the licenses provided under Section 3.5 shall become irrevocable. 7.6 SURVIVAL. The provisions of Sections 2.2(e)(iv), 2.3(a), 3.1, 3.2, 3.3, 3.4, 3.5, 3.7(b), 3.8, 7.5, and 7.6, and Articles 4, 5, 8, and 9 shall survive the expiration or termination of this Agreement for any reason, except as provided to the contrary in the Company Documents in the event of formation of the Company. ARTICLE 8 DISPUTE RESOLUTION 8.1 MEDIATION. If a dispute arises out of or relates to this Agreement or the breach thereof, and if said dispute cannot be settled through negotiation, then the parties agree first to try in good faith to settle the dispute by mediation under the Commercial Mediation Rules of the American Arbitration Association before resorting to arbitration, litigation, or some other dispute resolution procedures. 8.2 ARBITRATION. If the parties are unable to resolve any dispute, controversy, or claim between them arising out of or relating to the validity, construction, enforceability, or performance of this Agreement, including disputes relating to alleged breach or termination of this Agreement (each, a "Dispute"), the Dispute shall be settled by binding arbitration conducted in San Francisco, California, pursuant to the Commercial Arbitration Rules of the American Arbitration Association then in effect by one (1) arbitrator appointed in accordance with such rules. If a disagreement between the parties relates to the proposed modification of the Evaluation Program, and cannot be resolved through negotiation, then the parties will conduct the Evaluation Program according to the most recent Evaluation Plan. If the disagreement cannot be resolved through negotiation and relates to any other material aspect of this Agreement, then the disagreement will be submitted to an independent arbitrator selected by the parties who has expertise in the areas of biotechnology and joint ventures. While the arbitration is pending, (i) the obligations of the parties to form the Company will be suspended, and (ii) the Evaluation Program will continue to conclusion. The decision and/or award rendered by the arbitrator shall be written (specifically stating the arbitrator's findings of facts as well as the reasons upon which the arbitrator's decision is based), final, and nonappealable, (except for an alleged act of corruption or fraud on the part of the arbitrator) and may be entered in any court of competent jurisdiction. The parties agree that, any provision of applicable law notwithstanding, they will not request, and the arbitrator shall have no authority to award, punitive or exemplary damages against any party. The arbitrator shall have the authority to grant injunctive relief and order specific performance. The arbitrator shall determine what discovery will be permitted, consistent with the goal of limiting the cost and time that the parties must expend for discovery, provided, however, that the arbitrator shall permit such discovery as it deems necessary to permit an equitable resolution of the dispute. Evidence need not be obtained in the presence of the arbitrator. At the arbitration hearing, each party may make written and oral presentations to the 14 arbitrator, present testimony and written evidence, and examine witnesses. The costs of any arbitration, including administrative fees and fees of the arbitrator, shall be shared equally by the parties. Each party shall bear the cost of its own attorneys' fees and expert fees relating to the arbitration. The parties and the arbitrator shall use their best efforts to complete any such arbitration within one (1) year after appointment of the arbitrator, unless a party can demonstrate to the arbitrator that the complexity of the issues or other reasons warrant the extension of the time. In such case, the arbitrator may extend such timetable as reasonably required. The arbitrator shall, in rendering its decision, apply the substantive law of the State of California, without regard to its conflict of laws provisions, except that the interpretation of and enforcement of this Section 8.2 shall be governed by the U.S. Federal Arbitration Act. Pending the selection of the arbitrator or pending the arbitrator's determination of the merits of the controversy, either party may seek from a court of competent jurisdiction any interim or provisional relief that may be necessary to protect the rights or property of that party. ARTICLE 9 MISCELLANEOUS 9.1 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed, and interpreted in accordance with the laws of the State of California, without reference to rules of conflicts or choice of laws. 9.2 OTHER ACTIVITIES. Each party shall have the right to conduct other research or development activities outside the Evaluation Program, alone and with third parties, during the term of this Agreement and thereafter. 9.3 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be sent by prepaid registered or certified mail, return receipt requested, internationally recognized courier or personal delivery, or by fax with confirming letter mailed under the conditions described above in each case addressed to the other party at the address shown below or at such other address for which such party gives notice hereunder. Such notice shall be deemed to have been given when delivered: If to SAVIA or DNAP: SAVIA, S.A. de C.V. Plaza Commercial Las Villas Rio Caura # 358 Ote. (Altos) Col. Del. Valle, Garza Garcia, N.L. New Mexico 66220 with a copy to: 15 Joe A. Rudberg, Esq. Thompson & Knight 1700 Pacific Avenue Suite 3300 Dallas, TX 75201 and a copy to: Jorge Fenyvesi DNA Plant Technology Corporation 6701 San Pablo Avenue Oakland, CA 94608-1239 If to KOSAN: KOSAN Biosciences, Inc. 3832 Bay Center Place Hayward, CA 94545 Attn: Chief Executive Officer 9.4 FORCE MAJEURE. Neither party shall lose any rights hereunder or be liable to the other party for damages or losses (except for payment obligations) on account of failure of performance by the defaulting party if the failure is occasioned by war, strike, fire, Act of God, earthquake, flood, lockout, embargo, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the negligence, intentional conduct or misconduct of the nonperforming party, and the nonperforming party has exerted all reasonable efforts to avoid or remedy such force majeure, provided, however, that in no event shall a party be required to settle any labor dispute or disturbance. 9.5 NO CONSEQUENTIAL DAMAGES. IN NO EVENT SHALL A PARTY HERETO BE LIABLE FOR SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE EXERCISE OF ITS RIGHTS HEREUNDER, INCLUDING WITHOUT LIMITATION LOST PROFITS ARISING FROM OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF SUCH DAMAGES. 9.6 DISCLAIMER. The parties acknowledge that the research activities contemplated hereunder are experimental and that the Evaluation Program may not be successful. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, KOSAN AND SAVIA MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND REGARDING THE CONFIDENTIAL INFORMATION, PROGRAM TECHNOLOGY, AND/OR BACKGROUND TECHNOLOGY, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT, AND VALIDITY OF 16 TECHNOLOGY OR PATENT CLAIMS, ISSUED OR PENDING. ALL MATERIALS PROVIDED AS PART OF THE EVALUATION PROGRAM UNDER THIS AGREEMENT ARE PROVIDED "AS IS," AND EACH PARTY SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTIES OF NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO SUCH MATERIALS. 9.7 NO IMPLIED RIGHTS. Only the rights granted pursuant to the express terms of this Agreement shall be of any legal force or effect. No other rights shall be created by implication, estoppel, or otherwise. 9.8 ASSIGNMENT. This Agreement shall not be assignable by either party to any third party hereto without the written consent of the other party hereto, except either party may assign this Agreement without such consent to an entity that acquires all or substantially all of the business or assets of such party to which this Agreement pertains, whether by merger, reorganization, acquisition, sale, or otherwise. 