<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2000
REGISTRATION NO. 333-92853
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
DIVERSA CORPORATION
(NAME OF ISSUER IN ITS CHARTER)
<TABLE>
<CAPTION>
DELAWARE 8731 22-3297375
<S> <C> <C>
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
10665 SORRENTO VALLEY ROAD
SAN DIEGO, CA 92121
(858) 623-5106
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JAY M. SHORT, PH.D.
CHIEF EXECUTIVE OFFICER
DIVERSA CORPORATION
10665 SORRENTO VALLEY ROAD
SAN DIEGO, CA 92121
(858) 623-5106
(NAME, ADDRESS, TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
M. WAINWRIGHT FISHBURN, JR., ESQ. FAYE H. RUSSELL, ESQ.
NANCY DENYES KRUEGER, ESQ. MARIA P. SENDRA, ESQ.
DAVID B. BERGER, ESQ. BROBECK, PHLEGER & HARRISON LLP
COOLEY GODWARD LLP 550 WEST "C" STREET
4365 EXECUTIVE DRIVE, SUITE 1100 SAN DIEGO, CALIFORNIA 92101
SAN DIEGO, CALIFORNIA 92121 (619) 234-1966
(858) 550-6000
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
---------------
If any of the securities being registered on this Form are being 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, please 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,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY +
+THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 2000
PRELIMINARY PROSPECTUS
7,000,000 SHARES
[LOGO OF DIVERSA]
COMMON STOCK
-----------
This is an initial public offering of 7,000,000 shares of common stock of
Diversa Corporation. We are selling all of the shares of common stock offered
under this prospectus.
We expect the public offering price for our common stock to be between $20.00
and $22.00 per share. There is currently no public market for our common stock.
We have applied to have our common stock approved for listing on the Nasdaq
National Market under the symbol "DVSA."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-----------
<TABLE>
<CAPTION>
Per
Share Total
-------- --------
<S> <C> <C>
Public offering price........................................ $ $
Underwriting discounts and commissions....................... $ $
Proceeds to Diversa.......................................... $ $
</TABLE>
-----------
We have granted the underwriters a 30-day option to purchase up to an
additional 1,050,000 shares of common stock from us at the initial public
offering price less the underwriting discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares in New York, New York, on
, 2000.
-----------
BEAR, STEARNS & CO. INC.
CHASE H&Q
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus is , 2000
<PAGE>
[GATEFOLD COVER]
[Gatefold Cover: A diagram entitled "Diversa: Innovation from BioDiversity and
Gene Evolution" depicting alternative ecosystems, progressing to multiple
images depicting the discovery, development and manufacture of novel enzymes
and other biologically active compounds through our proprietary processes and
technologies, which then leads to photographs representing our four target
markets.
[Inside Front Cover: Heading reading "Diversa Corporation discovers and
develops novel enzymes and other biologically active compounds from diverse
environmental sources for use in agricultural, chemical processing, industrial
and pharmaceutical applications. We have commercialized our first product for
the industrial market and have multiple projects in various stages of
development in our target markets," followed by a diagram representing our
discovery and evolution processes and technologies, which then leads to
photographs representing our four target markets.
<PAGE>
PROSPECTUS SUMMARY
DIVERSA CORPORATION
You should read the following summary together with the more detailed
information regarding our company and our common stock being sold in this
offering and our financial statements and the notes to our financial statements
appearing elsewhere in this prospectus before making an investment decision.
You should also carefully consider the information discussed in "Risk Factors."
OUR BUSINESS AND TECHNOLOGIES
We believe that we are a global leader in discovering and developing novel
enzymes and other biologically active compounds from diverse environmental
sources for use in agricultural, chemical processing, industrial and
pharmaceutical applications. Enzymes are proteins that catalyze, or facilitate,
one or more chemical reactions. Our processes significantly speed the discovery
and development of such commercially valuable new enzymes and biologically
active small molecules. For example, we launched our first product for an
industrial application within two years of project initiation. Our processes
are designed to help our strategic partners and customers reduce cost, reduce
waste, improve yield and enhance the quality of end products and manufacturing.
We believe that the integration of our capabilities differentiates us from our
competitors. We accomplish this integration utilizing our proprietary methods
in the following manner:
. We collect genetic material from organisms that have not previously been
cultured in the laboratory found in diverse natural environments;
. We isolate, catalog and store genes and gene pathways, or groups of
genes that produce enzymes that act together to synthesize a molecule,
in vast DNA libraries;
. We screen these libraries to analyze more than a billion genes per day
to identify potentially useful enzymes and compounds;
. We optimize these enzymes and compounds by applying our
DirectEvolution(R) genetic modification technologies, including our Gene
Site Saturation Mutagenesis(TM) and GeneReassembly(TM) technologies; and
. We develop novel host organisms for the manufacture of resulting
products.
We believe our ability to construct vast libraries from DNA samples
collected from organisms in diverse environments is an important factor of our
success. Our use of minute DNA samples results in minimal impact to the
surrounding environment and has enabled us to enter into numerous formal
genetic resource access agreements. We estimate that our environmental gene
libraries currently contain the complete genomes of over 1 million unique
microorganisms.
Our ultra high-throughput screening technologies, such as SingleCell(TM)
screening, and our enrichment technologies, such as biopanning, allow for the
rapid discovery and identification of genes with desired biological activity or
specific DNA sequences. Our DirectEvolution technologies, Gene Site Saturation
Mutagenesis and GeneReassembly, enable us to modify the DNA sequences of genes
in order to optimize new genes for commercial applications. We use our Gene
Site Saturation Mutagenesis technology to create a family of related genes that
all differ from a parent gene by a single amino acid change at each defined
position. We use our GeneReassembly technologies for the reassembly of related
genes from two or more different species to create a large population of new
gene variants. The new genes created through these technologies can then be
screened for one or more desired characteristics.
We intend to commercialize products discovered or developed utilizing our
technologies, both independently and in collaboration with strategic partners.
We have successfully commercialized our first product and we have 42 other
projects with multiple production applications in various stages of
development.
1
<PAGE>
Our strategic partners are market leaders across multiple industries and
include Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc.,
The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and Finnfeeds
International Limited. These partners typically fund research costs and provide
various types of payments, which may include exclusivity payments, technology
access and development payments, milestone payments, license and
commercialization fees and royalties. In addition to $10.7 million received
from inception through December 31, 1999, our partners are committed to fund at
least $68.0 million under existing agreements over the next five years. Our
partners have also invested $9.2 million in our equity securities.
OUR TARGET MARKETS AND PRODUCTS
We are developing enzymes and other biologically active compounds for a
number of industries, including agricultural, chemical processing, industrial
and pharmaceutical applications. Our target markets provide both short-term and
long-term product revenue opportunities. Within these broad markets we are
targeting billion dollar key market segments where we believe our technologies
and products will create high value and competitive advantages for our
strategic partners and our customers. We are identifying and producing enzymes
that exhibit dramatic increases in activity, efficiency and stability. Examples
of our product applications include the following:
. In agriculture, we are developing a variety of specialty enzymes and
engineered genes to improve crop protection, crop yield and nutritional
value, as well as to reduce harmful environmental waste.
. In chemical processing, we are developing a variety of enzymes to create
manufacturing efficiencies, reduce production costs and accelerate
generation of new chemical products and processes.
. For industrial applications, we successfully commercialized a heat-
tolerant enzyme useful for oil and gas recovery and are developing
numerous products related to enzymatic processes for detergent, corn
processing, textile, pulp and paper processing and fats and oils
applications.
. In pharmaceuticals, we are working to discover small molecule compounds
as candidates for anti-microbials, anti-fungals, anti-virals and other
therapeutic drugs.
OUR STRATEGY
Our goal is to be the leading provider of novel enzymes and biologically
active compounds for use in unique, economically attractive applications. The
key elements of our strategy are to:
. Protect and enhance our technology leadership position;
. Expand our existing DNA libraries through access to novel genetic
material and utilize our proprietary technologies to discover new genes
and gene pathways to provide solutions to market needs;
. Deploy our technologies across diverse markets in order to maximize our
return on investment;
. Pursue additional strategic alliances with market leaders to access
funding and industry-specific expertise and to more efficiently develop
and commercialize a larger product portfolio; and
. Independently develop and commercialize products in selected markets to
capture their full economic value.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Diversa................. 7,000,000 shares
Common stock to be outstanding after the
offering....................................... 32,811,401 shares
Use of proceeds................................. We intend to use the net proceeds from
this offering for research and
development, capital expenditures,
working capital, general corporate
purposes and possible future
acquisitions.
Proposed Nasdaq National Market symbol.......... DVSA
</TABLE>
The share amounts in this table are based on shares outstanding as of December
31, 1999. This table excludes:
. 5,492,798 shares of our common stock reserved for issuance under our
stock option plans of which 3,125,000 shares are subject to outstanding
options with a weighted average exercise price of $1.73 per share and
13,937 shares of common stock issuable upon exercise of an outstanding
option granted outside our stock option plans with an exercise price of
$0.03 per share;
. 277,719 shares available for issuance under our Non-Employee Directors'
Stock Option Plan;
. 416,579 shares available for issuance under our 1999 Employee Stock
Purchase Plan; and
. 364,120 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $1.44 per share.
Except as otherwise indicated, information in this prospectus is based on the
following assumptions:
. the conversion of all outstanding shares of our preferred stock into
22,834,011 shares of common stock upon the closing of this offering;
. the issuance of an estimated 32,000 shares of common stock to be issued
at the closing of this offering to holders of our series A, B and D
preferred stock as payment of a dividend that began to accrue on
December 21, 1999;
. a 1-for-2.8806 reverse-split in our common stock that was effected on
February 8, 2000; and
. no exercise of the underwriters' over-allotment option to purchase up to
1,050,000 shares.
DIVERSA, Gene Site Saturation Mutagenesis, GSSM, Pyrolase, GeneReassembly,
DiverseLibraries, PathwayLibraries, DirectEvolution(R), SingleCell and SciLect
are trademarks of Diversa Corporation. This prospectus also refers to trade
names and trademarks of other organizations.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following financial information should be read together with the
"Selected Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................. $ 25 $ 706 $ 1,155 $ 1,347 $10,272
Total operating expenses...... 8,857 12,125 13,455 15,201 19,506
Operating loss................ (8,832) (11,419) (12,300) (13,854) (9,234)
Net loss...................... (8,904) (11,646) (12,392) (13,510) (9,019)
Net loss applicable to common
stockholders................. $(8,904) $(11,646) $(12,392) $(13,510) $(9,085)
======= ======== ======== ======== =======
Historical net loss per share,
basic and diluted............ $ (7.37) $ (7.68) $ (7.72) $ (7.64) $ (3.86)
======= ======== ======== ======== =======
Historical weighted average
shares outstanding........... 1,208 1,517 1,606 1,768 2,353
Pro forma net loss per share.. $ (0.36)
=======
Pro forma weighted average
shares outstanding........... 25,187
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term
investments................................... $ 5,084 $ 5,084 $140,594
Working capital................................ 13,902 13,902 149,412
Total assets................................... 31,072 31,072 167,412
Capital lease obligations, less current
portion....................................... 2,677 2,677 2,677
Redeemable convertible preferred stock......... 48,402 -- --
Stockholders' equity (deficit)................. (42,813) 5,589 141,099
</TABLE>
Pro forma net loss per share assumes all our preferred stock had been
converted into common stock on the date of original issuance. See our financial
statements for a more detailed description.
Pro forma balance sheet data assumes the conversion of all our outstanding
preferred stock into common stock in conjunction with the closing of this
offering.
The pro forma as adjusted balance sheet data above reflect the sale of
7,000,000 shares of our common stock in this offering at an assumed initial
public offering price of $21.00 per share after deducting estimated
underwriting discounts and commissions and estimated expenses of this offering,
the conversion of all outstanding preferred stock into common stock and the
issuance of an estimated 32,000 shares of common stock to be issued at the
closing of this offering to holders of our series A, B and D preferred stock as
payment of a dividend that began to accrue on December 21, 1999. See "Use of
Proceeds" and "Capitalization" for a discussion about how we intend to use the
proceeds from this offering and about our capitalization.
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently consider immaterial may also impair our
operations. If any of the following risks actually occurs, our business could
be harmed. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
WE HAVE A HISTORY OF NET LOSSES, WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses since our inception, including a net loss of
approximately $11.8 million for the year ended December 31, 1998 and
approximately $10.5 million for the year ended December 31, 1999. As of
December 31, 1999, we had an accumulated deficit of approximately $56.4
million. We expect to incur additional losses for at least the next several
years. The extent of our future losses will depend, in part, on the rate of
growth, if any, in our contract revenue and on the level of our expenses. To
date, substantially all of our revenue has been derived from strategic
alliances and grants, and we expect that substantially all of our revenue for
the foreseeable future will result from payments from strategic alliances.
Future revenue from strategic alliances are uncertain because our ability to
generate revenue will depend upon our ability to enter into new strategic
alliances and to meet research, development and commercialization objectives
under new and existing agreements. We expect to spend significant amounts to
fund research and development and enhance our core technologies. As a result,
we expect that our operating expenses will increase significantly in the near
term, and, consequently, we will need to generate significant additional
revenue to achieve profitability. In order for us to generate revenue, we must
not only retain our existing strategic partners and attract new ones, but also
develop products or technologies that our partners choose to commercialize and
from which we can derive revenue through royalties. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
BECAUSE WE ARE AN EARLY STAGE COMPANY DEVELOPING AND DEPLOYING NEW
TECHNOLOGIES, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR TECHNOLOGIES OR PRODUCTS,
WHICH COULD CAUSE US TO BE UNPROFITABLE OR CEASE OPERATIONS.
You must evaluate our business in light of the uncertainties and
complexities affecting an early stage biotechnology company. Our existing
proprietary technologies are new and in the early stage of development. We may
not be successful in the commercial development of these or any further
technologies or products. Successful products require significant development
and investment, including testing, to demonstrate their cost-effectiveness
prior to regulatory approval and commercialization. To date, we have
commercialized only one product, Pyrolase 160, and none of our strategic
partners have yet incorporated our technologies or inventions into their own
commercial products from which we can generate royalties. Because of these
uncertainties, our discovery process may not result in the identification of
product candidates that we or our strategic partners will commercialize. If we
are not able to use our technologies to discover new materials or products with
significant commercial potential, we will not be able to achieve our objectives
or build a sustainable or profitable business.
WE ARE DEPENDENT ON OUR STRATEGIC PARTNERS, AND OUR FAILURE TO SUCCESSFULLY
MANAGE OUR EXISTING AND FUTURE STRATEGIC ALLIANCE RELATIONSHIPS COULD PREVENT
US FROM DEVELOPING AND COMMERCIALIZING MANY OF OUR PRODUCTS AND ACHIEVING OR
SUSTAINING PROFITABILITY.
We currently have strategic alliance agreements with Novartis Seeds AG,
Novartis Agribusiness Biotechnology Research, Inc. and The Dow Chemical
Company, from which we expect to derive significant future revenue. Since we do
not currently possess the resources necessary to independently develop and
commercialize all of the potential products that may result from our
technologies, we expect to continue to
5
<PAGE>
enter into, and in the near-term derive additional revenue from, strategic
alliance agreements to develop and commercialize products. We will have limited
or no control over the resources that any strategic partner may devote to our
products. Any of our present or future strategic partners may not perform their
obligations as expected. These strategic partners may breach or terminate their
agreements with us or otherwise fail to conduct their collaborative activities
successfully and in a timely manner. Further, our strategic partners may not
develop products arising out of our collaborative arrangements or devote
sufficient resources to the development, manufacture, marketing or sale of
these products. If we fail to enter into or maintain strategic alliance
agreements, or if any of these events occur, we may not be able to
commercialize our products, grow our business or generate sufficient revenue to
support our operations. Our present or future strategic alliance opportunities
could be harmed if:
. We do not achieve our research and development objectives under our
strategic alliance agreements;
. We develop products and processes or enter into additional strategic
alliances that could conflict with the business objectives of our
strategic partners;
. We disagree with our strategic partners as to rights to intellectual
property we develop;
. We are unable to manage multiple simultaneous strategic alliances;
. Our strategic partners become competitors of ours or enter into
agreements with our competitors;
. Consolidation in our target markets limits the number of potential
strategic partners; or
. We are unable to negotiate additional agreements having terms
satisfactory to us.
WE DO NOT HAVE THE CAPACITY TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE. IF
WE ARE UNABLE TO ACCESS THE CAPACITY TO MANUFACTURE PRODUCTS IN SUFFICIENT
QUANTITY, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS OR GENERATE
SIGNIFICANT SALES.
We have only limited experience in enzyme manufacturing and we do not have
our own capacity to manufacture products on a commercial scale. We expect to be
dependent to a significant extent on third parties for commercial scale
manufacturing of our products. We have arrangements with a third party that has
the required manufacturing equipment and available capacity to manufacture
Pyrolase 160 under our direction and oversight. We also currently lease a pilot
facility for process development activities from a third party, which we intend
to vacate by March 2000. We plan to construct our own pilot development
facility during 2000 and have identified alternative capacity to meet interim
requirements. In addition to requiring investment in equipment, construction of
this new facility will necessitate compliance with applicable regulations.
After we complete the construction of our pilot facility, we will continue to
depend on third parties for large-scale commercial manufacturing. If we fail to
complete the construction of our pilot facility on time or at all, it could
interrupt our research and product development programs and harm our
relationships with strategic partners. Any difficulties or interruptions of
service with our third party manufacturers or our own planned pilot
manufacturing facility could disrupt our research and development efforts,
delay our commercialization of products and harm our relationships with our
strategic partners or customers.
WE HAVE ONLY LIMITED EXPERIENCE IN INDEPENDENTLY DEVELOPING, MANUFACTURING,
MARKETING, SELLING AND DISTRIBUTING COMMERCIAL PRODUCTS.
We intend to pursue some product opportunities independently. We currently
have only limited resources and capability to develop, manufacture, market,
sell or distribute products on a commercial scale. We will determine which
products to pursue independently based on various criteria, including:
investment required, estimated time to market, regulatory hurdles,
infrastructure requirements and industry-specific expertise necessary for
successful commercialization. At any time, we may modify our strategy and
pursue alliances for the development and commercialization of some products. We
may pursue products that ultimately require more resources than we anticipate
or which may be technically unsuccessful. In order for us to commercialize
these products directly, we would need to establish or obtain through
outsourcing arrangements the capability to develop, manufacture, market, sell
and distribute products. If we are unable to successfully commercialize
6
<PAGE>
products resulting from our internal product development efforts, we will
continue to incur losses. Even if we successfully develop a commercial product,
we may not generate significant sales and achieve profitability.
ETHICAL, LEGAL AND SOCIAL CONCERNS ABOUT GENETICALLY ENGINEERED PRODUCTS COULD
LIMIT OR PREVENT THE USE OF OUR PRODUCTS AND TECHNOLOGIES AND LIMIT OUR
REVENUE.
Some of our products are genetically engineered. If we are not able to
overcome the ethical, legal and social concerns relating to genetic
engineering, our products may not be accepted. Any of the risks discussed below
could result in expenses, delays or other impediments to our programs or the
public acceptance and commercialization of products dependent on our
technologies or inventions. Our ability to develop and commercialize one or
more of our technologies and products could be limited by the following
factors:
. Public attitudes about the safety and environmental hazards of, and
ethical concerns over, genetic research and genetically engineered
products, which could influence public acceptance of our technologies
and products;
. Public attitude regarding, and potential changes to laws governing,
ownership of genetic material which could harm our intellectual property
rights with respect to our genetic material and discourage strategic
partners from supporting, developing or commercializing our products and
technologies; and
. Governmental reaction to negative publicity concerning genetically
modified organisms, which could result in greater government regulation
of genetic research and derivative products, including labeling
requirements.
The subject of genetically modified organisms has received negative
publicity, which has aroused public debate. The adverse publicity could lead to
greater regulation and trade restrictions on imports of genetically altered
products.
IF WE ARE UNABLE TO CONTINUE TO COLLECT GENETIC MATERIAL FROM DIVERSE NATURAL
ENVIRONMENTS, OUR RESEARCH AND DEVELOPMENT EFFORTS AND OUR PRODUCT DEVELOPMENT
PROGRAMS COULD BE HARMED.
We collect genetic material from organisms found in diverse environments. We
collect material from government-owned land in foreign countries and in areas
of the United States under formal resource access agreements, and from private
lands under individual agreements with private land owners. If our access to
materials under access agreements or other arrangements terminates, it could
harm our internal and our collaborative research and development efforts. We
also collect samples from other environments where agreements are currently not
required, such as the deep sea. All of our agreements with foreign countries
expire in 2002 or earlier, and they are all subject to earlier termination. Our
access agreement with Iceland was terminated, and we have voluntarily ceased
collections of further samples in Yellowstone National Park pending their
resolution of collection guidelines.
OUR ABILITY TO COMPETE IN THE MARKET MAY DECLINE IF WE DO NOT ADEQUATELY
PROTECT OUR PROPRIETARY TECHNOLOGIES OR IF WE LOSE SOME OF OUR INTELLECTUAL
PROPERTY RIGHTS DUE TO BECOMING INVOLVED IN EXPENSIVE LAWSUITS OR
ADMINISTRATIVE PROCEEDINGS.
Our intellectual property consists of patents, copyrights, trade secrets,
know-how and trademarks. As of January 15, 2000, we owned 24 issued patents
relating to our technologies, had received notices of allowance with respect to
7 other patent applications and have over 125 patents pending. In addition, as
of January 15, 2000, we had in-licensed more than 25 additional patents or
patent applications that we believe strengthen our patent portfolio. Our
success depends in part on our ability to obtain patents and maintain adequate
protection of our other intellectual property for our technologies and products
in the United States and other countries. The laws of some foreign countries do
not protect proprietary rights to the same extent as the laws of the United
States, and many companies have encountered significant problems in protecting
their proprietary rights
7
<PAGE>
in these foreign countries. These problems can be caused by, for example, a
lack of rules and methods for defending intellectual property rights.
Our commercial success depends on neither infringing patents and proprietary
rights of third parties, nor breaching any licenses or other agreements that we
have entered into with regard to our technologies, products and business. The
patent positions of biotechnology companies, including our patent position,
involve complex legal and factual questions and, therefore, enforceability
cannot be predicted with certainty. We will apply for patents covering both our
technologies and products as we deem appropriate. Patents, if issued, may be
challenged, invalidated or circumvented. We cannot be sure that relevant
patents have not been issued that could block our ability to obtain patents or
to operate as we would like. Others may develop similar technologies or
duplicate technologies developed by us. We are aware of the existence of
patents in some countries that, if valid, may block our ability to
commercialize products in these countries if we are unsuccessful in
circumventing or acquiring the rights to these patents. We are also aware of
the existence of claims in published patent applications in some countries
that, if granted and valid, may also block our ability to commercialize
products in these countries if we are unable to circumvent or license them.
We are not currently a party to any litigation with regard to our patent
position. However, the biotechnology industry is characterized by extensive
litigation regarding patents and other intellectual property rights. Many
biotechnology companies have employed intellectual property litigation as a way
to gain a competitive advantage. If we became involved in litigation or
interference proceedings declared by the United States Patent and Trademark
Office, or oppositions or other intellectual property proceedings outside of
the United States, to defend our intellectual property rights or as a result of
alleged infringement of the rights of others, we might have to spend
significant amounts of money. We are aware of a significant number of patents
and patent applications relating to aspects of our technologies filed by, and
issued to, third parties. Should any of our competitors have filed patent
applications or obtained patents that claim inventions also claimed by us, we
may have to participate in an interference proceeding declared by the relevant
patent regulatory agency to determine priority of invention and, thus, the
right to a patent for these inventions in the United States. Such a proceeding
could result in substantial cost to us even if the outcome is favorable. Even
if successful on priority grounds, an interference may result in loss of claims
based on patentability grounds raised in the interference. The litigation or
proceedings could divert our management time and efforts. Even unsuccessful
claims could result in significant legal fees and other expenses, diversion of
management time and disruption in our business. Uncertainties resulting from
initiation and continuation of any patent or related litigation could harm our
ability to compete.
An adverse ruling arising out of any intellectual property dispute,
including an adverse decision as to the priority of our inventions, would
undercut or invalidate our intellectual property position. An adverse ruling
could also subject us to significant liability for damages, prevent us from
using processes or products, or require us to negotiate licenses to disputed
rights from third parties. 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, necessary licenses may not be
available to us on satisfactory terms, if at all.
We recently received a letter from a privately held biotechnology company
suggesting that we may want to consider licensing patents held by that third
party. We believe that we have defenses to any infringement claim with respect
to such patents. However, we cannot be certain that the third party will not
initiate litigation alleging that our technologies infringe claims of such
patent or that a court would not find such claims valid and infringed.
8
<PAGE>
WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH, WHICH COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
Our strategy includes entering into and working on simultaneous projects
across multiple industries. We increased the number of our employees from 74 at
December 31, 1998 to 102 at December 31, 1999 and expect to significantly
increase our rate of growth to meet our strategic objectives. If our growth
continues, it will continue to place a strain on us. Our ability to effectively
manage our operations, growth, and various projects requires us to continue to
improve our operational, financial and management controls, reporting systems
and procedures and to attract and retain sufficient numbers of talented
employees. We may not be able to successfully implement improvements to our
management information and control systems in an efficient or timely manner. In
addition, we may discover deficiencies in existing systems and controls.
CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT
DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION.
In order to protect our proprietary technology and processes, we also rely
in part on trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our trade secrets and
proprietary information. These measures may not provide adequate protection for
our trade secrets or other proprietary information. Our policy is to execute
confidentiality agreements with our employees and consultants upon the
commencement of an employment or consulting arrangement with us. These
agreements generally require that all confidential information developed by the
individual or made known to the individual by us during the course of the
individual's relationship with us be kept confidential and not disclosed to
third parties. These agreements also generally provide that inventions
conceived by the individual in the course of rendering services to us shall be
our exclusive property. 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. Costly
and time-consuming litigation could be necessary to enforce and determine the
scope of our proprietary rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business position.
MANY POTENTIAL COMPETITORS WHO HAVE GREATER RESOURCES AND EXPERIENCE THAN WE DO
MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE.
The biotechnology industry is characterized by rapid technological change,
and the area of gene research is a rapidly evolving field. Our future success
will depend on our ability to maintain a competitive position with respect to
technological advances. Rapid technological development by others may result in
our products and technologies becoming obsolete.
We face, and will continue to face, intense competition. We are not aware of
another company that has the scope and integration of technologies and
processes that we have. There are, however, a number of companies who compete
with us in various steps throughout our technology process. For example,
Terragen Discovery is involved in accessing organisms from diverse environments
for pharmaceutical applications. A number of companies are performing high-
throughput screening of molecules. Maxygen, Inc. and Evotech have alternative
evolution technologies. Integrated Genomics, Inc., Myriad Genetics, Inc.,
ArQule, Inc. and Aurora Biosciences Corporation perform screening, sequencing
and/or bioinformatics services. Novo Nordisk and Genencor International, Inc.
are involved in the development, overexpression, fermentation and purification
of enzymes. There are also a number of academic institutions involved in
various phases of our technology process. Many of these competitors have
significantly greater financial and human resources than we do. These
organizations may develop technologies that are superior alternatives to our
technologies. Further, our competitors may be more effective at implementing
their technologies for modifying DNA to develop commercial products.
9
<PAGE>
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Any products that we develop will compete
in highly competitive markets. Many of our potential competitors in these
markets have substantially greater financial, technical and marketing resources
than we do, and we cannot assure you that they will not succeed in developing
products that would render our products or those of our strategic partners
obsolete or noncompetitive. In addition, many of these competitors have
significantly greater experience than we do in their respective fields. Our
ability to compete successfully will depend on our ability to develop
proprietary products that reach the market in a timely manner and are
technologically superior to and/or are less expensive than other products on
the market. Current competitors or other companies may develop technologies and
products that are more effective than ours. Our technologies and products may
be rendered obsolete or uneconomical by technological advances or entirely
different approaches developed by one or more of our competitors. The existing
approaches of our competitors or new approaches or technology developed by our
competitors may be more effective than those developed by us.
STRINGENT LAWS AND REQUIRED GOVERNMENT APPROVALS COULD DELAY OUR INTRODUCTION
OF PRODUCTS.
All phases, especially the field testing, production and marketing, of our
potential products are subject to significant federal, state, local and/or
foreign governmental regulation. Regulatory agencies may not allow us to
produce and/or market our products in a timely manner or under technically or
commercially feasible conditions, or at all, which could harm our business.
In the United States, products for our target markets are regulated based on
their application, by either the FDA, the Environmental Protection Agency, or
EPA, or, in the case of plants and animals, the United States Department of
Agriculture, or USDA. The FDA regulates drugs, food and feed, as well as food
additives, feed additives and substances generally recognized as safe that are
used in the processing of food or feed. While substantially all of our projects
to date have focused on non-human applications of our technologies and products
outside of the FDA's review, in the future we may pursue strategic alliances
for further research and development of drug products for humans that would
require FDA approval before they could be marketed in the United States. In
addition, any drug product candidates must also be approved by the regulatory
agencies of foreign governments before any product can be sold in those
countries. Under current FDA policy, our products, or products of our strategic
partners incorporating our technologies or inventions, to the extent that they
come within the FDA's jurisdiction, may be subject to lengthy FDA reviews and
unfavorable FDA determinations if they raise safety questions which cannot be
satisfactorily answered, if results from pre-clinical or clinical trials do not
meet regulatory requirements or if they are deemed to be food additives whose
safety cannot be demonstrated. An unfavorable FDA ruling could be difficult to
resolve and could prevent a product from being commercialized. Even after
investing significant time and expenditures, we may not obtain regulatory
approval for any drug products. We have not submitted an investigational new
drug application for any product candidate, and no drug product candidate
developed with our technologies has been approved for commercialization in the
United States or elsewhere. The EPA regulates biologically derived chemical
substances not within the FDA's jurisdiction. An unfavorable EPA ruling could
delay commercialization or require modification of the production process
resulting in higher manufacturing costs, thereby making the product
uneconomical. In addition, the USDA may prohibit genetically engineered plants
from being grown and transported except under an exemption, or under controls
so burdensome that commercialization becomes impracticable. Our future products
may not be exempted by the USDA.
The European regulatory process for these classes of biologically derived
products has been in a state of flux in the recent past, as the EU attempts to
replace country by country regulatory procedures with a consistent EU
regulatory standard in each case. Some country-by-country regulatory oversight
remains. Other than Japan, most other regions of the world generally find
adequate either a United States or a European clearance together with
associated data and information for a new biologically derived product.
10
<PAGE>
IF WE REQUIRE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, WE MAY NEED TO ENTER
INTO FINANCING ARRANGEMENTS WITH UNFAVORABLE TERMS OR WHICH COULD ADVERSELY
AFFECT YOUR OWNERSHIP INTEREST AND RIGHTS AS COMPARED TO OUR OTHER
STOCKHOLDERS. IF SUCH FINANCING IS NOT AVAILABLE, WE MAY NEED TO CEASE
OPERATIONS.
We currently anticipate that our available cash resources and receivables,
committed funding from strategic partners and the net proceeds from this
offering will be sufficient to meet our capital requirements for at least the
next two years. However, our capital requirements depend on several factors,
including:
. The level of research and development investment required to maintain
our technology leadership position;
. Our ability to enter into new agreements with strategic partners or to
extend the terms of our existing collaborative agreements, and the terms
of any agreement of this type;
. The success rate of our discovery efforts associated with milestones and
royalties;
. Our ability to successfully commercialize products developed
independently and the demand for such products;
. The timing and willingness of strategic partners to commercialize our
products that would result in royalties;
. Costs of recruiting and retaining qualified personnel; and
. Our need to acquire or license complementary technologies or acquire
complementary businesses.
If additional capital is required to operate our business, we cannot assure
you that additional financing will be available on terms favorable to us, or at
all. If adequate funds are not available or are not available on acceptable
terms, our ability to fund our operations, take advantage of opportunities,
develop products or technologies or otherwise respond to competitive pressures
could be significantly limited. In addition, if financing is not available, we
may need to cease operations.
If we raise additional funds through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution or such equity securities may provide for
rights, preferences or privileges senior to those of the holders of our common
stock. If we raise additional funds through the issuance of debt securities,
such debt securities would have rights, preferences and privileges senior to
holders of common stock and the terms of such debt could impose restrictions on
our operations.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING 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. For example, our revenue for the year ended
December 31, 1999 was $10.3 million, as compared to $1.3 million for the same
period in 1998. This increase was primarily due to revenue from new strategic
alliances. Revenue in future periods may be greater or less than revenue in the
immediately preceding period or in the comparable period of the prior year.
Some of the factors that could cause our operating results to fluctuate
include:
. Termination of strategic alliances;
. The success rate of our discovery efforts associated with milestones and
royalties;
. The ability and willingness of strategic partners to commercialize
royalty-bearing products on expected timelines;
. Our ability to enter into new agreements with strategic partners or to
extend the terms of our existing strategic alliance agreements, and the
terms of any agreement of this type;
. Our ability to successfully satisfy all pertinent regulatory
requirements;
11
<PAGE>
. Our ability to successfully commercialize products developed
independently and the demand for such products; and
. General and industry specific economic conditions, which may affect our
strategic partners' research and development expenditures.
If revenue declines or does not grow as anticipated due to the expiration of
strategic alliance agreements, failure to obtain new agreements or grants,
lower than expected royalty payments or other factors, we may not be able to
correspondingly reduce our operating expenses. A large portion of our expenses,
including expenses for facilities, equipment and personnel, are relatively
fixed. In addition, we plan to significantly increase operating expenses in
2000. Failure to achieve anticipated levels of revenue could therefore
significantly harm our operating results for a particular fiscal period.
Due to the possibility of fluctuations in our revenue 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.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL AS NECESSARY, IT COULD DELAY OUR PRODUCT DEVELOPMENT PROGRAMS AND
HARM OUR RESEARCH AND DEVELOPMENT EFFORTS.
Our success depends to a significant degree upon the continued contributions
of our executive officers, management and scientific staff. If we lose the
services of one or more of these people, we may be unable to achieve our
business objectives or our stock price could decline. We may not be able to
attract or retain qualified employees in the future due to the intense
competition for qualified personnel among biotechnology and other technology-
based businesses, particularly in the San Diego area. If we are not able to
attract and retain the necessary personnel to accomplish our business
objectives, we may experience constraints that will adversely affect our
ability to meet the demands of our strategic partners in a timely fashion or to
support our internal research and development programs. In particular, our
product development programs depend on our ability to attract and retain highly
skilled scientists, including molecular biologists, biochemists and engineers.
Although we believe we will be successful in attracting and retaining qualified
personnel, competition for experienced scientists and other technical personnel
from numerous companies and academic and other research institutions may limit
our ability to do so on acceptable terms. All of our employees are at-will
employees, which means that either the employee or Diversa may terminate their
employment at any time.
Our planned activities will require additional expertise in specific
industries and areas applicable to the products developed through our
technologies. These activities will require the addition of new personnel,
including management, and the development of additional expertise by existing
management personnel. The inability to acquire these services or to develop
this expertise could impair the growth, if any, of our business.
IF WE ENGAGE IN ANY ACQUISITION, WE WILL INCUR A VARIETY OF COSTS AND MAY
POTENTIALLY FACE NUMEROUS OTHER RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS
OPERATIONS.
If appropriate opportunities become available, we may consider acquiring
businesses, technologies 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 pursue such a strategy, we could:
. Issue equity securities which would dilute current stockholders'
percentage ownership;
. Incur substantial debt; or
. Assume contingent liabilities.
We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future without a
significant expenditure of operating, financial and management resources,
12
<PAGE>
if at all. In addition, future acquisitions might negatively impact our
business relations with our strategic partners. Further, recent proposed
accounting changes could result in a negative impact on our results of
operations as well as the resulting cost of the acquisition. Any of these
adverse consequences could harm our business.
WE MAY BE SUED FOR PRODUCT LIABILITY.
We may be held liable if any product we develop, or any product which is
made with the use of any of our technologies, causes injury or is found
otherwise unsuitable during product testing, manufacturing, marketing or sale.
We currently have no product liability insurance. When we attempt to obtain
product liability insurance, this insurance may be prohibitively expensive, or
may not fully cover our potential liabilities. Inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or inhibit the
commercialization of products developed by us or our strategic partners. If we
are sued for any injury caused by our products, our liability could exceed our
total assets.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. These provisions could discourage
potential take-over attempts and could adversely affect the market price of our
common stock. Because of these provisions, you might not be able to receive a
premium on your investment.
THERE IS NO PRIOR MARKET FOR OUR COMMON STOCK, AND YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE.
Prior to this offering, there has been no public market for shares of our
common stock. An active, liquid trading market may not develop following
completion of this offering, or if developed, may not be maintained. We will
determine the initial public offering price for the shares through negotiations
between us and representatives of the underwriters. This price may not be
indicative of prices that will prevail later in the trading market. The market
price of the common stock may decline below the initial public offering price,
and you may not be able to resell your shares at or above the initial public
offering price.
OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN.
The stock market, from time to time, has experienced significant price and
volume fluctuations that are unrelated to the operating performance of
companies. The market prices of technology companies, particularly life science
companies, have been highly volatile. Our stock may be affected by this type of
market volatility, as well as by our own performance. The following factors,
among other risk factors, may have a significant effect on the market price of
our common stock:
. Developments in our relationships with current or future strategic
partners;
. Announcements of technological innovations or new products by us or our
competitors;
. Developments in patent or other proprietary rights;
. Our ability to access genetic material from diverse ecological
environments and practice our technologies;
. Future royalties from product sales, if any, by our strategic partners;
. Fluctuations in our operating results;
. Litigation;
. Developments in domestic and international governmental policy or
regulation; and
. Economic and other external factors or other disaster or crisis.
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<PAGE>
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in
the public market after the closing of this offering, or the perception that
these sales could occur. These sales could make it more difficult for us to
sell equity securities in the future at a time and price that we deem
appropriate. After this offering, we will have outstanding 32,811,401 shares of
common stock. All the shares sold in this offering will be freely tradeable. Of
the remaining 25,811,401 shares of common stock outstanding after this
offering, all of such shares will be eligible for sale in the public market
beginning 180 days after the date of this prospectus. After this offering we
also intend to register up to approximately 6,187,096 shares of our common
stock for sale upon exercise of outstanding stock options issued pursuant to
compensatory benefit plans or reserved for future issuance pursuant to our 1997
Equity Incentive Plan, 1999 Non-Employee Directors' Stock Option Plan and 1999
Employee Stock Purchase Plan. In addition, the market price of our common stock
could decline if we sell additional equity securities in connection with
financings or strategic alliance arrangements.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS MAY PREVENT OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS AND DEPRESS OUR STOCK PRICE.
After this offering, our officers, directors and stockholders with at least
5% of our stock will together control approximately 54.5% of our outstanding
common stock. If these officers, directors and principal stockholders act
together, they 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 mergers or other business
combination transactions. The interests of this concentration of ownership may
not always coincide with our interests or the interests of other stockholders.
For instance, officers, directors and principal stockholders, acting together,
could cause us to enter into transactions or agreements that we would not
otherwise consider. Similarly, this concentration of ownership may have the
effect of delaying or preventing a change in control of our company otherwise
favored by our other stockholders. This concentration of ownership could
depress our stock price.
AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN
THE NET TANGIBLE BOOK VALUE OF YOUR SHARES.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. Therefore, if you
purchase shares of our common stock in this offering, you will incur immediate
and substantial dilution in pro forma net tangible book value of $16.78 per
share. You may incur additional dilution if the holders of outstanding options
or warrants exercise those options or warrants. Additional information
regarding the dilution to investors in this offering is included in this
prospectus under the heading "Dilution."
WE USE HAZARDOUS 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 chemical, radioactive and biological materials.
Our operations also produce hazardous waste products. We cannot eliminate
entirely 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 may be sued for any 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. In addition, compliance with applicable environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development or production efforts.
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YEAR 2000 ISSUES COULD RESULT IN THE INTERRUPTION OF OUR BUSINESS AND
NEGATIVELY IMPACT OUR OPERATING RESULTS.
We have completed our assessment of the year 2000 readiness of our core
information technology systems. Through this process, we contacted key external
suppliers of software applications and computer systems to coordinate the
evaluation of potential year 2000 issues. To date, we have not encountered any
material year 2000 problems with software and information systems provided to
us by third parties. We completed minor remediation with regard to software
programs, hardware and microprocessor-controlled equipment. We did not
experience any year 2000 problems. However, we believe that it is not possible
to determine with complete certainty that all year 2000 problems affecting us
have been identified or will be corrected. The number of devices and systems
that could be affected and the interactions among these devices and systems are
too numerous to address.
No one can accurately predict which year 2000 problem-related failures will
occur, or the severity, timing, duration or financial consequences of these
potential failures. If year 2000 problems significantly impact our strategic
partners, it could delay our research programs and the commercialization of
products, if any. Business disputes alleging that we failed to comply with the
terms of contracts or industry standards of performance could result in
litigation or contract termination. We could also lose future revenue as a
result of network, software or hardware failures. We also could be materially
adversely affected if third parties, upon whom we depend in order to run our
day-to-day business, experience year 2000 problems. For example, if our
supplier of electricity has not made appropriate year 2000 corrections, we
could experience a power outage and, consequently an interruption of our
research and development.
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<PAGE>
SPECIAL STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "predict," "intend,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks described above and in other
parts of this prospectus. These factors may cause our actual results to differ
materially from any forward-looking statement.
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately
$135.5 million, based upon an assumed initial public offering price of $21.00
per share, after deducting estimated underwriting discounts and estimated
offering expenses. If the underwriters' over-allotment option is exercised in
full, we estimate that net proceeds will be $156.0 million.
We intend to use the net proceeds of this offering for research and
development, capital expenditures, working capital and general corporate
purposes. Additionally, a portion of the proceeds may be used for possible
future acquisitions. We are not currently a party to any contracts or letters
of intent with respect to any acquisitions. Pending such uses, the net proceeds
of this offering will be invested in short-term, interest-bearing, investment-
grade securities.
DIVIDEND POLICY
We paid dividends of approximately $31,000 in 1995 and approximately $66,000
in 1997 to our series I preferred stockholders. These dividends were paid
pursuant to an agreement related to interest income on escrowed funds, and did
not represent a dividend from operating results. Pursuant to our certificate of
incorporation, our series A, B and D preferred stockholders are entitled to
receive a 5% dividend per annum from December 21, 1999 through the date of
completion of this offering. As of December 31, 1999, we have accrued $66,000
related to those dividends, and will accrue approximately $6,500 per day in
additional dividends for each day between January 1, 2000 and the completion of
this offering. We are entitled to pay this dividend in cash or in shares of
common stock valued at the initial public offering price. We intend to pay
these dividends in shares of our common stock and estimate that 32,000 shares
of common stock will be issued to satisfy this obligation. The annual dividend
is $0.05 per share of series A preferred stock, $0.033 per share of series B
preferred stock and $0.0425 per share of series D preferred stock. We presently
intend to retain future earnings, if any, to finance the expansion of our
business and do not expect to pay any cash dividends in the foreseeable future.
Any future determination to pay cash dividends will be at the discretion of our
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, general business conditions and other
factors that the board of directors may deem relevant.
CORPORATE INFORMATION
We were incorporated in the State of Delaware in December 1992 under the
name Industrial Genome Sciences, Inc. In August 1997, we changed our name to
Diversa Corporation.
Our executive offices are located at 10665 Sorrento Valley Road, San Diego,
California 92121, and our telephone number is (858) 453-7020. Our web site is
http://www.diversa.com. The information found on our web site is not a part of
this prospectus.
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CAPITALIZATION
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes to those statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------
PRO FORMA
PRO AS
ACTUAL FORMA ADJUSTED
------- ------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments.. $ 5,084 $ 5,084 $140,594
======= ======= ========
Capital lease obligations, less current portion.... $ 2,677 $ 2,677 $ 2,677
------- ------- --------
Redeemable convertible preferred stock, par value
$0.001; 60,718,183 shares authorized; 60,220,183
shares issued and outstanding (actual); no shares
authorized, issued or outstanding (pro forma and
pro forma as adjusted)............................ 48,402 -- --
Stockholders' equity (deficit):
Series E convertible preferred stock, par value
$0.001; 5,555,556 shares authorized, issued and
outstanding (actual) 5,000,000 preferred stock
shares authorized, no shares issued or
outstanding (pro forma and pro forma as
adjusted)........................................ 6 -- --
Common stock, par value $0.001; 28,630,349 shares
authorized, 2,945,390 shares issued and
outstanding (actual); 65,000,000 shares
authorized, 25,811,401 shares issued and
outstanding (pro forma); 32,811,401 shares issued
and outstanding (pro forma as adjusted).......... 3 26 33
Additional paid-in capital........................ 20,102 68,487 203,990
Deferred compensation............................. (5,520) (5,520) (5,520)
Notes receivable from stockholders................ (36) (36) (36)
Accumulated deficit............................... (57,351) (57,351) (57,351)
Accumulated other comprehensive loss.............. (17) (17) (17)
------- ------- --------
Total stockholders' equity (deficit)........... (42,813) 5,589 141,099
------- ------- --------
Total capitalization........................... $ 8,266 $ 8,266 $143,776
======= ======= ========
</TABLE>
This table sets forth as of December 31, 1999:
. our actual capitalization;
. our pro forma capitalization, assuming the conversion of all of our
outstanding preferred stock into common stock in conjunction with the
closing of this offering;
. a 1-to-2.8806 reverse-split in our common stock that will take effect
prior to the date of this offering;
. our pro forma as adjusted capitalization to give effect to the sale of
7,000,000 shares of our common stock in this offering at an assumed
initial public offering price of $21.00 per share after deducting
estimated underwriting discounts and commissions and estimated expenses
of this offering and the conversion of all of our outstanding preferred
stock into common stock in conjunction with the closing of the initial
public offering; and
. the issuance of an estimated 32,000 shares of common stock to be issued
at the closing of this offering to holders of our series A, B and D
preferred stock as payment of a dividend that began to accrue on
December 21, 1999.
This table excludes:
. 5,492,798 shares of our common stock reserved for issuance under our
stock option plans, of which 3,125,000 shares are subject to outstanding
options with a weighted average exercise price of $1.73 per share and
13,937 shares of common stock issuable upon exercise of an outstanding
option granted outside of our stock option plans with an exercise price
of $0.03 per share;
. 277,719 shares available for issuance under our Non-Employee Directors'
Stock Option Plan;
. 416,579 shares available for issuance under our 1999 Employee Stock
Purchase Plan; and
. 364,120 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $1.44 per share.
17
<PAGE>
DILUTION
Our historical net tangible book value deficit as of December 31, 1999 was
approximately $45.3 million, or ($15.38) per share, based on the number of
common shares outstanding as of December 31, 1999. Historical net tangible book
value per share is equal to the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding as of
December 31, 1999.
Our pro forma net tangible book value, as of December 31, 1999, was $3.1
million, or $0.12 per share of common stock, assuming the conversion of all
outstanding shares of preferred stock into 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 considering the conversion of all outstanding preferred stock into common
stock. After giving effect to our sale of common stock offered hereby at an
assumed initial public offering price of $21.00 per share, and our receipt of
the estimated net proceeds from the offering, our pro forma net tangible book
value as of December 31, 1999 would have been approximately $138.6 million, or
$4.22 per share. This represents an immediate increase in net tangible book
value of $4.10 per share to existing stockholders and an immediate dilution of
$16.78 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $21.00
Historical net tangible book value per share before the
offering..................................................... $(15.38)
Increase per share attributed to the conversion of preferred
stock to common stock........................................ 15.50
-------
Pro forma net tangible book value per share before the
offering..................................................... 0.12
Increase per share attributable to new investors.............. 4.10
-------
Pro forma net tangible book value per share after this
offering....................................................... 4.22
------
Dilution per share to new investors............................. $16.78
======
</TABLE>
If the underwriters exercise their over-allotment in full, there will be an
increase in pro forma net tangible book value to $4.70 per share to existing
shareholders and an immediate dilution in pro forma net tangible book value of
$16.30 to new shareholders. Our existing shareholders would own 76.2% and our
new public investors would own 23.8% of the total number of shares of our
common stock outstanding after this offering.
The following table summarizes, on a pro forma basis as of December 31,
1999, 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.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 25,779,401 78.6% $ 58,604,000 28.5% $ 2.27
New public investors...... 7,000,000 21.4% 147,000,000 71.5% $21.00
---------- ----- ------------ -----
Total................... 32,779,401 100.0% $205,604,000 100.0%
========== ===== ============ =====
</TABLE>
The discussion and tables above assume no exercise of stock options or
warrants outstanding as of December 31, 1999. As of December 31, 1999, there
were options outstanding under our employee stock option plans to purchase a
total of 3,125,000 shares of common stock, with a weighted average exercise
price of $1.73 per share, 364,120 shares of common stock issuable upon the
exercise of outstanding warrants, with a weighted average exercise price of
$1.44 per share, and an option outstanding granted outside our stock option
plans to purchase 13,937 shares of common stock at $0.03 per share held by one
of our founders. To the extent that any of these options or warrants are
exercised, there will be further dilution to new investors.
18
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected financial data set forth below with respect to the Company's
statements of operations for the years ended December 31, 1997, 1998 and 1999,
and with respect to the Company's 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 years ended December 31, 1995 and 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from our audited financial
statements that are not included in this prospectus. The selected financial
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and related notes appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Collaborative revenue........ $ -- $ 200 $ 669 $ 625 $ 9,166
Grant and product revenue.... 25 506 486 722 1,106
------- -------- -------- -------- --------
Total revenue.............. 25 706 1,155 1,347 10,272
Operating expenses:
Research and development..... 5,306 6,496 8,195 10,665 12,149
Selling, general and
administrative.............. 3,551 4,465 5,260 4,536 7,357
Restructuring charge......... -- 1,164 -- -- --
------- -------- -------- -------- --------
Total operating expenses... 8,857 12,125 13,455 15,201 19,506
------- -------- -------- -------- --------
Operating loss............... (8,832) (11,419) (12,300) (13,854) ( 9,234)
Other income (expense)....... (72) (227) (92) 344 215
------- -------- -------- -------- --------
Net loss..................... (8,904) (11,646) (12,392) (13,510) ( 9,019)
Dividends payable to
preferred stockholders...... -- -- -- -- (66)
Net loss applicable to common
stockholders................ $(8,904) $(11,646) $(12,392) $(13,510) $( 9,085)
======= ======== ======== ======== ========
Historical net loss per
share, basic and diluted.... $ (7.37) $ (7.68) $ (7.72) $ (7.64) $ (3.86)
======= ======== ======== ======== ========
Historical weighted average
shares outstanding.......... 1,208 1,517 1,606 1,768 2,353
Pro forma net loss per
share....................... $ (0.36)
========
Pro forma weighted average
shares outstanding.......... 25,187
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short term investments...... $ 622 $ 5,040 $ 16,607 $ 5,552 $ 5,084
Working capital.............. (1,276) 3,584 13,540 2,470 13,902
Total assets................. 4,769 9,973 20,284 8,706 31,072
Capital lease obligations,
less current portion........ 2,213 1,725 1,500 2,202 2,677
Redeemable convertible
preferred stock............. 10,595 26,182 48,402 48,402 48,402
Stockholders' equity
(deficit)................... (10,580) (22,156) (34,024) (45,738) (42,813)
</TABLE>
See our financial statements for a description of the computation of the
historical and pro forma net loss per share and the number of shares used in
the historical and pro forma per share calculations in "Statement of Operations
Data" above.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the related notes to our financial statements and the other
financial information included elsewhere in this prospectus.
OVERVIEW
We were founded in December 1992 and began operations in May 1994. We
believe that we are the global leader in discovering and developing novel
enzymes and other biologically active compounds from diverse environmental
sources for use in agricultural, chemical processing, industrial and
pharmaceutical applications. To date, we have generated revenue from research
collaborations, government grants and enzyme product sales. Our strategic
partners include Novartis Seeds AG, Novartis Agribusiness Biotechnology
Research, Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A.
and Finnfeeds International Limited. Our current government grants are from the
National Institute of General Medical Sciences, the National Cancer Institute
and the National Institute of Environmental Health Sciences. Our enzyme product
sales to date are comprised of research kits and Pyrolase 160.
We have dedicated substantial resources to the development of our
proprietary technologies, which include capabilities for sample collection from
the world's microbial populations, generation of environmental gene libraries,
screening of these libraries using ultra-high throughput methods capable of
analyzing more than a billion genes per day and optimization via our
DirectEvolution technologies.
Our revenue has increased significantly since our inception, and for the
year ended December 31, 1999, we have experienced significant growth compared
to the year ended December 31, 1998. This increase was primarily attributable
to the addition of new strategic alliances, which included research funding and
technology access and development fees. Research funding is recognized as
revenue when the services are rendered. Revenue from technology access and
development fees is recognized over the term of the strategic alliance. Revenue
from milestone payments is recognized when the milestone is achieved. Our
strategic partners often pay us before we recognize the revenue, and these
payments are deferred until earned. As of December 31, 1999, we had current and
long-term deferred revenue totaling $19.6 million.
We have incurred substantial operating losses since our inception. As of
December 31, 1999, our accumulated deficit was $57.3 million, and total
stockholders' equity, after considering the conversion of all outstanding
shares of preferred stock to common stock, was $5.6 million. We expect to incur
additional operating losses over the next few years as we continue to develop
our technologies and fund internal product research and development.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
Revenue
Our revenue increased $9.0 million to $10.3 million for the year ended
December 31, 1999 from $1.3 million for the year ended December 31, 1998. This
increase was primarily attributable to the addition of new strategic alliances
with Novartis Agribusiness Biotechnology Research, Inc. and The Dow Chemical
Company and, to a much lesser extent, the addition of new government grants and
enzyme product sales. Revenue from collaborations accounted for 89% of total
revenue for the year ended December 31, 1999 and for 46% of total revenue for
the year ended December 31, 1998.
Research and Development Expenses
Our research and development expenses increased $1.4 million to $12.1
million for the year ended December 31, 1999, from $10.7 million for the year
ended December 31, 1998. During 1999, our research efforts
20
<PAGE>
were primarily focused on research associated with strategic alliance
agreements and continued work on internal products, whereas in 1998, we focused
significant resources on development of internal products and proprietary
technologies. 1999 expenses also increased over 1998 due to amortization of
deferred compensation, as discussed in the paragraphs below. We expect that our
research and development expenses will increase substantially to support our
collaborative research programs, internal product research and development and
technology development.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $2.9 million to
$7.4 million for the year ended December 31, 1999 from $4.5 million for the
year ended December 31, 1998. This increase was primarily attributable to
expenses related to separation agreements with former employees and
amortization of deferred compensation, as discussed in the paragraph below. We
expect that our selling, general and administrative expenses will increase to
support our growth and requirements as a public company.
Other Income (Expense)
Other income (expense) primarily consists of interest income and interest
expense. Interest income was relatively level at $0.5 million for the year
ended December 31, 1999 as compared to $0.6 for the year ended December 31,
1998. Interest expense increased $0.1 million to $0.4 million for the year
ended December 31, 1999 from $0.3 million for the year ended December 31, 1998.
This increase was primarily attributable to expanded equipment lease financing.
Provision for Income Taxes
We incurred net operating losses for the year ended December 31, 1999 and
1998, and accordingly, we did not pay any federal or state income taxes. As of
December 31, 1999, we had federal net operating loss carryforwards of
approximately $45.8 million, which begin to expire in 2009. The net operating
loss carryforwards for state tax purposes were approximately $28.9 million,
which began to expire in 1999. We also had federal research and development tax
credit carryforwards of approximately $1.2 million, which begin to expire in
2009. Our utilization of the net operating losses and credits may be subject to
substantial annual limitations pursuant to Section 382 of the Internal Revenue
Code, and similar state provisions, as a result of changes in our ownership
structure. The annual limitations may result in the expiration of net operating
losses and credits prior to utilization.
