AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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KOSAN BIOSCIENCES INCORPORATED
(Exact name of Registrant as specified in its charter)
CALIFORNIA 8731 94-3217016
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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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)
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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)
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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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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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 OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED SHARE PRICE REGISTRATION FEE
Common Stock, $0.001 par value.............. shares(1) $ $80,000,000 $21,120
(1) Includes shares which the Underwriters have the option to purchase to
cover over-allotments, if any.
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.
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PRELIMINARY PROSPECTUS Subject to completion dated March 31, 2000
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.
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Shares
[LOGO]
Common Stock
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This is our initial public offering of shares of common stock. No public market
currently exists for our common stock. We expect the public offering price to be
between $ and $ per share.
We have applied to have our common stock listed on the Nasdaq National Market
under the symbol "KOSN."
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK UNDER "RISK FACTORS" BEGINNING ON PAGE 5.
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.
Per
Share Total
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to Kosan $ $
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The underwriters may also purchase up to shares of common stock from us at
the public offering price, less the underwriting discounts and commissions,
within 30 days from the date of this prospectus. This option may be exercised to
cover over-allotments, if any. If the option is exercised in full, the total
underwriting discounts and commissions will be $ , and the total proceeds,
before expenses, to Kosan will be $ .
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about ,
2000.
Warburg Dillon Read LLC
CIBC World Markets
Prudential Vector Healthcare
a unit of Prudential Securities
ARTWORK
[DESCRIPTION OF ARTWORK]
[Front cover
"POLYKETIDE GENE MANIPULATIONS" The art shows 4 cells (arranged vertically or
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 heterologous expression,
gene manipulation and chemobiosynthesis.
Following is the text that will be presented with the artwork:
Polyketide Gene Manipulations
We have proprietary gene-manipulating technologies that enable the alteration
and production of polyketides, an important class of natural products that have
yielded many pharmaceuticals.
[The captions adjacent to the art are:]
HETEROLOGOUS OVER-EXPRESSION. We transfer polyketide genes from their host
organisms that produce only small amounts to our genetically modified hosts to
allow increased production of polyketides for commercialization.
GENE ALTERATION. We change the order of polyketide genes to make specific
changes in a polyketide and produce novel analogs.
CHEMOBIOSYNTHESIS. We disable an early part of a polyketide gene which allows us
to feed chemically prepared fragments into later parts of the polyketide and
incorporate them into the polyketide.]
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF
INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS."
OUR BUSINESS
We are a biotechnology company that focuses on the genetic manipulation of
an important class of organic, natural molecules known as polyketides. We are
using our proprietary gene manipulating technologies to generate a pipeline of
potentially high-value pharmaceutical product candidates. Due to their natural
bioactivity and many built-in properties, polyketides have been a rich source of
pharmaceutical products for many uses, including antibiotics, anticancer drugs,
cholesterol-lowering drugs, immunosuppressants and other therapeutics, as well
as animal health and agricultural products. Currently, natural or semi-synthetic
polyketide pharmaceuticals represent over 20 products industry-wide, with sales
exceeding $10 billion per year.
We are the leader in the alteration of polyketides through gene
manipulations. Polyketides are structurally complex molecules that are not easy
to make or modify by chemical means. Using our technologies, we can make and
modify 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 novel, improved versions of currently marketed high-value
pharmaceuticals;
- modify an existing polyketide used in one therapeutic area to create a
novel polyketide to be used in another;
- transfer polyketide genes from their natural hosts to our optimized hosts
to enable large-scale production of the polyketides; and
- expand significantly the potential repertoire of natural product libraries
to provide a source for the discovery of new product candidates.
OUR STRATEGY
Our goal is to translate our technologies into a pipeline of high-value drug
candidates, and to advance our candidates into clinical trials. Our technology
platform has five components: polyketide gene alteration, chemo-biosynthesis,
heterologous over-expression, combinatorial biosynthesis and screening
libraries. Together, our technologies allow us to modify, create and produce
novel polyketides and polyketide libraries. We aim to:
- maximize the value and minimize the risk associated with new drug
development by focusing on analogs of polyketides with known utility,
safety and market potential;
- establish collaborative relationships with large pharmaceutical companies
to develop our most complex projects through clinical trials and into the
market, as well as to prepare and screen our polyketide libraries; and
- expand and enhance our enabling technology platform to maintain our
leadership position and amplify our capabilities.
OUR PRODUCT DEVELOPMENT OPPORTUNITIES
We have six primary programs for the discovery and development of novel
polyketides for bacterial infections, 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 they address
very large markets. In infectious disease, we rapidly identified several
polyketide antibiotic lead product candidates that are effective against
organisms resistant to existing related products. We have developed these
candidates in collaboration with The R.W. Johnson Pharmaceutical Research
Institute, a Johnson & Johnson company.
2
THIS OFFERING
UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES:
- THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK
INTO 4,073,573 SHARES OF COMMON STOCK, INCLUDING 804,196 SHARES OF
SERIES C ISSUED IN MARCH 2000, UPON THE CLOSING OF THIS OFFERING;
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO
SHARES; AND
- OUR REINCORPORATION IN DELAWARE PRIOR TO THE CLOSING OF THIS OFFERING.
Common stock offered by us................ shares
Common stock to be outstanding after this
offering................................ shares(1)
Proposed Nasdaq National Market symbol.... KOSN
Use of proceeds........................... We intend to use the net proceeds from this offering for
advancing our product candidates through preclinical and
later-stage development, discovering new product
candidates, expanding our technology platform, including
through in-licensing opportunities or acquisition of
complementary technologies, capital expenditures,
working capital, general corporate purposes and possible
future acquisitions. See "Use of Proceeds."
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(1) The number of shares of common stock to be outstanding after this offering
excludes:
- 1,700,000 shares of common stock reserved for issuance under our 1996
Stock Option Plan, including 800,000 shares authorized following
December 31, 1999, of which 455,900 shares are subject to outstanding
options at December 31, 1999 with a weighted average exercise price of
$0.87 per share;
- 100,000 shares of common stock reserved for issuance under our 2000
Employee Stock Purchase Plan approved in March 2000; and
- 100,000 shares of common stock reserved for issuance under our 2000
Non-Employee Director Stock Option Plan approved 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.
3
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 sale of 804,196
shares of preferred stock on March 30, 2000 at a price of $31.00 per share, less
expenses, and the automatic conversion of all outstanding shares of preferred
stock into common stock on a one-to-one basis upon the closing of the offering.
The pro forma as adjusted balance sheet data reflects the automatic conversion
of our preferred stock into common stock on a one-to-one basis and the sale of
shares of our common stock at an assumed price to the public of $ per
share, after deducting the underwriting discounts, commissions and estimated
offering expenses payable by us, resulting in net proceeds of approximately
$ .
YEAR ENDED DECEMBER 31,
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STATEMENT OF OPERATIONS DATA: 1997 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenue............................................... $ 287 $ 1,236 $ 5,346
Total operating expenses.................................... 2,379 5,021 10,400
Operating loss.............................................. (2,092) (3,785) (5,054)
Net loss.................................................... $(1,994) $(3,267) $(4,401)
======= ======= =======
Historical net income (loss) per share, basic and diluted... $ (1.46) $ (2.30) $ (2.93)
======= ======= =======
Historical weighted average shares outstanding.............. 1,365 1,423 1,503
Pro forma net loss per share................................ $ (0.92)
=======
Pro forma weighted average shares outstanding............... 4,772
AS OF DECEMBER 31, 1999
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PRO FORMA
BALANCE SHEET DATA: ACTUAL PRO FORMA AS ADJUSTED
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(IN THOUSANDS)
Cash, cash equivalents and short-term investments........... $ 2,022 $26,622
Working capital............................................. 750 25,350
Long-term investments....................................... 8,442 8,442
Total assets................................................ 14,157 38,757
Capital lease and debt obligations, less current portion.... 1,591 1,591
Accumulated deficit......................................... (11,593) (11,593)
Stockholders' equity........................................ 10,471 35,071
4
RISK FACTORS
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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. WE ARE IN AN EARLY STAGE OF DEVELOPMENT AND WE
MAY NEVER SELL PRODUCTS OR 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 December 31, 1999, we had an accumulated
deficit of approximately $11.6 million. If we are ever to obtain revenue from
the sales of our products, we must successfully develop, test, obtain regulatory
approval for, manufacture, market and sell our products. 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
$4.4 million for the year ended December 31, 1999. 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 product
candidates. The amount of time necessary to successfully commercialize any of
our product candidates is long and uncertain and successful commercialization
may not occur at all. As a result, we may never become profitable.
WE MAY NOT BE SUCCESSFUL IN THE DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS.
Our technologies are new and our product 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. Successful products will
require significant development and investment, including testing, to
demonstrate their safety and efficacy prior to their commercialization. We have
not proven our ability to develop and commercialize products. We must conduct a
substantial amount of additional research and development before any regulatory
authority will approve any of our products. Our research and development and
clinical trials may not indicate that our products are safe and effective, in
which case regulatory authorities are likely not to approve them. In addition,
even if our research and development efforts are successfully completed, our
products may not perform in the manner we anticipate, and may not be accepted
for use by the public.
IF OUR DEVELOPMENT COLLABORATIONS WITH OTHER PARTIES FAIL, THE DEVELOPMENT AND
COMMERCIALIZATION OF OUR PRODUCTS WILL BE DELAYED OR STOPPED.
Because we do not currently possess the resources necessary to develop and
commercialize potential products that may result from our technologies, or the
resources to complete any approval processes which may be required for these
products, we must enter into collaborative arrangements to develop and
commercialize our product candidates. We have entered into a collaborative
agreement with The R.W. Johnson Pharmaceutical Research Institute and
Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson companies, to fund a
research and development program. This agreement expires on December 28, 2000
unless it is extended. If it is not extended or renewed, or if we do not enter
into new collaborative agreements, then our revenues will be reduced, and our
product candidates may not be developed or commercialized.
We have limited or no control over the resources that any collaborator may
devote to our product candidates. Our present or future collaborators may not
perform their obligations as expected. These collaborators may breach or
terminate their agreements with us or otherwise fail to conduct their
collaborative activities successfully and in a timely manner. Further, our
collaborators may elect not to
5
develop product candidates arising out of our collaborative arrangements, fail
to comply with government regulations or fail to devote sufficient resources to
the development, manufacture, market, or sale of these products. If any of these
events occur, then we may not be able to develop our technologies or
commercialize our products.
We may pursue opportunities in fields that could conflict or compete with
those of our collaborators. Moreover, disagreements with our collaborators could
develop over rights to our intellectual property. Any conflict or competition
with our collaborators could reduce our ability to obtain future collaboration
agreements and negatively impact our relationship with existing collaborators,
which could reduce our future revenues, and our product candidates may not be
developed or commercialized.
OUR POTENTIAL PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND SUBSTANTIAL
ADDITIONAL EFFORT WILL BE NECESSARY FOR DEVELOPMENT AND COMMERCIALIZATION.
All of our product candidates are in an early stage of development and will
require the commitment of substantial resources to move them towards
commercialization. All of the potential proprietary products that we are
currently developing will require extensive preclinical and clinical testing
before we can submit any application for 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 product
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 product
candidate. Our clinical trials, when commenced, may be suspended at any time if
we or the U.S. Food and Drug Administration, or 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.
OUR POTENTIAL THERAPEUTIC PRODUCTS ARE SUBJECT TO A LENGTHY AND UNCERTAIN
REGULATORY PROCESS. IF OUR POTENTIAL PRODUCTS ARE NOT APPROVED, THEN WE WILL NOT
BE ABLE TO COMMERCIALIZE THESE PRODUCTS.
The FDA must approve any therapeutic product before it can be marketed in
the U.S. Before we can file a new drug application or biologics license
application with the FDA, the product candidate must undergo extensive testing,
including animal and human clinical trials, which can take many years and
require substantial expenditures. Data obtained from such testing are
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. In addition, changes in regulatory policy for product
approval during the period of product development and regulatory agency review
of each submitted new drug application or biologics license application may
cause delays or rejections. The regulatory process is expensive and time
consuming.
6
Because our product candidates involve the application of new technologies
and may be based upon new therapeutic approaches, they may be subject to more
rigorous review by government regulatory authorities, and government regulatory
authorities may grant regulatory approvals more slowly for our products than for
products using more conventional technologies. We have not conducted any
clinical trials for any potential products nor have we submitted any
applications with the FDA or any other regulatory authority to test any
potential products in humans or to market any product candidate. Neither we nor
any of our collaborators may be able to conduct clinical testing or obtain the
necessary approvals from the FDA or other regulatory authorities to market our
products. The regulatory agencies of foreign governments must also approve any
therapeutic products we may develop before the products can be sold in those
countries.
