-----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, SmSCbmfq9TRiT8CM6hrkEGXxVn2HxfqtqiTg+5QvyZHm/DeKsVAzPm5OA762kFmG jBClhkV0RPeEINvd73j2UA== /in/edgar/work/20000907/0000912057-00-040472/0000912057-00-040472.txt : 20000922 0000912057-00-040472.hdr.sgml : 20000922 ACCESSION NUMBER: 0000912057-00-040472 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000907 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: 718515 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 SEPTEMBER 7, 2000 REGISTRATION NO. 333-33732 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 2 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. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE PRICE REGISTRATION FEE Common Stock, no par value...... 5,750,000 shares $16.00(1) $92,000,000 $24,288(2)
(1) Estimated solely for purposes of computing the amount of registration fee pursuant to Rule 457(a) under the Securities Act of 1933. (2) A fee of $21,120 was previously paid by the Registrant. 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 SEPTEMBER 7, 2000 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 per share. INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 7.
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 CIBC WORLD MARKETS SG COWEN FIDELITY CAPITAL MARKETS a division of National Financial Services LLC 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-production, gene manipulation and chemobiosynthesis. Following are captions that will be presented with the artwork: OVER-PRODUCTION. Genes transferred to better hosts. GENE MANIPULATION. Altered genes yield new compounds. CHEMOBIOSYNTHESIS. Synthetic starting materials yield new compounds.] TABLE OF CONTENTS
PAGE -------- Prospectus Summary...................... 3 Risk Factors............................ 7 Forward-Looking Statements.............. 14 Use of Proceeds......................... 15 Dividend Policy......................... 15 Dilution................................ 16 Capitalization.......................... 17 Selected Financial Data................. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 20 Business................................ 25
Management and Directors................ 38
PAGE -------- Related Party Transactions.............. 50 Principal Stockholders.................. 53 Description of Capital Stock............ 56 Shares Eligible for Future Sale......... 58 Underwriting............................ 60 Legal Matters........................... 63 Change in Independent Auditors.......... 63 Experts................................. 63 Where You Can Find More Information..... 63 Index to Financial Statements........... F-1
------------------------ 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 manipulate the genetic instructions by which polyketides are made; - chemobiosynthesis--the creation of new polyketides by incorporating synthetic starting materials into the biological processes by which polyketides are made; - heterologous over-expression--the over-production of polyketides by transferring the genes to better hosts; - 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. 3 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 August 2000, we signed a collaboration and license agreement with the Sloan-Kettering Institute for Cancer Research relating to potential anti-cancer compounds known as epothilones. 4 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. 5 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-for-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
6 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 OF OUR PRODUCTS MAY BE DELAYED OR STOPPED. Because we do not currently possess the financial and other resources necessary to develop 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 many of our drug candidates. If we do not maintain or further extend 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, 2001, 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. 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 7 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. 8 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. 9 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, WE MAY NOT BE ABLE TO MANAGE OUR DAY-TO-DAY OPERATIONS. 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 and consultant, 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. 10 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. 11 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 47.0% 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; 12 - the timing and willingness of collaborators to commercialize our products; 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 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. 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, 16,449,285 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." 13 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" and variations of these words or other comparable words. 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. The safe harbor for forward-looking statements contained in the Securities Litigation Reform Act of 1995 protects companies from liability for their forward-looking statements if they comply with the requirements of the Act. The Act does not provide the protection for initial public offerings and is not available for our forward-looking statements in this prospectus. 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. 14 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. 15 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. 16 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 underwriters' discounts and commissions and our 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. 17 SELECTED FINANCIAL DATA You should read the following selected historical financial data 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. We have derived 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 our balance sheets at December 31, 1998 and 1999 from our financial statements that Ernst & Young LLP audited. The audited financial statements qualify the disclosure in this selected financial data. You can review the audited financial statements elsewhere in this prospectus. We have derived 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 from our audited financial statements that we do not include in this prospectus. We have derived 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 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. We do not intend for the selected data in this section to replace our financial statements. Historical results are not necessarily indicative of the results that you might expect in the future.
FROM INCEPTION (JANUARY 5, SIX MONTHS ENDED 1995) TO YEAR ENDED DECEMBER 31, 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 ======= ========
- ------------------------ (1) Includes non-cash charges for stock-based compensation as follows (in thousands):
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- Research and development............................... $ -- $ -- $ 964 $403 $2,597 General and administrative............................. -- -- 181 -- 708 ------ ------ ------ ---- ------ $ -- $ -- $1,145 $403 $3,305 ====== ====== ====== ==== ======
18
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
19 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 the Sloan-Kettering Institute for Cancer Research focusing on the development of potential 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. Subsequent to June 30, 2000 we recorded deferred stock-based compensation of $1.4 million for stock options granted from July 1, 2000 through August 31, 2000. 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 August 31, 2000, we expect to record amortization for deferred stock-based compensation approximately as follows: $3.8 million for the remaining six months in 2000, $4.7 million in 2001, $2.6 million in 2002, $1.1 million in 2003 and $106,000 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. 20 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-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, 2001. If we do not maintain or 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. 21 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 earned under this collaboration were $5.0 million in 1999 and $969,000 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, 2001. If we do not maintain or 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. 22 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, 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. For periods subsequent to June 30, 2000, we have estimated our non-cancelable commitments under our collaboration with Sloan-Kettering to be approximately $700,000 in addition to our internal development efforts under this agreement. We have no material non-cancelable commitments under the Stanford and Harvard collaborations. 23 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; - Our ability to maintain our existing collaboration with The R.W. Johnson Pharmaceutical Research Institute; - 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:
2000 2001 2002 2003 TOTAL FAIR VALUE -------- -------- -------- -------- -------- ---------- (IN THOUSANDS) 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%
24 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 should 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
25 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.] 26 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 a collaboration 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. OUR TECHNOLOGY PLATFORM Our technology platform has five components: polyketide gene alteration, chemo-biosynthesis, heterologous over-expression, combinatorial biosynthesis, and screening libraries. Together, our 27 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 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 28 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 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. 29 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. 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 to 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 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 30 the important types of epothilone using our technologies. We also expect to produce proprietary analogs of epothilone. In August 2000, we entered into a 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 31, 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 and two foreign patents (which expire beginning in 2014) owned by the Sloan-Kettering Institute for Cancer Research. On that date, we also had 43 U.S. patent applications and 31 foreign patent applications, as well as the exclusive rights to 21 U.S. patent applications and 45 foreign patent applications. 31 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 exclusive rights to technology developed by Dr. S. Danishefsky claimed in a series of issued and pending patents filed by Sloan-Kettering. These patents include claims to epothilone compounds and methods of making and using epothilones. 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 Effective September 28, 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 2001. 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 to us, including for research and development, and for reaching certain milestones. In addition to creating a three-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 32 recognized $2.1 million of contract revenue for the six months ended June 30, 2000, $5.0 million for the year ended December 31, 1999 and $969,000 for the same period in 1998, pursuant to this agreement. Such amounts, excluding initial and milestone payments, approximated research and development expenses under this collaboration. Included in such amounts is the ratable portion of a $1 million up-front fee received upon signing the agreement, which is being recognized over the initial two-year term of the agreement. Included in 1999 contract revenue were $1.2 million of non-recurring milestone payments earned under this agreement. The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. can, until January 28, 2001, reduce research funding for the third year of the research term, and after December 28, 2000, can terminate the agreement as a whole upon payment of a termination fee. 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 or reduce the research funding for the third year of the research term, 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. So long as The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc. are actively developing or commercializing a product under the agreement, the agreement does not terminate until the last patent claiming the product or its manufacture or use expires or, in the absence of any such patent, until ten years after the first commercial sale of the product. SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH Effective August 26, 2000, we signed a collaboration and license agreement with the Sloan-Kettering Institute for Cancer Research 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 a two year term, the agreement grants licenses that include: - A research license, whereby we and Sloan-Kettering grant each other a license 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 we are unable to produce or otherwise provide the materials required for Phase II clinical trials within specified time periods in advance 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. Otherwise, so long as we are actively developing or commercializing a product under the agreement, the agreement does not 33 terminate until the last patent claiming the product or its manufacture or use expires or, in the absence of any such patents, until ten years after the first commercial sale of the product. STANFORD UNIVERSITY Effective March 11, 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 option to acquire an exclusive license to future patents or patent applications as determined by Stanford which are related to certain technology developed by Dr. Khosla related to polyketides and their production. We may terminate this agreement with respect to any country or patent or in its entirety on 60 days' advance notice. Stanford University may terminate this agreement if we are in default for failure to make royalty payments or required reports or for making materially incorrect reports or for a material breach of the agreement and do not cure the breach within 60 days after being notified of the breach by Stanford University. Otherwise, the agreement does not terminate until the last to expire patent claiming a product licensed under the agreement or its manufacture or use expires or, in the absence of such patents, until ten years after the first commercial sale of the product. HARVARD COLLEGE Effective December 2, 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. We may terminate this agreement in its entirety on 90 days' advance notice and payment of a nominal termination fee. Harvard College may terminate this agreement if we are in default for failure to make royalty or other payments and do not make such payments within 45 days of receiving notice from Harvard College or if we are in default for failure to make required reports or for making materially incorrect reports or for a material breach of the agreement and do not cure the breach, if a period for cure is allowed, within 90 days or less after being notified of the breach by Harvard College. Otherwise, the agreement does not terminate until the last patent claiming a product licensed under the agreement or its manufacture or use expires. We made total payments under the Stanford University and Harvard College collaborations for the years ended December 31, 1997, 1998 and 1999, and the six months ended June 30, 2000 of $25,000, $32,500, $42,500, and $42,500, respectively. For periods subsequent to June 30, 2000, we have estimated our non-cancelable commitments under the Sloan-Kettering collaboration to be approximately $700,000 in addition to internal development efforts under this agreement. We have no material non-cancelable commitments under the Stanford and Harvard collaborations. 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 34 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 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. 35 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. 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 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 36 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 into the year 2002, and beyond that time, that suitable additional space will be available on commercially reasonable terms. 37 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 Robert G. Johnson, Jr., M.D., Ph.D........ 48 Vice President, Medical Affairs and Corporate Development 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 38 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. ROBERT G. JOHNSON, JR., M.D., PH.D. has served as our Vice President, Medical Affairs and Corporate Development since September 2000. From 1998 to September 2000, Dr. Johnson was employed by Chiron Corporation, a biotechnology company, serving as Vice President, Pharmacology and Preclinical Affairs through 1999 and most recently as Vice President, Corporate Development. From 1991 to 1998, Dr. Johnson was Director of Pharmacology at Merck & Co., Inc., a pharmaceutical company. In addition, Dr. Johnson was a member of the faculty at the University of Pennsylvania from 1987 to 1991 and at Harvard Medical School from 1985 to 1987. Dr. Johnson received his B.A. and Ph.D in biophysics and his M.D. from the University of Pennsylvania. 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. 39 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 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. 40 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. 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 41 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. 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 September 2000, we entered into an agreement with Robert G. Johnson, Jr., M.D., Ph.D. in connection with his appointment as Vice President, Medical Affairs and Corporate Development. Under the agreement, Dr. Johnson is entitled to receive an annual salary of $230,000, a $50,000 sign-on bonus and an option to purchase 192,000 shares of our common stock at fair value. In addition, Dr. Johnson is entitled to a housing loan of $150,000 which will be secured by a deed of trust on Dr. Johnson's residence, 50% of which will be forgiven on the third anniversary date of his employment and the remaining will be forgiven on the fourth anniversary date. Dr. Johnson is also entitled to monthly mortgage assistance of $1,000 during the first three years of employment. Either we or Dr. Johnson may terminate his employment at any time for any reason. If we terminate Dr. Johnson without cause, he will receive six months of salary continuation and six additional months of vesting of his stock options will be accelerated. 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, and 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. 42 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 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, Metcalf and Johnson, 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. 43 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 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. 44 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 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. 45
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. 46 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. 47 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. 48 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. 49 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. All of the above shares of convertible preferred stock will convert into 9,581,421 shares of common stock upon the closing of this offering. 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 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 $11.00. 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 50 shares of convertible preferred stock owned by Dr. Santi will convert into 762,015 shares of common stock upon the closing of this offering. (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 51 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. 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. 52 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of our common stock as of August 31, 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 19,006,026 shares of our common stock and convertible preferred stock on an as-converted basis outstanding as of August 31, 2000 and 24,006,026 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 53 common stock shown as beneficially owned by them, subject to community property laws, where applicable.