Deferred Compensation and Other Non-Cash Compensation Charges
Deferred compensation for options granted to employees has been determined
as the difference between the exercise price and the fair value of our common
stock, as estimated by us for financial reporting purposes, on the date options
were granted. Deferred compensation for options granted to consultants has been
determined in accordance with Statement of Financial Accounting Standards No.
123 as the fair value of the equity instruments issued, and is periodically
remeasured as the underlying options vest in accordance with EITF 96-18.
In connection with the grant of stock options to employees, we recorded
deferred compensation of approximately $6.8 million in the year ended December
31, 1999. This amount was recorded as a component of stockholders' equity and
is being amortized as a charge to operations over the vesting period of the
options. We recorded amortization of deferred compensation of approximately
$3.0 million for the year ended December 31, 1999. Included in research and
development and selling, general and administrative expenses are $0.9 million
and $2.1 million, respectively, of amortization expense.
We recorded non-cash compensation charges of $1.1 million in 1999 in
conjunction with the acceleration of vesting for stock options of terminated
employees. We calculated the charge as the difference between the exercise
price of the stock options and the fair value of our common stock estimated for
financial reporting purposes on the date of the modification of the option
grants.
21
<PAGE>
We will record additional non-cash compensation charges totaling $5.8
million in the first quarter of 2000. These charges result from the
acceleration of vesting for unvested stock options in February 2000, of which
$1.7 million resulted from accelerated options held by a board member, and $4.1
million related to accelerated options held by employees. These actions are
described in more detail in "Certain Transactions."
Years Ended December 31, 1998 and 1997
Revenue
Our revenue increased to $1.3 million in 1998 from $1.2 million in 1997.
This increase was primarily attributable to the addition of new government
grants. Revenue from collaborations accounted for 46% of total revenue for 1998
and 58% of total revenue for 1997.
Research and Development Expenses
Our research and development expenses increased $2.5 million, or 30%, to
$10.7 million for 1998 from $8.2 million for 1997. This increase was primarily
attributable to expanded technology development and internal product
development.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses decreased $0.8 million to
$4.5 million for 1998 from $5.3 million for 1997. This decrease was primarily
attributable to lower staffing and related costs and reduced product
advertising and promotions. In addition, 1997 expenses include costs associated
with relocating our facilities from Pennsylvania to California.
Other Income (Expense)
Interest income increased $0.3 million to $0.6 million for 1998 from $0.3
million for 1997. This increase was attributable primarily to higher average
cash balances during 1998. Interest expense was level at $0.3 million year over
year.
Provision for Income Taxes
We incurred net operating losses for 1998 and 1997, and accordingly, we did
not pay any federal or state income taxes.
Deferred Compensation
In connection with the grant of stock options to employees, we recorded
deferred compensation of approximately $1.9 million in the year ended December
31, 1998. This amount was recorded as a component of stockholders' equity and
is being amortized as a charge to operations over the vesting period of the
options. We recorded amortization of deferred compensation of approximately
$1.7 million for the year ended December 31, 1998. Included in research and
development and selling, general and administrative expenses are $0.5 million
and $1.2 million, respectively, of amortization expense.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily through private
placements of preferred stock with net proceeds of $55.7 million, and funding
from strategic partners and government grants. As of December 31, 1999, we had
cash, cash equivalents and short-term investments of approximately $5.1
million. We expect to receive an additional $15.0 million in January 2000 from
Novartis Seeds AG as an initial payment under a strategic alliance agreement
signed in December 1999. Our funds are currently invested in U.S. Treasury and
government agency obligations and investment-grade corporate obligations.
22
<PAGE>
As part of our plan to lease new executive offices and research and
development facilities in 2000, we plan to construct a pilot manufacturing
facility, which will be used for process development activities. Our costs for
fixed assets relating to the pilot manufacturing facility will be approximately
$2.4 million, all of which we anticipate financing through equipment leases. As
of December 31, 1999, we had no purchase commitments relating to the pilot
facility. Additionally, we expect to fund $1.0 million in enhancements to our
SciLect project in 2000, which will be funded through working capital.
Our operating activities used cash of $4.0 million in the year ended
December 31, 1999, $10.8 million in the year ended December 31, 1998, and $11.2
million in 1997. Our use of cash for all periods primarily resulted from our
losses from operations and the changes in our working capital accounts.
Our investing activities used cash of $5.4 million in 1999, $1.9 million in
1998 and $0.7 million in 1997. Our investing activities consist primarily of
purchases of property and equipment, purchases of investment securities,
purchase of technology rights and increases in long-term deferred assets.
Our financing activities provided $7.5 million for the year ended December
31, 1999 and provided cash of $0.6 million in 1998 and $23.5 million in 1997.
Our financing activities have consisted primarily of the sale of preferred
stock to both private investors and strategic partners, and proceeds received
and payments made under our capital lease lines and notes payable.
We expect that the proceeds from this offering, combined with our current
cash and cash equivalents, short-term investments, and funding from existing
strategic alliances and grants including committed minimum funding totaling
$68.0 million from our collaborators to be received between 2000 and 2004 will
be sufficient to fund our operations for at least the next two years. This
estimate is a forward-looking statement that involves risks and uncertainties
as set forth under the caption "Risk Factors" in this prospectus. Our future
capital requirements and the adequacy of our available funds will depend on
many factors, including scientific progress in our research and development
programs, the magnitude of those programs, our ability to establish strategic
alliance relationships, and competing technological and market developments.
Therefore, it is possible that we may seek additional financing within this
timeframe. If we require additional capital to fund our operations and such
financing is not available, we may need to cease operations. Alternatively, we
may need to enter into financing arrangements which could dilute some
stockholders' ownership interests and adversely affect their rights.
YEAR 2000
The year 2000 problem potentially affects the computers, software and other
equipment that we use, operate or maintain in our operations. As a result, we
have formalized our year 2000 compliance plan to be implemented by a team of
employees, led by our internal information technology staff, responsible for
monitoring the assessment and remediation status of our year 2000 projects. We
have been working on this year 2000 compliance plan for the past six months.
Information Technology Systems. As part of our compliance plan, we made an
assessment of the year 2000 readiness of our core information technology
systems, including our servers, databases, internally developed software,
desktop computers and significant microprocessor-controlled equipment. The
majority of our computer systems and software are less than 26 months old. Our
business system was put into use in 1998 and has been certified year 2000
compliant. We have completed our assessment of the year 2000 readiness of our
core information technology systems. Through this process, we contacted key
external suppliers of software applications and computer systems to coordinate
the evaluation of potential year 2000 issues. We completed minor remediation
with regard to software programs, hardware and microprocessor-controlled
equipment. When appropriate, we coordinated our remediation efforts with our
third party suppliers.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems and other common devices may
be affected by the year 2000 problem.
23
<PAGE>
Costs of Remediation. We have spent less than $50,000 to date for
remediation and expect to incur minimal additional costs related to any
required modifications, upgrades or replacements of our internal systems.
To date, we have not experienced any material adverse effect on our business
or operating results as a result of any year 2000 problems. In addition, we
have not deferred any material information technology projects or equipment
purchases, as a result of our year 2000 problem activities.
Most Likely Consequences of Year 2000 Problems. We believe we have
identified and resolved all year 2000 problems that could materially adversely
affect our business operations. However, we believe that it is not possible to
determine with complete certainty that all year 2000 problems affecting us have
been identified or corrected. The number of devices and systems that could be
affected and the interactions among these devices and systems are too numerous
to address. In addition, no one can accurately predict which year 2000 problem-
related failures will occur or the severity, timing, duration, or financial
consequences of these potential failures. As a result, we believe that the
following consequences are possible:
. Operational inconveniences and inefficiencies for us and our strategic
partners that will divert management's time and attention and financial
and human resources from ordinary business activities;
. Business disputes alleging that we failed to comply with the terms of
contracts or industry standards of performance, some of which could
result in litigation or contract termination; and
. Loss of revenue as a result of network, software or hardware failures.
We also could be materially adversely affected if third parties upon whom we
depend in order to run our day-to-day business experience year 2000 problems.
Contingency Plans. We do not anticipate needing to develop contingency plans
to be implemented if our efforts to identify and correct year 2000 problems
affecting our internal systems are not effective. If the need arises, we will
rapidly develop contingency plans that may include:
. Accelerated replacement of affected equipment or software;
. Short to medium-term use of backup equipment and software or other
redundant systems;
. Increased work hours for our personnel or the hiring of additional
information technology staff; and
. The use of contract personnel to correct, on an accelerated basis, any
year 2000 problems that arise or to provide interim alternate solutions
for information system deficiencies.
Our implementation of any of these contingency plans could harm our
business.
Disclaimer. The discussion of our efforts and expectations relating to year
2000 compliance contains forward-looking statements. Our ability to achieve
year 2000 compliance, and the level of incremental costs associated with our
compliance, could be adversely affected by, among other things, the
availability and cost of contract personnel and external resources, third-party
suppliers' ability to modify proprietary software and unanticipated problems
not identified in the ongoing compliance review.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities," which will be effective for our fiscal
year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an
asset or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. SFAS 133 is not anticipated to have
a significant impact on our operating results or financial condition when
adopted, since we currently do not engage in hedging activities.
24
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited, however, to
our capital lease obligations, the interest rates under which are closely tied
to market rates, and our investments in interest rate sensitive financial
instruments. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We ensure the safety
and preservation of our invested principal funds by limiting default risks,
market risk and reinvestment risk. We mitigate default risk by investing in
investment grade securities. A hypothetical 100 basis point adverse move in
interest rates along the entire interest rate yield curve would not materially
affect the fair value of our interest sensitive financial instruments at
December 31, 1998 or December 31, 1999. Declines in interest rates over time
will, however, reduce our interest income while increases in interest rates
over time will increase our interest expense.
25
<PAGE>
BUSINESS
We believe that we are a global leader in discovering and developing novel
enzymes and other biologically active compounds, together known as
biomolecules, from diverse environmental sources for use in agricultural,
chemical processing, industrial and pharmaceutical applications. We apply our
fully-integrated and proprietary processes to obtain previously unaccessed
genetic material from uncultured organisms found in various natural
environments, catalog and store genes in gene libraries, screen these libraries
using methods capable of analyzing more than a billion genes per day, optimize
selected enzymes and compounds by applying our proprietary DirectEvolution(R)
genetic modification technologies, including Gene Site Saturation
Mutagenesis(TM) and GeneReassembly(TM), and we develop novel host organisms for
the manufacture of resulting products. We have entered into a number of
strategic alliances with market leaders across multiple industries, including:
Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc., The Dow
Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and Finnfeeds
International Limited.
INDUSTRY BACKGROUND
Introduction
Microbes, such as bacteria and fungi, are the world's most abundant and
varied organisms and can be found in almost every ecosystem, including oceans,
deserts, rain forests and arctic regions. Through generations of natural
selection in diverse environments, microbes have developed characteristics that
are broader and more varied than those encountered in plants or animals. These
characteristics, which include the ability to survive in extreme temperature,
tolerate high or low pH and high or low salt environments, are the result of
the highly diverse genetic material found in the microbial world. This genetic
material, commonly known as DNA, is a fundamental molecule found in the cells
of all living organisms and is composed of four different chemical bases called
nucleotides. Nucleotides are arranged into units called genes, which are the
elements of heredity. Each gene carries the instructions for the production of
a protein. One key class of proteins, known as enzymes, carries out the
chemical reactions that give each microbe its unique character. Countless
microbes, each with their unique enzymes, influence our lives in a multitude of
ways. For example, some microbes make the soil fertile, clean up the
environment and supply the atmosphere with oxygen, while others are used to
produce vitamins and drugs, or improve our food.
Commercial Applications
Virtually any product or process that utilizes or could utilize proteins can
potentially be improved using novel, naturally occurring biomolecules.
Consequently, naturally occurring biomolecules are commercially applicable to a
broad range of multi-billion dollar industries. For example, enzymes isolated
from microorganisms have been used in home laundry detergents and for the
production of cheese and sweeteners. While most enzyme applications were
developed prior to the era of biotechnology, new commercial applications have
been limited in the 1990's primarily because of the lack of new varieties of
enzymes. Additionally, a significant portion of the enzymes being used
commercially are not optimal for their intended uses.
Traditional Approaches and Their Limitations
Traditional methods of discovering enzymes and other biologically active
molecules do not utilize a DNA-based approach, but are accomplished by
screening extracts of plants or culturing microorganisms for the activity of
interest. Once an activity is identified, purification is performed and the
relevant molecule is isolated. With respect to biologically active molecules,
this process is followed by the difficult and time consuming task of
determining the chemical structure of the molecule, which requires producing
sufficient quantities of the molecule by culturing a sample in the laboratory.
To date, modern biochemical science has characterized greater than 3,000
enzymes. Nearly all of such enzymes have been identified from organisms that
have been successfully cultured in the laboratory. Therefore, enzymes from only
a small fraction of the billions
26
<PAGE>
of different species of microorganisms living throughout the world have been
characterized. The reasons for this include:
. Less than an estimated 1% of the microorganisms in most habitats will
grow using standard laboratory techniques because it is so difficult to
precisely create the required environmental conditions;
. If an extract from a plant or cultured organism is not collected at the
appropriate time, the activity of interest may not be present, since
enzymes and other bioactive molecules may only be synthesized at
specific times during a cell cycle or under specific conditions; and
. Even if the enzyme or bioactive molecule is isolated, the targeted
recovery of the corresponding gene or genes encoding these molecules is
usually difficult.
Accordingly, the universe of potentially useful compounds from biodiversity
remains largely untapped.
Once an enzyme of interest is discovered, its genetic sequence can be
studied and genetic variation may be introduced in an attempt to modify its
function through this process of evolution. Genetic variation is generated
predominantly by two methods: mutation and recombination. Mutation is the
introduction of changes into a gene. Mutation can be achieved by several
methods, including forcing the DNA to replicate in a manner which intentionally
causes random changes. Mutation is typically achieved by randomly introducing
single DNA base mutations into a gene in an attempt to alter a single amino
acid within the corresponding protein. Each of these methods has deficiencies
that make it virtually impossible to generate all 19 possible amino acid
changes at each position within the protein. To generate all amino acid changes
at each site would require multiple, appropriately positioned DNA base changes.
In actual practice, fewer than six changes, on average, are explored due to
deficiencies in mutation and sampling methods. Recombination, the other method
for producing genetic variation, is the mixing of two or more related genes to
form hybrids. However, the generation of improved variants has, to date, been
inefficient and laborious, or has allowed only closely related genes to be
recombined.
Regardless of the method used to generate the variation, mutation or
recombination, the improved molecules must be selected from numerous unimproved
or defective versions. This selection process requires the ability to quickly
screen large numbers of genes to distinguish the improved versions.
Once a desired gene is found and optimized, commercial production requires
insertion of the gene into a production system or host. Almost all of the
current commercial enzymes used in industrial applications today were derived
from cultured microorganisms and produced in these or similar organisms.
However, genes encoding unique biomolecules may not be able to be expressed and
commercially produced in traditional systems. Thus, traditional methods present
both the problem of novel biomolecule identification and the challenge of
commercial production of any identified biomolecules.
DIVERSA'S SOLUTION AND ADVANTAGES
Our proprietary technologies and tools address the limitations of
traditional approaches for the recovery and modification of novel genes and
linked genes comprising novel gene pathways and the manufacture and
commercialization of related products. Our fully-integrated process includes
the following steps:
. We collect small environmental samples containing heterogeneous
populations of uncultured microbes from diverse ecosystems and extract
the genetic material from these organisms, eliminating the need to grow
and maintain the organisms in cultures in the laboratory. Since small
samples yield sufficient DNA, we minimize our impact on sensitive
environments.
. We create gene expression libraries, DiverseLibraries(TM), from the DNA
extracted from the organisms found in the specified environment, and
PathwayLibraries(TM), libraries of multi-gene pathways responsible for
the production of small molecules. We estimate that our gene expression
libraries
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currently contain the complete genomes of over 1 million unique
microorganisms, comprising a vast resource of genetic material that can
be screened for valuable commercial products.
. We employ proprietary methods for quickly and cost-effectively screening
large numbers of novel genes and their variants. Our proprietary
screening techniques efficiently address the tremendous volume of
genetic material captured in our libraries and significantly accelerate
the product development process. Our data management and analysis
system, SciLect(TM), allows us to store and manipulate the vast amount
of information generated from our screening activities.
. We utilize our proprietary DirectEvolution technologies, including Gene
Site Saturation Mutagenesis and GeneReassemby, to enable a full range of
accelerated DNA mutations. This greatly enhances the efficiency of the
evolution process, and reduces the laborious nature of current mutation
and recombination processes.
. We insert a selected gene or pathway into novel hosts for biomolecule
production for the manufacture of resulting products, facilitating
better gene expression and thereby improving the efficiency of
traditional production processes.
Innovation From Biodiversity And Gene Evolution Process
[Diagram titled Diversa: Innovation from BioDiversity Process]
We believe the integration of these capabilities enables us to maintain our
leadership in developing and commercializing novel products to address the
needs of our target markets. The genetic diversity of our expansive gene
libraries and our proprietary high-throughput screening and evolution
technologies allow us to shorten the development cycles for novel enzymes and
biologically active compounds. Additionally, our processes are designed to help
our customers improve their manufacturing processes, reduce costs, reduce
waste, improve yield and improve the quality of their end products.
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MARKET OPPORTUNITIES
We are developing products for a number of multi-billion dollar markets,
including agricultural, chemical processing, industrial and pharmaceutical
applications. Our target markets provide both short-term and long-term product
revenue opportunities, with chemical and industrial products having relatively
short development and regulatory approval processes, agricultural products
having intermediate term development and regulatory approval processes, and
pharmaceutical products having longer development and regulatory approval
processes.
Within these broad markets we are targeting key segments where we believe
our technologies and products will create high value and competitive advantages
for our strategic partners and our customers. We have been able to identify and
produce enzymes that exhibit dramatic increases in efficiency and stability
applicable to strategic partners' and customers' unique requirements, such as
high or low temperature stability, high or low pH tolerance, high or low salt
tolerance, or combinations of these features.
Agricultural Products
The growth of the agricultural market has been spurred by the world's
population growth. This growth has led to the demand for new technology that
improves productivity, reduces environmental impact and improves quality,
safety and nutritional value of agricultural products. Animal feed crops, such
as corn, wheat, barley, rye, oats and soybean, can be improved through the
selective development of value-added traits. We estimate that the animal feed
market is currently $36 billion in annual revenue. Additionally, in 1997 $5.9
billion was spent on animal feed additives for the purpose of improving feed
digestibility and increasing nutritional value.
Genetically engineered crops with improved traits are expected to contribute
substantially more value to the existing $15 billion agriculture seeds market.
In addition, consumer and regulatory demands for alternative pest management
solutions will fuel growth in the agrochemical market, estimated at $33 billion
in 1998.
In agriculture, we are developing a variety of specialty enzymes, engineered
genes and small molecules for use in the following applications:
. Crop Protection. We have developed enzymes that will be used as
biological catalysts to produce building blocks for agricultural
chemicals and active ingredients in herbicides and insecticides. We are
also developing genes to be inserted into crops to provide them with
insect resistance and herbicide tolerance. In addition, we are
developing small molecules with anti-fungal properties. These products
are designed to increase crop yield and reduce the environmental impact
of crop protection techniques.
. Animal Feed Additives. Animal feed additives are designed to increase
digestibility of essential vitamins and minerals, increase nutritional
value and animal product yield and reduce harmful materials in waste. We
are developing several classes of enzymes, including phytases,
carbohydrases and proteases, for the increased absorption of organic
phosphorous and digestibility of carbohydrates, as well as the promotion
of weight gain in livestock. We are also developing genes to impart
these same qualities into genetically engineered crops.
. Agricultural Product Processing. We have developed genes for improving
grain processing, nutrition and specialty foods. These applications
include starch and oil modification and breakdown of non-starch
polysaccharides to increase nutritional and food value.
. Animal Health. In addition to the above applications, we intend to
develop vaccines and therapeutics to treat and prevent diseases of farm
animals.
Chemical Processing
Annual revenue for the chemical industry currently exceeds $800 billion. Our
focus is on both fine chemicals, such as chiral chemicals used as building
blocks for pharmaceuticals, and high-performance
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chemicals. The current market for fine chemical intermediates is approximately
$45 billion, of which an estimated $25 billion relates to building blocks
useful for the manufacture of chiral and other drugs.
In chemical processing, we are developing a variety of specialty enzymes for
use in the following applications:
. Building Blocks for Production of Chiral Pharmaceuticals. We are
developing enzymes for the production of desired, active and essential
elements for the manufacture of chiral drugs, including many of the
leading revenue generating drugs currently on the market. We believe
these enzymes may also reduce production costs and waste associated with
manufacturing these compounds.
. High Performance Specialty Chemicals and Polymers. We are developing
enzymes that act as biological catalysts in the production of specialty
chemicals and polymers such as amino acids, anti-oxidants, vitamins and
pigments. These enzymes are intended to reduce manufacturing costs both
by reducing the amount and number of steps necessary to produce these
specialty chemicals and polymers and by reducing the production of
unwanted byproducts from these production processes.
Industrial Enzymes
Industrial enzymes represents a growing market, estimated at $1.8 billion in
revenue in 1998. We believe there are a number of applications within this
market that could provide us with commercial opportunities. We are currently
developing a variety of specialty enzymes for use in the following
applications:
. Oil and Gas Well Breakers. We have developed thermostable enzyme
breakers that improve viscosity control and are designed for use in deep
and high temperature wells. These enzyme breakers allow for improved
extraction of oil and gas from existing wells, resulting in greater
production and increased revenue per well.
. Detergents. We are developing more effective enzymes for solving
currently unmet needs in fabric care, dishwashing and industrial
cleaning. These specialty enzymes are intended to improve removal of
oil, protein, starch and other difficult-to-remove stains, as well as
maintain the original condition of washed fabrics.
. Corn Wet Milling. Corn wet milling enzymes are used to modify the starch
found in corn to produce higher value end products, such as high
fructose corn syrup and ethanol. We are developing new enzymes that we
believe will significantly reduce the costs and energy requirements for
this process, by eliminating the need for particular process adjustments
and the waste that results from these processes.
. Textile Manufacturing. We have developed, and are continuing to develop,
enzymes that assist in the removal of starch from textiles in
manufacturing and also impart desired appearance qualities to the
finished fabric. These enzymes are designed to reduce the manufacturing
cost and waste associated with the use of harsh chemicals currently used
in this process.
. Pulp and Paper Processing. We intend to develop enzymes to aid in pre-
bleaching pulp, which reduces the need to use strong oxidizer chemicals,
such as chlorine and sulfite, in that process. The enzymes we develop
could reduce the cost of pulp processing both by reducing the amount of
oxidizer chemicals required and the expense associated with treating the
waste resulting from the use of these harsh chemicals.
. Production of Modified Oils. We intend to develop enzymes to create
custom products, such as margarines, cooking oils and lubricants,
through the modification of fats and oils. Our enzymes will be directed
to improving product qualities, such as reducing the cholesterol causing
components in margarine and cooking oils and improving the heat
stability of lubricants.
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Pharmaceutical Products
According to an industry source, the worldwide pharmaceutical market was
$300 billion in 1998 and is expected to grow to $415 billion by 2002. Our
earlier-stage pharmaceutical program seeks to apply our technologies to the
discovery and development of compounds for selected applications within this
market. We believe that the initial applications for our technologies will lead
to strategic partnerships that include:
. Discovery of Small Molecule Compounds. Using our ultra high-throughput
screening methods, we are working to discover small molecule compounds
as candidates for anti-microbials, anti-fungals, anti-virals and other
therapeutic drugs. We believe that our recombinant product methodologies
can yield results superior to other approaches because natural pathways
can yield more complex chemical structures compared to lab-based
synthesis. In addition, naturally-derived molecules have been pre-
selected in the environment to perform specific biological functions.
Finally, our recombinant small molecule discovery approach permits
higher throughput discovery.
. Improving Protein Therapeutics, Vaccines and Gene Therapy Products. We
intend to apply our technologies to the improvement of protein
therapeutics, vaccines and gene therapy products. Our DirectEvolution
technologies can be utilized on environmental and human proteins to
generate human therapeutics with enhanced activity, reduced side effects
and extended patent life.
OUR STRATEGY
Our goal is to be the leading provider of novel enzymes and biologically
active compounds for use in agricultural, chemical processing, industrial and
pharmaceutical applications. The key elements of our strategy are to:
Protect and enhance our technology leadership position. We are unique
relative to our competitors in that we have an end-to-end product solution
consisting of access to novel genetic material, assay technologies capable of
screening more than a billion genes per day, multiple evolution technologies
and manufacturing expertise. We have surrounded our technology with a
substantial portfolio of intellectual property, and we will continue to make
investments in developing and protecting these assets.
Expand our existing DNA libraries through access to novel genetic material
and utilize our proprietary technologies to discover new genes and pathways to
provide solutions to market needs. We believe our ability to create expanded
libraries using minute samples of genetic material collected from diverse
environments is an important factor to our success. Our need to use only small
environmental samples results in minimal impact to the surrounding ecosystem,
enabling us to enter into formal genetic resource access agreements. To date,
we have obtained samples under these agreements with Costa Rica, Bermuda,
Indonesia, Yellowstone National Park, Mexico and Iceland. We intend to enter
into additional agreements to further strengthen our biodiversity access
program by expanding both the countries and the types of ecosystems from which
we obtain samples. We have also collected samples from private lands in the
United States and in areas that do not require formal access agreements, such
as the deep sea. Using our proprietary techniques to recover the genes from
these samples, we have constructed our DiverseLibraries. We intend to expand
these DiverseLibraries, which we estimate currently contain the total genomes
of over 1 million unique microorganisms. We are also making a significant
effort to expand our collection of multi-gene pathways, our PathwayLibraries.
We believe that the application of our proprietary technologies to this vast
resource of genetic material will provide us with a myriad of product
candidates for attractive commercial applications.
Deploy our technologies across diverse markets in order to maximize our
return on investment. We are focusing on commercial solutions for a broad range
of applications for the agricultural, chemical, industrial processing and
pharmaceutical industries. Products and processes utilizing genes, proteins,
small molecules, pathways and bioactive molecules are all potential targets.
Discoveries or developments made for any particular market may find use in
other applications, resulting in enhanced revenues, more efficient use of
corporate resources and increased return on investments.
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Pursue additional strategic alliances with market leaders to access funding
and industry-specific expertise and to more efficiently develop and
commercialize a larger product portfolio. We will continue to enter into
strategic alliances with leading corporations in our target markets. The key
components of the commercial terms of such arrangements typically include some
combination of the following types of fees: exclusivity fees, technology access
fees, technology development fees, research support payments, milestone
payments, license or commercialization fees and royalties or profit sharing
income from the commercialization of products resulting from the strategic
alliances. These partners represent market leaders across multiple industries,
and include Novartis Seeds AG, Novartis Agribusiness Biotechnology Research,
Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and
Finnfeeds International Limited.
Independently develop and commercialize products in selected markets to
capture their full economic value. In addition to developing enzymes and
bioactive molecules through strategic alliances, we have developed and will
continue to develop products independently. For example, we successfully
introduced our first commercial product, Pyrolase 160, into the oil and gas
services market in 1999, and are currently developing Pyrolase 200, a second-
generation product with a higher range of temperature stability. We will
determine which products to pursue independently based on various criteria,
including: investment required, estimated time to market, regulatory hurdles,
infrastructure requirements and industry-specific expertise necessary for
successful commercialization. Because we will retain commercial rights to
independently developed products, we expect that these products will provide
attractive margins.
TECHNOLOGIES
DNA Sampling and Processing
Our discovery program begins with access to biodiversity. Biodiversity can
be defined as the total variety of life on earth, including genes, species,
ecosystems and the complex interactions between them. We have obtained samples
from virtually all ecosystems represented on earth including such environments
as: geothermal and hydrothermal vents, acidic soils and boiling mud pots,
alkaline springs, marine and freshwater sediments, marine symbionts, manure
piles, contaminated industrial sites, arctic tundra, dry Antarctic valleys,
super cooled sea ice, microbial mats, bacterial communities associated with
insects and nematodes, fungi and plant endophytes. We also access genetic
material from public and private culture collections. Because we clone DNA
directly from environmental sources, we need to collect only minute samples of
genetic material, which results in minimal impact on the surrounding ecosystem.
As a result, we have been able to obtain broad access to biologically diverse
environments around the world.
Gene Library Generation
To successfully capture the enormous genetic diversity present in uncultured
microbial community samples, we have developed a series of techniques, which
enable substantial recovery of DNA from a wide range of sample types, while
assuring DNA purity.
Our methods for analysis of environmental samples give scientists a rapid
estimation of the total number of species present and the relative abundance of
each species within a sample. DNA recovered from complex environmental samples
often represents the genomes of thousands of different microbial species, some
of which are generally more abundant than others. We estimate that there may be
as much as a 100,000-fold difference in abundance between a dominant species
and a rare species in a single sample. To access the genetic material of rare
microbial species in a given sample, we have developed proprietary
normalization technologies that result in a more equal representation of each
species at the genetic level. Because current culturing techniques are
generally incapable of capturing this underrepresented genetic material, this
potentially valuable source of genetic information has historically not been
available to commercialize.
DiverseLibrary Generation. We have developed proprietary methods for
construction of complex, representative environmental gene libraries. A gene
library is a stored collection of DNA fragments or genes.
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We store these genes in library form by cloning or splicing the DNA fragments
into a vector, a piece of DNA that acts as a carrier or a transporter into a
host cell. The DNA fragment spliced into the vector DNA is called a
recombinant molecule or clone. A collection of clones representing the entire
DNA isolated from the organisms in the sample is a representative gene
library. In order to capture the complete genomic diversity present in these
complex microbial samples, which may contain more than 4,000 distinct genomes,
we prepare very large member libraries. The result is the creation of a
DiverseLibrary, which typically represents genomic coverage of these
microorganisms. We estimate that collectively our DiverseLibraries contain the
complete genomes of over 1 million different microorganisms, which far exceeds
the estimated 10,000 microorganisms which have been described in the
scientific literature.
PathwayLibrary Generation. We are also developing PathwayLibraries,
collections of multi-gene pathways used in the discovery and production of
small molecules. While a single gene is responsible for the production of an
enzyme, the production of small molecules, such as antibiotics, typically
requires multiple genes working together in a coordinated fashion within a
genetic pathway. In addition, whereas the genetic blueprint for the production
of an enzyme is generally contained within approximately 1,000 nucleotides of
DNA, the blueprint for the production of an antibiotic pathway is typically
more than 25,000 nucleotides, and can be greater than 100,000 nucleotides. For
this reason, we are developing specific molecular tools that can accommodate
and stably maintain such large pieces of DNA in a library.
Screening and Enrichment
We have developed an array of automated, ultra high-throughput screening
technologies and enrichment strategies. Our proprietary rapid screening
capabilities are designed to discover novel biomolecules by screening for
biological activity, known as expression-based screening, as well as by
identifying specific DNA sequences of interest, known as sequence-based
screening.
We have developed several hundred assays capable of expression-based
screening from thousands to over 1 billion clones per day. Our key screening
technologies include SingleCell screening and high-throughput robotic-based
screening. Our ultra high-throughput SingleCell screening system uses
Flouresence Activated Cell Sorting, or FACS, a technology that enables the
identification of biological activity within a single cell. Our SingleCell
screens have been developed to identify clones based on activity or DNA
sequences. This system incorporates a laser with multiple wavelength
capabilities and the ability to screen up to 50,000 clones per second, or over
1 billion clones per day. The robotic screening system uses a high density
microtiter plate-based format, currently capable of screening and
characterizing up to 1 million clones per day.
If the clone expresses an activity or contains a DNA sequence of interest,
it is isolated for further analysis.
We have also developed rapid methods for sequence-based screening for
targeted genes directly from purified DNA. One of these methods, biopanning,
is a powerful alternative to traditional methods, especially when the gene is
toxic or unstable, or when the expression assay is laborious and time
consuming. Using our proprietary techniques, it is possible to screen 100
million clones per day for DNA sequences of interest.
Because we conduct patented, activity-based screening, we are able to use
gene sequences with known function from our proprietary database to identify
the function of genes in public databases based on their sequences. These
newly identified sequences are then added to the repertoire of proprietary
sequences in our own database. As more microbial genomes are sequenced, our
ability to associate gene sequence with enzyme function will be enhanced. This
sequence database provides us with unique opportunities to find and patent
more sequences with similar function and the potential to modify these
sequences in order to create optimized catalysts and other biomolecules for
various commercial applications.
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DirectEvolution
The genetic code is structured such that a sequence of three nucleotides
defines an amino acid. Nature uses 20 common amino acids in proteins arranged
in a sequence, defining the protein structure and activity. Over the course of
evolution, nature has sampled countless sequence possibilities to evolve
enzymes to function optimally within the cell. However, when an enzyme is
removed from its natural cellular environment and used to perform reactions,
such as in a chemical process, its function may not be optimal. Laboratory
methods can accelerate the evolutionary process of optimization outside of the
cell by creating a large number of variants for screening. In the traditional
method for improving proteins, called site-directed mutation, a single site is
typically targeted for change based on prior knowledge of the protein
structure. Other traditional techniques, including random mutation, typically
produce single nucleotide changes which can only access a limited number of
alternative amino acids, typically fewer than 6 of the possible 19
alternatives. These methods are limited by their inability to produce all
sequence variations. Furthermore, the large number of resulting sequences
presents formidable screening challenges.
We believe our techniques overcome the limitations of these traditional
methods, not only because of our superior screening capabilities, but also by
increasing the number and types of sequence variations we can create. Our
evolution technologies used to modify the DNA sequence of the genes,
DirectEvolution, include Gene Site Saturation Mutagenesis (GSSM) and
GeneReassembly. GSSM creates a family of related genes that all differ from a
parent gene by a single amino acid change at a defined position. By performing
GSSM on a gene encoding a protein, we create all possible single amino acid
substitutions within that protein, removing the need for prior knowledge about
the protein structure and allowing all possibilities to be tested in an
unbiased manner. The family of variant genes created using GSSM is then
available to be screened for proteins with improved qualities, such as
increased ability to work at high temperature, increased reaction rate,
resistance to deactivating chemicals or other properties important in a
chemical process. Individual changes in the gene that cause improvements can
then be combined to create a single highly improved version of the protein.
In addition to altering single genes using the GSSM technique, we use our
proprietary GeneReassembly technologies for the reassembly of related genes
from two or more different species. Our GeneReassembly technologies recombine
multiple genes to create a large population of new gene variants. The new genes
created by GeneReassembly are then screened for one or more desired
characteristics. This evolutionary process can be repeated on reassembled genes
until new genes expressing the desired properties are identified.
GeneReassembly technologies can be used to evolve properties which are coded
for by single genes, multiple genes and entire genomes.
As illustrated in the table below, we believe the combination of our GSSM
and GeneReassembly technologies addresses the broadest range of potential
optimization parameters for any enzyme:
<TABLE>
<CAPTION>
CHARACTERISTICS FOR ENZYME OPTIMIZATION OPTIMAL DIRECTEVOLUTION TECHNOLOGY
- ---------------------------------------------------------------------------------------
<S> <C>
Stability GSSM
- ---------------------------------------------------------------------------------------
Enhancement without inappropriate immune
response GSSM
- ---------------------------------------------------------------------------------------
Activity GeneReassembly/GSSM
- ---------------------------------------------------------------------------------------
Expression GeneReassembly/GSSM
- ---------------------------------------------------------------------------------------
Specificity GeneReassembly/GSSM
</TABLE>
We believe that the ability to selectively apply our GSSM or GeneReassembly
technologies to optimize enzymes provides us with a distinct competitive
advantage. GSSM is better suited in some situations, for example, in the
optimization of an enzyme's stability or its immune response characteristics.
With respect to stability, applying GSSM may significantly improve temperature
tolerance through combining single amino acid alterations at defined positions,
while maintaining the enzyme's overall characteristics, such as specificity. In
one situation, we have used this technology to improve enzyme stability by a
factor of 30,000. Similarly,
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adverse immune system responses may be avoided by the incremental changes
created by GSSM. In contrast, random shuffling technologies, which cause
dramatic block shifts in DNA structure, are more likely to reduce stability and
create undesirable immune response characteristics. On the other hand, when
optimizing for activity, expression and specificity, both GSSM and
GeneReassembly can produce optimal results. Because we have multiple evolution
technologies combined with optimal natural enzymes to which we apply these
evolution methodologies, we believe that we are well-positioned to provide the
best solutions to our customers.
Our Data Management and Analysis System - SciLect
We have developed and continue to enhance a leading edge, web-based
relational scientific database for internal purposes called SciLect. SciLect
provides a secure, reliable and accurate source for storage, retrieval and
analysis of vast amounts of proprietary biological data. Our SciLect system
includes custom-developed and third-party bioinformatics software tools which
assist in the acquisition and analysis of complex data relating to genes,
proteins, sequence similarity to known genes, three-dimensional structure
prediction and biological pathways. SciLect includes information relating to:
. Samples - detailed descriptions of each sample collected;
. DNA extractions - the results of separating or isolating DNA molecules
directly from samples;
. Gene libraries - detailed descriptions of the genetic material in our
DiverseLibraries and PathwayLibraries;
. Screening events - the results of assays from our high-throughput
screening systems;
. Novel enzymes - specific properties or characteristics of each enzyme
(e.g. optimal temperature, optimal pH, specific activity);
. Sequence data and analysis results - the output of raw DNA sequence data
from our ultra high-throughput screening technologies and the analytical
results from the application of our bioinformatics software tools;
. Clone data - descriptions of host organisms containing unique fragments
of DNA or copies of DNA optimized for increasing DNA or enzyme yield;
. Optimization data - results from GSSM and GeneReassembly;
. Expression data - results from the process of optimizing protein
production; and
. Patents - information on key data, genes and processes relating to our
intellectual property portfolio.
Utilizing the combination of SciLect and public databases, we are able to
first verify that we have a unique gene. We are then able to mine public
databases for previously unidentified proteins that can be added to our
portfolio of patented proteins. Publicly available databases of proteins and
genomic data are imported daily to our secure environment. Through the use of
SciLect, we have assembled a large proprietary database of patent-protected,
assembled and annotated unique gene sequences of over 1,000 novel enzymes.
Production - Host Cell Optimization
Production of proteins and pathway products has historically been very
challenging due to the difficulty of producing commercial quantities of these
products in traditional host organisms. This problem can be overcome by finding
or developing a more suitable host organism. In the past, random mutation has
been used in an effort to create more efficient hosts. We believe our host cell
optimization processes will accelerate this effort. We are working on a number
of host organisms to improve their functionality as production hosts by:
. Sequencing the complete DNA of a host organism;
. Engineering defined changes in the host genome by, for instance, adding
or removing genes that, when substituted, will improve production or
permit the host to grow better under industrial conditions;
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. Monitoring the effects of changes on the production of enzymes and
pathway products and continuing to engineer changes; and
. Applying our screening technologies to rapidly characterize the effects
of these changes.
PRODUCTS
We have successfully commercialized our first product, Pyrolase 160, an
enzyme for oil and gas well fracturing operations. Sales of this product
commenced in January 1999, only two years after project initiation. We expect
to commercialize Pyrolase 200, a second generation oilfield enzyme product that
operates at a wider temperature range, in 2000. We believe our independent
development of Pyrolase 160 validates our technologies and illustrates our
ability to develop products rapidly using our proprietary methods.
We intend to commercialize products both independently and in collaboration
with strategic partners. The following chart summarizes the stages of
development for the portfolio of projects we are pursuing. We anticipate that a
single project may lead to multiple commercial product candidates.
[DIAGRAM OF A PYRAMID WITH EIGHT LEVELS, EACH INDICATING A STAGE OF DEVELOPMENT
AND THE NUMBER OF PROGRAMS THAT HAVE PROGRESSED THROUGH THE SPECIFIED STAGE.]
As of January 15, 2000, we had 43 projects in various stages of development
in our target markets. Of these, 8 had reached advanced stages of development,
of which one had been commercialized. An additional 15 projects had already
entered the product candidate stage with 20 more projects in various earlier
stages of development. We believe that each of these projects could lead to
multiple product solutions across multiple target markets.
CURRENT ALLIANCES AND OTHER AGREEMENTS
Current Alliances
Our strategy includes pursuing strategic alliances with market leaders in
our target markets. In exchange for selected rights to future products, these
strategic alliances provide us funding and resources to develop and
commercialize a larger product portfolio. In various instances, these strategic
alliances allow us to leverage our partners' established brand recognition,
global market presence, established sales and distribution channels and other
industry-specific expertise. The key components of the commercial terms of such
arrangements typically include some combination of the following types of fees:
exclusivity fees, technology access fees, technology development fees, research
support payments, milestone payments, license or commercialization fees and
royalties or profit sharing from the commercialization of products. In addition
to $10.7 million received from inception through December 31, 1999, our
partners are committed to fund $68.0 million under existing agreements over the
next five years. Our partners have also purchased $9.2 million of our equity
securities.
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To date, we have entered into the following strategic alliances:
Novartis
In January 1999, we entered the agricultural biotechnology arena through a
strategic alliance with Novartis Agribusiness Biotechnology Research, Inc. This
alliance covers a multi-project collaborative research and development
agreement to develop products for crop enhancement and improved agronomic
performance. Under terms of the agreement, we are utilizing our unique
discovery and screening technologies to identify and optimize genes and gene
pathways for use in transgenic crops. The initial projects focus on new genomic
approaches that will provide improved performance and quality traits in crops
and enhance production. Under the agreement, Novartis receives an exclusive
option to receive a worldwide license to products developed. At Novartis'
election the license may be either exclusive or non-exclusive. In conjunction
with the transaction, Novartis purchased 5,555,556 shares of series E preferred
stock for gross proceeds of $7.3 million, paid a technology access fee of $3.0
million and provided project research funding of $2.2 million to us, for
aggregate total proceeds of $12.5 million. We are recognizing the research
payments and the technology access fee on a percentage of completion basis as
research is performed.
In December 1999, we formed a five-year, renewable strategic alliance with
Novartis Seeds AG. Through a contract joint venture, we will jointly pursue
opportunities in the field of animal feed and agricultural product processing.
We will share in the management of the venture and fund a portion of the sales
and marketing costs of this venture. Under the agreements, Novartis receives
exclusive, worldwide rights in the field of animal feed and project exclusive,
worldwide rights in the field of agricultural product processing. Novartis will
pay us for the license granted under this agreement, of which $15.0 million
will be due within 30 days of regulatory approval and an additional $5.0
million due at the 18 month anniversary of this agreement. Additionally, we
will receive minimum research funding over five years of $33.9 million, as well
as milestone payments upon achievement of project objectives totaling up to
$7.7 million and license and commercialization fees for any resulting products.
We will receive a share of the profits in the form of royalties on any product
sales.
Either party may terminate these agreements in the event a material breach
remains uncured for 90 days. Novartis may terminate these agreements within 60
days of a change of control of Diversa.
The Dow Chemical Company
In July 1997, we entered into an alliance with The Dow Chemical Company. The
alliance was for a project involving biocatalytic discovery and optimization
for use in new and existing Dow processes. This initial project was directed
towards the incorporation of a high performance enzyme into a modified chemical
process. Our staff successfully optimized an enzyme for this project with
significantly greater thermostability at a defined temperature, thereby meeting
milestones specified in the agreement.
In July 1999, we entered into a new, three-year research agreement and a
license agreement with Dow. The new agreements significantly broaden the scope
of our original alliance. We are applying our discovery and optimization
technologies for Dow to develop a variety of novel enzymes for multiple
chemical processes on a reaction-exclusive basis. The research agreement
involves multiple projects in the field of chemical processing. The three-year
agreement requires Dow to make annual technology development payments of $1.5
million. Dow will also fund the research costs for the duration of the contract
totaling $10.8 million. We will also receive milestone payments of up to $2.7
million upon achievement of established objectives and license and
commercialization fees for any resulting products. We will also receive
royalties on sales of our royalty-bearing products sold or sublicensed by Dow.
We are amortizing the technology development fees over the minimum guaranteed
period of the agreement. In the license agreement, we grant Dow an exclusive,
worldwide, royalty-bearing license to use enzymes for research processes.
Either party may terminate the research agreement upon failure to pay amounts
due for 30 days or material breach if uncured within 60 days. The research
agreement may also be terminated by Dow with 180 days written notice or upon a
change of control to a Dow competitor
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with 30 days notice, in both cases upon the payment of defined penalties. We
may terminate the license agreement in the event of a material breach if
uncured for 30 days. Dow may terminate the license agreement on 3 months
written notice.
Rhone-Poulenc Animal Nutrition S.A.
In June 1999, we entered into a six month collaboration agreement with
Rhone-Poulenc Animal Nutrition S.A., RPAN, under which we are using our gene
discovery and optimization technologies to develop novel enzymes which can be
used for biotransformation as an alternative to chemical synthesis. RPAN will
receive an option to obtain an exclusive, worldwide royalty-bearing license to
the targeted enzymes for a specified field. If RPAN does not exercise its
option, the agreement will expire. If RPAN exercises its option, the term of
this agreement will continue until the expiration of all patent rights covering
the licensed enzymes. RPAN supports research costs and will pay us a license
fee and a royalty based upon cost savings attributable to licensed enzymes.
This agreement may be terminated by either party upon material breach if
uncured within 30 days.
Finnfeeds International Limited
In May 1996, we formed an alliance with Finnfeeds International Limited. The
companies worked jointly to identify and develop a novel phytase enzyme that
when used as an additive in animal feed applications allows higher utilization
of phytic acid phosphates from the feed, thereby increasing its nutritional
value. The addition of phytase to animal feed reduces the need for inorganic
phosphorus supplementation and lowers the level of harmful phosphates that are
introduced to the environment through animal waste, resulting in inorganic
phosphate cost savings and a significant reduction in environmental pollution.
In conjunction with the agreement, we issued 844,444 shares of our series C
preferred stock to Finnfeeds for $1,900,000. We received and recognized as
revenue $0.8 million in research funding over the period from May 1996 through
December 31, 1998. We achieved all milestones under the agreement.
Following the completion of the initial objectives of our alliance with
Finnfeeds, in December 1998, we entered into a license agreement with
Finnfeeds. Under this license agreement, we granted Finnfeeds an exclusive,
worldwide license to an enzyme and related technology for specified uses,
including manufacturing and sales of the enzyme. Finnfeeds has continuing
royalty obligations to us on product sales that incorporate the licensed
technology. Finnfeeds can terminate this agreement at any time upon six months
notice to us. We can terminate this agreement upon material breach by Finnfeeds
if uncured within 60 days.
License Agreements
In addition to our strategic alliances, we have entered into various
agreements whereby we have in-licensed patented technologies to supplement our
internally developed methods, the most significant of which we have outlined
below. The financial impact of these agreements to us is not significant.
Invitrogen Corporation
In March 1999, we signed an agreement with Invitrogen Corporation for the
exchange of proprietary technologies and products in specified fields of use.
Under the terms of the agreement, we have an exclusive license to use
Invitrogen's TOPO Cloning technology in the field of cloning nucleic acids from
mixed populations and uncultured organisms. Invitrogen has an option to access
selected proprietary DNA modifying enzymes for use in the research reagent
marketplace. The TOPO Cloning technology broadens our portfolio of cloning
technologies. We paid Invitrogen a license fee and will pay an annual
maintenance fee in exchange for materials. Each party will have a royalty
obligation for the life of the patent rights on product sales that incorporate
the licensed technology. We can terminate this agreement with 90 days written
notice. Invitrogen
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can terminate with 90 days written notice upon our failure to make any payment
or immediately upon our default if uncured within 90 days.
Terragen Discovery, Inc.
In November 1999, we signed a royalty-free cross-license agreement with
Terragen Discovery, Inc. granting non-exclusive, worldwide license rights for
the life of specified patents. We granted rights to our patents protecting
accessing genomes of uncultured organisms for the discovery of pathways
producing novel small molecules for pharmaceutical applications and Terragen
granted us co-exclusive rights to patents protecting generation and screening
of combinatorial libraries from mixed populations of organisms for all fields
of use. Under the agreement, we paid Terragen a $2.5 million license fee and
will pay annual maintenance fees for the remaining life of the patents. The
term of the licenses we granted to Terragen and that Terragen granted to us
will continue until the expiration of all valid claims within the licensed
patent rights. Either party may terminate this agreement in the event a
material breach remains uncured for 60 days. Both parties have rights to
terminate under special conditions.
One Cell Systems, Inc.
In December 1997, we entered into a research license agreement with One Cell
Systems, Inc. which provided us with non-exclusive access to One Cell's
proprietary encapsulation technologies for an initial term of twelve months.
This agreement was extended in February 1999. Under the terms of the agreement,
we receive equipment and reagents to use the proprietary technology in exchange
for annual payments. The extension to the agreement expires on December 31,
1999 but is renewable for a subsequent term at One Cell's option.
Mycogen Corporation
In December 1997, we signed a license agreement with Mycogen Corporation for
access to its proprietary expression system. Under the terms and conditions of
the agreement, we have an exclusive, worldwide license to use the system for
the production of enzymes in exchange for a license fee and royalties paid to
Mycogen. The agreement can be terminated by either party upon material breach
if uncured for 60 days.
Biodiversity Access Agreements
We have obtained genetic material under formal genetic resource access
agreements with Costa Rica, Bermuda, Indonesia, Yellowstone National Park,
Mexico and Iceland. Pursuant to the terms of these agreements, we have obtained
non-exclusive access to collect samples from diverse ecosystems, we own the
samples collected and we pay a royalty to the other party on the sale of
products derived from the samples. All of these agreements expire in 2002 or
earlier, and they are all subject to earlier termination. Our access agreement
with Iceland was terminated, and we have voluntarily ceased collections of
further samples in Yellowstone National Park pending their resolution of
collection guidelines. If an access agreement terminates and a new agreement is
not established, we will not be permitted to collect any further materials from
the specified location; however, we will retain the right to use any samples we
have already collected. The financial impact of these agreements to us is not
significant.
COMPETITION
We believe we are the leader in the field of biomolecule discovery and
optimization from biodiversity. We are not aware of another company that has
the scope and integration of technologies and processes that we have. There
are, however, a number of competitors who are competent in various steps
throughout our technology process. For example, Terragen Discovery, Inc. is
involved in accessing organisms from diverse environments. A number of
companies are performing high-throughput screening of molecules. Maxygen, Inc.
and Evotech have alternative evolution technologies. Integrated Genomics Inc.,
Myriad Genetics, Inc., ArQule, Inc. and Aurora Biosciences Corporation perform
screening, sequencing and/or bioinformatics services. Novo
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Nordisk A/S and Genencor International Inc. are involved in development,
overexpression, fermentation and purification of enzymes. There are also a
number of academic institutions involved in various phases of our technology
process. Many of these competitors have significantly greater financial and
human resources than we do.
We believe that the principal competitive factors in our market are access
to genetic material, technological experience and expertise and proprietary
position. We believe that we compete favorably with respect to the foregoing
factors.
Any products that we develop will compete in multiple, highly competitive
markets. Many of our potential competitors in these markets have substantially
greater financial, technical and marketing resources than we do, and we cannot
assure you that they will not succeed in developing products that would render
our products or those of our strategic partners obsolete or noncompetitive. In
addition, many of these competitors have significantly greater experience than
we do in their respective fields. Our ability to compete successfully will
depend on our ability to develop proprietary products that reach the market in
a timely manner and are technologically superior to and/or are less expensive
than other products on the market. Current competitors or other companies may
develop technologies and products that are more effective than ours. Our
technologies and products may be rendered obsolete or uneconomical by
technological advances or entirely different approaches developed by one or
more of our competitors. The existing approaches of our competitors or new
approaches or technology developed by our competitors may be more effective
than those developed by us.
MANUFACTURING STRATEGY
Our manufacturing strategy is to secure contract manufacturing relationships
with qualified third parties possessing sufficient industrial fermentation
capacity to meet our commercial production requirements. We plan to place our
own technical personnel on site at contract manufacturing facilities to plan
and supervise our production. Our employees have extensive experience in scale-
up and production of industrial fermentation products, including industrial
enzymes. We have cleared regulatory requirements for our first two commercial
enzymes, and are producing our first product at commercial scale. We
manufacture Pyrolase 160 pursuant to an arrangement with a third party that has
the required manufacturing equipment and available capacity to manufacture the
product under our direction and oversight. We also currently lease a pilot
facility for process development activities from a third-party, which we intend
to vacate by March 2000. We plan to construct our own pilot development
facility during 2000 and have identified alternative capacity to meet interim
requirements. In addition to requiring investment in equipment, construction of
this new facility will necessitate compliance with applicable regulations.
After we complete the construction of our pilot facility, we will continue to
depend on third parties for large-scale commercial manufacturing.
We do not currently depend on any single supplier for the raw materials
necessary for the operation of our business. We may become dependent on a
single supplier in the future.
GOVERNMENT REGULATION
Many of our product opportunities, and all of our projects to date, have
applications other than as regulated drug products. Non-drug biologically
derived products are regulated, in the United States, based on their
application, by either the FDA, the Environmental Protection Agency (EPA) or,
in the case of plants and animals, United States Department of Agriculture
(USDA). In addition to regulating drugs, the FDA also regulates food and food
additives, feed and feed additives, and GRAS (Generally Recognized As Safe)
substances used in the processing of food. The EPA regulates biologically
derived chemicals not within the FDA's jurisdiction. Although the food and
industrial regulatory process can vary significantly in time and expense from
application to application, the timelines generally are shorter in duration
than the drug regulatory process, ranging from six months to three years.
The European regulatory process for these classes of biologically derived
products has undergone significant change in the recent past, as the EU
attempts to replace country by country regulatory procedures
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with a consistent EU regulatory standard in each case. Some country-by-country
regulatory oversight remains. Other than Japan, most other regions of the world
generally accept either a United States or a European clearance together with
associated data and information for a new biologically derived product.
In the United States, transgenic agricultural products may be reviewed, by
the FDA, EPA and USDA, depending on the plant and the trait engineered into it.
The regulatory process for these agricultural products can take up to five
years of field testing under USDA oversight, and up to another two years for
applicable agencies to complete their reviews.
Outside of the United States, scientifically-based standards, guidelines and
recommendations pertinent to transgenic and other products intended for the
international marketplace are being developed by, among others, the
representatives of national governments within the jurisdiction of the
standard-setting bodies, including Codex Alimentarius, the International Plant
Protection Convention and the Office des International Epizooties. The use of
the existing standard-setting bodies to address concerns about products of
biotechnology is intended to harmonize risk-assessment methodologies and
evaluation of specific products or classes of products.
PROPRIETARY RIGHTS
Our intellectual property consists of patents, copyrights, trade secrets,
know-how and trademarks. Protection of our intellectual property is a strategic
priority for our business. 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. As of January 15,
2000, we owned 24 issued patents relating to our technologies, had received
notices of allowance with respect to 7 other patent applications and have over
125 patents pending. In addition, as of January 15, 2000, we have in-licensed
more than 25 additional patents or patent applications that we believe
strengthen our patent position.
The patent positions of biotechnology companies, including our patent
position, involve complex legal and factual questions and, therefore,
enforceability cannot be predicted with certainty. Patents, if issued, may be
challenged, invalidated or circumvented. We cannot be sure that relevant
patents have not been issued that could block our ability to obtain patents or
to operate as we would like to. Others may develop similar technologies or
duplicate technologies developed by us. We are aware of the existence of
patents in some countries that, if valid, may block our ability to
commercialize products in these countries if we are unsuccessful in
circumventing or acquiring the rights to these patents. We are also aware of
the existence of claims in published patent applications in some countries
that, if granted and valid, may also block our ability to commercialize
products in these countries if we are unable to circumvent or license them.