Even after investing significant time and resources, we may not obtain
regulatory approval for our products. If we do not receive regulatory approval,
we cannot sell the product. Even if we receive regulatory approval, this
approval may place limitations on the indicated uses for which we can market a
product. Further, once regulatory approval is obtained, a marketed product and
its manufacturer are subject to continual review, and discovery of previously
unknown problems with a product or manufacturer may result in restrictions on
the product, manufacturer and manufacturing facility, including withdrawal of
the product from the market. In certain countries, regulatory agencies also set
or approve prices.
EVEN IF PRODUCT CANDIDATES EMERGE SUCCESSFULLY FROM CLINICAL TRIALS, WE MAY NOT
BE ABLE TO SUCCESSFULLY MANUFACTURE, MARKET AND SELL THEM.
None of our product candidates has been developed sufficiently or been
approved for clinical trials. If successful product candidates emerge from
clinical trials, we will either commercialize products resulting from our
proprietary programs directly or through licensing to other companies. We have
no experience in manufacturing and marketing, and we currently do not have the
resources or capability to manufacture, market and sell our products on a
commercial scale. For us to commercialize products directly, we would need to
develop or obtain through outsourcing arrangements the capability to
manufacture, market, and sell products. We currently do not have any agreements
for the manufacture, marketing, or sale of any of our products and we may not be
able to enter into such agreements on commercially reasonable terms or at all.
If we are unable to successfully commercialize products resulting from our
proprietary research efforts, then we will continue to incur losses.
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 product 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
7
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.
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
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. Others have filed
patent applications and issued patents, and in the future are likely to continue
to file patent applications and issue patents, claiming genes or gene fragments
which we may wish to use with our technologies and products that are similar to
products developed with the use of our technologies. If we wish to use the
claimed technology in issued and unexpired patents, then we may need to obtain a
license from the third party, enter into litigation, or incur the risk of
litigation.
The biotechnology industry is characterized by extensive litigation
regarding patents and other intellectual property rights. We cannot be sure that
other parties have not been issued relevant patents that could affect our
ability to obtain patents or to operate as we would like to. We are aware of
patents and published patent applications that, if valid, and if we are
unsuccessful in circumventing or acquiring the rights to these patents, may
block our ability to commercialize products. 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 U.S. 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 future patents and claim that the use of our
technologies infringes these patents or that we are employing their proprietary
technology without authorization. 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
8
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. Litigation or failure to obtain licenses could prevent us
from commercializing available products.
MANY POTENTIAL COMPETITORS WHO HAVE GREATER RESOURCES AND EXPERIENCE THAN WE DO
MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE.
The biotechnology industry is characterized by rapid technological change,
and the area of gene and product research is a rapidly evolving field. Our
future success will depend on our ability to maintain a competitive position
with respect to technological advances. Rapid technological development by
others may result in our products and technologies becoming obsolete.
We face, and will continue to face, intense competition from organizations
such as large 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.
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. 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 THE PUBLIC DOES NOT ACCEPT GENETICALLY ENGINEERED PRODUCTS, WE WILL HAVE LESS
DEMAND FOR OUR PRODUCTS.
The commercial success of our potential products will depend in part on
public acceptance of the use of genetically engineered products including drugs,
plants, and plant products. Our product candidates are derived from genetically
engineered cells and may not gain public acceptance. Negative public reaction to
genetically modified organisms and products could result in greater governmental
regulation of genetic research and resulting products, including stricter
labeling requirements, and could cause a decrease in the demand for our
products.
The subject of genetically modified organisms has received negative
publicity in the United States, Europe, and many other countries throughout the
world. The adverse publicity could lead to greater regulation and trade
restrictions on imports of genetically altered products. As a result of such
adverse
9
publicity, genetic research and resulting products could be subject to greater
domestic regulation and could cause a decrease in the demand for our products.
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.
WE MAY ENCOUNTER DIFFICULTIES IN MANAGING OUR GROWTH, WHICH COULD INCREASE OUR
LOSSES.
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 55 on March 30, 2000. Our ability to manage our operations
and growth effectively requires us to continue to expend funds to improve our
operational, financial, and management controls, reporting systems and
procedures and to attract and retain sufficient numbers of talented employees.
If we are unable to successfully implement improvements to our management
information and control systems in an efficient or timely manner, or if we
encounter deficiencies in existing systems and controls, then management may
receive inadequate information to manage our day-to-day operations.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, THEN WE MAY BE UNABLE TO DISCOVER AND DEVELOP OUR PRODUCTS.
We are highly dependent on the principal members of our management and
scientific staff, such as our two co-founders, the loss of whose services would
adversely impact the achievement of our objectives. Although we maintain and are
the beneficiary of $1.0 million key-man life insurance policies for the lives of
each of our two co-founders, Dr. Daniel Santi, our Chief Executive Officer, and
Dr. Chaitan Khosla, a director, we do not believe the proceeds would be adequate
to compensate us for their loss. We do not currently have sufficient executive
management personnel to execute our business plan fully. In addition, recruiting
and retaining qualified scientific personnel to perform future research and
development work will be critical to our success. Although we believe we will be
successful in attracting and retaining qualified personnel, competition may be
intense for experienced scientists. Failure to attract and retain skilled
personnel would prevent us from pursuing collaborations and developing our
products and core technologies to the extent otherwise possible.
Our planned activities will require additional expertise in specific
industries and areas applicable to the products developed through our
technologies. These activities will require the addition of new personnel,
including management, and the development of additional expertise by existing
management personnel. The inability to acquire or develop this expertise could
impair the growth, if any, of our business.
10
IF WE ENGAGE IN ANY ACQUISITION, WE MAY INCUR A VARIETY OF COSTS, AND WE MAY
NEVER REALIZE THE ANTICIPATED BENEFITS OF THE ACQUISITION.
If appropriate opportunities become available, we may attempt to acquire
businesses, technologies, services, or products that we believe are a strategic
fit with our business. We currently have no commitments or agreements with
respect to any material acquisitions. If we do undertake any transaction of this
sort, the process of integrating an acquired business, technology, service, or
product may result in unforeseen operating difficulties and expenditures and may
absorb significant management attention that would otherwise be available for
ongoing development of our business. Moreover, we may fail to realize the
anticipated benefits of any acquisition. Future acquisitions could reduce your
ownership in us and could cause us to incur debt, expose us to future
liabilities and result in amortization expenses related to goodwill and other
intangible assets.
In addition, recent proposed changes in the Financial Accounting Standards
Board rules for merger accounting may affect the cost of making acquisitions or
of being acquired. For example, if these proposed changes become effective, then
we would likely have to record goodwill or other intangible assets that we would
amortize to earnings if we merge with another company. Such amortization would
adversely impact our future operating results. Further, accounting rule changes
that reduce the availability of write-offs of the value of in-process research
and development in connection with an acquisition could result in the
capitalization and amortization of these amounts which would negatively impact
results of operations in future periods.
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, claimants may sue us for injury or contamination that results from our
use or the use by third parties of these materials, and our liability may exceed
our total assets. Compliance with environmental laws and regulations may be
expensive, and current or future environmental regulations may impair our
research, development, or commercialization efforts.
11
In addition, certain of our collaborators are working with these types of
hazardous materials in connection with our collaborations. To our knowledge, the
work is performed in accordance with applicable safety regulations. In the event
of a lawsuit or investigation, we could be held responsible for any injury
caused to persons or property by exposure to, or release of, these hazardous
materials. Further, under certain circumstances, we have agreed to indemnify our
collaborators against all damages and other liabilities arising out of
development activities or products produced in connection with these
collaborations.
WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER DOCUMENTS THAT MY
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 and prevent our stockholders from acting
by written consent. These provisions and other provisions of our by-laws and of
Delaware law applicable to us could delay or make more difficult a merger,
tender offer or proxy contest involving us.
RISKS RELATED TO THIS 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 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 was
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.
12
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;
- the timing and willingness of collaborators to commercialize our products
that would result in royalties; and
- general and industry specific economic conditions, which may affect our
collaborators research and development expenditures.
A large portion of our expenses are relatively fixed, including expenses for
facilities, equipment, and personnel. Accordingly, if revenues decline or do not
grow as anticipated due to expiration of research contracts or government
research grants, failure to obtain new contracts or other factors, we may not be
able to correspondingly reduce our operating expenses. In addition, we plan to
increase operating expenses in 2000. Failure to achieve anticipated levels of
revenues could therefore significantly harm our operating results for a
particular fiscal period.
Due to the possibility of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price would probably decline.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of this offering or the perception that these sales could occur. In addition,
these factors could make it more difficult for us to raise funds through future
offerings of common stock. There will be shares of common stock
outstanding immediately after this offering, or shares if the
representatives of the underwriters exercise their over-allotment option in
full. Of the shares sold in the offering, shares 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, and 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. The remaining 6,250,321 shares of
common stock outstanding will be restricted securities as defined in Rule 144.
5,147,478 of 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. See "Shares Eligible
for Future Sale."
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 % 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
13
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.
MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
YOU DO NOT AGREE AND IN WAYS THAT MAY NOT YIELD A RETURN.
Management will retain broad discretion over the use of proceeds from this
offering. Stockholders may not deem such uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. Management
intends to use a majority of the proceeds from this offering for research and
development, working capital, and other general corporate purposes and to
finance potential acquisitions or investments. Because of the number and
variability of factors that determine our use of the net proceeds from this
offering, we cannot assure you that these uses will not vary substantially from
our currently planned uses. Pending these uses of the net proceeds from this
offering, we intend to invest the net proceeds from this offering in
interest-bearing, investment grade and U.S. government securities.
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 $ 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."
14
FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
This prospectus contains forward looking statements within the meaning of
the federal securities laws that relate to future events or our future financial
performance. You can identify forward-looking statements by terminology such as
"may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "intend," "potential," or "continue," or the negative of these terms
or other comparable terminology. Examples of these forward-looking statements
include, but are not limited to, statements regarding the following:
- our technologies and programs,
- our ability to realize commercially valuable discoveries in our programs,
- our intellectual property portfolio,
- our business strategies and plans, and
- our ability to develop products suitable for commercialization.
Although we believe that the predictions and expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus or to conform these statements to actual
results.
USE OF PROCEEDS
- --------------------------------------------------------------------------------
We estimate that the net proceeds from the sale of the shares of
common stock that we are offering will be $ after deducting estimated
underwriters' discounts and commissions and estimated offering expenses and
assuming an initial public offering price of $ per share. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be $ million.
We anticipate using the net proceeds from this offering for advancing our
product candidates through preclinical and later stage development, discovering
new product candidates, expanding our technology platform including through
in-licensing opportunities or acquisition of complementary technologies, working
capital, and other general corporate purposes and capital expenditures. The
amounts and timing of our actual expenditures will depend upon numerous factors,
including the status of our product development and commercialization efforts,
technological advances, the amount of proceeds actually raised in this offering
and the amount of cash generated by our operations. We may also 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.
15
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.
DILUTION
- --------------------------------------------------------------------------------
Our pro forma net tangible book value, as of December 31, 1999, was
$35.1 million, or $5.94 per share of common stock, including the issuance of
804,196 shares of Series C preferred stock for cash on March 30, 2000 and after
giving effect to the automatic conversion of all outstanding shares of preferred
stock into an aggregate of 4,073,573 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 $ per share, and our receipt of the estimated net
proceeds from the offering of $ , our pro forma net tangible book value as
of December 31, 1999 would have been approximately $ million, or $ per
share. This represents an immediate increase in net tangible book value of
$ per share to existing stockholders and an immediate dilution of
$ per share to new investors. The following table illustrates this per
share dilution:
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
offering................................................ $ 5.94
Increase per share attributable to new investors..........
Pro forma net tangible book value per share after this
offering..................................................
------
Dilution per share to new investors......................... $
If the underwriters' over-allotment option were exercised in full, the pro
forma net tangible book value per share after this offering would be $ per
share, the increase in net tangible book value per share to existing
stockholders would be $ per share and the dilution in net tangible book
value to new investors would be $ per share.
The following table summarizes, on a pro forma basis as of December 31,
1999, as adjusted for the March 2000 issuance of Series C preferred stock
described above, 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.................... 5,900,421 % $45,934,000 % $ 7.78
New investors............................
--------- ----- ----------- -----
Total.................................. 100.0% 100.0%
========= ===== =========== =====
The discussion and tables above assume no exercise of stock options
outstanding. At December 31, 1999, there were options outstanding to purchase a
total of 455,900 shares of common stock, with a weighted average exercise price
of $0.87 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 December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the sale of 804,196 shares of
Series C preferred stock on March 30, 2000 with net proceeds of $24.6
million and after reflecting 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
shares of common stock by us in this offering at an assumed price of
$ per share less the estimated discounts and offering expenses.
