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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-29173
DIVERSA CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 22-3297375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4955 Directors Place, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 526-5000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 26, 2001 was $202.9 million.*
The number of shares outstanding of the Registrant's common stock was
35,089,960 as of March 26, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the Registrant's definitive Proxy Statement to be
filed with the Securities and Exchange Commission (the "Commission") pursuant
to Regulation 14A in connection with the 2001 Annual Meeting of Stockholders
to be held on May 17, 2001 is incorporated herein by reference into Part III
of this report. Such Proxy Statement will be filed with the Commission not
later than 120 days after the Registrant's year ended December 31, 2000.
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* Excludes the common stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the common stock outstanding at
March 26, 2001. This calculation does not reflect a determination that such
persons are affiliates for any other purposes.
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Diversa Corporation
Form 10-K
For the Year Ended December 31, 2000
INDEX
Page
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PART I.
Item 1. Business...................................................... 2
Item 2. Properties.................................................... 30
Item 3. Legal Proceedings............................................. 30
Item 4. Submission of Matters to a Vote of Security Holders........... 30
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder 31
Matters.......................................................
Item 6. Selected Financial Data....................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition 33
and Results of Operations.....................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 37
Item 8. Financial Statements and Supplementary Data................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting 58
and Financial Disclosures.....................................
PART III.
Item 10. Directors and Executive Officers of the Registrant............ 59
Item 11. Executive Compensation........................................ 59
Item 12. Security Ownership of Certain Beneficial Owners and 59
Management....................................................
Item 13. Certain Relationships and Related Transactions................ 59
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- 60
K.............................................................
FORWARD LOOKING STATEMENTS
This report contains statements that are "forward-looking" and involve a
high degree of risk and uncertainty. These include statements related to
investments in our core technologies, investments in our internal product
candidates, our ability to enter into additional biodiversity access
agreements, the discovery, development, and/or optimization of novel genes,
enzymes, and other biologically active compounds, the development and
commercialization of products and product candidates, the opportunities in our
target markets, the benefits to be derived from our current and future
strategic alliances, our plans for future business development activities, and
our estimates regarding future revenue, profitability, and capital
requirements, all of which are prospective. Such statements are only
predictions and reflect our expectations and assumptions as of the date of
this report based on currently available operating, financial, and competitive
information. The actual events or results may differ materially from those
projected in such forward-looking statements. Risks and uncertainties and the
occurrence of other events could cause actual events or results to differ
materially from these predictions. The risk factors set forth below at pages
21 to 30 should be considered carefully in evaluating us and our business.
These forward-looking statements speak only as of the date of this report. We
expressly disclaim any intent or obligation to update these forward-looking
statements.
We use market data and industry forecasts throughout this report. We have
obtained this information from internal surveys, market research, publicly
available information, and industry publications. Industry publications
generally state that the information they provide has been obtained from
sources believed to be reliable, but that the accuracy and completeness of
such information is not guaranteed. Similarly, we believe that the surveys and
market research we or others have performed are reliable, but we have not
independently verified this information. We do not represent that any such
information is accurate.
DIVERSA(R), Gene Site Saturation Mutagenesis, GigaMatrix, GSSM, Pyrolase,
GeneReassembly, DiverseLibrary, DiverseLibraries, PathwayLibrary,
PathwayLibraries, DirectEvolution(R), SingleCell, SciLect, and Streptomyces
diversa are trademarks of Diversa Corporation. ThermalAce is a trademark of
Invitrogen Corporation. This report also refers to trade names and trademarks
of other organizations.
1
PART I
Item 1. Business
We are a global leader in developing and applying proprietary technologies
to discover and evolve novel genes and gene pathways from diverse
environmental sources. We are utilizing our fully integrated approach to
develop novel enzymes and other biologically active compounds, such as orally
active drugs, produced by these genes and gene pathways. Our proprietary
evolution technologies facilitate the optimization of genes found in nature to
enable product solutions for the pharmaceutical, agricultural, chemical
processing, and industrial markets. Within these broad markets, we are
targeting key multi-billion dollar market segments where we believe our
technologies and products will create high value and competitive advantages
for strategic partners and customers. Our strategic partners are market
leaders and include Aventis Animal Nutrition S.A., Celanese Ltd., Celera
Genomics, Finnfeeds International Ltd (a unit of Danisco Cultor), The Dow
Chemical Company, GlaxoSmithKline plc, IntraBiotics Pharmaceuticals, Inc.,
Invitrogen Corporation, and Syngenta (formerly Novartis) Agribusiness
Biotechnology Research, Inc. We have also formed joint ventures with The Dow
Chemical Company (named Innovase LLC) and with Syngenta Seeds AG (named
Zymetrics).