The biotechnology industry is characterized by extensive litigation
regarding patents and other intellectual property rights. Many biotechnology
companies have employed intellectual property litigation as a way to gain a
competitive advantage. Third parties may sue us in the future to challenge our
patent rights or claim infringement of their patents. An adverse determination
in litigation or interference proceedings 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 filed by, and issued to,
third parties. Should any of our competitors have filed patent applications or
obtain patents that claim 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.
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We recently received a letter from a privately held biotechnology company
suggesting that we may want to consider licensing patents held by that third
party. We believe that we have defenses to any infringement claim with respect
to such patents. However, we cannot be certain that the third party will not
initiate litigation alleging that our technologies infringe claims of such
patent or that a court would not find such claims valid and infringed.
We also rely on trade secrets, technical know-how and continuing invention
to develop and maintain our competitive position. We have taken security
measures to protect our trade secrets, proprietary know-how and technologies
and confidential data and continue to explore further methods of protection.
Our policy is to execute confidentiality agreements with our employees and
consultants upon the commencement of an employment or consulting arrangement
with us. These agreements generally require that all confidential information
developed or made known to the individual by us during the course of the
individual's relationship with us to be kept confidential and not disclosed to
third parties. These agreements also generally provide that inventions
conceived by the individual in the course of rendering services to us shall be
our exclusive property. 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.
EMPLOYEES
As of December 31, 1999, we had approximately 102 full-time employees, 25 of
whom hold Ph.D. degrees. Of these employees, 77 were engaged in research and
development and 25 were engaged in business development, finance and general
administration. None of our employees are represented by labor unions or
covered by collective bargaining agreements. We have not experienced any work
stoppages and consider our employee relations to be good.
FACILITIES
Our executive offices and research and development facilities are currently
located in San Diego, California. We lease approximately 24,900 square feet of
space. These facilities are leased through January 31, 2002. We are also
negotiating a sublease for approximately 3,000 square feet of adjacent
laboratory space for use through December 2000. To meet our expected growth
needs, we have selected two site alternatives in proximity to our current space
and are currently in lease negotiations for approximately 75,000 square feet of
space that will be built to our specifications. We plan to occupy the new space
in late 2000, at which time we plan to sublease our current space for the
remaining term. We will not have any equity interest related to the new
facility.
LEGAL PROCEEDINGS
We are not presently a party to any material legal proceedings.
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SCIENTIFIC ADVISORY BOARD
We have established a select group of scientists to advise us on scientific
and technical matters in areas of the Company's business. The scientific
advisors are compensated with a $15,000 annual fee, payable quarterly. We have
also entered into consulting and other agreements with a number of our
scientific advisors under which they have received options to purchase shares
of our common stock.
None of our scientific advisors is employed by us, and they may have other
commitments to, or consulting or advisory contracts with, their employers or
other entities that may conflict or compete with their obligations to us. Our
scientific advisors include:
<TABLE>
<CAPTION>
NAME TITLE/AFFILIATION
- ---- -----------------
<S> <C>
Melvin I. Simon, Ph.D.................... Chairman and Professor of Biology
California Institute of Technology
Karl O. Stetter, Ph.D.................... Chairman and Professor of Microbiology
University of Regensburg, Germany
Robert M. Kelly, Ph.D.................... Professor of Chemical Engineering
North Carolina State University
George M. Whitesides, Ph.D............... Chairman and Professor of Chemistry
Harvard University
</TABLE>
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information about our directors and executive
officers as of January 15, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jay M. Short, Ph.D. .................... 41 President, Chief Executive Officer and
Chief Technology Officer, Director
William H. Baum......................... 54 Senior Vice President, Business Development
Karin Eastham........................... 50 Senior Vice President, Finance, Chief
Financial Officer and Secretary
R. Patrick Simms........................ 55 Senior Vice President, Operations
Carolyn A. Erickson..................... 35 Vice President, Intellectual Property
Daniel T. Carroll (1)................... 73 Director
James H. Cavanaugh, Ph.D. (1)........... 62 Director
Patricia M. Cloherty (1)................ 57 Director
Peter Johnson (2)....................... 54 Director
Donald D. Johnston (2).................. 74 Director
Mark Leschly (2)........................ 31 Director
Melvin I. Simon, Ph.D. ................. 62 Director
</TABLE>
- --------
(1) Member of human resources (compensation) committee.
(2) Member of audit committee.
Dr. Jay M. Short was appointed our Chief Executive Officer in February 1999.
He has served as our Chief Technology Officer and as a director since September
1994 and also as our President since June 1998. Dr. Short served as President
of Stratacyte, Inc. and Vice President of Research & Development and Operations
for Stratagene Cloning Systems, both molecular biology companies based in La
Jolla, California. Dr. Short serves as a director for Invitrogen Corporation, a
gene expression company, and StressGen Biotechnologies Corp., a company engaged
in the medical application of stress proteins. Dr. Short received his Ph.D.
from Case Western Reserve University and his B.A. from Taylor University.
Mr. William H. Baum joined us in August 1997 as Vice President, Sales and
Marketing, and was promoted to Senior Vice President, Business Development in
November 1999. Mr. Baum was Vice President of Global Sales and Marketing with
International Specialty Products, a specialty chemical company, from July 1993
to August 1997. Prior to joining International Specialty, Mr. Baum was with
Betz Laboratories, also a specialty chemical company, for 20 years in a variety
of international and domestic executive management positions including
Executive Vice President of European Operations and as Managing Director of
Germany. Mr. Baum received a B.S. from Widener University.
Ms. Karin Eastham was appointed Senior Vice President, Finance, Chief
Financial Officer and Secretary in May 1999. Ms. Eastham served as Vice
President, Finance and Administration and Chief Financial Officer of CombiChem,
Inc., a computational chemistry company, from April 1997 to April 1999. From
October 1992 through April 1997, Ms. Eastham served as Vice President, Finance
and Administration and Chief Financial Officer of Cytel Corporation, a
biopharmaceutical company. Ms. Eastham also held several positions, including
Vice President, Finance, at Boehringer Mannheim Corporation, from June 1976 to
August 1988. Ms. Eastham received a B.S. and an M.B.A. from Indiana University.
She is a Certified Public Accountant.
Mr. R. Patrick Simms has served as our Senior Vice President, Operations
since October 1998. He served as our Vice President, Process Engineering and
Manufacturing from February 1997 to October 1998. Mr. Simms served as Senior
Vice President, Business Development and Manufacturing, at Biosys, Inc., an
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agricultural biotechnology company focusing on natural insecticide products,
from March 1990 to February 1997. Biosys filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code in September 1996. Mr. Simms subsequently filed
for liquidation under Chapter 7 of the U.S. Bankruptcy Code in February 1997.
From December 1984 to March 1990, Mr. Simms served as Vice President,
Commercial Operations, at Genencor, a biotech company focusing on industrial
enzymes. Prior to joining Genencor, Mr. Simms spent 18 years with A.E. Staley
in a wide range of technical and operational positions. Mr. Simms received a
B.S. from West Virginia University .
Ms. Carolyn A. Erickson has served as Vice President, Intellectual Property
since November 1999. From July 1994 to November 1999, Ms. Erickson held several
positions with us, including Director of Intellectual Property, Manager,
Business Development & Regulatory Affairs, Senior Patent & Licensing Liaison,
Patent & Licensing Liaison and Laboratory Administrator. Prior to joining us,
from April 1988 to June 1994 Ms. Erickson held several positions in Business
Development/Technology Transfer, Product Management, Marketing and Technical
Sales for Stratagene Cloning Systems. Ms. Erickson received a B.A. from the
University of California, San Diego.
Dr. James H. Cavanaugh has been a director since December 1992 and our
Chairman since October 1998. Dr. Cavanaugh is President of HealthCare Ventures
LLC, a health care venture capital management company. Dr. Cavanaugh was
formerly President of SmithKline & French Laboratories--U.S., the
pharmaceutical division of SmithKline Beckman Corporation. Previously, he was
President of SmithKline Beckman's clinical laboratory business and, before
that, President of Allergan International. Prior to his industry experience,
Dr. Cavanaugh served as Staff Assistant to The President for Health Affairs and
then Deputy Director of the Domestic Council. Under President Ford, he was
appointed Deputy Assistant to the President for Domestic Affairs and Deputy
Chief of the White House Staff. Dr. Cavanaugh is on the board of directors of
MedImmune, Inc., and non-executive Chairman of the Board of Shire
Pharmaceuticals Group PLC. He also serves on the boards of the National Center
for Genome Resources and the National Committee for Quality Health Care. Dr.
Cavanaugh received a Ph.D. and M.A. from the University of Iowa and a B.S. from
Farleigh Dickinson University.
Mr. Daniel T. Carroll has been a director since October 1996. Mr. Carroll
has been Chairman of The Carroll Group, a management consulting firm, since
1982. From early 1980 until early 1982, he was President and Chief Executive
Officer and a director of Hoover Universal, Inc. From 1972 until early 1980, he
was President of Gould Inc. He served as President of the Management Consulting
Division at Booz Allen & Hamilton, Inc. from 1954 to 1972. He is a director of
A.M. Castle & Co., American Woodmark Corporation, Aon Corporation, Comshare,
Inc., Oshkosh Truck Corporation, Wolverine World Wide, Incorporated, and
Woodhead Industries Inc. Mr. Carroll earned an A.B. from Dartmouth College and
an M.A. from the University of Minnesota.
Ms. Patricia M. Cloherty has been a director since May 1996. Ms. Cloherty is
a Special Limited Partner of Patricof & Co. Ventures, Inc., an international
venture capital company. From 1988 through 1999, she was General Partner, and
successively, Senior Vice President, President and Co-Chairman of that firm.
From 1970 to 1977, she also was General Partner of that firm. She has served in
government, as Deputy Administrator of the U.S. Small Business Administration
from 1977 through 1978 and as Chairman of the U.S. Russia Investment Fund from
1995 to the present. She is past president and chairman of the National Venture
Capital Association and has been honored by the National Association of Small
Business Investment Companies for her work with growth companies. She is a
director of several privately-held companies and of several philanthropies. She
holds a B.A. from the San Francisco College for Women and an M.A. and an M.I.A.
from Columbia University.
Mr. Peter Johnson has been a director since December 1999. Mr. Johnson was a
founder of Agouron Pharmaceuticals, Inc. and has served as President and Chief
Executive Officer of Agouron since its inception in 1984. He received a B.A.
and an M.A. from the University of California, San Diego.
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Mr. Donald D. Johnston has been a director since September 1993. Since 1986,
Mr. Johnston has worked as a consultant for various companies, including
Johnson & Johnson, Human Genome Sciences, Inc. and HealthCare Investment
Corporation. He worked in product and general management for Johnson & Johnson
from 1962 to 1986, including serving as President of J&J Baby Products Co. from
1972 to 1977. Mr. Johnston also served as a director of Johnson & Johnson from
1975 through 1986. Mr. Johnston currently serves on the board of directors of
Osteotech, Inc. Mr. Johnston received a B.A. from the University of Cincinnati.
Mr. Mark Leschly has been a director since August 1999. Mr. Leschly is a
managing director of Rho Management Company, Inc. Prior to joining Rho in July
1999, beginning in 1994 Mr. Leschly worked at HealthCare Ventures where he was
a general partner. Prior to Healthcare Ventures, he worked at McKinsey &
Company, a management consulting company. Mr. Leschly is a director of several
privately-held companies and is a member of the advisory board of the Harvard
AIDS Institute. Mr. Leschly received a B.A. from Harvard University and an
M.B.A. from the Stanford Graduate School of Business.
Dr. Melvin I. Simon has been a director since May 1994. Dr. Simon is
Chairman and has been a professor in the Division of Biology at the California
Institute of Technology since 1982, where he is currently the Anne P. and
Benjamin F. Biaggini Professor of Biological Sciences. From 1965 to 1982, Dr.
Simon was a professor at the University of California, San Diego. He received a
B.S. from the City College of New York and a Ph.D. from Brandeis University.
CLASSIFIED BOARD
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, three of the nominees to the board will be
elected to one-year terms, two will be elected to two-year terms and three will
be elected to three-year terms. After these initial terms, directors will be
elected for three-year terms. Messrs. Carroll and Leschly and Ms. Cloherty and
have been designated Class I directors whose terms expire at the 2001 annual
meeting of stockholders. Messrs. Johnson and Johnston have been designated
Class II directors whose terms expire at the 2002 annual meeting of
stockholders. Drs. Cavanaugh, Short and Simon have been designated Class III
directors whose terms expire at the 2003 annual meeting of stockholders. For
additional discussion regarding the effects of our classified board, see
"Description of Capital Stock--Possible Anti-Takeover Matters."
COMMITTEES OF THE BOARD OF DIRECTORS
Our human resources committee reviews and makes recommendations to the board
concerning compensation and benefits of all of our executive officers,
administers our stock option plan and establishes and reviews general policies
relating to compensation and benefits of our employees. The human resources
committee currently consists of Mr. Carroll, Dr. Cavanaugh and Ms. Cloherty.
The audit committee of the board of directors reviews our internal
accounting procedures and consults with and reviews the services provided by
our independent accountants. The audit committee currently consists of Messrs.
Johnson, Johnston and Leschly.
DIRECTOR COMPENSATION
Prior to the completion of this offering, our directors did not receive cash
compensation for their service as members of the board of directors, except for
Messrs. Carroll and Johnston, who each received $10,000 per year, and Dr.
Simon, who received $25,000 for his service as a director and as a scientific
advisor. Non-employee directors are reimbursed for expenses in connection with
attendance at board and committee meetings. Following the completion of this
offering, our directors will receive $1,500 for each board meeting
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attended. Dr. Simon will continue to receive compensation in connection with
his service under our consulting agreement with him. We do not provide
additional compensation for committee participation or special assignments of
the board of directors. From time to time, some of our directors have received
grants of options to purchase shares of our common stock under the 1997 Equity
Incentive Plan in connection with their employment or consulting agreements.
For information concerning options we have granted to our non-employee
directors, please see the description under the caption "Certain Transactions--
Agreements with Officers and Directors" included in this prospectus. See "--
Executive Compensation--Employment Agreements" for a description of employment
agreements with employee directors. Upon the completion of this offering, all
of our non-employee directors will be eligible to receive equity incentives in
the form of stock option grants under our 1999 Non-Employee Directors Stock
Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1999, Mr. Carroll, Dr. Cavanaugh
and Ms. Cloherty served as members of our human resources committee. We have
never employed any member of the human resources committee of our board of
directors. None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or our human resources
committee of the board of directors. For information on recent purchases of our
capital stock by the members of our human resources committee or their
respective affiliates, please see the description under the caption "Certain
Transactions--Sales of Stock and Notes" included in this prospectus.
47
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid to, or
earned or accrued for services rendered to us in all capacities during the
fiscal year ended December 31, 1999 to our current and former Chief Executive
Officer, the four other most highly compensated officers whose total salary and
bonus exceeded $100,000 in fiscal 1999 and our former Chief Financial Officer
who departed from Diversa during the last fiscal year. In accordance with SEC
rules, the compensation described in the table does not include medical, group
life insurance or other benefits which are available generally to all our
salaried employees and perquisites and other personal benefits which do not
exceed the lesser of $50,000 or 10% of the officers' total salary and bonus
disclosed in this table. We refer to these officers as our named executive
officers in other parts of this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS
--------------------------- ---- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Jay M. Short, Ph.D. (1)..................... 1999 $262,333 $500,000 -- --
Current President, Chief Executive Officer 1998 $243,000 $545,000 -- 1,292,045
and Chief Technology Officer
Terrance J. Bruggeman (2)................... 1999 $ 72,315 $ -- $316,229(3) --
Former Chief Executive Officer 1998 $270,000 $ 65,000 $ 25,000(4) --
William H. Baum............................. 1999 $207,400 $ 10,000 -- 199,609
Senior Vice President, Business
Development 1998 $195,000 $ 28,000 -- --
Karin Eastham (5)........................... 1999 $142,100 -- -- 277,718
Current Senior Vice President, Finance, 1998 -- -- -- --
Chief Financial Officer and Secretary
R. Patrick Simms............................ 1999 $188,558 $ 10,000 -- 95,465
Senior Vice President, Operations 1998 $173,000 $ 29,000 $ 7,096(6) 34,714
Kathleen H. Van Sleen (7)................... 1999 $ 97,898 $ -- $228,467(8) 34,714
Former Vice President, Finance and 1998 $190,000 $ 36,000 $ 4,949(6) --
Administration, Chief Financial Officer,
Treasurer and Secretary
</TABLE>
- --------
(1) In 1998, Dr. Short held the title of Chief Technology Officer and, from
June 1998, President. At the time of Dr. Short's appointment as President
in June 1998, he was awarded a bonus of $1,000,000 payable in two equal
installments of $500,000 in 1998 and 1999. In January 2000, our Board
granted Dr. Short an option to purchase 206,453 shares of common stock at
an exercise price equal to the initial public offering price.
(2) Mr. Bruggeman resigned as Chief Executive Officer effective as of February
1999.
(3) Consists of $4,200 for reimbursement of relocation costs, $297,500 for
severance payments and $14,529 for separation expenses.
(4) Consists of $16,700 for reimbursement of relocation costs and $8,300 for a
cost of living adjustment for relocation.
(5) Ms. Eastham commenced her employment as Senior Vice President, Finance,
Chief Financial Officer and Secretary in April 1999 at a base salary of
$210,000.
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<PAGE>
(6) For reimbursement of relocation costs.
(7) Ms. Van Sleen resigned as Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary effective as of March 1999.
(8) Consists of $131,125 for separation payments, $55,443 for payments relating
to Ms. Van Sleen's purchase of a residence and $41,900 of forgiveness of
indebtedness.
OPTION GRANTS
The following table sets forth information concerning stock options granted
to our named executive officers during the fiscal year ended December 31, 1999:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME GRANTED YEAR (PER SHARE) DATE 5% 10%
---- ---------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Short, Ph.D...... -- -- $ -- -- $ -- $ --
Terrance J. Bruggeman... -- -- -- -- -- --
William H. Baum......... 17,357 1.1% 0.58 01/07/09 569,000 891,000
43,393 2.9% 1.73 06/30/09 1,373,000 2,178,000
138,859 9.2% 2.02 10/26/09 4,355,000 6,931,000
Karin Eastham........... 208,289 13.7% 1.73 04/29/09 6,593,000 10,456,000
69,429 4.6% 2.02 10/26/09 2,177,000 3,465,000
R. Patrick Simms........ 26,036 1.7% 0.58 01/07/09 854,000 1,337,000
69,429 4.6% 2.02 10/26/09 2,177,000 3,465,000
Kathleen H. Van Sleen... 34,714 2.3% 0.58 01/07/09 1,139,000 1,783,000
</TABLE>
The figures above represent options granted under our 1997 Equity Incentive
Plan. We granted options to purchase 1,515,695 shares of our common stock in
1999. All options were granted at an exercise price equal to the fair market
value of the common stock on the date of grant as determined by our board of
directors.
The options granted to our employees typically vest in 25% increments on
each of the four annual anniversaries of the date of grant. The options granted
to our consultants generally vest in 33% increments on each of the three annual
anniversaries of the date of the grant or in accordance with specified
performance goals over a ten-year term. Options granted to the persons listed
above expire 10 years from the grant date.
The potential realizable value represents amounts, net of exercise price
before taxes, that may be realized upon exercise of the options immediately
prior to the expiration of their terms assuming appreciation of 5% and 10% over
the option term. The 5% and 10% values are calculated based on rules
promulgated by the SEC and are applied to an assumed initial public offering
price of $21.00 per share and do not reflect our estimate of future stock price
growth. The actual value realized may be greater or less than the potential
realizable value set forth in the table.
We have never granted stock appreciation rights.
49
<PAGE>
OPTIONS EXERCISED AND FISCAL YEAR-END VALUES
The following table sets forth information concerning the number and value
of options exercised by each of the named executive officers as of December 31,
1999 and the value and number of unexercised options held by each of the named
executive officers at December 31, 1999. The value of unexercised in-the-money
options at December 31, 1999 represents an amount equal to the difference
between the assumed initial public offering price of $21.00 per share and the
option exercise price, multiplied by the number of unexercised in-the-money
options. An option is in-the-money if the fair market value of the underlying
shares exceeds the exercise price of the options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999
SHARES ACQUIRED VALUE -------------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Short, Ph.D...... 290,300 $397,324 276,816 724,929 $5,758,000 $14,812,000
Terrance J. Bruggeman... 428,676 560,620 -- -- -- --
William H. Baum......... 95,466 152,350 -- 199,609 -- 3,826,000
Karin Eastham........... 69,429 16,667 -- 208,289 -- 3,997,000
R. Patrick Simms........ 19,093 30,470 64,437 159,468 1,323,000 3,161,000
Kathleen H. Van Sleen... -- -- 118,463 19,526 2,434,000 400,000
</TABLE>
1994 EMPLOYEE INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
Introduction. On October 12, 1994, our board adopted, and on December 20,
1994, our stockholders approved our 1994 Employee Incentive and Non-Qualified
Stock Option Plan. The plan was subsequently amended to, among other things,
authorize a total of 2,912,587 shares of common stock for issuance under the
plan. The 1994 plan was terminated by our board on August 28, 1997. We will not
grant any additional stock options under the 1994 plan; however, termination of
the plan did not affect any outstanding options which remained in effect. Since
the plan has been terminated, shares subject to stock awards that in the past
have expired, and in the future either expire or otherwise terminate, without
having been exercised in full, will not be available for grant under the plan.
The terminated 1994 plan permitted the grant of options to our directors
employed by us, officers, employees and consultants. Outstanding options are
either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code to employees or nonstatutory stock options.
The 1994 plan is administered by the board or a committee appointed by the
board. The board has delegated the authority to administer the 1994 plan to its
human resources committee. Subject to the limitations set forth in the 1994
plan, the board and the committee exercised the authority to select the
eligible persons to whom award grants are to be made, to designate the number
of shares to be covered by stock options, to determine whether an option was an
incentive stock option or a nonstatutory stock option, to establish vesting
schedules, to specify the exercise price of options and the type of
consideration to be paid upon exercise and, subject to specified restrictions,
to specify other terms of awards.
The maximum term of options granted under the 1994 plan is ten years. Stock
options granted under the 1994 plan generally are non-transferable. Options
exercisable on the date of termination of employment, or such other
relationship with us, generally expire three months after the termination of an
optionholder's service, except that all unexercised options will be immediately
terminated if the optionholder is terminated for cause or if the board makes a
determination that the optionee was engaged in disloyalty, convicted of a
felony, disclosed company trade secrets or breached a non-competition agreement
with us. However, if an optionholder is permanently disabled or dies during his
or her service, that person's options exercisable on the date of disability or
death generally may be exercised up to 12 months following disability or death
unless, in the case of disability, such person commences employment with a
competitor during such time.
50
<PAGE>
The exercise prices of options granted under the 1994 plan were determined
by the board or committee in accordance with the guidelines set forth in the
1994 plan. The exercise prices of incentive stock options granted under the
plan could not be less than 100% of the fair market value of the common stock
on the date of the grant or 110% of the fair market value on the date of the
grant if the optionee, at the time of the grant, owned more than 10% of the
total combined voting power of all of our stock. The exercise price of a
nonstatutory stock option could not be less than $0.01 per share.
In the event of a change in control in our ownership as defined in our plan,
all outstanding stock awards under the 1994 plan must either be assumed or
substituted by the surviving entity. In the event the surviving entity does not
assume or substitute such stock awards, then the vesting and exercisability of
outstanding awards will accelerate prior to the change in control and such
awards will terminate to the extent not exercised prior to the change in
control.
Notwithstanding the previously described change in control provision, in the
event that a change in control occurs and within one month prior to, or 13
months after, such change in control an employee's employment is involuntarily
terminated as defined in the 1994 plan, then the vesting and exercisability of
all options held by such employee under the 1994 plan will be accelerated in
full on the effective date of his involuntary termination.
As of December 31, 1999, we had issued and outstanding under the 1994 plan
options to purchase approximately 109,847 shares of common stock and
approximately 841,986 shares of common stock had been purchased upon the
exercise of options under the 1994 plan. The per share exercise prices of these
options range from $0.03 to $0.73.
1997 EQUITY INCENTIVE PLAN
On August 28, 1997, our board adopted our 1997 Equity Incentive Plan, and
the plan was approved by our stockholders on October 15, 1997. The plan has
been subsequently amended, most recently in 1999 to authorize a total of
5,982,633 shares of common stock for issuance under the plan. Shares subject to
stock awards that have expired or otherwise terminated without having been
exercised in full again become available for grant.
The 1997 plan permits the grant of options to our directors, employees and
consultants. Options may be either incentive stock options to employees within
the meaning of Section 422 of the Internal Revenue Code or nonstatutory stock
options. In addition, the 1997 plan permits the grant of stock bonuses and
rights to purchase restricted stock. Except in specified circumstances, no
person may be granted options covering more than 694,299 shares of common stock
in any calendar year.
The 1997 plan is administered by the board or a committee appointed by the
board. The board has delegated the authority to administer the 1997 plan to its
human resources committee. Subject to the limitations set forth in the 1997
plan, the compensation committee and the administrator have the authority to
select the eligible persons to whom grants are to be made, to designate the
number of shares to be covered by each award, to determine whether an option is
to be an incentive stock option or a nonstatutory stock option, to establish
vesting schedules, to specify the exercise price of options and the type of
consideration to be paid upon exercise and, subject to specified restrictions,
to specify other terms of awards.
The maximum term of options granted under the 1997 plan is ten years.
Incentive stock options granted under the 1997 plan generally are non-
transferable. Nonstatutory stock options generally are nontransferable,
although the applicable option agreement may permit some transfers. Options
generally expire three months after the termination of an optionholder's
service. However, if an optionholder is permanently disabled or dies during his
or her service, that person's options generally may be exercised up to 12
months following disability or death.
The exercise price of options granted under the 1997 plan is determined by
the board or committee in accordance with the guidelines set forth in the 1997
plan. The exercise price of an incentive stock option
51
<PAGE>
cannot be less than 100% of the fair market value of the common stock on the
date of the grant. The exercise price of a nonstatutory stock option cannot be
less than 85% of the fair market value of the common stock on the date of
grant.
The board or the committee will have the authority, with the consent of the
affected optionholders, to cancel outstanding options under the plan in return
for the grant of new options for the same or a different number of option
shares with an exercise price per share based upon the fair market value of our
common stock on the new grant date.
Options granted under the 1997 plan vest at the rate determined by the board
or committee and specified in the option agreement. The terms of any stock
bonuses or restricted stock purchase awards granted under the 1997 plan will be
determined by the board or committee. The purchase price of restricted stock
under any restricted stock purchase agreement will be determined by the board
or committee and will not be less than 85% of the fair market value of our
common stock on the date of grant. Stock bonuses and restricted stock purchase
agreements awarded under the 1997 plan are generally nontransferable, although
the applicable award agreement may permit some transfers.
In the event of a change in control in our ownership as defined in our plan,
all outstanding stock awards under the 1997 plan must either be assumed or
replaced with substitute awards by the surviving entity. In the event the
surviving entity does not assume or substitute such stock awards, then the
vesting and exercisability of outstanding awards will accelerate prior to the
change in control and such awards will terminate to the extent not exercised
prior to the change in control. Notwithstanding the previously described change
in control provision, in the event that a change in control occurs and within
one month prior to, or 13 months after, such change in control an employee's
employment is involuntarily terminated as defined in the 1997 plan, then the
vesting and exercisability of all options held by such employee under the 1997
plan will be accelerated in full on the effective date of his involuntary
termination.
The board may amend or terminate the 1997 plan at any time. Amendments will
generally be submitted for stockholder approval to the extent required by
applicable law.
As of December 31, 1999, we had issued and outstanding under the 1997 plan
options to purchase approximately 3,014,988 shares of common stock and
approximately 599,775 shares had been purchased upon the exercise of options.
The per share exercise prices of these options range from $0.43 to $8.65.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In December 1999, our board adopted our 1999 Non-Employee Directors' Stock
Option Plan. We intend to seek stockholder approval of the plan prior to the
closing of this offering. The plan provides for the automatic grant of options
to purchase shares of common stock to our non-employee directors. The
directors' plan is administered by the board, unless the board delegates
administration to a committee of at least two disinterested directors.
A total of 277,719 shares of common stock have been reserved for issuance
under the directors' plan, none of which are currently subject to outstanding
options. Pursuant to the terms of the directors' plan:
. On the closing of this offering, each person who is then a non-employee
director will be granted an option to purchase 27,771 shares of common
stock;
. Each person who, after the closing of this offering, for the first time
becomes a non-employee director automatically will be granted, upon the
date of his or her initial appointment or election to be a non-employee
director, a one-time option to purchase 27,771 shares of common stock,
provided such person has not previously been in our employ; and
. On the day following each annual meeting of our stockholders commencing
with the 2001 annual meeting of stockholders, each person who is elected
to be a non-employee director at such annual meeting automatically will
be granted an option to purchase 6,943 shares of common stock, pro-rated
to the extent that a director did not serve as a director for a full
year prior to the annual meeting.
52
<PAGE>
Options granted under the directors' plan shall vest in equal monthly
installments over three years from the date of grant and must be exercised
within ten years from the date they are granted, subject to earlier termination
following the optionee's cessation of service. Options granted under the
directors' plan may be exercised prior to vesting, subject to our repurchase.
Outstanding options under the plan will vest in full on an accelerated basis
upon certain changes in control or ownership of the Company, unless assumed or
replaced with substitute options by the successor entity. The exercise price of
options under the directors' plan will equal 100% of the fair market value of
the common stock on the date of grant. Options granted under the directors'
plan are generally transferable to family members and trusts under which the
director or members of the director's family are beneficiaries. Unless
otherwise terminated or amended by the board of directors, the directors' plan
automatically terminates when all of our common stock reserved for issuance
under the directors' plan has been issued.
EMPLOYEE STOCK PURCHASE PLAN
In December 1999, our board adopted the 1999 Employee Stock Purchase Plan.
We intend to seek stockholder approval of the plan prior to the closing of this
offering. A total of 416,579 shares of common stock initially has been reserved
for issuance under the purchase plan. The share reserve will automatically
increase on the day of each annual stockholders' meeting by an amount equal to
three-fourths of one percent (0.75%) of the total number of outstanding shares
of our common stock on the day of the annual stockholders' meeting, or an
amount determined by our board, but in no event will any such annual increase
exceed 347,149 shares. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code. Under the purchase plan, the board of directors may authorize
participation by eligible employees, including officers, in periodic offering
following the commencement of the purchase plan. The initial offering under the
purchase plan will commence on the effective date of this offering and
terminate on February 28, 2002.
Unless otherwise determined by the board, employees are eligible to
participate in the purchase plan only if they are employed by us or one of our
subsidiaries designated by the board of directors for at least 20 hours per
week, are customarily employed for at lest five months per calendar year and do
not beneficially own more than 5% of our outstanding capital stock. Employees
who participate in an offering may have up to 15% of their earnings withheld
pursuant to the purchase plan. The amount withheld is then used to purchase
shares of common stock on specified dates determined by the board of directors.
The price of common stock purchased under the purchase plan shall be at least
85% of the lower of the fair market value of the common stock at the
commencement date of each offering period or the fair market value of the
common stock at the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment.
In the event of a merger, reorganization, consolidation or liquidation, the
board of directors has discretion to provide that each right to purchase common
stock will be assumed or an equivalent right substituted by the successor
corporation or the board of directors may provide for all sums collected by
payroll deductions to be applied to purchase stock immediately prior to such
merger or other transaction. The board of directors has the authority to amend
or terminate the purchase plan, provided, however, that no such action may
adversely affect any outstanding rights to purchase common stock.
53
<PAGE>
EMPLOYMENT AGREEMENTS
In August 1994, we entered into an employment offer letter with Jay M.
Short, Ph.D., our President, Chief Executive Officer and Chief Technology
Officer. Pursuant to his employment offer letter, Dr. Short's annual
compensation was initially set at a base salary of $200,000 and a target bonus
of 20% of his base salary. The 20% bonus was guaranteed for the first year. We
also paid Dr. Short a signing bonus of $75,000. In addition, we granted Dr.
Short 56,847 shares of our common stock and he also received a stock option
under our 1994 plan to purchase 34,108 shares of common stock at an exercise
price of $0.03 per share. This option vested 25% in September 1995, with the
remainder vesting annually over the following three years. In the event
Dr. Short's employment is terminated without cause, he will receive severance
compensation equal to six months' salary.
In June 1998 we entered into a second letter agreement with Dr. Short under
which we paid Dr. Short a bonus of $500,000 in each of June 1998 and June 1999
and granted him a stock option under our 1997 plan to purchase 1,001,744 shares
of our common stock at an exercise price of $0.58 per share. This option vested
25% in June 1999 with the remainder vesting in equal quarterly installments
over the following three years. However, vesting this option will be
accelerated in full upon the sale of Diversa or upon Dr. Short's termination of
employment without cause. This second offer letter also provides that if Dr.
Short's employment is terminated without cause at any time prior to June 25,
2000 he will receive severance compensation equal to twenty-four months'
salary. After June 25, 2000, Dr. Short's severance will revert to six months'
salary as described in his original offer letter. In January 2000, we granted
Dr. Short a stock option under our 1997 plan to purchase 206,453 shares of
common stock at an exercise price equal to the initial public offering price.
This option vests 25% at the first anniversary of the grant date, with the
remainder vesting over the following three years.
In February 1997, we entered into an employment offer letter with R. Patrick
Simms, our Senior Vice President, Operations. Pursuant to his employment offer
letter, Mr. Simms' annual compensation was initially set at a base salary of
$165,000 and a bonus of up to 20% of his base salary. The calculation of each
annual bonus is based on both Mr. Simms' job performance as well as our
performance. In addition, we granted Mr. Simms a stock option under our 1997
plan to purchase 69,429 shares of our common stock at an exercise price of
$0.43 per share. This option vests 25% on the first anniversary of the date of
grant with the remainder vesting quarterly over the following three years. Mr.
Simms was also offered the right to purchase up to $50,000 of our series B
preferred stock on the same terms offered to our other series B preferred stock
investors. Mr. Simms exercised this right in May 1997 and acquired 39,147
shares of our series B preferred stock in exchange for $25,000 in cash and
delivery of a promissory note for $25,000. The note carries an interest rate of
6.64%, is payable in four equal annual installments commencing in March 1998
and is secured by his shares of series B preferred stock. Mr. Simms also was
reimbursed $25,000 for relocation costs. In the event that Mr. Simms'
employment is terminated without cause, he will receive severance compensation
equal to six months' base salary and benefits until he commences new
employment.
In July 1997, we entered into an employment offer letter with William H.
Baum, our Senior Vice President, Business Development. Pursuant to his
employment offer letter, Mr. Baum's annual compensation was initially set at a
base salary of $195,000 and a target bonus of 20% of his base salary, with a
guaranteed bonus of $13,000 for 1997 only. We also paid him a hiring bonus of
$30,000, paid in two equal installments on September 1, 1997 and March 1, 1998.
In addition, we granted Mr. Baum a stock option under our 1997 plan to purchase
95,466 shares of our common stock at an exercise price of $0.43 per share. This
option vests 25% on the first anniversary of his date of hire with the
remainder vesting quarterly over the following three years. In the event Mr.
Baum's employment is terminated without cause, he will receive severance
compensation equal to six months of his then-current base salary and we will
continue to pay his employee benefits until he commences new employment. Mr.
Baum was reimbursed $50,000 for relocation costs. Mr. Baum was offered the
right to purchase up to $50,000 of our series D preferred stock on the same
terms offered to our other series D preferred stock investors. Mr. Baum
exercised this right in October 1997 and acquired 58,824 shares of our series D
preferred stock in exchange for delivery of a promissory note for $50,000. The
note carries an interest
54
<PAGE>
rate of 6.64%, is payable in four equal annual installments commencing in
October 1998 and is secured by his shares of series D preferred stock.
In April 1999, we entered into an employment offer letter with Karin
Eastham, our Senior Vice President, Finance and Chief Financial Officer.
Pursuant to her employment offer letter, Ms. Eastham's annual compensation was
initially set at a base salary of $210,000 and a target bonus of 20% of her
base salary. The 20% bonus was guaranteed for the first year. In addition, we
granted Ms. Eastham a stock option under our 1997 plan to purchase 208,289
shares of our common stock at an exercise price of $1.73 per share. This option
vests 25% at the earlier of the first anniversary of the date of hire or the
closing of this initial public offering, with the remainder vesting quarterly
over three years.
For a description of recent severance agreements with Terrance J. Bruggeman
and Kathleen H. Van Sleen, see the descriptions provided under the caption
"Certain Transactions -- Agreements with Officers and Directors."
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. In addition, our bylaws require us to
indemnify our directors and officers, and allow us to indemnify our other
employees and agents, to the fullest extent permitted by law. We have also
entered into agreements to indemnify some of our directors and executive
officers. We believe that these provisions and agreements are necessary to
attract and retain qualified directors and executive officers. At present,
there is no pending litigation or proceeding involving any director, officer,
employee or agent where indemnification will be required or permitted. We are
not aware of any threatened litigation or proceeding that might result in a
claim for such indemnification. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or
persons controlling our company pursuant to the foregoing provisions, we have
been informed that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
55
<PAGE>
CERTAIN TRANSACTIONS
SALES OF STOCK AND NOTES
Series B Preferred Stock Financing. In May 1997, Mr. Simms, our Senior Vice
President, Operations, and Ms. Van Sleen, our former Chief Financial Officer,
Vice President, Finance and Administration and Secretary, exercised rights to
purchase 37,879 and 75,758 shares, respectively, of our series B preferred
stock at a price of $0.66 per share. The shares of series B preferred stock
issued to Mr. Simms and Ms. Van Sleen will automatically convert into an
aggregate of 39,449 shares of common stock upon the closing of this offering.
Mr. Simms paid for a portion of his shares and Ms. Van Sleen paid for all of
her shares by delivering full-recourse promissory notes in the amount of
$25,000 and $50,000, respectively. The notes are payable over four years in
equal annual installments commencing on March 30, 1998, and bear interest at
6.64% per year. In 1999, we forgave the then outstanding balance under the note
receivable from Ms. Van Sleen, $37,500, pursuant to the terms of a severance
agreement more fully described below.
Bridge Loan Financing. In September 1997, we issued and sold $3,432,804 of
secured convertible promissory notes to 15 accredited investors. The promissory
notes carried an interest rate of 8.0% per year and under their terms
automatically converted into 4,038,592 shares of series D preferred stock in
October 1997. This series D preferred stock will automatically convert into an
aggregate of 1,401,996 shares of common stock upon the closing of this
offering. Investors owning 5% or more of our capital stock and directors and
officers who participated in this transaction include:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NUMBER OF SHARES OF COMMON STOCK
SERIES D PREFERRED UPON CONVERSION
STOCK UPON OF SERIES D
INVESTOR PROMISSORY NOTE CONVERSION PREFERRED STOCK
-------- --------------- ------------------- ---------------
<S> <C> <C> <C>
HealthCare Ventures
Entities................. $1,001,162 1,177,837 408,885
Patricof & Co. Ventures
Entities................. 1,000,000 1,176,470 408,411
Rho Management Trust II... 410,153 482,532 167,510
Donald D. Johnston........ 500,000 588,235 204,205
Melvin I. Simon, Ph.D. ... 20,000 23,529 8,168
</TABLE>
Dr. Cavanaugh, one of our directors, is a general partner of HealthCare
Partners III, L.P., HealthCare Partners IV, L.P. and HealthCare Partners V,
L.P., which are the general partners of HealthCare Ventures III, L.P.,
HealthCare Ventures IV, L.P. and HealthCare Ventures V, L.P., respectively.
Together, these partnerships own greater than 10% of our capital stock. In this
prospectus we refer to HealthCare Ventures III, L.P., HeathCare Ventures IV,
L.P. and HealthCare Ventures V, L.P., collectively, as entities affiliated with
HealthCare Ventures.
Ms. Cloherty, one of our directors, is a special limited partner of funds
managed by Patricof & Co. Ventures, Inc., including APA Pennsylvania Partners
II, L.P., APA Excelsior IV, L.P. and APA Excelsior IV/Offshore, L.P. APA
Pennsylvania Partners II, L.P. is the general partner of The P/A Fund, L.P.
Patricof & Co. Managers, Inc. is the general partner of APA Excelsior IV
Partners, L.P., the general partner of Patricof Private Investment Club, L.P.
Collectively, APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A
Fund, L.P. and Patricof Private Investment Club, L.P. own greater than 10% of
our capital stock, and are collectively referred to in this prospectus as
entities affiliated with Patricof & Co. Ventures.
Mr. Leschly, one of our directors, is a managing director of Rho Management
Company, Inc., which serves as the investment advisor to Rho Management Trust
II.
Mr. Johnston and Dr. Simon are members of our board of directors.
Series D Preferred Stock Financing. In October 1997, we issued 24,809,555
shares of series D preferred stock for $0.85 per share to 27 accredited
investors. The series D preferred stock will automatically convert
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into an aggregate of 8,612,620 shares of common stock upon the closing of this
offering. Investors owning 5% or more of our shares and directors and officers
who participated in this transaction include:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NUMBER OF COMMON STOCK
INVESTOR SERIES D SHARES UPON CONVERSION
-------- --------------- ---------------
<S> <C> <C>
HealthCare Ventures Entities.................... 6,206,103 2,154,446
Patricof & Co. Ventures Entities................ 2,184,999 758,519
Rho Management Trust II......................... 2,336,042 810,856
State of Michigan............................... 5,882,353 2,042,058
William H. Baum................................. 58,824 20,420
Donald D. Johnston.............................. 588,235 204,205
Melvin I. Simon, Ph.D. ......................... 23,529 8,168
</TABLE>
Mr. Baum is our Senior Vice President, Business Development.
Series E Preferred Stock Financing. In connection with our entering into a
collaboration agreement with Novartis Agribusiness Biotechnology Research, Inc.
in January 1999, we sold 5,555,556 shares of series E preferred stock to
Novartis for $1.32 per share under the terms of a series E preferred stock
purchase agreement. The series E preferred stock will automatically convert
into an aggregate of 1,928,610 shares of common stock upon the closing of this
offering. The stock purchase agreement designates a portion of the total
proceeds received of $12.5 million as a technology access fee and another
portion as advance payments for research support under the collaboration
agreement.
The shares of series E preferred stock were subsequently transferred to
Novartis Seeds AG, an affiliate of Novartis Agribusiness Biotechnology
Research, Inc. In December 1999, we entered into a joint venture agreement with
Novartis Seeds AG. For a further description of this joint venture and the
collaboration agreement, see "Business--Current Alliances and Other
Agreements."
Registration Rights. In connection with the preferred stock financings, we
granted registration rights to all of our preferred stockholders. See
"Description of Capital Stock--Registration Rights" for a more complete
description of registration rights we granted to our stockholders.
AGREEMENTS WITH OFFICERS AND DIRECTORS
In May 1994, we entered into a four year consulting agreement with Melvin I.
Simon, Ph.D. under which Dr. Simon agreed to provide us with at least 20 days
of service each year. Under his agreement, Dr. Simon will serve as a member and
chairman of our scientific advisory board, serve on our board of directors and
provide other consulting services. His compensation initially was set at
$75,000 per year, payable quarterly. We amended Dr. Simon's consulting
agreement in October 1996 to limit Dr. Simon's services to attendance at up to
three scientific advisory board meetings and 12 board and board committee
meetings per year and reducing his annual compensation to $25,000 per year. In
addition, we granted Dr. Simon a stock option to purchase 6,942 shares of our
common stock under our 1994 plan in consideration for his agreement to amend
the original agreement. This initial 6,942 share option was fully vested and
exercisable upon its grant to Dr. Simon and carried an exercise price of $0.42
per share. We also granted Dr. Simon a second stock option to purchase 20,828
shares of common stock having an exercise price of $0.42 per share that vested
over a period of three years. This second option grant was fully vested
effective as of October 1999.
We amended Dr. Simon's consulting agreement a second time in October 1999.
This second amendment provides that Dr. Simon's annual compensation will
continue at $25,000 per year for an additional three year term. This second
amendment also provides that Dr. Simon will attend up to six board meetings and
one scientific advisory board meeting per year. We will pay Dr. Simon an
additional $1,000 per day for any additional service he performs. We also
granted Dr. Simon a stock option to purchase 22,564 shares of our
57
<PAGE>
common stock under our 1997 plan, with 8,678 shares vesting in October 2000 and
6,943 shares in each of the following two years.
In December 1999, we granted Dr. Simon a stock option under our 1997 plan to
purchase 173,574 shares of our common stock with an exercise price of $8.64 per
share. One third of the shares subject to this option were vested upon grant
and the remaining shares vested in February 2000 when the option vesting
schedule was accelerated by our Board. The Company recorded a charge to
operations of approximately $1.7 million based on the fair value of the
options.
In August 1997, we granted Daniel T. Carroll a stock option under our 1997
plan to purchase 5,207 shares of our common stock with an exercise price of
$0.43 per share. One-third of the shares vested on October 1, 1997 and one-
twelfth vested quarterly thereafter until fully vested. In February 1998 we
granted Mr. Carroll a second stock option under our 1997 plan to purchase 5,207
shares of our common stock with an exercise price of $0.58 per share. This
option vests in equal annual installments over a period of three years. In
December 1999 we granted Mr. Carroll a third stock option under our 1997 plan
to purchase 17,357 shares of our common stock with an exercise price of $8.64
per share. This option was fully vested upon grant.
In August 1997, we granted Donald D. Johnston a stock option under our 1997
plan to purchase 5,207 shares of our common stock with an exercise price of
$0.43 per share. One-third of the shares vested on October 1, 1997 and one-
twelfth vested quarterly thereafter until fully vested. In February 1998 we
granted Mr. Johnston a second stock option under our 1997 plan to purchase
5,207 shares of our common stock with an exercise price of $0.58 per share.
This option vests in equal annual installments over a period of three years. In
December 1999 we granted Mr. Johnston a third stock option under our 1997 plan
to purchase 17,357 shares of our common stock with an exercise price of $8.64
per share. This option was fully vested upon grant.
In February 1999, we entered into a Separation Agreement with Terrance J.
Bruggeman, our former Chief Executive Officer. Under this agreement, we agreed
to continue to make severance payments to Mr. Bruggeman in the form of
continuation of his base salary until the earlier of 12 months following his
final day of employment or the date on which he begins employment with another
company. We further agreed to pay Mr. Bruggeman an additional $50,000 as an
additional severance payment, reimburse him up to an additional $25,700 for
various other expenses and pay for up to 18 months of continued health and
dental insurance following his final day of employment. In addition, effective
as of his last day of employment, we accelerated the vesting of options to
purchase an aggregate of 142,892 shares of our common stock having an exercise
price of $0.43 per share. In conjunction with this agreement modification, the
Company recorded a charge to compensation expense of $557,000.
In March 1999, we entered into a Separation Agreement with Kathleen H. Van
Sleen, our former Chief Financial Officer, Vice President, Finance and
Administration, Treasurer and Secretary. Under this agreement, we paid Ms. Van
Sleen $224,000 and forgave outstanding indebtedness of $42,000. We further
agreed to pay for up to 12 months of health, dental and life insurance. In
addition, we agreed that the term and vesting of options to purchase an
aggregate of 208,289 shares of our common stock will continue until March 30,
2000, after which Ms. Van Sleen will have 90 days to exercise her vested
options. The extension of vesting on those options will result in the vesting
of an additional 62,920 options with an average exercise price of $0.46 per
share. In conjunction with this agreement modification and an extension of the
exercise date for her previously vested options, the Company recorded a charge
to compensation expense of $538,000. Ms. Van Sleen is not required to perform
consulting or any other services as part of the separation agreement.
Both Mr. Bruggeman and Ms. Van Sleen terminated their employment with
Diversa in the ordinary course of business in connection with our continued
evolution and growth.
In December 1999, we granted Peter Johnson a stock option under our 1997
plan to purchase 41,657 shares of our common stock with an exercise price of
$5.76 per share. This option vests in equal annual installments over a period
of three years.
58
<PAGE>
In November 1999, our Board implemented a program to allow optionees to
early exercise stock options prior to vesting. Six optionees, including Jay
Short, Karin Eastham, William Baum and Melvin Simon, purchased our common stock
pursuant to this program. This stock was subject to repurchase restrictions
which lapsed over the same period as the predecessor stock options would have
vested. As part of our agreement to amend the options, we agreed to prepare tax
election forms for the benefit of the optionees. These tax election forms were
not prepared or timely filed and, as a result, the optionees were exposed to
substantial potential tax liabilities. In order to minimize the potential
adverse tax consequences to the optionees, on February 7, 2000, our Board
removed the stock repurchase restrictions and agreed to advance funds to the
optionees in an amount necessary to provide the cash to pay the individual tax
liabilities that resulted from removal of the repurchase restrictions. After
consideration of each optionee's individual tax situation and in order to
fairly rectify the effect of our failure to timely prepare these tax election
forms, our Board agreed to compensate two optionees, Ms. Eastham and Dr. Simon,
directly in amounts of approximately $80,000 and $160,000, respectively, to
compensate for the permanent tax liabilities associated with our failure to
complete the filings. We will record this cash compensation charge to
operations in the first quarter of 2000. Additionally, our board approved the
acceleration of vesting of the 207,000 unvested options related to those option
grants, and we will record a non-cash compensation charge of approximately $4.1
million in the first quarter of 2000 as a result of this acceleration. Our
Board also agreed to make full recourse secured loans to the optionees,
including approximately $400,000.00 to Dr. Short, $400,000.00 to Ms. Eastham,
$250,000.00 to Mr. Baum and $100,000.00 to Dr. Simon, to assist with temporary
differences in taxation. The loans carry a market interest rate and are
repayable in five years, and prepayment is required in specified circumstances,
including if the employee leaves the Company or sells the related shares of
stock.
All of the shares of preferred stock and promissory notes described under
this section were issued in reliance upon the exemption provided by Section
4(2) of the Securities Act and/or Regulation D under the Securities Act. With
respect to the issuance of options described under this section, exemption from
registration was not necessary in that the transactions did not involve a
"sale" of securities as that term is used in Section 2(a)(3) of the Securities
Act.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of December 31, 1999, and after the sale of
shares in this offering, by:
. Each person who is known by us to own beneficially more than 5% of our
outstanding common stock;
. Each named executive officer;
. Each of our directors; and
. All of our current directors and executive officers as a group.
Except as indicated below, 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. Unless otherwise indicated, the address for each stockholder is c/o
Diversa Corporation, 10665 Sorrento Valley Road, San Diego, California 92121.
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
Percentage of beneficial ownership is based on 25,779,401 shares of common
stock outstanding as of December 31, 1999 and assuming 32,811,401 shares of
common stock outstanding after completion of this offering.
The table assumes no exercise of the underwriters' over-allotment option. If
the underwriters' over-allotment option is exercised in full, we will sell up
to an aggregate of 1,050,000 shares of our common stock, and up to 33,861,401
shares of common stock will be outstanding after completion of this offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PRIOR TO OFFERING
------------------------------------------------
PERCENTAGE OF
SHARES ISSUABLE SHARES DIVERSA SHARES
PURSUANT TO MAY REPURCHASE BENEFICIALLY
NUMBER OF OPTIONS AND WITHIN 60 DAYS OWNED
SHARES WARRANTS EXERCISABLE OF -----------------
BENEFICIALLY WITHIN 60 DAYS DECEMBER 31, BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF DECEMBER 31, 1999 1999(1) OFFERING OFFERING
- ------------------------------------ ------------ -------------------- -------------- -------- --------
<S> <C> <C> <C> <C> <C>
Funds Affiliated with HealthCare Ventures (2).. 5,744,544 139,265 -- 22.2% 17.4%
44 Nassau St.
Princeton, New Jersey 08542
Funds Affiliated with Patricof & Co.
Ventures, Inc. (3)............................ 4,616,965 -- -- 17.9% 14.1%
445 Park Avenue, 11th Floor
New York, New York 10022
Rho Management Trust II (4).................... 2,353,438 20,461 -- 9.1% 7.2%
767 Fifth Avenue, 43rd Floor
New York, New York 10153
State of Michigan ............................. 2,042,058 -- -- 7.9% 6.2%
Department of Treasury, Treasury Building
30 West Allegan
East Lansing, Michigan 48922
Novartis Seeds AG ............................. 1,928,610 -- -- 7.5% 5.9%
Schwarzwaldallee 215
CH-4002 Basel
Switzerland
Jay M. Short, Ph.D............................. 712,994 338,615 61,803 2.7% 2.2%
Terrance J. Bruggeman.......................... 428,676 -- -- 1.7% 1.3%
William H. Baum................................ 120,225 4,339 41,767 * *
Karin Eastham.................................. 69,429 -- 69,429 * *
R. Patrick Simms............................... 110,138 77,456 -- * *
Kathleen H. Van Sleen.......................... 153,440 127,461 -- * *
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PRIOR TO OFFERING
------------------------------------------------
PERCENTAGE OF
SHARES ISSUABLE SHARES DIVERSA SHARES
PURSUANT TO MAY REPURCHASE BENEFICIALLY
NUMBER OF OPTIONS AND WITHIN 60 DAYS OWNED
SHARES WARRANTS EXERCISABLE OF -----------------
NAME AND ADDRESS OF BENEFICIAL BENEFICIALLY WITHIN 60 DAYS DECEMBER 31, BEFORE AFTER
OWNER OWNED OF DECEMBER 31, 1999 1999(1) OFFERING OFFERING
- ------------------------------ ------------ -------------------- -------------- -------- --------
<S> <C> <C> <C> <C> <C>
James H. Cavanaugh, Ph.D. (2).. 5,744,544 139,265 -- 22.2% 17.4%
Daniel T. Carroll.............. 26,035 26,035 -- * *
Patricia M. Cloherty (3)....... 4,616,968 -- -- 17.9% 14.1%
Peter Johnson.................. -- -- -- * *
Donald D. Johnston............. 621,667 26,035 -- 2.4% 1.9%
Mark Leschly (4)............... 2,353,438 20,461 -- 9.1% 7.2%
Melvin I. Simon, Ph.D. ........ 219,048 57,858 22,564 * *
All executive officers and
directors as a group (12
persons)...................... 14,617,864 713,442 195,563 55.2% 43.6%
</TABLE>
- --------
* Less than one percent.
(1) On February 7, 2000, our Board approved the removal of these stock
repurchase restrictions. See "Certain Transactions."
(2) Includes:
. 3,229,005 shares held by HealthCare Ventures III, L.P., including
107,659 shares issuable upon exercise of warrants exercisable within 60
days of December 31, 1999, which represents 12.5% and 10.0%,
respectively, of the total number of shares outstanding before and
after this offering.
. 949,145 shares held by HealthCare Ventures IV, L.P., including 31,606
shares issuable upon exercise of warrants exercisable within 60 days of
December 31, 1999, which represents 3.7% and 2.9%, respectively, of the
total number of shares outstanding before and after this offering.
. 1,566,394 shares held by HealthCare Ventures V, L.P., which represents
6.1% and 4.9%, respectively, of the total number of shares outstanding
before and after this offering.
James H. Cavanaugh, Ph.D. is a managing member of the general partner of
each of the above-listed investment funds, and shares investment and
voting power over these shares with the other managing members of each of
the general partners of these funds, none of whom are affiliated with us.
Dr. Cavanaugh disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
(3) Includes:
. 3,049,566 shares held by APA Excelsior IV, L.P., which represents 11.8%
and 9.4%, respectively, of the total number of shares outstanding
before and after this offering.
. 969,468 shares held by The P/A Fund, L.P., which represents 3.8% and
3.0%, respectively, of the total number of shares outstanding before
and after this offering.