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Capital lease and debt obligations, less current portion.... $ 1,591 $ 1,591 $ 1,591
-------- -------- -------
Stockholders' equity:
Convertible preferred stock, par value $0.001; 4,348,182
shares authorized, 3,269,377 shares issued and
outstanding (actual); no shares issued and outstanding
(pro forma and pro forma as adjusted)................... 3 --
Common stock, par value $0.001; 12,000,000 shares
authorized, 1,826,848 shares issued and outstanding,
actual; 5,900,421 shares issued and outstanding, pro
forma; shares issued and outstanding, pro forma as
adjusted................................................ 2 6
Additional paid-in capital.................................. 24,851 49,450
Notes receivable from stockholders.......................... (349) (349) (349)
Deferred stock compensation................................. (2,377) (2,377) (2,377)
Accumulated deficit......................................... (11,593) (11,593) (11,593)
Accumulated other comprehensive loss........................ (66) (66) (66)
-------- -------- -------
Total stockholders' equity............................ 10,471 35,071
-------- -------- -------
Total capitalization.................................. $ 12,062 $ 36,662 $
======== ======== =======
This table excludes:
- 1,700,000 shares of our common stock reserved for issuance under our 1996
Stock Option Plan, including 800,000 shares authorized following
December 31, 1999, of which 455,900 shares are subject to outstanding
options with a weighted average exercise price of $0.87 per share;
- 100,000 shares available for issuance under our 2000 Employee Stock
Purchase Plan approved in March 2000; and
- 100,000 shares available for issuance under our 2000 Non-Employee Director
Stock Option Plan approved in March 2000.
17
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and related notes
appearing elsewhere in this prospectus. The selected financial data set forth
below with respect to our statements of operations for the years ended
December 31, 1997, 1998 and 1999 and with respect to the our balance sheets at
December 31, 1998 and 1999 are derived from our financial statements that have
been audited by Ernst & Young LLP, which are included elsewhere in this
prospectus, and are qualified by reference to such financial statements. The
statement of operations data for the period from Inception (January 5, 1995) to
December 31, 1995 and for the year ended December 31, 1996 and the balance sheet
data as of December 31, 1996 and 1997 are derived from our audited financial
statements that are not included in this prospectus.
FROM INCEPTION
(JANUARY 5,
1995) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
STATEMENT OF OPERATIONS DATA: 1995 1996 1997 1998 1999
- ----------------------------- -------------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Contract revenue............................ $ -- $ -- $ 10 $ 974 $ 5,206
Grant revenue............................... -- 200 277 262 140
------ ------- ------- ------- -------
Total revenues............................ -- 200 287 1,236 5,346
Operating expenses:
Research and development.................. 197 1,286 1,922 4,030 7,623
General and administrative................ 281 402 457 991 1,632
Stock-based compensation.................. -- -- -- -- 1,145
------ ------- ------- ------- -------
Total operating expenses.................... 478 1,688 2,379 5,021 10,400
------ ------- ------- ------- -------
Operating loss.............................. (478) (1,488) (2,092) (3,785) (5,054)
Other income, net........................... -- 35 98 518 653
------ ------- ------- ------- -------
Net loss.................................... $ (478) $(1,453) $(1,994) $(3,267) $(4,401)
====== ======= ======= ======= =======
Historical net loss per share, basic and
diluted................................... $(0.49) $ (1.41) $ (1.46) $ (2.30) $ (2.93)
====== ======= ======= ======= =======
Historical weighted average shares
outstanding............................... 978 1,027 1,365 1,423 1,503
Pro forma net loss per share................ $ (0.92)
=======
Pro forma weighted average shares
outstanding............................... 4,772
AS OF DECEMBER 31,
----------------------------------------------------
BALANCE SHEET DATA: 1995 1996 1997 1998 1999
- ------------------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Cash, cash equivalents and short-term
investments.................................... $ 31 $ 1,465 $ 2,019 $ 6,328 $ 2,022
Working capital.................................. (257) 1,369 1,976 4,267 750
Long-term investments............................ -- -- -- 9,073 8,442
Total assets..................................... 62 1,965 2,757 17,201 14,157
Capital lease and debt obligations,
less current portion........................... -- -- 385 1,004 1,591
Accumulated deficit.............................. (478) (1,930) (3,924) (7,192) (11,593)
Stockholders' equity............................. (226) 1,721 2,111 13,759 10,471
18
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 both proprietary gene manipulating
technologies and a pipeline of potentially high-value pharmaceuticals. We use
our platform technologies to develop product candidates from an important class
of organic natural molecules known as polyketides. Our pipeline of product
opportunities currently targets 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.
We have incurred significant losses since our inception. As of December 31,
1999, our accumulated deficit was $11.6 million and total stockholders' equity
was $10.5 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.
DEFERRED COMPENSATION
During the year ended December 31, 1999, in connection with the grant of
stock options to employees, we recorded deferred stock-based compensation
totaling $2.9 million, representing the difference between the deemed fair
market value of our common stock for financial reporting purposes 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. We recognized amortization of deferred compensation of
$535,000 for the year ended December 31, 1999. At December 31, 1999, we had a
total of $2.4 million remaining to be amortized over the vesting periods of the
stock options. We expect to defer additional stock-based compensation of
$9.9 million for stock options granted to employees from January 1, 2000 through
March 24, 2000. Accordingly, we expect to recognize additional amortization
expense related to stock-based compensation of approximately $5.6 million during
2000, $3.7 million during 2001, $2.0 million during 2002, $832,000 during 2003
and $85,000 during 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 $610,000 for the year ended December 31, 1999. In addition, we expect to
recognize other stock-based compensation in connection with stock options and
restricted stock granted to non-employees of $934,000 during 2000, $829,000
during 2001, $677,000 during 2002, $213,000 during 2003 and $41,000 during 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. Please see Notes 1 and 9 of
our financial statements.
RESULTS OF OPERATIONS
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 $974,000 in 1998. Also included
in 1999
19
contract revenue was $1.2 million of non-recurring milestones earned under this
agreement. The initial term of our collaboration with The R.W. Johnson
Pharmaceutical Research Institute has been extended to December 28, 2000. If we
do not further extend this agreement, our revenues will significantly decrease
thereafter, unless we enter into additional collaborations.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
consist primarily of salaries and other personnel-related expenses, facility
expenses, lab consumables and depreciation of facilities and equipment. Research
and development expenses increased to $7.6 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 16 in
January 1998 and higher occupancy expenses associated with our move to a larger
facility in March 1999. We expect our research and development expenses will
increase substantially to fund the expansion of our technology platform, support
our collaborative research program and advance our in-house research programs
into later stages of development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1.6 million in 1999 from $991,000 in 1998. This increase was
primarily due to additional staffing and higher facility related expenses. 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.
STOCK-BASED COMPENSATION. Stock-based compensation expense was
$1.1 million in 1999. Stock-based compensation results from the amortization of
deferred stock-based compensation related to stock options granted to employees
and compensation expense from the valuation of stock options and restricted
stock granted to consultants.
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 preferred stock and contract revenue
received under our collaboration with The R.W. Johnson Pharmaceutical Research
Institute.
20
INTEREST EXPENSE. Interest expense increased to $80,000 in 1998 from
$56,000 in 1997. This increase resulted from additional debt financing
associated with our fixed asset purchases.
PROVISION FOR INCOME TAXES
We incurred net operating losses in the years ended December 31, 1999 and
1998, and consequently did not pay federal, state or foreign income taxes. As of
December 31, 1999, we had federal and state net operating loss carryforwards of
approximately $9.6 million and $4.1 million, 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
preferred stock, totaling $21.0 million in net proceeds, contract payments under
our collaboration agreement, equipment financing arrangements and government
grants. As of December 31, 1999, we had $10.5 million in cash and investments
compared to $15.4 million as of December 31, 1998. 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 $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 provided cash of $978,000 in the year ended
December 31, 1999 compared to the usage of cash of $11.6 million in the year
ended December 31, 1998. Our investing activities consist primarily of purchases
and maturities of investment securities and capital expenditures. Cash provided
by our 1999 investing activities consisted of $2.8 million of net investment
maturities, partially offset by capital expenditures of $1.8 million. Cash used
in our 1998 investing activities primarily reflected the net purchases of
securities with the $14.9 million net proceeds from the issuance of our 1998
Series B preferred stock.
Net additions to property and equipment were $1.8 million for the year ended
December 31, 1999 and $1.2 million for the year ended December 31, 1998.
Proceeds received from equipment financing arrangements amounted to
$1.3 million for the year ended December 31, 1999 and $870,000 for the same
period ended 1998. In January 2000, we secured an additional $2.0 million line
of credit for facility improvements and equipment purchases.
On March 30, 2000, we issued 804,196 shares of Series C preferred stock at a
purchase price of $31.00 per share for net proceeds of approximately $24.6
million. We will reflect a deemed dividend of approximately $13.7 million in our
first quarter 2000 financial statements in relation to the Series C financing.
Please see Note 11 of our financial statements. We believe our existing cash and
investments, including proceeds of the sale of Series C preferred stock and of
this offering, will be sufficient to meet our anticipated cash requirements for
at least 24 months. Our future capital uses and requirements
21
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;
- The costs and timing of obtaining, enforcing and defending our patent and
intellectual rights;
- The costs and timing of regulatory approvals; and
- Expenses associated with unforeseen litigation.
For the next several years, we do not expect our operations to generate the
amounts of cash required for our future cash needs. In order to fulfill our cash
requirements, we expect to finance future cash needs through the sale of equity
securities, strategic collaborations and debt financing. We cannot assure you
that additional financing or collaboration and licensing arrangements will be
available when needed or that, if available, will be on terms favorable to us or
our stockholders. Insufficient funds may require us to delay, scale back or
eliminate some or all of our research or development programs, to lose rights
under existing licenses or to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than we
would otherwise choose or may adversely affect our ability to operate as a going
concern. If additional funds are obtained by issuing equity securities,
substantial dilution to existing stockholders may result.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximize the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities and corporate obligations.
The table below presents the principal amounts of our investments and
equipment loans by expected maturity and related weighted average interest rates
at December 31, 1999 (in thousands):
2000 2001 2002 2003 TOTAL FAIR VALUE
-------- -------- -------- -------- -------- ----------
Debt securities:
US treasury.......................... $ -- $1,300 $ -- $ -- $1,300 $1,290
Corporate bond....................... 1,000 -- -- -- 1,000 990
Average interest rate.................. 5.6% 5.6% -- -- 5.6%
Asset-backed securities................ -- -- -- -- 7,198 7,152
Average interest rate.................. -- -- -- -- 5.9%
Equipment financing.................... 447 497 616 311 1,871 1,871
Average interest rate.................. 10.8% 10.8% 10.8% 11.0% 10.8%
22
BUSINESS
- --------------------------------------------------------------------------------
OVERVIEW
We are a biotechnology company that has both proprietary gene manipulating
technologies and a pipeline of potentially high-value pharmaceuticals. We use
our platform technologies to develop product candidates from an important class
of organic, natural molecules known as polyketides. Polyketides have long been a
rich source of pharmaceutical products for many uses, including antibiotics,
anticancer drugs, cholesterol-lowering drugs, immunosuppressants and other
therapeutics, as well as animal health and agricultural products. Currently,
natural or semi-synthetic polyketide pharmaceuticals represent over 20 products,
with worldwide sales exceeding $10 billion per year.
We are the leader in the alteration of polyketides by gene manipulations.
Polyketides are naturally bioactive, small molecules and possess many built-in
properties that are useful in pharmaceuticals, such as oral availability and the
ability to penetrate biological membranes. Polyketides are structurally complex
molecules that are not easy to make or modify by chemical means. Using our
technologies, we can 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 novel, improved versions of currently marketed high-value
pharmaceuticals;
- modify an existing polyketide used in one therapeutic area to create a
novel polyketide to be used in another;
- transfer polyketide genes from their natural hosts to our optimized hosts
to enable large-scale production of the polyketides; and
- significantly expand the repertoire of natural product libraries to
provide a source for the discovery of new product candidates.
We are applying our technologies to develop a pipeline of product candidates
in the areas of infectious disease, gastrointestinal motility, 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 they address
very large markets. In infectious disease, we have a collaboration with The R.W.
Johnson Pharmaceutical Research Institute, a Johnson & Johnson company, that has
rapidly generated several polyketide antibiotic product candidates that are
effective against organisms resistant to existing related products.
OVERVIEW OF POLYKETIDES
Polyketides are complex natural products that are produced by soil
microorganisms. There are about 7,000 known polyketides, from which numerous
pharmaceutical products in many therapeutic areas have been derived.
23
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
Unlike most classes of chemicals, polyketides often have unrelated
structures. The common features that link the polyketides as a class are the
sequence of reactions, or biosynthetic pathways, 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. For example, the antibiotic erythromycin is made by
approximately 25 consecutive enzyme reactions, all carried out within a single
large PKS. 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.