Industry Background
Microbes, including 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 billions of years of
natural selection in diverse environments, microbes have developed broader and
more varied characteristics than those encountered in plants or animals. These
characteristics, which include the ability to survive in extreme temperature,
tolerate high or low pH, and endure 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. Genes carry the instructions for
the production of molecules called proteins. Proteins are made up of
functional building blocks called amino acids. One key class of proteins is
known as enzymes. An enzyme is produced by the expression of a single gene
inside a cell. Enzymes carry 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. Further, multiple genes can also be expressed in concert inside cells to
create other types of organic compounds called small molecules. These arranged
genes are called biosynthetic pathways. Examples of small molecules include
antibiotics.
Enzymes and small molecules are examples of naturally occurring
biomolecules. Virtually any product or process that utilizes proteins can be
improved using novel, naturally occurring biomolecules. Consequently,
naturally occurring biomolecules are commercially applicable to a broad range
of multi-billion dollar industries.
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 scientists using the traditional culturing approach identify an
activity, they purify the sample of interest and seek to isolate the relevant
molecule. With respect to biologically active molecules, this process is
traditionally 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
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have been identified from organisms that have been successfully cultured in
the laboratory. The scientific community has characterized enzymes from only a
small fraction of the billions of different species of microorganisms living
throughout the world. The reasons for this limited discovery effort 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, the genetic sequence of the gene
encoding it can be studied and genetic variation may be introduced in an
attempt to modify its function through a process of test tube 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. Mutagenesis has been
achieved by randomly introducing single nucleotide changes into a gene in an
attempt to alter a single amino acid within the corresponding protein. Random
methods have deficiencies that make it virtually impossible to generate all 19
possible amino acid changes at each position within the protein. The best
method to generate all amino acid changes at each site requires multiple,
appropriately positioned DNA base changes (non-random methods. Historically,
on average, three or fewer changes are explored due to deficiencies in
mutation and sampling methods. Recombination, or shuffling, 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 that are generated by these methods. 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 the impact on sensitive
environments.
. We create gene expression libraries from DNA contained in environmental
and other samples. Our DiverseLibrary(TM) collection is generated from
the DNA extracted from the specified environment. Our PathwayLibrary(TM)
collections consist of multiple genes which act in concert to produce
small
3
molecules. We estimate that our gene expression libraries currently
contain the complete genomes of over 2 million unique microorganisms,
representing billions of genes and comprising a vast resource of genetic
material that can be screened for valuable commercial products.
. We employ several 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(R) technologies, including
Gene Site Saturation Mutagenesis(TM) (GSSM(TM)) and GeneReassemby(TM),
as well as gene shuffling, to enable a full range of accelerated DNA
mutations. These methods enhance the efficiency of the evolution process
and reduce the laborious nature of current mutagenesis 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: Innovation From Biodiversity And Gene Evolution 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 contained within our
extensive DiverseLibrary collection and PathwayLibrary collections, as well as
our proprietary high-throughput screening and evolution technologies, allow us
to shorten the development cycles for novel enzymes and other biologically
active compounds.
Genomics adds an entirely new dimension to the way pharmaceutical products
can be identified and developed. To date, a number of anti-microbials, anti-
fungals, anti-virals, and other therapeutic drugs have been commercialized
from microbial sources. With the completion of the Human Genome Project,
increasing efforts are being directed at understanding the role of proteins in
a range of diseases. Each identified protein or protein-protein interaction
can be a potential target for intervention in the disease process. In
addition, the increase in the world's population has created demand for new
technologies that improve productivity, reduce environmental impact, and
improve the quality, safety, and nutritional value of agricultural products.
Within the $800 billion
4
chemical industry, we have identified high-growth markets in the manufacturing
of both fine and high-performance chemicals. The global market for industrial
and specialty enzymes was estimated at $3.6 billion in revenue for 2000. There
is also a demand for new industrial enzymes for specialty applications and for
biomolecules that can resist degradation and remain stable at extremes of
temperature and pH or in the presence of organic solvents.
Market Opportunities
We are developing products for a number of multi-billion dollar markets,
including pharmaceutical, agricultural, chemical processing, and industrial
applications. Our target markets provide both short-term and long-term product
revenue opportunities. Chemical and industrial products have relatively short
development and regulatory approval processes; agricultural products have
intermediate term development and regulatory approval processes; and
pharmaceutical products have 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 customers.
Pharmaceutical Products
According to an industry source, the worldwide pharmaceutical market was
$337 billion in 1999 and is expected to grow to $506 billion by 2004. Our
pharmaceutical program seeks to apply our technologies to the discovery and
development of compounds for selected applications within this market. Two key
areas of focus include:
. Discovery of Small Molecule Compounds. According to IMS Health, global
sales for pharmaceuticals derived from microbes exceeded $25.3 billion
in 1999. Some examples of products derived from microbes include
antibiotics, immunosuppressants, and cholesterol lowering agents.