. 537,510 shares held by APA Excelsior IV/Offshore, L.P., which
represents 2.1% and 1.7%, respectively, of the total number of shares
outstanding before and after this offering.
. 60,422 shares held by Patricof Private Investment Club, L.P., which
represents less than 1% of the total number of shares outstanding both
before and after this offering.
Patricia M. Cloherty is a special limited partner of APA Excelsior IV,
L.P., The P/A Fund, L.P., APA Excelsior IV/Offshore, L.P. and Patricof
Private Investment Club, L.P., and shares investment and voting power over
these shares with the other managing members or general partners of the
funds, none of whom are affiliated with us. Ms. Cloherty disclaims
beneficial ownership of such shares except to the extent of her pecuniary
interest therein.
(4) Mark Leschly is a managing director of Rho Management Company, Inc.,
financial advisor to Rho Management Trust II. Mr. Leschly disclaims
beneficial ownership of the shares held by Rho Management Trust II except
to the extent of his pecuniary interest therein.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock, after
giving effect to the conversion of all outstanding preferred stock into common
stock, will consist of 65,000,000 shares of common stock, $0.001 par value, and
5,000,000 shares of preferred stock, $0.001 par value.
The following is a summary of various provisions of our common stock,
preferred stock, amended and restated certificate of incorporation and bylaws.
COMMON STOCK
As of December 31, 1999, there were 2,945,390 shares of common stock
outstanding, held by approximately 115 stockholders of record. An additional
22,834,011 shares of our common stock will be issued upon conversion of all
outstanding shares of the preferred stock on the closing of this offering and
an estimated 32,000 shares will be issued related to dividends payable to the
holders of our series A, B and D preferred stock for the period between
December 21, 1999 and the completion of this offering. All outstanding shares
of common stock are, and the common stock to be issued in this offering will
be, fully paid and nonassessable.
The following summarizes the rights of holders of our common stock:
. Each holder of shares of common stock is entitled to one vote per share
on all matters to be voted on by stockholders generally, including the
election of directors;
. There are no cumulative voting rights;
. The holders of our common stock are entitled to dividends and other
distributions as may be declared from time to time by the board of
directors out of funds legally available for that purpose, if any;
. Upon our liquidation, dissolution or winding up, the holders of shares
of common stock will be entitled to share ratably in the distribution of
all of our assets remaining available for distribution after
satisfaction of all our liabilities and the payment of the liquidation
preference of any outstanding preferred stock; and
. The holders of commons stock have no preemptive or other subscription
rights to purchase shares of our stock, nor are they entitled to the
benefits of any redemption or sinking fund provisions.
PREFERRED STOCK
Upon the closing of this offering, there will be no shares of preferred
stock outstanding. Our certificate of incorporation authorizes our board of
directors to create and issue one or more series of preferred stock and
determine the rights and preferences of each series within the limits set forth
in our certificate of incorporation and applicable law. Among other rights, the
board of directors may determine, without further vote or action by our
stockholders:
. The number of shares constituting the series and the distinctive
designation of the series;
. The dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;
. Whether the series will have voting rights in addition to the voting
rights provided by law, and if so, the terms of the voting rights;
. Whether the series will have conversion privileges and, if so, the terms
and conditions of conversion;
. Whether or not the shares of the series will be redeemable or
exchangeable, and, if so, the dates, terms and conditions of redemption
or exchange, as the case may be;
. Whether the series will have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
the sinking fund; and
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<PAGE>
. The rights of the shares of the series in the event of our voluntary or
involuntary liquidation, dissolution or winding up and the relative
rights or priority, if any, of payment of shares of the series.
Unless otherwise provided by our board of directors, the shares of all
series of preferred stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Although we have
no present plans to issue any shares of preferred stock, any future issuance of
shares of preferred stock, or the issuance of rights to purchase preferred
shares, may have the effect of delaying, deferring or preventing a change in
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of the common stock.
REGISTRATION RIGHTS
The holders of the 22,866,011 outstanding shares of our common stock which
will be issued upon conversion of the preferred stock on the closing of this
offering, which are referred to below as our preferred investors, have the
right to cause us to register their shares under the Securities Act as follows:
. DEMAND REGISTRATION RIGHTS: Each class of our preferred investors,
excluding the holders of the series E preferred stock, may make one
demand for registration by providing a written demand from the holders
of at least 50% of the shares of common stock issued upon conversion of
such class of preferred stock demanding registration. All of our
preferred investors, including the holders of the series E preferred
stock, acting as a single class may make two demands for registration by
providing, in each instance, a written demand from the holders of at
least 50% of the shares of common stock issued upon conversion of all of
the preferred stock. We must use our best efforts to effect such
registration as soon as possible after receipt of notice.
. PIGGYBACK REGISTRATION RIGHTS: Our preferred investors can request to
have their shares registered any time we file a registration statement
to register any of our securities for our own account. Such registration
opportunities are unlimited but the number of shares that can be
registered may be eliminated entirely or cut back by the underwriters.
. S-3 REGISTRATION RIGHTS: After we have qualified for registration on
Form S-3, our preferred investors can request us to register their
shares if the aggregate price of the shares to the public is not less
than $500,000. Except for former holders of our series E preferred stock
who are limited to only three such registrations, such registration
opportunities are unlimited. However, we are not obligated to register
the shares of any single stockholder on Form S-3 more than once during
any single calendar year.
We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses for
us and adversely affect any future equity or debt offerings.
POSSIBLE ANTI-TAKEOVER MATTERS
Certificate of Incorporation and Bylaws
Our certificate of incorporation authorizes our board of directors to
establish one or more series of undesignated preferred stock, the terms of
which can be determined by the board of directors at the time of issuance. See
"--Preferred Stock" for a description of our preferred stock. Our certificate
of incorporation also provides that all stockholder action must be effected at
a duly called meeting of stockholders and not by a consent in writing. Our
bylaws provide that our board of directors will be classified into three
classes of directors. Please see "Management--Classified Board" for a list of
our directors and the class to which they belong. Our bylaws also require that
stockholders give advance notice to our secretary of any nominations for
director or other business to be brought by stockholders at any stockholders'
meeting and require a
63
<PAGE>
supermajority vote of members of our board of directors and/or stockholders to
amend some bylaw provisions. These provisions of our certificate of
incorporation and our bylaws could discourage potential acquisition proposals
and could delay or prevent a change in control. Such provisions may also have
the effect of preventing changes in our management.
Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law which,
subject to specified exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder--defined as any
person or entity that is the beneficial owner of at least 15% of a
corporation's voting stock--for a period of three years following the time that
such stockholder became an interested stockholder, unless:
. Prior to that time, the corporation's board of directors approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. Upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the corporation's voting stock 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; and
. At or subsequent to such time, the business combination is approved by
the corporation's 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 two-thirds of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines business combination to include:
. Any merger or consolidation involving the corporation and the interested
stockholder;
. Any sale, lease, exchange, mortgage, transfer, pledge or other
disposition involving the interested stockholder and 10% or more of the
assets of the corporation;
. Subject to specified exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. Any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; and
. The receipt by the interested stockholder of the benefit of any loans,
advance, guarantees, pledges or other financial benefits provided by or
through the corporation.
NASDAQ NATIONAL MARKET
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "DVSA."
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is American
Stock Transfer & Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale described
below, sales of substantial amounts of common stock in the public market after
the restrictions lapse could adversely affect the prevailing market price and
our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 32,811,401 shares
of common stock, assuming no exercise of the underwriters' over-allotment
option. Of these shares, the 7,000,000 shares sold in this offering will
generally be freely tradable without restriction or further registration under
the Securities Act. Of the remaining 25,811,401 shares, all may be sold in the
public market upon expiration of lock-up agreements 180 days after the date
this prospectus is declared effective, subject to the volume and other
restrictions of Rule 144.
In general, under Rule 144 as currently in effect, our affiliates and other
stockholders who have beneficially owned restricted shares for at least one
year will be entitled to sell in any three-month period a number of shares that
does not exceed the greater of:
. 1% of the then outstanding shares of our common stock; or
. The average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the SEC.
Sales pursuant to Rule 144 are subject to requirements relating to manner of
sale, notice, and the availability of current public information about us. A
stockholder who is not deemed to have been an affiliate of ours at any time
during the 90 days immediately preceding the sale and who has beneficially
owned restricted shares for at least two years is entitled to sell those shares
under Rule 144(k) without regard to the limitations described above.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 of the Securities Act, as currently in effect, may
be relied upon with respect to the resales of securities originally purchased
from us by our employees, directors, officers, consultants or advisors prior to
the date we become subject to the reporting requirements of the Securities
Exchange Act, pursuant to written compensatory benefit plans or written
contracts relating to the compensation of those persons. In addition, the SEC
has indicated that Rule 701 will apply to typical stock options granted by an
issuer before it becomes subject to the reporting requirements of the Exchange
Act, along with the shares acquired upon exercise of such options, including
exercises after the date of this prospectus. Securities issued in reliance on
Rule 701 are restricted securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this prospectus, may be
sold by persons other than affiliates subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its minimum holding period requirements.
Shortly after this offering, we may also file a registration statement under
the Securities Act covering shares of common stock reserved for issuance under
our equity incentive plans. Such registration statement will cover
approximately 6,187,096 shares. Shares registered under this registration
statement will, subject to Rule 144 volume limitations applicable to
affiliates, be available for sale in the open market, unless such shares are
subject to the lock-up agreements described above.
65
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives, Bear, Stearns & Co. Inc., Chase Securities Inc. and Deutsche
Bank Securities Inc. has severally agreed to purchase from us the aggregate
number of shares of our common stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- -----------
<S> <C>
Bear, Stearns & Co. Inc. ...........................................
Chase Securities Inc. ..............................................
Deutsche Bank Securities Inc. ......................................
-----------
Total........................................................... 7,000,000
===========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions, including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all of the above shares of our common stock if any are purchased.
PUBLIC OFFERING PRICE
The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus and
at that price less a concession not in excess of $ per share of common
stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $ per share of common stock to
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. Our common stock is offered
subject to receipt and acceptance by the underwriters and subject to other
conditions, including the right to reject orders in whole or in part. The
underwriters have informed us that the underwriters do not expect to confirm
sales of common stock to any accounts over which they exercise discretionary
authority.
The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid to the underwriters by us and the proceeds of the offering, before
expenses, to us. The information presented assumes either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
TOTAL
-------------------------
WITHOUT WITH
OVER- OVER-
PER SHARE ALLOTMENT ALLOTMENT
--------- ------------ ------------
<S> <C> <C> <C>
Public offering price..................... $ $ $
Underwriting discounts and commissions
payable by us............................
Proceeds, before expenses, to us..........
</TABLE>
The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock.
We estimate total expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $1.2 million.
66
<PAGE>
OVER-ALLOTMENT OPTION TO PURCHASE ADDITIONAL SHARES
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 1,050,000 additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be obligated to purchase additional shares of common stock in
proportion to their respective purchase commitments as shown in the table set
forth above, subject to various conditions.
INDEMNIFICATION AND CONTRIBUTION
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act or will contribute to payments that the underwriters may be
required to make in respect of those liabilities.
LOCK-UP AGREEMENTS
Our directors and officers and stockholders holding 25,594,411 shares have
agreed that they will not offer, sell or agree to sell, directly or indirectly,
or otherwise dispose of any shares of common stock in the public market without
the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days
from the date of this prospectus.
In addition, we have agreed that for a period of 180 days from the date of
this prospectus, we will not, without the prior written consent of Bear,
Stearns & Co. Inc., offer, sell or otherwise dispose of any shares of common
stock, except that we may issue, and grant options to purchase, shares of
common stock under our stock option plans and employee stock purchase plan and
shares issuable upon exercise of outstanding options granted outside our plans.
During this lock-up period, subject to various conditions, we may also issue
additional equity securities in connection with collaborative and licensing
arrangements or to pay for possible acquisitions, so long as the recipients of
such securities are also subject to the 180 day lock-up period.
NASDAQ NATIONAL MARKET QUOTATION
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in those negotiations, the
primary factors will be our results of operations in recent periods, estimates
of our prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of this
offering and the prices of similar securities of generally comparable
companies. We have applied for approval for the quotation of our common stock
on the Nasdaq National Market, under the symbol "DVSA." We cannot assure you,
however, that an active or orderly trading market will develop for the common
stock or that the common stock will trade in the public market subsequent to
this offering at or above the initial offering price.
STABILIZATION, SYNDICATE SHORT POSITION AND PENALTY BIDS
In order to facilitate this offering, persons participating in this offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we have
actually sold to them. The underwriters may elect to cover any such short
position by purchasing shares of common stock in the open market and may impose
penalty bids, under which selling concessions allowed to syndicate members or
other broker-dealers participating in this offering are reclaimed if shares of
common stock previously distributed in this offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the common stock to the extent that it
discourages resales thereof. No representation is made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may
be discontinued at any time.
67
<PAGE>
RESERVED SHARE PROGRAM
At our request, the underwriters have reserved for sale at the initial
public offering price up to 400,000 shares of common stock to be sold in this
offering for sale to our directors, officers, employees, business associates,
vendors and related persons. Purchases of reserved shares are to be made
through an account at Bear, Stearns & Co. Inc. in accordance with Bear, Stearns
& Co. Inc.'s procedures for opening an account and transacting in securities.
The number of shares available for sale to the general public will be reduced
to the extent that any reserved shares are purchased. Any reserved shares not
purchased by our directors, officers, employees, business associates, vendors
and related persons will be offered by the underwriters to the general public
on the same terms as the other shares offered by this prospectus.
LEGAL MATTERS
Cooley Godward llp, San Diego, California will pass on the validity of the
shares of common stock offered by this prospectus for us and certain other
legal matters. Upon the completion of this offering, attorneys with Cooley
Godward llp, through an investment partnership, will beneficially own a total
of 12,252 shares of our common stock.
Brobeck, Phleger & Harrison LLP, San Diego, California will pass on legal
matters in connection with this offering for the underwriters.
EXPERTS
The audited financial statements included in this prospectus have been
audited by Ernst & Young LLP, independent auditors, as described in their
report. We have included our financial statements in this prospectus in
reliance upon Ernst & Young LLP's report, given on their authority as experts
in accounting and auditing.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
In August 1999, we dismissed PricewaterhouseCoopers LLP as our independent
accountants. The former independent accountants' report did not contain an
adverse opinion, a disclaimer of opinion or any qualifications or modifications
related to uncertainty, limitation of audit scope or application of accounting
principles. The former independent accountants' report does not cover any of
our financial statements in this registration statement. There were no
disagreements with the former public accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure with respect to our financial statements up through the time of
dismissal that, if not resolved to the former accountants' satisfaction, would
have caused them to make reference to the subject matter of the disagreement in
connection with their report. In August 1999, we retained Ernst & Young LLP as
our independent public accountants. The decision to retain Ernst & Young LLP
was approved by resolution of the audit committee of the board of directors.
Prior to retaining Ernst & Young LLP, we had not consulted with Ernst & Young
LLP regarding accounting principles.
68
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act, with respect to
the common stock offered by this prospectus. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules to the registration statement. For further information with
respect to us and our common stock, reference is made to the registration
statement and the exhibits and schedules filed as part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or document filed as an exhibit to the registration statement are
qualified by reference to the applicable exhibit as filed.
A copy of the registration statement, and the exhibits and schedules to the
registration statement, as well as reports and other information filed by us
with the SEC may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
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.
69
<PAGE>
DIVERSA CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
Statement of Stockholders' Deficit 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
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Diversa Corporation
We have audited the accompanying balance sheets of Diversa Corporation as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' deficit, 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 Diversa Corporation 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
San Diego, California
January 12, 2000, except for Note 11, as to which the
date is February 8, 2000.
F-2
<PAGE>
DIVERSA CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AS OF
-------------------------- DECEMBER 31,
1998 1999 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 4,473,000 $ 2,490,000
Short-term investments............. 1,079,000 2,594,000
Accounts receivable, net of
allowance of $6,000 and $1,000 at
December 31, 1998 and 1999,
respectively...................... 48,000 15,571,000
Other current assets............... 410,000 659,000
------------ ------------
Total current assets............. 6,010,000 21,314,000
Property and equipment, net.......... 2,622,000 3,096,000
Acquired technology rights, net...... -- 2,487,000
Other assets......................... 74,000 4,175,000
------------ ------------
Total assets......................... $ 8,706,000 $ 31,072,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable................... $ 235,000 $ 668,000
Accrued liabilities................ 1,530,000 1,653,000
Deferred revenue................... 301,000 4,491,000
Notes payable...................... 552,000 --
Current portion of capital lease
obligations....................... 922,000 600,000
------------ ------------
Total current liabilities........ 3,540,000 7,412,000
------------ ------------
Capital lease obligations, less
current portion..................... 2,202,000 2,677,000
Deposit from sublessee............... 300,000 300,000
Long-term deferred revenue........... -- 15,094,000
Commitments and contingencies (Note
7)
Redeemable Convertible Preferred
Stock--$0.001 par value;
60,718,183 shares authorized,
60,220,183 shares issued and
outstanding at December 31, 1998
and 1999; no shares issued and
outstanding pro forma............. 48,402,000 48,402,000 $ --
Stockholders' equity (deficit):
Series E Convertible Preferred
Stock--$0.001 par value; 5,555,556
shares authorized, issued and
outstanding at December 31, 1999;
5,000,000 shares authorized, no
shares issued and outstanding
pro forma.......................... -- 6,000 --
Common stock--$0.001 par value;
28,630,349 shares authorized,
1,856,343 and 2,945,390 shares
issued and outstanding at December
31, 1998 and 1999, respectively;
65,000,000 shares authorized,
25,779,401 shares issued and
outstanding pro forma.............. 2,000 3,000 26,000
Additional paid-in capital.......... 4,309,000 20,102,000 68,487,000
Deferred compensation............... (1,692,000) (5,520,000) (5,520,000)
Notes receivable from stockholders.. (93,000) (36,000) (36,000)
Accumulated deficit................. (48,266,000) (57,351,000) (57,351,000)
Accumulated other comprehensive
income (loss)...................... 2,000 (17,000) (17,000)
------------ ------------ ------------
Total stockholders' equity
(deficit)....................... (45,738,000) (42,813,000) $ 5,589,000
------------ ============ ============
Total liabilities and
stockholders' equity (deficit).. $ 8,706,000 $ 31,072,000
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
DIVERSA CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Revenue:
Collaborative revenue.............. $ 669,000 $ 625,000 $ 9,166,000
Grant and product revenue.......... 486,000 722,000 1,106,000
------------ ------------ -----------
Total revenue........................ 1,155,000 1,347,000 10,272,000
Operating expenses:
Research and development........... 8,195,000 10,665,000 12,149,000
Selling, general and
administrative.................... 5,260,000 4,536,000 7,357,000
------------ ------------ -----------
Total operating expenses............. 13,455,000 15,201,000 19,506,000
------------ ------------ -----------
Loss from operations................. (12,300,000) (13,854,000) (9,234,000)
Other income (expense)............... (25,000) 99,000 79,000
Interest income...................... 288,000 553,000 527,000
Interest expense..................... (355,000) (308,000) (391,000)
------------ ------------ -----------
Net loss............................. (12,392,000) (13,510,000) (9,019,000)
Dividends payable to preferred
stockholders........................ -- -- (66,000)
------------ ------------ -----------
Net loss applicable to common
stockholders........................ $(12,392,000) $(13,510,000) $(9,085,000)
============ ============ ===========
Historical net loss per share, basic
and diluted......................... $ (7.72) $ (7.64) $ (3.86)
============ ============ ===========
Shares used in calculating historical
net loss per share, basic and
diluted............................. 1,606,000 1,768,000 2,353,000
Pro forma net loss per share......... $ (0.36)
===========
Shares used in calculating pro forma
net loss per share.................. 25,187,000
</TABLE>
See accompanying notes.
F-4
<PAGE>
DIVERSA CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES E
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE OTHER
----------------- ----------------- PAID-IN DEFERRED FROM ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT INCOME (LOSS)
--------- ------ --------- ------ ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996........... -- $ -- 1,576,978 $2,000 $ 190,000 $ -- $ (50,000) $(22,298,000) $ --
Issuance of
notes
receivable from
stockholders
related to sale
of preferred
stock ......... -- -- -- -- -- -- (113,000) -- --
Stock options
exercised...... -- -- 50,847 -- 18,000 -- -- -- --
Dividends....... -- -- -- -- -- -- -- (66,000) --
Net loss and
comprehensive
loss........... -- -- -- -- -- -- -- (12,392,000) --
Deferred
compensation
related to
stock options.. -- -- -- -- 2,113,000 (2,113,000) -- -- --
Amortization of
deferred
compensation... -- -- -- -- -- 685,000 -- -- --
--------- ------ --------- ------ ----------- ----------- ---------- ------------ --------
Balance at
December 31,
1997........... -- -- 1,627,825 2,000 2,321,000 (1,428,000) (163,000) (34,756,000) --
Comprehensive
income (loss):
Net loss........ -- -- -- -- -- -- -- (13,510,000) --
Unrealized gain
on available-
for-sale
securities..... -- -- -- -- -- -- -- -- 2,000
Comprehensive
loss........... -- -- -- -- -- -- -- -- --
Stock options
exercised...... -- -- 228,518 -- 59,000 -- -- -- --
Payments
received on
notes
receivable..... -- -- -- -- -- -- 70,000 -- --
Deferred
compensation
related to
stock options.. -- -- -- -- 1,929,000 (1,929,000) -- -- --
Amortization of
deferred
compensation... -- -- -- -- -- 1,665,000 -- -- --
--------- ------ --------- ------ ----------- ----------- ---------- ------------ --------
Balance at
December 31,
1998........... -- -- 1,856,343 2,000 4,309,000 (1,692,000) (93,000) (48,266,000) 2,000
Comprehensive
income (loss):
Net loss........ -- -- -- -- -- -- -- (9,019,000) --
Unrealized loss
on available-
for-sale
securities..... -- -- -- -- -- -- -- -- (19,000)
Comprehensive
loss........... -- -- -- -- -- -- -- -- --
Issuance of
preferred
stock, net of
issuance costs
of $71,000..... 5,555,556 6,000 -- -- 7,248,000 -- -- -- --
Issuance of
stock options
to former
employee as
part of
severance
agreement...... -- -- -- -- 1,095,000 -- -- -- --
Stock options
exercised...... -- -- 1,089,047 1,000 607,000 -- -- -- --
Payment of note
receivable from
stockholders... -- -- -- -- -- -- 13,000 -- --
Forgiveness of
notes
receivable
related to
employee
terminations... -- -- -- -- -- -- 44,000 -- --
Dividends
payable to
preferred
stockholders... -- -- -- -- -- -- -- (66,000) --
Deferred
compensation
related to
stock options.. -- -- -- -- 6,843,000 (6,843,000) -- -- --
Amortization of
deferred
compensation... -- -- -- -- -- 3,015,000 -- -- --
--------- ------ --------- ------ ----------- ----------- ---------- ------------ --------
Balance at
December 31,
1999........... 5,555,556 $6,000 2,945,390 $3,000 $20,102,000 $(5,520,000) $ (36,000) $(57,351,000) $(17,000)
========= ====== ========= ====== =========== =========== ========== ============ ========
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
--------------
<S> <C>
Balance at
December 31,
1996........... $(22,156,000)
Issuance of
notes
receivable from
stockholders
related to sale
of preferred
stock ......... (113,000)
Stock options
exercised...... 18,000
Dividends....... (66,000)
Net loss and
comprehensive
loss........... (12,392,000)
Deferred
compensation
related to
stock options.. --
Amortization of
deferred
compensation... 685,000
--------------
Balance at
December 31,
1997........... (34,024,000)
Comprehensive
income (loss):
Net loss........ (13,510,000)
Unrealized gain
on available-
for-sale
securities..... 2,000
--------------
Comprehensive
loss........... (13,508,000)
Stock options
exercised...... 59,000
Payments
received on
notes
receivable..... 70,000
Deferred
compensation
related to
stock options.. --
Amortization of
deferred
compensation... 1,665,000
--------------
Balance at
December 31,
1998........... (45,738,000)
Comprehensive
income (loss):
Net loss........ (9,019,000)
Unrealized loss
on available-
for-sale
securities..... (19,000)
--------------
Comprehensive
loss........... (9,038,000)
Issuance of
preferred
stock, net of
issuance costs
of $71,000..... 7,254,000
Issuance of
stock options
to former
employee as
part of
severance
agreement...... 1,095,000
Stock options
exercised...... 608,000
Payment of note
receivable from
stockholders... 13,000
Forgiveness of
notes
receivable
related to
employee
terminations... 44,000
Dividends
payable to
preferred
stockholders... (66,000)
Deferred
compensation
related to
stock options.. --
Amortization of
deferred
compensation... 3,015,000
--------------
Balance at
December 31,
1999........... $(42,813,000)
==============
</TABLE>
F-5
<PAGE>
DIVERSA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Operating activities:
Net loss applicable to common
stockholders........................ $(12,392,000) $(13,510,000) $(9,085,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 842,000 1,178,000 1,498,000
Loss on disposal of property and
equipment.......................... 86,000 -- --
Dividends payable to Series A, B and
D preferred stockholders........... -- -- 66,000
Amortization of deferred
compensation....................... 685,000 1,665,000 3,015,000
Issuance of stock options to former
employees.......................... -- -- 1,095,000
Forgiveness of notes receivable..... -- -- 44,000
Change in operating assets and
liabilities:
Accounts receivable, net............ (61,000) 233,000 (664,000)
Other current assets................ (64,000) (137,000) (609,000)
Other assets........................ 48,000 78,000 (47,000)
Accounts payable.................... (10,000) (294,000) 433,000
Accrued liabilities................. (312,000) (335,000) 123,000
Deferred revenue.................... -- 301,000 81,000
------------ ------------ -----------
Net cash used in operating
activities......................... (11,178,000) (10,821,000) (4,050,000)
Investing activities:
Purchases of property and equipment.. (1,310,000) (1,234,000) (1,421,000)
Purchase of acquired technology
rights.............................. -- -- (2,500,000)
Proceeds from release of restricted
investment securities............... 263,000 405,000 --
Purchases of investments............. -- (21,710,000) (26,943,000)
Maturities of investments............ -- 20,633,000 25,426,000
Deposit from sublessee............... 300,000 -- --
------------ ------------ -----------
Net cash used in investing
activities......................... (747,000) (1,906,000) (5,438,000)
Financing activities:
Advances under capital lease
obligations......................... 1,024,000 1,624,000 1,075,000
Principal payments on capital
leases.............................. (978,000) (1,146,000) (922,000)
Proceeds from repayment of notes
receivable from stockholders........ 1,402,000 70,000 13,000
Payments on long-term debt/note
payable............................. (15,000) (14,000) (552,000)
Proceeds from sales of preferred and
common stock, net of issuance
costs............................... 22,125,000 59,000 7,891,000
Payments of preferred stock
dividends........................... (66,000) -- --
------------ ------------ -----------
Net cash provided by financing
activities......................... 23,492,000 593,000 7,505,000
------------ ------------ -----------
Net (decrease) increase in cash and
cash equivalents..................... 11,567,000 (12,134,000) (1,983,000)
Cash and cash equivalents at beginning
of period............................ 5,040,000 16,607,000 4,473,000
------------ ------------ -----------
Cash and cash equivalents at end of
period............................... $ 16,607,000 $ 4,473,000 $ 2,490,000
============ ============ ===========
Supplemental disclosure of cash flow
information:
Interest paid........................ $ 363,000 $ 368,000 $ 451,000
============ ============ ===========
Supplemental schedule of noncash
activities:
Conversion of bridge notes to
preferred stock..................... $ 3,433,000 $ -- $ --
============ ============ ===========
Conversion of Series I preferred
stock to Series D preferred stock... $ 668,000 $ -- $ --
============ ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Diversa Corporation (the "Company") was incorporated under the laws of the
State of Delaware on December 21, 1992 and received initial funding to commence
its operations in May 1994. The Company discovers and develops novel enzymes
and other biologically active compounds from diverse environmental sources for
use in agricultural, chemical processing, industrial and pharmaceutical
applications.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers cash equivalents to be only those investments which
are highly liquid, readily convertible to cash and which mature within three
months from the date of purchase. The Company generally invests its excess cash
in U.S. Government securities and investment grade corporate obligations.
Short-term Investments
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities, to its
investments. Under SFAS No. 115, the Company classifies its short-term
investments as "Available-for-Sale" and records such assets at estimated fair
value in the balance sheet, with unrealized gains and losses, if any, reported
in stockholders' equity (deficit).
At December 31, 1998, all short-term investments consisted of investments in
U.S. government treasury securities. At December 31, 1999, short-term
investments consisted of the following:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
COST VALUE GAIN (LOSS)
--------- ------ -----------
<S> <C> <C> <C>
Corporate debt securities.......................... $1,505 $1,496 $ (9)
Obligations of U.S. Government agencies............ 1,106 1,098 (8)
------ ------ ----
$2,611 $2,594 $(17)
====== ====== ====
</TABLE>
These investments all mature in less than one year.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
short-term investments. The Company limits its exposure to credit loss by
placing its cash and investments with high credit quality financial
institutions.
During the years ended December 31, 1997, 1998 and 1999, the Company had
collaborative research agreements that accounted for 58%, 46%, and 89%,
respectively, of total revenue.
Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (generally three to five years) using the straight-
line method. Amortization of leasehold improvements is computed over the
shorter of the lease term or the estimated useful life of the related assets.
F-7
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, if indicators of impairment
exist, the Company assesses the recoverability of the affected long-lived
assets by determining whether the carrying value of such assets can be
recovered through undiscounted future operating cash flows. If impairment is
indicated, the Company measures the amount of such impairment by comparing the
carrying value of the asset to the present value of the expected future cash
flows associated with the use of the asset. While the Company's current and
historical operating and cash flow losses are indicators of impairment, the
Company believes the future cash flows to be received from the long-lived
assets will exceed the assets' carrying value, and accordingly the Company has
not recognized any impairment losses through December 31, 1999.
Acquired Technology Rights
In accordance with APB 17, Accounting for Intangible Assets, the acquired
technology rights are recorded at cost. The rights related to patents (Note 3)
and will be amortized over the remaining life of the patents (sixteen years.)
For purposes of evaluating impairment of the acquired technology rights, the
Company compares the carrying values and estimated future cash flows of both
the acquired rights and the Company's internally developed technology on a
combined basis.
Fair Value of Financial Instruments
Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, are carried at cost,
which management believes approximates fair value because of the short-term
maturity of these instruments.
Revenue Recognition
Strategic alliance revenues are earned and recognized on a percentage of
completion basis as research costs are incurred in accordance with the
provisions of each strategic alliance agreement. Fees paid to initiate research
projects are deferred and amortized over the project period in accordance with
SEC Staff Accounting Bulletin (SAB) No. 101. Milestone payments are recognized
as revenue upon the completion of the milestone. Revenue from grants is
recognized on a percentage of completion basis as related costs are incurred.
Revenue from product sales is recognized at the time of shipment to the
customer. The Company recognizes revenue only on payments that are non
refundable, and defers revenue recognition until performance obligations have
been completed. None of the strategic alliances or grants require scientific
achievement as a performance obligation.
Research and Development
Expenditures relating to research and development are expensed in the period
incurred.
Income Taxes
Current income tax expense (benefit) is the amount of income taxes expected
to be payable (receivable) for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax bases of assets and liabilities, as well as the
expected future tax benefit to be derived from tax loss and credit
carryforwards. Deferred income tax expense is generally the net change during
the year in the deferred income tax asset or liability. Valuation allowances
are established when realizability of deferred tax assets is uncertain. The
effect of tax rate changes is reflected in tax expense (benefit) during the
period in which such changes are enacted.
F-8
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock-Based Compensation
As permitted by SFAS No. 123, 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 fair value of the Company's common stock on the date of the
grant. In 1999, the Company recognized deferred stock compensation related to
certain stock option grants (see Note 5).
F-8--1
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred compensation for options granted to non-employees has been
determined in accordance with SFAS No. 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. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying options vest.
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income (loss) and its components; the Company has
disclosed its comprehensive income (loss) as a component of its statement of
stockholders' equity (deficit).
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity with
SFAS No. 128, Earnings per Share, and SAB 98, for all periods presented. Under
the provisions of SAB 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 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 No. 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. Pro forma
basic and diluted net loss per common share, as presented in the statements of
operations, has been computed for the year ended December 31, 1999 as described
above, and also gives effect to the assumed conversion of preferred stock which
will automatically convert to common stock immediately prior to the completion
of the Company's initial public offering (using the "as if converted" method)
from the original date of issuance. The pro forma shares have been adjusted to
give effect to the 1-for-2.8806 reverse stock split contemplated in Note 11.
The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Net loss applicable to common
stockholders......................... $(12,392,000) $(13,510,000) $(9,085,000)
Basic and diluted net loss per share.. $ (7.72) $ (7.64) $ (3.86)
============ ============ ===========
Weighted-average shares used in
computing historical net loss per
share, basic and diluted............. 1,606,000 1,768,000 2,353,000
Pro forma:
Net loss............................ $(9,085,000)
Pro forma net loss per share, basic
and diluted (unaudited).............. $ (0.36)
===========
Shares used above..................... 2,353,000
Pro forma adjustment to reflect
weighted-average effect of assumed
conversion of convertible preferred
stock (unaudited).................. 22,834,000
-----------
Shares used in computing pro forma
net loss per share, basic and
diluted (unaudited)................ 25,187,000
</TABLE>
F-9
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has excluded all convertible preferred stock, outstanding stock
options and warrants, and shares subject to repurchase from the calculation of
diluted loss per common share because all such securities are antidilutive for
all applicable periods presented. The total number of shares excluded from the
calculations of diluted net loss per share, prior to application of the
treasury stock method for options and warrants, was 23,620,000, 24,231,000 and
25,959,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Such securities, had they been dilutive, would have been included in the
computation of diluted net loss per share.
Segment Reporting
As of January 1, 1998, the Company adopted SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas, and
major customers. The Company has determined that it operates in only one
segment. Accordingly, the adoption of this statement had no impact on the
Company's financial statements.
Effect of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which will be
effective January 1, 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company
believes the adoption of SFAS No. 133 will not have a material effect on the
financial statements.
2. BALANCE SHEET DETAILS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
------- -----------
<S> <C> <C>
Trade.................................................. $13,000 $ 23,000
Grants................................................. 41,000 204,000
Partnership alliances.................................. -- 15,345,000
------- -----------
54,000 15,572,000
Allowance for doubtful accounts........................ (6,000) (1,000)
------- -----------
Total.................................................. $48,000 $15,571,000
======= ===========
</TABLE>
The partnership alliance receivable consists primarily of a receivable from
Novartis related to the joint venture discussed in Note 3. This receivable was
recorded upon the commencement of the related research efforts in December 1999
after the agreement was signed, and the payment of the receivable is due by
February 2000.
F-10
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Laboratory equipment............................... $ 4,228,000 $ 5,720,000
Computer equipment................................. 1,735,000 2,112,000
Furniture and fixtures............................. 274,000 322,000
Leasehold improvements............................. 77,000 132,000
----------- -----------
6,314,000 8,286,000
Accumulated depreciation and amortization.......... (3,692,000) (5,190,000)
----------- -----------
Total.............................................. $ 2,622,000 $ 3,096,000
=========== ===========
</TABLE>
At December 31, 1999, other assets primarily consisted of a $4.0 million
long-term receivable from the Novartis joint venture (See Note 3). This
receivable is due in June 2001, and is carried at its present value using a
discount rate of 15%.
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---------- ----------
<S> <C> <C>
Compensation........................................... $ 855,000 $ 929,000
Professional fees...................................... 334,000 287,000
Property taxes......................................... 67,000 85,000
Other.................................................. 274,000 352,000
---------- ----------
$1,530,000 $1,653,000
========== ==========
</TABLE>
3. SIGNIFICANT STRATEGIC ALLIANCES
Novartis Agribusiness Biotechnology Research
In January 1999, the Company entered into a strategic alliance with Novartis
Agribusiness Biotechnology Research Inc. ("Novartis"). Under the agreement, the
Company will receive research funding from Novartis to conduct multiple
independent research projects with the intention of identifying and developing
biomolecules that meet the scientific specifications of Novartis. In
conjunction with the transaction, Novartis purchased 5,555,556 shares of Series
E Convertible Preferred Stock for gross proceeds of $7.3 million, paid a
technology access fee of $3.0 million, and provided project research funding of
$2.2 million to the Company, for aggregate total proceeds of $12.5 million. The
Company is recognizing the research payments and the technology access fee on a
percentage of completion basis as research is performed. The only obligation of
the Company under this agreement is to perform research activities; Novartis
did not acquire any rights or privileges other than as disclosed in Note 4 as
an owner of Series E preferred stock.
All of the research required under the collaboration was completed by
December 31, 1999, and accordingly the entire technology access fee of $3.0
million and the research funding of $2.2 million were recognized in 1999. The
Company has no further performance obligations related to this alliance.
Novartis Joint Venture
In December 1999, the Company formed a five-year, renewable strategic
alliance with Novartis Seeds AG ("Novartis"). Through a contract joint venture,
the Company and Novartis will jointly pursue opportunities in the field of
animal feed and agricultural product processing. Both parties will share in the
management of the venture and fund a portion of the sales and marketing costs
of this venture. Under the agreements, Novartis receives exclusive, worldwide
rights in the field of animal feed and project exclusive, worldwide rights in
the
F-11
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
field of agricultural product processing. Novartis will pay for the license
granted under this agreement, of which $15.0 million is due by February 2000
and an additional $5 million due in June 2001. The Company has recorded the
receivable at its present value of $4.0 million. The technology access fee will
be recognized as revenue on a straight-line basis over the term of the
agreement which approximates the timing of the actual performance requirements.
Additionally, the Company will receive minimum research funding over five years
of $33.9 million, as well as milestone payments upon achievement of project
objectives totalling up to $7.7 million and license and commercialization fees
for any resulting products. Research funding will be recognized as the research
is performed, and milestone payments will be recognized as revenue when earned.
The Company will receive a share of the profits in the form of royalties on any
product sales. The joint venture is 50% owned, and therefore the Company will
account for the results of the joint venture utilizing the equity method.
Revenue recognized under the Novartis contract joint venture agreement was
$0.8 million for the year ended December 31, 1999, consisting of research
funding of $0.5 million and amortization of the license fee of $0.3 million.
The Dow Chemical Company
In July 1999, the Company expanded its existing strategic alliance with The
Dow Chemical Company ("Dow"). Under the expanded agreement, the Company will
seek to identify and develop enzymes that can be utilized by Dow to manufacture
chemical compounds. The three-year agreement requires Dow to make annual
technology development payments of $1.5 million each year. Dow will fund the
research costs for the duration of the contract totaling $10.8 million. The
Company will receive milestone payments of up to $2.7 million upon achievement
of established objectives and license and commercialization fees for any
resulting products. The Company will receive royalties on product sales. The
Company is amortizing the technology development fees over the minimum
guaranteed period of the agreement.
Revenue recognized under the strategic alliance with Dow was approximately
$2.5 million (27% of total collaborative revenues) for the year ended December
31, 1999, consisting of research funding of $1.9 million, and amortization of
technology development fees of $0.6 million.
In June 1997, the Company entered into an initial agreement with Dow to
develop an enzyme to be used in a Dow industrial process. As of December 31,
1998, the Company had successfully achieved the three technical milestones as
outlined in the agreement.
Finnfeeds International Limited
In May 1996, the Company entered into a strategic alliance with Finnfeeds
International Limited ("Finnfeeds") to jointly discover new enzymes for the
animal feed market. In conjunction with the agreement, the Company issued
844,444 shares of its Series C Redeemable Convertible Preferred Stock to
Finnfeeds for $1,900,000. The Company received and recognized as revenue $0.8
million in research funding over the period from May 1996 through December 31,
1998. The only obligation of the Company under this agreement is to perform
research activities; Finnfeeds did not acquire any rights or privileges other
than as disclosed in Note 4 as an owner of Series C preferred stock.
In December 1998, the Company and Finnfeeds entered into a license agreement
to commercialize an enzyme developed under the strategic alliance. Under the
terms of the agreement, the Company granted Finnfeeds an exclusive license to
manufacture, use and sell the developed enzyme. In consideration for the
license, the Company will be paid a royalty on related product sales made by
Finnfeeds.
F-12
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Terragen Discovery Inc.
In November 1999, the Company signed a license agreement with Terragen
Discovery Inc. ("Terragen") under which Terragen and the Company agreed to
cross license certain technologies. The Company entered into the agreement to
obtain exclusive, non-transferrable access to a Terragen technology which could
have been valuable to a competitor. Terragen obtained an exclusive, non-
transferable license to certain Diversa technology relating to screening from
the environment for small molecules. Under the terms of the agreement, the
Company made an initial payment of $2.5 million in 1999 and agreed to make
annual payments of $100,000 to Terragen to maintain the patent rights over the
remaining patent life. The Company intends to make all required payments, in
order to maintain the license through the patent expiration date. The Terragen
license was acquired to enhance the Company's intellectual property position in
combinational libraries. The Company believes the benefits associated with
preventing a competitor from licensing the Terragen technology exceed the
financial costs of the agreement. These benefits include certain marketing
advantages as well as increased protection from potential litigation, although
there had never been any asserted or unasserted claims against the Company
related to this technology. The Company has capitalized the initial payment as
an intangible asset, which will be amortized over the sixteen year patent life.
Other Agreements
The Company has signed various agreements with research institutions,
governmental and commercial entities. Generally these agreements call for the
Company to pay research support, cost reimbursement and, in some cases,
subsequent royalty payments in the event a product is commercialized. The
financial impact of these agreements on the Company is not significant.
4. PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Initial Public Offering
In December 1999, the board of directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. If the initial public offering is closed under the terms presently
anticipated, all of the preferred stock outstanding will automatically convert
into 22,834,011 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.
Authorization of Preferred Stock
In December 1999, the board of directors approved an amendment to the
Company's articles of incorporation to authorize an additional 5,000,000 shares
of undesignated preferred stock, for which the board of directors is authorized
to fix the designation, powers, preferences, and rights, and authorized an
additional 5,000,000 shares of common stock.
Characteristics and Terms Applicable to Preferred Stock
The Company has Series A, B, C, D and E preferred stock (the "Preferred
Stock") outstanding at December 31, 1999. All outstanding shares of Preferred
Stock automatically convert into Common Stock upon the effective date of an
initial public offering ("IPO") with gross proceeds exceeding $25 million and a
price per share of not less than $3.00. The Preferred Stock is convertible at
any time into Common Stock of the Company at a conversion ratio (one to one)
determined based on a formula provided in the Company's Restated Certificate of
Incorporation. The conversion ratio will be adjusted to 1-for-2.8806 when the
reverse stock split discussed in Note 11 is effected. The Company has reserved
the full number of shares of Common Stock issuable upon conversion of the
Preferred Stock.
F-13
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of convertible preferred stock issued and outstanding as of
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
LIQUIDATION
SHARES PREFERENCE
---------- -----------
<S> <C> <C>
Series A............................................ 10,000,000 $10,000,000
Series B............................................ 24,566,184 16,873,681
Series C............................................ 844,444 --
Series D............................................ 24,809,555 21,088,122
Series E............................................ 5,555,556 4,722,223
---------- -----------
65,775,739 $52,684,026
========== ===========
</TABLE>
The liquidation preference on the Series C Preferred Stock is determined by
the board of directors of the Company, and is based on the board's
interpretation of the value of the intellectual property rights related to the
genes and gene-sequencing technology developed under the Finnfeeds
collaboration agreement.
Dividends are payable when and if declared by the board of directors for
the Series A, B and D Stockholders. Such dividends will be declared so that
each of these Stockholders participates equally. From December 21, 1999 until
the date of the consummation of the first sale of common shares in an IPO, the
Series A, B and D Preferred Stockholders are entitled to a 5% dividend per
annum. The Company has accrued $66,000 in dividends payable, as of December
31, 1999, and will continue to accrue approximately $6,500 per day through the
completion of an initial public offering. The Company intends to settle the
dividend payable through the issuance of shares of common stock valued at the
IPO price. The dividend for the Series A, B and D Preferred stock is $0.05,
$0.033, and $0.0425 per share, respectively, or such greater amount of
dividends as the Preferred Stockholders would be entitled to if converted into
Common Stock. Dividends are payable when and if declared by the board of
directors on the Series C and E Preferred Stock, but are junior to the
dividends on the Series A, B and D Preferred Stock.
The Preferred Stockholders have voting rights on an "as if converted" basis
on most matters; however, the approval of a majority of the Preferred
Stockholders voting as a separate class is required for certain transactions.
In the event of a liquidation, the Series A, B and D Preferred Stockholders
are entitled to receive on a pro rata basis a liquidation payment in an amount
equal to the original issuance price of the Preferred Stock plus any unpaid
cumulative dividends plus declared but unpaid dividends, as well as a pro rata
distributive share of any remaining assets on an "as if fully converted" basis
with the Common Stock.
The Company will be required to redeem the Series A, B, C and D Preferred
Stock on and after May 2001, upon a written request of the Preferred
Stockholders representing not less than 75% of the combined voting power of
the Preferred Stock. The redemption price of the Preferred Stock is equal to
the original issuance price, plus unpaid cumulative dividends and declared but
unpaid dividends. The Series C Preferred Stock will be redeemed only after
full redemption of the Series A, B and D Preferred Stock.
Series A Redeemable Convertible Preferred Stock
During 1994 and 1995, the Company issued a total of 10,000,000 shares of
Series A Redeemable Convertible Preferred Stock for aggregate net proceeds of
$9,927,000.
Series B Redeemable Convertible Preferred Stock
In May 1996, the Company issued 18,939,394 shares of Series B Redeemable
Convertible Preferred Stock (the "Series B Preferred Stock") for aggregate net
proceeds of $11,947,000. In December 1996, the Company
F-14
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
issued an additional 4,545,455 shares of Series B Redeemable Convertible
Preferred Stock for aggregate proceeds of $3,000,000. In conjunction with the
issuance of Series B Redeemable Convertible Preferred Stock, rights were
granted to certain key employees and consultants to purchase an additional
1,272,727 shares of Series B Preferred Stock for $840,000. In December 1996,
certain of these individuals exercised their rights and purchased 967,698
shares of Series B Preferred Stock for $640,000.
In May 1997, two key employees exercised their rights and purchased a total
of 113,637 shares of Series B Preferred Stock for $0.66 per share in exchange
for promissory notes aggregating $75,000. The notes are payable over four years
in equal annual installments commencing March 30, 1998, and bear interest at
6.64% per annum. These notes have been recorded as a separate component of
stockholders' equity (deficit). The right to purchase an additional $125,000 in
Series B Preferred Stock expired in May 1997. In 1999, the Company forgave
$44,000 related to notes receivable from certain employees, and recorded
compensation expense for the forgiveness.
Series C Redeemable Convertible Preferred Stock
In July 1997, the Company issued 844,444 shares of Series C Redeemable
Convertible Preferred Stock (the "Series C Preferred Stock") to Finnfeeds for
$2.25 per share in conjunction with a collaboration agreement (Note 3). Total
issuance costs of $10,000 were netted against the cash proceeds. The rights of
the Series C Preferred Stock are junior to the rights of Series A, B and D
Preferred Stock, and on par with the Series E Preferred Stock.
Series D Redeemable Convertible Preferred Stock
In October 1997, the Company issued 24,809,555 shares of Series D Redeemable
Convertible Preferred Stock (the "Series D Preferred Stock") for $0.85 per
share. The $21,088,000 total issuance price of the Series D Preferred Stock
included the conversion of bridge notes in the amount of $3,433,000, the
exchange of Series I Preferred Stock in the amount of $688,000 and a $50,000
note receivable from a key employee which is payable over four years in equal
annual installments commencing December 1997, and bears interest at 6.64% per
annum. Total issuance costs of $165,000 were netted against the cash proceeds.
Series E Convertible Preferred Stock
In January 1999, in conjunction with a strategic alliance signed with
Novartis (Note 3), the Company sold 5,555,556 shares of Series E Convertible
Preferred Stock. The terms of the stock purchase agreement designate a portion
of the proceeds as a technology access fee, a portion of the proceeds as
advance payments for research support under the collaboration agreement, and
$7,333,000 for the Series E Convertible Preferred Stock ($1.32 per share). The
rights of the Series E Convertible Preferred Stock are junior to the rights of
Series A, B and D with respect to dividends and liquidation preferences.
5. STOCK OPTION PLANS AND WARRANTS
1999 Employee Stock Purchase Plan
In December 1999, the board of directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 416,579 shares of the Company's
common stock have been reserved for issuance under the Purchase Plan. The
Purchase Plan permits eligible employees to purchase common stock at a
discount, but only through payroll deductions, during defined offering periods.
The price at which stock is purchased under the Purchase Plan is equal to 85%
of the fair market value of the common stock on the first or last day of the
offering period, whichever is lower. The initial offering period will commence
on the effective date of the
F-15
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
offering. In addition, the Purchase Plan provides for annual increases of
shares available for issuance under the Purchase Plan beginning with fiscal
2001.
1999 Nonemployee Directors Stock Option Plan
In December 1999, the Company adopted the 1999 Nonemployee Directors Stock
Option Plan and reserved a total of 277,719 shares of common stock for issuance
thereunder. Each nonemployee director who becomes a director of the Company
will be automatically granted a nonstatutory stock option to purchase 27,772
shares of common stock on the date on which such person first becomes a
director. At each board meeting immediately following each annual stockholders
meeting beginning with the first board meeting after the 1999 Annual
Stockholders Meeting, each nonemployee director will automatically be granted a
nonstatutory option to purchase 1,736 shares of common stock. The exercise
price of options under the director 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 director plan is ten years. Each initial grant under the
director plan will vest as to 25% of the shares subject to the option one year
after the date of grant and at a rate of 25% of the shares at the end of each
year. Each subsequent grant will vest in full one year after the date of grant.
The director plan will terminate in September 2009, unless terminated earlier
in accordance with the provisions of the director plan.
The 1997 Equity Incentive Plan
In August 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan") which provides for the granting of incentive or non-statutory
stock options, stock bonuses, and rights to purchase restricted stock to
employees, directors, and consultants as administered by the human resources
committee of the board of directors. Unless terminated sooner by the board of
directors, the 1997 Plan will terminate in August 2007.
The incentive and non-statutory stock options are granted with an exercise
price of not less than 100% and 85%, respectively, of the estimated fair value
of the underlying common stock as determined by the board of directors. The
1997 Plan allows a purchase price for each restricted stock purchase that is
not less than 85% of the estimated fair value of the Company's common stock as
determined by the board of directors.
Options granted under the 1997 Plan vest over periods ranging up to four
years and are exercisable over periods not exceeding ten years. The aggregate
number of shares which may be awarded under the 1997 Plan is 5,836,468, and an
equal number of shares of common stock are reserved for the exercise of these
options. This aggregate number includes 3,020,204 shares which were authorized
by the board of directors in October 1999.
The Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan
The Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan
(the "1994 Plan") provides for the granting of incentive or non-qualified stock
options to employees and consultants as administered by the human resources
committee of the board of directors. The incentive stock options are granted
with an exercise price of not less than the estimated fair value of the
underlying common stock as determined by the board of directors. The non-
qualified stock options are granted with an exercise price of not less than
$0.03.
Options granted under the 1994 Plan vest over periods ranging up to four
years and are exercisable over periods not exceeding ten years. Options to
purchase 951,902 shares have been granted under the 1994 Plan and 110,000
options remain outstanding related to the 1994 Plan. In August 1997, this Plan
was terminated and there are no options available for future grant.
F-16
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Information with respect to the plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at January 1, 1997...................... 1,279,000 $0.40
Granted....................................... 1,203,000 $0.43
Exercised..................................... (51,000) $0.35
Cancelled..................................... (81,000) $0.46
----------
Balance at December 31, 1997.................... 2,350,000 $0.43
Granted....................................... 1,185,000 $0.58
Exercised..................................... (228,000) $0.26
Cancelled..................................... (346,000) $0.43
----------
Balance at December 31, 1998.................... 2,961,000 $0.49
Granted....................................... 1,515,000 $3.14
Exercised..................................... (1,089,000) $0.55
Cancelled..................................... (262,000) $0.49
----------
Balance at December 31, 1999.................... 3,125,000 $1.73
==========
</TABLE>
At December 31, 1999, options under the plans to purchase approximately
3,125,000 shares were exercisable and approximately 2,368,000 shares remain
available for grant.
Following is a further breakdown of the options outstanding under the plans
as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHED AVERAGE EXERCISE
OPTIONS REMAINING LIFE AVERAGE EXERCISE OPTIONS PRICE OF OPTIONS
RANGE OF EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE EXERCISABLE
------------------------ ----------- -------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.03--$0.49............ 469,000 7.0 $0.40 469,000 $0.40
$0.58................... 1,331,000 8.4 $0.58 1,331,000 $0.58
$1.73--$8.64............ 1,325,000 9.7 $3.43 1,325,000 $3.43
--------- ---------
$0.03--$8.64............ 3,125,000 8.8 $1.73 3,125,000 $1.73
========= =========
</TABLE>
The Company has outstanding an option to purchase 13,937 shares of common
stock with an exercise price of $0.03 per share that was issued in 1994 to a
founder of the Company as consideration for waiving certain rights in
conjunction with a previous financing. This option was issued outside of the
1994 and 1997 plans. The option expires at the earlier of the 10th anniversary
of the option or eighteen months after the completion of an IPO.
Adjusted pro forma information regarding net loss and net loss per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options and stock purchase plan under the
fair value method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using the "Minimum Value" method for option
pricing with the following assumptions for 1997, 1998 and 1999; risk-free
interest rates of 6.50%; dividend yield of 0%; and a weighted-average expected
life of the options of five years.
F-17
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the vesting period. The Company's
adjusted pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Adjusted pro forma net loss....... $(12,466,000) $(13,572,000) $(9,251,000)
Adjusted pro forma basic net loss
per share........................ $ (7.76) $ (7.68) $ (3.93)
</TABLE>
The pro forma effect on net loss for 1997, 1998 and 1999 is not likely to
be representative of the pro forma effects on reported net income or loss in
future years because these amounts reflect less than four years of vesting.
During the years ended December 31, 1997, 1998 and 1999, in connection with
the grant of certain stock options to employees, the Company recorded deferred
stock compensation totaling approximately $10.8 million, representing the
difference between the exercise price and the fair value of the Company's
common stock as estimated by the Company's management for financial reporting
purposes on the date such stock options were granted. Deferred compensation is
included as a reduction of stockholders' equity and is being amortized to
expense over the vesting period of the options. During the year ended December
31, 1999, the Company recorded amortization of deferred stock compensation
expense of approximately $3.0 million.
The Company has a total of approximately 364,000 warrants outstanding,
consisting of approximately 174,000 warrants to purchase Series A Preferred
Stock at $2.88 per share, and approximately 190,000 warrants to purchase
common stock at between $0.03 and $0.43 per share. The common stock warrants
were issued in previous years in connection with certain debt and equity
financing transactions, and expire through 2006. The Series A Preferred Stock
warrants were issued in conjunction with a lease financing agreement, and
expire at the later of February 2005, or the fifth anniversary of the
completion of an initial public offering.
At December 31, 1999, the Company has reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Conversion of convertible preferred stock......................... 22,834,000
1994 and 1997 Stock Option Plan................................... 5,493,000
Option issued to a founder of the Company......................... 14,000
Warrants.......................................................... 364,000
----------
28,705,000
==========
</TABLE>
Employee Terminations
During 1999, the Company agreed to separation terms with two former
officers. In conjunction with these agreements, the Company agreed to
accelerate one year's unvested options for one officer, and extend the vesting
period for one year for the other officer. The Company considered each
modification to require a remeasurement of the options and accordingly
recorded an expense of $1.1 million related to the option modifications. The
expense was recorded at the time of the separation as the former officers will
perform no services on behalf of the Company after the separation date.