AMOUNT OF SHARES BENEFICIALLY OWNED AS OF AUGUST 31, 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 19.2% 15.2% Jean Deleage, Ph.D. (2)................................. 2,389,875 12.6% 10.0% Alta Partners One Embarcadero Center, Suite 4050 San Francisco, CA 94111 Peter Davis, Ph.D. (3).................................. 1,502,931 7.9% 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 6.1% 4.8% Franklin Biotechnology Discovery Fund 777 Mariners Island Boulevard San Mateo, CA 94404 Raymond Whitaker, Ph.D. (6)............................. 957,477 5.0% 4.0% S.R. One, Limited Four Tower Bridge West Conshohoken, PA 19428 Chaitan Khosla, Ph.D. (7)............................... 1,785,000 9.4% 7.4% 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 1.3% 1.1% Daniel Chu (13)......................................... 67,500 * * All current directors and executive officers as a group (10 persons)(14)...................................... 11,484,793 59.1% 47.0%
- ------------------------ * Less than one percent (1%) (1) Includes 390,624 shares that are subject to our right of repurchase as of August 31, 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 54 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 113,748 shares that are subject to our right of repurchase as of August 31, 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) 3,999 shares that are subject to our right of repurchase as of August 31, 2000; and (ii) 19,500 shares that are subject to option as of August 31, 2000, of which 13,437 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) 124,374 shares that are subject to our right of repurchase as of August 31, 2000; and (ii) 75,000 shares that are subject to option as of August 31, 2000, of which 65,625 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 August 31, 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 August 31, 2000. (12) Includes the following: (i) 118,125 shares that are subject to our right of repurchase as of August 31, 2000; and (ii) 37,500 shares that are subject to option as of August 31, 2000, of which 32,811 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. 55 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 56 - 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. 57 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; - 16,449,285 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 98.8 percent 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. 58 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. 59 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 LLC, 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 LLC.............................................. ----- 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. Lehman Brothers Inc., on behalf of the underwriters, expects to deliver the shares on or about , 2000. 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." 60 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 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 61 representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice. 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 98.8 percent of our securities 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 and pursuant to collaborative relationships that we establish or acquisitions of assets, products or technologies from others. 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 LLC, 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. 62 LEGAL MATTERS Wilson Sonsini Goodrich & Rosati, Professional Corporation, 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, Professional Corporation, 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 63 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. 64 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 9, 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 9 to the financial statements. /S/ ERNST & YOUNG LLP Palo Alto, California September 5, 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 -- -- Beneficial conversion feature associated with the issuance of Series C convertible preferred stock (unaudited)................ -- -- -- -- 11,267 -- -- Deemed dividend to preferred stockholders (unaudited)......... -- -- -- -- (11,267) -- -- 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 Beneficial conversion feature associated with the issuance of Series C convertible preferred stock (unaudited)................ -- -- 11,267 Deemed dividend to preferred stockholders (unaudited)......... -- -- (11,267) 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............. (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 upon successful completion of a performance milestone event. 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 the Company to receive certain payments, including payments for research and development costs for at least two years, and receive 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 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) and 1999 and the six months ended June 30, 1999 and 2000, the Company recognized $969,000, $5.0 million, $2.9 million and $2.1 million, respectively, of contract revenues pursuant to this agreement which represents 99%, 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 and with the President and Fellows of Harvard College 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 to a director totaling $346,500 for the exercise of certain stock options. These notes bear interest of 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 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. 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 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) 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
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 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) 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 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 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 $11.00 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 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) 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 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 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) 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 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. 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) 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-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 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-21 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-22 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) SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH In August 2000, the Company signed a collaboration and license agreement with the Sloan-Kettering Institute for Cancer Research 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 24 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. Estimated non-cancelable commitments under this agreement are approximately $700,000 in addition to internal development efforts under this agreement. EXTENSION OF COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT In August 2000, the Company amended its collaborative Research and Development Agreement with the R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson Companies. Under the terms of the agreement, subject to termination provisions, the research program and funding have been extended until at least December 28, 2001. F-23 [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 LLC 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........................................ $ 24,288 NASD Fee.................................................... 11,200 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............................................... 40,012 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 From inception through June 30, 2000, we granted stock options and stock purchase rights to acquire 1,272,400 shares of Common Stock at prices ranging from $0.25 to $12.00 per share to employees, consultants and directors pursuant to our 1996 stock option plan, for aggregate consideration of $2,325,310. 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+ Research and License Agreement between Registrant and The Sloan-Kettering Institute for Cancer Research, dated August 25, 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.
II-4
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 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. 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.
II-5
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.33** Promissory Note from Shareholder by and between Registrant and Brian Metcalf, dated May 30, 2000. 10.34+ Amendment No. 2 to the Research and License Agreement between Registrant and The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., dated August 31, 2000. 10.35* Employment Agreement between Registrant and Robert G. Johnson, Jr., dated September 5, 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. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment No. 2 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 7th day of September 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 September 7, 2000 Daniel V. Santi Executive Officer) Vice President, Finance and * Chief Financial Officer ---------------------------------------- (Principal Financial and September 7, 2000 Susan M. Kanaya Accounting Officer) ---------------------------------------- Director September 7, 2000 Peter Davis * ---------------------------------------- Director September 7, 2000 Jean Deleage * ---------------------------------------- Director September 7, 2000 Chaitan Khosla * ---------------------------------------- Director September 7, 2000 Christopher Walsh * ---------------------------------------- Director September 7, 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+ Research and License Agreement between Registrant and The Sloan-Kettering Institute for Cancer Research, dated August 25, 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. 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.
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 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. 10.34+ Amendment No. 2 to the Research and License Agreement between Registrant and The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc., dated August 31, 2000. 10.35* Employment Agreement between Registrant and Robert G. Johnson, Jr., dated September 5, 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-3.2 2 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 September __, 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 September, 2000. - ---------------------------------- ----------------------------------- Daniel V. Santi, President Blair W. Stewart, Secretary -4- EX-10.2 3 a2024793zex-10_2.txt EXHIBIT 10.2 KOSAN BIOSCIENCES, INC. 1996 STOCK OPTION PLAN (as amended and restated effective September, 2000) 1. PURPOSES OF THE PLAN. The purposes of this 1996 Stock Option Plan are: - to attract and retain the best available personnel for positions of substantial responsibility, - to provide additional incentive to Employees, Directors and Consultants, and - to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended. (e) "COMMITTEE" means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan. (f) "COMMON STOCK" means the common stock of the Company. (g) "COMPANY" means Kosan Biosciences, Inc., a Delaware corporation. (h) "CONSULTANT" means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. (i) "DIRECTOR" means a member of the Board. (j) "DISABILITY" means total and permanent disability as defined in Section 22(e)(3) of the Code. (k) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (p) "NOTICE OF GRANT" means a written or electronic notice evidencing certain terms and conditions of an individual Option grant. The Notice of Grant is part of the Option Agreement. (q) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (r) "OPTION" means a stock option granted pursuant to the Plan. (s) "OPTION AGREEMENT" means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (t) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price. (u) "OPTIONED STOCK" means the Common Stock subject to an Option. (v) "OPTIONEE" means the holder of an outstanding Option granted under the Plan. (w) "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (x) "PLAN" means this Kosan Biosciences, Inc. 1996 Stock Option Plan. (y) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (z) "SECTION 16(b) " means Section 16(b) of the Exchange Act. (aa) "SERVICE PROVIDER" means an Employee, Director or Consultant. (bb) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan. (cc) "SUBSIDIARY" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 1,700,000 Shares plus an annual increase to be added on January 1 of each year (beginning in 2001), equal to the lesser of (i) 375,000 Shares, (ii) 5% of the outstanding Shares on such date or (iii) such lesser number of Shares as approved by the Board of Directors. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); PROVIDED, however, that Shares that have actually been issued under the Plan upon exercise of an Option, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of restricted stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. (i) MULTIPLE ADMINISTRATIVE BODIES. Different Committees with respect to different groups of Service Providers may administer the Plan. (ii) SECTION 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iii) RULE 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (iv) OTHER ADMINISTRATION. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Options may be granted hereunder; (iii) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; (vii) to institute an Option Exchange Program; (viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to modify or amend each Option (subject to Section 14(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan; (xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; (xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (xiii) to make all other determinations deemed necessary or advisable for administering the Plan. (c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 5. ELIGIBILITY. Nonstatutory Stock Options may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 6. LIMITATIONS. (a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (b) Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such relationship at any time, with or without cause. (c) The following limitations shall apply to grants of Options: (i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 1,000,000 Shares. (ii) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 1,000,000 Shares, which shall not count against the limit set forth in subsection (i) above. (iii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 12. (iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 12), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 7. TERM OF PLAN. Subject to Section 18 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless terminated earlier under Section 14 of the Plan. 8. TERM OF OPTION. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 9. OPTION EXERCISE PRICE AND CONSIDERATION. (a) EXERCISE PRICE. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. (b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions that must be satisfied before the Option may be exercised. (c) FORM OF CONSIDERATION. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (i) cash; (ii) check; (iii) promissory note; (iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; (v) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee's participation in any Company-sponsored deferred compensation program or arrangement; (vii) any combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 10. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 11. NON-TRANSFERABILITY OF OPTIONS. Unless determined otherwise by the Administrator, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate. 12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET SALE. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action. (c) MERGER OR ASSET SALE. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. If, in such event, the Option is not assumed or substituted, the Option shall terminate as of the date of the closing of the merger. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. DATE OF GRANT. The date of grant of an Option shall be, for all purposes, the date on which the Administrator makes the determination granting such Option, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant. 14. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan. (b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 15. CONDITIONS UPON ISSUANCE OF SHARES. (a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. EX-10.7 4 ex-10_7.txt EXHIBIT 10.7 RESEARCH AND LICENSE AGREEMENT BETWEEN KOSAN BIOSCIENCES, INC. AND THE MEMORIAL SLOAN-KETTERING CANCER RESEARCH CENTER AUGUST 25, 2000 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 -- DEFINITIONS -2- ARTICLE 2 -- RESEARCH -8- ARTICLE 3 -- SCREENING BY LICENSEE -14- ARTICLE 4 -- LICENSES -15- ARTICLE 5 -- DEVELOPMENT AND COMMERCIALIZATION -18- ARTICLE 6 -- LICENSE FEES AND MILESTONE PAYMENTS -21- ARTICLE 7 -- ROYALTIES, RECORDS, AND REPORTS -22- ARTICLE 8 -- SUPPLY OF PRODUCTS -27- ARTICLE 9 -- CONFIDENTIALITY -27- ARTICLE 10 -- REGULATORY MATTERS -29- ARTICLE 11 -- PATENT INFRINGEMENT -30- ARTICLE 12 -- INTELLECTUAL PROPERTY -31- ARTICLE 13 -- PUBLICITY -34- ARTICLE 14 -- WARRANTIES AND REPRESENTATIONS -34- ARTICLE 15 -- TRADEMARKS -36- ARTICLE 16 -- INDEMNIFICATION -36- ARTICLE 17 -- BANKRUPTCY -37- ARTICLE 18 -- TERM AND TERMINATION -37- ARTICLE 19 -- ASSIGNMENT -40- ARTICLE 20 -- DISPUTE RESOLUTION -41- ARTICLE 21 -- MISCELLANEOUS -42-