9.9 PARTIAL INVALIDITY. If any provision of this Agreement is held to be invalid by a court of competent jurisdiction, then the remaining provisions shall remain, nevertheless, in full force and effect. The parties agree to renegotiate in good faith any provision held invalid and to be bound by the mutually agreed substitute provision to give the most approximate effect originally intended by the parties. 9.10 ADVICE OF COUNSEL. KOSAN, DNAP, and SAVIA have each consulted counsel of their choice regarding this Agreement, and each acknowledges and agrees that this Agreement shall not be deemed to have been drafted by one party or the other and will be construed accordingly. 9.11 INDEPENDENT CONTRACTORS. The relationship of KOSAN, DNAP, and SAVIA established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed to (i) give any party the power to direct or control the day-to-day activities of the other, (ii) constitute the parties as partners, joint venturers, co-owners, or otherwise as participant in a joint or common undertaking, or (iii) allow a party to create or assume any obligation on behalf of the other party for any purpose whatsoever. 9.12 NO WAIVER. No waiver of any term or condition of this Agreement shall be valid or binding on either party unless agreed in writing by the party to be charged. The failure of either party to enforce at any time any of the provisions of the Agreement or the failure to require at any time performance by the other party of any of the provisions of this Agreement, shall in no way be construed to be a present or future waiver of such provisions, nor in any way affect the validity of either party to enforce each and every such provision thereafter. 9.13 FURTHER ASSURANCES. At any time following the Effective Date, at the request of the other party hereto, each party shall (i) deliver to the other party such documents consistent with the 17 provisions of this Agreement, and (ii) execute and deliver or cause to be delivered all such assignments, consents, documents, or further instruments, and (iii) take or cause to be taken all such other actions as the requesting party may reasonably deem necessary or desirable for the requesting party to obtain the full benefit of this Agreement. 9.14 COUNTERPARTS. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute one (1) instrument. 9.15 EXECUTION BY DNAP. DNAP is executing this agreement solely with respect to the rights and obligations specifically set forth herein as to DNAP. DNAP shall not be liable for any obligations of SAVIA set forth herein. 9.16 ENTIRE AGREEMENT; AMENDMENT. This Agreement, including the Exhibits attached hereto, constitutes the entire agreement of the parties with respect to the subject matter hereof, and supercedes all prior or contemporaneous understandings or agreements, whether written or oral, between KOSAN, DNAP, and SAVIA with respect to such subject matter. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed by the duly authorized representatives of the parties. IN WITNESS WHEREOF, the undersigned are duly authorized to execute this Agreement on behalf of SAVIA, DNAP, and KOSAN, as applicable. KOSAN BIOSCIENCES, INC. SAVIA, S.A. de C.V. By: /s/ Daniel V. Santi By: /s/ Bernardo Jimenez ------------------------------- ------------------------------ Name: Daniel V. Santi Name: Bernardo Jimenez ----------------------------- ---------------------------- Title: Chairman & CEO Title: Attorney In Fact ---------------------------- --------------------------- DNA PLANT TECHNOLOGY CORPORATION By: /s/ Jorge Fenyvesi ------------------------------- Name: Jorge Fenyvesi ----------------------------- Title: President ---------------------------- Exhibit A: Company Formation Term Sheet 18 EXHIBIT A TERM SHEET PROPOSED FORMATION OF LIMITED LIABILITY COMPANY BETWEEN SAVIA AND KOSAN 1. PARTIES SAVIA, S.A. de. C.V., and/or its designated Affiliate or Affiliates ("SAVIA") and Kosan Biosciences Incorporated ("KOSAN") 2. FORM OF ENTITY After successful completion of Phase I, as described in the evaluation Agreement, SAVIA and Kosan would form a limited liability company, either in Delaware or Nevada (the "COMPANY"). Either SAVIA or Kosan may subsequently request that the Company be converted to a "C" or other form of company (subject to the Company's ability to maximize potential technology rights), and the other party will not unreasonably refuse such request. 3. CAPITAL STRUCTURE AND OWNERSHIP The Company initially would have one class of ownership interest: common. SAVIA would own fifty and one-tenth percent (50.1%) of the ownership interests and Kosan would own forty-nine and nine-tenths percent (49.9%) of the ownership interests. 4. FIELD DEFINITIONS 4.1 "COMPANY FIELD" shall mean the production, use and commercialization of plants (including plant parts, e.g. fruits, seeds, roots, etc.) that produce transgenically encoded polyketides for purposes of commercialization in either of the following two (2) areas: (a) commercialization of transgenic plants where the plants exhibit improved traits by expressing a polyketide other than a polyketide developed by Kosan on behalf of a third party where such development of a polyketide by Kosan begins prior to initiation of work by the Company on plants expressing such polyketide and where such third party is pursuing development or commercialization of such polyketide; and (b) commercialization of polyketide compounds extracted from transgenic plants, provided, that such polyketide compounds shall not include polyketide compounds which are either (i) disclosed and claimed in patents and patent applications controlled by Kosan, or (ii) developed by Kosan for itself or a third party where such development begins prior to initiation of work by the Company on plants expressing such polyketide compounds and where Kosan or such third party is pursuing development or commercialization of such compound. 4.2 "KOSAN FIELD" shall mean production, use and commercialization of polyketides in areas not included in the Company Field. 4.3 "SAVIA FIELD" means production, use and commercialization of plants that do not produce transgenically encoded polyketides. 5. ENTITY MANAGEMENT The Company would have four (4) managers, two (2) designated by SAVIA and two (2) designated by Kosan (provided that one (1) of each party's two (2) managers will have a scientific background and the other a business orientation). Notwithstanding the ownership interests of Kosan and SAVIA, all principal decisions on behalf of the Company will require the unanimous agreement of the managers designated by SAVIA and Kosan. The President, Chief Financial Officer and other officers of the Company would be appointed by unanimous agreement of the managers designated by SAVIA and Kosan. 6. BUSINESS PLAN As described below, the Company would conduct research using certain technology available to SAVIA and DNA Plant Technology Corporation and/or Kosan to develop applications of such technology in plants. The business would be developed in three (3) phases. 6.1 PHASE I - The parties have entered into an Evaluation Agreement, to which this Term Sheet is an Exhibit governing the first Phase, Phase I, of the business plan identifying specific milestones. 6.2 PHASE II - DEVELOPMENT OF COMMERCIALIZABLE PRODUCT Purpose: Develop applications of the technology to plants that can be exploited commercially through licensing, product sales, or other methods. The initial activities to be undertaken by the parties in Phase II, and for determining when such phase has been successfully completed and whether the business should advance to the next phase ("MILESTONES") will be determined by the parties prior to the formation of the Company. Time Frame: Beginning with the formation of the Company and continuing for up to three (3) years. Budget: Five million, five hundred and twenty-three thousand, eight hundred and sixty-eight U.S. dollars ($5,523,868, the "PHASE II BUDGET"). 