A modular PKS is encoded by neighboring DNA sequences, collectively called a
gene cluster, in the host organism's genome. The genes are not neighboring in
most other biosynthetic pathways for natural products, but are dispersed over
the chromosome of the organism and are not easily identified. Thus, when any
component of the polyketide gene cluster is identified, the entire cluster can
be obtained by DNA sequencing in either direction, and the cluster can be
modified or transferred to another host organism.
[FIGURE 1]
[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.]
A modular PKS is subdivided into units called modules. Polyketide assembly
begins at one end of the PKS, and continues to the other by adding and then
modifying 2-carbon building blocks at each module to form a polyketide chain.
The chain is finally converted into a polyketide ring. Since each module codes
for one building block, the number of modules in a PKS codes for the size of the
polyketide. Each module contains the same three enzyme activities that connect
the polyketide building blocks. One of these modules also selects which one of
about three building blocks is used by that module, and thereby determines the
structure at one of the two carbon atoms of the building block. A
24
module may also have 1, 2 or 3 additional enzymes that modify the building
blocks and thereby determine the structure at the other carbon of the building
block.
The structure of a modular polyketide ring can be viewed as being coded by
the content, sequence and number of modules in a PKS, much as the structure of a
protein is encoded by sequence of DNA. The contents of a module code for the
structure of each 2-carbon building block used in a polyketide, the sequence of
modules codes for the arrangement of building blocks, and the number of modules
codes for the number of building blocks in, or size of, a polyketide. Modifying,
rearranging or deleting the modules results in specific changes to the structure
of the polyketide.
OUR STRATEGY
Our goal is to translate our technologies into a pipeline of high-value drug
candidates, and to advance our candidates into clinical trials. Our strategy
includes the following components:
MAXIMIZE VALUE, MINIMIZE RISK. We apply our technologies to improve
existing high-value pharmaceuticals and create new ones, generating a pipeline
of drug candidates moving towards market. 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
product candidates through clinical trials and into the market, prepare and
screen our polyketide libraries, apply our technologies to new polyketides and
develop large-scale production systems for polyketides.
ENHANCE LEADERSHIP POSITION OF OUR TECHNOLOGY PLATFORM. We will expand and
enhance our enabling technology platform by increasing in-house research
activities in order to maintain our leadership position. 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.
OUR TECHNOLOGY PLATFORM
Our technology platform has five components: polyketide gene alteration,
chemo-biosynthesis, heterologous over-expression, combinatorial biosynthesis,
and screening libraries. Together, our technologies enable us to modify, create
and produce proprietary polyketides and polyketide libraries that may enable us
to develop valuable pharmaceutical products.
POLYKETIDE GENE ALTERATION
The structure of a polyketide is primarily determined by variation in the
number, sequence and components of modules in the gene cluster. 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, small organic molecules that are not
easy to make or modify chemically. Because each building block of a polyketide
is encoded by a specific module of the gene cluster, 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, and to activate inert parts of the polyketide.
This allows us to make subsequent chemical modifications not currently feasible.
We can also make small changes in the structure of existing proprietary
polyketide products to allow freedom to operate in otherwise
25
proprietary space. In addition, by changing the order and number of modules, we
can create entirely new libraries of polyketides as sources of new structures
both for screening and for improving bio-activities of 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 should enable us to produce
novel polyketide product candidates.
First, we disable the first two modules in a PKS by gene alteration. This
prevents formation of the two-building-block intermediate that feeds module two,
but leaves the remainder of the PKS fully functional. Then, microorganisms
containing this modified PKS are fed our chemically synthesized fragments which
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 poorly understood or difficult or slow to grow, or whose
genes are not easy to manipulate. In addition, polyketides are often produced in
small amounts in organisms that naturally produce them, which can limit their
commercial opportunities. We have created genetically-enhanced microorganisms to
serve as optimized hosts for efficient polyketide manipulation and production.
Our proprietary technologies allow us to transfer polyketide genes to these
optimized hosts to enable easier manipulation and increased production of
polyketides necessary for commercialization of our technologies.
COMBINATORIAL BIOSYNTHESIS
We have developed a novel combinatorial technology to produce libraries of
polyketides. Because the approximately 7,000 naturally occurring polyketides
have yielded many pharmaceutical products, we believe that libraries of new
polyketides may do likewise. We separate the large polyketide gene cluster into
several fragments. Each of these gene 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 combinatorial
polyketide libraries. Using our combinatorial biosynthesis technology, we
produce large polyketide libraries. For example, one of our libraries contains
the largest number of erythromycin analogs produced by genetic engineering.
[FIGURE 2]
[DESCRIPTION OF ARTWORK]
[The artwork is a depiction of the process of combinatorial biosynthesis.
A) The first drawing depicts a PKS gene cluster, and underneath it are
individual modules obtained from other PKS gene clusters. B) The second drawing
shows the incorporation of new individual modules into the gene cluster to make
hybrid gene clusters. C) The third drawing shows a number of cells containing
individual (colored) hybrid genes. D) The fourth drawing shows cell colonies,
each producing a different polyketide (color-coded).]
SCREENING LIBRARIES
In addition to our combinatorial library, 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
26
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 a flow of new chemical entities for our product
pipeline.
OUR PRODUCT DEVELOPMENT OPPORTUNITIES
Our primary programs are currently directed at discovery and development of
novel polyketides for bacterial infections, 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 very large markets. We are able to maintain a diverse
portfolio of product candidates because the fundamental aspects of our
technology generally apply to all PKS gene clusters.
BACTERIAL INFECTIONS
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. Another company has
recently filed a new drug application with the FDA for a ketolide.
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. Recently,
Cisapride's manufacturer announced that Cisapride will no longer be marketed in
the United States. Motilides have an entirely different mechanism of action and
should not have the same side effects. Another company's motilide candidate is
in clinical trials.
Many members of our erythromycin library can readily be converted into
motilides. In less than a year, we have prepared several proprietary motilides
with IN VITRO activity comparable to the motilide that is in clinical trials. In
addition, our genetic manipulation technology enables the preparation of
numerous new motilides that could not easily be made chemically. We expect to
have optimized candidates advance into preclinical testing within a year.
MUCUS HYPERSECRETION
Mucus hypersecretion, or excessive production of mucus, is a major,
problematic symptom of asthma, chronic obstructive pulmonary disease, or COPD,
cystic fibrosis and allergic rhinitis, including hay fever. Mucus hypersecretion
in these diseases results from the release of mucus from abnormally high numbers
of large mucus-secreting cells, or goblet cells. There is no effective treatment
for this type of mucus hypersecretion from which to determine market potential,
but we believe, based on the disease prevalence, that the market potential is
significant.
27
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 technology to optimize its
activity. Although this is an early-stage project, we believe we will have
candidates 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 their natural organism to another to produce greater
quantities of the polyketide. Our scientists have cloned and expressed the
epothilone gene cluster in two high-producing organisms and demonstrated
production of all important forms of epothilone, including epothilone D. We
believe we can increase current yields of the important types of epothilone
through our gene-manipulating technologies. We also expect to produce
proprietary analogs of epothilone.
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 primary site at which FK506 is metabolized by P450-3A could be
blocked without affecting its biological activity, the variable metabolism of
the drug might be averted. The primary site of metabolism of FK506 is different
from those required for activity, so we do not expect its modification to
prevent metabolism to be detrimental. This site of metabolism cannot be
protected by chemical modification, but can be protected using our technology.
We have modified this site in an FK506 analog, FK520, to make proprietary,
metabolically stable analogs. We expect to have optimized 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
non-immunosuppressant nerve regeneration agents by removing their ability to
bind to calcineurin. 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 optimized candidates to
advance into preclinical testing within a year.
28
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 copyrights or are effectively
maintained as trade secrets. Accordingly, patents or other proprietary rights
are an essential element of our business. As of March 29, 2000, we owned three
U.S. patents and one foreign patent and had exclusive license rights to six U.S.
patents and five foreign patents owned by Stanford University. We also have 34
U.S. patent applications and 23 foreign patent applications, as well as the
exclusive rights to 15 U.S. patent applications and 33 foreign patent
applications.
We have exclusive rights to the combinatorial biosynthesis technology
developed by Dr. Chaitan Khosla, which is 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, six of these
patents have issued and three patent applications have been allowed 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 applied for patents claiming the production of polyketide libraries
using our proprietary multi-vector technology, the production of polyketides in
E. COLI, yeast, and 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 that are commercially important to our business. We also rely
on trade secrets to protect our technology, especially where patent protection
is deemed inappropriate or unobtainable. We protect our proprietary technology
and processes, in part, by confidentiality agreements with our employees,
consultants, collaborators and certain contractors. There can be no assurance
that proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or that we can
meaningfully protect our trade secrets.
COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
JOHNSON & JOHNSON
In September 1998, we signed a two-year collaborative agreement with The
R.W. Johnson Pharmaceutical Research Institute, and Ortho-McNeil
Pharmaceutical, Inc., both Johnson & Johnson companies, which has been extended
through December 2000. Under the terms of the agreement, we use our technologies
to produce specific novel antibiotics on a best efforts basis. The agreement
provides for payments, including payments for research and development costs,
and payments for reaching certain research and development milestones. In
addition to creating a two-year collaborative research term, the agreement
grants several licenses that include:
- a research license, whereby we and The R.W. Johnson Pharmaceutical
Research Institute grant each other a non-exclusive license, with no
sublicense rights, to make and use methods and material covered under the
parties' respective patents to carry out research during the term of the
agreement;
29
- 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
Ortho-McNeil Pharmaceutical, Inc. and The R.W. Johnson Pharmaceutical
Research Institute exclusive worldwide rights to make, use, develop and
sell the licensed products as defined in the agreement.
The development, marketing, and sale of drugs resulting from this collaboration
will be undertaken by The R.W. Johnson Pharmaceutical Research Institute and
Ortho-McNeil Pharmaceutical, Inc. Should the development efforts result in a
marketable product, we will receive royalty payments based on product sales as
well as payments based on reaching research and development milestones. We
recognized $5.0 million of contract revenue for the year ended December 31, 1999
and $1.0 million for the same period in 1998, pursuant to this agreement.
Included in 1999 contract revenue were $1.2 million of nonrecurring milestones
earned under this agreement. After the research term under this agreement ends,
The R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil
Pharmaceutical 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 terminate the agreement, rights to compounds
developed under the agreement revert to us except for rights to compounds being
commercialized by The R.W. Johnson Pharmaceutical Research Institute and
Ortho-McNeil Pharmaceutical.
STANFORD UNIVERSITY
In March 1996, we entered into an exclusive license agreement with the Board
of Trustees of the Leland Stanford Junior University, or Stanford University,
for certain technology and related patent rights now contained in six issued
U.S. patents and five foreign patents, as well as 44 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 and will pay milestones and royalties on net sales resulting from
successful products originating from the licensed technology. In March 2000, an
amendment to the agreement was signed giving us an exclusive option to acquire
an exclusive license to future patents or patent applications related to certain
technology related to polyketides and their production developed by Dr. Khosla.
HARVARD COLLEGE
In December 1998, we entered into an exclusive license agreement with the
President and Fellows of Harvard College for certain technology and related
patent rights for the production of polyketides. In connection with the license
agreement, which gives us the exclusive license rights to the technology in five
patent applications, we paid a non-refundable license fee and will pay annual
maintenance fees, milestones and royalties on net sales of products originating
from the licensed technology.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive.
Many companies, including biotechnology, chemical and pharmaceutical companies,
are actively engaged in activities similar to ours, including research and
development of drugs for the treatment of the same diseases and conditions as
our potential product candidates. Many of these companies have substantially
greater financial and other resources, larger research and development staffs,
and more extensive marketing and manufacturing organizations than we do. In
addition, some of them have considerable experience in preclinical testing,
clinical trials and other regulatory approval procedures. There are also
academic
30
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.
Our major competitors include fully integrated pharmaceutical companies that
have extensive drug discovery efforts. We face significant competition from
organizations that are pursuing the same or similar technologies, including
polyketide manipulation, as the technologies used by us in our drug discovery
efforts. 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. Other pharmaceutical and biotechnology companies have announced
efforts in the field of polyketide manipulation. 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.
Developments by others may render our product 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.
In order to compete successfully, we must develop proprietary positions in
patented drugs for therapeutic markets that have not been satisfactorily
addressed by conventional research strategies and, in the process, expand our
expertise in polyketide manipulation. Our potential products, even if
successfully tested and developed, may not be adopted by physicians over other
products and may not offer economically feasible alternatives to other
therapies.
GOVERNMENT REGULATION
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our potential products.