RESEARCH AND LICENSE AGREEMENT This RESEARCH AND LICENSE AGREEMENT (the "AGREEMENT"), made as of August 25, 2000 (the "EFFECTIVE DATE"), by and between KOSAN BIOSCIENCES, INC., a corporation organized under Delaware law having its principal office at 3832 Bay Center Place, Hayward, California 94545 ("LICENSEE"); ON THE ONE HAND, AND: THE SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH, a non-profit organization having its principal office at 1275 York Ave., New York, NY 10021 ("SKI"); ON THE OTHER HAND, WITNESSETH: A. WHEREAS, SKI has been engaged in research efforts focused on the discovery and development of EPOTHILONES and has certain research and development capabilities in the FIELD to which it has the right to grant licenses; B. WHEREAS, patent applications have been filed in the name of SKI in the United States and other territories for the granting of letters patent relating to certain EPOTHILONES that may have activity within the FIELD; C. WHEREAS, LICENSEE has been engaged in research efforts focused on the discovery and development of EPOTHILONES and has certain research, development, and commercialization capabilities in the FIELD; D. WHEREAS, SKI and LICENSEE desire to engage in collaborative research to conduct a drug discovery and development 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, provided that LICENSEE is able to obtain a license under the SKI PATENT RIGHTS and SKI KNOW-HOW (as hereinafter defined) with exclusivity to protect its investment in such program; and F. WHEREAS, SKI recognizes that LICENSEE requires such a license to justify the investment in funding and personnel needed to develop and market PRODUCTS 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: 1 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 "AFFILIATE(S)" shall mean any corporation(s) or organization(s) that directly or indirectly CONTROLS, is (are) CONTROLLED by, or is (are) under common CONTROL with LICENSEE or SKI. 1.2 "ANTICANCER ACTIVITY" shall mean cytotoxic or cytostatic activity. 1.3 "BEST EFFORTS" shall mean efforts by a party commensurate with that party's efforts to research, develop, market and/or commercialize its own product. 1.4 "BULK PRODUCT" shall mean the purified active ingredient, or purified intermediate for manufacture of any PRODUCT, as the case may be, in bulk form. 1.5 "COLLABORATION COMPOUNDS" shall mean any EPOTHILONE claimed in SKI PATENT RIGHTS. 1.6 "COMMITTED FTEs" shall mean, with respect to the RESEARCH PROGRAM, those SKI FTEs for which LICENSEE will provide RESEARCH FUNDING as set forth in the RESEARCH PLAN to conduct such RESEARCH PROGRAM. 1.7 "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. 1.8 "DEVELOPMENT" shall mean all work involved in STAGES O, I, II, and III for a PRODUCT in any country or territory. 1.9 "DEVELOPMENT PLAN" shall mean the plan for DEVELOPMENT of a PRODUCT pursuant to Article 5. 1.10 "EFFECTIVE DATE" shall mean August 26, 2000. 1.11 "EPOTHILONE" shall mean epothilone A, epothilone B, epothilone C, epothilone D, epothilone E, epothilone F, desoxyepothilone F, and any intermediate, derivative, or analog of any of the foregoing compounds. 2 1.12 "FDA" shall mean the United States Food and Drug Administration. 1.13 "FIELD" shall mean the research, development, manufacture, USE, and SALE of any COLLABORATION COMPOUND for any purpose, including but not limited to all human and animal pharmaceutical and agricultural applications. 1.14 "FINISHED PRODUCT" shall mean the finished pharmaceutical form, in any formulation, of a PRODUCT packaged for sale to a THIRD PARTY. 1.15 "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, and the like, consistent with SKI's normal business practices) of scientific work, on or directly related to the RESEARCH PROGRAM, 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. 1.16 "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. 1.17 "JDAC" shall mean the Joint Development Advisory Committee described in Section 5.1.1 below. 1.18 "JRC" shall mean the Joint Research Committee described in Section 2.3.1 below. 1.19 "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, inventions, discoveries, trade secrets, improvements, and technical information, together with all experience, data, formulas, procedures, and results, and including all biological, chemical, pharmacological, toxicological, clinical, analytical, and quality control data, in each case, which is necessary or useful in the DEVELOPMENT, manufacturing, or USE of COLLABORATION COMPOUNDS or PRODUCTS. 1.20 "LICENSEE KNOW-HOW" shall mean such KNOW-HOW that LICENSEE or its AFFILIATE(S) discloses to SKI under this AGREEMENT. 1.21 "LICENSEE 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, 3 continuation, continuation-in-part, substitution, reissue, extension, supplementary protection certificate or other application based thereon, owned or controlled by LICENSEE or its AFFILIATE(S), and to which LICENSEE or its AFFILIATE(S) has the ability to grant a license or sublicense to without violating the terms of any agreement with any THIRD PARTY. 1.22 "MAJOR MARKET COUNTRY" shall mean each of the United States, United Kingdom, Germany, France, Italy, Spain, or Japan. 1.23 "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 a PRODUCT. 1.24 "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 that 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. 1.25 "NET SALES" shall mean the revenue received by LICENSEE or an AFFILIATE or received by LICENSEE from a SUBLICENSEE from the sale of PRODUCTS to independent THIRD PARTIES in a BONA FIDE arm's length transaction, 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 Principles, 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 AFFILIATE(S) or SUBLICENSEE(S) 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, LICENSEE may with notice to SKI calculate NET SALES by discounting the BONA FIDE list price of a PRODUCT by the average percentage discount of all products of LICENSEE and/or its AFFILIATE(S) or SUBLICENSEE(S) in a particular "bundle", calculated as follows: Average percentage discount on a = (1 - A / B) x 100 particular "bundle" 4 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." LICENSEE shall provide SKI documentation, reasonably acceptable to SKI, establishing such average discount with respect to each "bundle." If LICENSEE 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 within sixty (60) days 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 physiologically, therapeutically, or prophylactically 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 DIVIDED BY (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 DIVIDED BY 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 within sixty (60) days by the parties in good faith. 1.26 "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 COLLABORATION COMPOUNDS or PRODUCTS. 1.27 "PHASE I", "PHASE II", and "PHASE III" shall mean Phase I (or Phase I/II), Phase II (or Phase II/III), and Phase III clinical trials, respectively, in each case as prescribed by the regulations of the applicable government agency or other regulatory entity. 5 1.28 "PRODUCT" shall mean any pharmaceutical product containing a COLLABORATION COMPOUND that is selected for DEVELOPMENT and/or marketing by LICENSEE or its AFFILIATE(S) or SUBLICENSEE(S). 1.29 "RESEARCH FUNDING" shall mean the funding to be paid by LICENSEE to SKI for the conduct of the RESEARCH PROGRAM. 1.30 "RESEARCH PLAN" shall have the meaning described in Section 2.2 hereof and is attached hereto as Exhibit A. 1.31 "RESEARCH PROGRAM" shall mean all research and development performed in the course of performing the RESEARCH PLAN during the RESEARCH TERM. 1.32 "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 18 below. 1.33 "SELLER" shall mean one who SELLS. 1.34 "SKI KNOW-HOW" shall mean all KNOW-HOW that (i) SKI owns as of the EFFECTIVE DATE and that relates to the FIELD, or (ii) is developed by SKI in performance of the RESEARCH PROGRAM during the RESEARCH TERM. 1.35 "SKI PATENT RIGHTS" shall mean (i) the patents and patent applications identified in Exhibit B 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, continuation-in-part, 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 SKI in performance of the RESEARCH PROGRAM, and (iii) any other claims in existing or future patents or patent applications covering the manufacture, USE, or SALE of a PRODUCT for the treatment of cancer to the extent such patents or patent applications claim inventions made by SKI during the RESEARCH TERM of this AGREEMENT. 1.36 "SOLD," "SALE," "SALES," "SELL," "SELLING" and "SELLS" shall refer to the act of selling or disposing of for value. 1.37 "STAGE O" shall mean that portion of the DEVELOPMENT program which starts with the selection of a COLLABORATION 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 6 manufacturing development necessary to obtain the permission of regulatory authorities to begin and continue human clinical testing. 1.38 "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. 1.39 "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. 1.40 "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. 1.41 "SUBLICENSEE" shall mean, with respect to a particular PRODUCT, a THIRD PARTY to whom LICENSEE has granted a license 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. 1.42 "THIRD PARTY" shall mean any party other than SKI or LICENSEE or AFFILIATE(S) of either of them. 1.43 "USE," "USES", and "USED" shall refer to the act of using for any commercial purposes whatsoever. 1.44 "VALID CLAIM" shall mean a claim of an issued, unexpired patent that 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. ARTICLE 2 -- RESEARCH 7 2.1 RESEARCH PROGRAM. Subject to the terms and conditions herein, SKI hereby agrees to conduct the RESEARCH PROGRAM in collaboration with LICENSEE with a goal of discovering, identifying, and synthesizing COLLABORATION COMPOUNDS for DEVELOPMENT by LICENSEE into one or more PRODUCTS for commercialization by LICENSEE, 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, describing the activities to be conducted by SKI and LICENSEE hereunder, the objectives thereof, and the budget therefor. 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 and provide general oversight and direction of the RESEARCH PROGRAM. The JRC shall be responsible for making changes to the RESEARCH PLAN based on the results of the RESEARCH PROGRAM and other factors. The JRC shall endeavor to make decisions on a consensus basis, but all decisions of the JRC must be by majority vote. 2.3.2 MEMBERSHIP. The JRC shall include three (3) representatives of each of LICENSEE and SKI, each Party's members selected by that party, and each member shall be actively engaged in managing or conducting the RESEARCH PROGRAM. SKI 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. At least for the first two (2) years of the RESEARCH TERM, the JRC shall meet at least quarterly, or more frequently as agreed by the parties, and shall meet at least bi-annually thereafter. Such meetings shall take place by teleconference or in person in New York at SKI or in California at Kosan, or at other locations as the parties agree. The JRC will otherwise communicate regularly by telephone, electronic mail, facsimile and/or video conference. With the consent of the parties, other representatives of SKI 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 thirty (30) 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: 8 (i) oversee and direct research and DEVELOPMENT 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 PROGRAM; (ii) review and monitor the progress of the RESEARCH PROGRAM, and determine, at each meeting, whether each party is making satisfactory progress in achieving the objectives of the RESEARCH PLAN, and if not, then provide direction regarding the actions to be taken by either party in the following quarter to address any problems identified that impede such progress, revise the RESEARCH PLAN as it deems appropriate, set priorities for research activities, review results achieved, and provide general guidance to assist in achieving the overall objective of fostering successful identification of COLLABORATION COMPOUNDS for DEVELOPMENT by LICENSEE; (iii) advise LICENSEE regarding the selection of COLLABORATION 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 relevant agreements with THIRD PARTIES to be made by SKI related to performance of the RESEARCH PROGRAM under this AGREEMENT; (vi) determine, at any time prior to the initiation of Phase II clinical trials using materials provided by LICENSEE, whether actions directed by the JRC to be taken by a party to address a problem preventing satisfactory progress of the RESEARCH PROGRAM have been taken, and if so, whether such actions have addressed the problem, and if not, then to recommend to the authorized representatives of the parties whether the AGREEMENT should be terminated pursuant to Section 18.2.4; and (vii) perform such other functions as are appropriate to further the purposes of this AGREEMENT as determined by the parties. 2.3.5 DISPUTE RESOLUTION. If a majority of the JRC members fails to reach agreement on any issue being considered by the JRC, and which after [**] of discussion between the JRC representatives of LICENSEE and SKI cannot be resolved, the issue will be referred to the respective Chief Executive Officers of each party or their designees for resolution. If there is no resolution of the issue at that level after [**] days, and the issue pertains to (i) the RESEARCH PLAN, then the status quo as reflected in the last approved RESEARCH PLAN shall remain in effect; (ii) LICENSEE's ability to produce or provide sufficient amounts of epothilone D to initiate and complete Phase II clinical trials, then SKI shall have the right to initiate mediation, followed by termination if mediation does not result in agreement between the parties; (iii) whether sufficient [**] is available to conduct the [**] development plan, or whether the [**] development plan jeopardizes or poses a risk of serious delay to the RESEARCH PROGRAM, then SKI shall make the final determination; (iv) the [**] 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. 