6. BENEFIT PLAN
The Company has a 401(k) plan which allows participants to defer a portion
of their income through contributions. Such deferrals are fully vested and are
not taxable to the participant until distributed from the plan upon
termination, retirement, permanent disability or death. During the years ended
December 31, 1997, 1998 and 1999, the Company made discretionary contributions
of approximately $39,000, $45,000 and $54,000, respectively.
F-18
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Company leases office and laboratory space as well as equipment under
noncancelable leases as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31:
2000................................................ $ 943,000 $ 563,000
2001................................................ 1,012,000 580,000
2002................................................ 1,035,000 49,000
2003................................................ 817,000 --
2004................................................ 296,000 --
Thereafter............................................ 45,000 --
---------- ----------
Total minimum lease payments.......................... 4,148,000 $1,192,000
==========
Amount representing interest.......................... 871,000
----------
Present value of minimum capital lease obligations.... 3,277,000
Current portion....................................... 600,000
----------
Long-term capital lease obligation.................... $2,677,000
==========
</TABLE>
The operating lease commitment includes rental payments due under the
Company's San Diego facility lease and excludes approximately $390,000 in
payments due related to a previously occupied facility for which the Company
has sublessee rental commitments to meet substantially all required lease
payments, and has received a $300,000 deposit from the sublessee. For the years
ended December 31, 1997, 1998, and 1999, rent and administrative service
expense under operating leases for the San Diego facility was approximately
$413,000, $516,000, and $533,000, respectively.
Equipment acquired under capital leases is included in property and
equipment, and amounted to $4,971,000 and $6,075,000 (net of accumulated
amortization of $2,421,000 and $1,916,000) as of December 31, 1998 and December
31, 1999, respectively. The Company's capital lease obligations mature at
various dates through 2004 with interest rates ranging from 9.5% to 15.7%. As
of December 31, 1999, the Company has $828,000 available under lease financing
lines.
8. NOTES PAYABLE
In March 1995, the Company issued a $600,000 note payable with a 9% per
annum interest rate payable in connection with the acquisition of fixed assets.
The note was paid in full in 1999.
9. RELATED PARTY TRANSACTIONS
Included in the statement of operations are consulting fees and reimbursed
expenses to various stockholders, amounting to approximately $275,000 and
$413,000 for the year ended December 31, 1998 and 1999, respectively.
F-19
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
Significant components of the Company's deferred tax assets are shown below.
A valuation allowance of $19,269,000 and $22,605,000 has been recognized to
offset the deferred tax assets at December 31, 1998 and 1999, respectively, as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 16,584,000 $ 17,724,000
Deferred revenue.................................. -- 1,155,000
Licenses.......................................... -- 1,266,000
Start-up costs.................................... 556,000 278,000
Allowances and accrued liabilities................ 574,000 349,000
Federal and state tax credits..................... 1,391,000 1,669,000
Depreciation...................................... 164,000 164,000
------------ ------------
Total deferred tax assets......................... 19,269,000 22,605,000
Valuation allowance............................... (19,269,000) (22,605,000)
------------ ------------
Net deferred tax assets............................. $ -- $ --
============ ============
</TABLE>
At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $45,817,000 and $28,901,000, respectively.
The federal net operating loss carryforwards will begin to expire in 2009. The
California net operating loss carryforwards will continue to expire in 2000
(approximately $760,000 expired in 1999). The Company also has federal and
California tax credits of approximately $1,242,000 and $657,000, respectively,
which will expire in 2009.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of
the Company's net operating loss and credit carryforwards may be limited in the
event of a cumulative change in ownership of more than 50%. However, the
Company does not believe such limitation will have a material effect upon the
utilization of these carryforwards.
11. SUBSEQUENT EVENTS
In February 2000, the Company effected a 1-for-2.8806 reverse stock split of
the Company's common stock. All share data have been retroactively restated to
reflect the reverse stock split. In conjunction with the reverse stock split,
the certificate of incorporation was amended to authorize 65,000,000 shares of
common stock and 5,000,000 shares of preferred stock.
In February 2000, the Company initiated a loan program for 6 employees to
loan them monies to pay a personal tax liability. This tax liability resulted
from the Company's delayed filing of a Form 83B election related to those
employees' exercise of incentive and non qualified stock options during 1999.
This failure to timely file the Form 83B election exposed the employees to
significant personal tax liability. To limit the tax exposure, the Company has
elected to accelerate the vesting of the remaining unvested options, totaling
approximately 207,000 options, and will loan the employees a total of $1.6
million in full recourse promissory notes. The acceleration of the unvested
options will result in a non-cash compensation charge to the Company of
approximately $4.1 million in the first quarter of 2000. Additionally, the
Company will directly compensate two individuals a total of $240,000, which
will be a cash compensation charge recorded in the first quarter of 2000. The
loans carry a market interest rate, and will be repaid over a five year term.
In addition, the proceeds from any sale of stock or realization of the
individuals' tax credit carryforward will first be used to repay the
outstanding loan.
F-20
<PAGE>
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In February 2000, the Company accelerated the vesting on 104,145 stock
options previously granted to a director of the Company who also serves as
Chairman of the Scientific Advisory Board and as a consultant. To the extent
the option grants were for consulting services, the Company will record a non-
cash charge to operations of $1.7 million in the first quarter of 2000 in
accordance with SFAS 123 and EITF 96-18. This charge was calculated based on
the fair value of the common stock on the date of the modification, which was
calculated using the Black-Scholes pricing model, and the expense was recorded
on the measurement date of the option modification. There will be no future
expense associated with this option grant, however, Dr. Simon will be
compensated $1,000 per day for future consulting services as these services are
performed.
F-21
<PAGE>
[LOGO OF DIVERSA]
<PAGE>
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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 our 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 the time of delivery of this
prospectus or any sale of our common stock.
Until , 2000, all dealers that effect trans- actions of these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This 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
---------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Special Statement Regarding Forward-Looking Statements................... 16
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Corporate Information.................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Information........................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 26
Management............................................................... 44
Certain Transactions..................................................... 56
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 66
Legal Matters............................................................ 68
Experts.................................................................. 68
Where You Can Find More Information...................................... 69
Index to Financial Statements............................................ F-1
</TABLE>
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- -------------------------------------------------------------------------------
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[LOGO OF DIVERSA]
7,000,000 SHARES
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
BEAR, STEARNS & CO. INC.
CHASE H&Q
DEUTSCHE BANC ALEX. BROWN
, 2000
- -------------------------------------------------------------------------------
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
Registration fee.................................................... $ 46,755
NASD filing fee..................................................... 18,210
Nasdaq National Market listing fee.................................. 95,000
Printing and engraving expenses..................................... 200,000
Legal fees and expenses............................................. 450,000
Accounting fees and expenses........................................ 250,000
Blue Sky fees and expenses.......................................... 10,000
Transfer agent and registrar fees................................... 10,000
Miscellaneous....................................................... 120,035
----------
Total........................................................... $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws require that directors and officers be indemnified to
the maximum extent permitted by Delaware law.
The Delaware General Corporation Law (the "Delaware GCL") provides that a
director or officer of a corporation (i) shall be indemnified by the
corporation for all expenses of litigation or other legal proceedings when he
is successful on the merits, (ii) may be indemnified by the corporation for the
expenses, judgments, fines and amounts paid in settlement of such litigation
(other than a derivative suit) even if he is not successful on the merits if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation (and, in the case of a
criminal proceeding, had no reason to believe his conduct was unlawful), and
(iii) may be indemnified by the corporation for expenses of a derivative suit
(a suit by a stockholder alleging a breach by a director or officer of a duty
owed to the corporation), even if he is not successful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, provided that no such
indemnification may be made in accordance with this clause (iii) if the
director or officer is adjudged liable to the corporation, unless a court
determines that, despite such adjudication but in view of all of the
circumstances, he is entitled to indemnification of such expenses. The
indemnification described in clauses (ii) and (iii) above shall be made upon
order by a court or a determination by (i) a majority of disinterested
directors or by such committee such disinterested directors may designate, (ii)
if there are no such directors or if such directors so direct, by independent
legal counsel in a written opinion or (iii) the stockholders that
indemnification is proper because the applicable standard of conduct is met.
Expenses incurred by a director or officer in defending an action may be
advanced by the corporation prior to the final disposition of such action upon
receipt of an undertaking by such director or officer to repay such expenses if
it is ultimately determined that he is not entitled to be indemnified in
connection with the proceeding to which the expenses relate. The Company's
Certificate of Incorporation includes a provision eliminating, to the fullest
extent permitted by Delaware law, director liability for monetary damages for
breaches of fiduciary duty.
The Company has entered into indemnity agreements (the "Indemnity
Agreements") with each director or officer designated by the Board of
Directors. The Indemnity Agreements require that the Company indemnify
II-1
<PAGE>
directors and officers who are parties thereto in all cases to the fullest
extent permitted by our bylaws and by Delaware law. Under the Delaware GCL,
except in the case of litigation in which a director or officer is successful
on the merits, indemnification of a director or officer is discretionary rather
than mandatory. Consistent with the Company's Bylaw provision on the subject,
the Indemnity Agreements require the Company to make prompt payment of
litigation expenses at the request of the director or officer in advance of
indemnification provided that he undertakes to repay the amounts if it is
ultimately determined that he is not entitled to indemnification for such
expenses. The advance of litigation expenses is mandatory; under the Delaware
GCL such advance would be discretionary. Under the Indemnity Agreements, the
director or officer is permitted to bring suit to seek recovery of amounts due
under the Indemnity Agreements and is entitled to recover the expenses of
seeking such recovery if such suit for recovery is successful in whole or in
part. Without the Indemnity Agreements, the Company would not be required to
pay the director or officer for his expenses in seeking indemnification
recovery against the Company. Under the Indemnity Agreements, directors and
officers are not entitled to indemnity or advancing of expenses (i) if such
director or officer has recovered payment under an insurance policy for the
subject claim, or has otherwise been indemnified against the subject claim,
(ii) for actions initiated or brought by the director or officer and not by way
of defense (except for actions seeking indemnity or expenses from the Company),
(iii) if the director or officer violated section 16(b) of the Exchange Act or
similar provisions of law, (iv) if a court of competent jurisdiction determines
that the director or officer failed to act in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Company or, with respect to any proceeding which is of a criminal nature,
determines that the director or officers' conduct was knowingly fraudulent,
deliberately dishonest or constituted willful misconduct or (v) if
indemnification is unlawful. Absent the Indemnity Agreements, indemnification
that might be made available to directors and officers could be changed by
amendments to the Company's Certificate of Incorporation or Bylaws.
The underwriting agreement provides that the underwriters are obligated,
under some circumstances, to indemnify our directors, officers and controlling
persons against specified liabilities, including liabilities under the
Securities Act. Reference is made to the form of underwriting agreement filed
as Exhibit 1.1 to this registration statement.
In addition, we have an existing directors and officers liability insurance
policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1997, the Registrant has sold and issued the following
unregistered securities:
(a) On July 14, 1997, the Registrant issued and sold 844,444 shares of its
Series C Preferred Stock to Finnfeeds International Limited for a purchase
price of $1,900,000, in connection with the Registrant's Collaboration
Agreement with Finnfeeds International Limited. The Registrant relied on the
exemption provided by Section 4(2) and/or Regulation D promulgated under the
Securities Act. The sale was made without general solicitation or advertising.
The purchaser was a sophisticated investor with access to all relevant
information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment.
(b) On September 2, 1997, the Registrant issued to 15 investors, secured
promissory notes for an aggregate of $3,432,804 that were convertible into
shares of the Registrant's Series D Preferred Stock. The Registrant relied on
the exemption provided by Section 4(2) and/or Regulation D promulgated under
the Securities Act. The issuances were made without general solicitation or
advertising. Each investor was a sophisticated investor with access to all
relevant information necessary to evaluate the investment and represented to
the Registrant that the securities were being acquired for investment.
(c) On October 22, 1997, the Registrant issued and sold an aggregate of
24,809,555 shares of its Series D Preferred Stock to 27 investors for an
aggregate purchase price of $21,088,122, which reflected the conversion of all
of the Registrant's outstanding Series I Preferred Stock and convertible,
secured promissory notes into Series D Preferred Stock. The Registrant relied
on the exemption provided by Section 4(2) and/or
II-2
<PAGE>
Regulation D promulgated under the Securities Act. The sales were made without
general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to the Registrant that the securities were being
acquired for investment.
(d) On January 25, 1999, the Registrant issued and sold 5,555,556 shares of
its Series E Preferred Stock to Novartis Agribusiness Biotechnology Research,
Inc. for a purchase price of $7,333,334 in connection with a Collaboration
Agreement between the parties. The Registrant relied on the exemption provided
by Section 4(2) and/or Regulation D promulgated under the Securities Act. The
sale was made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment.
(e) From time to time since January 1, 1997, the Registrant has granted
stock options to purchase shares of its common stock to various employees and
consultants pursuant to its 1994 Employee Incentive and Non-Qualified Stock
Option Plan. With respect to all grants of options, exemption from registration
was unnecessary in that the transactions did not involve a "sale" of securities
as that term is used in Section 2(a)(3) of the Securities Act.
(f) From time to time since August 28, 1997, the Registrant has granted
stock options to purchase shares of its common stock to various employees and
consultants pursuant to its 1997 Equity Incentive Plan. With respect to all
grants of options, exemption from registration was unnecessary in that the
transactions did not involve a "sale" of securities as that term is used in
Section 2(a)(3) of the Securities Act.
(g) As of December 31, 1999, the Registrant had issued and sold, in the
aggregate, 62,949 shares of its common stock for per share exercise prices
ranging from $0.58 to $2.02 to employees and consultants pursuant to their
exercise of stock options granted under the Registrant's 1994 Employee
Incentive and Non-Qualified Stock Option Plan. The Registrant relied on the
exemption provided by Rule 701 under the Securities Act.
(h) As of December 31, 1999, the Registrant had issued and sold, in the
aggregate, 702,386 shares of its common stock for per share exercise prices
ranging from $0.04 to $1.73 to employees and consultants pursuant to their
exercise of stock options granted under the Registrant's 1997 Equity Incentive
Plan. The Registrant relied on the exemption provided by Rule 701 under the
Securities Act.
The common stock amounts and per share exercise prices in the descriptions
above reflect the 1-for-2.8806 reverse stock split of the Registrant's common
stock which will take place prior to effectiveness of this offering. The
recipients of the above-described securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
such transactions. All recipients had adequate access, through employment or
other relationships, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ----------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriter's Agreement.
3.1** Registrant's Certificate of Incorporation, as amended, as currently in
effect.
3.2** Registrant's Bylaws, as amended, as currently in effect.
3.3** Form of Amended and Restated Certificate of Incorporation, to be filed
prior to the Closing.
3.4** Form of Registrant's Amended and Restated Certificate of
Incorporation, to be effective upon the closing of this offering.
3.5** Form of Registrant's Amended and Restated Bylaws, to be effective upon
the closing of this offering.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ----------------------------------------------------------------------
<C> <S>
4.1** Form of Common Stock Certificate of Registrant.
5.1** Opinion of Cooley Godward LLP.
10.1** Form of Indemnity Agreement entered into between the Company and its
directors and executive officers.
10.2** 1994 Employee Incentive and Non-Qualified Stock Option Plan, as
amended.
10.3** Form of Stock Option Agreement under the 1994 Employee Incentive and
Non-Qualified Stock Option Plan.
10.4** 1997 Equity Incentive Plan.
10.5** Form of Stock Option Grant Notice and Stock Option Agreement under the
1997 Equity Incentive Plan.
10.6** 1999 Non-Employee Directors' Stock Option Plan.
10.7** Form of Stock Option Grant Notice and Related Stock Option Agreement
under the 1999 Non-Employee Directors' Stock Option Plan.
10.8** 1999 Employee Stock Purchase Plan.
10.9** Amended and Restated Stockholders' Agreement by and among the Company
and the Stockholders identified therein, dated January 25, 1999.+
10.10** Form of Warrant Agreement to purchase Series A Preferred Stock (with
schedule of holders attached).
10.11** Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).
10.12** Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).
10.13** Multi-Tenant Office R&D Building Lease by and between the Company and
Sycamore/San Diego Investors, dated September 24, 1996.
10.14** Master Lease Agreement by and between the Transamerica Business Credit
Corporation and the Company, dated April 4, 1997.
10.15 License Agreement by and between the Company and The Dow Chemical
Company, dated July 20, 1997 and July 22, 1997.+
10.16 Collaborative Research Agreement by and between the Company and The
Dow Chemical Company, dated July 20, 1999 and July 22, 1999.+
10.17** License Agreement by and between the Company and Finfeeds
International Limited, dated December 1, 1998.+
10.18** Collaboration Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999, as
amended.+
10.19** Stock Purchase Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999.+
10.20** Collaboration Agreement by and between the Company and Rhone-Poulenc
Animal Nutrition S.A., dated June 28, 1999.+
10.21** License Agreement by and between the Company and Invitrogen
Corporation, dated March 29, 1999.+
10.22** License Agreement by and between the Company and Mycogen Corporation,
dated December 1997, as amended on March 6, 1998 and December 19,
1997.+
10.23** Patent Cross-License Agreement by and between the Company and Terragen
Discovery Inc., dated November 18, 1999.+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ---------------------------------------------------------------------
<C> <S>
10.24** Joint Venture Agreement by and between the Company and Novartis Seeds
AG, dated December 1, 1999.+
10.25** Research Lease by and between the Company One Cell Systems, Inc.,
dated February 16, 1999.
10.26** Research and Development Agreement by and between the Company and
Novartis Enzymes, Inc., dated December 1, 1999.+
10.27** Employment Offer Letter to Patrick Simms, dated February 3, 1997.
10.28** Employment Offer Letter to Jay Short, dated August 30, 1994.
10.29** Employment Offer Letter to Karin Eastham, dated April 2, 1999.
10.30** Employment Offer Letter to William H. Baum, dated July 31, 1997.
10.31** Separation Agreement by and between the Company and Terrance J.
Bruggeman, effective as of April 12, 1999.
10.32** Separation Agreement by and between the Company and Kathleen H. Van
Sleen, effective as of May 10, 1999.
10.33** Letter Agreement with Jay M. Short, Ph.D., dated June 25, 1998.
16.1** Letter from PricewaterhouseCoopers LLP to the Securities and Exchange
Commission, dated January 28, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed as an exhibit to this Registration Statement.
+ Confidential Treatment will be requested with respect to portions of this
exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
(b) Schedules
All schedules are omitted because they are not required, are not applicable
or the information is included in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter 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 provisions described in Item 14 or otherwise, the registrant has
been advised that in the opinion of the 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, 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.
II-5
<PAGE>
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Act, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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.
(2) That, 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.
(3) 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-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
Amendment No. 5 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of San Diego, County of San Diego, State of
California, on the 10th day of February, 2000.
By:/s/ Karin Eastham
-----------------------------------
Karin Eastham
Senior Vice President, Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jay M. Short* President, Chief Executive February 10, 2000
_________________________________ Officer, Chief Technology
Jay M. Short, Ph.D. Officer and Director
(Principal Executive
Officer)
/s/ Karin Eastham Senior Vice President, February 10, 2000
____________________________________ Finance and Chief Financial
Karin Eastham Officer (Principal Financial
Officer)
/s/ James H. Cavanaugh* Director February 10, 2000
____________________________________
James H. Cavanaugh, Ph.D.
/s/ Daniel T. Carroll* Director February 10, 2000
____________________________________
Daniel T. Carroll
/s/ Patricia M. Cloherty* Director February 10, 2000
____________________________________
Patricia M. Cloherty
/s/ Donald D. Johnston* Director February 10, 2000
____________________________________
Donald D. Johnston
/s/ Mark Leschly* Director February 10, 2000
____________________________________
Mark Leschly
/s/ Melvin I. Simon* Director February 10, 2000
____________________________________
Melvin I. Simon, Ph.D.
/s/ Peter Johnson* Director February 10, 2000
____________________________________
Peter Johnson
*By: /s/ Karin Eastham
____________________________________
Karin Eastham
Attorney-in-Fact and Agent
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ----------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriter's Agreement.
3.1** Registrant's Certificate of Incorporation, as amended, as currently in
effect.
3.2** Registrant's Bylaws, as amended, as currently in effect.
3.3** Form of Amended and Restated Certificate of Incorporation, to be filed
prior to the Closing.
3.4** Form of Registrant's Amended and Restated Certificate of
Incorporation, to be effective upon the closing of this offering.
3.5** Form of Registrant's Amended and Restated Bylaws, to be effective upon
the closing of this offering.
4.1** Form of Common Stock Certificate of Registrant.
5.1** Opinion of Cooley Godward LLP.
10.1** Form of Indemnity Agreement entered into between the Company and its
directors and executive officers.
10.2** 1994 Employee Incentive and Non-Qualified Stock Option Plan, as
amended.
10.3** Form of Stock Option Agreement under the 1994 Employee Incentive and
Non-Qualified Stock Option Plan.
10.4** 1997 Equity Incentive Plan.
10.5** Form of Stock Option Grant Notice and Stock Option Agreement under the
1997 Equity Incentive Plan.
10.6** 1999 Non-Employee Directors' Stock Option Plan.
10.7** Form of Stock Option Grant Notice and Related Stock Option Agreement
under the 1999 Non-Employee Directors' Stock Option Plan.
10.8** 1999 Employee Stock Purchase Plan.
10.9** Amended and Restated Stockholders' Agreement by and among the Company
and the Stockholders identified therein, dated January 25, 1999.+
10.10** Form of Warrant Agreement to purchase Series A Preferred Stock (with
schedule of holders attached).
10.11** Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).
10.12** Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).
10.13** Multi-Tenant Office R&D Building Lease by and between the Company and
Sycamore/San Diego Investors, dated September 24, 1996.
10.14** Master Lease Agreement by and between the Transamerica Business Credit
Corporation and the Company, dated April 4, 1997.
10.15 License Agreement between the Company and The Dow Chemical Company,
dated July 20, 1997 and July 22, 1997.+
10.16 Collaborative Research Agreement by and between the Company and The
Dow Chemical Company, dated July 20, 1999 and July 22, 1999.+
10.17** License Agreement by and between the Company and Finfeeds
International Limited, dated December 1, 1998.+
10.18** Collaboration Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999, as
amended.+
10.19** Stock Purchase Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ----------------------------------------------------------------------
<C> <S>
10.20** Collaboration Agreement by and between the Company and Rhone-Poulenc
Animal Nutrition S.A., dated June 28, 1999.+
10.21** License Agreement by and between the Company and Invitrogen
Corporation, dated March 29, 1999.+
10.22** License Agreement by and between the Company and Mycogen Corporation,
dated December 1997, as amended on March 6, 1998 and December 19,
1997.+
10.23** Patent Cross-License Agreement by and between the Company and Terragen
Discovery Inc., dated November 18, 1999.+
10.24** Joint Venture Agreement by and between the Company and Novartis Seeds
AG, dated December 1, 1999.+
10.25** Research Lease by and between the Company One Cell Systems, Inc.,
dated February 16, 1999.
10.26** Research and Development Agreement by and between the Company and
Novartis Enzymes, Inc., dated December 1, 1999.+
10.27** Employment Offer Letter to Patrick Simms, dated February 3, 1997.
10.28** Employment Offer Letter to Jay Short, dated August 30, 1994.
10.29** Employment Offer Letter to Karin Eastham, dated April 2, 1999.
10.30** Employment Offer Letter to William H. Baum, dated July 31, 1997.
10.31** Separation Agreement by and between the Company and Terrance J.
Bruggeman, effective as of April 12, 1999.
10.32** Separation Agreement by and between the Company and Kathleen H. Van
Sleen, effective as of
May 10, 1999.
10.33** Letter Agreement with Jay M. Short, Ph.D., dated June 25, 1998.
16.1** Letter from PricewaterhouseCoopers LLP to the Securities and Exchange
Commission, dated January 28, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed as an exhibit to this Registration Statement.
+ Confidential Treatment will be requested with respect to portions of this
exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 10.15
Confidential Treatment Requested
Under 17 C.F.R. (S)(S) 200.80 (b) (4)
200.83 and 230.406
LICENSE AGREEMENT
BETWEEN
THE DOW CHEMICAL COMPANY
AND
DIVERSA CORPORATION
*Confidential Treatment Requested
1
<PAGE>
<TABLE>
<CAPTION>
ARTICLE TITLE PAGE NUMBER
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
I DEFINITIONS 1
- -------------------------------------------------------------------------------------------------
II PATENT LICENSE GRANT 4
- -------------------------------------------------------------------------------------------------
III PAYMENTS 6
- -------------------------------------------------------------------------------------------------
IV PATENT RIGHTS 9
- -------------------------------------------------------------------------------------------------
V CONFIDENTIALITY 11
- -------------------------------------------------------------------------------------------------
VI ASSIGNMENT 12
- -------------------------------------------------------------------------------------------------
VII THIRD PARTY INFRINGEMENT CLAIMS 12
- -------------------------------------------------------------------------------------------------
VIII PATENT ENFORCEMENT & LITIGATION 13
- -------------------------------------------------------------------------------------------------
IX U.S. EXPORT CONTROL AND GOVERNMENT LICENSES 14
- -------------------------------------------------------------------------------------------------
X PRODUCT LIABILITY AND INDEMNIFICATION 15
- -------------------------------------------------------------------------------------------------
XI WARRANTY & DISCLAIMER, 16
- -------------------------------------------------------------------------------------------------
XII TERM AND TERMINATION 17
- -------------------------------------------------------------------------------------------------
XIII FORCE MAJEURE 18
- -------------------------------------------------------------------------------------------------
XIV DISPUTE RESOLUTION 19
- -------------------------------------------------------------------------------------------------
XV NOTICES 20
- -------------------------------------------------------------------------------------------------
XVI MISCELLANEOUS PROVISIONS 21
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
APPENDIX TITLE PAGE
- -------------------------------------------------------------------------------------------------
<C> <S> <C>
A PATENT RIGHTS A
- -------------------------------------------------------------------------------------------------
A-1 DIVERSA PATENT RIGHTS A-1
- -------------------------------------------------------------------------------------------------
A-2 DIVERSA PATENT RIGHTS [****] A-2
- -------------------------------------------------------------------------------------------------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
ROYALTY BEARING PRODUCTS
- --------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
A-3 DIVERSA PATENT RIGHT [****] A-3
- --------------------------------------------------------------------------------------------------------------------
B JOINT PATENT RIGHTS B-1
- --------------------------------------------------------------------------------------------------------------------
C LICENSED PRODUCT C-1
- --------------------------------------------------------------------------------------------------------------------
D ROYALTY BEARING PRODUCT D-1
- --------------------------------------------------------------------------------------------------------------------
E ROYALTY BEARING PRODUCT CLASSIFICATION E-1
- --------------------------------------------------------------------------------------------------------------------
F ROYALTY SCHEDULE F-1
- --------------------------------------------------------------------------------------------------------------------
G OPTION AGREEMENT G-1
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
ii
<PAGE>
This LICENSE AGREEMENT (including the Appendices hereto, the "License") is
by and between THE DOW CHEMICAL COMPANY, a corporation duly formed and existing
under the laws of the State of Delaware, having a place of business at 2030 Dow
Center, Midland, Michigan 48674, United States of America ("DOW" or a "Party"),
and DIVERSA CORPORATION, a corporation duly formed and existing under the laws
of the State of Delaware, having a place of business at 10665 Sorrento Valley
Road, San Diego, California 92121, United States of America ("DIVERSA" or a
"Party").
R E C I T A L S
A. DIVERSA has discovered and developed enzymes and has expertise in the
rearrangement of DNA to produce and discover genes utilizing proprietary
technologies for the rapid discovery, development and optimization of
enzymes.
B. DOW has expertise in the discovery, development and production of chemical
compounds.
C. DOW and DIVERSA are concurrently with this License entering into a separate
Collaborative Research and Development Agreement ("Agreement") in order to
perform research together to discover and optimize the function of new
genes, processes and products resulting thereupon that can be used by DOW
to produce certain, desired commercial chemical compounds.
D. DIVERSA represents that it has Patent Rights and Know-How that pertain to
this License.
E. DOW is desirous of obtaining, and DIVERSA wishes to grant to DOW, a
worldwide, exclusive royalty-bearing license to use Patent Rights and
Licensed Products in Research Target Processes.
NOW, THEREFORE, in consideration of the mutual covenants contained herein, and
for other good and valuable consideration, the Parties hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
When used in this License, the following terms shall have the meanings set out
below, unless the context requires otherwise. The singular shall be interpreted
as including the plural and vice versa, unless the context clearly indicates
otherwise.
1
<PAGE>
1.1 "Affiliate" means any corporation, firm, limited liability company,
partnership or other entity that directly or indirectly controls or is
controlled by or is under common control with a Party to this License.
Control for this purpose means ownership, directly or through one or more
affiliated entities, of 50 percent (50%) or more of the shares of stock
entitled to vote for the election of directors in the case of a
corporation, or 50 percent (50%) or more of the equity interests in the
case of any other type of legal entity, or any other arrangement whereby a
Party controls or has the right to control the board of directors or
equivalent governing body of a corporation or other entity.
1.2 "Agreement" means the Collaborative Research Agreement between DOW and
DIVERSA, executed concurrently with this License.
1.3 "Areas of Interest" means the development of Improved Enzymes (as defined
below) for use in the following [****] specific areas:
(a) [****]
(b) [****]
(c) [****]
1.4 "Confidential Information" means all information, Know-How, scientific,
technical, or non-technical data, samples and Materials, business plans,
and marketing and sales information disclosed by one Party to the other
under this License, and including information disclosed under the Agreement
regarding Licensed Products, whether disclosed or provided in oral, written
(including but not limited to electronic, facsimile, paper or other means),
graphic, photographic or any other form, except to the extent that such
information:
(a) as of the date of disclosure is known to the receiving Party as
shown by written documentation, other than by virtue of a prior
confidential disclosure from the disclosing Party to the
receiving Party;
(b) as of the date of disclosure is in, or subsequently enters, the
public domain through no fault or omission of the receiving
Party;
(c) as of the date of disclosure or thereafter is obtained from a
Third Party free from any obligation of confidentiality; or
(d) as of the date of disclosure or thereafter is developed by the
receiving Party independent of the disclosure by the disclosing
Party as evidenced by written documentation.
1.5 "Controls" or "Controlled" means, with respect to intellectual property,
possession by DIVERSA (other than by virtue of this License) of the ability
to grant licenses or sublicenses to DOW without violating the terms of any
agreement or other arrangement with any Third Party and to the reasonable,
good faith knowledge and belief of DIVERSA, without violating the rights of
a Third Party.
*Confidential Treatment Requested
2
<PAGE>
1.6 [****] means a [****] that is not [****] whereupon the [****] shall be
[****] on the [****] and [****] of the [****] including a [****] of [****]
an [****].
1.7 "Effective Date" means the date of last signature of the Parties at the end
of this License.
1.8 "Field" means [****]
1.9 "Improved Enzyme" means an enzyme or enzymes, either ex vivo or in vivo,
provided to DOW by DIVERSA which is within the claims of Patent Rights or
Joint Patent Rights or that incorporates, is derived from, or is
identified, discovered, developed or made through the use of Know-How,
which is developed in the Areas of Interest under the Agreement.
1.10 "Joint Patent Rights" means patent rights, which are jointly developed or
invented by both Parties under the Agreement in accordance with its terms,
as shown in Appendix B, which Appendix B-1 may be modified to include joint
patent rights obtained during the Research Term under the Agreement, and
which rights pertain to a Licensed Product. Joint Patent Rights concern
only the scope of the claims that have not been held invalid or
unenforceable after all appeals have been exhausted. Claims shall be deemed
valid unless held otherwise.
1.11 "Know-How" means all Research Results, as defined and obtained under the
Agreement, and all know-how, nonpatented inventions, improvements,
discoveries, data, instructions, processes, formulas, sequences,
information (including, without limitation, chemical, physical and
analytical, safety, manufacturing and quality control data and
information), procedures, devices, methods and trade secrets which are
conceived, discovered or invented during the term of the Agreement, and
which are necessary or appropriate to develop and commercialize Licensed
Products. (Know-How does not include inventions within the Patent Rights or
Joint Patent Rights.)
1.12 "Licensed Product" means (i) any Improved Enzyme which is used to convert a
Research Target (as defined in the Agreement) into a product using a
Research Target Process, or (ii) any Improved Enzyme which is based on or
incorporates or is identified, discovered, or developed under the
Agreement, for which both (i) and (ii) are designated by the RMC, and
encompassed
*Confidential Treatment Requested
3
<PAGE>
within DIVERSA Patent Rights or Joint Patent Rights and listed on Appendix
C, which is attached hereto and made a part hereof and which is identical
to Appendix G of the Agreement.
1.13 "Material" means the original, tangible materials of any type provided by
DOW or DIVERSA to the other Party in order that the recipient can perform
its obligations under this License.
1.14 "Net Sales" means the amount invoiced on sales of Royalty Bearing Product
by DOW and its Affiliates to a Third Party, less the following deductions
to the extent included in the amounts invoiced:
(a) [****] and
(b) [****] and
(c) [****] and
(d) [****] and
(e) [****]
Net Sales shall not include sales between or among DOW and its Affiliates.
1.15 "Patent Rights" means patent and patent applications Controlled solely by
DIVERSA as shown in Appendix A, including:
(a) all patents and patent applications which are conceived of under the
Agreement, and which are necessary (but for this License DOW would
infringe these patents) for DOW to make, use or sell the Royalty
Bearing Products; and are listed on Appendix A-1, attached hereto and
made a part hereof, which Appendix A-1 may be modified to include
Patent Rights obtained during this License;
(b) the patents and patent applications listed on Appendix A-2, attached
hereto and made a part hereof, are patent rights of DIVERSA that
[****] and
(c) any divisions, continuations, continuations-in-part, reissues,
reexaminations, extensions or other governmental actions which extend
any of the subject matter of the patent applications or patents in
*Confidential Treatment Requested
4
<PAGE>
(i) or (ii) above, and any substitutions, confirmations, patents-of-
addition, registrations or revalidations of any of the foregoing,
which Patent Rights are necessary (but for this License DOW would
infringe these patents) for DOW to make, use or sell the Royalty
Bearing Products, which shall be listed on Appendix A-1 or A-2,
respectively;
(d) [****]
in each case, which are Controlled by DIVERSA. All patents and patent
applications subject to this definition are listed on Appendix A or will be
included on Appendix A as they are developed or obtained under the
Agreement and this License. Patent Rights concern only the scope of the
claims that have not been held invalid or unenforceable after all appeals
have been exhausted. Claims shall be deemed valid unless held otherwise.
1.16 "Royalty Bearing Product" means the material resulting from the application
of a Licensed Product or a Licensed Product in a Research Target Process
(defined in the Agreement), which shall be classified by its Royalty
Bearing Product Classification and listed in Appendix D, attached hereto
and made a part hereof. (If DIVERSA manufactures for DOW a Licensed Product
using an in vivo Improved Enzyme, it shall be subject to a separate
agreement.)
1.17 "Royalty Bearing Product Classification" means the [****] in accord with
Appendix E, as attached hereto and made a part hereof. The Royalty Bearing
Product [****]
1.18 "Royalty Schedule" means the [****] Royalty Bearing Product, as determined
by the [****] read from the [****] on Appendix F, attached hereto and made
a part hereof.
1.19 "Territory" means the world.
1.20 "Third Party" means anyone other than DOW or DIVERSA, or their respective
Affiliates.
*Confidential Treatment Requested
5
<PAGE>
ARTICLE II
PATENT LICENSE GRANT
--------------------
2.1 Grant of License to DOW - Subject to the terms and conditions of this
License, DIVERSA hereby grants to DOW, and DOW hereby accepts:
(a) an a exclusive, royalty-bearing, worldwide license, including the
right to grant sublicenses pursuant to Section 2.4, under the DIVERSA
Patent Rights and Joint Patent Rights to make, have made, import,
have imported, use, have used, sell, have sold and otherwise exploit
Royalty Bearing Products;
(b) an exclusive, world-wide license, including the right to grant
sublicenses pursuant to Section 2.4, under DIVERSA's enzymes [****]
to use enzymes to convert Research Target(s) into products via
Research Target Processes (Research Target and Research Target
Processes are defined as in the Agreement). The royalty for this
grant is obtained by DIVERSA under (a);
(c) a non-exclusive, royalty-bearing, world-wide license to [****] and
(d) a royalty-free license to any Know-How required to exploit the rights
granted under (a), (b), and (c), and for DOW or its Affiliates to
perform research on any Improved Enzyme.
2.2 Grant of Right to DIVERSA - If DOW desires that any Licensed Product be
further modified after DIVERSA supplies it to DOW under the terms of the
Agreement, then DOW may request that:
(a) DIVERSA perform such added modification under the Agreement, if it is
still in effect; or
(b) if the Agreement is no longer in effect, then using good faith, the
Parties shall negotiate terms consistent with the intent of obtaining
a Licensed Product; or
(c) if DIVERSA declines to do such modification within thirty (30) days
or an agreement is not reached within three (3) months having terms
similar to the Agreement and providing for the work to commence
within thirty (30) days of the signature date, [****]
*Confidential Treatment Requested
6
<PAGE>
Notwithstanding the above, [****] if (i) a transfer or sale of
substantially all of the business of DIVERSA to which this License relates
occurs, whether by merger, sale of stock, sale of assets or otherwise, to a
[****] or (ii) bankruptcy, insolvency, dissolution or winding up of DIVERSA
(other than dissolution or winding up for the purposes of reconstruction or
amalgamation). [****]. DOW would continue to pay DIVERSA for any Royalty
Bearing Product under this License.
2.3 Grant of Rights to Use Licensed Products for New Research Targets within
the Field after Termination of the Agreement - In the event DOW desires to
obtain exclusive or non-exclusive rights to Licensed Products to make, have
made, use, sell, offer for sale and import products in new Research Targets
within the Field, DIVERSA and DOW agree to negotiate such rights in good
faith, subject to any prior obligations DIVERSA has regarding the granting
of said rights. If DIVERSA becomes aware of new Research Targets for
Licensed Products within the Field, then DIVERSA shall notify DOW of such
Licensed Product application, and [****]. If DOW declines to negotiate a
license and DIVERSA and a Third Party desire to use a Licensed Product for
a new Research Target, DIVERSA and DOW agree to negotiate for DIVERSA to
pay DOW royalties on net sales of such Licensed Product in such Research
Target consistent with the royalties DOW pays to DIVERSA under this License
as indicated in Table 1 of Appendix F attached hereto.
2.4 Sublicensing - The exclusive license granted under Section 2.1(a) to DOW
includes the right to sublicense Third Parties, whether or not Affiliates
of DOW, including the right to enter into distributor contracts,
manufacturing contracts, or other commercial transactions, including but
not limited to sublicensing a competitor of DOW. DOW will be responsible
for all payments due to DIVERSA as a result of any sublicensee and
Affiliate Net Sales in the Field in the Territory. DOW will be responsible
for the observance by all sublicensees of all applicable provisions of this
License and will use its reasonable good faith efforts to cause all
sublicensees to observe the covenants in this License (i.e., regarding
confidentiality, maintaining records, reporting Net Sales, and governmental
regulations). All sublicenses, other than a label license for DOW Net
Sales, shall be in writing. DOW shall notify DIVERSA in writing within
thirty (30) days of the grant of any
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sublicense hereunder. Notwithstanding the foregoing, DOW shall have no
right under any circumstances to sublicense any rights to the DIVERSA
Patent Rights listed on Appendix A-3, and licensed to DOW hereunder.
2.5 Reservations by DOW - DOW reserves the right to work with Third Parties
outside the Areas of Interest, or after the Agreement terminates within the
Areas of Interest, or to conduct its own research within the Areas of
Interest.
2.6 Ex vivo Improved Enzyme Production - If DOW chooses not to exclusively
manufacture a Licensed Product, DIVERSA shall be given a right of first
refusal to manufacture such Licensed Product. DIVERSA must submit a bid
which is competitive with any other Third Party supplier. Any bid received
by DIVERSA shall be held confidential by DOW. If DIVERSA is the lowest
cost, most effective producer of the Licensed Product, DOW and DIVERSA
shall negotiate in good faith a separate manufacturing agreement for
DIVERSA to provide the relevant Licensed Product to or on behalf of DOW.
Such agreement may include the development of additional technology for
such production. If such an agreement is negotiated, it shall contain at a
minimum terms for a worldwide, non-exclusive license for the Know-How and
any Patent Rights required (whether under this License in Appendix B-2 or
developed separately). This [****].
2.7 Prior Option Agreement - DOW exercised its rights under a prior Option
(copy attached for reference as Appendix H) for a license to a precursor
for an Improved Enzyme and paid DIVERSA the exercise fee. This License
shall also be a grant to the technology and the precursor Improved
Enzyme(s) developed under that Option in the same manner for a Licensed
Product.
ARTICLE III
PAYMENTS
--------
3.1 Milestone Payment for Option under Section 2.7 - To meet the milestone
payment due DIVERSA under the Option in accord with Section 2.7, DOW shall
pay DIVERSA Two Hundred Thousand Dollars ($200,000) within thirty (30) days
from the Effective Date. This License shall suffice for the exercise of the
Option for a license.
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3.2 License Product Nomination - When an Improved Enzyme is identified by the
RMC under the Agreement as being adequately developed for
commercialization, then DOW must inform DIVERSA in writing within sixty
(60) days whether such Improved Enzyme shall become a Licensed Product
under this License. If DOW desires to designate an Improved Enzyme as a
Licensed Product, then it shall be listed on either Appendix C or D under
the terms of this License and classified by DOW under the Royalty Bearing
Product Classification of Appendix E as to which Royalty Schedule applies
in accord with Appendix F. Up to three (3) Improved Enzymes per Royalty
Bearing Product can be designated as Licensed Product(s). Within [****] of
designation of more than one Improved Enzyme as a Licensed Product, DOW
will select [****] Licensed Product for each Royalty Bearing Product, and
all other Licensed Product(s) shall revert to Improved Enzyme status. If
DOW does not designate an Improved Enzyme as a Licensed Product, then
DIVERSA may license such Improved Enzyme to a Third Party for other than
any Research Target without further obligation to DOW, unless Section 3.8
applies.
3.3 License Fees - Within thirty (30) days of the identification by the RMC of
a Licensed Product in accordance with Section 3.2, DOW shall pay to DIVERSA
a license fee of [****] dollars. Only [****].
3.4 Commercialization Fees - Within thirty (30) days of the first commercial
sale by DOW of each Royalty Bearing Product from a commercial scale plant,
DOW shall pay to DIVERSA [****] dollars. Only [****].
3.5 Royalty Payments - Royalties owed for each Royalty Bearing Product are
subject to Section 4.8 and shall vary according to Table 1 in the Royalty
Schedule set forth on Appendix F. Upon pilot plant evaluation for each
Royalty Bearing Product, DOW will propose to DIVERSA the Royalty Bearing
Product Classification and specific royalty from Table 1 in the Royalty
Schedule in Appendix F. DIVERSA and DOW shall discuss the proposal. The
proposal shall be subject to DIVERSA approval, which shall not be
unreasonably withheld. In the [****].
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3.6 Method of Payment - All payments due under this License shall be made in
with the respective sections of Article III by check or by bank wire
transfer in immediately available funds to a bank account designated in
writing to DOW by DIVERSA. In the event that the due date of any payment
subject to this Article III hereof is a Saturday, Sunday or national
holiday, such payment may be paid on the following business day. Any late
payments shall bear interest, to the extent permitted by applicable law, at
the prime rate (as reported by the Bank of America, San Francisco,
California or its successor bank) on the date such payment is due plus two
(2%) percent, calculated on the number of days such payment is delinquent.
The rights provided in this Section 3.6 shall in no way limit any other
remedies available to DIVERSA hereunder.
3.7 Sublicense Payments - Any sublicense agreement for Royalty Bearing Product
shall contain royalty provisions that at a minimum provide for the payment
of the same running royalty as would similarly be paid to DIVERSA by DOW in
accord with Section 3.5. DOW will be responsible for any auditing for
performance for similar terms and conditions by a sublicensee.
3.8 [****].
3.9 [****].
3.10 Exchange Rate and Payment - Royalty payments shall be paid to DIVERSA in US
dollars in funds to be deposited in a US account as instructed in writing
by DIVERSA in accordance with Section 3.6. If DOW receives payment on
Royalty Bearing Products in currency other than US dollars, such payments
shall be converted to US dollars on the last day of the calendar quarter
using an exchange rate established by a leading New York bank, such as
CitiBank, and published in The Wall Street Journal, but are not due for
sixty (60) days from the last day of each calendar quarter for each Royalty
Bearing Product.
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If DOW receives payment in a form other than a currency, it shall be
estimated at its fair market value and converted to U.S. dollars.
3.11 Quarterly Royalty Reports and Payments - Within sixty (60) days after the
close of each calendar quarter, DOW shall submit a report on the Net Sales
on Royalty Bearing Product for the Territory in sufficient detail to enable
a calculation of the royalty due in accord with Article III and payment of
the royalty (if any) due. The quarterly reports will also specify the
calculations based on Sections 3.7 and 3.10, Royalty Bearing Product
Classifications made, the royalty rate from Table 1 of the Royalty Schedule
in Appendix F for a given Royalty Bearing Product, and identification of
any Licensed Products that are returned as Improved Enzymes.
3.12 Books of Account - DOW shall maintain true and complete books of account
containing an accurate record of all data necessary for the proper
computation of royalty payments due from it or on behalf of any Affiliate.
Such records shall be maintained for at least five (5) years after the date
of the pertinent royalty payment.
3.13 Audit Right - DIVERSA shall have the right through a firm of independent
public accountants to whom DOW has no reasonable objection, to examine the
books of account of DOW at reasonable times within three (3) years after
the end of the calendar year to which they relate (but not more than once
in each calendar year) for the purpose of verifying the correctness of any
report concerning payment of royalties under Article III. Such examination
shall be made during normal business hours at the place of business of DOW.
The information provided as a result of any such examination shall be
maintained in confidence on the terms specified in Article V. The fees and
expenses of such an audit shall be borne by DIVERSA, unless such audit
discloses an underpayment of more than five percent (5%) of the amount due
under this License. In such case, DOW shall bear the full cost of such
audit. If any such audit shows any underpayment or overcharge, a correcting
payment or credit against future royalties shall be made. Any payment
required from DOW to DIVERSA from such audit shall be made within thirty
(30) days of DIVERSA's receipt of the auditors' statement. DOW shall be
subject to a penalty as if the payment were deemed late in accord with
Section 3.6.
3.14 Withholding Tax Payments - If any taxes for DIVERSA's account, withholding
or otherwise, are levied by any taxing authority in the Territory in
connection with the receipt by DIVERSA of any amounts payable under Article
III of this License according to any tax treaty or agreement between the
United States and any country in the Territory, then DOW shall have the
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right to pay such taxes to the local tax authorities and the payment to
DIVERSA shall be the net amount due after reduction by the amount of such
taxes, together with
(a) evidence of payment of such taxes and a translation thereof
into English,
(b) indication of the amount of such tax paid, and
(c) indication of the country in the TERRITORY and the authority to
whom it was paid, and
(d) other information required for DOW to comply with DOW's royalty
reporting obligations under this License.
ARTICLE IV
PATENT RIGHTS
-------------
4.1 DIVERSA to Maintain Patent Rights - DIVERSA shall have the obligation and
be responsible at its own cost and expense for prosecuting the patent
applications in Patent Rights for maintaining and extending those Patent
Rights for the term of this License. DIVERSA shall use good faith efforts
to prosecute, issue and maintain all Patent Rights.
DIVERSA shall supply DOW with a copy of all Patent Rights applications,
their published texts, and issued patents. Where available a translation
into English shall be provided.
4.2 Joint Patent Rights -
In those instances where joint inventors (as defined by 35 U.S.C. et seq.)
between DOW (or its Affiliate) and DIVERSA (or its Affiliate) result in a
patentable invention, then DOW and DIVERSA shall mutually determine, using
their good faith efforts:
(a) whether DOW or DIVERSA shall file a patent application;
(b) whether the patent application has joint ownership and joint
claim structure; and
(c) which Party should prosecute the patent application and pay the
annuities.
Thus DOW shall have joint ownership rights to such Joint Patent Rights in
accord with Article II. If either Party desires exclusive rights to Joint
Patent Rights, then such Party must notify the other and both Parties shall
negotiate in good faith. Should such joint inventorship arise, then the
Parties shall discuss in good faith how the costs are shared, which Party
should file the Joint Patent Rights, where the Joint Patent Rights should
be
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filed, and, if term extension or restoration is available, who should
extend the patent. DIVERSA shall use its reasonable good faith efforts to
obtain the Joint Patent Rights and secure the broadest scope reasonably
possible in view of the commercial intent of DOW.
Each Party shall supply the other Party with a copy of all joint patent
applications, their published texts, and issued patents included in the
Joint Patent Rights under its control and their official actions and shall
advise the other Party on the content of any responses. Where available a
translation into English shall be provided.
4.3 Notice of Patent Lapse of Patent Rights and Joint Patent Rights -DIVERSA
shall promptly advise DOW of the grant, lapse, nullification, revocation,
surrender, or invalidation of any of the Patent Rights and Joint Patent
Rights under its control at least in advance of any abandonment to enable
DOW to assume that prosecution, at DOW's expense, should DOW not agree to
such abandonment. If under these facts, DOW succeeds in issuing the Patent,
then patent costs shall be credited against royalty payments. DOW shall
promptly advise DIVERSA of the grant, lapse, nullification, revocation,
surrender, or invalidation of any of the Joint Patent Rights under its
control at least in advance of any abandonment to enable DIVERSA to assume
that prosecution, at DIVERSA's expense, should DIVERSA not agree to such
abandonment.
4.4 Validity, Non-Infringement - DIVERSA does not warrant that the manufacture,
use and sale of Licensed Products do not fall within the scope of Third
Party patents or the industrial property rights of a Third Party. However,
to the best of DIVERSA's knowledge, information and belief, that as of the
Royalty Bearing Product Classification, the [****] for the [****] does not
fall within the scope of Third Party patents which are not owned or
licensed by DIVERSA.
4.5 Disclaimer of Warranties as to Patent Rights - Other than as stated in
Section 4.4, DIVERSA makes no representation that the inventions covered in
any Patent Rights are patentable or that the Patent Rights are or will be
valid or enforceable, nor does DIVERSA warrant or represent that the
exercise of the rights licensed hereunder is free of infringement of patent
rights of Third Parties.
4.6 Hold Harmless - [****] agrees to hold [****] harmless for patent
infringement under [****]
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which may be [****] under this License so long as this License is in effect
and is not terminated.
4.7 Cooperation - DIVERSA and DOW shall use good faith efforts to cooperate
with respect to any issues that concern the development of the Licensed
Product under this License. DOW is aware that competition in the Territory
is likely if no Patent Rights or Joint Patent Rights exist or are obtained,
and DOW accepts this License with that knowledge. DIVERSA shall promptly
inform DOW of any references of which DIVERSA becomes aware which might
significantly impact the scope of the Patent Rights or Joint Patent Rights
or dominate Patent Rights or Joint Patent Rights.
4.8 Patent Rights Issues - DOW [****] owes DIVERSA under Article III for
Royalty Bearing Products made using Licensed Products [****] DIVERSA agrees
that it [****]
4.9 Country list for Global Filing Issues - DIVERSA shall file all Patent
Rights at least in the US and PCT [****]
4.10 DOW technology and patents - DOW may develop and patent technology in the
Field or Areas of Interest during this License. DOW does not need to pay
any royalty to DIVERSA on such technology or patents unless it is dominated
by any DIVERSA patents. [****]
ARTICLE V
CONFIDENTIALITY
---------------
5.1 Efforts - Each Party shall use good faith efforts to retain in confidence
and not disclose to any Third Party each other's Confidential Information
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disclosed pursuant to the terms of this License. Such "good faith efforts"
shall mean the same degree of care, but no less than a reasonable degree of
care, as the receiving Party uses to protect its own Confidential
Information of a like nature. All Confidential Information initially
received in a non-written form shall be reduced to writing within thirty
(30) days by the disclosing Party and such writing provided to the
receiving Party. The receiving Party shall not be obligated if such writing
is not received timely. DOW shall continue to use the same good faith
efforts with respect to the DIVERSA Confidential Information already in its
possession under the Agreement. Each Party may use Confidential Information
of the other Party only to the extent required to accomplish the purposes
of this License.
5.2 Notwithstanding the provisions of Section 5.1, if the receiving Party
becomes legally compelled to disclose any of the disclosing Party's
Confidential Information, the receiving Party shall promptly advise the
disclosing Party of such required disclosure in order that the disclosing
Party may seek a protective order confidential treatment or such other
remedy as the disclosing Party may consider appropriate in the
circumstances. The receiving Party shall disclose only that portion of the
Confidential Information which it is legally required to disclose. Such a
disclosure shall not release the receiving Party with respect to the
Confidential Information so disclosed except to the extent of permitting
the required disclosure.
5.3 Disclosure to Affiliates, Contractors - DOW may disclose Confidential
Information to its Affiliates, sublicensees, consultants, contractors
(parties under contract with DOW for the custom manufacturing or shipping
of Royalty Bearing Product or obtention of registration in the Territory),
as may be necessary to exercise the rights granted hereunder and to
register and prepare for commercialization of Royalty Bearing Product, and
to commercialize Royalty Bearing Product under this License, under
conditions of confidentiality at least as stringent as those set out in
Article V.
5.4 Survival of Confidentiality - Termination of this License for any reason
shall not relieve the Parties of their obligations under Article V. The
provisions of Article V shall survive termination of this License for ten
(10) years.
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ARTICLE VI
ASSIGNMENT
----------
6.1 DOW - DOW shall have the right to assign its rights in this License (or any
part hereof) to an Affiliate: provided, however, that DOW shall continue to
be responsible for the obligations of any such Affiliate. DOW may assign
its rights hereunder in connection with the transfer or sale of all or
substantially all of the business of DOW to which this License relates,
whether by merger, sale of stock, sale of assets or otherwise.
6.2 DIVERSA - DIVERSA shall have the right to assign its rights in this License
(or any part hereof) to an Affiliate: provided, however, that DIVERSA shall
continue to be responsible, using its reasonable best efforts, for the
obligations of any such Affiliate, including honoring the terms of this
License. DIVERSA may assign its rights hereunder in connection with the
transfer or sale of all or substantially all of the business of DIVERSA to
which this License relates, whether by merger, sale of stock, sale of
assets or otherwise.
ARTICLE VII
THIRD PARTY INFRINGEMENT CLAIMS
-------------------------------
7.1 Defense of Third Party Patent Claims - If a claim is brought by a Third
Party that the manufacture, use or the sale of a Royalty Bearing Product in
the Territory (regardless of use) infringes a patent of such Third Party,
DOW will give prompt written notice to DIVERSA of such claim if it concerns
Patent Rights or Joint Patent Rights. The Parties shall confer in accord
with Section 7.2.
7.2 Mutual Decisions - From the Effective Date and using their good faith
efforts, DIVERSA and DOW shall discuss any claim or suit brought by a Third
Party for patent infringement and mutually evaluate whether that Third
Party's patent is infringed by the manufacture, use or sale of Royalty
Bearing Product by DOW or its Affiliates in the Territory. Specifically,
DIVERSA and DOW shall mutually try to agree on:
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(a) the strategy for such suit or claim, e.g. whether to negotiate
a settlement, sue or withdraw selling Royalty Bearing Product
from the country in the Territory in which infringement is
claimed;
(b) the basis to be determined for sharing the costs of litigation,
damages awarded, and royalty to be paid to the Third Party.
[****].
(c) which Party should conduct the defense or if both DIVERSA and
DOW should jointly defend; and the consequences of such
decisions, such as amendment to this License with regard to
royalties due to DIVERSA.