The process required by the FDA before our products may be marketed in the
United States generally involves the following:
- preclinical laboratory and animal tests;
- submission of an investigational new drug, or IND, application, which must
become effective before clinical trials may begin;
- adequate and well-controlled human clinical trials to establish the safety
and efficacy of the proposed drug for its intended use; and
- FDA approval of a new drug application, or NDA, or biologics license
application, or BLA.
The testing and approval process requires substantial time, effort, and
financial resources, and we cannot be certain that any approvals for any of our
potential products will be granted on a timely basis, if at all.
Prior to commencing clinical trials, which are typically conducted in three
sequential phases, we must submit an IND application to the FDA. The IND
automatically becomes effective 30 days after receipt by the FDA, unless the
FDA, within the 30-day time period, raises concerns or questions about
31
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
to impose costly procedures upon our activities. Success in early stage clinical
trials does not assure success in later stage clinical trials. Data obtained
from clinical activities is not always conclusive and may be susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
Even if a product receives regulatory approval, the approval may be
significantly limited to specific indications and dosages. Further, even after
regulatory approval is obtained, later discovery of previously unknown problems
with a product may result in restrictions on the product or even complete
withdrawal of the product from the market. Delays in obtaining, or failures to
obtain additional regulatory approvals for any of our products would have a
material adverse effect on our business.
Any products manufactured or distributed by us pursuant to FDA approvals are
subject to continuing regulation by the FDA, including record-keeping
requirements and reporting of adverse experiences with the drug. Drug
manufacturers and their subcontractors are required to register their
establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with good manufacturing practices, which impose certain procedural
and documentation requirements upon us and our third party manufacturers. We
cannot be certain that we or our present or future 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 March 30, 2000 we had 55 full-time employees, 29 of whom hold Ph.D.
degrees and 28 of whom were engaged in full-time research activities. We believe
that our relations with our employees are good.
FACILITIES
Our facilities consist of approximately 44,000 square feet of research and
office space located in Hayward, California that is leased to us until 2003. We
believe that our facility will meet our space requirements for research and
development and administration functions through the year 2002, and beyond that
time, that suitable additional space will be available on commercially
reasonable terms.
32
MANAGEMENT
- --------------------------------------------------------------------------------
The following table provides information regarding our directors, executive
officers and key employees:
NAME AGE TITLE
- ---- -------------------- ------------------------------------------
Daniel V. Santi, M.D., Ph.D............... 58 Chief Executive Officer and Chairman of
the Board of Directors
Michael S. Ostrach........................ 48 Chief Operating Officer
Brian Metcalf, Ph.D....................... 54 Senior Vice President, Chief Scientific
Officer
Susan M. Kanaya........................... 37 Vice President, Finance and Chief
Financial Officer
Kevin Kaster.............................. 40 Vice President, Intellectual Property
C. Richard Hutchinson..................... 56 Vice President, New Technologies
Chaitan Khosla, Ph.D...................... 35 Director
Jean Deleage.............................. 59 Director
Raymond Whitaker, Ph.D.................... 52 Director
Peter Davis, Ph.D......................... 55 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
33
Research Center from 1973-1983. Dr. Metcalf received his B.S. and Ph.D. in
organic chemistry from the University of Western Australia.
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.
C. RICHARD HUTCHINSON has served as our Vice President, New Technologies
since March 2000. From 1971 to 2000, Dr. Hutchinson served on the faculty of the
University of Wisconsin-Madison, most recently as Professor of Medicinal
Chemistry, School of Pharmacy and Professor of Bacteriology. Dr. Hutchinson
received his B.S. in pharmacy from Ohio State University and his Ph.D. in
organic chemistry from the University of Minnesota.
CHAITAN KHOSLA, PH.D., is one of our co-founders and has served as our
director since our inception. Dr. Khosla has been Associate Professor of
chemical engineering, chemistry and biochemistry at Stanford University since
1997, and has been a faculty member since 1992. Dr. Khosla is co-chairman of our
Scientific Advisory Board. Dr. Khosla is the inventor of the combinatorial
biosynthesis technology that we licensed from Stanford University. He is the
recipient of several awards, including the 1999 Alan T. Waterman award by the
National Science Foundation, the 1999 Eli Lilly Award in biological chemistry,
and the 2000 ACS Award in pure science. Dr. Khosla is the author of over 90
publications and is an inventor on numerous patents. Dr. Khosla received his B.
Tech. from the Indian Institute of Technology, Bombay, India and his Ph.D. from
the California Institute of Technology.
JEAN DELEAGE, PH.D., has served as our director since April 1996. He is a
founder and managing general partner of Alta Partners, a venture capital
partnership investing in information technologies and life science companies.
From 1979 to 1996, Dr. Deleage was a managing partner of Burr, Egan, Deleage &
Co., a venture capital firm. Dr. Deleage was the founder of Sofinnova, a venture
capital firm in France, and Sofinnova, Inc., the U.S. subsidiary of Sofinnova.
Dr. Deleage is a director of Flamel Technologies, S.A., Aclara
BioSciences, Inc. and several privately held companies. Dr. Deleage received a
Baccalaureate in France, a Masters Degree in electrical engineering from the
Ecole Superieure d'Electricite, and a Ph.D. in economics from the Sorbonne.
RAYMOND WHITAKER, MBA, PH.D., has served as our director since April 1998.
Dr. Whitaker has been Vice President of S.R. One, Ltd., the venture investment
affiliate of SmithKline Beecham, since 1997. From 1992 to 1996, he was Director,
Worldwide Business Development, SmithKline Beecham Pharmaceuticals. He has over
twenty-five years of international business development experience. His 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
34
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. Dr. Walsh received his A.B. in
biology from Harvard University and Ph.D. in life sciences from The Rockefeller
University, New York.
In April 1998, Mr. Ostrach consented, without admitting or denying the
Securities and Exchange Commission's allegations and conclusions, to the entry
of a Commission administrative order requiring future compliance with Rule 102
of the Commission's Regulation M, a regulation which prohibits participants in a
public stock offering from purchasing securities for their own account until the
public distribution is complete. The administrative order resulted from
Mr. Ostrach's purchase of 600 shares of Neurobiological Technologies, Inc., or
NTI, common stock during a restricted period preceding a 1996 stock offering by
NTI.
SCIENTIFIC ADVISORY BOARD
The following individuals are members of our Scientific Advisory Board, or
SAB:
CHAITAN KHOSLA, PH.D., is co-chairman of our SAB and a member of our board
of directors.
CHRISTOPHER WALSH, PH.D., is co-chairman of our SAB and a member of our
board of directors.
HOMER A. BOUSHEY, M.D., is a Professor of Medicine at the University of
California, San Francisco. Dr. Boushey is an expert in clinical research on the
causes and treatment of asthma and serves as Principal Investigator for UCSF's
Asthma Clinical Research Center.
DAVID CANE, PH.D., is Professor of Chemistry at Brown University. He 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.
He 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. He 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. He recently retired from
Hoffmann-La Roche, where he held the position of Deputy Director of the
Department of Infectious Diseases since 1987.
35
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.
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 I directors whose terms expire
at the annual meeting of stockholders to be held in 2001;
- Drs. Walsh and Davis will be the Class II 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 III directors whose terms will
expire at the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following the election. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of one-third of the directors.
This classification of our board of directors may have the effect of delaying or
preventing change in our control or management.
COMMITTEES OF THE BOARD
COMPENSATION COMMITTEE. The compensation committee, which is composed of
Drs. Davis, Deleage and Walsh, reviews and recommends to our board of directors
the compensation and benefits of all our officers and establishes and reviews
general policies relating to compensation and benefits to our employees.
AUDIT COMMITTEE. The audit committee, which is comprised of Drs. Whitaker,
Davis and Deleage, reviews our internal accounting procedures and the services
provided by our independent auditors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently, or has ever
been at any time since our formation, one of our officers or employees, nor has
served as a member of the board of directors or compensation committee of any
entity that has one or more officers serving as a member of our board of
directors or compensation committee.
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 5,000 shares of common stock to director Dr. Christopher Walsh. See
"Management--Stock Plans--2000 Non-Employee Director Stock Option Plan" and
"Related Party Transactions."
36
EMPLOYMENT AGREEMENTS
We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. At the time of commencement of employment, our employees also
generally sign offer letters specifying basic terms and conditions of
employment.
In March 2000, we entered into an agreement with Brian Metcalf, Ph.D. in
connection with his appointment as Senior Vice President and Chief Scientific
Officer. Under the agreement, Dr. Metcalf is entitled to receive an annual
salary of $280,000, a $100,000 sign-on bonus and an option to purchase 100,000
shares of our common stock. In addition, Dr. Metcalf is entitled to a housing
loan up to $400,000 which will be secured by a deed of trust on Dr. Metcalf's
principal residence. In addition, Dr. Metcalf is entitled to five years of
monthly mortgage assistance to support up to a $400,000 mortgage. Either we or
Dr. Metcalf may terminate his employment at any time for any reason. If we
terminate Dr. Metcalf without cause during his first three years of employment,
he will receive twelve months of salary continuation. Further, if such
termination occurred after one year from his date of hire, six additional months
of vesting of his stock options will be accelerated.
In October 1999, we entered into an agreement with Susan M. Kanaya in
connection with her appointment as Vice President, Finance and Chief Financial
Officer. Under the agreement, Ms. Kanaya is entitled to receive an annual salary
of $172,500, a $20,000 sign-on bonus and an option to purchase 50,000 shares of
our common stock. 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, MD,
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
250,000 shares of our common stock. 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 60,000 shares of our common stock. Either we or
Mr. Kaster may terminate his employment at any time for any reason. If we
terminate Mr. Kaster without cause during the first three and one-half years of
employment, he will receive an amount equal to six months of his then current
base salary and will accelerate the vesting of the lesser of (a) six months of
his original stock option grant and (b) the remainder of his original stock
option grant.
Drs. Santi, Khosla and Metcalf, Messrs. Ostrach and Kaster and Ms. Kanaya
each have stock option or stock purchase agreements which contain acceleration
clauses providing for 100% vesting of the unvested shares in the event of a
change in control.
37
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation that we
paid during 1999 to our Chief Executive Officer and to our four other most
highly compensated executive officers who received salary and bonus compensation
of more than $100,000 during 1999 on an annualized basis. All option grants were
made under our 1996 Stock Option Plan.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER OPTIONS
- --------------------------- -------- -------- -------- ------------
Daniel V. Santi .................................... $250,812 -- -- --
Chairman and Chief Executive Officer
Michael S. Ostrach ................................. 191,667 -- -- --
Chief Operating Officer
Susan M. Kanaya(1) ................................. 26,870 $20,000 -- 50,000
Vice President, Finance and Chief Financial
Officer
Kevin Kaster ....................................... 190,559 -- -- 12,500
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 $172,500.
(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 market 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 154,700 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 market 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
38
continuing over the next three years of service. See "Management--Stock Plans"
for a description of the material terms of these options.
OPTION GRANTS IN 1999
PERCENTAGE OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT ASSUMED ANNUAL
SECURITIES OPTIONS RATES OF STOCK APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------------
NAME GRANTED FISCAL YEAR (PER SHARE) DATE 5% 10%
- ---- ---------- ------------- ----------- ---------- ------------ -------------
Daniel V. Santi................. -- -- -- -- $ $
Michael S. Ostrach(1)........... -- -- -- --
Susan M. Kanaya(2).............. 50,000 32% $1.00 11/04/09
Kevin Kaster(3)................. 12,500 8% 1.00 08/06/09
Daniel Chu...................... -- -- -- --
- ------------------------
(1) In February 2000, we granted Mr. Ostrach an option to purchase 25,000 shares
of common stock at an exercise price of $1.25 per share, which was equal to
the fair market 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 5,000 shares of
common stock at an exercise price of $3.00 per share, which was equal to the
fair market 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 12,500 shares
of common stock at an exercise price of $1.25 per share, which was equal to
the fair market 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 market value of the
common stock on the
39
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.
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............... -- -- 110,000 -- --
Susan M. Kanaya.................. -- -- 50,000 -- --
Kevin Kaster..................... -- -- 72,500 -- --
Daniel Chu....................... -- -- -- -- --
- ------------------------
(1) Based on an assumed initial public offering price of $ 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 $ 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 March 30, 2000, 1,700,000
shares of common stock were reserved for issuance under this plan. Of these
shares, 701,439 shares were issued upon exercise of stock options, 355,434
shares were subject to outstanding options and 643,127 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.
40
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 in
April 2000. A total of 100,000 shares of our common stock has been reserved for
issuance under the 2000 employee stock purchase plan.
The 2000 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 5,000
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 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.
41
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 in April 2000, but it will not become effective
until the date of this offering. The director option plan has a term of ten
years, unless terminated sooner by our board of directors. A total of 100,000
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 2,500 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 1,250 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.
42
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.