9 provision to SKI of COLLABORATION COMPOUND pursuant to section 18.2.4, then SKI shall make the final determination; and (v) any other matter, then LICENSEE shall make the final determination. SKI shall be able to initiate mediation pursuant to subsection (ii) hereinabove only after [**]. If during the pendency of any mediation proceeding initiated pursuant to subsection (ii) of this section, LICENSEE is able to provide SKI with [**] of COLLABORATION COMPOUND at Good Manufacturing Practice (GMP) level of purity, then SKI shall no longer be able to exercise its right to terminate this AGREEMENT pursuant to subsection (ii) of this section. 2.3.6 INFORMATION AND ACCESS. SKI and LICENSEE 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 that it reasonably may request to perform its obligations hereunder; provided that, if such documents are under a bona fide obligation of confidentiality to a THIRD PARTY, SKI or LICENSEE, 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. LICENSEE and SKI shall each use reasonable efforts to conduct the RESEARCH PROGRAM and collaborate in the DEVELOPMENT of COLLABORATION COMPOUNDS 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 SKI RESEARCH EFFORTS. SKI 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, equipment, and other facilities consistent with such undertaking, and reasonably to cooperate with LICENSEE in the conduct of the RESEARCH PROGRAM. SKI agrees that, on average for each twelve (12) month period during the RESEARCH TERM, SKI shall dedicate FTEs to each phase of each PROJECT and the RESEARCH PROGRAM as specified the RESEARCH PLAN. SKI will use its BEST EFFORTS to continue its research efforts on COLLABORATION COMPOUNDS and 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. SKI shall initiate and complete in 2001 a physician-sponsored Phase I clinical trial at SKI of epothilone D with material produced with the support of the RAID award from the National Cancer Institute. Should SKI fail to complete the Phase I clinical trial in 2001, LICENSEE shall have no further obligation to conduct clinical trials at SKI or, if Phase II clinical trials are not initiated at SKI, to pay the milestone payment for the initiation of Phase II clinical trials in the U.S. pursuant to Section 6.3 and SKI shall have no further obligation to conduct the 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. Phase I clinical trials for LICENSEE. Provided the Phase I trial results are deemed by the JRC to be satisfactory, the parties shall initiate in 2002 a Phase II clinical trial of epothilone D using materials provided by LICENSEE. In addition, SKI will collaborate with LICENSEE to identify and conduct pre-clinical testing on one or more COLLABORATION COMPOUNDS as potential back-up development candidates for epothilone D and as second-generation anticancer agents. 2.4.4 LICENSEE RESEARCH EFFORTS. LICENSEE 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, equipment, and other facilities consistent with such undertaking, and reasonably to cooperate with SKI in the conduct of the RESEARCH PROGRAM. LICENSEE will use its BEST EFFORTS to develop a process for making epothilone D and 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, LICENSEE will use its BEST EFFORTS to produce epothilone D or intermediates in [**] and [**] to make epothilone D at commercial levels. LICENSEE shall 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 approved PRODUCT. LICENSEE will prepare and provide to SKI GMP-produced epothilone D as provided for in the RESEARCH PLAN. 2.4.5 SUBCONTRACTORS. SKI may have work performed by THIRD PARTY contractors as provided in the RESEARCH PLAN or otherwise approved by the JRC. LICENSEE, after notifying and consulting with the JRC, shall have the right to have THIRD PARTY contractors prepare or provide COLLABORATION COMPOUNDS for use in the RESEARCH PROGRAM. 2.4.6 INFORMATION AND REPORTS. (a) DISCLOSURES. (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 COLLABORATION COMPOUNDS, and the ANTICANCER ACTIVITY of such COLLABORATION COMPOUNDS, 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) Each party will make available and use all reasonable efforts to disclose to the other party KNOW-HOW necessary to make chemical modifications of the COLLABORATION COMPOUNDS in accordance with the RESEARCH PLAN, to conduct process development and strain selection research with respect to COLLABORATION 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. 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) SKI shall disclose KNOW-HOW from research conducted in the laboratory of Professor Samuel J. Danishefsky at SKI and funded by the RESEARCH PROGRAM as described in Article 2.6. (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 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, SKI shall require all persons, agents, contractors, and consultants employed or retained by SKI to work on the RESEARCH PROGRAM, prior to beginning such employment, to be bound in writing to (i) assign to SKI 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 SKI or its designees or assignees, and (ii) to be bound in writing to provisions of confidentiality substantially similar to those of Article 9. 2.5 RESEARCH TERM. The RESEARCH PROGRAM shall commence on the EFFECTIVE DATE and continue for two (2) years thereafter. The RESEARCH TERM shall 12 automatically be extended for such period as SKI is performing clinical testing of COLLABORATION COMPOUNDS and may be further extended by mutual agreement. 2.6 RESEARCH PROGRAM FUNDING. 2.6.1 FUNDING. For the conduct of the RESEARCH PROGRAM by SKI, LICENSEE shall pay SKI RESEARCH FUNDING in accordance with the budget in the RESEARCH PLAN. LICENSEE shall fund all costs of the RESEARCH PROGRAM; provided (i) the Phase I clinical trials shall be conducted using epothilone D materials produced with the support of the RAID award received by SKI from the National Cancer Institute; and (ii) SKI and LICENSEE shall use BEST EFFORTS to obtain funding from the NIH and other government agencies with which to support the RESEARCH PROGRAM and shall continue to apply any such existing funding supporting current activities that will continue as part of the RESEARCH PROGRAM. 2.6.2 TIMING OF PAYMENTS. SKI 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 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. 2.6.3 USE OF RESEARCH FUNDING. All funds provided by LICENSEE hereunder shall be used by SKI in the conduct of the RESEARCH PROGRAM. LICENSEE shall be under no obligation to provide FTE support to SKI beyond the levels stated in the RESEARCH PLAN. SKI shall have no obligation to expend any amount on the RESEARCH PROGRAM except the amounts paid by LICENSEE and the amounts received under grants awarded pursuant to 2.6.1.(ii). 2.6.4 THIRD PARTY LICENSES. In the event that SKI or LICENSEE becomes aware that it is necessary for SKI to acquire a license from any THIRD PARTY specifically for the conduct of the RESEARCH PROGRAM, such party shall inform the JRC. If SKI determines that such license is required, then LICENSEE shall either acquire such license or relieve SKI of its obligation to perform that aspect of the RESEARCH PROGRAM for which SKI believes a license is required. 2.7 AUDIT. SKI will maintain complete and accurate records which are relevant to its expenditure of SKI RESEARCH FUNDING provided to it by LICENSEE pursuant to Section 2.6 hereof. Such records shall be open during regular business hours for a period of three (3) years from creation of individual records for examination at LICENSEE's expense for the sole purpose of verifying that SKI has devoted to the RESEARCH PROGRAM the resources required by Section 2.4.3 above; provided however, that such right may not be exercised more than once in any calendar year. LICENSEE shall be entitled to a credit against future research payments or a refund in the event such audit reveals that the proper resources were not allocated in accordance with Section 2.4.3 above. 13 ARTICLE 3 -- SCREENING BY LICENSEE 3.1 EXCLUSIVE SCREENING. 3.1.1 ANTICANCER ACTIVITY. During the TERM of this AGREEMENT, LICENSEE shall have the exclusive right to screen COLLABORATION COMPOUNDS for ANTICANCER ACTIVITY. Until the termination of this AGREEMENT, SKI agrees that (i) it shall not grant a THIRD PARTY the right to screen or develop the COLLABORATION COMPOUNDS, and (ii) except in connection with the RESEARCH PROGRAM, shall not itself screen or develop the COLLABORATION COMPOUNDS for ANTICANCER ACTIVITY. 3.2 DELIVERY OF COMPOUNDS. 3.2.1 COLLABORATION COMPOUNDS. (a) During the TERM of this AGREEMENT, SKI will deliver to LICENSEE agreed quantities of COLLABORATION COMPOUNDS sufficient to conduct IN VITRO screening for ANTICANCER ACTIVITY, as specified in the RESEARCH PLAN. 3.2.2 NO TRANSFER; LIMITED USE. Except as expressly provided herein, LICENSEE shall not (i) transfer any of the COLLABORATION COMPOUNDS supplied to LICENSEE to any THIRD PARTY other than an AFFILIATE or an actual or prospective SUBLICENSEE without the express prior written consent of SKI, or (ii) use or permit any other person or entity to use any of the COLLABORATION COMPOUNDS supplied to LICENSEE for any purpose other than for screening or development and/or commercialization as expressly permitted in this AGREEMENT. 3.3 SCREENING RESULTS. Each party shall provide the other with written quarterly summary reports within thirty (30) days of the end of each calendar quarter with respect to their screening activities, identifying all assays in which any of the COLLABORATION COMPOUNDS demonstrated activity and the level of such activity for the COLLABORATION COMPOUNDS, all assays in which the COLLABORATION COMPOUNDS did not demonstrate activity, and a summary of all other results of screening activities. ARTICLE 4 -- LICENSES 4.1 RESEARCH LICENSES. 4.1.1 TO LICENSEE. Subject to the terms and conditions of this AGREEMENT, SKI hereby grants LICENSEE an exclusive paid-up license, with no right to grant sublicenses, under SKI PATENT RIGHTS and SKI KNOW-HOW to make and use methods and materials to carry out the RESEARCH PROGRAM during the RESEARCH TERM. 14 4.1.2 TO SKI. Subject to the terms and conditions of this AGREEMENT, LICENSEE hereby grants SKI a non-exclusive paid-up license, with no right to grant sublicenses, under LICENSEE PATENT RIGHTS and LICENSEE KNOW-HOW to make and use methods and materials to carry out the RESEARCH PROGRAM during the RESEARCH TERM. 4.1.3 ACADEMIC AND NOT-FOR-PROFIT RESEARCH. SKI and LICENSEE agree that SKI may provide, at its own expense, small amounts of COLLABORATION COMPOUNDS to scientists at academic or other not-for-profit research institutions solely for non-commercial research purposes, provided that (i) the members JRC are informed of any such transfers in advance; and (ii) the recipient signs SKI's standard material transfer agreement providing that the material is to be used only for research purposes, that such research is not funded by or conducted for or on behalf of a for-profit entity, and that SKI and LICENSEE will be granted a royalty-free license, with right to sublicense, to any patent filed by the recipient that discloses such research. Any rights flowing to SKI as a result of any such material transfer agreement shall be exclusively sublicensed to LICENSEE. 4.2 SCREENING LICENSES. SKI hereby grants to LICENSEE an exclusive, worldwide license during the TERM of this AGREEMENT to use the COLLABORATION COMPOUNDS to conduct screening for ANTICANCER ACTIVITY. 4.3 DEVELOPMENT AND COMMERCIALIZATION LICENSE. 4.3.1 GRANT. SKI hereby grants to LICENSEE, and LICENSEE hereby accepts from SKI, a worldwide, exclusive license, with the right to grant sublicenses, under the SKI PATENT RIGHTS and SKI KNOW-HOW, to make, USE, and develop COLLABORATION COMPOUNDS, and, to make, have made, USE, import, offer for SALE, SELL, and have SOLD PRODUCTS in the FIELD. 4.3.2 TERM. Unless LICENSEE's rights are terminated earlier as provided in Article 18, the foregoing license in Section 4.3.1 shall remain exclusive on a COLLABORATION COMPOUND-by-COLLABORATION COMPOUND and PRODUCT-by-PRODUCT basis (i) as to the applicable SKI PATENT RIGHTS, for their respective terms on a country-by-country basis, and (ii) as to the SKI KNOW-HOW, until the termination of LICENSEE's obligation to make royalty payments under Section 7.1, at which time the license under the SKI KNOW-HOW shall automatically become a fully paid, non-exclusive license. Notwithstanding the foregoing, however, with respect to any country of the European Union, the license to the SKI KNOW-HOW shall remain exclusive until the earlier of (i) the date on which the SKI KNOW-HOW becomes published or generally known to the public through no fault on the part of LICENSEE, its AFFILIATE(S), or SUBLICENSEE(S) or (ii) the tenth (10th) anniversary of the first commercial sale of the first PRODUCT in any country of the European Union, at which time the license under the SKI KNOW-HOW shall automatically become a fully paid, non-exclusive license. 15 4.4 AFFILIATE LICENSES. In the event LICENSEE wishes to manufacture PRODUCT or SELL in a country where its AFFILIATE is unable to pay royalties to LICENSEE or where payment of royalties to LICENSEE is limited as to its tax deductibility, SKI hereby agrees, at the written request of LICENSEE, such written request to constitute a license from LICENSEE to SKI to do the same, to grant appropriate licenses containing the same terms, conditions, and provisions as this AGREEMENT to any AFFILIATE under SKI PATENT RIGHTS and SKI KNOW-HOW to make, have made, USE, and SELL PRODUCTS. Any such licensed AFFILIATE shall thereafter report NET SALES directly to SKI, and the activities of any such AFFILIATE shall not be includable in any reports made by LICENSEE to SKI. 4.5 SUBLICENSES. LICENSEE and its AFFILIATE(S) shall have the right to grant to THIRD PARTIES sublicenses under the licenses granted to LICENSEE in Sections 4.1, 4.2, and 4.3 (or to its AFFILIATE(S) under Section 4.4) with respect to PRODUCTS developed by or on behalf of LICENSEE; provided, however, that until the earlier of (i) [**] from the EFFECTIVE DATE, and (ii) the initiation of Phase II clinical trials of epothilone D, SKI and LICENSEE shall make joint decisions regarding all sublicenses to THIRD PARTIES for the DEVELOPMENT and commercialization of COLLABORATION COMPOUNDS. After that time, LICENSEE has the right and sole discretion to grant sublicenses to THIRD PARTIES; provided, however, that SKI shall have the right to notify LICENSEE of THIRD PARTIES to which LICENSEE shall not grant sublicenses, because the activities of such THIRD PARTIES are incompatible with SKI's mission or inimical to its interests. 4.6 RSUBLICENSE TO [**]. Provided that sufficient amounts of polyglutamate-linked [**] can be made available to [**] for its research and development, LICENSEE will grant [**] a sublicense of SKI PATENT RIGHTS under which [**] will be licensed to make, USE, and SELL [**] for the treatment of cancer. [**] 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 PROGRAM, then the JRC shall approve the development plan. The JRC shall make this determination within [**] of receipt of the [**] development plan. LICENSEE and SKI shall agree upon the business terms of a sublicense to [**] and negotiate diligently with [**] to conclude a sublicense to [**] within [**] of the date the JRC approves the [**] development plan. Such [**]sublicense shall include a timeline for the development of the compound, with the right for LICENSEE 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 LICENSEE. 4.7 No COMPETING RESEARCH. During the RESEARCH TERM, researchers working on the RESEARCH PROGRAM and employed by SKI or LICENSEE shall not knowingly conduct, have conducted, or fund any research or development activity specifically directed at discovery or 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. developing COLLABORATION COMPOUNDS intended for use in the FIELD, except pursuant to this AGREEMENT. 4.8 COLLABORATION COMPOUND EXCLUSIVITY. During the term of this AGREEMENT, SKI shall not develop, commercialize, or sublicense to any THIRD PARTY any COLLABORATION COMPOUND to which LICENSEE retains commercial license rights, without the prior written consent of LICENSEE. 