6.3 PHASE III - COMMERCIALIZATION Purpose: To commercially exploit the technology developed by the Company in the Company Field. Time Frame: Indefinite Budget: To be determined 7. CAPITALIZATION AND FUNDING 7.1 At the time the Company is formed, Kosan would contribute in exchange for its ownership interest and subject to any legal or contractual restrictions and financial obligations owed to third parties, a non-exclusive, worldwide, royalty free license (or royalty-bearing sublicense, as applicable) to the intellectual property described on Exhibit A-1 hereto. The Company shall pay any royalties and other payments owed to third parties as a result of practice by the Company of such technology licensed by Kosan hereunder. 7.2 At the time the Company is formed, SAVIA would contribute in exchange for its ownership interest and subject to any legal or contractual restrictions and financial obligations owed to third parties, a non-exclusive, worldwide, royalty free license (or royalty-bearing sublicense as applicable) to the intellectual property described on Exhibit A-2 hereto. The Company shall pay any royalties and other payments owed to third parties as a result of practice by the Company of such technology licensed by SAVIA hereunder. In addition, SAVIA would agree to fund the Phase II Budget in exchange for its ownership interest. 2 7.3 Upon Company formation the parties will initiate Phase II of the business plan, which may be modified from time to time by unanimous agreement of the Managers of the Company. SAVIA will contribute as consideration for its ownership interest the Phase II Budget. This contribution will be made by SAVIA on a calendar quarterly basis beginning May 1, 1999, paid one (1) quarter in advance. If the actual expenditures under an approved budget are for an amount in excess of the Phase II Budget, then the additional required funding may be provided, with the approval of all of the managers of the Company, (i) by SAVIA and Kosan based on their respective percentage ownership interests, or (ii) if the Company is then a C corporation, such funding may be raised from third parties and/or from SAVIA and/or Kosan. If the parties proceed with Phase II, the licenses from each party to the Company will be automatically extended for the duration of Phase II and broadened to include product development in the Company Field. 7.4 If the parties determine to proceed to Phase III of the business plan, it is anticipated that the Company will be self-funding. However, if additional funding is required, pursuant to a mutually approved budget, with the approval of all of the managers of the Company, (i) it may be provided by SAVIA and Kosan, based on their respective percentage ownership interests, or (ii) if the Company is then a C corporation, such funding may be raised from third parties. If the parties determine to proceed to Phase III, the licenses from each party to the Company pursuant to Phase II will be extended automatically to include product commercialization for the duration of Phase III or dissolution of the Company, whichever occurs earlier. 7.5 Provided that SAVIA has in the ordinary course of its business funds available to loan, and that such loan would not cause a breach or violation of any existing SAVIA loans or bank covenants, SAVIA will loan Kosan up to two and one-half million U.S. dollars ($2,500,000) to enable Kosan to contribute its share of the Company's additional funding needs. The loan will bear interest at the cost of SAVIA debt, will be repayable within three (3) years of issuance and will be secured by an appropriate amount of Kosan stock. 7.6 If either SAVIA or Kosan chooses not to contribute its share of additional funding under 7.3(i) or 7.4(i), its percentage ownership interests will be adjusted based on a formula to be specified in the Company Documents. 8. RESEARCH CONTRACT & ASSISTANCE SAVIA's Affiliate, DNA Plant Technology Corporation, will conduct required plant genetic engineering research activities and Kosan will conduct required polyketide research activities, in each case where the party has sufficient capability to conduct the research within a reasonable time and at a competitive cost. Both Kosan and SAVIA will provide research assistance and supervision from their scientists with respect to the technology licensed to the Company by each party. Fees for all research assistance and supervision (including research performed by Affiliates of the parties) will be determined on an arms-length basis. 9. COVENANTS So long as a party and its Affiliates collectively own a twenty percent (20%) or greater ownership interest in the Company, such party and its Affiliates agree to maintain the patents and/or intellectual property rights owned or Controlled by such party and its Affiliates that are listed on Exhibits A-1 and A-2. 10. NON-COMPETITION So long as a party and its Affiliates collectively own a twenty percent (20%) or greater 3 ownership interest in the Company, such party and its Affiliates will not: (i) sell products in the Company Field except for activities conducted with or on behalf of the Company; (ii) license technology to a third party specifically and expressly for use in the Company Field; or (iii) engage in research and development activities on behalf of itself or a third party specifically and expressly directed to the development of transgenic polyketide-producing plants for the commercial purpose of producing plants exhibiting improved agronomic or quality traits. Notwithstanding the foregoing: (i) Kosan may license to third parties technology to produce or use polyketides in any cell or system, including plants, if such license is in connection with a license relating to one or more specific polyketides; (ii) Kosan shall be free to develop, sell products, and license technology in the Kosan Field; and (iii) SAVIA shall be free to develop, sell products, and license technology in the SAVIA Field. 11. OWNERSHIP OF INTELLECTUAL PROPERTY The Company will own all technology, patent rights (including patent applications and patents issued), know-how (including ideas, inventions, data and other proprietary information) and other intellectual property that are conceived or reduced to practice or otherwise developed by or on behalf of the Company in the course of Company-funded research ("COMPANY INTELLECTUAL PROPERTY") provided that Kosan will own provisional patent application Serial No. 60/052,211 filed 10 July 1997 by Kosan entitled "Transformed Plants and Plant Cells that Express Polyketide Synthase"; U.S. patent application Serial No. 09/114,080 filed 10 July 1998; PCT patent application No. US98/14570 filed 10 July 1998 and any patent or patent application claiming priority to any of the foregoing; and provided further that Kosan will own inventions that are not separately patentable over inventions disclosed and claimed in the patent applications identified above in this paragraph. 12. LICENSES 12.1 ENABLING LICENSES TO THE COMPANY Each of Kosan and SAVIA shall, to the extent free to do so, grant to the Company a non-exclusive, non-transferable, worldwide royalty free (excluding royalties and other payments owed to third parties) license to commercialize products in the Company Field under the intellectual property listed on Exhibits A-1 and A-2 respectively, which is owned or controlled by it at the time of Company formation and, to the extent free to do so, under Intellectual Property developed or acquired by it thereafter for so long as it and its Affiliates collectively own at least a twenty percent (20%) interest in the Company to conduct the Company's business in the Company Field. With respect to Kosan Intellectual Property, no license will be granted to Kosan's proprietary technology for creating novel polyketides by altering genes or gene fragments that code for polyketide synthase or polyketide processing enzymes. SAVIA will initiate a process whereby Kosan is able to evaluate any SAVIA's license rights and corresponding obligations applicable to the Company Field. Kosan shall not be bound to complete any transaction if it determines, in its sole discretion, that such rights are insufficient to enable the Company to carry on its intended business or such obligations make doing so commercially unacceptable. 