43
RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
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 PREFERRED STOCK
COMMON ------------------------------
STOCK SERIES A SERIES B SERIES C
----------------- -------- -------- --------
DIRECTORS AND EXECUTIVE
OFFICERS
Daniel V. Santi, M.D., Ph.D.... 966,498 229,761 24,244 --
Chaitan Khosla, Ph.D........... 587,857 7,143 -- --
5% STOCKHOLDERS
AG Biotech Capital LLC(1)...... -- -- 484,848 16,129
Alta California Partners(2).... 52,263 462,968 5,415 23,654
Alta Embarcadero Partners(2)... 1,552 13,224 237,009 540
Franklin Biotechnology
Discovery Fund............... -- -- -- 387,097
Lombard Odier & Cie............ 363,636 58,065
S.R. One, Limited(3)........... 303,030 16,129
Price per share................ $0.001 to $1.10 $4.20 $8.25 $ 31.00
Date(s) of purchase............ Jan 1995 - Nov 99 Jan 97 Apr 98 Mar 00
- ------------------------
(1) 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.
(2) Jean Deleage, one of our directors, is a general partner of Alta Partners,
an affiliate of Alta California Partners and Alta Embarcadero Partners.
(3) Raymond Whitaker, one of our directors, is Vice President of S.R. One,
Limited, the venture investment affiliate of SmithKline Beecham.
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 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 February 29, 2000, the original and outstanding principal amounts of
each promissory note by a director or executive officer are set forth below.
ORIGINAL AND
OUTSTANDING NOTE
DIRECTOR OR EXECUTIVE OFFICER ISSUANCE DATE AMOUNT
- ----------------------------- -------------- ----------------
Daniel V. Santi............................. December 1998 $275,000
Michael S. Ostrach.......................... February 2000 74,250
Susan M. Kanaya............................. February 2000 50,000
Kevin Kaster................................ February 2000 72,500
Chaitan Khosla.............................. September 1999 71,500
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
44
option to purchase 65,000 shares of our common stock at an exercise price of
$1.10 per share which vest over a four year period. During 1999, total
consulting fees paid to Dr. Khosla totaled $104,279. 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 20,000 shares of common
stock at a purchase price of $0.002 per share, which vest over five years. In
March 2000, we granted Dr. Walsh an additional option to purchase 5,000 shares
of common stock at a purchase price of $3.00 per share, which vest over a
four-year period.
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".
45
PRINCIPAL STOCKHOLDERS
- --------------------------------------------------------------------------------
The following table sets forth information with respect to beneficial
ownership of our common stock as of March 30, 2000, as adjusted to reflect the
sale of common stock in this offering. Information is given for:
- each stockholder who is known by us to beneficially own more than five
percent of our common stock;
- our Chief Executive Officer and each of our four other most highly
compensated executive officers whose compensation on an annualized basis
exceeded $100,000 in 1999;
- 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
6,250,321 shares of our common stock outstanding as of March 30, 2000 and
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 common stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
AMOUNT OF SHARES BENEFICIALLY OWNED
AS OF MARCH 30, 2000
-----------------------------------------
PERCENTAGE OF TOTAL
OUTSTANDING SHARES
BENEFICIALLY OWNED
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ ------------------- -------- --------
Daniel V. Santi, M.D., Ph.D.(1)......................... 1,220,503 19.5%
Alta Partners (2)....................................... 796,625 12.8%
AG Biotech Capital (3).................................. 500,977 8.0%
Lombard Odier & Cie (4)................................. 421,701 6.8%
Franklin Biotechnology Discovery Fund (5)............... 387,097 6.2%
S.R. One, Limited (6)................................... 319,159 5.1%
Peter Davis, Ph.D. (7).................................. 500,977 8.0%
Jean Deleage, Ph.D. (8)................................. 796,625 12.8%
Chaitan Khosla, Ph.D. (9)............................... 595,000 9.5%
Christopher Walsh, Ph.D. (10)........................... 26,500 *
Raymond Whitaker, Ph.D. (11)............................ 319,159 5.1%
Michael S. Ostrach (12)................................. 135,000 2.2%
Brian W. Metcalf, Ph.D. (13)............................ 100,000 1.6%
Susan M. Kanaya (14).................................... 55,000 *
Kevin Kaster (15)....................................... 85,000 1.4%
Daniel Chu (16)......................................... 22,500 *
All directors and executive officers as a group (10
persons)(17).......................................... 3,856,264 61.7%
- ------------------------
* Less than one percent (1%)
(1) Includes 161,458 shares that are subject to our right of repurchase as of
March 30, 2000 if Dr. Santi is no longer an employee, director or
consultant with us. Dr. Santi is located at 3832 Bay Center Place, Hayward,
CA 94545.
46
(2) Alta Partners is located at One Embarcadero Center, Suite 4050, San
Francisco, CA 94111. Includes 544,300 shares that are held by Alta
California Partners, L.P. and 252,325 shares that are held by Alta
Embarcadero Partners, LLC.
(3) AG Biotech Capital, LLC is located at AG Biotech Capital LLC, c/o Viridian
Management, LLC, 686 N. DuPont Boulevard #200, Milford, DE 19963.
(4) Lombard Odier & Cie is located at Sihlstrasse 20, 8021 Zurich, Switzerland.
(5) Franklin Biotechnology Discovery Fund is located at 777 Mariners Island
Blvd., San Mateo, CA 94404
(6) S.R. One, Limited is located at Four Tower Bridge, West Conshohoken, PA
19428.
(7) Includes 500,977 shares that are held 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 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.
Dr. Davis is located c/o Pulsar International, 1 Tower Bridge, West
Conshohoken, PA 19428.
(8) Consists of 796,625 shares held directly by Alta Partners. 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. Dr. Deleage is located at One
Embarcadero Center, Suite 4050, San Francisco, CA 94111.
(9) Includes 46,041 shares that are subject to our right of repurchase as of
March 30, 2000 if Dr. Khosla is no longer an employee, director or
consultant with us. Dr. Khosla is located at 3832 Bay Center Place,
Hayward, CA 94545.
(10) Includes the following:
(i) 3,333 shares that are subject to our right of repurchase as of
March 30, 2000; and
(ii) 6,500 shares that are subject to option as of March 30, 2000, of
which 5,687 would be subject to our right of repurchase if Dr.
Walsh is no longer an employee, director or consultant with us.
(11) Includes 319,159 shares that are held 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. Dr. Whitaker is
located at Four Tower Bridge, West Conshohoken, PA 19428.
(12) Includes the following.
(i) 52,916 shares that are subject to our right of repurchase as of
March 30, 2000; and
(ii) 25,000 shares that are subject to option as of March 30, 2000, of
which 24,479 would be subject to our right of repurchase if Mr.
Ostrach is no longer an employee, director or consultant with us.
(13) Includes 100,000 shares that are subject to option as of March 30, 2000,
all of which would subject to our right of repurchase if Dr. Metcalf is no
longer an employee, director or consultant with us.
(14) Includes the following:
(i) 50,000 shares that are subject to our right of repurchase as of
March 30, 2000; and
(ii) 5,000 shares that are subject to option as of March 30, 2000, all
of which would be subject to our right of repurchase if Ms. Kanaya
is no longer an employee, director or consultant with us.
(15) Includes the following:
(i) 46,927 shares that are subject to our right of repurchase as of
March 30, 2000; and
(ii) 12,500 shares that are subject to option as of March 30, 2000, of
which 12,239 would be subject to our right of repurchase if Mr.
Kaster is no longer an employee, director or consultant with us.
(16) Dr. Chu resigned as Vice President, Research, effective November 30, 1999.
(17) Includes shares included pursuant to notes (1) and (8) through (16) above.
47
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 March 30, 2000,
after giving effect to the conversion of all of our preferred stock into common
stock, 6,250,321 shares of common stock were outstanding. As of March 30, 2000,
we had 99 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 preferred stock issued after
the sale of the common stock offered hereby may be entitled, holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available
therefor. In the event of our liquidation, dissolution or winding up, holders of
common stock will be entitled to share in our assets remaining after the payment
of liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription rights, and there
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and the shares of common stock offered
by us in this offering, when issued and paid for, will be, fully paid and
nonassessable. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock, which we may designate in
the future.
PREFERRED STOCK
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
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 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 4,408,827 shares of common stock and
holders of shares of common stock issuable upon conversion of our Series A,
Series B and Series C 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
48
- 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.
49
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 outstanding shares of
common stock, assuming no exercise of the over-allotment option and no exercises
of outstanding options after , 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 6,250,321 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 shares sold in the public
offering will be freely tradable upon completion of the offering;
- 5,147,478 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
- 66,853 shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus.
LOCK-UP AGREEMENTS
All of our directors, officers, employees and other stockholders, who
together hold all 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 Warburg
Dillon Read LLC. 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 Warburg Dillon
Read LLC.
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 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.
50
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 4,408,827 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
We intend to file a registration statement under the Securities Act after
the effective date of this offering to register shares to be issued pursuant to
our employee and director benefit plans. As a result, any options or rights
exercised under the 1996 stock option plan, the 2000 employee stock purchase
plan and the 2000 non-employee directors' stock option plan will also be freely
tradable in the public market. However, shares held by affiliates will still be
subject to the volume limitation, manner of sale, notice and public information
requirements of Rule 144, unless otherwise resalable under Rule 701. As of
March 30, 2000, we had granted options to purchase 355,434 shares of common
stock that had not been exercised, of which options to purchase 48,063 shares
were both exercisable and not subject to a right of repurchase in our favor.
51
UNDERWRITING
- --------------------------------------------------------------------------------
We have entered into an underwriting agreement with the underwriters named
below. Warburg Dillon Read LLC, CIBC World Markets Corp., and Prudential
Securities Incorporated are acting as representatives of the underwriters.
The underwriting agreement will provide for the purchase of a specific
number of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specific number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter will severally agree to purchase
the number of shares of common stock set forth opposite its name below.
NAME NUMBER OF SHARES
- ---- ----------------
Warburg Dillon Read LLC.....................................
CIBC World Markets Corp.....................................
Prudential Securities Incorporated..........................
-----
Total...................................................
=====
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a concession
of $ per share. The underwriters may also allow to dealers, and such
dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of additional shares of
our common stock to cover over-allotments. If the underwriters exercise all or
part of this option, they will purchase shares covered by the option at the
public offering price that appears on the cover page of this prospectus, less
the underwriting discount. If this option is exercised in full, the underwriters
will purchase shares from us, the total price to the public will be
, and the total proceeds to us will be . The underwriters have
severally agreed that, to the extent the over-allotment option is exercised,
each of the underwriters will purchase a number of additional shares
proportionate to its initial amount reflected in the above table.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us:
PAID BY US
---------------------------------------------
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------------------- ---------------------
Per Share.............................. $ $
Total.................................. $ $
We estimate that the total expenses of this offering, excluding the
underwriter discount, will be approximately $ .
52
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act.
We and our directors, executive officers, and all of the holders of our
common stock and securities convertible into or exercisable or exchangeable for
common stock issued prior to this offering, have agreed pursuant to certain
lock-up agreements with the underwriters that we and they will not offer, sell,
contract to sell, pledge, grant any option to sell, or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities convertible
into or exercisable or exchangeable for our common stock for a period of
180 days after the date of this prospectus without the prior written consent of
Warburg Dillon Read LLC. Warburg Dillon Read LLC, in its sole discretion, may
release the shares subject to the lock-up agreements in whole or in part at any
time with or without notice. However, Warburg Dillon Read LLC has no current
plan to do so.
At our request, the underwriters have reserved for offer and sale at the
initial public offering price up to shares of our common stock for our
officers, directors, employees, clients, friends and related persons who express
an interest in purchasing these shares. The number of shares of our common stock
available for sale to the general public will be reduced to the extent these
persons purchase these reserved shares. The underwriters will offer any shares
not so purchased by these persons to the general public on the same basis as the
other shares in this initial public offering.
Warburg Dillon Read LLC and CIBC World Markets Corp. intend to distribute
and deliver this prospectus only by hand or mail and intend to use only printed
prospectuses. Prudential Securities Incorporated facilitates the marketing of
new issues online through its PrudentialSecurities.com division. Clients of
Prudential advisors may view offering terms and this prospectus online.
Prior to this offering, there has been no public market for our common
stock. Consequently, the offering price for our common stock will be determined
by negotiations between us and the underwriters and will not necessarily be
related to our asset value, net worth or other established criteria of value.
The factors to be considered in these negotiations, in addition to prevailing
market conditions, will include the history of and prospects for the industry in
which we compete, an assessment of our management, our prospects, our capital
structure and certain other factors as are deemed relevant.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of shares is
completed. However, the underwriters may engage in the following activities in
accordance with the rules:
- STABILIZING TRANSACTIONS--The representatives may make bids for or
purchases of the shares for the purpose of pegging, fixing or maintaining
the price of the shares, so long as stabilizing bids do not exceed a
specified maximum.