4.9 MODE OF COMMERCIALIZATION. Subject to the limitation in 4.5, LICENSEE shall have the right to sublicense one or more THIRD PARTIES to conduct manufacturing, marketing, sales, and/or distribution activities for any COLLABORATION COMPOUND; provided, however, that SKI shall have the right to notify LICENSEE of THIRD PARTIES to which LICENSEE shall not grant sublicenses, because the activities of such THIRD PARTIES are incompatible with SKI's mission or inimical to its interests. LICENSEE may SELL PRODUCTS through its AFFILIATE(S), SUBLICENSEE(S), or agents in any country. LICENSEE agrees to be responsible and liable for the performance hereunder by its AFFILIATE(S), agents, and SUBLICENSEE(S) 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 LICENSEE, and any such AFFILIATE or SUBLICENSEE may make the pertinent reports and royalty payments specified in Article 7 hereof directly to SKI on behalf of LICENSEE; otherwise, such reports and payments on account of SALES of PRODUCTS by each AFFILIATE and SUBLICENSEE shall be made by LICENSEE; and, in any event, the SALES of PRODUCT by each such AFFILIATE and SUBLICENSEE shall be separately shown in the reports to SKI if such information is readily available to LICENSEE. 4.10 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. ARTICLE 5 -- DEVELOPMENT AND COMMERCIALIZATION 5.1 DEVELOPMENT. 5.1.1 JDAC. LICENSEE shall have the right to select one or more COLLABORATION COMPOUNDS for DEVELOPMENT as replacement or back-up candidates for epothilone D and as second generation anticancer PRODUCTS. For each PRODUCT in DEVELOPMENT, including epothilone D, 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 SKI and LICENSEE, each party's members to be selected by that party. SKI and LICENSEE may each replace its JDAC representatives at any time, upon written notice to the other party. 17 One of the LICENSEE members of the JDAC, chosen at the sole discretion of LICENSEE, 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 SKI 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 LICENSEE in the preparation of a written DEVELOPMENT PLAN that describes LICENSEE'S proposed commercialization activities, including appropriate timelines for DEVELOPMENT, for such PRODUCT, which DEVELOPMENT PLAN shall be provided by LICENSEE to SKI; (b) review progress of the DEVELOPMENT work at least quarterly, and advise LICENSEE concerning changes or modifications to the DEVELOPMENT PLAN; (c) oversee and direct the transfer of COLLABORATION COMPOUNDS from LICENSEE to clinical trial site(s); and (d) review progress reports as to the performance of the DEVELOPMENT PLAN, the first such report to be submitted by LICENSEE six (6) months following selection of a COLLABORATION COMPOUND for DEVELOPMENT and at six (6) month 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 SKI. 18 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. LICENSEE shall be solely responsible for and have the exclusive right, at its discretion but in consultation with the JDAC, to select COLLABORATION COMPOUNDS which shall then be designated PRODUCTS for further DEVELOPMENT by LICENSEE and marketing by LICENSEE and its AFFILIATE(S) or SUBLICENSEE(S). LICENSEE shall provide SKI with written notice of its decision to select a COLLABORATION COMPOUND for DEVELOPMENT. Once a PRODUCT has been selected for further DEVELOPMENT, LICENSEE, with the advice of the JDAC, shall have the exclusive right to develop the PRODUCT through STAGES O, I, II and III and shall have the exclusive right to prepare and file, and shall be the owner of, all applications for MARKETING AUTHORIZATION throughout the world. During such DEVELOPMENT efforts, SKI will assist LICENSEE as may be mutually agreed, at LICENSEE'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. LICENSEE 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 LICENSEE. In the course of such efforts LICENSEE 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 COLLABORATION 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 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 LICENSEE reasonably deems to be required for subsequent inclusion in filings for MARKETING AUTHORIZATION; and (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 MARKETING AUTHORIZATION. MARKETING AUTHORIZATION applications shall be compiled by LICENSEE based on information generated during the DEVELOPMENT program. LICENSEE shall own such MARKETING AUTHORIZATIONS. At LICENSEE's 19 request and expense, SKI shall prepare supporting documentation requested by LICENSEE and SKI shall further assist LICENSEE with the preparation of supporting data to apply for and pursue MARKETING AUTHORIZATIONS. Before filing an NDA for a COLLABORATION COMPOUND, LICENSEE shall provide a pre-marketing plan to SKI that describes its proposed commercialization activities for such COLLABORATION COMPOUND. 5.3 COMMERCIALIZATION STATUS. If LICENSEE is developing a COLLABORATION COMPOUND, or any PRODUCT, during the period from the EFFECTIVE DATE to the first commercial sale of such PRODUCT, LICENSEE shall keep SKI informed of its DEVELOPMENT activities with respect to such COLLABORATION COMPOUND and PRODUCT, including without limitation, the achievement of the milestones set forth in Section 6.4 and the commercialization of such COLLABORATION COMPOUND and PRODUCT, by annually providing SKI with a written report stating the status of development of each such COLLABORATION 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 SKI hereunder. 5.4 COMMERCIALIZATION. Once a PRODUCT has been approved for marketing, LICENSEE shall exercise BEST 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. LICENSEE shall be responsible for all commercialization activities relating to COLLABORATION COMPOUNDS approved for therapeutic use. 5.5 PERFORMANCE OBLIGATIONS. 5.5.1 LACK OF DILIGENCE. LICENSEE, directly or through an AFFILIATE or SUBLICENSEE, shall use its BEST EFFORTS to commercialize and develop a PRODUCT. Non-performance of this Article 5, or any subparagraph thereof by LICENSEE, shall be a breach of this AGREEMENT, subject to SKI's right to terminate this AGREEMENT pursuant to Section 18.2. 5.5.2 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. SKI acknowledges that LICENSEE may now or in the future develop or acquire other products for the treatment or prevention of cancer. 5.6 NO OTHER PRODUCTS OTHER THAN PRODUCTS. Except as otherwise agreed in writing or specifically provided by this AGREEMENT, neither LICENSEE nor its SUBLICENSEE(S) 20 shall commercialize any COLLABORATION COMPOUND 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 the EFFECTIVE DATE, LICENSEE shall pay SKI an initial fee of [**] to reimburse SKI for past research and development. Such fee shall neither be refundable nor creditable against other amounts due SKI under this AGREEMENT. 6.2 MAINTENANCE FEE. In consideration of the continuing rights and licenses granted to LICENSEE under this AGREEMENT and subject to Article 18, LICENSEE shall pay SKI a maintenance fee of [**] on each anniversary of the EFFECTIVE DATE prior to the first commercial SALE of a PRODUCT by LICENSEE or its AFFILIATE or SUBLICENSEE. Such fee shall neither be refundable nor creditable against other amounts due SKI under this AGREEMENT. 6.3 DEVELOPMENT MILESTONE PAYMENTS. Within thirty (30) days following the occurrence of the relevant events specified below with respect to the first such PRODUCT developed by LICENSEE or its AFFILIATE(S) but not by its SUBLICENSEE(S) to achieve such development milestone and subject to Article 18, LICENSEE shall pay to SKI the following amounts: DEVELOPMENT MILESTONE PAYMENT --------------------- ------- [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] Payments for achievement of [**] milestones may be withheld at the time of the corresponding event unless and until SKI has received a VALID CLAIM in a patent that is neither involved nor expected by the parties to become involved in an interference or opposition proceeding in such country claiming such PRODUCT, claiming the approved use of such PRODUCT where the PRODUCT itself is not patented by a THIRD PARTY, or claiming the actual method of manufacture of such PRODUCT where neither the PRODUCT nor its use is patented by a THIRD PARTY. 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. 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. 6.4 NO WITHHOLDING. All amounts paid to SKI pursuant to this Article 6 shall be made without withholding for taxes or any other charge. ARTICLE 7 -- ROYALTIES, RECORDS, AND REPORTS 7.1 EARNED AND MINIMUM ANNUAL ROYALTIES; ROYALTY TERM. For the rights and privileges granted under this AGREEMENT and subject to Article 18, LICENSEE shall pay to SKI, on a country-by-country and PRODUCT-by-PRODUCT basis, earned and minimum annual royalties on NET SALES by LICENSEE or its AFFILIATE(S) but not its SUBLICENSEE(S) as follows: 7.1.1 where the PRODUCT itself is within the scope of a VALID CLAIM which is owned solely by SKI or owned jointly by SKI and LICENSEE, LICENSEE shall pay to SKI a [**] royalty on the NET SALES of all such PRODUCTS that are SOLD by or for LICENSEE or its AFFILIATE(S) under this AGREEMENT in a country until the expiration of the last to expire of such patents in the PATENT RIGHTS in such country; 7.1.2 where the approved use for which the PRODUCT is marketed falls within the scope of a VALID CLAIM which is owned solely by SKI, and such PRODUCT is itself not patented by a THIRD PARTY, LICENSEE shall pay to SKI a [**] royalty on the NET SALES of all such PRODUCTS that are SOLD by or for LICENSEE or AFFILIATE(S) under this AGREEMENT until the expiration of the last to expire of such patents in the PATENT RIGHTS in such country; 7.1.3 where the actual method of manufacture used by LICENSEE to manufacture the PRODUCT falls within the scope of a VALID CLAIM which is owned solely by SKI, LICENSEE shall pay to SKI [**] royalty on the NET SALES of all such PRODUCTS that are SOLD by or for LICENSEE or AFFILIATE(S) under this AGREEMENT until the expiration of the last to expire of such patents in the PATENT RIGHTS in such country and in any country where the PRODUCT is SOLD, provided the PRODUCT SOLD in that country was made using the patented method in the country where the patent issued; 7.1.4 where the manufacture, use, or SALE of the PRODUCT is not within the scope of a VALID CLAIM subject to Section 7.1.1, 7.1.2, or 7.1.3, LICENSEE shall pay to SKI a [**] royalty on NET SALES of all such PRODUCTS that are SOLD by or for LICENSEE or AFFILIATE(S) under this AGREEMENT in such country, for a period of [**] from the date of first commercial sale of such PRODUCT in such country, provided that the PRODUCT or its actual manufacture or use is patented by SKI in the United States, a MAJOR MARKET COUNTRY in Europe, or Japan; and 7.1.5. beginning on the anniversary of the EFFECTIVE DATE after the first SALE of a PRODUCT by LICENSEE or its AFFILIATE(S) and until the later of the expiration date of the last to expire SKI PATENT RIGHTS or [**] after the first SALE of a 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. PRODUCT by LICENSEE or its AFFILIATE(S), LICENSEE shall pay to SKI a minimum annual royalty, which shall be fully creditable against royalties paid on NET SALES for that same calendar year, of [**]. 7.1.6 Regardless of any credits or offsets to which LICENSEE is entitled under this AGREEMENT, the royalty payments due SKI under Article 7 shall not be less than [**] of the royalties due pursuant to Sections 7.1.1, 7.1.2, 7.1.3, or 7.1.4, 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 Sections 7.1 and 7.5 hereof on all PRODUCTS SOLD under this AGREEMENT, and the earned royalty payable on a given PRODUCT made hereunder shall not become due and owing until such PRODUCT is SOLD. In the event that more than one of the foregoing royalty rates specified in Sections 7.1.1 through 7.1.4 apply, LICENSEE shall pay the highest of these rates. Except where LICENSEE or its AFFILIATE(S) 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. LICENSEE shall be responsible for procuring such licenses as it deems, in its sole discretion, required for the manufacture, use, marketing, SALE, or distribution of PRODUCTS by LICENSEE and its AFFILIATE(S) and SUBLICENSEE(S), and for the payment of any amounts due THIRD PARTIES under such licenses; provided that LICENSEE may offset against the royalties owed to SKI up to [**] of royalties owed to such THIRD PARTY, up to a maximum of [**] of the royalty owed to SKI 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 LICENSEE, AFFILIATE(S), and SUBLICENSEE(S) or between AFFILIATE(S) 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 ROYALTIES ON NET SALES BY SUBLICENSEE(S). In lieu of the royalty payments under Section 7.1 and the development milestone payments under Section 6.3, for any sublicense of only SKI PATENT RIGHTS entered into prior to the earlier of (i) [**] years from the EFFECTIVE DATE; and (ii) the initiation of Phase II clinical trials for epothilone D, SKI shall receive [**] of all sublicensing proceeds, and LICENSEE shall receive the remainder. For any other sublicense, and in lieu of the royalty payments under Section 7.1 and the development milestone payments under Section 6.3, LICENSEE shall pay SKI [**] of the sublicensing proceeds, provided, however, that SKI's [**] 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. share of any royalty payments received from such SUBLICENSEE shall not exceed the royalty that LICENSEE would have paid to SKI if LICENSEE marketed the PRODUCT. Sublicensing proceeds include both royalty and non-royalty income received by LICENSEE, including anything of value in lieu of cash payments, but excluding reimbursement for research and development, including clinical trial, expenses, proceeds from sale of equity (but not any premium attributable to the sublicense thereon) made in connection with the sublicense, and manufacturing costs (but not any profits in excess of normal manufacturing profits therefrom). SKI shall have the right to audit LICENSEE's business records, as provided in Section 7.7, to verify that such expenses, premium, or costs reported by LICENSEE are accurate. In the event LICENSEE sublicenses SKI or LICENSEE's PATENT RIGHTS as part of an agreement to license THIRD PARTY technology required to make, use, or sell a PRODUCT, then such agreement shall not be subject to the sharing of sublicensing proceeds specified in this Section 7.5. 7.6 ROYALTIES ON COMMERCIALIZATION OF LICENSEE'S EPOTHILONE TECHNOLOGY. In the event that LICENSEE, by itself or through its AFFILIATE(S) or a THIRD PARTY, during the TERM of this AGREEMENT, commercializes an EPOTHILONE or commercializes technology for producing an EPOTHILONE without utilization of SKI PATENT RIGHTS or SKI KNOW-HOW licensed hereunder, then Kosan agrees to pay SKI a royalty on the NET SALES by LICENSEE or its AFFILIATE(S) or SUBLICENSEE(S) of such product or any 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 NET SALES of such product, regardless of whether LICENSEE or its AFFILIATE(S) or SUBLICENSEE(S) markets the product. If SKI does not perform such pre-clinical and Phase I clinical testing, then the royalty shall be [**] on NET SALES, regardless of whether LICENSEE or its AFFILIATE(S) or SUBLICENSEE(S) markets the product. In either event, such royalty shall be subject to the third party royalty credit set forth in Section 7.3. No other payments of any type or kind shall be due SKI for the commercialization of LICENSEE's EPOTHILONE technology by LICENSEE or its AFFILIATE(S) or SUBLICENSEE(S). 