7.3 Third Party License - The Parties shall use their good faith efforts
(either individually or together) to [****]. As of the Royalty Bearing
Product Classification, DIVERSA is not aware of the need for any such Third
Party license.
ARTICLE VIII
PATENT ENFORCEMENT & LITIGATION
-------------------------------
8.1 Prosecution by DIVERSA -
8.1.1 DIVERSA, at its sole discretion, may take action on its own behalf
and expense to institute any action or proceeding by reason of
infringement of any of the Patent Rights related to a Royalty
Bearing Product. If either Party learns of any infringement of
Patent Rights by a Third Party, it shall promptly notify the other
Party. DIVERSA shall have the first right, at its own expense, to
prosecute all litigation against a Third Party infringer. DOW shall
provide all reasonable cooperation, including any necessary use of
its name required to prosecute such litigation. DOW shall be
consulted concerning the litigation. DIVERSA gets to [****].
8.1.2 If the possible infringement concerns a Licensed Product for the
Research Target that is [****] then DIVERSA shall [****] and removal
from the market place of all infringing
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Third Party products. DIVERSA will bear the costs and shall be
entitled to any recovery obtained from such litigation, settlement
or compromise thereof. If DIVERSA elects not to take action for such
infringement, then DOW may do so at DOW's expense and shall be
entitled to any recovery obtained from such litigation, settlement
or comprise thereof and DOW retains all damages received.
8.1.3 If the infringement of the Licensed Product is in areas that are
[****] then DIVERSA shall [****]
8.1.4 If a Patent Right is finally declared invalid or unenforceable in a
judicial or administrative proceeding from which no appeal is or can
be taken, then from and after that date with respect to that Patent
Right in that country of the Territory, [****] If no other Patent
Right is providing protection in that country of the Territory, then
[****]
8.2 Neither Party Defends - If neither DIVERSA nor DOW will defend the Patent
Rights in a particular country in the Territory, then for that Patent
Rights in that country the royalty under Article III is [****] upon that
decision.
8.3 Joint Patent Rights Suits - If the litigation concerns Joint Patent Rights,
then both DIVERSA and DOW shall mutually work together and divide equally
any recovery, but each shall pay their own costs.
8.4 Settlement - Any settlement of an infringement suit, whether brought by DOW
or by DIVERSA, shall be subject to the consent of both Parties, which
consent shall not be unreasonably withheld.
8.5 Cooperation - Each Party shall cooperate with the other Party to the extent
reasonably requested in any legal action:
(i) brought by a Third Party against one Party; or
(ii) brought by a Third Party against both Parties; or
(iii) taken against a Third Party by either Party regarding Patent Rights
or Joint Patent Rights in the Field in the Territory, and each Party
shall have the right to participate in any defense, compromise or
settlement to the extent that, in its judgment, it may be prejudiced
thereby.
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In addition, DOW shall not settle any claim or suit in any manner that
shall adversely affect any Patent Rights or Joint Patent Rights, require
any payment by DIVERSA or reduce the royalty due to DIVERSA hereunder
without the prior written consent of DIVERSA.
ARTICLE IX
EXPORT CONTROL AND GOVERNMENT REGULATIONS
-----------------------------------------
9.1 Compliance by DIVERSA - DIVERSA agrees to comply with all governmental
regulations for shipping Improved Enzyme, whether in vivo or in vitro, to
DOW or any regulation for safety of the culture.
9.2 Compliance by DOW - DOW agrees to comply with all necessary United States,
European and other country's governmental regulations in the Territory with
respect to export of Know-How and any Royalty Bearing Product. DOW agrees
to not export or re-export any Know-How or Royalty Bearing Product received
from DIVERSA or the direct products of such technology to any prohibited
country listed in the U.S. Export Administration Regulations (15 C.F.R.
(S)700 et seq.) unless properly authorized by the U.S. Government.
9.3 Clearances - DOW agrees to obtain all necessary clearances from any
government in the Territory for export or re-export with respect to the
Know-How or Royalty Bearing Product.
ARTICLE X
PRODUCT LIABILITY AND INDEMNIFICATION
-------------------------------------
10.1 Indemnity by DIVERSA - DIVERSA shall indemnify and hold DOW, its agents,
directors, officers, employees and Affiliates harmless from and against any
and all liabilities, claims, demands, damages, costs, expenses or money
judgments (including reasonable attorneys' fees and expenses) incurred by
or rendered against any of them for personal injury, sickness, disease or
death or property damage which directly arise out of:
(a) the intentional misconduct or negligence of DIVERSA; or
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(b) the breach by DIVERSA of its representations, warranties or
agreements given in this License; or
(c) any activity carried out with Licensed Product by DIVERSA other than
through DOW and its Affiliates under this License or other written
agreements between the Parties;
provided, however, that DOW shall give DIVERSA notice in writing as soon as
practicable of any such claim or lawsuit and shall permit DIVERSA to
undertake the defense thereof (including the right to settle the claim
solely for monetary consideration)at DIVERSA's expense. However,
(i) DOW will cooperate in such defense by providing access to
witnesses and evidence available to it. DOW shall have the
right to participate in any defense to the extent that in its
judgment, DOW may be prejudiced thereby; and
(ii) in any claim or suit in which DOW seeks indemnification by
DIVERSA, DOW shall not settle, offer to settle or admit
liability or damages in any such claim or suit without the
prior written consent of DIVERSA.
10.2 Indemnity by DOW - DOW shall defend, indemnify and hold DIVERSA and its
Affiliates, and their respective agents, directors, officers, and employees
harmless from and against any and all losses, liabilities, claims, demands,
damages, costs, expenses or money judgments (including reasonable
attorneys' fees and expenses) incurred by or rendered against any of them
for personal injury, sickness, disease or death or property damage which
arise out of
(i) the [****] of Royalty Bearing Product by DOW or its Affiliates,
except for those instances provided in Section 10.1 for which DIVERSA
is obligated to indemnify DOW; or
(ii) the breach by DOW of any of its representations, warranties or
covenants contained in this License or any agreement contemplated by
the terms of this License; or
(iii) the intentional misconduct or gross negligence of DOW;
provided, however, that DIVERSA shall give DOW notice in writing in accord
with Article XV as soon as practicable of any such claim or lawsuit and
shall permit DOW to undertake the defense thereof at DOW's expense.
However,
(i) DIVERSA will cooperate in such defense by providing access to
witnesses and evidence available to it. DIVERSA shall have the right
to participate in any defense to the extent that in its judgment,
DIVERSA may be prejudiced thereby; and
(ii) In any claim or suit in which DIVERSA seeks indemnification by DOW,
DIVERSA shall not settle, offer to settle or admit liability or
damages in any such claim or suit without the prior written consent
of DOW.
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ARTICLE XI
WARRANTY AND DISCLAIMER
-----------------------
11.1 Belief of Accuracy - DIVERSA represents that the [****] and any [****]
transferred or provided to DOW hereunder are believed to be accurate and
complete as of their then current status at DIVERSA at the date when the
Licensed Product is added to Appendix C or D or as of the Effective Date
and that DIVERSA's interpretations and conclusions drawn therefrom were
made in good faith and in the exercise of DIVERSA's scientific judgment as
of the dates of the documents contained therein, and that to the best of
DIVERSA's knowledge, data subject to regulations is in compliance with such
regulations.
11.2 Reliance - DOW represents that it will be solely relying on its own
evaluation of the Licensed Product and the other Confidential Information
transferred or provided to it hereunder and on its scientific expertise in
using the same in its development and commercialization of Royalty Bearing
Product.
11.3 Mutual Representations - DIVERSA and DOW each represents and warrants as
follows:
11.3.1 Organization - It is a corporation duly organized, validly existing
and is in good standing under the laws of the jurisdiction of its
incorporation, is qualified to do business and in good standing as
a foreign corporation in each jurisdiction in which the performance
of its obligations hereunder requires such qualification and has
all requisite power and authority, corporate or otherwise, to
conduct its business as now being conducted, to own, lease and
operate its properties and to execute, deliver and perform this
License.
11.3.2 Authorization - The execution, delivery and performance by it of
this License have been duly authorized by all necessary corporate
action and do not and will not: (a) require any consent or approval
of its stockholders or (b) violate any provision of any law, rule,
regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to
it or any provision of its charter documents.
11.3.3 Binding Agreement - This Agreement is a legal, valid and binding
obligation of it, enforceable against it in accordance with its
terms and conditions.
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11.3.4 Warranty Disclaimer - EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
THIS License, NEITHER Party MAKES ANY REPRESENTATION OR WARRANTY OF
ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO ANY Confidential
Information, Patent Rights, Know-How, Improved Enzymes, Licensed
Products, OR OTHER TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER
SUBJECT MATTER OF THIS License AND HEREBY DISCLAIMS ANY WARRANTY OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-
INFRINGEMENT, OR VALIDITY OF TECHNOLOGY OR PATENT CLAIMS, ISSUED OR
PENDING, WITH RESPECT TO ANY AND ALL OF THE FOREGOING.
11.3.5 Limited Liability - EXCEPT AS EXPRESSLY PROVIDED HEREIN, NEITHER
DIVERSA NOR DOW WILL BE LIABLE TO THE OTHER PARTY WITH RESPECT TO
ANY SUBJECT MATTER OF THIS License UNDER ANY CONTRACT, NEGLIGENCE,
STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR (i) ANY
SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR
LOST PROFITS OR (ii) COST OF PROCUREMENT OF SUBSTITUTE GOODS,
TECHNOLOGY OR SERVICES.
ARTICLE XII
TERM AND TERMINATION
--------------------
12.1 Term - Unless terminated under the provisions of this Article XII, this
License shall continue in full force and effect until the expiration of the
last to expire Patent Rights and Joint Patent Rights listed on Appendices A
and B, subject to the survivorship clause Section 12.7.
12.2 [****]
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12.3 Termination by DOW - DOW may surrender and terminate this License on three
(3) months written notice to DIVERSA, either for specific Royalty Bearing
Products or this License as a whole. DOW will disclose to DIVERSA its
reasons for any such termination. It is understood that upon evaluation
for commercialization some Royalty Bearing Products may be re-designated
as Licensed Products and also that some Licensed Products may be re-
designated as Improved Enzymes.
12.4 Termination by DIVERSA - DIVERSA shall have the further right to terminate
this License immediately, but separately on each Royalty Bearing Product,
on written notice to DOW if:
(a) DOW shall cease to carry on business or a receiver shall be
appointed to DOW's assets; or
(b) DOW fails to meet any of its payments in accord with Article III;
however, DOW shall be entitled to a period of sixty (60) days from
the delivery of a notice of failure to pay in which to remedy or to
undertake to remedy the same; or
(c) DOW breaches any material provision (e.g., Sections 2.2 and 2.4) of
this License and has not cured such breach within thirty (30) days
after written notice thereof by DIVERSA.
12.5 On Termination - DOW shall, upon termination of this License by DIVERSA
under Section 12.4, termination by DOW under Section 12.3, or termination
by either Party under Section 12.8:
(a) pay to DIVERSA all payments and royalties due or accrued at the
termination date within thirty (30) days after termination; and
(b) make no further use of any kind of any and all Know-How and
Confidential Information of DIVERSA disclosed hereunder by DIVERSA,
except to the extent such information has become public knowledge
other than through fault of DOW, and make no further use of the
surviving Patent Rights.
12.6 Effect of Termination.
(a) Upon termination of this License, all rights to the DIVERSA
Intellectual Property as defined in the Agreement shall revert to
DIVERSA; and
(b) Within thirty (30) days following the termination of this License,
but separately on each Royalty Bearing Product, each party shall
return to the other Party, or destroy, upon the written request of
the other Party, any and all Confidential Information of the other
Party in its possession; and
(c) Expiration or termination of this License shall not relieve the
Parties of any obligation accruing prior to such expiration or
termination.
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12.7 Survival of [****] - On termination of this License: the obligations of
confidentiality set forth in Article V shall survive for the time stated
therein; Export Control compliance set forth in Article IX shall survive;
and the indemnification obligations set forth in Article X and third party
infringement claims set forth in Article VII shall also survive as to all
claims or actions arising from events which occurred before termination.
Article XIV shall survive termination of this License so long as any
disputes arising prior to such termination exist.
12.8 Bankruptcy - If either Party (the "Insolvent Party") files for protection
under bankruptcy laws, makes an assignment for the benefit of creditors,
appoints or suffers appointment of a receiver or trustee over its
property, files a voluntary petition under any bankruptcy or insolvency
act or has any such petition filed against it which is not discharged
within 60 days of the filing thereof, then the other Party may, at its
sole election upon notice to the Insolvent Party, terminate this License
by written notice under Section 15.1.
All rights and licenses granted under or pursuant to this License shall be
deemed to be, for purposes of Section 365(n) of the US Bankruptcy Code,
licenses or rights to "intellectual property" as defined under Section
101(52) of the US Bankruptcy Code. The Parties agree that each Party, as a
licensee of such rights under this License, shall retain and may fully
exercise all of its rights and elections under the US Bankruptcy Code,
subject to performance by the licensee of its preexisting obligations
under this License.
ARTICLE XIII
FORCE MAJEURE
-------------
13.1 Event of Force Majeure - In the event that performance under this License,
or any obligation hereunder, is hindered, delayed or prevented by reason
of acts of God, strikes, lockouts, labor troubles, intervention of any
governmental authority, fire, riots, insurrections, invasions, war or
other reason of similar nature beyond the reasonable control of the Party
and are without its fault or negligence, then performance of that act
shall be excused for the period of the delay and the period for the
performance of that act shall be extended for an equivalent period.
13.2 Notification. Upon occurrence of an event of force majeure, the affected
Party shall promptly notify the other Party in writing, setting forth the
nature of the occurrence, its expected duration and how that Party's
performance is affected.
*Confidential Treatment Requested
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The affected Party shall resume the performance of its obligations as soon
as practicable after the force majeure event ceases.
ARTICLE XIV
DISPUTE RESOLUTION
------------------
14.1 Choice of Law - This License shall be governed by the laws of the State of
Delaware, excepting its conflict of laws principles, in all respects of
validity, construction and performance, except that all questions
concerning the construction, validity, coverage or infringement of Patent
Rights or Joint Patent Rights shall be decided in accordance with the
patent law of the country where the patent was granted.
14.2 Disputes - Both Parties shall make good faith efforts to resolve any
questions concerning construction and performance under this License,
excluding Patent Rights and antitrust issues, by:
14.2.1 Notice, contact and negotiation, all proceedings and documents in
English, between the Parties listed under Article 15.1 within one
hundred twenty (120) days from the date of the notice by
negotiation either by telephone or by meeting in Denver, CO; and
14.2.2 If unsuccessful under Article 14.2.1, then senior executive
management with settlement authority and counsel of DOW and
DIVERSA shall meet at a mutually agreeable location within sixty
(60) days from a date of notice that Article 14.2.1 failed to
resolve the issues. Counsel shall present the legal and factual
arguments to such executives in English, with supporting evidence
if necessary, and resolution by these executives is expected
within ten (10) days, which may be reduced to writing in English
as an amendment to this License; and
14.2.3 If such executives have not met or resolved the issues under
Article 14.2.2, then within seventy five (75) days from the date
of the notice under Article 14.2.1, the Parties shall submit the
issues to mediation in Chicago, IL, in English, in accordance with
the Rules of the American Arbitration Association ("AAA"), which
may be modified by the Parties, and judgment shall not be binding.
The Parties agree that the following procedures shall be adhered
to even though they may, in part, not be in full conformance with
said Rules:
(a) Three Mediators shall be selected from a list of at least 20
arbitrators selected by the AAA composed of counsel with
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chemistry, molecular biology or pharmaceutical expertise who are
practicing or retired partners in law firms or in-house corporate
counsel not affiliated with the Parties with at least 15 years of
experience in law and knowledge of the pertinent laws of any country
relevant to the dispute. The mediation proceedings and reports shall
be in English. The time from the beginning of submission for
mediation and conclusion of any oral or written proceedings shall not
exceed six (6) months; and
(b) Limited discovery to only that which each Party has a substantial,
demonstrable need, and shall be conducted in the most expeditious and
cost-effective manner. The Mediators shall resolve any issues with
regard to the discovery. Decision by the Mediators shall be given in
writing within thirty (30) days from the end of oral proceedings; and
(c) The decision by the Mediators is binding, but should either Party
then need to have a Court of competent jurisdiction for the Parties
enforce the decision, either Party may introduce into court the
decision reached by Mediation with its supporting evidence.
ARTICLE XV
NOTICES
-------
15.1 Official -Any notice, request or communication specifically provided for
or permitted to be given under this License must be in writing and may be
delivered by hand delivery, overnight courier service, or electronic
transmission such as facsimile, and shall be deemed effective as of the
time of actual delivery thereof to the addressee. For purposes of notice
the addresses of the Parties shall be as follows:
If to DIVERSA:
Diversa Corporation
10665 Sorrento Valley Road
San Diego, California 92121
Attention: Jay M. Short, PhD
Chief Executive Officer
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Telephone: 619-623-5135
Facsimile: 619-623-5180
With a copy to:
Diversa Corporation
10665 Sorrento Valley Road
San Diego, California 92121
Attention: Carolyn Erickson
Director, Intellectual Property
Telephone: 619-623-5104
Facsimile: 619-453-9133
If to DOW:
The Dow Chemical Company
Patent Department
1790 Building, Washington Street
Midland, Michigan 48674
Attention: Karen L. Kimble
Senior Counsel
[****]
*Confidential Treatment Requested
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15.2 Development Issues - For purposes of commercial development reporting, the
addresses of the Parties shall be as follows:
If to DIVERSA:
Diversa Corporation
10665 Sorrento Valley Road
San Diego, California 92121
Attention: Jay M. Short, PhD
Chief Executive Officer
Telephone: 619-623-5135
Facsimile: 619-623-5180
If to DOW:
The Dow Chemical Company
1707 Building, Washington Street
Midland, Michigan 48674
Attention: William Dowd
Biomaterials Platform Director
[****]
ARTICLE XVI
MISCELLANEOUS PROVISIONS
------------------------
16.1 Amendments - This License may be amended only in writing executed by both
Parties.
16.2 Entirety of Agreement - This License together with the Agreement sets
forth the entire agreement and understanding between the Parties hereto
with respect to the commercialization of Royalty Bearing Products in the
Territory.
16.3 Severability - If any term or provision under this License is deemed
invalid under the laws of a particular country or jurisdiction, the
invalidity shall not invalidate
*Confidential Treatment Requested
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the whole License but it shall be construed as if not containing that
particular term or provision and the rights and obligations of the Parties
shall be construed and enforced accordingly. The Parties shall negotiate
in good faith a substitute provision in compliance with the law to as
nearly as possible retain the Parties intent in legally valid language.
16.4 Waivers, Cumulative Remedies - A waiver by either Party of any term or
condition of this License in any one instance shall not be deemed
construed to be a waiver of such term or condition for any similar
instance in the future or of any subsequent breach hereof. All rights,
remedies, undertakings, obligations and agreements contained in this
License shall be cumulative and none of them shall be a limitation of any
other remedy, right, undertaking, obligation or agreement of either Party.
16.5 Headings - Headings in this License are included herein for ease of
reference and shall not affect the meaning of the provisions of this
License, nor shall they have any other legal effect.
16.6 Other Documents - Each Party agrees to execute such additional papers or
documents in customary legal form and to make such governmental filings or
applications as may be necessary or desirable to effect the purposes of
this License and carry out its provisions.
16.7 Publicity - Neither DOW nor DIVERSA shall make the financial terms of this
License public, except as required by law or by mutual consent. Either
Party may make such disclosure of the existence of this License to its
attorneys, advisors, investors, prospective investors, leaders and other
financing sources, under circumstances that reasonably ensure
confidentiality. In the event that a filing of a copy of this License with
the US Securities and Exchange Commission is required, then DIVERSA shall
seek confidential treatment of information considered confidential by DOW
and shall redact the financial and as much other information as possible.
Any press release or publicity of this License shall be reviewed and
approved by both Parties prior to any release. It is expected that a Q&A
outline for use in responding to inquires about this License shall be
prepared and used by both Parties. Thereafter both Parties may disclose
the information contained in such press release and Q&A outline without
the need for further approval. In no event shall the financial terms of
this License be publicly disclosed, except as note in the first paragraph
of Section 16.7.
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In addition, DIVERSA may make public statements regarding the Licensed
Products by announcing in general terms that DOW has exercised its license
to them.
16.8 Interpretation - DOW and DIVERSA acknowledge and agree that: (i) each
Party and its counsel reviewed and negotiated the terms and provisions of
this License and have contributed to its revision; (ii) the rule of
construction to the effect that any ambiguities are resolved against the
drafting Party shall not be employed in the interpretation of this
License; and (iii) the terms and provisions of the License shall be
construed fairly as to all Parties hereto and not in favor of or against
any Party, regardless of which Party was generally responsible for the
preparation of this License.
16.9 Counterparts - This License may be executed simultaneously in two (2) or
more counterparts, each of which shall be deemed an original.
16.10 No Agency or Partnership - Nothing contained in this License shall give
either Party the right to bind the other Party, or be deemed to constitute
either Party as an agent for the other Party or as a partner with the
other Party or any Third Party.
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IN WITNESS WHEREOF, the Parties have caused this License to be executed in
duplicate originals as of the last signature date below, by their duly
authorized representatives. This License is intended to be signed concurrently
with the Agreement and shall not be effective until the Agreement has also been
executed by both Parties. Such License may be subject to management and/or Board
approval by each Party. Upon signature such Board approval is indicated to have
been obtained.
DIVERSA CORPORATION THE DOW CHEMICAL COMPANY
By ________________________ By_________________________________
Name Jay M. Short, PhD Name Fernand Kaufmann
Title Chief Executive Officer Title Vice President
New Businesses and
Strategic Development
Date__________________________ Date______________________________
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Appendix A-3
------------
Diversa Patent Rights [****]
[****]
*Confidential Treatment Requested
<PAGE>
Appendix E
Royalty Bearing Product Classification
Product Classifications:
The Royalty Bearing Product shall be classified according to the following
definitions:
. [****]
. [****]
. [****]
*Confidential Treatment Requested
<PAGE>
Appendix F
----------
Royalty Schedule
[****]
[****]
[****]
[****]
[****]
[****]
*Confidential Treatment Requested
<PAGE>
[****]
[****]
[****]
[****]
<PAGE>
OPTION AGREEMENT
THIS option agreement (hereinafter "OPTION") is made between THE DOW CHEMICAL
COMPANY (hereinafter "DOW" or a "Party"), a corporation duly formed and existing
under the laws of the State of Delaware, having a place of business at 2030 Dow
Center, Midland, Michigan 48674, United States of America, and Recombinant
BioCatalysis Inc. (hereinafter "RBI" or a "Party"), a corporation duly formed
and existing under the laws of Delaware, having a place of business at 10665
Sorrento Valley Road, San Diego, CA 92121;
WITNESSETH:
WHEREAS, DOW possess an enzyme for use in a recycle process or with a reaction
coproduct produced by DOW; and
WHEREAS, DOW has proprietary rights in this enzyme and desires that the enzyme
be improved; and
WHEREAS, RBI desires to undertake the further evaluation of this enzyme under
the terms of this OPTION and, if RBI is able to improve on this enzyme, RBI is
willing to grant DOW an exclusive or non-exclusive license to such improvements;
WHEREAS, DOW desires to obtain an exclusive or non-exclusive, global license to
this improved enzyme; and
WHEREAS, RBI desires to supply DOW with such improved enzyme.
NOW, THEREFORE, DOW and RBI, in consideration of the mutual covenants contained
herein, agree as follows:
ARTICLE 1 - DEFINITIONS
When used in this OPTION, the following terms shall have the meanings set out
below, unless the context requires otherwise. The singular shall be interpreted
as including the plural and vice versa, unless the context clearly indicates
otherwise.
1.1 "AFFILIATE" means a corporation or any other entity that at any time during
the term of this OPTION directly or indirectly through one or more
intermediaries is CONTROLLED by the designated Party, but only for so long
as the relationship exists. A corporation or other entity shall no longer
be an AFFILIATE when through loss, divestment, dilution or other reduction
of a Party's ownership, the Party loses CONTROL of such corporation or
other entity.
1.2 "CANDIDATE ENZYMES" means those ENZYMES which meet the criteria of
exhibiting initial hydrolysis rates (Vmax) significantly higher than the
wild type (wt) recombinant ENZYME [*****].
*Confidential Treatment Requested
<PAGE>
[****]
1.3 "CDA" means a Confidential Disclosure Agreement between the Parties
effective August 27, 1996, a copy attached hereto as Appendix E.
1.4 "CONFIDENTIAL INFORMATION" means any proprietary information of a Party
that is submitted to the other Party hereunder, including, but not limited
to PATENTS, JOINT PATENTS, ENZYME, sample of ENZYME, TECHNOLOGY, the FIELD,
financial terms of this OPTION, business information of RBI or DOW and
business development plans for an ENZYME.
1.5 "CONTROL" or "CONTROLLED" shall mean, in the case of a corporation,
ownership or control, directly or indirectly, of more than fifty percent
(50%) of the shares of stock entitled to vote for the election of directors
and, in the case of an entity other than a corporation, ownership or
control, directly or indirectly, of more than 50% of the assets or the
ability in the case of either a corporate or non-corporate entity to direct
the management and affairs of such entity.
1.6 "EFFECTIVE DATE" means June 30,1997.
1.7 "ENZYME" means any enzyme supplied by DOW to RBI for use under this OPTION
in the FIELD, including TECHNOLOGY such as its amino acid or DNA sequence,
or expression system; and any improvements to such enzyme (e.g., where the
productivity of the enzyme is increased and/or where the product inhibition
is lowered) when done by RBI.
1.8 "EVOLVED ENZYMES" means those ENZYMES which meet the criteria of exhibiting
initial hydrolysis rates at least 6-fold that of the wild type (wt)
recombinant ENZYME for a multiply halogenated organic molecule in aqueous
buffer in the presence of the product as an inhibitor. Kinetically, an
EVOLVED ENZYME is characterized as having a Vmax (at 100 mM of product) >
-
6.0 times Vmax (recombinant ENZYME at 0 mM of product).
1.9 "FIELD" means the use of ENZYME in a recycle process or with a reaction
coproduct produced by DOW where the ENZYME [*****].
1.10 "IMPROVED ENZYMES" means those ENZYMES which meet the criteria of [*****].
1.11 "LETTER OF INTENT" means the agreement signed between DOW and RBI,
effective May 27, 1997, a copy attached hereto for reference as Appendix A.
*Confidential Treatment Requested
<PAGE>
1.12 "LICENSE" means a license agreement contemplated under Section 5.2 to be
granted by RBI to DOW if, by no later than the end of the OPTION TERM, DOW
notifies RBI in writing of its desire to exercise its rights to obtain a
license.
1.13 "JOINT PATENTS" means those PATENTS in the FIELD which are jointly owned by
and have claims present by employees of both DOW and RBI during the term of
this OPTION and, if they exist, shall be listed in Appendix B, which shall
be reviewed and updated [*****], to be attached hereto and made a part
hereof.
1.14 "OPTION TERM" means until December 1, 1998 for an exclusive LICENSE and
until January 31, 1999 for a non-exclusive LICENSE, unless extended in
writing by the Parties.
1.15 "PATENTS" means all patent applications and patents to which RBI has rights
which claim improvements to the ENZYME made by RBI (or other inventions,
including but not limited to, apparatus, made by RBI in the course of
performing work under the RESEARCH PLAN) during this OPTION TERM, together
with any continuations, continuations-in-part, divisions, reissues,
registrations, confirmations, patents-of -addition, and extensions of the
foregoing, which claims cover the preparation, use or per se ENZYME in the
TERRITORY, which shall be listed in Appendix C (such patents to be mutually
agreed upon to be listed if regarding other inventions), to be attached
hereto and made a part hereof, and reviewed and updated annually as of the
EFFECTIVE DATE.
1.16 "PRODUCTIVITY ENZYMES" means those ENZYMES which meet the criteria of
exhibiting at least [*****].
1.17 "RESEARCH PLAN" means a mutually agreed upon plan for RBI to perform
research activities to improve ENZYME for commercial use to achieve TARGET
ACTIVITY in the FIELD during the OPTION TERM in accord with Appendix D,
attached hereto and made a part hereof.
1.18 "SIGNATURE DATE" means the date of the last signature of the Parties to
this OPTION.
1.19 "TARGET ACTIVITY" refers to the Milestone [*****] target for the [*****].
It is determined at the [*****] and projected from the Milestone 2 data to
be sufficient for a [*****]. It is defined in terms of [*****].
*Confidential Treatment Requested
<PAGE>
1.20 "TECHNOLOGY" means data for ENZYME, including for example physical
properties, DNA sequence, Vmax and Ki and process to make them
1.21 "TERRITORY" means the world.
ARTICLE 2 - GRANT OF OPTION
2.1 Grant of OPTION - RBI hereby grants to DOW, and DOW hereby accepts either:
(1) an exclusive right during the OPTION TERM to acquire an exclusive
LICENSE to make, have made, use, sell, import and have sold ENZYME(S)
for the FIELD in the TERRITORY under the PATENTS, JOINT PATENTS and
TECHNOLOGY and subject to Section 5.3; or
(2) a non-exclusive right during the OPTION TERM to acquire a nonexclusive
LICENSE to make, have made, use, sell, import and have sold ENZYME(S)
for the FIELD in the TERRITORY under the PATENTS, JOINT PATENTS and
TECHNOLOGY and subject to Section 5.3.
Whether (1) or (2) above is selected is solely DOW's choice during the OPTION
TERM.
2.2 Reservation - DOW reserves for itself and its AFFILIATES the right to do
internal research on ENZYMES (excluding any improvements to the ENZYMES
made by RBI) within the FIELD during the OPTION TERM.
2.3 Expansion of FIELD - In the event that DOW wishes to expand the FIELD at
the time of exercise of the LICENSE, the Parties agree to discuss in good
faith the proposed expansion of the FIELD and the terms therefore.
2.4 Exercise of OPTION for LICENSE - DOW may exercise its rights under Section
2.1 by providing written notice to RBI of its election under Section 2.1
(1) or (2) on or before the last day of the OPTION TERM.
ARTICLE 3 - OPTION PAYMENTS
3.1 Initial Payment for OPTION - Within fifteen (15) business days from the
EFFECTIVE DATE, DOW shall pay RBI [*****].
3.2 Additional Payments during OPTION TERM - The further payments to RBI by DOW
are tied to the achievement of milestone technical events in accord with
Article 4. DOW shall be invoiced one (1) month prior to any payment due to
RBI for each of these milestones. The payments for each milestone are:
3.2.1 Milestone 1 - [*****] - [*****], if RBI is technically successful as
defined in Article 4; plus [*****], if RBI accomplishes this Milestone
1 in less than [*****] from the date of receipt by RBI of [*****] from
DOW;
*Confidential Treatment Requested
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3.2.2 Milestone 2 - [*****] - [*****], payable within [*****] of receipt
by DOW of the ENZYME [*****] by DOW that RBI has provided DOW with
[*****] (DOW shall use its reasonable good faith efforts to conclude
such evaluation within [*****] the CANDIDATE [*****]); plus [*****],
if RBI provides DOW with [*****] CANDIDATE ENZYMES and/or [*****]
ENZYME [*****]; and
3.2.3 Milestone 3 - [*****]
(A) [*****] payable within [*****] of receipt by DOW of the ENZYME
[*****] by DOW that RBI has provided DOW [*****]; plus
(B) [*****] payable within [*****] of receipt by DOW of the ENZYME
[*****] by DOW that RBI has provided DOW [*****] ENZYME (for
both (A) and (B) of this Section 3.2.3 DOW shall use its
reasonable good faith efforts to conclude such evaluations
[*****] of the ENZYMES), plus a bonus of -
(i) [*****] if either of the criteria for (B) [*****] are met
within [*****] from the EFFECTIVE DATE, plus
(ii) [*****] if the [*****] exceeds [*****], plus
(iii) [*****] if the [*****] exceeds [*****].
It is agreed that if any of these milestones categories in Section 3.2 is
surpassed by an ENZYME providing performance at a higher category that the
payments for those surpassed categories will still be made.
The [*****].
These payments are tied to performance under the RESEARCH PLAN described in
Article 4.
3.3 Payments to RBI - All payments under this Article 3 are to be made to:
Recombinant BioCatalysis, Inc. and sent by wire transfer to:
*Confidential Treatment Requested
<PAGE>
Account Name: [*****].
ARTICLE 4 - ENZYME USE AND RESEARCH PLAN
4.1 RBI Obligations - RBI shall maintain sole physical control of the ENZYME
which shall be treated as CONFIDENTIAL INFORMATION under the terms of
Article 7 of this OPTION. RBI shall use any information provided to it by
DOW solely to improve ENZYME in the FIELD. RBI shall provide a written
report with a summary of the data to DOW on a quarterly basis or at a
milestone achievement in accord with Section 4.3 in a quarter, whichever
occurs first. (If clarification of a report is requested by DOW to more
fully understand such report, then a meeting of respective personnel is
permitted.) A final written report shall be provided of the results
obtained by RBI on its improvement efforts for the ENZYME, including its
sequence, within thirty (30) days at the end of the OPTION TERM or within
thirty (30) days upon termination.
4.2 Development Efforts - During the OPTION TERM, RBI shall perform research
activities to improve the ENZYME to achieve TARGET ACTIVITY in the FIELD in
a diligent manner as specified in Article 3 and described in detail in a
RESEARCH PLAN. Such improvement can be met by any manner acceptable to the
Parties. The ENZYME is to be improved for commercial use in a manner agreed
upon between the Parties. The RESEARCH PLAN may be amended by mutual,
written consent of the Parties. However, either Party may terminate the
research and this OPTION at any technical milestone specified in Section
4.3 for any reason; but if RBI terminates, then DOW has thirty (30) days to
notify RBI whether DOW desires either an exclusive or nonexclusive LICENSE
in accord with Section 2.1 for the ENZYME until that termination. If DOW
terminates the research and this OPTION and any of the milestones beyond
Milestone 1 have been achieved and completed in accord with each milestone
requirement in accordance with Section 4.3, then RBI shall have the rights
described in Section 5.2.3.
4.3 Milestones -
4.3.1 Milestone 1
DOW completes preliminary [*****] and defines general parameters for
the ENZYME, [*****]
RBI develops of a suitable [*****].
4.3.2 Milestone 2
*Confidential Treatment Requested
<PAGE>
RBI [*****] ENZYME by [*****] to obtain CANDIDATE ENZYME, transfers
to DOW the [*****] CANDIDATE ENZYMES and [*****] of each CANDIDATE
ENZYME.
DOW confirms [*****] CANDIDATE ENZYMES and evaluates their
performance attributes [*****].
(DOW and RBI scientists shall discuss the relationship between
[*****] in performance of the [*****] CANDIDATE ENZYME and
improvement in productivity of the CANDIDATE ENZYME as a supported
catalyst. After such discussions, the Parties shall mutually agree
on [*****] i.e. TARGET ACTIVITY, prior to starting Milestone 3.)
4.3.3 Milestone 3
(A) RBI increases productivity as stated in Article 3 for [*****]
ENZYMES and transfers [*****] of all such ENZYMES to DOW
together with each ENZYME's [*****]. DOW confirms [*****]
ENZYMES and evaluates their performance attributes [*****]. If
[*****] ENZYME [*****], then part (B) below shall occur.
(B) RBI [*****]as stated in Article 3 for [*****] ENZYMES and
transfers [*****] of [*****] ENZYMES to DOW together with each
ENZYME's [*****]. DOW confirms [*****] ENZYMES and evaluates
their performance attributes [*****].
4.4 RESEARCH PLAN and Payments are tied - The events under Section 4.3 for
performance under the RESEARCH PLAN are tied to payments under Article 3.
4.5 DOW Obligations - DOW shall provide the assay mentioned in Section 4.3.1,
Milestone 1, analytical information or know-how, including evaluation of
the modified ENZYME at DOW facilities, the identity of the gene for the
host interaction desired, and the DNA sequence of the gene. All information
supplied by DOW to RBI shall be treated as confidential under Article 7.
ARTICLE 5 - LICENSE TERMS
The following terms are contemplated by the Parties to be included in a LICENSE
if, by no later than the end of the OPTION TERM, DOW exercises its right to such
LICENSE.
*Confidential Treatment Requested
<PAGE>
5.1 Exercise Payment - Upon exercise of the right to a LICENSE, a payment shall
be due to RIBI depending upon whether DOW elects rights under Section 2.1
(1) or (2) as follows. If DOW elects Section 2.1 (1) for an exclusive
LICENSE, then a one time fee of Two Hundred Thousand Dollars (US$200,000)
Dollars is payable within thirty (30) days from exercise of the exclusive
LICENSE but no sooner than December 1, 1998. If DOW elects Section 2.1(2)
for a non-exclusive LICENSE, then terms shall be negotiated using
reasonable good faith efforts by the Parties by January 31, 1999.
5.2 Exercise for LICENSE - The OPTION TERM shall be for the term of the
Research Plan, including any mutually agreed upon extensions. At present
both Parties agree that the OPTION TERM for an exclusive LICENSE shall run
from the EFFECTIVE DATE until December 1, 1998 and for a nonexclusive
LICENSE until January 31, 1999. In addition, DOW has eighteen (18) months
from its receipt by DOW to evaluate the TECHNOLOGY and improved ENZYME
provided by RBI before execution of the LICENSE.
5.2.1 By the end of the OPTION TERM, DOW, at its sole discretion, may
negotiate an exclusive LICENSE to the ENZYME and gene coding for the
ENZYME in the FIELD from RBI, or purchase the ENZYME or immobilized
ENZYME from RBI or an alternate supplier in accord with Section 5.3.
Upon execution of the LICENSE, manufacturing licenses and terms of
sale for any ENZYME shall be on commercially reasonable terms,
mutually agreed upon, and shall include, without limitation,
royalties and minimum payments (as negotiated by the Parties in good
faith taking into account the value created by the respective
contributions of the Parties, e.g., monetary, scientific and capital
contributions). If DOW exercises the OPTION for a nonexclusive
LICENSE, RBI shall also have the non-exclusive right to make, have
made, use, sell, import, and have sold ENZYME for the FIELD in the
TERRITORY under the PATENTS, JOINT PATENTS and TECHNOLOGY.
5.2.2 In the event that the ENZYME is improved and DOW has had eighteen
(18) months from the time the TECHNOLOGY and improved ENZYME was
delivered to DOW in accord with Milestone 3(B) of Section 3.2.3 to
test it, and DOW then provides written notice to RBI in accord with
Section 12.1 of DOW's lack of interest in commercial use of the
improved ENZYME provided by RBI, then, RBI shall have the rights
described in Section 5.2.3.
5.2.3 RBI Rights - Under the circumstances described in Sections 4.2 and
5.2.2 and in the event that RBI terminates the OPTION in accord with
Section 10.2 upon material breach by DOW, DOW shall have no LICENSE
(but shall have the right for internal research use of ENZYME,
TECHNOLOGY, PATENTS and JOINT PATENTS) and RBI shall have all
commercial rights to make, have made, use, sell, import and have
sold ENZYME for the FIELD in the TERRITORY under the PATENTS, JOINT
PATENTS and TECHNOLOGY by notifying DOW in writing in accord with
Section 12.1 and making the following payments (at RBI's sole
option):
<PAGE>
(A) RBI shall pay DOW as a [****] fee for DOW's total investment in
the ENZYME (which fee shall be computed from the time of such
request by RBI, but in no event would be less than [****] Such
payment would be due to DOW within thirty (30) days from
invoice by DOW; or
(B) RBI agrees to pay to DOW reasonable royalty and payments for
all income received from RBI's commercialization or sale of the
TECHNOLOGY or PATENTS using the ENZYME. Such payments shall be
negotiated as an agreement by the Parties using their good
faith efforts.
RBI must elect between (A) and (B) within one hundred and eighty (180) days from
DOW's written notification of lack of interest and convey their election in
writing to DOW in accord with Section 12.1.
Any payments to DOW under this Section 5.2.3 shall be made to. The Dow Chemical
Company, and be sent by wire transfer to:
[*****].
5.3 Supply of ENZYME - In the event that the ENZYME is improved and is of
further interest to DOW and DOW exercises its rights to a LICENSE under
Section 2.1, then DOW shall have [****] from the time the improved ENZYME
is delivered in a practicable form to DOW in accord with Milestone 3(B)
under Section 4.3.3 (B) to provide written notice under Section 12.1 to RBI
of DOW's intent to either:
(A) have RBI supply the improved ENZYME commercially to DOW. If this
course is mutually agreed upon then a commercial agreement shall be
negotiated using reasonable good faith efforts by the Parties; or
(B) inform RBI that DOW will use an alternate supplier (not RBI) for the
improved ENZYME. RBI agrees to provide to a qualified third party
under appropriate, reasonable licensing terms for the industry, the
information and rights required to supply the ENZYME to DOW; or
(C) If DOW does not desire any commercial supply of the improved ENZYME,
then refer to Section 5.2.2.
5.4 DOW Evaluation - DOW has the right, during the OPTION TERM and the [*****]
evaluation period, for its purposes of evaluation only, to produce
sufficient ENZYME for its needs.
*Confidential Treatment Requested
<PAGE>
5.5 Other terms - Other customary and negotiated terms are expected to be
included in the LICENSE and are permitted.
ARTICLE 6 - PATENT RIGHTS
6.1 RBI to Maintain PATENTS - Any improvements to the ENZYME made by RBI during
this OPTION TERM shall belong to RBI, if within the claimed scope of any
PATENT. DOW shall be informed of all such PATENTS and be provided with a
copy thereof, and provided with their publication numbers or patent numbers
and each country where filing was done. If requested by DOW, a completed
file wrapper for a given application or patent shall be provided to DOW. An
annual status of the concerned PATENTS shall be provided to DOW until all
have issued or are abandoned. If DOW exercises its rights for a LICENSE,
then rights to any PATENTS shall be granted in the LICENSE for the FIELD
for the TERRITORY. If RBI obtains rights under Section 5.2.3, then such
rights shall include rights to any PATENTS for the FIELD for the TERRITORY.
6.2 Notice of Patent Lapse - RBI shall advise DOW of the grant, lapse,
nullification, revocation, surrender, or invalidation of any of the PATENTS
at the annual update of the PATENT listing for Appendix C.
6.3 JOINT PATENTS - Although unlikely to occur, in those instances where joint
inventions between DOW and RBI result in a patentable invention, then DOW
and RBI shall mutually determine, using their good faith efforts, whether
the patent application has joint ownership and joint claim structure, and
which Party should prosecute the patent application and pay the annuities.
Both Parties shall elect any countries in which filing shall be done. If
DOW exercises its rights for a LICENSE, then rights to any JOINT PATENTS
shall be granted in the LICENSE for the FIELD for the TERRITORY. If RBI
obtains rights under Section 5.2.3, then such rights shall include rights
to JOINT PATENTS for the FIELD for the TERRITORY.
6.4 TECHNOLOGY - TECHNOLOGY developed during the OPTION TERM or known as of the
LETTER OF INTENT by either Party shall remain that Party's property. Any
use by one Party of the other's TECHNOLOGY shall be under the
confidentiality provisions of Article 7.
6.5 DOW Patents - No rights are granted by DOW to RBI to use any DOW
intellectual property rights including patents (such as sole DOW patents),
trade secrets, confidential information and computer programs, except in
providing the contemplated services under the RESEARCH PLAN. If Section
5.2.3 pertains, then rights to commercial use of the JOINT PATENTS and
ENZYME are granted by DOW to RBI.
ARTICLE 7 - CONFIDENTIALITY
7.1 Each Party shall use good faith efforts to retain in confidence and not
disclose to any third party each other's CONFIDENTIAL INFORMATION. Such
"good faith efforts" shall mean the same degree of care, but no less than a
reasonable degree of care, as the receiving Party uses to protect its own
CONFIDENTIAL INFORMATION of a like nature. This obligation shall be
effective from August 29, 1996 upon the SIGNATURE
<PAGE>
DATE and shall cease five (5) years from termination of this OPTION. This
OPTION shall supersede the CDA upon the SIGNATURE DATE.
7.2 Excepted from the obligation of confidentiality under Section 7.1 is that
information which:
(a) is available, or becomes available, to the general public without
fault of the receiving Party; or
(b) is obtained by the receiving Party without an obligation of
confidence from a third party (other than a governmental agency) who
is rightfully in possession of such information and is under no
obligation of confidentiality to the disclosing Party concerning such
information; or
(c) is released from confidentiality in writing by the disclosing Party;
or
(d) is permitted to be disclosed by Section 7.4.
For the purpose of Section 7.1, a specific CONFIDENTIAL INFORMATION shall not be
deemed to be within the foregoing exceptions merely because it is embraced by
more general information in the public domain, or in the possession of the
receiving Party. In addition, any combination of features shall not be deemed to
be within the foregoing exceptions merely because individual features are in the
public domain or in the possession of the receiving Party, but only if the
combination itself and its principle of operation and process to make it are in
the public domain or in the possession of the receiving Party.
7.3 Notwithstanding the provisions of Section 7.1, if the receiving Party
becomes legally compelled to disclose any of the disclosing Party's
CONFIDENTIAL INFORMATION, the receiving Party shall promptly advise the
disclosing Party of such required disclosure in order that the disclosing
Party may seek a protective order or such other remedy as the disclosing
Party may consider appropriate in the circumstances. The receiving Party
shall disclose only that portion of the CONFIDENTIAL INFORMATION which it
is legally required to disclose. Such a disclosure shall not release the
receiving Party with respect to the CONFIDENTIAL INFORMATION so disclosed
except to the extent of permitting the required disclosure. In addition,
the receiving Party may disclose CONFIDENTIAL INFORMATION of the disclosing
Party to the extent such disclosure is reasonably necessary in connection
with the filing or prosecution of JOINT PATENTS. If DOW CONFIDENTIAL
INFORMATION is reasonably necessary to be disclosed in connection with the
filing or prosecution of PATENTS, then DOW's prior written consent must be
obtained in accord with Section 12.1.
7.4 Disclosure to AFFILIATES - RBI or DOW may disclose CONFIDENTIAL INFORMATION
to its AFFILIATES, and consultants as may be necessary to exercise the
rights granted hereunder, but only under conditions of confidentiality at
least as stringent as those set out in Sections 7.1, 7.2 and 7.3.
7.5 Document Return - In the event of termination of this OPTION under Article
10, without exercise of a LICENSE, then:
<PAGE>
(a) RBI will cease its use of the ENZYMES in accord with Section 10.3,
and
(b) each Party will cease its use of all CONFIDENTIAL INFORMATION of the
other Party provided hereunder and, on the disclosing Party's
request, within sixty (60) days either return all such CONFIDENTIAL
INFORMATION, including any copies thereof, ENZYMES in whatever media
or form, or will promptly destroy the same and certify such
destruction to the disclosing Party.
Notwithstanding the above, a Party may retain one copy of any CONFIDENTIAL
INFORMATION of the other Party in its legal files, but shall return or destroy
any DOW samples of ENZYME or ENZYME provided by the other Party. The foregoing
provisions shall not apply to RBI to the extent it exercises its rights under
Section 5.2.3.
ARTICLE 8 - U.S. EXPORT CONTROL AND GOVERNMENT LICENSES
8.1 Compliance - Both Parties agree to comply, at their expense, with all
necessary United States governmental regulations with respect to export of
ENZYMES and TECHNOLOGY in the TERRITORY. Both Parties agree to not export
or re-export any ENZYME or TECHNOLOGY received from the other or the direct
products of such TECHNOLOGY to any prohibited country listed in the U.S.
Export Administration Regulations unless properly authorized by the U.S.
Government. Each Party shall be responsible for the acts of its AFFILIATES,
contractors, and consultants and assumes all liability if it or its
AFFILIATES, fails to obtain any of the necessary licenses or commits any
violations of the United States Export Laws or Regulations (15 C.F.R.
(S)700 et seq.). Each Party shall indemnify the other for its acts and for
any breach of compliance.
8.2 Licenses and Clearances - Both Parties agree to obtain all necessary
licenses or clearances, at its expense, and to comply with all applicable
regulations of agencies in the TERRITORY.
ARTICLE 9 - WARRANTY, DISCLAIMER, GUARANTEE
9.1 Belief of Accuracy - Each Party represent that ENZYME, TECHNOLOGY and any
other CONFIDENTIAL INFORMATION transferred or provided to the other Party
hereunder are believed to be accurate and complete as of their current
status on the EFFECTIVE DATE and that each Party's interpretations and
conclusions drawn therefrom were made in good faith and in the exercise of
its scientific judgment as of the dates of the documents contained therein.
However, neither Party warrants or represents that such information is or
will be sufficient to market ENZYME or to commercially produce ENZYME, or
to commercialize ENZYME in the TERRITORY or that DOW or RBI shall be free
to practice or sell any ENZYME.
9.2 DOW Representation - DOW will be solely relying on its own evaluation of
ENZYME, TECHNOLOGY and the other CONFIDENTIAL INFORMATION transferred or
provided to it hereunder and on its own scientific expertise in using the
same in its development and evaluation of ENZYME.
<PAGE>
9.3 Validity, Non-Infringement - No warranty is provided that the manufacture,
use and sale of ENZYME falls outside the scope of third party patents or
the industrial property rights of a third party.
9.4 Disclaimer of Warranties as to PATENTS - RBI makes no representation that
the inventions covered in any PATENTS are patentable or that the PATENTS
are or will be valid or enforceable, nor does RBI warrant or represent that
the exercise of the rights hereunder is free from infringement of patent
rights of third parties.
ARTICLE 10 - TERM AND TERMINATION
10.1 Term - Unless terminated under the provisions of this Article 10, this
OPTION shall continue in effect until the end of the OPTION TERM, unless
mutually agreed upon in writing by the Parties to be extended.
10.2 Termination for Breach - In the event of a material breach by either DOW or
RBI of any of the obligations contained in this OPTION, the other Party
shall be entitled to terminate this OPTION by notice in writing under
Section 12.1, provided that such notice shall specify the breach or
breaches. If the said breach or breaches are capable of remedy, the Party
committing such breach or breaches shall be entitled to a period of sixty
(60) days from the delivery of such notice in which to remedy or to
undertake to remedy the same. In the case the defaulting Party shall fail
to remedy the breach or to undertake to remedy the breach to the
satisfaction of the injured Party, the injured Party shall have the right
to cancel this OPTION in whole or only terminate those rights and
obligations relating to the particular breach by simple notification to the
Party in default. Failure of a Party to exercise its rights under this
Section 10.2 shall not be construed as a waiver as to future breaches
whether or not they are similar.
10.3 Termination by RBI or DOW - Either Party may terminate this OPTION at the
end of any Milestone in Section 4.3 by written notice to the other. Each
will disclose to the other its reasons for any such termination. Upon such
termination, both Parties shall refrain from further use of CONFIDENTIAL
INFORMATION received from the other Party, including ENZYME, except that
this provision shall not apply to RBI if it exercises its rights under
Section 5.2.3.
10.4 Termination by DOW - DOW shall have the further right to terminate this
OPTION immediately on written notice to RBI if:
(a) RBI shall cease to carry on business or shall go into liquidation or
a receiver shall be appointed to RBI's assets; or
(b) RBI shall become bankrupt or insolvent or unable to meet any of its
performance obligations; or
(c) RBI fails to conduct testing on the ENZYMES for more than sixty (60)
days from any Milestone.
10.5 On Termination - DOW shall, upon termination of this OPTION under Article
10:
<PAGE>
(a) pay to RBI all payments due or accrued at the termination date within
thirty (30) days after termination; and
(b) make no further use of, or permit any use by any third party of any
kind of any and all ENZYMES disclosed hereunder by RBI, and make no
further use of the surviving PATENTS in the FIELD.
10.6 Survival of Certain Obligations - On termination of this OPTION: the
obligations of confidentiality set forth in Article 7 shall survive for the
time stated therein; payments due under Article 3 shall survive for the
terms specified; and Export Control compliance set forth in Article 8 shall
survive indefinitely.
ARTICLE 11 - FORCE MAJEURE
11.1 Event of Force Majeure - In the event that performance under this OPTION,
or any obligation hereunder, is hindered, delayed or prevented by reason of
acts of God, strikes, lockouts, labor troubles, intervention of any
governmental authority, fire, riots, insurrections, invasions, war or other
reason of similar nature beyond the reasonable control of the Party and are
without its fault or negligence, then performance of that act shall be
excused for the period of the delay and the period for the performance of
that act shall be extended for an equivalent period.
11.2 Notification. Upon occurrence of an event of force majeure, the affected
Party shall promptly notify the other Party in writing, setting forth the
nature of the occurrence, its expected duration and how that Party's
performance is affected. The affected Party shall resume the performance of
its obligations as soon as practicable after the force majeure event
ceases.
ARTICLE 12 - NOTICES
12.1 Official -Any notice, request or communication specifically provided for
or permitted to be given under this OPTION must be in writing and may be
delivered by hand delivery, courier service, or electronic transmission
such as telex, facsimile, or telegram, and shall be deemed effective as of
the time of actual delivery thereof to the addressee. For purposes of
notice the addresses of the Parties shall be as follows:
DOW:
The Dow Chemical Company
2030 Dow Center
Midland, Michigan
48674
USA
Attention: William Dowd
Director
Biocatalysis Laboratory
[*****]
*Confidential Treatment Requested
<PAGE>
with a copy to:
The Dow Chemical Company
Patent Department
1790 Building, Washington Street
Midland, Michigan 48674
USA
Attention: Karen L. Kimble, JD
Senior Counsel
[*****]
RBI:
Recombinant BioCatalysis, Inc.
10665 Sorrento Valley Road
San Diego, CA 92121
USA
Attention: Donald C. Garaventi
President
[*****]
12.2 For purposes of scientific reporting, the Parties designate as their
respective principle contacts:
DOW:
The Dow Chemical Company
Building 1707
Washington Street
Midland, MI 48674
USA
Attention: Joseph Affholter, PhD
Research Leader
[*****]
RBI:
Recombinant BioCatalysis, Inc.
10665 Sorrento Valley Road
San Diego, CA 92121
USA
Attention: Dan Robertson, PhD
Director of Enzymologys
*Confidential Treatment Requested
<PAGE>
[*****]
12.3 Each Party may change its address and its representative for notice by the
giving of notice thereof in the manner provided in Section 12.1.
ARTICLE 13 - ASSIGNMENT
13.1 Assignment - Neither Party to this OPTION shall assign or sublicense any
rights hereunder without the prior written consent of the other Party, such
consent not to be unreasonably withheld. It being agreed, however, that
without such consent being required from RBI, DOW may assign to its
AFFILIATES, but RBI must be notified in writing in accord with Section
12.1.
13.2 Consolidation, Reorganization or Merger - Should RBI be consolidated,
reorganized or merged with another entity, this OPTION and all rights and
obligations arising under this OPTION may be assigned to the successor
entity or the assignee of all or substantially all of RBI's business and
assets without DOW's prior written consent. However, RBI shall promptly
notify DOW prior to such action in accord with Section 12.1.
Effect on Successors and Assignees - This OPTION shall inure to the benefit of
and be binding upon such successors and permitted assignees.
ARTICLE 14 - LIABILITY
14.1 DOW Liability to RBI - Neither DOW, any of its AFFILIATES, nor the
respective agents, servants, officers, directors, and employees of each
shall be liable to RBI, or RBI's employees, directors, officers, agents or
legal heirs, for any personal injury, death, or property damage that occurs
while RBI is performing under this OPTION, except to the extent such
injury, death, or property damage is caused by the sole negligence of DOW.
14.2 RBI Liability to DOW - Neither RBI, any of its subsidiaries, nor the
respective agents, servants, officers, directors, and employees of each
shall be liable to DOW, or DOW's employees, directors, officers, agents or
legal heirs, for any personal injury, death, or property damage that occurs
while DOW is performing under the OPTION, except to the extent such injury,
death, or property damage is caused by the sole negligence of RBI.