- OVER-ALLOTMENTS AND SYNDICATE COVERING TRANSACTIONS--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with this offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
- PENALTY BIDS--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of these transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued at any time
without notice. The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
53
LEGAL MATTERS
- --------------------------------------------------------------------------------
Wilson Sonsini Goodrich & Rosati, PC, will pass upon the validity of the
issuance of the shares of common stock offered by this prospectus. The
underwriters have been represented by Brobeck, Phleger & Harrison LLP. An
investment partnership composed of current and former members of and persons
associated with Wilson Sonsini Goodrich & Rosati, PC, beneficially owns 5,479
shares of our common stock.
CHANGE IN INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
Effective May 28, 1998, Ernst & Young LLP was engaged as our independent
accountants and replaced Coopers & Lybrand L.L.P. (now, PricewaterhouseCoopers
LLP), who were dismissed as our independent accountants in May 1998. The
decision to change accountants 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
54
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, 13(th) Floor, New York, New York
10048, and copies of all of any part of the registration statement may be
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.
55
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
F-2
KOSAN BIOSCIENCES INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------- DECEMBER 31,
1998 1999 1999
-------- -------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,049 $ 1,032
Short-term investments.................................... 3,279 990
Other receivables......................................... 168 498
Prepaid expenses and other current assets................. 209 325
------- --------
Total current assets........................................ 6,705 2,845
Property and equipment, net................................. 1,407 2,587
Long-term investments....................................... 9,073 8,442
Notes receivable from related party......................... 12 87
Other assets................................................ 4 196
------- --------
Total assets................................................ $17,201 $ 14,157
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 333 $ 486
Accrued liabilities....................................... 98 626
Deferred revenue.......................................... 1,719 409
Current portion of capital lease obligation............... 118 127
Current portion of equipment loan......................... 170 447
------- --------
Total current liabilities................................... 2,438 2,095
Equipment loan, less current portion........................ 700 1,424
Capital lease obligation, less current portion.............. 304 167
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 4,348,182
shares authorized, 3,269,377 shares issued and
outstanding at December 31, 1998 and 1999 (none pro
forma) (aggregate liquidation preference of $21,095 at
December 31, 1999)...................................... 3 3 $ --
Common stock, $0.001 par value, 12,000,000 shares
authorized, 1,729,317 and 1,826,848 shares issued and
outstanding at December 31, 1998 and 1999, respectively
(5,096,225 shares issued and outstanding pro forma)..... 2 2 5
Additional paid-in capital................................ 21,230 24,851 24,851
Notes receivable from stockholders........................ (275) (349) (349)
Deferred stock compensation............................... -- (2,377) (2,377)
Accumulated other comprehensive income (loss)............. (9) (66) (66)
Accumulated deficit....................................... (7,192) (11,593) (11,593)
------- -------- -------
Total stockholders' equity.................................. 13,759 10,471 $10,471
------- -------- -------
Total liabilities and stockholders' equity.................. $17,201 $ 14,157
======= ========
See accompanying notes.
F-3
KOSAN BIOSCIENCES INCORPORATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER
------------------------------
1997 1998 1999
-------- -------- --------
Revenues:
Contract revenue........................................ $ 10 $ 974 $ 5,206
Grant revenue........................................... 277 262 140
------- ------- -------
Total revenues............................................ 287 1,236 5,346
Operating expenses:
Research and development................................ 1,922 4,030 7,623
General and administrative.............................. 457 991 1,632
Amortization of stock-based compensation................ -- -- 535
Other stock-based compensation.......................... -- -- 610
------- ------- -------
Total operating expenses.................................. 2,379 5,021 10,400
------- ------- -------
Loss from operations...................................... (2,092) (3,785) (5,054)
Interest income........................................... 154 598 679
Interest expense.......................................... (56) (80) (196)
Other income.............................................. -- -- 170
------- ------- -------
Net loss.................................................. $(1,994) $(3,267) $(4,401)
======= ======= =======
Basic and diluted net loss per share........................ $ (1.46) $ (2.30) $ (2.93)
======= ======= =======
Shares used in computing basic and diluted net loss per
share..................................................... 1,365 1,423 1,503
Pro forma net loss per share (unaudited).................... $ (0.92)
=======
Shares used in computing pro forma basic and diluted net
loss per share (unaudited)................................ 4,772
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 1,156,095 $ 1 $ 3,649 $ -- --
Conversion of Series A convertible
preferred stock to common
stock............................ (213,722) (1) 213,722 1 -- -- --
Conversion of Series B convertible
preferred stock to Series A
convertible preferred stock and
common stock..................... (122,500) -- 122,500 -- -- -- --
Issuance of Series A convertible
preferred stock, net of issuance
costs of $15..................... 571,429 -- -- -- 2,384 -- --
Repurchase of common stock......... -- -- (6,800) -- -- -- --
Net loss........................... -- -- -- -- -- -- --
--------- ---------- --------- ---------- ------- ----- -------
BALANCES AT DECEMBER 31, 1997...... 1,451,195 1 1,485,517 2 6,033 -- --
Issuance of common stock upon
exercise of options.............. -- -- 4,008 -- 1 -- --
Issuance of common stock upon
exercise of options in exchange
for promissory note.............. -- -- 250,000 -- 275 (275) --
Issuance of Series B convertible
preferred stock, net of issuance
costs of $77..................... 1,818,182 2 -- -- 14,921 -- --
Repurchase of common stock......... -- -- (10,208) -- -- -- --
Comprehensive income (loss):
Net loss......................... -- -- -- -- -- -- --
Unrealized loss on
available-for-sale
securities..................... -- -- -- -- -- -- --
Comprehensive loss................. -- -- -- -- -- -- --
--------- ---------- --------- ---------- ------- ----- -------
BALANCES AT DECEMBER 31, 1998...... 3,269,377 3 1,729,317 2 21,230 (275) --
Issuance of common stock upon
exercise of options.............. -- -- 26,906 -- 25 -- --
Issuance of common stock upon
exercise of options in exchange
for promissory note.............. -- -- 70,625 -- 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 1,826,848 $ 2 $24,851 $(349) $(2,377)
========= ========== ========= ========== ======= ===== =======
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
==== ========= =======
See accompanying notes.
F-5
KOSAN BIOSCIENCES INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
OPERATING ACTIVITIES
Net loss.................................................. $(1,994) $(3,267) $(4,401)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 122 246 654
Amortization of stock-based compensation................ -- -- 535
Other stock-based compensation.......................... -- -- 610
Loss on sale of investments............................. -- -- 41
Loss on disposal of property and equipment.............. -- -- 10
Changes in assets and liabilities:
Other receivables..................................... (136) (8) (330)
Prepaid expenses and other current assets............. (42) (156) (116)
Other assets and notes receivable from related
parties............................................. 8 28 (267)
Accounts payable...................................... 8 282 153
Accrued liabilities................................... 46 (17) 528
Deferred revenue...................................... (8) 1,719 (1,310)
------- ------- -------
Net cash used in operating activities............... (1,996) (1,173) (3,893)
------- ------- -------
INVESTING ACTIVITIES
Acquisition of property and equipment, net................ (111) (1,173) (1,828)
Proceeds from sale of property and equipment.............. 324 -- 2
Purchase of investments................................... (1,914) (21,419) (11,929)
Proceeds from maturity of investments..................... -- 10,972 14,733
------- ------- -------
Net cash provided by (used in) investing
activities........................................ (1,701) (11,620) 978
------- ------- -------
FINANCING ACTIVITIES
Proceeds from issuance of common stock.................... -- 1 25
Proceeds from issuance of convertible preferred stock, net
of issuance costs....................................... 2,385 14,923 --
Proceeds from equipment loans............................. -- 870 1,336
Principal payments under capital lease obligations........ (48) (34) (128)
Principal payments under equipment loans.................. -- (23) (335)
------- ------- -------
Net cash provided by financing activities........... 2,337 15,737 898
------- ------- -------
Net decrease in cash and cash equivalents................... (1,360) 2,944 (2,017)
Cash and cash equivalents at beginning of period............ 1,465 105 3,049
------- ------- -------
Cash and cash equivalents at end of period.................. $105 $3,049 $1,032
======= ======= =======
SUPPLEMENTAL DISCLOSURES
Interest expense paid in cash............................... $56 $80 $196
======= ======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock under note receivable.............. $-- $275 $74
Fixed assets acquired under capital lease................... 403 35 --
Deferred stock-based compensation........................... -- -- 2,912
See accompanying notes.
F-6
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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. The Company was considered
to be in the development stage through December 31, 1998. The Company is engaged
in the discovery and development of pharmaceuticals by genetic manipulation of
biosynthetic pathways of natural products, with an initial focus on polyketides.
The Company's technology permits modifications of polyketides not feasible by
chemical methods, and over-expression of scarce polyketides in optimized hosts.
Therapeutic targets for the Company's compounds include infectious disease,
gastrointestinal motility disorders, mucus hypersecretion, cancer, nerve
regeneration and immunosuppression.
The Company has funded its operations primarily through sales of 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.
UNAUDITED PRO FORMA INFORMATION
If the Company's initial public offering, or IPO, as described in Note 11 is
consumated, all of the preferred stock outstanding will automatically be
converted into common stock. The unaudited pro forma convertible preferred stock
and stockholders' equity at December 31, 1999 has been adjusted for the assumed
conversion of preferred stock based on the shares of preferred stock outstanding
at December 31, 1999.
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.
F-7
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of three to five years. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the lease term.
REVENUE RECOGNITION
The Company recognizes license and other upfront fees on a ratable basis
over the term on the respective agreement. Milestone payments are recognized
pursuant to the terms of the agreement upon the achievement of the specified
milestones. Contract revenues related to collaborative research and development
agreements and government grants are recognized based on the timing of the
performance of services. 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 under
such arrangements for the years ended December 31, 1998 and 1999.
NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity with
the Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), for all periods presented. Following the guidance given by the
Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock that has been issued or granted for
nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of 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 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.
F-8
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per share (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Net loss.................................................... $(1,994) $(3,267) $(4,401)
Weighted-average shares of common stock outstanding......... 1,458 1,484 1,758
Less: weighted-average shares subject to repurchase......... (93) (61) (255)
------- ------- -------
Weighted-average shares used in computing basic
and diluted net loss per share............................ 1,365 1,423 1,503
======= ======= =======
Basic and diluted net loss per share........................ ($ 1.46) $ (2.30) $ (2.93)
======= ======= =======
Pro forma:
Shares used above........................................... 1,503
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock
(unaudited)............................................... 3,269
-------
Shares used in computing pro forma basic
and diluted net loss per share (unaudited)................ 4,772
=======
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (0.92)
=======
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 options was 34,800, 471,600 and 455,900 for the years ended
December 31, 1997, 1998 and 1999, respectively. Such securities, had they been
dilutive, would have been included in the computations of diluted net loss per
share. 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
F-9
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-10
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE COSTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain
costs incurred in connection with developing or obtaining internal use software.
The Company has no capitalized software at December 31, 1999, therefore, the
adoption of this statement did not have a significant impact on the Company's
results of operations or financial condition.
2. COLLABORATIVE RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS
THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE
In September 1998, the Company signed a collaborative agreement with The
R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil
Pharmaceutical, Inc., both Johnson & Johnson companies. Under the terms of the
agreement, the Company will use its technologies to produce novel macrolide
antibiotics on a "best efforts" basis. The agreement provides for certain
payments, including payments for research and development costs for at least two
years, and payments for reaching certain research and development milestones.
The collaborative partner received exclusive worldwide rights to the products
developed in the field of use as defined in the agreement. The development,
marketing, and sale of drugs resulting from the collaboration will be undertaken
by the partner and should the development efforts result in a marketable
product, the Company will receive royalty payments based on product sales. Upon
the execution of the collaborative agreement the Company received an initial
up-front fee of $1.0 million which was deferred and will be recognized on a
ratable basis over the term of the agreement. For the years ended December 31,
1998 and 1999, the Company recognized $974,000 and $5.0 million, respectively,
of contract revenues pursuant to this agreement which represents 100% and 96% of
the contract revenues for 1998 and 1999, respectively. Included in 1999 contract
revenue was $1.2 million of milestones earned under this agreement.
LICENSE AGREEMENTS
The Company entered into exclusive license agreements with The Board of
Trustees of The Leland Stanford Junior University (Stanford) and with the
President and Fellows of Harvard College (Harvard) in March 1996 and December
1998, respectively. These licenses provide the Company with certain technology
and related patent rights and materials for the production of polyketides. Under
the terms of the agreements, the Company pays annual license or maintenance fees
and will pay milestones and royalties on net sales of products originating from
the licensed technology.