12.2 LICENSE TO KOSAN The Company shall grant to Kosan an irrevocable, royalty bearing (not to exceed two percent (2%)), worldwide exclusive license, with the right to grant sublicenses, under Company intellectual property rights to make, have made, use, have used, sell, and have sold polyketides for use in the Kosan Field. If Kosan desires to produce polyketides in transgenic plants, then Kosan shall grant the Company a right of first refusal to produce 4 such polyketides in transgenic plants for Kosan on commercially reasonable terms. To the extent it has the power to do so, Kosan will use its commercially reasonable best efforts to induce its partners and licensees who desire to produce polyketides in plants to retain the Company in those areas where the Company has worked with the class of polyketides in question or otherwise has existing expertise. 12.3 LICENSE TO SAVIA The Company shall grant to SAVIA an irrevocable, royalty bearing (not to exceed two percent (2%)), worldwide exclusive license, with the right to grant sublicenses, under Company intellectual property rights to make, have made, use, have used, sell and have sold for any purpose non-polyketide producing plants for use in the SAVIA Field. 13. PATENT MATTERS The Company shall be responsible for the preparation, filing, and prosecution of patent applications of all Company owned Intellectual Property. Each party will have the right to conduct, at its sole discretion and expense, preparation, filing, and prosecution of patent applications disclosing or claiming any solely owned inventions owned by it. Jointly made inventions which are not Company owned Intellectual Property will be jointly owned, enforced, prosecuted and maintained by the parties. 14. TRANSFER OF OWNERSHIP INTERESTS No transfer of an interest in the Company will be permitted until the earlier of (i) funding of the Phase II Budget, or (ii) successful completion of Phase II, unless such transfer is to an Affiliate of the transferring party or as otherwise provided herein. After commencement of Phase III, a party desiring to sell, transfer, assign, pledge or otherwise dispose of or encumber its ownership interest in the Company (other than to an Affiliate of such party) may do so only to a Qualified Transferee pursuant to a BONA FIDE third party offer after affording the other party a right of first refusal to acquire such ownership interest on the same terms as the Qualified Transferee. As used in this document, "AFFILIATE" means any person controlling, controlled by or under common control with either of the parties. "CONTROL" means the right to direct the management or policies of the person or to elect or appoint a majority of its management body (such as the board of directors of a corporation, the managers of a limited liability company, the general partners of a partnership, the trustees of a trust, etc.), or the ownership of more than fifty percent (50%) of the equity interests of the person entitled to vote. "PERSON" means any individual, corporation, company, partnership, trust, association or other legal entity. "QUALIFIED TRANSFEREE" means a person who is not directly or indirectly via an Affiliate a competitor of the other party, who is financially sound and who is of good moral character. 15. DEADLOCK 15.1 In the event of a disagreement between SAVIA and Kosan, the Managers of the Company will attempt to resolve the disagreement through negotiation. In the event the Managers cannot resolve the disagreement, the President or CEO of Kosan and a representative of very upper management of SAVIA will attempt to resolve the disagreement through negotiation. If the disagreement cannot be resolved through negotiation and relates to any material aspect of the Company or its actual or anticipated business, including the proposed modification or determination of a budget, the Milestones or any other matter related to the Company's business, then the disagreement will be submitted to an independent arbitrator selected by the parties who has expertise in the areas of biotechnology and joint ventures. The Company will conduct its business according to the most recently approved business plan, budget and Milestones for at least six (6) months 5 following appointment of the arbitrator and the parties will use best efforts to conclude the arbitration within six (6) months. The decision of the arbitrator will be binding. 15.2 The expenses of the arbitration will be recoverable by the prevailing party (if the arbitrator determines that one party is the prevailing party) unless the arbitrator determines otherwise. The Company Documents will include procedures for appointing arbitrator(s), consequences of a party's failure to act, deadlines for conducting the arbitration and other customary arbitration provisions. 16. PURCHASE OPTION 16.1 A purchase option will be triggered in the following circumstances: (i) SAVIA or Kosan becomes the subject of a bankruptcy or similar proceeding that is not dismissed within ninety (90) days; (ii) there is a change in Control of SAVIA or Kosan (whether by merger, stock issuance, open market stock purchases, or otherwise) and the Person acquiring Control is not a Qualified Transferee, or either of them sells substantially all of its assets to a Person other than a Qualified Transferee; or (iii) one party is in material breach of the Company Documents after having been notified of the breach and having had thirty (30) days from the notice date in which to cure such breach and the matter is not disputed and not then the subject of an arbitration as provided in the Deadlock provision above. The "TRIGGERING PARTY" means the party that is the subject of the bankruptcy or similar proceeding, the party that undergoes a change in control, or the party in material breach of the Company Documents, as the case may be. The party that is not the triggering party is the "NON-TRIGGERING PARTY." 16.2 If a purchase option triggering event occurs, the non-triggering party will have the option to purchase all (or in the case of a change in Control, any part) of the triggering party's ownership interest in the Company for a cash price equal to the pro-rata portion of the appraised value of the non-triggering party's interest purchased, less the cost of the appraisal. The non-triggering party may exercise this option only by notifying the triggering party within the first three (3) months following a triggering event. The appraisal mechanism will be defined in the Company Documents. 16.3 In any purchase option situation and during the pendency of any dispute or arbitration, the selling party will continue to license or sublicense, (in either case to the extent of such party's right or obligation to do so in light of its no longer having an ownership interest to the Company any technology in existence at the time of purchase reasonably necessary to facilitate the exploitation by the Company of product development and commercialization or other business in the Company Field. Also, the selling party will continue, if requested by the purchasing party for two (2) years to provide advisory services and technical assistance to the Company as to know-how and other matters facilitating the use of the selling party's technology, and in exchange for such services would receive a two percent (2%) royalty on commercialization of such technology. 17. DISSOLUTION 17.1 Unless the parties otherwise agree, the Company will be dissolved (i) if SAVIA fails to make a payment agreed to for funding the Phase II Budget, (ii) if none of the Phase II Milestones are achieved after the expenditure of the Phase II Budget or any amount in excess thereof approved by the parties, or (iii) Kosan elects, without cause, not to perform the activities it agrees to perform in Phase II, or (iv) for any other reasons specified in the Company Documents. 