7.7 AUDIT RIGHTS. LICENSEE shall keep, and shall cause its AFFILIATE(S) and SUBLICENSEE(S) to keep, full, true, and accurate books of account containing all particulars in accordance with LICENSEE's normal accounting procedures then in effect for the purpose of showing the amount payable to SKI by way of royalty as aforesaid or by way of any other provision hereunder. Said books of account shall be kept at LICENSEE'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 five (5) years 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 SKI and reasonably acceptable to LICENSEE or such SUBLICENSEE for the purpose of verifying LICENSEE's royalty statements, or LICENSEE'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 discrepancy is identified. Said accountant shall disclose to SKI only information relating to the 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. accuracy of the royalty reports and the royalties paid under this AGREEMENT. Names of customers and other confidential information shall not be disclosed to SKI by such independent accountant. Such accountant shall be retained at SKI's sole expense. Notwithstanding the foregoing, inspections of the records of SUBLICENSEE(S) shall be limited to the extent that LICENSEE has the right to authorize SKI to make such inspection; provided that if LICENSEE does not have the right to authorize SKI to make such an inspection, upon SKI's request, LICENSEE, at its expense, using an independent certified accountant reasonably acceptable to SKI, shall inspect the SUBLICENSEE's records and shall provide to SKI the results of such inspection. In any audit, if an underpayment of more than [**] is established for a quarter, LICENSEE shall pay the costs of the audit of such period and shall promptly pay to SKI any amounts due together with interest as provided in Section 7.8. 7.8 ROYALTY REPORTS. LICENSEE within sixty (60) days after the first day of January, April, July, and October of each year (the "Reporting Date") shall deliver to SKI a true and accurate report, giving such particulars of the PRODUCTS SOLD by LICENSEE, AFFILIATE(S), and SUBLICENSEE(S) and the NET SALES due during the three (3) months 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, LICENSEE shall pay to SKI the royalty due under this AGREEMENT for the period covered by such report. If no royalties are due, it shall be so reported. 7.9 PAYMENT METHOD; LATE PAYMENTS. All amounts due SKI hereunder shall be paid in U.S. dollars by check in immediately available funds to a bank account designated by SKI. 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 prime rate as reported by Citibank (or its successor in interest), New York, New York, plus [**], or the maximum rate permitted by law, calculated on the number of days such payment is delinquent, compounded monthly. 7.10 CURRENCY CONVERSION. All royalty payments by LICENSEE to SKI shall be converted into U.S. Dollars in accordance with LICENSEE's current customary and usual procedures for calculating same which are the following: the rate of currency conversion shall be calculated using a simple average of monthly period end "spot rates" provided by Brown Brothers Harriman, 59 Wall Street, NY, NY 10005 for each quarter, or if such rate is not available, the spot rate as published by a leading United States commercial bank for such accounting period. LICENSEE shall give SKI prompt written notice of any changes to LICENSEE's customary and usual procedures for currency conversion, which shall only apply after 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 part of the royalties due as is necessary, shall be made by the deposit thereof, in whatever currency is allowable, to the credit 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. and account of SKI in any commercial bank or trust company of SKI's choice located in that country. Prompt notice of said deposit shall be given by LICENSEE to SKI and LICENSEE shall use reasonable efforts to assist SKI in securing the payment of such funds to SKI's U.S. bank account. 7.11 TAXES. Any tax required to be withheld on royalties payable to SKI under the laws of any foreign country shall be promptly paid by LICENSEE for and on behalf of SKI to the appropriate governmental authority, and LICENSEE shall furnish SKI with proof of payment of such tax together with official documents issued by the appropriate governmental authority and other appropriate evidence sufficient to enable SKI to support a claim for a tax credit in respect of any sum so withheld, and at SKI's request, provide reasonable assistance to SKI in recovering such amounts, if possible. 7.12 LEGAL LIMIT ON ROYALTIES. In any country where the rate of royalty is limited by applicable law, the royalty payment shall be made to SKI 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. 7.13 RESTRICTIONS ON PAYMENTS. The obligation to pay royalties to SKI 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 SKI by depositing such amounts, to the credit and account of SKI or its nominee in any commercial bank or trust company of SKI's choice located in that country, prompt notice of which shall be given by LICENSEE to SKI. ARTICLE 8 -- SUPPLY OF PRODUCTS 8.1 LICENSEE RESPONSIBILITY. With the exception of the epothilone D requirements for the Phase I clinical trials, for which SKI shall be responsible, LICENSEE shall be solely responsible for making or having made PRODUCTS for DEVELOPMENT and commercialization. 8.2 TECHNOLOGY TRANSFER. Upon LICENSEE's request, SKI shall provide reasonable technical assistance, and, to the extent that SKI 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 five (5) years thereafter, the receiving party shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any 26 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 (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 that 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, 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, 27 Confidential Information may be provided to THIRD PARTIES under appropriate terms and conditions including confidentiality provisions equivalent to those in this AGREEMENT for consulting, sublicensing negotiations, manufacturing development, manufacturing, external testing, and marketing trials with respect to PRODUCTS. 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 thirty (30) days from the date of receipt in which to determine whether the information to be disclosed contains subject matter for which patent protection should be sought prior to disclosure, or otherwise contains Confidential Information of the reviewing party which such party desires to maintain as a trade secret. Each party shall designate a representative for receipt of proposed publications from the other party. 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 thirty (30) day period, the non-disclosing party shall so notify the Disclosing Party, who shall then delay public disclosure of the information for an additional period of up to thirty (30) days 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. If the publication discloses a COLLABORATION COMPOUND, the Disclosing Party shall submit a copy of the manuscript to the JRC thirty (30) days prior to submission for publication. 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 otherwise 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 a 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 promptly to provide the other party with any additional information in its possession that indicates adverse effects in humans associated with a PRODUCT. The obligations of this Article shall survive termination of this AGREEMENT as to any PRODUCT continued to be SOLD by LICENSEE or its AFFILIATE(S) or SUBLICENSEE(S). 28 10.2 REGULATORY AND OTHER INQUIRIES. In the event SKI is contacted by the FDA or any drug regulatory agency for any regulatory purpose pertaining to this AGREEMENT or to a PRODUCT, SKI 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, subject to SKI approval. LICENSEE shall have sole responsibility for responding to all inquiries to LICENSEE or SKI regarding the benefits, side effects, and other characteristics of PRODUCTS. The party 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 SKI 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. In consultation with SKI, and with due consideration thereto, LICENSEE shall make the final determination to recall or otherwise remove the PRODUCT or any lot or lots thereof from the market. SKI shall be responsible for the costs of any recall due to defects in BULK PRODUCTS manufactured by SKI, 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 by a THIRD PARTY of any patent licensed to LICENSEE hereunder that covers the manufacture, USE, or SALE of a PRODUCT, LICENSEE shall notify SKI in writing to that effect, including with said written notice evidence establishing a PRIMA FACIE case of infringement by such THIRD PARTY. 11.2 ACTION. 11.2.1 LICENSEE ACTION. LICENSEE shall have the right, but not the obligation, to bring suit against any infringer of any patent licensed to LICENSEE hereunder that is owned solely by SKI or jointly by SKI and LICENSEE and join SKI as a party plaintiff, provided that LICENSEE shall bear all the expenses of such suit. In the event LICENSEE brings such suit, and damages or other monies are awarded or received in settlement of such suit, LICENSEE shall be entitled to deduct an amount to cover its out-of-pocket expenses, including attorneys' and professional fees. The balance of any recoveries shall be [**]. SKI will cooperate with LICENSEE in any suit for infringement of a licensed patent brought by LICENSEE against a THIRD PARTY, and shall have the right to consult with LICENSEE and to participate in and be represented by independent counsel in such litigation at its own expense. LICENSEE shall incur no liability to SKI as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding SKI's patent invalid or unenforceable; provided, LICENSEE shall not enter into any settlement, consent judgment, or other voluntary final disposition of such litigation without the prior written consent of SKI, which consent shall not be unreasonably withheld. 29 [**] 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. 11.2.2 SKI ACTION. In the event that LICENSEE notifies SKI that it intends to take no action to stop infringement of a patent owned solely by SKI or jointly by SKI and LICENSEE, or LICENSEE fails to take such action within one hundred eighty (180) days of being requested to do so by SKI, then SKI shall after any such notification or time period, at its option, take action to obtain a discontinuance of such infringement or bring suit against the THIRD PARTY infringer. SKI 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, SKI shall be entitled to deduct an amount to cover its out-of-pocket expenses, including attorneys' and professional fees. The balance of any recoveries shall be [**]. LICENSEE and its AFFILIATE(S) will cooperate with SKI in any such suit and shall have the right to consult with SKI and be represented by its own counsel at its own expense. SKI shall incur no liability to LICENSEE and its AFFILIATE(S) as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding SKI's patent invalid or unenforceable; provided, SKI shall not enter into any settlement, consent judgment, or other voluntary final disposition of such litigation without the prior written consent of LICENSEE, which consent shall not be unreasonably withheld. In the event that SKI or LICENSEE is sued by a third party for alleged infringement of the third party's patent, LICENSEE shall pay the legal costs of defending such suit. 11.3 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. SKI will own any inventions and patents claiming such inventions conceived or reduced to practice solely by SKI personnel in connection with the performance of the RESEARCH PROGRAM, subject to the licenses granted in Article 4 above. LICENSEE will own any inventions and patents claiming such inventions conceived and reduced to practice solely by LICENSEE personnel in connection with the RESEARCH PROGRAM. The parties will jointly own any inventions and patents claiming such inventions conceived and reduced to practice jointly by LICENSEE and SKI personnel in connection with the RESEARCH PROGRAM ("Joint Inventions"). 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 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. 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. 12.2.1 SKI shall file, maintain, and prosecute the patent applications within the SKI PATENT RIGHTS to obtain patents thereon in such countries it deems appropriate. Upon the receipt of an invoice from the provider of patent services detailing the same, LICENSEE shall reimburse SKI for all past costs of filing, maintaining, and prosecuting the patent applications within the SKI PATENT RIGHTS, and LICENSEE shall pay all future costs for any such activities it approves in advance in writing. If LICENSEE declines to pay the costs of filing, maintaining, and prosecuting a patent or patent application, then LICENSEE's license to that patent or patent application hereunder shall terminate. SKI does not represent or warrant that any such patent will be obtained, and SKI shall, subject to Section 12.2.2, be responsible for determining whether to abandon any or all of said patent applications or any portions thereof. 12.2.2 SKI shall promptly notify LICENSEE in the event SKI 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 SKI PATENT RIGHTS. Such notification will be given as early as possible, which in no event will be less than sixty (60) days prior to the date on which said application(s) will become abandoned. LICENSEE shall have the option, exercisable upon written notification to SKI, 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 7.1.4 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 SKI regarding the content of patent applications in the SKI PATENT RIGHTS, prior art searches and correspondence, and to comment thereon. SKI shall consider all such comments offered by LICENSEE, it being agreed, however, that, subject to Section 12.2.2, all final decisions respecting conduct of the prosecution of said patent applications shall rest solely in the discretion of SKI. SKI agrees to promptly provide LICENSEE with copies of: 12.3.1 all patent applications included in SKI PATENT RIGHTS which disclose COLLABORATION COMPOUNDS or methods for their manufacture or USE; 12.3.2 all prior art searches and patentability, validity, or infringement opinions conducted on behalf of SKI related to said patent applications and the subject matter of this AGREEMENT; and 31 12.3.3 all correspondence to and from the United States Patent and Trademark Office related to said patent applications as well as all correspondence relating to corresponding foreign 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. LICENSEE shall pay 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. 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) 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. SKI 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 SKI, and SKI agrees to seek diligently 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 SKI PATENT RIGHTS, including any patent that may issue on a patent application within the SKI PATENT RIGHTS. LICENSEE shall diligently advise SKI 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 approval obtained by or on behalf of LICENSEE or an AFFILIATE that is pertinent to any such extension. LICENSEE shall supply SKI 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 SKI to obtain any such extension that it may seek. LICENSEE shall supply SKI 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 32 or required to comply with any corresponding laws and regulations that are or shall be in effect in any country within the SKI PATENT RIGHTS, all without further consideration. LICENSEE shall require its AFFILIATE(S) to comply with this Section 12.5. 33 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 (including, but not limited to, the Securities and Exchange Act of 1934, as amended, the regulations promulgated thereunder), or (ii) announcements to LICENSEE's private advisors, present investors, and bona fide prospective investors or a potential SUBLICENSEE so long as such disclosure is made under a binder of confidentiality wherein such advisor or investor or potential SUBLICENSEE 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 LICENSEE or its prospective sublicense. 