14.3 Safety by RBI - RBI personnel agree to observe the same safety and other
rules required of DOW employees while RBI is on premises owned, operated,
leased or under the control of DOW.
14.4 Safety by DOW - DOW personnel agree to observe the same safety and other
rules required of RBI employees while LOW is on premises owned, operated,
leased or under the control of RBI.
ARTICLE 15 - MISCELLANEOUS PROVISIONS
*Confidential Treatment Requested
<PAGE>
15.1 Amendments - This OPTION may be amended only in writing executed by both
Parties.
15.2 Disputes - Both Parties shall make good faith efforts to resolve any
questions concerning construction and performance under this OPTION
15.3 Entirety of Agreement - This OPTION sets forth the entire agreement and
understanding between the Parties hereto with respect to ENZYME for its
evaluation in the TERRITORY for use in the FIELD. This OPTION shall be
deemed to be in compliance with the LETTER OF INTENT and should any
differences exist, this OPTION shall control.
15.4 Severability - If any term or provision under this OPTION is deemed
invalid under the laws by a United States court of competent jurisdiction,
the invalidity shall not invalidate the whole OPTION but it shall be
construed as if not containing that particular term or provision for that
particular country or jurisdiction and the rights and obligations of the
Parties shall be construed and enforced accordingly. The Parties shall
negotiate in good faith a substitute provision as an addendum to this
OPTION for that particular country or jurisdiction in compliance with the
law to as nearly as possible retain the Parties intent in legally valid
language.
15.5 Waivers, Cumulative Remedies - A waiver by either Party of any term or
condition of this OPTION in any one instance shall not be deemed construed
to be a waiver of such term or condition for any similar instance in the
future or of any subsequent breach hereof. All rights, remedies,
undertakings, obligations and agreements contained in this OPTION shall be
cumulative and none of them shall be a limitation of any other remedy,
right, undertaking, obligation or agreement of either Party.
15.6 Publicity - Neither DOW nor RBI shall make the financial terms of this
OPTION public, except as required by law. In the event that a filing of a
copy of this OPTION with the US Securities and Exchange Commission is
required, then RBI shall seek confidential treatment of information
considered confidential by DOW. Any press release or publicity of this
OPTION shall be reviewed and approved by both Parties prior to any release.
15.7 Choice of Law - This OPTION shall be governed by the laws of the State of
Michigan, excepting its conflict of laws principles, in all respects of
validity, construction and performance; except that all questions
concerning the construction, validity, coverage or infringement of PATENTS
or JOINT PATENTS shall be decided in accordance with the patent law of the
country where the PATENT or JOINT PATENT was granted.
15.8 Headings - Headings in this OPTION are included herein for ease of
reference and shall not affect the meaning of the provisions of this
OPTION, nor shall they have any other legal effect.
15.9 Cooperation - RBI and DOW shall use good faith efforts to cooperate with
respect to any issues that concern the development of the ENZYME under this
OPTION.
<PAGE>
15.10 RBI's Status - RBI's status hereunder is that of an independent
contractor, and not that of an agent of DOW. As such RBI is responsible of
all Income Tax withholding and the payment of any other appropriate taxes
on all payments to RBI by DOW.
IN WITNESS WHEREOF, the Parties have duly executed duplicate originals of this
OPTION by their appropriate authorized representative. Such OPTION may be
subject to management and/or Board approval by each Party. Separate signature
pages are acceptable in facsimile form and shall be accepted in lieu of original
signatures, provided each Party receives a dated, signed, legible facsimile
indicating the signator for the other Party. Upon the SIGNATURE DATE, this
OPTION shall be effective as of the EFFECTIVE DATE. If requested by either
Party, duplicate originals, bearing the same date as the facsimile signature or
in lieu of facsimile signatures may be provided.
THE DOW CHEMICAL COMPANY RECOMBINANT BIOCATALYSIS, INC.
By:__________________________________ By:___________________________________
Name: R.J. Pangborn Name: T.J. Bruggeman
Title: Vice President Title: CEO
Central & New Businesses R & D
Date:________________________________ Date:_________________________________
<PAGE>
APPENDIX A
May 27, 1997
Donald C. Garaventi
President
Recombinant BioCatalysis, Inc.
10665 Sorrento Valley Road
San Diego, CA 92121
USA
LETTER OF INTENT
Dear Mr. Garaventi:
The purpose of this Letter of Intent is to summarize the present arrangements
and intent between The Dow Chemical Company ("DOW") and Recombinant BioCatalysis
Inc. ("RBI") for use of an enzyme provided by DOW. The Parties intend to
negotiate an option agreement ("Option") encompassing this intent.
RBI and DOW shall negotiate in good faith to result in an Option having at least
the following terms and conditions:
1. Option Territory - The Option shall be for the world.
2. Permitted Use by RBI - RBI shall use any information provided to it by DOW
solely to improve an enzyme identified by DOW for use in recycle process or
with a reaction coproduct produced by DOW [*****]. [This enzyme and any
improvements thereto (e.g., where the productivity of the enzyme is
increased and/or where the product inhibition is lowered) are referred to
as "Enzyme".]
3. Option Grant - The Option, if DOW requests an exclusive grant for the Field
to make, have made, use, sell, import and have sold the Enzyme for the
Field in the Territory, shall include the patents and technology on the
Enzyme in the Field subject to the terms of the Option and any
manufacturing license agreement. The fee for this exclusive Option is a one
time fee of [*****] payable no sooner than December 1, 1998.
If DOW requests a non-exclusive grant for the Field to make, have made, use,
sell, import and have sold the Enzyme for the Field in the Territory, including
the patents and technology on the Enzyme In the Field, then the terms shall be
negotiated using reasonable good faith efforts by the Parties by January 31,
1999.
In either event the Option shall be executed by the Parties no later than
December 1, 1998 if exclusive or January 31, 1999 if non-exclusive.
*Confidential Treatment Requested
1.
<PAGE>
4. Option Term - The Option term shall be for the term of the research plan
("Plan"), including any mutually agreed upon extensions ("Term"). At
present both Parties agree that the Term for an exclusive license shall run
from the letterhead date of this Letter of Intent until December 1, 1998
and for a nonexclusive until January 31, 1999. By the end of the Term DOW,
at its sole discretion, may negotiate an exclusive license to the Enzyme
and gene coding for the Enzyme in the Field from RBI, or purchase the
Enzyme or immobilized Enzyme from RBI or an alternate supplier in accord
with Paragraph 8. Upon exercise of the license, manufacturing licenses and
terms of sale for any Enzyme shall be on commercially reasonable terms,
mutually agreed upon, and shall include, without limitation, royalties and
minimum payments.
In the event that the Enzyme is improved and DOW has had [*****] from the time
the technology and improved Enzyme is delivered to DOW in accord with Milestone
3(B) to test it, and DOW then provides written notice to RBI of DOW's lack of
interest in commercial use of the improved Enzyme provided by RBI, then, at
RBI's sole option, either:
(a) RBI shall pay DOW as a one time fee for DOW's total investment in the
Enzyme (which fee shall be computed from the time of such request by RBI,
but in no event would be less than [*****]). Such payment would be due to
DOW within thirty (30) days from invoice by DOW; or
(b) RBI agrees to pay to DOW reasonable royalty and payments for all income
received from RBI's commercialization or sale of the technology or patents
using the Enzyme. Such payments shall be negotiated as an agreement by the
Parties using good faith efforts.
RBI must elect between (a) and (b) within [*****] from DOW's written
notification of lack of interest and convey their election in writing to DOW.
DOW has the right, during the Term and the eighteen (18) month evaluation
period, for purposes of evaluation only, to produce sufficient Enzyme for its
needs.
5. Payments - Within fifteen (15) days from execution of the Option DOW shall
pay RBI [*****]. For subsequent payments DOW shall be invoiced one (1)
month prior to any payment due to RBI. The further payments are tied to
achievement of milestone technical events. The technical events for each
milestone payment are described in Paragraph 6. The payments for each
milestone are:
Milestone 1 - [*****]
[*****] if RBI is technically successful as defined in Paragraph 6; plus [*****]
if RBI accomplishes this Milestone 1 in less than [*****] days from the date on
which RBI receives the assay from DOW;
Milestone 2 - Productivity Calibration Definitions for Milestone 2:
"Candidate Enzymes" are those which meet the criteria of exhibiting initial
hydrolysis rates (Vmax) significantly higher than the wild type (wt) recombinant
enzyme toward a [*****].
*Confidential Treatment Requested
2.
<PAGE>
Kinetically, a Candidate Enzyme that is significantly
higher is characterized as having a Vmax [*****].
"Evolved Enzymes" are those which meet the criteria of exhibiting [*****].
Payments for Milestone2:
[*****] payable within thirty (30) days of receipt by DOW of the Enzyme
sequences and validation by DOW that RBI has provided DOW with at least [*****]:
and
Milestone 3 - Productivity Enhancement Definitions for Milestone 3:
"Improved Enzymes" are those which meet the criteria of, exhibiting at least;
plus [****] if RBI provides DOW with at least [*****].
"Productivity Enzymes" are those which meet the criteria of exhibiting at least
[*****].
"Target Activity" refers to the Milestone 3 improvement target for the initial
hydrolysis rate (Target Vmax) toward a [*****]. It is determined at the
conclusion of Milestone 2 and projected from the Milestone 2 data to be
sufficient for a commercial catalyst. It is defined in terms of fold-improvement
over the wild-type (wt) recombinant Enzyme activity under [*****].
Payments for Milestone 3:
(A) [*****] payable within thirty (30) days of receipt by DOW of the Enzyme
sequence and validation by DOW that RBI has provided DOW with at least [*****]
plus (B) [*****] payable within thirty (30) days of receipt by DOW of the Enzyme
sequence and validation by DOW that RBI has provided DOW with at least [*****]
*Confidential Treatment Requested
3.
<PAGE>
[****]
(i) [*****]
(ii) [*****]
(iii) [*****]
[*****]
[*****]
These payments are tied to performance under the Plan described in Paragraph 6.
6. Plan - During the Term, RBI shall perform research activities to improve
the Enzyme to achieve Target Activity in the Field in a diligent manner as
specified in Paragraph 5 and described in detail in a protocol attached to
the Option. Such improvement can be met by any manner acceptable to the
Parties. The Enzyme is to be improved for commercial use in a manner agreed
upon between the Parties. The protocol may be amended by written consent of
the Parties. However, either Party may terminate the research and the
Option at any technical milestone specified below for any reason; but if
RBI terminates, then DOW has thirty (30) days to notify RBI whether DOW
desires either an exclusive or non-exclusive license for the Enzyme until
that termination.
. Milestone 1 = [*****].
. Milestone 2 = [*****].
4.
<PAGE>
[****]
. Milestone 3 = [*****].
(B) RBI increases productivity as stated in Paragraph 5 for Productivity
Enzymes and transfers as UCA [*****] DOW confirms [****].
These events for performance under the Plan are tied to payments under Paragraph
5.
7. Patents - Any improvements to the Enzyme made by RBI during the Option
shall belong to RBI, if within the claimed scope of an issued RBI patent or
pending patent application. DOW shall be informed of all such patents or
pending applications and be provided with a copy thereof, and provided with
their publication numbers or patent numbers and each country where filing
was done. If requested by DOW, a completed file wrapper for a given
application or patent shall be provided to DOW. An annual status of the
concerned patents shall be provided to DOW until all have issued or are
abandoned.
Although unlikely to occur, in any instance where a Joint patent between DOW and
RBI results in a patentable invention, then DOW and RBI shall mutually
determine, using good faith efforts, whether DOW or RBI shall file and prosecute
the patent application and pay the annuities. If DOW exercises its Option for
exclusive rights for the joint patent shall be granted in the Option to DOW for
the Field for the Territory.
Know-how developed under the Option or known as of the Letter of Intent by
either Party shall remain that Party's property. Any use by one Party of the
other's know-how shall be under the confidentiality provisions of Paragraph 14.
8. [*****] - In the event that the Enzyme is improved and is of further
interest to DOW and DOW exercises its Option, then DOW shall have [*****]
from the time the improved Enzyme is delivered in a practicable form to DOW
in accord with Milestone 3(B) to provide by written notice to RBI of DOW's
intent to either:
*Confidential Treatment Requested
5.
<PAGE>
(a) [*****]. If this course is mutually agreed upon then a commercial
agreement shall be negotiated using reasonable good faith efforts by the
Parties;
or
(b) inform RBI that DOW will use an alternate supplier (not RBI) for the
improved Enzyme. RBI agrees to provide to a qualified third party under
appropriate, reasonable licensing terms for the industry, the information
and rights required to supply the Enzyme to DOW.
If DOW does not desire any commercial supply of the improved Enzyme, then refer
to Paragraph 4.
9. RBI Obligations - RBI shall provide a written report with a summary of the
data to DOW on a quarterly basis or at a milestone achievement in a
quarter, whichever occurs first. (If clarification of a report is requested
by DOW to more fully understand such report, then a meeting of respective
personnel permitted.) A final written report shall be provided of the
results obtained by RBI on its improvement efforts for the Enzyme,
including its sequence, within thirty (30) days at the end of the Term or
within thirty (30) days upon termination, and [*****].
10. DOW Obligations - DOW shall provide the [*****].
11. Safety - RBI personnel agree to observe the same safety and other rules
required of DOW employees while RBI is on premises owned, operated, leased
or under the control of DOW.
DOW personnel agree to observe the same safety and other rules required of
RBI employees while DOW is on premises owned, operated, leased or under the
control of RB1.
12. Liability - Neither DOW, any of its subsidiaries, nor the respective
agents, servants, and employees of each shall be liable to RBI or RBI's
employees, directors, agents or legal heirs, for any personal injury,
death, or property damage that occurs while RBI is performing under the
Option, except to the extent such injury, death, or property damage is
caused by the sole negligence of Dow.
Neither RBI, any of its subsidiaries, nor the respective agents, servants,
and employees of each shall be liable to DOW, or DOW's employees,
directors, agents or legal heirs, for any personal injury, death, or
property damage that occurs while DOW is performing under the Option,
except to the extent such injury, death, or property damage is caused by
the sole negligence of RBI.
*Confidential Treatment Requested
6.
<PAGE>
13. RBI's Status - RBI's status hereunder is that of an independent contractor,
and not that of an agent of DOW. As such RBI is responsible of all Income
Tax withholding and the payment of any other appropriate taxes on all
payment to RBI by DOW.
14. Confidentiality - The Parties agree to maintain confidential all
discussions and information obtained from the other regarding the Enzyme,
the Field, business information of RBI or DOW since August 29, 1996, and to
maintain confidential any discussions on terms for the Option, except for
information:
(a) which was known to RBI prior to receipt or development hereunder;
(b) which is, or without fault of RBI becomes, generally known to the public;
or
(c) which is acquired by RBI, without an obligation of confidence, from a third
party having a legal right to make such disclosure.
No rights are granted by DOW to RBI to use any DOW intellectual property
rights including patents, trade secrets, confidential information and
computer programs, except in providing the contemplated Plan services. Each
Party's obligations for confidentiality shall cease five (5) years from
termination of this Letter of Intent or Option, which ever time is later.
Confidentiality terms and conditions shall also be included and continued
in the Option.
15. Publicity - Neither DOW nor RBI shall make public the financial terms of
this Letter of Intent. Any press release or publicity concerning this
Letter of Intent shall be reviewed and approved by both Parties prior to
any release.
16. Entire Agreement - This Letter of Intent document contains the entire
agreement between the Parties and supersedes all preexisting agreements
between them respecting its subject matter. Modification of this Letter of
Intent shall only be binding if made in writing and signed by both Parties.
17. Choice of Law - This Agreement shall be subject to the laws of the State of
Michigan, excepting its conflict of laws provisions.
18. Other Items - Other customary terms and conditions in the Option are also
expected and modifications of this Letter of Intent that form a part of the
Option are permitted.
Upon signature by both Parties, the letterhead date is the effective date
for this Letter of Intent. This Letter of Intent shall be void ab initio
if not signed by both Parties no later than June 16, 1997. The negotiations
for the Option shall then begin, using good faith efforts, to complete the
Option no later than forty-five (45) days from this letterhead date. Such
Option is subject to management and/or Board approval by each Party, which
shall be secured by each Party prior to exercise of and/or signing the
Option, if required. Should the Parties fail to reach agreement for the
Option by that date, then either the date may be extended by mutual written
consent or the negotiations may be terminated.
7.
<PAGE>
Sincerely,
Fred P. Carson
Vice President
Research and Development
AGREED TO AND ACCEPTED BY:
Recombinant BioCatalysis Inc.
_______________________________
Donald G. Garaventi
President
Date________________
8.
<PAGE>
This Appendix is blank as of the
SIGNATURE DATE. Additions during the
OPTION TERM are possible.
1.
<PAGE>
This Appendix is blank as of the
SIGNATURE DATE. Additions during the
OPTION TERM are possible.
1.
<PAGE>
APPENDIX D
[DOW PARTNERSHIP PROJECT SPREADSHEET]
1.
<PAGE>
APPENDIX E
CONFIDENTIALITY AGREEMENT August 27, 1996
In order to protect certain proprietary, confidential information (Information)
which may be exchanged between them, The Dow Chemical Company (DOW), having an
address of: Patent Department, P.O. Box 1967, 1790 Building, Midland, Michigan
48641-1967, Attn: Karen L. Kimble; and Recombinant Biocatalysis, Inc., Elmwood
Court Two, 512 Elmwood Avenue, Sharon Hill, PA 19079-1005 (RBI), and together
hereafter called the Parties, agree that:
1. The effective date of this Agreement is August 27, 1996.
2. The Discloser(s) of Information is (are): Both Parties.
3. The Recipient(s) of Information is (are): Both Parties.
4. The Information disclosed under this Agreement is: any and all information
including but not limited to, data, know-how, any and all subject matter
(whether patentable or not) pertaining to the Parties research, inventions,
development, materials, technology, businesses plans, processes, protocols,
enzymes, expression systems, the commercial applications of enzymes which
the parties consider to be of value, and all information generated by RBI as
a result of carrying out the purpose set forth in paragraph 5.
5. The purpose for disclosing Information is to see if RBI's proprietary
technology might be used to improve performance of Dow proprietary [****]
enzymes, or if RBI's proprietary collection of enzymes contains any enzymes
of commercial interest to DOW, or if RBI and DOW should enter into a
relationship to identify novel enzymes of commercial interest to DOW.
6. This Agreement covers only Information disclosed between Effective Date and
August 27, 1997. Recipient's obligations shall expire on August 27, 1999.
7. Recipient agrees to maintain Information in confidence and not disclose
Information to any third party except as expressly provided in this
Agreement. Recipient will not use Information except as provided for in
Paragraph 5. Recipient shall use the same degree of care, but no less than a
reasonable degree of care, as the Recipient uses to protect its own
confidential information of a like nature to prevent disclosure of
Information to third parties. Third parties include all governmental patent
offices.
8. Recipient's obligations will apply only to Information that is: (a)
disclosed in tangible form clearly identified as confidential at the time of
disclosure; (b) disclosed initially in non-tangible form and identified as
confidential at the time of disclosure and, within thirty (30) days of the
initial disclosure, is summarized and designated as confidential in writing
and delivered to Recipient; or (c) generated by Recipient as set forth in
Paragraph 4.
*Confidential Treatment Requested
1.
<PAGE>
9. Recipient has no obligation with respect to any Information disclosed
hereunder which: (a) was in Recipient's possession before receipt from
Discloser; (b) is or becomes a matter of general public knowledge through
no fault of Recipient; (c) is rightfully received by Recipient from a third
party without an obligation of confidence; (d) is disclosed by Discloser to
a third party without an obligation of confidence on the third party; (e)
is independently developed by Recipient's representatives who have not had
access to such Information; or (f) is disclosed without obligation of
confidence under operation of law, governmental regulation, or court order,
provided Recipient first gives Discloser notice and uses all reasonable
effort to secure confidential protection of such Information. Specific
confidential Information shall not be considered to fall within the above
exceptions merely because it is within the scope of more general
information within an exception. A combination of features shall not be
considered to fall within the above exceptions unless the combination
itself, including its principles of operation, are within the exceptions.
10. All Information shall be provided at the sole discretion of Discloser. With
respect to Information, DISCLOSER MAKES NO WARRANTIES OF ACCURACY,
RELIABILITY, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PURPOSE.
INFORMATION IS PROVIDED ON AN "AS-IS" BASIS AND DISCLOSER EXPRESSLY
DISCLAIMS ANY WARRANTIES WITH RESPECT TO THE INFORMATION. Discloser shall
not be liable for any consequential, punitive, exemplary or incidental
damages arising out of the evaluation or use of Information by Recipient.
11. Neither Party transfers any rights in Information. No rights are granted
under any intellectual property rights of either Party. This Agreement does
not create any other obligations, including agency or partnership
obligations, between the parties. This Agreement does not constitute an
offer to sell Information. Results obtained by Recipient upon evaluation of
Information shall be disclosed to Discloser. Copyrights on reports of
results transferred to Discloser generated by Recipient based on the
evaluation of Information shall be owned by Discloser.
12. Recipient will not knowingly export or reexport any Information or software
received from Discloser or the direct products of such Information or
software to any country or entity or for any use prohibited by the U.S.
Export Administration Regulations unless properly authorized by the U.S.
Government.
13. The parties may disclose Information received from Discloser to their
Affiliates, consultants or third-party contractors on a need-to-know basis,
subject to confidentiality terms consistent with this Agreement. The
Parties warrant that their Affiliates, consultants or third-party
contractors will comply with the terms of this Agreement. Affiliates means
companies wherein either Party owns or controls, directly or indirectly,
greater than fifty percent of the equity interest of the company or in
which a Party has management control.
14. This Agreement can only be changed by a written document signed by all
parties. The terms of this Agreement shall become effective upon the
Effective Date when executed
2.
<PAGE>
by all parties. This Agreement shall become voidable upon written notice
by DOW in the event it is not executed by all parties within 120 days of
the date first written above. This Agreement shall be governed according
to the laws of the State of Michigan. The parties have caused this
Agreement to be executed in duplicate and this Agreement may be signed in
separate counterparts.
THE DOW CHEMICAL COMPANY RECOMBINANT BIOCATALYSIS, INC.
By: ___________________________ By: _____________________________
Name: _________________________ Name: ___________________________
Title: ________________________ Title: __________________________
Date: _________________________ Date: ___________________________
3.
<PAGE>
EXHIBIT 10.16
Confidential Treatment Requested
Under 17 C.F.R. (S)(S) 200.80(b)(4)
200.83 and 230.406
COLLABORATIVE RESEARCH AGREEMENT
BETWEEN
THE DOW CHEMICAL COMPANY
AND
DIVERSA CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
ARTICLE TITLE PAGE NUMBER
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
1 DEFINITIONS 1
- ---------------------------------------------------------------------------------------------------
2 R&D PROGRAM 6
- ---------------------------------------------------------------------------------------------------
3 LICENSE RIGHTS 14
- ---------------------------------------------------------------------------------------------------
4 PAYMENTS 16
- ---------------------------------------------------------------------------------------------------
5 LICENSE AGREEMENT; DEVELOPMENT REPORTS 17
- ---------------------------------------------------------------------------------------------------
6 TREATMENT OF CONFIDENTIAL INFORMATION 17
- ---------------------------------------------------------------------------------------------------
7 INTELLECTUAL PROPERTY RIGHTS 20
- ---------------------------------------------------------------------------------------------------
8 PROVISIONS CONCERNING THE FILING, PROSECUTION AND MAINTENANCE OF 21
PATENT RIGHTS
- ---------------------------------------------------------------------------------------------------
9 LEGAL ACTION 22
- ---------------------------------------------------------------------------------------------------
10 TERMINATION AND DISENGAGEMENT 23
- ---------------------------------------------------------------------------------------------------
11 REPRESENTATIONS AND WARRANTIES 25
- ---------------------------------------------------------------------------------------------------
12 INDEMNIFICATION 26
- ---------------------------------------------------------------------------------------------------
13 DISPUTE RESOLUTION 27
- ---------------------------------------------------------------------------------------------------
14 MISCELLANEOUS 28
- ---------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------
APPENDIX TITLE PAGE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
A-1 RESEARCH [*****] A-1
- ---------------------------------------------------------------------------------------------------
A-2 [*****] PLANS A-2
- ---------------------------------------------------------------------------------------------------
A-3 RMC MEMBERSHIP A-3
- ---------------------------------------------------------------------------------------------------
B-1 PATENT RIGHTS [*****] B-1
- ---------------------------------------------------------------------------------------------------
B-2 DIVERSA PATENT RIGHTS [*****] B-2
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Confidential Treatment Requested
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
APPENDIX TITLE PAGE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
B-3 PATENT RIGHTS [*****] B-3
- ---------------------------------------------------------------------------------------------------
B-4 [*****] DIVERSA PARENT RIGHTS [*****] B-4
- ---------------------------------------------------------------------------------------------------
C MILESTONE PAYMENTS C-1
- ---------------------------------------------------------------------------------------------------
D LICENSE AGREEMENT D-1
- ---------------------------------------------------------------------------------------------------
E [*****] PROCEDURES E-1
- ---------------------------------------------------------------------------------------------------
F MATERIAL TRANSFER AGREEMENT F-1
- ---------------------------------------------------------------------------------------------------
G LICENSED [*****] G-1
- ---------------------------------------------------------------------------------------------------
H RESEARCH [*****] H-1
- ---------------------------------------------------------------------------------------------------
</TABLE>
iii * Confidential Treatment Requested
<PAGE>
COLLABORATIVE RESEARCH AGREEMENT
BETWEEN
THE DOW CHEMICAL COMPANY
AND
DIVERSA CORPORATION
COLLABORATIVE RESEARCH AGREEMENT (including the Appendices hereto, the
"Agreement") by and between THE DOW CHEMICAL COMPANY, a corporation duly formed
and existing under the laws of Delaware, having a place of business at 2030 Dow
Center, Midland, Michigan 48674, United States of America ("DOW" or a "Party"),
and DIVERSA CORPORATION, a corporation duly formed and existing under the laws
of Delaware, having a place of business at 10665 Sorrento Valley Road, San
Diego, California 92121, United States of America ("DIVERSA" or a "Party").
R E C I T A L S
A. DIVERSA has discovered and developed enzymes and has expertise in the
rearrangement of DNA to produce and discover genes utilizing proprietary
technologies for the rapid discovery, development and optimization of enzymes.
B. DOW has expertise in the discovery, development and production of
chemical compounds.
C. DOW and DIVERSA wish to enter into this Agreement in order to perform
research together to discover and optimize the function of new genes, processes
and products resulting thereupon that can be used by DOW to produce certain,
desired commercial chemical compounds.
D. DIVERSA will perform research either independently or with DOW on
projects funded and supported by DOW in order to discover and develop such
genes processes and products resulting therefrom for the purpose of development,
manufacture use and sale of products by DOW.
E. DOW will perform research to develop products and technology [*****].
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and for other good and valuable consideration, the Parties hereby agree as
follows:
1 * Confidential Treatment Requested
<PAGE>
Article 1. DEFINITIONS
When used in this Agreement, the following terms shall have the meanings set out
below, unless the context requires otherwise. The singular shall be interpreted
as including the plural and vice versa, unless the context clearly indicates
otherwise.
1.1 "Affiliate" means any corporation, firm, limited liability company,
---------
partnership or other entity that directly or indirectly controls or is
controlled by or is under common control with a Party to this Agreement.
Control for purpose means ownership, directly or through one or more
affiliated entities, of [*****] or more of the shares of stock
entitled to vote for the election of directors in the case of a
corporation, or [*****] or more of the equity interests in the
case of any other type of legal entity, or any other arrangement whereby a
Party controls or has the right to control the board of directors or
equivalent governing body of a corporation or other entity.
1.2 "Agreement Term" means six months from the expiration or termination of
---------------
the Research Term or until this Agreement is otherwise terminated as
provided herein.
1.3 "Areas of Interest" means the development of [*****] Enzymes (as defined
-----------------
below) for use in the following [*****]:
[*****]
1.4 "Confidential Information" means all information, Know-How, scientific,
------------------------
technical, or non-technical data, samples and Materials, business plans,
and marketing and sales information disclosed by one Party to the other
hereunder or under the Option Agreement between DIVERSA and DOW dated June
30, 1997, whether disclosed or provided in oral, written (including but not
limited to electronic, facsimile, paper or other means), graphic,
photographic or any other form, except to the extent that such information:
(i) as of the date of disclosure is known to the receiving Party as
shown by written documentation, other than by virtue of a prior
confidential disclosure from the disclosing Party to the receiving
Party;
(ii) as of the date of disclosure is in, or subsequently enters, the
public domain through no fault or omission of the receiving Party;
(iii) as of the date of disclosure or thereafter is obtained from a Third
Party free from any obligation of confidentiality; or
(iv) as of the date of disclosure or thereafter is developed by the
receiving Party independent of the disclosure by the disclosing
Party as evidenced by written
2 * Confidential Treatment Requested
<PAGE>
documentation.
1.5 "Consultants" means a non-Affiliate person who is under confidentiality to
-----------
and paid by a Party to act or advise on that Party's behalf under this
Agreement.
1.6 "Controls" or "Controlled" means, with respect to intellectual property,
-------- ----------
possession (other than by virtue of this Agreement) of the ability to
grant licenses or sublicenses to the other Party hereto without violating
the terms of any agreement or other arrangement with any Third Party
[*****].
1.7 "DIVERSA Intellectual Property" means DIVERSA Patent Rights and DIVERSA
-----------------------------
Know-How and Joint Intellectual Property.
1.8 "DIVERSA Know-How" means know-how Controlled solely by DIVERSA. The term
----------------
"know-how" means all Research Results and all know-how, nonpatented
inventions, improvements, discoveries, data, instructions, [*****]
information (including, without limitation, [*****] and information),
processes, procedures, devices, methods and trade secrets which are
conceived, discovered or invented during the Research Term in the course
of performance of the R&D Program or which have been conceived, discovered
or invented by DIVERSA prior to this Agreement, and which are necessary or
appropriate to develop and commercialize Licensed Products; and does not
include inventions within the Patent Rights.
1.9 "DIVERSA Patent Rights" means Patent Rights Controlled solely by DIVERSA
[*****].
1.10 "DIVERSA Research Results" means Research Results invented or discovered
------------------------
solely by DIVERSA.
1.11 "DOW Intellectual Property" means DOW Patent Rights and DOW Know-How and
-------------------------
Joint Intellectual Property.
1.12 "DOW Know-How" means Know-How Controlled solely by DOW.
------------
1.13 "DOW Patent Rights" means Patent Rights Controlled solely by DOW.
-----------------
1.14 "DOW Research Results" means Research Results invented or discovered
--------------------
solely by DOW.
1.15 "Effective Date" means the date of last signature set forth at the end of
--------------
this Agreement.
1.16 "Field" means [*****]; all Areas of Interest shall fall within this field.
-----
1.17 "FTE" means the equivalent of one full year of work on a full time basis
---
by a scientist or other professional [*****]
3 * Confidential Treatment Requested
<PAGE>
[*****].
1.18 "Intellectual Property" means Diversa Intellectual Property and Dow
---------------------
Intellectual Property.
1.19 "[*****] Enzyme" means an enzyme or enzymes, either ex vivo or in vivo,
--------------
provided to Dow by Diversa which is within the claims of DIVERSA Patent
Rights or that incorporates, is derived from, or is identified,
discovered, developed or made through the use of DIVERSA Know-How, which
is developed from the [*****].
1.20 "Jointly Developed" or "Jointly Invented" means any item developed or
----------------- ----------------
invented by both Parties in the course of the performance of the R & D
Program during the Research Term. If the item developed or invented is a
patentable invention, such invention is jointly developed if both Parties'
employees or consultants are considered inventors under 35 U.S.C. et.
seq., as interpreted by the U.S. Patent and Trademark Office and the
United States courts.
1.21 "Joint Intellectual Property" means Joint Patent Rights and Joint Know-
---------------------------
How.
1.22 "Joint Know-How" means Know-How which is Jointly Developed or Jointly
--------------
Invented.
1.23 "Joint Patent Rights" means Patent Rights which are Jointly Developed.
-------------------
1.24 "Joint Research Results" means Research Results which are Jointly
----------------------
Developed or Jointly Invented.
1.25 "Know-How" means all Research Results and all know-how, nonpatented
--------
inventions, improvements, discoveries, data, instructions, [*****]
information (including, without limitation, [*****] and information),
processes, procedures, devices, methods and trade secrets which are
conceived, discovered or invented during the Research Term in the course
of performance of the R&D Program, and which are necessary or appropriate
to develop and [*****].
1.26 "License Agreement" means the agreement described in Section 5.1 hereof.
-----------------
1.27 "Licensed Product" means (i) [*****] which is used to [*****], or (ii)
----------------
[*****] and which is [*****] and which both (i) and (ii) are designated by
the RMC and listed on Appendix G attached hereto, encompassed within
[*****], which is attached hereto and made a part hereof. It is expected
that [*****] at the exercise of each License Agreement.
1.28 "Material" means the original, tangible materials provided by DOW or
--------
DIVERSA to the
4 * Confidential Treatment Requested
<PAGE>
other Party in order that the recipient can perform its obligations under
the R&D Program and any exchange of samples developed during the R&D
Program.
1.29 "Patent Rights" means (i) all patents and patent applications which are
-------------
conceived of by DIVERSA and/or DOW during the Research Term and in the
course of performance of the R & D Program, and which are necessary for
DOW to make, use or sell the Royalty Bearing Products (as defined in the
License Agreement); if such patent rights arise they shall be listed on
Appendix B-1, attached hereto and made a part hereof; (ii) the patents and
patent applications listed on Appendix B-2, attached hereto and made a
part hereof, are patent rights of DIVERSA that [*****]; (iii) the [*****];
and (iv) any divisions, continuations, continuations-in-part, reissues,
reexaminations, extensions or other governmental actions which extend any
of the subject matter of the patent applications or patents in (i) or (ii)
above, and any substitutions, confirmations, patents-of-addition,
registrations or revalidations of any of the foregoing, in each case,
------------
which are Controlled by DIVERSA or DOW during the Research Term and which
are necessary for DOW to make, have made, use, sell, have sold, export or
import the Royalty Bearing Products. All patents and patent applications
subject to this definition are listed on Appendix B or will be included on
Appendix B by the end of the Agreement Term.
1.30 "R&D Program" means the research and development program to be conducted
-----------
during the Research Term by DIVERSA and DOW pursuant to Section 2, as more
fully described [*****].
1.31 "Research Data" means all data, [*****] and any other information
-------------
obtained or developed in the course of performance of the R&D Program.
1.32 "Research Management Committee" or "RMC" means the committee created
----------------------------- ---
pursuant to Section 2.2 hereof and which membership is defined in Appendix
A-3, attached hereto and made a part hereof.
1.33 "Research Materials" mean all tangible property obtained or developed in
------------------
the course of performance of the R&D Program, including but not limited to
[*****] Enzymes.
1.34 "Research Project Flow Chart" means a chart as Appendix H, attached hereto
---------------------------
for reference, to aid in understanding the efforts made under this
Agreement and the [*****].
5 * Confidential Treatment Requested
<PAGE>
1.35 "Research Results" means Research Data and Research Materials.
----------------
1.36 "[*****]" means a specific target within [*****] as specifically
-------
described in Appendix A-1 hereto and made a part hereof, as may be amended
from time to time by the RMC in its written minutes.
1.37 "[*****]" means a [*****] within [*****] as specifically described in
-------
Appendix A-1 hereto and made a part hereof, as may be amended from time to
time by the RMC in its written minutes.
1.38 "Research Term" means the period commencing on the Effective Date and,
-------------
unless extended by written agreement of the Parties or sooner terminated
as provided herein, terminating on the third (3) anniversary of the
Effective Date.
1.39 "Responsible Party" shall have the meaning set forth in Section 8.1.2.
-----------------
1.40 "Staffing Level" shall have the meaning set forth in Section 2.1.1(d).
--------------
1.41 "Third Party" means any party who is not a Party, or an Affiliate.
-----------
1.42 "[*****] Plans" mean the written plans drafted and approved by the RMC
-------------
defining the activities to be carried out for, and the budget for, each
[*****] during each twelve month period of the R&D Program, as more
specifically detailed in [*****] attached hereto and made a part hereof,
as modified from time to time by the RMC in its written minutes. The
[*****] Plan Procedures are provided in [*****], attached hereto and made
a part hereof.
Article 2. R&D PROGRAM
2.1 Implementation of the R&D Program.
----------------------------------
2.1.1 Basic Provisions of Program.
(a) The primary objective of the R&D Program shall be the
identification and development of [*****] Enzymes providing
enhanced or new properties useful in the [*****]. The Research
[*****] indicates the progress expected to occur under this
Agreement; namely, from [*****] discovery to [*****] Enzyme to
identification of a Licensed [*****]. Once a Licensed [*****]
is identified then the License Agreement pertains for the
remainder of the [*****].
(b) DIVERSA and DOW shall use their reasonable good faith efforts
to conduct the research activities set forth in the [*****]
Plans, and to provide Materials as set forth therein. Both
Parties shall employ the best methods they know which are
legally available to them to
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perform the [*****] Plans. However, [*****] (which basis must
be explained to DIVERSA) about the ability of DIVERSA to
[*****], then DOW may request a modification to the [*****]
Plan. DOW accepts that this could effect the ability to obtain
the desired [*****] Enzyme(s) for the [*****].
(c) The Research [*****] and Research [*****], both in [*****], are
defined in the [*****] Plans in [*****], as amended from time
to time by the RMC in its written minutes.
(d) In carrying out the R&D Program, DIVERSA shall devote [*****]
FTEs per year for each of the [*****] years of the Research
Term ("Staffing Level"), and DOW shall pay DIVERSA for the
services of such FTEs as set forth herein. At the request of
DOW, DIVERSA will in good faith consider and discuss proposed
increases or decreases to the Staffing Level with adjustments
in payments. Notwithstanding the foregoing or anything
contained herein to the contrary, that the Staffing Level shall
remain at [*****] FTEs, unless the Parties, in each Party's
sole discretion, agree in writing to increase or decrease the
Staffing Level. Any increase or decrease to the Staffing Level
agreed to by the Parties shall be [*****] in the relevant
[*****] Plan for each Research [*****] or Research [*****] and
the budget associated with such [*****] Plan. Unless previously
consented to in writing by DOW, the budget for the [*****] Plan
for each Research [*****] and Research [*****] shall remain
within the funding proposed in Section 4. No more than [*****]
times per Research Term year, DOW shall have the right to
audit, at its expense, during regular business hours at
DIVERSA's place of business and, if conducted at different
sites also where the work is performed, both for the technology
development and FTEs assigned to the R&D Program.
(e) DIVERSA and DOW shall use commercially reasonable efforts to
perform the tasks set forth in the [*****] Plans, and to
provide the facilities, materials and equipment necessary to
perform the research activities set forth in the [*****] Plans.
(f) DIVERSA shall not be obligated to utilize more than [*****]
FTEs per year in the R&D Program. DOW shall be responsible for
the expense of research activities in the R&D Program that are
[*****], provided that DOW is notified of the reasons why
DIVERSA [*****], is notified of the [*****], and gives its
prior written consent.
-------------
(g) At such time as each [*****] Plan is under consideration by the
RMC, DOW may propose to the RMC to [*****] any selected
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Research [*****] or Research [*****] and upon acceptance of
the proposal by the RMC in its written minutes, DIVERSA will
[*****] in respect of such Research [*****] or Research
[*****], subject to DOW's obligations to maintain the Staffing
Level. In such event, DOW may propose a substitute Research
[*****] or Research [*****] within [*****] of the Areas of
Interest to be included in the R&D Program, which shall be
subject to the approval of the RMC. In the event no replacement
Research [*****] in any Area of Interest can be identified by
DOW and approved by the RMC, then (i) DOW may propose a new
[*****] which when accepted by the RMC would be added by
amendment to this Agreement or a new Research [*****] or
Research [*****] within the Field and if this new replacement
is acceptable to DIVERSA, this new replacement shall be
instituted promptly; or (ii) the Staffing Level will be
adjusted in accordance with Section 2.1.1(d).
(h) Upon any such abandonment under Section 2.1.1(g), DOW shall
have no further commercial rights with respect to any [*****]
Enzymes or other DIVERSA Intellectual Property related to the
abandoned Research [*****] or Research [*****]. DIVERSA shall,
however, be free to continue the research efforts on its own
behalf or with a Third Party at [*****] to DOW. All Joint
Intellectual Property related to any abandoned Research [*****]
or Research [*****] shall be listed on [*****] 3, attached
hereto and made a part hereof. DOW shall retain the right to do
research or non-commercial development using such Research
[*****]. However, if DOW should later develop during the
Agreement Term a suitable [*****] which DOW then desires to
commercialize and which product used [*****] Enzyme or DIVERSA
Patent Rights, then DOW would request [*****] DIVERSA. Unless
the abandoned Area of Interest has been [*****], DIVERSA shall
negotiate using good faith efforts with DOW for such [*****].
2.1.2 Collaborative Efforts and Reports.
---------------------------------
(a) The Parties agree that the successful execution of the R&D
Program will require the collaborative use of both Parties'
areas of expertise. The Parties shall keep the RMC fully
informed about the status of the portions of the R&D Program
they respectively perform. Without limiting the foregoing, each
Party shall furnish to the RMC [*****] reports within [*****]
days after the end of each [*****] period, describing the
progress of its activities in connection with the R&D Program
in reasonable
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detail, including at least:
(i) an estimation by DIVERSA of the FTEs used for each
Research [*****] and Research [*****] and the budget
used for each [*****] Plan, and
(ii) a summary of the testing and development of
[*****] Enzymes and Licensed [*****].
The reports described in this Section 2.1.2 (a) shall describe
all [*****] Enzymes that have been put into [*****], and shall
also contain sufficient other information to allow a Party to
monitor the other Party's compliance with this Agreement,
including without limitation, each Party's obligations with
respect to the accomplishment of the [*****]. All reports and
information provided under this Section 2.1.2 (a) shall be
deemed Confidential Information of the Party which provided
the information.
(b) DIVERSA and DOW shall cooperate in the performance of the R&D
Program and, subject to any confidentiality obligations to
Third Parties or legal restrictions, shall exchange
information [*****] as necessary to carry out the R&D Program
pursuant to the provisions of this Agreement. Each Party will
attempt to accommodate any reasonable request of the other
Party to send or receive personnel for purposes of discussing
the R&D Program. Such visits and access will be at mutually
agreed times, have defined purposes, be of agreed limited
duration, and be scheduled in advance. Each Party shall
[*****] of their respective personnel related to these visits.
It is understood that any such visiting personnel may be
[*****] the R&D Program and the rights of Third Parties, which
may include [*****] of the R&D Program. All personnel shall
abide by the required rules for any Third Party visiting that
Party's site, including, but not limited to, [*****] and other
matters.
(c) During the Research Term and for a period of [*****] years
thereafter, DIVERSA and DOW shall maintain records of the R&D
Program (or cause such records to be maintained) in sufficient
detail and good scientific manner as will properly reflect all
work done in the R&D Program and results achieved in the
performance of the R&D Program. Each Party shall allow the
other Party to have reasonable access to all pertinent
Research [*****] generated by or on behalf of such Party with
respect to each [*****] Enzyme. This retention of records may
be extended if there is a legal proceeding pending (i.e.,
court action, or US
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interference or opposition involving the Intellectual
Property) where those records are reasonably required and a
written request with the reason is provided to the Party.
Nothing herein shall require, or be construed to require, that
DIVERSA disclose to DOW any DIVERSA Know-How, except to the
extent necessary for the filing of patent applications
[*****]. DOW shall not be required to disclose to DIVERSA any
DOW Know-How or any DOW [*****] on any Research [*****],
Research [*****] or [*****] Enzyme, except for the reasonable
information required by the RMC.
2.1.3 Work Plans.
----------
(a) In order to carry out the R&D Program, the RMC shall develop a
[*****] Plan for each Research [*****] and Research [*****].
These [*****] Plans shall be in writing and attached hereto as
[*****]. The [*****] Plans for each initial Research [*****]
and Research [*****] will be agreed to not later than [*****]
after the Effective Date and will be attached hereto as
Appendix [*****] and made a part hereof. For each [*****]
period during the Research Term after the period covered by the
initial [*****] Plans attached hereto as Appendix [*****],
[*****] Plans shall be prepared by the co-chairs of the RMC and
approved by the RMC no later than [*****] days before the end
of the then current [*****] period. Absent written agreement by
the Parties, DIVERSA and DOW shall continue to conduct research
activities within the scope of the projects set forth in the
previous [*****] Plans, within the bounds of the then currently
available FTEs.
(b) Each [*****] Plan shall set forth specific, [*****] research,
and development, objectives, including, without limitation, the
applicable Research [*****] and Research [*****] within Areas
of Interest, and resource allocations in accordance with the
procedures set forth in Appendix [*****] attached hereto. Each
[*****] Plan will reflect at least [*****], but no more than
[*****] research milestones per year. These research milestones
shall be designed to facilitate diligent development and
identification of [*****] Enzymes for use in the Research
[*****] or Research [*****]. The RMC will review research
milestones on at least a [*****] basis. If the milestones are
not met, then in the next written [*****] Plan, the RMC must
(i) revise these milestones and/or [*****] Plan, (ii) replace
the Research [*****] or Research [*****] with another Research
[*****] or Research [*****] using their good faith efforts,
(iii) if the replacement under (ii) is not deemed viable by the
RMC, then DIVERSA and DOW agree to use their good faith efforts
to permit some new [*****] in the Field to be substituted as a
new [*****], or
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(iv) abandon that Research [*****] or Research [*****] if so
requested by DOW.
(c) If the RMC is unable to agree as to the terms of a [*****] Plan
for any given [*****] period following the initial [*****]
period for a [*****] Plan, by the date provided in Section
2.1.3(a), above, then the matter shall be addressed as provided
in Article 13 below .
(d) The [*****] Plans may be modified by the RMC to satisfy the
requirements of the Research [*****] and Research [*****], but
a written copy of each revised [*****] Plan, signed by the co-
chairs, shall be supplied to each Party as an amendment to
Appendix [*****].
2.1.4 Additional Research Activities.
------------------------------
(a) In the event that prior to the end of the Research Term, all
research activities directed to [*****] Research [*****] and
Research [*****] have been successfully completed or terminated
by agreement of the Parties, then DOW shall have the right to
propose to DIVERSA:
(i) [*****] Research [*****] or Research [*****] to be
pursued in the Areas of Interest under the R&D
Program, or
(ii) deploying the FTEs on Research [*****] and
Research [*****] which are already underway, or
(iii) if (i) and (ii) are not available, then
considering deploying, using their good faith efforts,
the FTE's on Research [*****] or Research [*****]
within the Areas of Interest and for which DIVERSA has
[*****] or serious obligations ([*****]) to a Third
Party, or
(iv) if (i) through (iii) are not available, then
reducing the number of FTE's and [*****] for those
FTEs no longer required computed in accordance with
Section 4.4.
If DIVERSA does not have [*****] with respect to the Research
[*****] or Research [*****] proposed in Section 2.1.4(a)(i) or
(iii) and does not have a [*****] on its own behalf or with a
Third Party, the Parties shall negotiate in good faith the
terms on which such additional research activities
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may be conducted under the R&D Program. Such additional
research activities will only be initiated if the Parties reach
written agreement on the terms thereof, including, without
limitation, milestone and other payments on resulting products.
(b) During the R&D Program DOW may also propose that additional
research activities directed to [*****] and Research [*****]
and Research [*****] within those Areas of Interest, using
their good faith efforts, be conducted in connection with the
R&D Program. In such event, the Parties shall discuss an
expansion of the R&D Program, provided DIVERSA shall have no
obligation to conduct any such activities with DOW unless terms
for such activities are agreed to in writing by the Parties. If
DIVERSA does not have a [*****] with respect to a proposed
additional Research [*****]or Research [*****]on its [*****] or
with a Third Party, DIVERSA will notify DOW in writing of such
within [*****] days of the proposal, and within [*****] days of
such notice, the RMC will implement a [*****] for each
additional Research [*****] or Research [*****]. In the event
the RMC fails to initiate a [*****] Plan within such [*****]
day period, or if DOW notifies DIVERSA in writing that it does
not intend to pursue an additional Research [*****] or Research
[*****], DIVERSA shall have [*****] to DOW under this Agreement
with respect to such [*****] Research [*****] or Research
[*****] and may collaborate with a Third Party on such [*****]
Research [*****] or Research [*****].
(c) DOW shall further have the right during the [*****] period
following the Effective Date to propose up to [*****] projects
encompassed in new Areas of Interest [*****]. DIVERSA will
consider such proposal, and, if the Parties agree to proceed,
the Parties will negotiate a separate agreement for such a
collaboration [*****]. The separate agreement will contain
terms consistent with other DIVERSA agreements of this nature
for [*****], including a separate [*****], and different
milestone and [*****] payments.
2.1.5 Disclosures.
-----------
If DIVERSA or DOW wishes to disclose any Research [*****] to a Third
Party on a confidential basis, it shall first submit a description
of the proposed disclosure directly to all members of the RMC for
review at least [*****] prior to any such disclosure. Within [*****]
of receipt of such description, the RMC shall notify DIVERSA or DOW,
as the case may be, of its approval or denial of
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such disclosure, provided such approval shall not be unreasonably
withheld. Failure to provide such notice within the [*****] period
shall be deemed to be consent to the proposed disclosure.
Notwithstanding the foregoing, subject to Section 2.5, DIVERSA may
provide any [*****] Enzyme under confidentiality terms at least as
strict as this Agreement to a Third Party [*****] for use [*****] the
Areas of Interest. DOW may provide any [*****] Enzyme under
confidentiality terms at least as strict as this Agreement to any
Third Party without the consent of the RMC or DIVERSA if used within
the Areas of Interest if used with technology or intellectual property
unavailable to DIVERSA.
2.2 Research Management Committee.
-----------------------------
2.2.1 Establishment and Functions of RMC.
----------------------------------
(a) DIVERSA and DOW hereby agree to establish the RMC. The RMC
will act on behalf of the Parties and will be responsible
for the planning and monitoring of the R&D Program and for
setting forth specific research and development
objectives, including, without limitation, (i) preparation
and approval of each [*****] Plan in accordance with the
procedures set forth in Appendix [*****] attached hereto
and made a part hereof, (ii) determining whether research
projects should be continued as active projects, and (iii)
determining resource allocation for the R&D Program, so as
to insure that meaningful research and development
activity will be undertaken on all Research [*****] and
Research [*****] in each [*****] period, taking into
account that the overall research and development focus
reflects both [*****] priorities.
(b) In planning and monitoring the R&D Program, the RMC shall
assign tasks and responsibilities taking into account each
Party's respective specific capabilities and expertise in
order to avoid duplication and enhance efficiency and
synergies. For example, [*****].
2.2.2 RMC Membership.
--------------
DIVERSA and DOW each shall appoint, in its sole discretion,
[*****] members to the RMC, including a co-chair designated by
DOW and a co-chair designated by DIVERSA. Substitutes or
alternates for the co-chairs
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or other RMC members, if any, may be appointed at any time by
written notice to the other Party prior to any meeting of the
RMC. All RMC members shall be full time employees of DIVERSA
and DOW. If either Party desires that an employee of an
Affiliate or a consultant attend an RMC meeting, then such
consultant to a Party must be under confidentiality obligations
to that Party having terms at least a strict as those of this
Agreement, must be approved in writing to attend by the other
Party, and such person has no vote in the decisions of the RMC.
The initial co-chairs and other RMC members are identified in
Appendix [*****] attached hereto and made a part hereof, which
Appendix shall be updated in writing from time to time to
reflect any changes in RMC membership.
2.2.3 Meetings.
--------
The RMC shall meet at least quarterly, with such meetings
alternating between [*****], and [*****], unless the Parties
agree otherwise. The first such meeting shall be held in
[*****] within [*****] days after the Effective Date at which
time the initial [*****] Plans shall be finalized. Any
additional meetings, other than [*****], shall be held at
places and on dates selected by the co-chairs of the RMC. RMC
members may participate in any such meeting in person, by
telephone or by videoconference. In addition, the RMC may act
without a formal meeting by a written memorandum signed by the
co-chairs of the RMC. Subject to the obligations set forth in
Article 6, other full-time employees of each Party, in addition
to the members of the RMC, may attend RMC meetings as nonvoting
observers at the invitation of either Party with the prior
written approval of the other Party.
2.2.4 Minutes.
-------
The RMC shall keep minutes of its meetings that record all
decisions and all actions recommended or taken. The Party
hosting the meeting shall be responsible for the preparation of
the meeting agenda and preparation and circulation of the draft
minutes. Draft minutes shall be delivered by mail, electronic
mail or facsimile to the co-chairs of the RMC within [*****]
after each meeting. Any intellectual property issues that may
need attention will be highlighted and forwarded to each
Party's Patent Coordinator. Draft minutes shall be edited by
the co-chairs and shall be issued in final form only with their
approval and agreement as evidenced by their signatures on the
minutes. A copy of the signed minutes shall be retained in each
Party's files for at least [*****] after termination of this
Agreement.
2.2.5 Quorum; Voting; Decisions.
-------------------------
At each RMC meeting, at least [*****] members appointed by each
Party shall constitute a quorum and decisions shall be made by
[*****] vote. If the RMC is unable to reach agreement on any
matter, such dispute shall be
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settled pursuant to Article 13 below.
2.2.6 Expenses.
--------
DIVERSA and DOW shall [*****] expenses of their respective RMC
members related to their participation on the RMC and
attendance at RMC meetings.
2.3 Third Party Licenses.
--------------------
2.3.1 DOW Responsibility.
------------------
In the event that DOW can reasonably demonstrate that [*****]
of a Third Party's patent rights would [*****] under a [*****]
Plan, then DOW shall so notify DIVERSA. DIVERSA shall state
whether it has obtained or is planning to obtain [*****] of the
[*****] Plan to go forward. If DOW elects to [*****], then the
RMC may amend the [*****] Plan if only DOW can [*****]. If DOW
and DIVERSA elect not to [*****], then the [*****] Plan shall
be altered by the RMC to enable the performance of the modified
[*****] Plan.
2.3.2 DIVERSA Responsibility.
----------------------
In the event that it is necessary to [*****] to perform the R&D
Program with regard to [*****] provided by DIVERSA, including,
without limitation, [*****], DIVERSA will be responsible for
the payment of any amounts due to Third Parties for the [*****]
for the performance of the R&D Program with regard to such
[*****] and the costs of [*****]. The decision [*****] shall be
solely DIVERSA's, and DOW shall be notified of that decision.
Notwithstanding the foregoing, DIVERSA shall be responsible for
[*****] for use of an [*****] Enzyme. DIVERSA and DOW shall
promptly notify the other Party in writing of any allegation by
a Third Party that the use of an [*****] Enzyme [*****]. If DOW
believes that a [*****] to use an [*****] Enzyme, then DOW
shall express its concerns to DIVERSA in writing. DIVERSA shall
explain to DOW whether it agrees that a [*****] and shall
provide sufficient explanation and reasons for its answer.
Should DIVERSA be aware and concerned of such [*****] or be
considering, instituting or have instituted a [*****], then all
such [*****] by DIVERSA. The decision whether such a license is
required shall be DIVERSA's. Notwithstanding the foregoing,
DIVERSA shall
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use good faith efforts to terminate [*****].