6 17.2 Upon dissolution of the Company pursuant to Section 17.1(i), (x) subject to licenses with third parties, rights will revert to each party for any Intellectual Property in existence at the time of Company formation that were licensed, sold or contributed by such party to the Company, (y) Company Intellectual Property will be assigned to Kosan and (z) SAVIA will pay Kosan five hundred thousand U.S. dollars ($500,000) plus an amount equal to the Company's anticipated budget for the succeeding quarter. Any licenses entered into by the Company with the parties or third parties shall remain in full force and effect, with Kosan assuming the rights and obligations of the Company thereunder. 17.3 Upon dissolution of the Company pursuant to 17.1(ii), (x) subject to licenses with third parties, rights will revert to each party for any Intellectual Property in existence at the time of Company formation that were licensed, sold or contributed by such party to the Company, (y) Company Intellectual Property will be assigned to each party, SAVIA's rights to such technology will be exclusive and royalty free in the SAVIA Field, and Kosan's rights to such technology will be exclusive and royalty free in all other fields; in each case with the right to sublicense. Any licenses entered into by the Company with the parties or third parties shall remain in full force and effect, with SAVIA and Kosan, as applicable based on the field to which the license pertains, assuming the rights and obligations of the Company thereunder; revenues received from such licenses shall be divided between the parties in accordance with their respective ownership interests in the Company immediately prior to dissolution after any adjustment necessary to compensate a party for assuming the obligations of such license. 17.4 Upon dissolution of the Company pursuant to 17.1(iii), (x) subject to licenses with third parties, rights will revert to each party for any Intellectual Property in existence at the time of Company formation that were licensed, sold or contributed by such party to the Company, and (y) Company Intellectual Property will be assigned to SAVIA. Any licenses entered into by the Company with the parties or third parties shall remain in full force and effect, with SAVIA assuming the rights and obligations of the Company thereunder. 17.5 After any dissolution, subject to any legal or contractual restrictions, each party will provide advisory services (technical assistance) and technology/intellectual property licenses to the other, on commercially reasonable terms to be determined by the parties in good faith, to the extent reasonably necessary to facilitate the exploitation by the other party of the Company Intellectual Property distributed to it. 17.6 The distributions provided for in 17.2 through 17.4 above shall be the sole and exclusive remedies of the parties in the event of a dissolution of the Company. 18. ASSUMPTIONS AND CONDITIONS It is assumed as of the Closing Date that: 18.1 Both parties will be in full compliance with all applicable laws and regulations. 18.2 The party licensing technology to the Company will either own such technology directly or, if the parties agree, have the rights to such technology under a license that permits sublicensing. No such technology will be subject to license rights granted to third parties by the person licensing the technology to the Company, or, to the knowledge of the licensing party, to any other claims of third parties, in relation to the Company Field in a manner inconsistent with the grants herein. 18.3 There will have been no material adverse change after the date hereof in the business or business prospects of either party or such party's technology or the ownership thereof. 7 18.4 Any due diligence conducted by a party or its advisors in connection with the joint venture will not have caused them to become aware of any material facts adversely affecting the technology, related liabilities or the financial condition of the other which, in such party's good faith judgment makes it inadvisable to proceed with the joint venture. Exhibit A-1 Kosan Intellectual Property Exhibit A-2 SAVIA Intellectual Property 8 EXHIBIT A-1 KOSAN INTELLECTUAL PROPERTY
- ------------------------------------------------------------------------------------------- PRODUCTION OF POLYKETIDES IN BACTERIA AND YEASTS - BARR, SANTI, ASHLEY, ZIERMAN 12 Dec 97 US97/23014 Pub. 98/27203 - 25 Jun 98 (NP 18 Jun 99) 11 Dec 97 08/989,332 Pending 18 Dec 96 60/033,193 Lapsed - ------------------------------------------------------------------------------------------- PLANTS THAT EXPRESS POLYKETIDE SYNTHETIC - BETLACH, GUTTERSON, KEALEY, RALSTON 10 July 98 US98/14570 Pub. 99/02669 - 21 Jan 99 (NP 10 Jan 00) 10 July 98 09/114,083 Pending 10 July 97 60/052,211 Lapsed - ------------------------------------------------------------------------------------------- PHOSPHOPANTETHEINYL TRANSFERASES - LAMBALOT, GEHRING, REID, WALSH 11 Oct 96 US96/16202 Pub No. 97/13845 - 17 Apr 97 (NP 15 Apr 98) AUS 74357/96 Pending CAN 2,232,230 Pending EPO 96936313.4 Pending JAP Pending 11 Oct 96 08/728,742 Pending 12 July 96 60/021,650 Lapsed 13 Oct 95 60/005,152 Lapsed Licensed from Harvard - ------------------------------------------------------------------------------------------- PRODUCTION OF NOVEL POLYKETIDES - KHOSLA, HOPWOOD, EBERT-KHOSLA, MCDANIEL, FU, KAO 20 Sep 94 US94/10643 Pub. 95/08548 - 30 Mar 95 (NP 20 Mar 96) AUS 77317/94 Pat. No. 678058 - 4 Sep 97 CAN 2171629 Pending EPO 94928169.5 Pub. 0725778 - 14 Aug 96 JAP 7-509422 Pub. 9-505983 - 17 Jun 97 5 Mar 99 09/263,184 Pending 31 Mar 97 08/828,898 Iss Fee Pd 5 Apr 99 31 Mar 97 08/829,244 U.S. Patent No. 5,843,718 - 1 Dec 98 6 May 94 08/238,811 U.S. Patent No. 5,672,491 - 30 Sep 97 8 Dec 93 08/164,301 Abandoned 30062-20001.20 20 Sep 93 08/123,732 Abandoned 30062-20001.00 Licensed from Stanford - -------------------------------------------------------------------------------------------
9 EX-10.30 15 ex-10_30.txt EXHIBIT 10.30 EXHIBIT 10.30 KOSAN BIOSCIENCES, INC. 3832 BAY CENTER PLACE HAYWARD, CA 94545 TEL: (510) 732-8400 FAX: (510) 732-8401 E-MAIL: postmaster@kosan.com ================================================================================ February 21, 2000 Mr. Bernardo Jimenez SAVIA, S.A. de C.V. Plaza Commercial Las Villas Rio Caura #358 Ote. (Altos) Col. Del. Valle, Garza Garcia, N.L. Mexico 66220 Dear Bernardo: The purpose of this letter agreement is to document Savia's, DNAP's, and Kosan's agreement to the following with respect to the collaboration of Savia, DNAP and Kosan under the Evaluation Agreement and Term Sheet: 1. Savia, DNAP and Kosan agree that DNAP and Kosan will wind down the collaboration activities and their respective research activities under the collaboration with the objective of taking each project to an appropriate ending point and completing a wind-down by the end of 1999. 2. Savia will reimburse Kosan for work performed and expenditures made on behalf of the collaboration during the period May 1, 1999 - December 31, 1999. The reimbursement rate will be $240,000 per FTE. Payment in full of $159,600 for Kosan expenses for the period May 1, 1999 - December 31, 1999 will be made promptly upon signing of this letter agreement. No further payment will be owed to Kosan by Savia or DNAP under the Evaluation Agreement and Term Sheet. 3. Kosan will not assert any right it may have to additional payments of any type from Savia or DNAP. 1 of 3 4. Effective upon termination of the Evaluation Agreement, as set forth in paragraph 6 below, the respective rights of each of Savia, Kosan and DNAP to all technology, patent rights, know-how and other intellectual property licensed to another party hereunder in connection with the collaboration will revert to the licensing party and all technology, patent rights, know-how and other intellectual property conceived or reduced to practice or otherwise developed by or on behalf of the collaboration by DNAP, Kosan and DNAP and Kosan jointly will be owned by Kosan. 