F-11
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
======
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
DECEMBER 31,
-------------------
1998 1999
-------- --------
Computer equipment and software............................. $ 249 $ 362
Office furniture............................................ 138 165
Lab equipment............................................... 1,400 2,228
Leasehold improvements...................................... 42 825
------ ------
1,829 3,580
Less accumulated depreciation and amortization.............. (422) (993)
------ ------
$1,407 $2,587
====== ======
Depreciation expense was $246,000 and $636,000 for the years ended
December 31, 1998 and 1999, respectively. Property and equipment financed under
capital leases amounted to $562,000 at December 31, 1998 and 1999. Accumulated
amortization related to this property and equipment amounted to $264,000 and
$378,000 at December 31, 1998 and 1999, respectively.
F-12
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL LEASES AND EQUIPMENT FINANCING
The Company leases certain equipment and facility improvements under
noncancelable capital leases and debt obligations. 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 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.
F-13
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, and
$1.2 million for the years ended December 31, 1997, 1998 and 1999 respectively.
The sublease income was approximately $100,000, $14,000, and $159,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
DECEMBER 31,
-------------------
1998 1999
-------- --------
Facilities related.......................................... $ -- $280
Compensation................................................ 37 163
Professional fees........................................... 40 120
Other....................................................... 21 63
---- ----
$ 98 $626
==== ====
8. RELATED PARTY TRANSACTIONS
In December 1998 and September 1999, the Company issued promissory notes to
an officer and a director totaling $346,500 for the exercise of certain stock
options. These notes bear interest between 4.47% and 5.89% per annum, compounded
semiannually, and the principal and accrued interest is repayable three years
from the date of issuance. These are full recourse notes secured in part by a
pledge of the Company's common stock owned by the officer and director.
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.
F-14
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company entered into a 14-month evaluation agreement with Savia
Corporation and DNAP Plant Technologies ("DNAP") on March 1, 1998. The
evaluation program was for the development of intellectual property and
technology for use in the field. The Company received revenue of approximately
$90,000 upon signing the agreement for work performed to that date. This
agreement was subsequently terminated effective December 31, 1999. Under the
terms of the termination agreement the Company will receive approximately
$160,000 for development services performed through December 31, 1999, which is
included in revenue and other receivables in 1999. A board member of the company
which controls DNAP is also a board member of the Company.
9. STOCKHOLDERS' EQUITY
During January 1997, the Company converted each existing share of "Original"
Series A preferred stock into 0.76190 shares of common stock and 0.23810 shares
of Series A preferred stock. Each existing share of "original" Series B
preferred stock was converted into 0.13095 shares of common stock and 0.86905
shares of Series A preferred stock. Outstanding shares of the Company's
preferred stock were converted to Series A preferred stock and common stock as
follows:
SHARES OF
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 0.76190 213,722
"Original" B...................... 935,476 0.86905 812,976 0.13095 122,500
Convertible preferred stock outstanding as of December 31, 1999 was as
follows (in thousands, except share data):
SHARES
SHARES ISSUED AND REDEMPTION/
AUTHORIZED OUTSTANDING LIQUIDATION VALUE
---------- ----------- -----------------
Convertible preferred stock:
Series A............................. 1,480,000 1,451,195 $ 6,095
Series B............................. 1,818,182 1,818,182 15,000
--------- --------- -------
Total.............................. 3,298,182 3,269,377 $21,095
========= ========= =======
Upon the closing of an initial public offering, each of the outstanding
3,269,377 shares of convertible preferred stock will be automatically converted
into one share of common stock.
SERIES A 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 $21.00 per share. The conversion price initially
will
F-15
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
be $4.20 adjusted for any stock splits or combinations, consolidation, stock
dividends, and recapitalizations. The Series A preferred shareholders are
entitled to vote together with Series B preferred shareholders and common
shareholders as a single class on all matters, except as otherwise required by
law. The number of votes to which each Series A preferred shareholder 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 shareholders
shall be paid to the holders of Series A preferred stock in an amount per share
equal to $4.20 (adjusted for any stock dividends, split or combination,
recapitalization, consolidation with respect to such shares) prior to any
distribution to holders of Series B preferred stock and common stock. If there
are inadequate funds available to provide a full payment of the liquidation
preference amount to both the Series A and B preferred shareholders, then the
assets available for distribution will be shared in proportion to the preference
amount each such shareholder is entitled to receive. 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 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 $21.00 per share. The
initial conversion price is $8.25, and may be adjusted for any stock splits or
combination, consolidation, stock dividends, and recapitalizations. The
Series B preferred shareholders are entitled to vote together with the Series A
preferred and common shareholders as a single class on all matters, except as
otherwise required by law. The number of votes to which each Series B Preferred
Stock preferred shareholder 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 splits
or combination, consolidation, stock dividends, and recapitalization respect to
such shares) prior to any distribution to holders of common stock. 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.
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,
247,553 shares were subject to such repurchase terms.
F-16
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
1996 STOCK OPTION PLAN
In 1996, the board of directors adopted the 1996 Stock Option Plan (the
"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. Subsequent to December 31, 1999 the Company
increased the total shares of common stock reserved for issuance under the 1996
Plan from 900,000 to 1,700,000 shares. A summary of the activity follows:
OPTIONS OUTSTANDING
----------------------------------------------------
WEIGHTED
SHARES AVAILABLE NUMBER OF EXERCISE AGGREGATE AVERAGE
FOR GRANT SHARES PRICE PRICE EXERCISE PRICE
---------------- --------- ----------- --------- --------------
Reserved at inception............ 250,000 -- -- $ -- $ --
Granted........................ (66,000) 66,000 $0.25 16,500 $0.25
-------- -------- ---------
Balances at December 31, 1996.... 184,000 66,000 $0.25 16,500 $0.25
Granted........................ (28,800) 28,800 $0.25-$0.45 11,960 $0.42
Canceled....................... 60,000 (60,000) $0.25 (15,000) $0.25
-------- -------- ---------
Balances at December 31, 1997.... 215,200 34,800 $0.25-$0.45 13,460 $0.39
Additional reserved............ 590,000 -- -- -- --
Granted........................ (695,000) 695,000 $0.45-$1.10 671,775 $0.97
Canceled....................... 4,192 (4,192) $0.25-$1.00 (1,978) $0.47
Exercised...................... -- (254,008) $0.25-$1.10 (276,262) $1.09
-------- -------- ---------
Balances at December 31, 1998.... 114,392 471,600 406,995 $0.86
Additional reserved............ 60,000 -- -- -- --
Granted........................ (154,700) 154,700 $1.00 154,700 $1.00
Canceled....................... 72,869 (72,869) $0.45-$1.00 (66,023) $0.91
Exercised...................... -- (97,531) $0.25-$1.10 (99,127) $1.02
-------- -------- ---------
Balances at December 31, 1999.... 92,561 455,900 $ 396,545 $0.87
======== ======== =========
Options vested at December 31, 1998 and 1999 were 39,678 and 130,721,
respectively.
F-17
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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)
$0.25 5,000 7.02 3,646 $0.25
$0.45 101,100 7.97 54,665 $0.45
$1.00 349,800 9.05 72,410 $1.00
------- -------
455,900 8.79 130,721 $0.75
======= =======
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.
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 for the year ended December 31, 1999. 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 Stock Option Plan; and a dividend yield of zero.
F-18
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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..................................... $ (1.46) $ (2.30) $ (2.93)
Pro forma....................................... (1.46) (2.43) (3.17)
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-19
KOSAN BIOSCIENCES INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS
SERIES C FINANCING
In March 2000, the Company issued 804,196 shares of Series C preferred stock
at a purchase price of $31.00 per share for gross proceeds of $24.9 million. The
Company will reflect a deemed dividend of approximately $13.7 million in the
first quarter of fiscal year 2000 in relation to the Series C financing.
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 preferred stock
outstanding will automatically convert into 4,073,573 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.
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 100,000 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 50,000 shares, 0.75% of the outstanding
shares on the date of the annual increase or such amount as may be determined by
the board. The Purchase plan permits eligible employees to purchase common stock
at a discount through payroll deductions during defined offering periods. The
price at which the stock is purchased is equal to the lower of 85% of the fair
market value of the common stock on the first day of the offering or 85% of the
fair market value of the Company's common stock on the purchase date. The
initial offering period will commence on the effective date of the offering.
2000 NON-EMPLOYEE DIRECTORS PLAN
In March 2000, subject to stockholder approval, the Company adopted the 2000
Non-Employee Directors' Stock Option Plan and reserved 100,000 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 2,500 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 1,250 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-20
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 A 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.
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.
TABLE OF CONTENTS
Prospectus Summary.................... 2
Risk Factors.......................... 5
Forward-Looking Statements............ 15
Use of Proceeds....................... 15
Dividend Policy....................... 16
Dilution.............................. 16
Capitalization........................ 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 23
Management............................ 33
Related Party Transactions............ 44
Principal Stockholders................ 46
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 50
Underwriting.......................... 52
Legal Matters......................... 54
Change in Independent Accountants..... 54
Experts............................... 54
Where you can find more information... 54
Index to Financial Statements......... F-1
PRELIMINARY PROSPECTUS
Shares
[LOGO]
COMMON STOCK
Warburg Dillon Read LLC
CIBC World Markets
Prudential Vector Healthcare
a unit of Prudential Securities
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
AMOUNT
TO BE
PAID
----------
SEC Registration Fee........................................ 21,120
NASD Fee.................................................... 8,500
Nasdaq Listing Fee.......................................... *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Blue Sky Fees and Expenses.................................. *
Transfer Agent Fees......................................... *
Printing Fees and Expenses.................................. *
Miscellaneous............................................... *
Total..................................................... $
- ------------------------
* 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
II-1
services as directors or executive officers of the registrant or as directors or
officers of any other 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
Amended and Restated Articles of Incorporation of
Registrant................................................ 3.1
Form of Certificate of Incorporation of Registrant, to be
filed upon closing of the offering........................ 3.2
Bylaws of Registrant, to be filed 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
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 1997 or as otherwise indicated, the Registrant has issued and
sold the following securities:
From June 1996 to March 2000 we sold an aggregate of 701,439 shares of
unregistered common stock to 43 directors, officers, employees, former employees
and consultants at prices ranging from $0.25 to $1.10 per share, for aggregate
consideration of approximately $677,000. These shares were sold pursuant to the
exercise of options granted by the board of directors. 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
II-2
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 in the aggregate
1,818,182 shares of unregistered Series B 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 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles 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 to be filed 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.
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 Form of Stock Option Agreement under the 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.
10.8+ License Agreement between the Registrant and The Board of
Trustees of The Leland Stanford Junior University, dated
March 11, 1996; Letter to Mona Wan to confirm the agreement
between Registrant and the Board of Trustees of the Leland
Stanford Junior University, dated September 21, 1998; and
Amendment No. 3 to License Agreement, dated March 20, 2000.
II-3
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.9+ Amendment No. 1 to License Agreement with the Board of
Trustees of The Leland Stanford Junior University, dated
March 1996.
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 25, 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.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
II-4
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
24.1 Power of Attorney (See page II-6).
27.1 Financial Data Schedule.
- ------------------------
* To be filed by amendment
+ 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.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions referenced in Item 14 of this registration Statement
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Act shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement 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 30th day of March 2000.
KOSAN BIOSCIENCES, INC.
By: /s/ DANIEL V. SANTI
--------------------------------------------
Daniel V. Santi
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE
BOARD OF DIRECTORS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints, jointly and severally, Daniel V. Santi and
Michael S. Ostrach and each one of them, his true and lawful attorney-in-fact
and agents, each with full power of substitution, for his and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and any registration
statement related to the offering contemplated by this registration statement
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933 and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as she might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done or by virtue
hereof.
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
/s/ DANIEL V. SANTI Chairman of the Board of
------------------------------------------- Directors (Principal March 30, 2000
Daniel V. Santi Executive Officer)
Vice President, Finance and
/s/ SUSAN M. KANAYA Chief Financial Officer
------------------------------------------- (Principal Financial and March 30, 2000
Susan M. Kanaya Accounting Officer)
------------------------------------------- Director March , 2000
Peter Davis
II-6
SIGNATURES TITLE DATE
---------- ----- ----
------------------------------------------- Director March , 2000
Jean Deleage
/s/ CHAITAN KHOSLA
------------------------------------------- Director March 30, 2000
Chaitan Khosla
/s/ CHRISTOPHER WALSH
------------------------------------------- Director March 30, 2000
Christopher Walsh
/s/ RAYMOND WHITAKER
------------------------------------------- Director March 30, 2000
Raymond Whitaker
II-7
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles 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 to be filed 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.
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.
10.8+ 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 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.
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 (See page II-6).
27.1 Financial Data Schedule.
- ------------------------
* To be filed by amendment
+ 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.