2.3.3 Infringement Claims.
-------------------
In the event that DOW or DIVERSA receives a written notice of
an allegation of possible patent infringement from a Third
Party or determines that there is such possible infringement
based on (i) the use of a particular [*****], which has been or
is planned to be used in the conduct of the R&D Program, or
(ii) the use of an [*****] Enzyme or Confidential Information
of DIVERSA [*****], such Party shall, within [*****] days,
notify the other Party in writing and provide an explanation of
the circumstances. If such possible infringement is of concern
to DOW, DIVERSA may provide a [*****] to DOW from [*****],
which may be based on a [*****], explaining DIVERSA's position
and the bases therefore.
In such event if no prior legal opinion has been done such that
the [*****], then the Parties shall forward a copy of such
claim to a [*****] and request that such [*****]. The cost of
this review shall be borne by [*****]. If the [*****] that the
activities of the R&D Program with respect to the [*****] would
be found by a court of competent jurisdiction to infringe a
claim of the Third Party patent which is likely to be found
valid, then within [*****] days of such [*****], either
(i) a [*****] will be substituted by DIVERSA for use in the
[*****] Enzyme in the R&D Program, subject to the approval of
the RMC, or
(ii) DIVERSA will notify DOW that it will [*****] from such
Third Party for any intellectual property rights necessary for
use of the [*****] in the R&D Program pursuant to Section
2.3.2, or
(iii) if the claim relates to alleged infringement of [*****]
used to obtain a [*****] an [*****] Enzyme, DIVERSA will
determine if an alternative technology could be used that does
not infringe the claim of such Third Party patent, and propose
to the RMC that such [*****], whereupon any [*****] Plan
relating to the aforementioned [*****] Enzyme will be modified
by the RMC; or
(iv) the RMC may elect to cease to conduct any activity in the
R&D Program requiring the use of [*****] and, if necessary,
reallocate DIVERSA's FTEs to other activities within the R&D
Program,
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If either (i), (ii), (iii), or (iv) above is not satisfied
within [*****], DOW may, upon written notice to DIVERSA,
immediately terminate this Agreement and cease all payments,
after such notice, except for work performed prior to receipt
of such notice by DIVERSA and the payment due under Section
10.4.
2.4 Post Research Term Cooperation.
------------------------------
At least [*****] months prior to the expiration of the Research Term, the
Parties shall meet to agree on mechanisms for coordinating and managing
activities (including, but not limited to, patent prosecution and
publication review) that will occur after the expiration of the Research
Term which would otherwise be addressed by the RMC. Any patent applications
included in Intellectual Property or Joint Intellectual Property which have
not been filed shall be filed in the first instance during the Agreement
Term, and both Parties shall cooperate with respect to all issues and
formal papers. As part of such considerations, if any research project has
not yet resulted in a Licensed [*****] and requires reasonable additional
development to accomplish such result, and either the RMC notifies DOW and
DIVERSA at its last meeting of this development request or DOW notifies
DIVERSA not later than [*****] months after the expiration of the Research
Term that DOW wishes to continue such research project with the help of
DIVERSA, then DIVERSA agrees to consider in good faith the terms of such a
continuation as proposed by DOW, which, in any event, will include the
undertaking by DIVERSA to give to DOW access to experienced DIVERSA FTEs to
be employed in the diligent continuation of the research project at the
same cost as set forth in Section 4.4 hereof plus [*****]. Notwithstanding
the foregoing, in no event will DIVERSA be obligated to continue any
Research [*****] beyond the Research Term. Should DIVERSA elect not to
continue with such incomplete [*****], then DOW is permitted to continue
such [*****] in any manner, including with a Third Party, but without the
use of DIVERSA Intellectual Property.
2.5 Research Exclusivity.
--------------------
During the Research Term, DIVERSA will not collaborate with or license the
rights to any Third Party to use any [*****] Enzyme in a Research [*****]
to convert a Research [*****] to a [*****], as defined in Appendix [*****],
so long as DOW satisfies the diligence obligations set forth in the [*****]
Plan with respect to the development of the applicable [*****] Enzyme.
During the Research Term, DOW will not collaborate with or license the
rights to any Third Party to evolve any enzyme in a Research [*****] to
convert a Research [*****] to a [*****], as defined in Appendix [*****].
Article 3. LICENSE RIGHTS
3.1 To DOW.
------
(a) Subject to the terms and conditions of this Agreement, DIVERSA hereby
grants to DOW a non-exclusive, nonsublicensable, royalty-free,
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worldwide license under the specific DIVERSA Intellectual Property
listed on Appendix [*****] and Appendix [*****] (attached hereto and
made a part hereof) to all Research [*****] using any Licensed [*****]
to make, have made, import, have imported, use, have used, sell, have
sold and otherwise exploit Royalty Bearing Products (as defined in the
License Agreement), and a royalty-free license to all DIVERSA Know-How
required for DOW to commercialize Royalty Bearing Products, and the
[*****] provided to DOW by DIVERSA hereunder solely to conduct the R&D
Program. DOW (i) shall promptly notify DIVERSA in writing of any
improvements to the DIVERSA Intellectual Property conceived of or
developed by DOW during the Research Term (the "Improvements"), and
(ii) shall irrevocably assign to DIVERSA all right, title and interest
in and to such Improvements. Such Improvements shall be included in
the DIVERSA Intellectual Property licensed to DOW under this Section
3.1 and under the License Agreement.
(b) Should DOW determine that modification of an [*****] Enzyme is
required, after it has been provided to DOW by DIVERSA under the terms
of this Agreement, to make the Licensed [*****] related to such
[*****] Enzyme [*****], then DOW may request that DIVERSA perform such
added modification under the R&D Program or, if this Agreement has
terminated, then under terms to be negotiated in good faith by the
Parties. DOW may use the [*****] or request that a Third Party perform
the desired modifications of an [*****] Enzyme:
(1) if DIVERSA is unwilling to perform such added modification,
or
(2) upon (i) the transfer or sale of all or substantially all of
the business of DIVERSA to which this Agreement relates, whether
by merger, sale of stock, sale of assets or otherwise, to a
[*****], or (ii) the bankruptcy, insolvency, dissolution or
winding up of DIVERSA (other than dissolution or winding up for
the purposes of [*****]), then DOW or its Affiliates may modify
the [*****] Enzyme to make the Licensed [*****] related to the
[*****] Enzyme commercially viable and DOW continues to be able
to use DIVERSA Intellectual Property listed in Appendix [*****]
(attached hereto and made a part hereof) solely to modify the
[*****] Enzyme and/or the Licensed [*****] related to the [*****]
Enzyme, provided that DOW pays DIVERSA for the [*****].
(c) Notwithstanding the foregoing Sections 3.1 (a) and (b), DOW (or DOW
with its consultants or though a separate agreement between DOW and a
Third Party) may
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conduct independent research activities outside the R&D Program,
whether within the Areas of Interest or not, and [*****], but except
as otherwise agreed to by DIVERSA in writing, DOW agrees that it will
not itself or through any Third Party use any DIVERSA Intellectual
Property, Joint Intellectual Property and/or Research [*****] to
develop a [*****] Licensed [*****], except under the terms of this
Agreement.
3.2 To DIVERSA.
----------
Subject to the terms and conditions of this Agreement, DOW hereby grants to
DIVERSA (i) a nonexclusive, nontransferable, nonsublicensable, royalty-
free, worldwide research license to DOW Intellectual Property, where
legally possible, and the [*****] provided to DIVERSA by DOW, solely to
conduct the R&D Program, and (ii) a nonexclusive, nontransferable,
nonsublicensable, royalty-free, worldwide license under any patents, trade
secrets and other intellectual property Controlled by DOW that relate to
[*****] Enzymes in the R&D Program.
3.3 Assignment.
----------
3.3.1 DOW.
---
DOW shall have the right to assign its rights in the license granted
herein (or any part thereof) to an Affiliate; provided, however,
that DOW shall continue to be responsible for the obligations of any
such Affiliate. DOW may assign its rights hereunder in connection
with the transfer or sale of all or substantially all of the
business of DOW to which this Agreement relates, whether by merger,
sale of stock, sale of assets or otherwise.
3.3.2 DIVERSA.
-------
DIVERSA shall have no right to assign its rights in the licenses
granted to it by DOW pursuant to Section 3.2 hereof (or any part
thereof) to any of its Affiliates or any Third Party, except in
connection with the transfer or sale of all or substantially all of
the business of DIVERSA to which this Agreement relates, whether by
merger, sale of stock, sale of assets or otherwise. If DIVERSA is
acquired by a Third Party [*****] for Research [*****] or if DIVERSA
is controlled by merger, sale of stock, sale of assets or otherwise
to a Third Party competitor, then prior to closure of such
acquisition, DOW shall be informed of the identity of the Third
Party competitor and at DOW's sole discretion can elect to terminate
this Agreement under Section 10.4 and request in writing immediate
return of all Confidential Information.
3.4 Retained Rights.
----------------
3.4.1 DIVERSA.
-------
DIVERSA shall retain all right, title and interest in and to the
DIVERSA
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<PAGE>
Intellectual Property and Joint Intellectual Property, except as
expressly granted to DOW in Section 3.1 or in the License Agreement.
DIVERSA may grant to Third Parties licenses under the Diversa
Intellectual Property for use of [*****] Enzymes; provided, however,
that such licenses do not conflict with the license granted to DOW
herein or under the License Agreement, and provided that in the
event the [*****] Enzyme is a [*****] provided by DOW to DIVERSA
under the terms of this Agreement, DIVERSA obtains DOW's prior
written consent (which may be withheld for any reason) and pays a
reasonable royalty to DOW in accordance with a separate license
agreement to be negotiated in good faith between the Parties.
DIVERSA shall inform DOW of the application(s) for an [*****] Enzyme
that is intended transferred to a Third Party if the [*****] Enzyme
is a [*****] provided by DOW to DIVERSA under the terms of this
Agreement.
Notwithstanding the license granted to DOW in Section 3.1, DIVERSA
shall retain the right to use all [*****] Enzymes for its own
research purposes (i.e., to develop, improve and validate its
technology and intellectual property).
3.4.2 DOW.
---
DOW shall retain all right, title and interest in and to the DOW
Intellectual Property and Joint Intellectual Property, except as not
expressly granted to DIVERSA in Section 3.2; provided, however, that
during the Agreement Term, DOW shall not grant any license under the
DOW Intellectual Property or Joint Intellectual Property which
conflicts with the license granted to DIVERSA herein.
Article 4. PAYMENTS
4.1 Technology Development.
----------------------
Within [*****] days after the Effective Date, DOW shall pay to DIVERSA a
technology development fee of One Million Five Hundred Thousand
(US$1,500,000) Dollars, and shall similarly provide DIVERSA with a
technology development fee of One Million Five Hundred Thousand
(US$1,500,000) Dollars, during the Agreement Term, within [*****] days of
each of the successive two anniversary dates of the Effective Date.
Thus within [*****] days after the Effective date, DOW shall pay to DIVERSA
a technology development fee of One Million Five Hundred Thousand
(US$1,500,000) Dollars and Nine Hundred Thousand (US$900,000)
Dollars for the first quarter FTE payment under Section 4.4 for a total of
Two Million Four Hundred Thousand (US$2,400,000) Dollars.
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4.2 Milestone Payments.
------------------
DOW shall make milestone payments to DIVERSA as set forth in Appendix
[*****] attached hereto and made a part hereof. The RMC shall determine
whether DIVERSA has achieved a milestone and shall note such decision in
its signed minutes. If the RMC cannot reach a decision, then Article 13
shall control. The milestone goal achievements shall be determined [*****]
by the RMC at its meeting [*****], shall be performance driven goals, and
shall be paid by DOW to DIVERSA [*****] days after the determination has
been made by the RMC that the milestone was met. The amount of milestone
payments in a given year may be up to [*****] Dollars for all [*****]
Plans.
4.3 Payments.
--------
All payments due under this Agreement shall be made in accord with the
respective sections of Article 4 by bank wire transfer in immediately
available funds to a bank account designated in writing to DOW by DIVERSA.
In the event that the due date of any payment subject to this Article 4
hereof is a Saturday, Sunday or national holiday, such payment may be paid
on the following business day. Any late payments shall bear interest to the
extent permitted by applicable law at the prime rate (as reported by the
Bank of America, San Francisco, California, or its successor), on the date
such payment is due plus an additional [*****], calculated on the number of
days such payment is delinquent. The rights provided in this Section 4.3
shall in no way limit any other remedies available to DIVERSA hereunder.
4.4 FTE Payments.
------------
4.4.1 In addition to the other payments due pursuant to this Article 4,
DOW will pay to DIVERSA a nonrefundable amount of Three Million Six
Hundred Thousand (US$3,600,000) Dollars per year for the 12 FTEs
set forth in Section 2.1.1(d) for each of the three years of the
Research Term, commencing as of the Effective Date.
4.4.2 Payments due pursuant to the above Section 4.4.1 shall be made in
advance, on or before the first day of each calendar quarter, with
the first and last payments prorated in the event that the Effective
Date is not the first day of a calendar quarter. Should payment be
due on a Saturday, Sunday or national holiday, such payment may be
paid on the following business day. In the event that the Parties
agree to a different Staffing Level for any given calendar quarter,
the payment set forth in this Section 4.4 shall be prorated
accordingly based on a level of funding of [*****] Dollars per year
per FTE. Any change in the amount of the FTE payment due in a
quarter shall be reported to DOW by DIVERSA in writing [*****] days
in advance of such payment.
Article 5. LICENSE AGREEMENT; DEVELOPMENT REPORTS
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5.1 License Agreement.
-----------------
The Parties have entered into a License Agreement covering [*****] Enzymes
and Licensed [*****] executed contemporaneously with this Agreement, a copy
of which is attached hereto for reference as Appendix [*****]. DIVERSA
hereby represents:
(a) that it is willing and able to grant to DOW
(i) an exclusive, royalty bearing, worldwide license under the
DIVERSA Intellectual Property to use the [*****] Enzymes and the
[*****] the [*****] Enzymes in a Research [*****] to make, have
made, use, sell, offer for sale and import Royalty Bearing
Products (as defined in the License Agreement), and
(ii) a non-exclusive, royalty bearing, worldwide license under DIVERSA
Intellectual Property to improve Licensed [*****]; and
(b) that to the best of its knowledge, there are [*****] required for DOW
to practice the DIVERSA Intellectual Property.
5.2 DOW may perform research within the Areas of Interest independent of this
Agreement. If DOW desires that a Third Party assist DOW in such research,
it shall be in accordance with Sections 3.1, 3.3 and 3.4.
Article 6. TREATMENT OF CONFIDENTIAL INFORMATION
6.1 Confidentiality.
---------------
6.1.1 General.
-------
(a) DIVERSA and DOW each recognize that the other Party's
Confidential Information constitutes highly valuable and
proprietary confidential information. Subject to the terms and
conditions of Article 8, DIVERSA and DOW agree that, except as
required by applicable law, rule or regulation (including the
filing and prosecution of patent applications) or judicial or
administrative order, during the Agreement Term and for
[*****] years thereafter, unless these terms are modified by
the License Agreement after the expiration of the Agreement
Term that:
(i) it will keep confidential and will cause its
employees, consultants, and Affiliates, to keep
confidential, all Confidential Information of the
other Party that is disclosed to it, or to any of
its employees or consultants, under or in
connection with this Agreement; and
(ii) neither it nor any of its respective employees,
consultants or Affiliates shall use Confidential
Information of the other Party for any purpose
whatsoever, except as expressly permitted in this
Agreement.
22 * Confidential Treatment Requested
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(b) Notwithstanding subsection (a) above:
(i) either Party may disclose the other Party's
Confidential Information to the extent reasonably
necessary in prosecuting or defending litigation,
complying with applicable governmental regulations or
court orders or otherwise submitting information to tax
or other governmental authorities; provided that, if a
Party is required to make any such disclosure of the
other Party's Confidential Information, it will give
reasonable advance notice to the other Party of such
disclosure and will use reasonable efforts to secure
confidential treatment of such Confidential Information
(whether through protective orders or otherwise); and
(ii) the Parties will reasonably cooperate with each
other in the making of reasonable disclosures of
Confidential Information to actual and potential
agents, investment bankers, investors and potential
investors of each Party; provided, however, that such
disclosures shall be critically required for an
investment objective, notice shall be provided to the
Party who owns the Confidential Information to protect
its rights, and only be made under the terms of a
confidentiality agreement providing protections no less
stringent than those contained herein.
6.1.2 Restricted Access.
-----------------
(a) Disclosure of a Party's Confidential Information to any of the
officers, employees, consultants or agents of the other Party
shall be made only if and to the extent necessary to carry out
rights and responsibilities under this Agreement, shall be
limited to the maximum extent possible, consistent with such
rights and responsibilities, and shall only be made to persons
who are bound to maintain the confidentiality thereof and not
to use such Confidential Information except as expressly
permitted by this Agreement. If DOW discloses any DIVERSA
Confidential Information to [*****], it shall do so under these
same terms and conditions of this Section 6.1.2.
(b) Each Party shall use at least the same standard of care, but no
less than a reasonable standard of care for this industry, as
it uses to protect its own Confidential Information to ensure
that its [*****], employees, agents, consultants and other
representatives do not disclose or make any unauthorized use of
Confidential Information of the other Party. Each Party shall
promptly notify the other Party of any unauthorized use or
disclosure of Confidential Information of the other Party.
(c) Within [*****] days following termination or expiration of this
Agreement, each Party will return to the other Party, or
destroy, upon the written request of the other Party, all
Confidential
23 * Confidential Treatment Requested
<PAGE>
Information disclosed to it by the other Party pursuant to this
Agreement, including all copies and extracts of documents;
provided that a Party may retain Confidential Information of
the other Party relating to any license or right to use
Intellectual Property that survives such termination and one
copy of all other Confidential Information may be retained in
confidential and inactive archives solely for the purpose of
establishing the contents thereof and to determine the
continuing obligations of each Party.
6.1.3 Employee Confidentiality Agreements.
-----------------------------------
DIVERSA and DOW each represent that all of its employees and any
consultants to such Party participating in the R&D Program or who
shall otherwise have access to Confidential Information of the other
Party are bound by written agreements to maintain such information
in confidence and not to use such information except as expressly
permitted herein. Each Party agrees to [*****] by which its
employees and consultants are bound.
6.2 Publicity.
---------
Except as expressly provided herein, neither Party may disclose the
existence or terms of this Agreement without the prior written consent of
the other Party; provided, however, that either Party may make such
disclosure to the extent required by law and that either Party may make a
disclosure of the existence of this Agreement to its attorneys, advisers,
investors, prospective investors, lenders and other financing sources,
under circumstances that reasonably ensure the confidentiality thereof.
Notwithstanding the foregoing, the Parties shall mutually agree upon a
press release to announce the execution of this Agreement, together with a
corresponding Q&A outline for use in responding to inquiries about the
Agreement; thereafter, DOW and DIVERSA may each disclose to Third Parties
the information contained in such press release and Q&A outline without the
need for further approval by the other Party. In no event shall the
financial terms of this Agreement be publicly disclosed, except to the
extent required by any Securities and Exchange Commission filings or
regulations, but all financial terms must be redacted prior to submission.
In addition, DIVERSA may (i) make public statements regarding Licensed
[*****] by announcing in general terms the achievement of milestones,
following consultation with DOW and with the prior written consent of DOW,
and (ii) without the prior consent of DOW, make public statements, without
identifying DOW, regarding the overall success rate(s) achieved by and/or
for its customers with the use of its technology, including a general
description of activities undertaken in connection with the R&D Program,
and success of such activities. DOW is free to make public statements,
press releases, and the like, with respect to Licensed [*****].
6.3 Publication.
-----------
A Party wishing to publish or otherwise publicly disclose its Research
[*****] shall first submit a draft of the proposed manuscripts
simultaneously to all members of the RMC
24 * Confidential Treatment Requested
<PAGE>
for review by the other Party at least [*****] days prior to any submission
for publication or other public disclosure. To avoid loss of patent rights
as a result of premature public disclosure of patentable information, the
reviewing Party shall notify the submitting Party in writing within [*****]
days after receipt of such proposed disclosure whether the reviewing Party
desires that a patent application be filed on any invention disclosed in
such proposed disclosure. In the event that the reviewing Party desires
such filing, the submitting Party shall withhold publication or disclosure
of such proposed disclosure until the earlier of (i) the date a patent
application is filed thereon, or (ii) the date the Parties determine after
consultation that no patentable invention exists, or (iii) [*****] days
after receipt by the submitting Party of the reviewing Party's written
notice of the reviewing Party's desire to file such patent application. If
the proposed disclosure contains Confidential Information of the reviewing
Party that is subject to nondisclosure obligations under this Article 6,
the submitting Party agrees to remove such Confidential Information upon
request of the reviewing Party.
Article 7. INTELLECTUAL PROPERTY RIGHTS
7.1 Disclosure of Inventions.
------------------------
Each Party shall promptly inform the RMC of all Research [*****] relevant
to the progress of each [*****] Plan towards its pre-agreed goals, in
accordance with a procedure established by the RMC.
7.2 Ownership.
---------
All intellectual property rights, which are in possession of either Party
as of the Effective Date, shall remain in the possession of that Party.
Ownership of inventions conceived of during the course of the collaboration
in the Areas of Interest (the "Inventions") will be as follows:
7.2.1 DIVERSA Intellectual Property Rights.
------------------------------------
DIVERSA shall have sole and exclusive ownership of all right, title
and interest on a worldwide basis in and to any DIVERSA Research
Results.
7.2.2 DOW Intellectual Property Rights.
--------------------------------
DOW shall have sole and exclusive ownership of all right, title and
interest on a worldwide basis in and to any DOW Research Results.
7.2.3 Joint Intellectual Property Rights.
----------------------------------
DOW and DIVERSA shall jointly own all Joint Research Results.
7.2.4 Inventions Relating to [*****] Enzymes or Licensed Products.
-----------------------------------------------------------
Notwithstanding the foregoing, (i) DIVERSA will own all Inventions
relating to compositions of matter, uses or methods of, or otherwise
involving, any [*****] Enzyme or [*****] except for Joint
Intellectual Property
25 * Confidential Treatment Requested
<PAGE>
or [*****] supplied by DOW, and (ii) DOW will own all Inventions
relating to compositions of matter, uses or methods of, or otherwise
involving, products made by Licensed [*****] in the Areas of
Interest. If the product made by the Licensed [*****] is within the
Field but outside the Areas of Interest, then DOW shall have a right
of first refusal for a reasonable time to obtain rights for that use
under a separate license agreement.
7.3 Patent Coordinators.
-------------------
DIVERSA and DOW shall each appoint a patent coordinator ("Patent
Coordinator") who shall serve as such Party's primary liaison with the
other Party on matters relating to ownership of Inventions, inventorship,
patent filing, prosecution, maintenance and enforcement. Each Party may
replace its Patent Coordinator at any time by notice in writing to the
other Party. The initial Patent Coordinator from DIVERSA is [*****] and
from DOW is [*****].
7.4 Inventorship.
------------
Except as specifically provided above, ownership of Inventions and
inventorship shall be determined by the Patent Coordinators in accordance
with United States patent law. If the Patent Coordinators can not agree on
inventorship or ownership of Inventions, then a neutral patent attorney
acceptable to both Parties shall make the determination, with each Party
[*****].
7.5 Deposits.
--------
Should deposits of the [*****] Enzyme or Licensed [*****] be desired by
either Party to support the filing of a patent application, both Parties
agree to cooperate to enable and obtain such deposit. Ownership of and
costs for the deposit shall be borne by the Party responsible in accordance
with Article 8.
Article 8. PROVISIONS CONCERNING THE FILING, PROSECUTION AND MAINTENANCE OF
PATENT RIGHTS
The following provisions relate to the filing, prosecution and maintenance
of Patent Rights claiming Inventions.
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8.1 Filing and Prosecution of Patents.
---------------------------------
8.1.1 Primary Responsibilities.
------------------------
In consultation with the Patent Coordinators, the RMC will
coordinate the determination of what patents will be filed on
Research [*****]. Unless the RMC agrees otherwise in writing, the
Parties shall have the following responsibilities for patent filing,
prosecution and maintenance (including the defense of interferences,
oppositions and similar proceedings) (collectively, "Patent
Activities"):
(a) Royalty Bearing Products (as defined in the License Agreement).
--------------------------------------------------------------
DOW will be responsible, at its sole expense, for Patent
Activities with respect to Inventions made by DIVERSA or DOW or
Jointly Developed relating primarily to Royalty Bearing
Products and [*****] that use [*****] Enzymes and/or [*****]
Enzymes that make Royalty Bearing Products (as defined in the
License Agreement) in accordance with Section 7.2.4 (ii).
(b) Improved Enzymes. DIVERSA will be responsible, at its sole
-----------------
expense, for Patent Activities with respect to Inventions made
by DIVERSA or DOW or Jointly Developed relating primarily to
[*****] Enzymes in accordance with Section 7.2.4 (i).
(c) All Other Inventions. DOW will be responsible, at its sole
--------------------
expense, for Patent Activities with respect to Inventions made
solely by DOW not otherwise covered in Section 8.1.1 (a) and
(b). DIVERSA will be responsible, at its sole expense, for
Patent Activities with respect to Inventions made solely by
DIVERSA not otherwise covered in Section 8.1.1 (a) and (b). In
the case of Inventions Jointly Developed not otherwise covered
in Section 8.1.1, Patent Activities shall be conducted by
outside counsel, reasonably acceptable to both Parties, with
equal control and joint responsibility for costs incurred in
connection with the applicable Patent Activities.
8.1.2 Cooperation.
-----------
In each case in Section 8.1.1 above, the Party responsible for
Patent Activities for the applicable patent applications (the
"Responsible Party") shall use reasonable efforts to obtain patent
coverage that is as broad as possible to [*****] thereof. Each Party
shall be kept informed of all substantive matters relating to the
preparation and prosecution of all patent applications under the
Joint Patent Rights.
8.2 Elective Termination of Rights.
------------------------------
If at any time the Responsible Party does not wish to file any patent
application or
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<PAGE>
wishes to discontinue the prosecution or maintenance of any Patent Rights
claiming any [*****] Enzyme or Licensed [*****] filed in any country, it
shall promptly give notice of such intention to the other Party. The latter
shall have the right, [*****], to assume responsibility for
the filing, prosecution or maintenance of any such Patent Rights on a
country-by-country basis at its own expense, by giving notice to the
Responsible Party of such intention within [*****] days. No assignment of
Patent Rights shall occur to the other Party unless specifically agreed to
under appropriate negotiated terms and conditions. In any such case, the
Party declining such responsibilities shall not grant any Third Party a
license under its interest in the applicable Patent Rights in the
applicable country or countries and may not practice the applicable Patent
Rights for any commercial use (but may practice, royalty free such Patent
Rights for research use) without the prior written consent of the other
Party. The other Party will bear the costs of Patent Activities with
respect to all Patent Rights for which it has assumed responsibility
pursuant to this Section 8.2.
Article 9. LEGAL ACTION
9.1 Actual or Threatened Infringement.
---------------------------------
9.1.1 Notice.
------
In the event either Party becomes aware any where in the world of
any actual or threatened commercially material infringement or
unauthorized possession, knowledge or use of any Patent Rights
(collectively, an "Infringement"), that Party shall, within 60 days,
notify the other Party and provide it with all available details to
the extent it is legally permitted to do so. The [*****].
9.1.2 Primary Responsibility.
----------------------
(a) Notwithstanding the foregoing, if the Parties do not otherwise
agree on a course of action, DOW shall have primary
responsibility for the prosecution, prevention or termination
of any Infringement of DOW's Patent Rights hereunder, at DOW's
expense and with the sharing of recoveries as specified below.
(b) DIVERSA shall have primary responsibility for the prosecution,
prevention or termination of any Infringement of DIVERSA's
Patent Rights, at DIVERSA's expense and with the sharing of
recoveries as specified below.
If either Party which has primary responsibility as described in (a)
or (b) above determines that it is necessary or desirable for the
other Party to join any such suit, action or proceeding, the other
Party shall execute all papers and perform such other acts as may be
reasonably required in the circumstances, at the
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<PAGE>
expense of the Party which has primary responsibility.
9.1.3 Jointly-Owned Patents.
---------------------
In the event of an Infringement of Joint Patent Rights, the Parties
shall agree which Party will have the rights and responsibilities of
abating such Infringement, and how the expenses and any recovery
thereof shall be shared. In this event, the responsible Party shall
[*****], and shall keep the other Party fully informed as to the
status of such matters. In the event only one Party wishes to pursue
such proceeding, it shall have the right to proceed alone, at its
expense, and may retain any recovery, and the other Party agrees, at
the request and expense of the Party initiating such action, to
cooperate and join in any proceedings in the event that a Third
Party asserts that the co-owner of such Joint Invention is necessary
or indispensable to such proceedings.
9.1.4 Costs.
-----
DOW shall bear the cost of any proceeding or suit under this Section
9.1 brought by DOW; DIVERSA shall bear the cost of any such
proceeding or suit brought by DIVERSA. In each such case, the
Responsible Party shall have the right first to [*****] in such suit
or in [*****] incurred by such Party, including [*****]. The
remainder shall [*****] so incurred. Any remaining amounts or any
non-monetary recovery shall be kept by the Responsible Party. If the
suit results in damages being owed to a Third Party, then the
Responsible Party [*****], except if the suit is based on Joint
Patent Rights and both Parties are actively involved, then the costs
and damages are to [*****].
9.1.5 Separate Counsel.
----------------
Each Party shall always have the right to be represented by counsel
of its own selection and at its own expense in any suit instituted
under this Section 9.1 by the other Party for an Infringement.
9.1.6 Standing.
--------
If either Party lacks standing and the other Party has standing to
bring any such suit, action or proceeding as specified above, then
the Responsible Party may request the other Party to do so at the
Responsible Party's expense. The Party with standing is under no
obligation to comply with such request, but rather is free to refuse
such request.
9.1.7 Cooperation.
-----------
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<PAGE>
In any action under this Section 9.1, each Party shall fully
cooperate with and assist the other Party as reasonably requested.
No suit regarding DIVERSA Intellectual Property or Joint
Intellectual Property may be settled by DOW without DIVERSA's prior
written consent. No suit regarding DOW Intellectual Property or
Joint Intellectual Property may be settled by DIVERSA without DOW's
prior written consent.
9.2 Defense of Claims Asserted by Third Parties Against DOW.
-------------------------------------------------------
DOW shall indemnify DIVERSA for the development, manufacture, use,
handling, storage, sale or other disposition of Licensed [*****] or
Research [*****] by DOW or its Affiliates during the Agreement Term.
9.3. Defense of Claims Asserted by Third Parties Against DIVERSA.
-----------------------------------------------------------
DIVERSA shall indemnify DOW for the development, manufacture, use,
handling, storage, sale or other disposition of [*****] Enzyme or Research
[*****] by DIVERSA or its Affiliates during the Agreement Term.
9.4 Notice.
------
DOW or DIVERSA shall notify the other in accord with Section 14.1 of any
suits or claims or proceedings brought against it under Section 9.2 or 9.3,
respectively.
Article 10. TERMINATION AND DISENGAGEMENT
10.1 Term.
----
This Agreement shall be effective as of the Effective Date and, unless
otherwise terminated earlier pursuant to this Agreement, shall continue in
full force and effect until the end of the Agreement Term. Nevertheless,
this Agreement may be terminated at any time upon mutual written agreement
of the Parties, provided that DOW pays any actual costs to DIVERSA done
under the [*****] Plans until the date of termination.
10.2 Material Breach. In the event either Party has materially breached or
---------------
defaulted in the performance of any of its obligations hereunder, the
nonbreaching Party may terminate this Agreement. A material breach of this
Agreement by a Party shall be deemed to have occurred:
(a) upon the failure of a Party to pay, when due, any amount due
hereunder to the other Party, if such Party has not paid the
amount due within [*****] days after receiving notice from the
non-breaching Party of such failure to pay; or
(b) upon breach of any other material obligation or condition by a
Party, if such Party has not cured such breach within [*****]
days after receiving written notice from the nonbreaching Party
of such breach. For this purpose a breach of a material
obligation must result from a failure to meet that Party's
representations,
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warrantees, covenants or performance under the [*****] Plan.
10.3 Bankruptcy.
----------
10.3.1 If either Party (the "Insolvent Party") files for protection under
bankruptcy laws, makes an assignment for the benefit of creditors,
appoints or suffers appointment of a receiver or trustee over its
property, files a voluntary petition under any bankruptcy or
insolvency act or has any such petition filed against it which is
not discharged within [*****] days of the filing thereof, then the
other Party may, at its sole election upon notice to the Insolvent
Party, terminate this Agreement by written notice to such Party.
10.3.2 All rights and licenses granted under or pursuant to this Agreement
shall be deemed to be, for purposes of Section 365(n) of the U.S.
Bankruptcy Code, licenses or rights to "intellectual property" as
defined under Section 101(52) of the U.S. Bankruptcy Code. The
Parties agree that each Party, as a licensee of such rights under
this Agreement, shall retain and may fully exercise all of its
rights and elections under the U.S. Bankruptcy Code, subject to
performance by the licensee of its preexisting obligations under
this Agreement.
10.4 Termination by DOW.
------------------
DOW may terminate this Agreement upon 180 days prior written notice to
DIVERSA; provided, however, that DOW shall pay to DIVERSA (i) [*****] upon
termination of this Agreement during the [*****] following the Effective
Date, and (ii) [*****] upon termination of this Agreement during the
[*****] following the Effective Date. DOW may immediately terminate this
Agreement in accord with Section 3.3.2 by providing 30 days written
notice to DIVERSA and providing payment of any remaining technology
development fees of Section 4.1 (but no payment of any remaining FTE fees
under Section 4.4). Notwithstanding the foregoing, DIVERSA will not refund
DOW any portion of any payments made under Section 4.4.
10.5 Effect of Termination; Accrued Obligations.
------------------------------------------
10.5.1 Accrued Obligations.
-------------------
Termination of this Agreement for any reason shall not release any
Party hereto from any liability which, at the time of such
termination, has already accrued to the other Party or which is
attributable to a period prior to such termination, nor preclude
either Party from pursuing any rights and remedies it may have
hereunder or at law or in equity which accrued or are based upon
any event occurring prior to such termination.
10.5.2 Licenses.
--------
(i) In the event that DOW terminates this Agreement to DIVERSA,
pursuant to Section 10.2, then the R&D Program shall immediately
terminate and all
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payments due by DOW to DIVERSA shall immediately terminate. This
Agreement relates to research rights only and all commercial rights
are stated in the License Agreement and are not affected hereby.
(ii) In the event DOW terminates the Agreement pursuant to Section 10.
3.1, the licenses granted to DIVERSA in Article 3 shall terminate.
(iii) In the event DIVERSA terminates the Agreement pursuant to Section
10.3.1, the licenses granted to DOW in Article 3 shall terminate.
10.6 Surviving Provisions.
--------------------
Articles 12, 13 and 14 and Sections 6.1, 6.2, 7.2, 7.5, 10.5, 11.1.4 and
11.1.5 of this Agreement shall survive the expiration or termination of
this Agreement for any reason.
Article 11. REPRESENTATIONS AND WARRANTIES
11.1 Mutual Representations.
----------------------
DIVERSA and DOW each represents and warrants as follows:
11.1.1 Organization.
------------
It is a corporation duly organized, validly existing and is in good
standing under the laws of the jurisdiction of its incorporation,
is qualified to do business and in good standing as a foreign
corporation in each jurisdiction in which the performance of its
obligations hereunder requires such qualification and has all
requisite power and authority, corporate or otherwise, to conduct
its business as now being conducted, to own, lease and operate its
properties and to execute, deliver and perform this Agreement.
11.1.2 Authorization.
-------------
The execution, delivery and performance by it of this Agreement
have been duly authorized by all necessary corporate action and do
not and will not: (a) require any consent or approval of its
stockholders or (b) violate any provision of any law, rule,
regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to
it or any provision of its charter documents.
11.1.3 Binding Agreement.
-----------------
This Agreement is a legal, valid and binding obligation of it,
enforceable against it in accordance with its terms and conditions.
11.1.4 Warranty Disclaimer.
-------------------
The Parties acknowledge that the research activities contemplated
hereunder are experimental, and that the R&D Program may not be
successful. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS
AGREEMENT, NEITHER
32
<PAGE>
PARTY MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR
IMPLIED, WITH RESPECT TO ANY CONFIDENTIAL INFORMATION, PATENT
RIGHTS, KNOW-HOW, [*****] ENZYMES, LICENSED [*****], OR OTHER
TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER SUBJECT MATTER OF THIS
AGREEMENT AND HEREBY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, OR VALIDITY OF
TECHNOLOGY OR PATENT CLAIMS, ISSUED OR PENDING, WITH RESPECT TO ANY
AND ALL OF THE FOREGOING.
11.1.5 Limited Liability.
-----------------
EXCEPT AS EXPRESSLY PROVIDED HEREIN, NEITHER DIVERSA NOR DOW WILL
BE LIABLE TO THE OTHER PARTY WITH RESPECT TO ANY SUBJECT MATTER OF
THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR
OTHER LEGAL OR EQUITABLE THEORY FOR (i) ANY SPECIAL, INDIRECT,
INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOST PROFITS OR
(ii) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR
SERVICES.
Article 12. INDEMNIFICATION
12.1 Indemnification.
----------------
Neither Party shall indemnify the other Party nor its Affiliates, or
respective officers, directors, employees and agents and its respective
successors, heirs and assigns ("Indemnitees") except for Sections 9.2 and
9.3, its respective gross negligence, or failure to perform using its
reasonable best efforts under the [*****] Plans. This paragraph does not
limit either Party's other remedies available to it under the laws.
12.2 Procedure.
---------
A Party that intends to claim indemnification under this Article 12 (the
"Indemnitee") shall promptly notify the other Party (the "Indemnitor") in
writing of any loss, claim, damage, liability or action in respect of which
the Indemnitee or any of its Affiliates or their directors, officers,
employees, agents, consultants or counsel intend to claim such
indemnification, and the Indemnitor shall have the right to participate in,
and, to the extent the Indemnitor so desires, to assume the defense thereof
with counsel of its own choice.
The indemnity agreement in this Article 12 shall not apply to amounts paid
in settlement of any loss, claim, damage, liability or action if such
settlement is made without the consent of the Indemnitor, which consent
shall not be withheld unreasonably. The failure to deliver written notice
to the Indemnitor within a reasonable time after the commencement of any
such action, if prejudicial to its ability
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<PAGE>
to defend such action, shall relieve such Indemnitor of any liability to
the Indemnitee under this Article 12.
At the Indemnitor's request, the Indemnitee under this Article 12, and its
employees and agents, shall cooperate fully with the Indemnitor and its
legal representatives in the investigation and defense of any action, claim
or liability covered by this indemnification and provide full information
with respect thereto.
Article 13. DISPUTE RESOLUTION
13.1 Informal Dispute Resolution.
---------------------------
13.1.1 Senior Officials.
----------------
The Parties recognize that a bona fide dispute as to certain
matters may from time to time arise during the Agreement Term,
which relates to either Party's rights or obligations hereunder. In
the event of the occurrence of such a dispute, either Party may, by
written notice to the other Party, have such dispute referred to
the [*****] of DIVERSA and the [*****] of DOW, or their successors
or counterparts, for resolution by good faith negotiations within
[*****] days after such notice is received at a [*****].
13.1.2 Interim Conduct.
---------------
If the Parties are unable to reach agreement with respect to a
[*****] Plan pursuant to Section 13.1.1, then such dispute shall be
resolved as described in Section 13.2 below.
13.2 Arbitration.
-----------
Any dispute under this Agreement, except one that arises with respect to
determination of Research [*****] or Research [*****], which is not settled
by mutual consent pursuant to Section 13.1, shall be finally settled by
binding arbitration, conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association (or such rules as
are appropriate to the dispute) by three independent, neutral arbitrators
having at least 15 years of experience in the areas of the contested issues
and appointed in accordance with said rules. The procedures or rules for
the arbitration may be modified by mutual consent of the Parties, including
having mediation rather than an arbitration conducted. Any arbitration
shall be in English held in [*****]. The arbitrators shall determine what
discovery shall be permitted, consistent with the goal of limiting the cost
and time that the Parties must expend for discovery; provided, however,
that the arbitrators shall permit such discovery, as they deem necessary to
permit an equitable resolution of the dispute. Any written evidence
originally in a language other than English shall be submitted in English
translation accompanied by the original or a true copy thereof. Except as
otherwise expressly
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provided in this Agreement, the costs of the arbitration, including
administrative and arbitrator fees, shall be [*****] by the Parties and
each Party shall bear its own costs and attorneys' and witness' fees
incurred in connection with the arbitration.
A disputed performance or suspended performance(s) pending the resolution
of the arbitration must be completed within a reasonable time period
following the final decision of the arbitrators.
Any arbitration subject to this Article 13 shall be completed within
[*****] from the filing of notice of a request for such arbitration and a
written decision with reasons therefore provided to the Parties. Any
decision shall be deemed confidential and not disclosed to any Third Party.
Should a Party believe that reporting the decision is required by
governmental regulation, then the Parties shall mutually agree as to the
content of such report.
Any decision which requires a monetary payment shall require such payment
to be payable in United States dollars, free of any tax or other deduction.
The Parties agree that the decision shall be the sole, exclusive and
binding remedy between them regarding any and all disputes, controversies,
claims and counterclaims presented to the arbitrators. If a decision is
not complied with by a Party, then any award or decision may be entered in
a court of competent jurisdiction for a judicial recognition of the
decision and an order of enforcement.
Article 14. MISCELLANEOUS
14.1 Notices.
-------
All notices (including, but not limited to, legal matters and copies of the
signed RMC minutes) shall be in writing mailed via certified mail, return
receipt requested, or overnight express mail, courier providing evidence of
delivery, addressed as follows, or to such other address as may be
designated by notice so given from time to time:
If to DOW: THE DOW CHEMICAL COMPANY
[*****]
If to DIVERSA: DIVERSA CORPORATION
10665 Sorrento Valley Road
San Diego, California 92121
Attention: Chief Executive Officer
Notices shall be deemed given as of the date received.
If the notice relates to scientific matters, such as the RMC, a [*****]
Plan, a Research [*****], or a Research [*****], the notice for the Parties
is to be supplied and received in the manner described above but sent to:
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If to DOW: THE DOW CHEMICAL COMPANY
[*****]
If to DIVERSA: DIVERSA CORPORATION.
10665 Sorrento Valley Road
San Diego, California 92121
Attention: Jay M. Short, Ph.D.
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<PAGE>
14.2 Governing Law and Jurisdiction.
-------------------------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, without regard to the application of
principles of conflicts of law.
14.3 Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective legal representatives, successors and
permitted assigns.
14.4 Headings.
--------
Section and subsection headings are inserted for convenience of reference
only and do not form a part of this Agreement.
14.5 Counterparts.
------------
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original.
14.6 Amendment; Waiver.
-----------------
This Agreement may be amended, modified, superseded or canceled, and any of
the terms may be waived, only by a written instrument executed by each
Party or, in the case of waiver, by the Party or Parties waiving
compliance. Nevertheless, Appendices [*****] may be amended by the
signatures of the co-chairs of the RMC to a revised Appendix, which must
then be supplied to the persons for notice under Section 14.1, and
Appendices [*****] may be amended by the signatures of both Patent
Coordinators listed in Section 7.3. The delay or failure of any Party at
any time or times to require performance of any provisions shall in no
manner affect the rights at a later time to enforce the same. No waiver by
any Party of any condition or of the breach of any term contained in this
Agreement, whether by conduct, or otherwise, in any one or more instances,
shall be deemed to be, or considered as, a further or continuing waiver of
any such condition or of the breach of such term or any other term of this
Agreement.
14.7 No Agency or Partnership.
------------------------
Nothing contained in this Agreement shall give either Party the right to
bind the other Party, or be deemed to constitute either Party as an agent
for the other Party or as a partner with the other Party or any Third
Party.
14.8 Assignment and Successors.
-------------------------
Except as expressly provided herein, this Agreement may not be assigned by
either Party without the prior written consent of the other Party, except
that each Party may, without such consent, assign this Agreement and the
rights, obligations and interests of such Party, in whole or in part, to
any
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purchaser or other transferee of all or substantially all of its assets
in the line of business to which this Agreement pertains, or to any
successor corporation resulting from any merger or consolidation of such
Party with or into another entity, subject, however, in the case of
DIVERSA to the restriction set forth in Section 3.3.2. In the event of
any merger or consolidation by a Party into another entity, such Party
shall promptly notify the other Party in writing of such merger or
consolidation and the obligations under this Agreement shall be
maintained and performed by the successor entity unless modified in
accord with Section 14.6.
14.9 Force Majeure.
-------------
Neither DOW nor DIVERSA shall be liable to the other Party for failure of
or delay in performing obligations set forth in this Agreement, and
neither shall be deemed in breach of its obligations, if such failure or
delay is due to natural disasters or any other cause beyond the
reasonable control of a Party, and notice of such prevention of
performance is promptly provided by the non-performing Party to the other
Party. Such excuse shall be continued so long as the condition
constituting force majeure continues and the non-performing Party takes
reasonable efforts to remove the condition. In event of such force
majeure, the Party affected thereby shall use reasonable efforts to cure
or overcome the same and resume performance of its obligations hereunder.
14.10 Interpretation.
--------------
The Parties hereto acknowledge and agree that: (i) each Party and its
counsel reviewed and negotiated the terms and provisions of this
Agreement and have contributed to its revision; (ii) the rule of
construction to the effect that any ambiguities are resolved against the
drafting Party shall not be employed in the interpretation of this
Agreement; and (iii) the terms and provisions of this Agreement shall be
construed fairly as to all Parties hereto and not in a favor of or
against any Party, regardless of which Party was generally responsible
for the preparation of this Agreement.
14.11 Integration: Severability.
-------------------------
This Agreement (including the Exhibits attached hereto) together with the
License Agreement sets forth all of the agreements and understandings
between the Parties with respect to the subject matter hereof and
supersedes all other agreements and understandings between the Parties
with respect to the same.
If any provision of this Agreement is or becomes invalid or is ruled
invalid by any court of competent jurisdiction or is deemed
unenforceable, it is the intention of the Parties that the remainder of
this Agreement shall not be affected. If possible, the invalid provision
shall be replaced with a valid provision, which meets the intent of the
Parties.
14.12 Approvals.
---------
DOW shall be responsible, at its expense, for obtaining any approvals
from governmental entities which may be required under applicable law for
the development of Research [*****] or Licensed [*****], and shall use
its best efforts to obtain all necessary
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approvals as soon as reasonable. DIVERSA shall be responsible, at its
expense, for obtaining any approvals from governmental entities which may
be required under applicable law for the shipment of [*****] Enzymes to
DOW to perform its obligations under the R&D Program.
14.13 Export Controls.
---------------
This Agreement is made subject to any restrictions concerning the export
of Licensed [*****], Research [*****], Research [*****] or Intellectual
Property (collectively, "Technology") from the United States that may be
imposed upon either Party from time to time by laws or regulations of the
United States. Neither Party will export, directly or indirectly, any
Technology to any country for which the United States government or any
agency thereof at the time of export requires an export license or other
governmental approval, without first obtaining the written consent to do
so from the Department of Commerce, Bureau of Export Administration, or
other agency of the United States government when required by applicable
statute or regulation.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in duplicate as of the last signature date below, by their duly authorized
representatives. This Agreement is intended to be signed concurrently with the
License Agreement and shall not be effective until the License Agreement has
also been executed by both Parties.
THE DOW CHEMICAL COMPANY
Date:______________________________ By:_________________________________
Fernand Kaufmann
Vice President
New Businesses and Strategic
Development
DIVERSA CORPORATION
Date:_______________________________ By:_________________________________
Jay M. Short, Ph.D.
Chief Executive Officer
13 Appendix Enc.:
Appendix A-1: [*****]
Appendix A-2: [*****]
Appendix A-3: [*****]
Appendix B-1: [*****]
Appendix B-2: [*****]
Appendix B-3: [*****]
[*****]
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Appendix B-4: [*****]
Appendix C: [*****]
Appendix D: [*****]
Appendix E: [*****]
Appendix F: [*****]
Appendix G: [*****]
Appendix H: [*****]
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APPENDIX [*****]
RESEARCH [*****] AND/OR RESEARCH [*****]
* Confidential Treatment Requested
<PAGE>
APPENDIX [*****]
[*****] PLANS
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<PAGE>
APPENDIX [*****]
RMC MEMBERSHIP
* Confidential Treatment Requested
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APPENDIX A-3
RMC MEMBERSHIP
The following employees of DIVERSA will represent DIVERSA as the company's
initial RMC members:
[*****]
[*****]
[*****]
The following employees of DOW will represent DOW as the company's initial RMC
members:
[*****]
[*****]
[*****]
[*****]
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APPENDIX [*****]
PATENT RIGHTS DURING THE AGREEMENT TERM UNDER THE [*****] PLANS
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<PAGE>
APPENDIX [*****]
DIVERSA PATENT RIGHTS WHICH [*****]
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<PAGE>
APPENDIX [*****]
PATENT RIGHTS DIRECTED TO [*****] RESEARCH [*****] AND/OR RESEARCH
[*****]
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APPENDIX [*****]
SPECIFIC [*****] DIVERSA PATENT RIGHTS USED TO [*****] ENZYMES
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APPENDIX [*****]
[*****]
<TABLE>
<CAPTION>
Title/Subject Filing Date Serial No.
- ------------------------------------------------------------------------------------------
<S> <C> <C>
[*****]
</TABLE>
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<PAGE>
APPENDIX [*****]
[*****]
* Confidential Treatment Requested
<PAGE>
APPENDIX [*****]
[*****]
[*****].
* Confidential Treatment Requested
<PAGE>
APPENDIX [*****]
LICENSE AGREEMENT
* Confidential Treatment Requested
<PAGE>
APPENDIX [*****]
[*****] PLAN PROCEDURES
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APPENDIX E
[*****]
[*****]
I. [*****]
[*****]
1. [*****];
2. [*****]; and
3. [*****].
II. [*****]
[*****]:
1. [*****];
2. [*****];
3. [*****];
4. [*****]; and
5. [*****].
III. [*****]
[*****]:
1. [*****]; and
2. [*****].
IV. [*****]
* Confidential Treatment Requested
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[*****].
* Confidential Treatment Requested
<PAGE>
APPENDIX [*****]
MATERIAL TRANSFER AGREEMENT
* Confidential Treatment Requested
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APPENDIX F
MATERIAL TRANSFER AGREEMENT
Effective as of , (the "Effective Date") this Agreement ("MTA")
is made and entered into by and between Diversa Corporation, a Delaware
corporation with headquarters at 10665 Sorrento Valley Road, San Diego, CA 92121
(hereinafter "DIVERSA") and The Dow Chemical Company, a Delaware corporation
with headquarters at 2030 Dow Center, Midland, Michigan 48674 (hereinafter
"DOW"), collectively known as "The Parties".
WHEREAS, DIVERSA will provide DOW with certain proprietary genes as set forth
below and hereinafter referred to as "Material" pursuant to the terms and
conditions of this Agreement; and
WHEREAS, DOW desires to use the Material for purposes of research to be
conducted under the Collaborative Research Agreement between the Parties dated
July 22, 1999 (the "Agreement") and is willing to receive the Material pursuant
to the terms and conditions of this MTA.
NOW THEREFORE, in consideration of the mutual promises and covenants herein
contained, the Parties mutually agree to the following terms:
1. DIVERSA will provide to DOW the following Material: [TO BE DETERMINED]
2. DOW agrees that the Material shall be used solely for the purpose research
under the Agreement and shall not be used for any other purpose whatsoever.
3. The Material delivered hereby is experimental in nature. DIVERSA MAKES NO
WARRANTIES, EXPRESS OR IMPLIED INCLUDING ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
4. Information transferred under this MTA, including but not limited to the
Material and all information related to the Material, shall be "Confidential
Information". DOW shall not disclose to third parties any Confidential
Information received from DIVERSA hereunder, provided, however, that DOW
shall have no obligations to DIVERSA with respect to the use, or disclosure
to others not party to this Agreement of such information which;
a) prior to disclosure was known to or in the possession of DOW as
evidenced by its written records; or
b) is or becomes publicly known during the term of this MTA, other than
through a breach of DOW's obligations hereunder; or
c) is received from a third party having no obligations of confidentiality
to DIVERSA hereunder; or
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d) is developed by DOW independently of any disclosures made under this
MTA as evidenced by its written records; or
e) is required by law or bona fide legal process to be disclosed
provided that DOW takes all reasonable notice to DIVERSA or
f) is authorized to be released in written release by DIVERSA.
5. DOW shall not modify the Materials in any way reverse engineer the Material
use the Materials for reproduction, offer the Materials or any derivative
thereof for resale, or use the Materials in any form of human or animal testing
except as provided in the Agreement.
6. DOW agrees that the Material method of using the Material or any other
material that could not have been made but for the Material, shall not be sold
or otherwise transferred to any third party except as provided in the Agreement.
7. In the event that DOW provides DIVERSA with DOW's Material all the
provisions above shall be construed to bind DIVERSA in the place of DOW in an
identical manner. DIVERSA acknowledges that it has received Material from DOW
under another research agreement for use as a dehalogenase enzyme, which
Material may be used under this MTA for the present Agreement.
8. This MTA and rights thereunder shall not be assigned or transferred directly
or indirectly in whole or in part by the Parties except as provided in the
Agreement.
9. This MTA shall become effective beginning on the Effective Date and through
the term of the Agreement.
10. This MTA may be terminated as set forth in the Agreement.
11. The Parties represent and warrant that each has the authority to undertake
the obligations set forth in the MTA without breaching or violating any
contractual or statutory obligation owed to another.
12. The provisions of this MTA are severable and in the event any provisions
of this MTA are determined to be held invalid or unenforceable under any
controlling body of law such invalidity or unenforceability shall not in any way
affect the validity and enforceability of the remaining provisions hereof.
13. This MTA shall be construed in accordance with the laws of the State of
Delaware without regard to its conflict of laws principles.
After receipt of the executed Agreement, DIVERSA will arrange to provide DOW
with the materials.
IN WITNESS WHEREOF, the Parties have, through duly authorized representatives,
executed this MTA, effective as of the date forth above.
* Confidential Treatment Requested
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THE DOW CHEMICAL COMPANY DIVERSA CORPORATION
_________________________________ _________________________________
Name:____________________________ Name:____________________________
Title:___________________________ Title:___________________________
Date:____________________________ Date:____________________________
<PAGE>
APPENDIX [*****]
LICENSED [*****]
* Confidential Treatment Requested
<PAGE>
APPENDIX [*****]
RESEARCH [*****]
* Confidential Treatment Requested
<PAGE>
APPENDIX [*****]
RESEARCH [*****]
* Confidential Treatment Requested
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Information" and "Experts" and to the use of our report dated January
12, 2000, except for Note 11, as to which the date is February 8, 2000, in
Amendment No. 5 to the Registration Statement (Form S-1, Registration No. 333-
92853) and related Prospectus of Diversa Corporation for the registration of
shares of its common stock.
/s/ ERNST & YOUNG LLP
San Diego, California
February 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 4,473 2,490
<SECURITIES> 1,079 2,594
<RECEIVABLES> 54 15,572
<ALLOWANCES> (6) (1)
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,010 21,314
<PP&E> 2,622 3,096
<DEPRECIATION> 1,178 1,498
<TOTAL-ASSETS> 8,706 31,072
<CURRENT-LIABILITIES> 3,540 7,412
<BONDS> 0 0
0 0
48,402 48,408
<COMMON> 6 6
<OTHER-SE> (45,732) 42,807
<TOTAL-LIABILITY-AND-EQUITY> 8,706 31,072
<SALES> 0 0
<TOTAL-REVENUES> 1,347 10,272
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 15,201 19,506
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 308 391
<INCOME-PRETAX> (13,510) (9,085)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,510) (9,085)
<EPS-BASIC> (7.64) (3.86)
<EPS-DILUTED> 0 (0.36)
</TABLE>