5. a. Kosan, for itself, its successors and assigns, releases and forever discharges Savia, DNAP and affiliates of either, including their respective past and present directors, officers, employees, successors and assigns, from any and all causes of action, claims and demands in law or in equity arising out of the March 1, 1998 Evaluation Agreement and Term Sheet, including activities taken or contemplated thereunder, provided that, such release and discharge does not extend to the (i) obligations of Savia and DNAP in provisions of the Evaluation Agreement stated in paragraph 6 below to survive termination of the Evaluation Agreement, and (ii) obligations of Savia and DNAP set forth above in this letter agreement. b. Savia and DNAP, each for itself, its successors and assigns, releases and forever discharges Kosan and its affiliates, including their respective past and present directors, officers, employees, successors and assigns, from any and all causes of action, claims and demands in law or in equity arising out of the March 1, 1998 Evaluation Agreement and Term Sheet, including activities taken or contemplated thereunder, provided that, such release and discharge does not extend to the (i) obligations of Kosan in provisions of the Evaluation Agreement stated in paragraph 6 below to survive termination of the Evaluation Agreement, and (ii) obligations of Kosan set forth above in this letter agreement. c. With respect to the releases of this paragraph 5, the parties acknowledge having been fully advised by their respective attorneys of the contents of Section 1542 of the Civil Code of the State of California, which provides: 2 of 3 "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 the debtor." The benefits of Section 1542 are hereby expressly waived by the parties. 6. The Evaluation Agreement, including its attached Term Sheet, is terminated effective December 31, 1999, provided that, the provisions of Sections 2.3(a), 3.1(b), 3.2, 3.3(a), 3.4, 3.8 and 7.5(b) and Articles 4, 5, 8 and 9 of the Evaluation Agreement will survive such termination date, and provided further that, the obligations set forth above in this letter agreement, to the extent unfulfilled as of such termination date, will survive such termination. Please indicate Savia's and DNAP's agreement to the foregoing by having an authorized officer of Savia and DNAP sign and return a copy of this letter to me. Very truly yours, /s/ Michael S. Ostrach Michael S. Ostrach Chief Operating Officer ACCEPTED AND AGREED: SAVIA, S.A. de C.V. By: /s/ Bernardo Jimenez ------------------------- DNA PLANT TECHNOLOGY CORPORATION By: /s/ Jorge Fenyvesi ------------------------- cc: Peter Davis, Ph.D. 3 of 3 EX-10.31 16 ex-10_31.txt EXHIBIT 10.31 EXHIBIT 10.31 EXHIBIT C-6 PROMISSORY NOTE $15,000.00 San Francisco, CA - ---------- 25 APRIL, 2000 FOR VALUE RECEIVED, SUSAN KANAYA promises to pay to Kosan Biosciences Incorporated (the "Company"), or order, the principal sum of FIFTEEN THOUSAND AND NO/100 ($15,000.00), together with interest on the unpaid principal hereof from the date hereof at the rate of Six and 6/10 percent (6.6%) per annum, compounded semiannually. Principal and interest shall be due and payable on 25 APR, 2003. Should the undersigned fail to make full payment of principal or interest for a period of 10 days or more after the due date thereof, the whole unpaid balance on this Note of principal and interest shall become immediately due at the option of the holder of this Note. Payments of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Option, dated as of 14 MAR 2000. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. In the event the undersigned shall cease to be an employee or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. /s/ Susan Kanaya --------------------- Signature SUSAN M. KANAYA ---------------------- Print Name EX-10.32 17 ex-10_32.txt EXHIBIT 10.32 Exhibit 10.32 LOAN AGREEMENT (EMPLOYEE LOAN) This LOAN AGREEMENT (the "Agreement") is entered into this 3rd day of March 2000 by and between KOSAN BIOSCIENCES, INC. (the "Company"), and Susan M. Kanaya (the "Employee"). WHEREAS, Employee has requested that the Company provide a loan in the amount of $52,900.00 for the purpose of replacing an existing loan with her former employer in connection with the Employee's purchase of a principal residence; and WHEREAS, the Company has agreed to provide Employee with the loan in exchange for Employee's services to the Company and other valuable consideration; NOW THEREFORE, the parties hereto agrees as follows: 1. LOAN. The Company shall loan Employee a total of $52,900.00 ("Loan"). The Loan proceeds shall be used solely to repay an existing loan with her former employer in connection with the purchase of Employee's principal residence. 2. INTEREST. The Loan shall bear interest rate of six and thirty-five hundreths percent (6.35%) per annum. 3. PROMISSORY NOTE. The Loan shall be made pursuant to a promissory note in the form attached hereto as Exhibit A (the "Note"). Employee shall execute the Note concurrently with the execution of this Agreement. 4. TIMING AND METHOD OF FUNDING. The loan proceeds shall be advanced to Employee no later than April 24, 2000 (the "Funding Date"). The loan proceeds shall be advanced by check from the Company payable to SUGEN, Inc., for benefit of Employee, which check shall be separate from Employee's regular paycheck. 5. DEED OF TRUST. Employee hereby agrees to secure the Loan by executing a deed of trust granting a second lien on Employee's principal residence (the "Property") to the Company. Employee hereby represents and warrants that the deed of trust shall remain a second lien on the Property, junior only to the first deed of trust. Employee covenants and agrees to execute and deliver to the Company a standard deed of trust on or prior to the Funding Date in favor of the Company covering the Loan. Employee further agrees to deliver all instruments, agreements or other documents as the Company shall reasonably require to obtain the full benefits of this Agreement. Employee hereby authorizes and appoints the Company as attorney in fact to execute a deed of trust on Employee's behalf and file and record the same in accordance with this Section 5. 6. REPAYMENT OF LOAN. All principal and interest on the Loan shall become due and payable as follows: (a) EMPLOYMENT TERMINATION. At the end of (i) the twelfth (12th) month following the date of Employee's death or (ii) the sixth (6th) month following the date of Employee's voluntary termination or termination for Cause, as defined below. "Cause" shall mean (i) conviction of any felony or any crime involving moral turpitude or dishonesty; (ii) participation in a fraud or act of dishonesty against the Company; (iii) willful breach of Company's policies; (iv) intentional damage to Company's property; (v) material breach of any employment agreements entered into with Company, or any other agreements with the Company, including but not limited to, agreements regarding confidentiality or proprietary information; (vi) engaging in or in any manner participating in any activity which is competitive with or intentionally injurious to Company (vii) commission of any fraud against Company or use or appropriation for Employee's personal use or benefit of any funds or properties of Company not authorized by the Board of Directors to be so used or appropriated; or (viii) conduct by Employee which in good faith and reasonable determination of the Board of Directors of the Company demonstrates gross unfitness to serve; or (b) Insolvency. In the Event of the insolvency of Employee, including but not limited to a bankruptcy or insolvency proceeding having been instituted by or against her, or a receiver is appointed for her property, of if she makes an assignment for the benefit of creditors. 