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 two (2) days' 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 one (1) day 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. Except as expressly authorized by subsection (i), LICENSEE shall not use the name of SKI or Memorial-Sloan Kettering Cancer Research Center, nor any of its employees, nor any adoption thereof, in any fund-raising, advertising, promotional or sales literature without prior written consent obtained from SKI in each case. ARTICLE 14 -- WARRANTIES AND REPRESENTATIONS 14.1 SKI warrants to the best of its knowledge that as of the EFFECTIVE DATE it owns or exclusively controls by agreement, assignment, or license all right, title, and interest in the SKI PATENT RIGHTS and SKI KNOW-HOW and that it has full power and authority to execute, deliver, and perform this AGREEMENT and the obligations hereunder. 14.2 LICENSEE to the best of its knowledge warrants that as of the EFFECTIVE DATE it owns or exclusively controls by agreement, assignment, or license all right, title, and interest in the LICENSEE PATENT RIGHTS and LICENSEE KNOW-HOW and that it has full power and authority to execute, deliver, and perform this AGREEMENT and the obligations hereunder. 14.3 SKI 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 rights granted herein, and that it has not granted and will not grant during the term of this 34 AGREEMENT or any renewal hereof, any rights, license, consent, or privilege that conflict with the rights granted herein. 14.4 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. 14.5 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. 14.6 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. 14.7 Each party hereby represents and warrants that, to the extent the United States government has any interest in the SKI PATENT RIGHTS as a result of government funded research, 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 SKI PATENT RIGHTS and shall make reasonable efforts to ensure that such laws, regulations, and requirements are fulfilled with respect to the SKI 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 SKI PATENT RIGHTS allowable by law. LICENSEE and SKI agree that they will provide the necessary reports and information required to comply with 35 U.S.C. Section 202 ET SEQ. and 37 C.F.R. Section 401.1 ET SEQ., including periodic reports on utilization or efforts on utilization of the inventions covered by the SKI PATENT RIGHTS. 14.8 SKI 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 either will be successful. SKI AND LICENSEE EXPRESSLY DISCLAIM ANY WARRANTIES OR CONDITIONS, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, WITH RESPECT TO THE CONFIDENTIAL INFORMATION, SKI PATENT RIGHTS OR KNOW-HOW, COLLABORATION COMPOUNDS, OR PRODUCTS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF ANY INTELLECTUAL PROPERTY, 35 PATENTED OR UNPATENTED, OR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. ARTICLE 15 -- TRADEMARKS LICENSEE, 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. SKI recognizes the exclusive ownership by LICENSEE of any proprietary LICENSEE name, logotype, or trademark furnished by LICENSEE (including LICENSEE's AFFILIATE(S)) for use in connection with the PRODUCT. SKI shall 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 16 -- INDEMNIFICATION 16.1 BY LICENSEE. LICENSEE agrees to indemnify and hold harmless SKI and its AFFILIATE(S) and their respective officers, directors, employees and agents (each a "SKI Indemnitee") from and against any and all liability, damages, losses, claims, suits, proceedings, demands, recoveries, or expenses, including reasonable attorneys' fees and expenses, incurred or rendered against such SKI Indemnitees that arise out of or result from the use, testing, manufacture, processing, packaging, labeling, sale, or distribution of PRODUCTS by LICENSEE or its AFFILIATE(S) or SUBLICENSEE(S); except to the extent such liability, damages, losses, claims, suits, proceedings, demands, recoveries, or expenses incurred by or rendered against SKI are based upon the gross negligence or willful misconduct by SKI or its AFFILIATE(S). 16.2 BY SKI. SKI agrees to indemnify and hold harmless LICENSEE and its AFFILIATE(S) and SUBLICENSEE(S) 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 attorneys' fees and expenses, incurred or rendered against such LICENSEE Indemnitee(s) which arise out of or result from the gross negligence or willful misconduct by SKI or its AFFILIATE(S) in carrying out the RESEARCH PROGRAM under this AGREEMENT. 16.3 CONTROL. A party or person (the "Indemnitee") that intends to claim indemnification under this Article 16 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 AFFILIATE(S) or SUBLICENSEE(S) 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 agreement in this Article 16 shall not apply to amounts paid in 36 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 16. At the Indemnitor's request, the Indemnitee under this Article 16 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 17 -- 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 18 -- TERM AND TERMINATION 18.1 TERM. 18.1.1 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 LICENSEE has paid royalties for the full period under which such royalty payments are due under Section 7.1 hereunder, and LICENSEE and its AFFILIATE(S) shall thereafter have a fully paid-up, irrevocable, non-exclusive license under the SKI KNOW-HOW to make, have made, USE, SELL, and have SOLD PRODUCTS. 18.1.2 TERM AND TERMINATION OF RESEARCH PROGRAM. (a) TERM. Unless earlier terminated pursuant Sections 2.3.5, 18.1.2(b) or 18.2, the term of the RESEARCH PROGRAM shall be as set forth in Section 2.5, above. (b) PERMISSIVE TERMINATION. With six (6) month's prior written notice to SKI, LICENSEE may terminate the RESEARCH PROGRAM after initiation of the Phase I clinical trial in the U.S. for epothilone D. 18.2 TERMINATION OF THE AGREEMENT. 37 18.2.1 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 three (3) months' written notice to SKI. At its sole discretion, SKI 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 three (3) month period. 18.2.2 MATERIAL BREACH. Notwithstanding any other provisions of this AGREEMENT, either party, at its option, may terminate this AGREEMENT on ninety (90) days 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 ninety (90) day period following notification, or such extended period as may be agreed between 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. 18.2.3 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 sixty (60) days 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. 18.2.4 FAILURE TO ACHIEVE RESEARCH PLAN OBJECTIVES. This AGREEMENT shall terminate in the event the parties determine that the objectives of the RESEARCH PLAN cannot be achieved in a reasonable time with the resources available to them. The parties anticipate that the Phase II clinical trials for epothilone D will begin in January, 2002, and will require about [**] of material and that, for LICENSEE to meet its obligations to provide such material, LICENSEE should commence production so that [**] of GMP epothilone D will be available no later than [**], for use in the Phase II clinical trials. Should LICENSEE fail to produce at least [**] of GMP epothilone D by [**] prior to the anticipated initiation date of the Phase II clinical trials, should such date be later than January, 2002), and should such failure be for a cause that is not readily correctable by LICENSEE without delay of the initiation of Phase II clinical trials, then SKI shall have the right to terminate this Agreement. This AGREEMENT shall terminate in the event that LICENSEE is unable to produce and provide SKI with [**] of epothilone D at GMP-level of purity on or before the start of the Phase II clinical trials as described in the RESEARCH PLAN. This AGREEMENT shall also terminate in the event that LICENSEE is unable to produce and provide SKI with an amount, not to exceed [**], of epothilone D sufficient for purity testing by [**]. [**], if the JRC determines that it would be useful for LICENSEE to provide additional samples, not to exceed [**] to SKI for further purity testing, then LICENSEE shall do so. Further, if the JRC determines that it would be needed for the RESEARCH PROGRAM, LICENSEE shall provide SKI with up to [**] of epothilone 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. D for animal testing on or before [**]. 18.3 EFFECT OF TERMINATION. 18.3.1 ACCRUED RIGHTS AND OBLIGATIONS. Termination of this AGREEMENT for any reason shall not release any party hereto from any liability that, 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 that accrued or are based upon any event occurring prior to such termination. 18.3.2 RETURN OF CONFIDENTIAL INFORMATION. Upon any termination of this AGREEMENT, LICENSEE and SKI 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). 18.3.3 LICENSES. In the event of any termination of this AGREEMENT pursuant to Sections 18.1.2.(b),18.2.1(i), 18.2.2, 18.2.3, or 18.2.4, the licenses granted in Article 4 shall terminate concurrently. In the event of any termination pursuant to Section 18.2.1(ii) only with respect to one or more PRODUCTS, the licenses granted in Article 4 shall terminate only with respect to such PRODUCTS. 18.3.4 REVERSION. In the event that the licenses terminate as described in Section 18.3.3 above, then each party undertakes the following: (a) to deliver to the other any of the other party's KNOW-HOW in its possession; (b) not to use the other party's KNOW-HOW as long as it has to be kept confidential pursuant to Article 9 hereunder; (c) at SKI's request, to transfer (and grant the right to access, cross-reference and use, without charge) all MARKETING AUTHORIZATIONS, pre-clinical and clinical data, and regulatory filings relating to COLLABORATION 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; (d) at SKI's request, to transfer to SKI responsibility for and control of ongoing DEVELOPMENT work, including contracts with THIRD PARTIES for such work, in 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. an expeditious and orderly manner with the costs for such work assumed by SKI as of the date such contracts are transferred; and (e) in the event of a termination of licenses pursuant to Sections 18.2.1(ii) wherein LICENSEE retains certain licenses, the foregoing provisions of Section 18.3.4 shall apply only to the terminated rights and licenses. 18.4 SURVIVAL. Sections 2.7, 7.7, 10.1, 12.1, 12.4, 14.7, 18.3, and 19.2, and Articles 9, 15, 20, and 21 shall survive the expiration and any termination of the AGREEMENT for any reason. ARTICLE 19 -- ASSIGNMENT 19.1 PERMITTED ASSIGNMENTS. This AGREEMENT or any interest herein shall not be assigned or transferred, in whole or in part, by either party without the prior written consent of the other party. 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. 19.2 BINDING EFFECT. This AGREEMENT shall be binding upon and inure to the benefit of the parties 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 SKI in any way reasonably adverse to its interests. 40 ARTICLE 20 -- DISPUTE RESOLUTION 20.1 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 Officers of SKI and LICENSEE or their designees, 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 [**] business days 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 [**] days after delivery of the response, the Chief Executive Officers of SKI and LICENSEE 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. 20.2 MEDIATION. If the matter has not been resolved within [**] of the disputing party's notice, or if the Chief Executive Officers of SKI and LICENSEE fail to meet within the time frame set forth in Section 20.1, either party may initiate mediation of the dispute as set forth in this Section 20.2 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 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 attended by a senior executive with authority to resolve the dispute from each of the 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 [**] peremptory challenges within [**] of receiving the CPR list. (d) The mediator shall confer with the parties to design procedures to conclude the mediation within no more than [**] days after initiation. 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. (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. ARTICLE 21 -- MISCELLANEOUS 21.1 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 that 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 that 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 SKI 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 SKI and LICENSEE taking the form of an instrument in writing signed and dated by duly authorized representatives of both SKI and LICENSEE. 21.2 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. 42 If to SKI: James S. Quirk, Senior Vice-President The Memorial Sloan-Kettering Cancer Research Center 1275 York Ave. New York, NY 10021 Telefax No. 212-717-3439 If to LICENSEE: Michael S. Ostrach, Chief Operating Officer Kosan Biosciences, Inc. 3832 Bay Center Place Hayward, CA 94545 Telefax No. 510-732-8401 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. 21.3 GOVERNING LAW. All matters affecting the interpretation, validity, and performance of this AGREEMENT shall be governed by the internal laws of the State of New York without regard to its conflict of law principles, except as to any issue which by New York 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. 21.4 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. 21.5 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. 21.6 NO REPRESENTATIONS. Notwithstanding anything to the contrary in this AGREEMENT, nothing herein contained shall be construed as a representation by SKI that the PATENT RIGHTS can or will be used to prevent the importation, SALE, or USE by a THIRD PARTY 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, SALE, or USE by reason of any applicable law or treaty. 43 21.7 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 twelve (12) months, this AGREEMENT may be terminated by either party. 21.8 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 party 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. 21.9 ADVICE OF COUNSEL. SKI 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. 21.10 PATENT MARKING. LICENSEE agrees to mark and have its AFFILIATE(S) and SUBLICENSEE(S) 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. 21.11 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. 21.12 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 44 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. 21.13 USE OF SINGULAR. As used in this AGREEMENT, singular includes the plural, and plural includes the singular, wherever so required by the context. 21.14 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. 21.15 COUNTERPARTS. This AGREEMENT may be executed in two counterparts, each of which shall be deemed an original and which together shall constitute one instrument. 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 SKI For and on Behalf of LICENSEE By: /s/ JAMES S. QUIRK By: /s/ MICHAEL S. OSTRACH ----------------------------- ------------------------------- James S. Quirk Michael S. Ostrach Senior Vice President, Chief Operating Officer Research Resources Management Date: August 25, 2000 Date: August 25, 2000 45 EXHIBIT A RESEARCH PLAN 25 AUGUST 2000 This Research Plan describes the activities contemplated by the parties as of the Effective Date of the Research Collaboration and License Agreement. These activities include: [**]
Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 8 [**] 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. [**] Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 13 [**] 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. [**] Confidential Information 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. [**] Confidential Information 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. [**] Confidential Information 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.