7. FORGIVENESS OF LOAN. Provided no default under this Agreement or the Note has occurred and is continuing, principal and accrued interest on the Loan will be forgiven on November 4, 2002 if (a) the Loan has not become due and payable pursuant to Section 6 above, and (b) Employee has remained in continuous employment with the Company since the commencement of employment with the Company. In the event Employee's employment is terminated by the Company without Cause, then the Company will forgive the Loan on Employee's termination date. 8. DEFAULT AND REMEDIES. (a) DEFAULT. Employee will be in default under this agreement upon the occurrence of any one or more of the following events: (i) the failure of Employee to make any payment required hereunder or under the Note when due, (ii) the breach by Employee of any other covenant or agreement under this Agreement or Note, (iii) the default by Employee of its obligations under the Deed of Trust, or any other instrument evidencing or securing this Note, (iv) the default by Employee of its obligations under any mortgage, deed of trust, encumbrance or lien respecting the property, which encumbrance is senior to the Deed of Trust, (v) the sale of principal resident by Employee, her estate, or by a person who acquires said property through gift, bequest, inheritance, through a domestic relations order or property settlement incident to divorce, or (vi) the appointment of a receiver for any part of the property of, or an assignment for the benefit of creditors by, or the commencement of any proceedings under any bankruptcy or insolvency laws by or against any maker, endorser or guarantor. (b) REMEDIES. Upon Employee's default, Company may, with notice to Employee, declare the entire principal sum and any amounts due thereon immediately due and payable and exercise any and all of the remedies provided under the Deed of Trust or a law or in equity. 9. NON-TRANSFERABLE. The right of Employee to request and receive the Loan hereunder, as well as the benefits of the interest arrangement under this Agreement, shall not be assignable, or otherwise transferable by Employee. 10. TAXES; TAX RETURN. All taxes resulting from this Agreement are to be the sole responsibility of Employee, and Employee agrees to pay to the Company in cash or check an amount equal to any withholding obligation imposed on the Company by reason of this Agreement including, without limitation, any taxes due with respect to any forgiven amounts. Employee certifies to the Company that she reasonably expects to be entitled to and will itemize deductions on her income tax returns for each year the Loan is outstanding. 11. GENERAL PROVISIONS. (a) This Agreement shall be governed by the laws of the State of California applicable to contracts made and performed in such a state, without regard to principles of conflicts of laws. (b) This Agreement and its Exhibits contains the entire agreement between Employee and the Company, and is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. Employee and the Company each acknowledge and represent that this Agreement is entered without reliance on any promise or representation other than those expressly contained herein and that this Agreement cannot be modified except in writing signed by both parties. (c) Except as otherwise specified herein, any notice, demand or request required or permitted to be given by either the Company or Employee pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. Mail, First Class with postage prepaid, and addressed to the Company at its then current principal office and to Employee at the address listed for her on the Company's payroll. (d) Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitutes a waiver of either party's right to assert all other legal; remedies available to it under the circumstances. (e) Employee agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purpose or intent of this Agreement. (f) In the event of any litigation concerning this Agreement, the prevailing party shall be entitled to a reasonable sum for attorney's fees, costs, and litigation expenses, whether or not such action is prosecuted to judgment. "Prevailing Party" includes without limitation a party who agrees to dismiss an action upon payment by the other party of sums allegedly due or performance of the covenants allegedly breached, or who obtains substantially the relief sought by that party. In the event that the Company is the prevailing Party, the Company shall also be entitled to reasonable costs associated with the collection of the Loan. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above. KOSAN BIOSCIENCES, INC. EMPLOYEE a California Corporation By: [Illegible] By: /s/ Susan Kanaya Title: Chief Operating Officer Address: 3832 Bay Center Place Address: 1421 Woodberry Ave. Hayward, CA 94545 San Mateo, CA 94403 EXHIBIT A DO NOT DESTROY THIS ORIGINAL NOTE: WHEN PAID, THE ORIGINAL NOTE, TOGETHER WITH THE DEED OF TRUST SECURING SAME, MUST BE SURRENDERED TO THE TRUSTEE FOR CANCELLATION AND RETENTION BEFORE RECONVEYANCE WILL BE MADE. PROMISSORY NOTE (EMPLOYEE LOAN) $52,900.00 Hayward, California 31 March 2000 For value received, I promise to pay Kosan Biosciences, Inc., a California corporation (the "Company"), at its principal office at 3832 Bay Center Place, Hayward, California 94545, or at such other place as the Company shall designate in writing, the aggregate principal amount of $52,900.00 together with interest thereon as specified below, payable at the times and in the manner set for in that Loan Agreement (Employee Loan) dated as of 31 March 2000 by and between the undersigned and the Company ("Loan Agreement"), the terms of which are incorporated herein by reference. In the event undersigned is continuously employed full-time by the Company from November 4, 1999 through November 4, 2002 (the "Forgiveness Date"), this Note shall be canceled and the entire principal amount, together with any accrued interest, forgiven as compensation to the undersigned. If prior to the Forgiveness Date, the undersigned shall cease to be a full-time employee of the Company due to the undersigned's death, voluntary termination or termination for Cause (as defined in the Employee Loan), the entire principal amount hereof, together with all accrued interest, shall immediately become due and payable (i) in the event of Employee's death, at the end of the twelfth (12th) month following the death, and (ii) in the event of a voluntary termination or termination for Cause, at the end of the sixth (6th) month following the date of Employee's termination of employment. Interest shall accrue from the date of the Note at the rate of 6.35% per annum; provided, however, that interest shall be forgiven upon the terms and conditions set forth in the Loan Agreement. This Note is to be secured by a deed of trust on the real property to be occupied by undersigned as her principal residence. In the event the undersigned fails to provide the Company with said deed of trust, in form satisfactory to the Company, this Note shall, at the option of the Noteholder, become immediately due and payable. In the event of any default on this Note, the undersigned agrees to pay the Company all expenses incurred by the Company, including, without limitation, reasonable attorney's fees and court costs (including any costs of appeal), in enforcing and collecting this Note. The undersigned and all endorsers, sureties and guarantors hereof hereby jointly and severally waive presentment, demand for payment, notice of dishonor, notice of protest, and protest, and all other notices or demands in connection with the delivery, acceptance, performance default, endorsement or guaranty of this Note. No delay or failure by the holder of this Note in exercising any power or right hereunder shall operate as a waiver of any power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof, or the exercise of any other power or right hereunder or otherwise. The rights and remedies of the holder of this Note shall be cumulative and shall note preclude the assertion by the holder hereof of any other rights or the seeking by the holder hereof of any other remedies against the undersigned. This Note shall be governed by and construed in accordance with the laws of the State of California, as such laws are applied by California courts to contracts made and to be performed entirely in California by residents of that state. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected hereby. The provisions of the Note shall be binding upon, and inure to the benefit of, any successor of undersigned and extend to any holder hereof. EMPLOYEE: /s/ Susan Kanaya ---------------------- Address: 1421 Woodberry Avenue ---------------------- San Mateo, CA 94403 ---------------------- EX-10.33 18 ex-10_33.txt EXHIBIT 10.33 Exhibit 10.33 PROMISSORY NOTE $400,000.00 May 30, 2000 Hayward, California FOR VALUE RECEIVED, Brian Metcalf ("Employee"), an employee of Kosan Biosciences, Inc. ("Company"), hereby unconditionally promises to pay to the order of Company, in lawful money of the United States of America and in immediately available funds, the principal sum of Four Hundred Thousand Dollars ($400,000.00)(the "Loan") due and payable on the date and in the manner set forth below. 1. Intent. It is the intent of the parties that the purpose of this Note is not for consumer, family or household purposes. 2. Principal Repayment. The outstanding principal amount of the Loan shall be due and payable on the earlier of the following (the "Maturity Date"): (a) May 30, 2005; or (b) the date on which Employee voluntarily terminates his employment relationship with Company. 3. Interest Rate. Employee further promises to pay interest on the outstanding principal amount hereof from the date hereof until payment in full, which interest shall be payable at the rate of 6.3% per annum compounded annually. Interest shall be due and payable on the Maturity Date and shall be calculated on the basis of a 360-day year for the actual number of days elapsed. 4. Place of Payment; Prepayment. All amounts payable hereunder shall be payable at the office of Company unless another place of payment shall be specified in writing by Company. Prepayment is permitted. 5. Application of Payments. Payment on this Note shall be applied first to accrued interest, if any, and thereafter to the outstanding principal balance hereof. 6. Default. Each of the following events shall be an "Event of Default" hereunder: (a) Employee fails to pay timely any of the principal amount due under this Note on the date the same becomes due and payable or any accrued interest or other amounts due under this Note, if any, on the date the same becomes due and payable, or fails to perform any other obligations hereunder; (b) Employee files a petition or action for relief under any bankruptcy, insolvency or moratorium law or any other law for the relief of, or relating to, debtors, now or hereafter in effect, or makes any assignment for the benefit of creditors or takes any action in furtherance of any of the foregoing; (c) An involuntary petition is filed against Employee (unless such petition is dismissed or discharged within sixty (60) days) under any bankruptcy statute now or hereafter in effect, or a custodian, receiver, trustee, assignee for the benefit of creditors (or other similar official) is appointed to take possession, custody or control of any property of Employee; or (d) Employee's employment by or association with the Company is terminated for any reason or no reason, including, without limitation, death of Employee. Upon the occurrence of an Event of Default hereunder, all unpaid principal, accrued interest and other amounts owing hereunder, if any, shall, at the option of Company, and, in the case of an Event of Default pursuant to (b) or (c) above, automatically, be immediately due, payable and collectible by Company pursuant to applicable law. Notwithstanding the foregoing, if an Event of Default has occurred under (d) above due to the Company's termination of Employee's employment with the Company without cause, this Note shall be converted to a five (5) year note at an interest rate equal to the Prime Rate plus one percent (1%), compounded annually, and the principal shall be payable in five equal annual installments, together with interest thereon payable in arrears calculated on the basis of a 360 day year for the actual number of days elapsed, beginning one year from such date of termination of employment. The Prime Rate shall mean the variable rate of interest, per annum, most recently published in the Money Rate Section of the New York Edition of The Wall Street Journal, as the "prime rate". If an Event of Default has occurred under (d) above due to the Company's termination of Employee's employment with the Company for cause, all unpaid principal and accrued interest shall be due and payable within six (6) months from such date of Employee's termination of employment. The Company shall have all rights and may exercise any remedies available to it under law, successively or concurrently. Employee expressly acknowledges and agrees that Company shall have the right to offset any obligations of Employee hereunder against salaries, bonuses or other amounts that may be payable to Employee by Company. 7. Waiver. Employee waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note, and shall pay all costs of collection when incurred, including, without limitation, reasonable attorneys' fees, costs and other expenses. The right to plead any and all statutes of limitations as a defense to any demands hereunder is hereby waived to the full extent permitted by law. 8. Governing Law. This Note shall be governed by, and construed and enforced 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. 9. Successors and Assigns. The provisions on this Note shall inure to the benefit of and be binding on any successor to Employee and shall extend to any holder hereof. Employee shall not, without the prior written consent of holder, assign any of its rights or obligations hereunder. Dated: May 30, 2000 /s/ Brian W. Metcalf - ----------------------------- BRIAN METCALF EX-16.1 19 ex-16_1.txt EXHIBIT 16.1 [PRICEWATERHOUSECOOPERS LETTERHEAD] EXHIBIT 16.1 - ------------------------------------------------------------------------------- April 5, 2000 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Gentlemen: We have read the disclosure related to Change in Independent Accountants required by Item 304 of Regulation S-K in the Form S-1 filed March 31, 2000 of Kosan Biosciences Incorporated and are in agreement with the statements contained in the second paragraph on page 54 therein. We have no basis to agree or disagree with other statements of the registrant contained therein. Very truly yours, /s/ PricewaterhouseCoopers LLP EX-23.2 20 ex-23_2.txt EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated March 10, 2000, except for the first paragraph of Note 11 as to which the date is , in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-33732) and related Prospectus of Kosan Biosciences Incorporated for the registration of 5,000,000 shares of its common stock. ERNST & YOUNG LLP Palo Alto, California The foregoing consent is in the form that will be signed upon the completion of the stock split and increase in authorized shares of common and preferred stock described in Note 11 to the financial statements. /S/ ERNST & YOUNG LLP Palo Alto, California August 7, 2000 EX-27.1 21 ex-27_1.txt EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 19,015 6,012 112 0 0 25,392 4,388 1,414 36,898 3,022 2,099 0 4 7 31,766 36,898 0 2,224 0 0 9,414 0 167 (6,679) 0 (6,679) 0 0 0 (6,679) (3.57) (3.57) Reflects a 3:1 stock split that will become effective upon the closing of this offering
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