EXHIBIT B SKI PATENT RIGHTS SERIAL NUMBER FILING DATE STATUS - --------------------------------------------------------------------------------------------------- [**]
[**] 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-10.34 5 a2024793zex-10_34.txt EXHIBIT 10.34 AMENDMENT NUMBER 2 TO RESEARCH AND LICENSE AGREEMENT BY AND BETWEEN KOSAN BIOSCIENCES, INC., AND THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE AND ORTHO-MCNEIL PHARMACEUTICAL, INC. This Amendment dated August 31, 2000, is made to the RESEARCH AND LICENSE AGREEMENT, made as of September 28, 1998, and amended pursuant to that certain Amendment No. 1 dated March 17, 2000 (the RESEARCH AND LICENSE AGREEMENT) as amended March 17, 2000, is hereinafter called the "AGREEMENT"), 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 or 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 Fast Track Project to be conducted over the first twelve months, and an SAR Project to be conducted over the first twenty-four months, each with a provision for additional CONTINGENT WORK, to be performed in the event a GO DECISION was made for a Project; C. WHEREAS, having completed the first 15 months of the RESEARCH PROGRAM, the parties agreed to fund the CONTINGENT WORK on the Fast Track Project, thereby extending the RESEARCH TERM until December 28, 2000; 1 D. WHEREAS, the parties desire to fund the CONTINGENT WORK for the GO DECISION with respect to the first NCE ("N2") in the SAR Project pursuant to Section 2.6.4 of the AGREEMENT and extend the RESEARCH TERM until December 28, 2001: NOW, THEREFORE, in consideration of the premises and the performance of the covenants herein contained, the parties agree to amend the AGREEMENT as follows: 1. DEFINED TERMS. Unless otherwise defined herein, all capitalized terms used herein shall have the same meaning as set forth in the AGREEMENT. 2. EXTENSION OF RESEARCH PROGRAM. The RESEARCH PROGRAM shall be continued until at least December 28, 2001. 3. CURRENT FTE RESEARCH FUNDING. In accordance with the AGREEMENT, LICENSEE is currently providing RESEARCH FUNDING, paid quarterly in advance, for KOSAN FTEs as follows: [**] on an annual basis for the period of December 28, 1999, to September 28, 2000, for a total of [**]; and [**] on an annual basis for the period of September 28, 2000, to December 28, 2000, for a total of [**]. 4. ADDITIONAL KOSAN FTE RESEARCH FUNDING. In accordance with this Amendment, LICENSEE shall provide, in addition to the current RESEARCH FUNDING, RESEARCH FUNDING for additional KOSAN FTEs (the "Additional KOSAN FTEs") as follows: [**] on an annual basis for the period of September 28, 2000, to December 28, 2000, for a total of [**]. [**] on an annual basis for the period of December 28, 2000, to December 28, 2001, for a total of [**]. LICENSEE shall provide RESEARCH FUNDING for the Additional KOSAN FTEs on a quarterly basis, with the payment for the quarter ending December 28, 2000, made on or before January 8, 2001; the payment for the quarter ending March 28, 2001, made on or before February 2, 2001; and the payments for the remaining three quarters made on or before March 31, June 30, and September 31, 2001, respectively. 5. DECLARATION OF THE FIRST NCE IN THE SAR PROJECT. On or before September 28, 2000, LICENSEE shall identify at least one MACROLIDE from the SAR Project as either the first NCE ("N2") or as a LICENSED COMPOUND, provided, however, that the payment therefor pursuant to Section 6.2.1 or Section 6.3 of the AGREEMENT shall be made only if LICENSEE elects not to decrease the additional KOSAN FTE RESEARCH FUNDING pursuant to Section 6 of this Amendment and, in that event, shall become due January 31, 2001, notwithstanding any termination of RESEARCH FUNDING under Section 7 of this Amendment. LICENSEE's provision of RESEARCH FUNDING for the Additional KOSAN FTEs shall satisfy its obligation to provide RESEARCH FUNDING 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. for the CONTINGENT WORK for the GO DECISION with respect to the first NCE ("N2") in the SAR Project pursuant to Section 2.6.4 of the AGREEMENT. 6. DECREASE OF ADDITIONAL FTE RESEARCH FUNDING - PUBLISHED PATENT CONTINGENCY. If a patent application assigned to a third party publishes prior to January 31, 2001, and, in LICENSEE's reasonable judgment, the application presents a substantial risk to the manufacture, sale or use as an anti-infective of NCE N2 or the LICENSED COMPOUND identified pursuant to Section 5 hereof, then LICENSEE shall have the right to reduce the number of Additional KOSAN FTEs engaged in the RESEARCH PROGRAM in calendar year 2001 from [**] to [**] and to reduce RESEARCH FUNDING for such FTEs accordingly. To exercise such right, LICENSEE must provide KOSAN written notification of LICENSEE's decision to reduce the number of Additional KOSAN FTEs and RESEARCH FUNDING therefor on or before January 31, 2001. 7. TERMINATION OF ADDITIONAL FTE RESEARCH FUNDING - TECHNICAL CONTINGENCY. After December 28, 2000, and in the event that, in LICENSEE's judgment to be exercised at its sole discretion, the objectives of the RESEARCH PROGRAM cannot be achieved due to a technological problem. LICENSEE shall have the right to terminate the RESEARCH PROGRAM and its obligations to continue to provide RESEARCH FUNDING for the Additional KOSAN FTEs by providing KOSAN (i) written notification of LICENSEE's decision to terminate and the technological reasons therefor; and (ii) a payment of US$ ([**]US dollars). 8. REVERSION OF RIGHTS TO KOSAN. LICENSEE's notification of a decrease in, under Section 6 of this Amendment, or a termination of, under Section 7 of this Amendment, RESEARCH FUNDING for the Additional KOSAN FTEs shall be deemed to be a termination of the AGREEMENT pursuant to Section 19.2.1(i) of the AGREEMENT and shall constitute a release and reversion to KOSAN in accordance with Section 19.3.4 of the AGREEMENT of any and all of LICENSEE's rights to all MACROLIDES, AROMATIC POLYKETIDES, NCEs, LICENSED COMPOUNDS, CLOSE STRUCTURAL ANALOGS, and RESERVED COMPOUNDS. 9. TERMINATION OF RESEARCH PROGRAM ON DECEMBER 28, 2001. In the event that LICENSEE is not actively engaged in activities to progress a MACROLIDE into full clinical development as of December 28, 2001, then the AGREEMENT shall, unless otherwise agreed, terminate pursuant to Section 19.2.1(i) of the AGREEMENT, and such termination shall constitute a release and reversion to KOSAN in accordance with Section 19.3.4 of the AGREEMENT of any and all of LICENSEE's rights to all MACROLIDES, AROMATIC POLYKETIDES, NCEs, LICENSED COMPOUNDS, CLOSE STRUCTURAL ANALOGS, and RESERVED COMPOUNDS. Termination pursuant to this Section 9 shall not obligate LICENSEE to any wind-down or other payment to KOSAN, whether pursuant to Section 19.1.2(c) of the AGREEMENT or otherwise. 10. CONTINUATION OF RESEARCH PROGRAM AFTER DECEMBER 28, 2001. In the event that LICENSEE is actively engaged in activities to progress a MACROLIDE 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. into full clinical development as of December 28, 2001, then the RESEARCH PROGRAM shall, at LICENSEE's option exercisable by not later than [**] prior to written notice to KOSAN, continue for an additional year until December 28, 2002, and LICENSEE agrees to provide RESEARCH FUNDING for at least [**] to conduct such RESEARCH PROGRAM. LICENSEE's provision of RESEARCH FUNDING for the [**] shall satisfy its obligation to fund the CONTINGENT WORK for the GO DECISION with respect to the second NCE ("N3") in the SAR Project pursuant to Section 2.6.4 of the AGREEMENT. If LICENSEE does not exercise its option pursuant to this Section 10, then LICENSEE's rights to MACROLIDES, AROMATIC POLYKETIDES, NCEs, LICENSED COMPOUNDS, CLOSE STRUCTURAL ANALOGS, and RESERVED COMPOUNDS other than the MACROLIDE(s) for which LICENSEE is actively engaged in activities to initiate full clinical development and the CLOSE STRUCTURAL ANALOGS thereof shall, unless otherwise agreed, terminate pursuant to Section 19.2.1(ii) of the AGREEMENT, and such termination shall constitute a release and reversion of the same to KOSAN in accordance with Section 19.3.4 of the AGREEMENT. 11. AGREEMENT. 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 to the 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 V. Santi --------------------------------- Title: Chief Executive Date: 28 August 2000 --------------------------------- For and on Behalf of LICENSEE By: [illegible] ----------------------------------- Name: P.A. Peterson --------------------------------- Title: Chairman, THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE Date: August 30, 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. 4 EX-23.2 6 a2024793zex-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 9 as to which the date is , in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-33732) and related Prospectus of Kosan Biosciences Incorporated for the registration of 5,750,000 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 9 to the financial statements. /S/ ERNST & YOUNG LLP Palo Alto, California September 5, 2000 -----END PRIVACY-ENHANCED MESSAGE-----