Microbes naturally produce these compounds, which were developed
utilizing methods of traditional natural products discovery. The
traditional process is limited in its potential for producing novel
products, because less than 1% of microbes will grow in the laboratory
under standard conditions. However, current market estimates for
microbe-derived pharmaceuticals do not include products that can be
identified using a genomics approach to natural product discovery.
We believe that our recombinant natural 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. We are working to discover small molecule compounds as
candidates for anti-microbials, anti-fungals, anti-virals and other
therapeutic drugs.
. Improving Protein and Gene Therapeutics. We are applying our evolution
technologies to the improvement of protein therapeutics and antibodies.
With the completion of the Human Genome Project, increasing efforts are
being directed at understanding the role of proteins in a range of
diseases. Our DirectEvolution technologies can be applied to human
proteins discovered by these efforts, as well as microbe-derived
proteins, to tailor protein therapeutics with a desired activity. Each
identified protein or protein-protein interaction can be a potential
target for intervention in the disease process. This intervention can
take a number of forms, including an enzyme activity, a soluble protein
receptor, or in the case of protein pairs, use of the agonist/antagonist
protein ligand. In many instances, human monoclonal antibodies can be
evolved not only for use as tools in target validation, but also as
potential drug candidates.
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 technologies that
improve productivity, reduce the environmental impact, and improve
5
the 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. In
1999 alone, $7 billion was spent on animal feed additives that improve
digestibility and increase nutritional value. Genetically engineered crops are
expected to contribute substantial value to the existing $15 billion
agriculture seeds market. In addition, consumer and regulatory demands for
alternative pest management solutions are expected to fuel growth in the crop
protection market, estimated at $33 billion in 1999.
In agriculture, we are developing a variety of specialty enzymes, enhanced
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
discovering 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 and
carbohydrases 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 enzymes 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 therapeutics to treat and prevent diseases of farm animals.
Chemical Processing
The chemical industry accounted for approximately $800 billion in revenue
in 2000. We are developing enzymes to aid in the manufacture of both fine and
high-performance chemicals. These enzymes are used to create manufacturing
efficiencies, reduce production costs, and accelerate the generation of new
chemical products and processes. We are developing a variety of specialty
enzymes for use in the following applications:
. Fine Chemicals. Fine chemicals, one of the fastest growing and highest
margin segments in the chemical industry, includes chiral molecules used
as building blocks for synthetic pharmaceuticals. The current market for
fine chemicals is approximately $45 billion annually, more than half of
which consists of chemical building blocks for chiral and other drugs.
We are developing enzymes for the production of essential elements for
the manufacture of chiral drugs, which include many of the leading
revenue-generating drugs currently on the market. We believe these
enzymes may also reduce production costs and contaminated waste
associated with current manufacturing processes.
. High-Performance Chemicals. We are developing enzymes that act as
biological catalysts in the production of polymers and specialty
chemicals such as amino acids, antioxidants, vitamins, and pigments.
These enzymes are expected to lower manufacturing costs by decreasing
both the number of steps necessary to produce these specialty compounds
and the amount of unwanted by-products.
Industrial Enzymes
The global market for industrial and specialty enzymes was approximately
$3.6 billion in revenue for 2000. Today, it is estimated that fewer than 30
enzymes account for more than 90% of the industrial enzymes currently in use.
Most industrial enzymes break down easily or become inactive in the industrial
environment. Our
6
proprietary discovery and evolution strategies are designed to identify, and,
if necessary, customize biomolecules to resist degradation and to remain
stable at high temperatures or in the presence of organic solvents. Similarly,
these capabilities enable us to address the demand for new enzyme activities
for specialty applications. A number of applications within this market
provide us with commercial opportunities for which we are currently developing
a variety of enzymes:
. Consumer Products. Enzymes and other biomolecules have applications in
cosmetics, food, and nutrition products. Our discovery and development
programs seek to address these market opportunities with enzymes, novel
polymers, and other bioactives. These natural compounds may be utilized
to improve product appearance, texture, color, fragrance, flavor, and
health benefit.
. Starch Processing. Starch processing enzymes modify starch to produce
higher value end products, such as high fructose corn syrup and ethanol.
We are developing new enzymes to significantly reduce the costs and
energy requirements by eliminating the need for process adjustments and
by eliminating waste.
. 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.
. Pulp and Paper Processing. We are developing enzymes to aid in pre-
bleaching pulp, which would reduce the use of dangerous oxidizer
chemicals such as chlorine and sulfite. These improvements could reduce
the cost of pulp processing by both reducing the amount of oxidizer
chemicals required and the expense associated with treating the harsh
chemical waste.
. Production of Modified Oils. We are working on developing enzymes to
create custom products, such as margarines, cooking oils, and
lubricants, through the modification of fats and oils. These enzymes
will be directed to improving product qualities, such as reducing the
saturated fatty acids in margarine and cooking oils and improving the
heat stability of lubricants.
. Research Reagents & Diagnostics. Nucleic acid modifying enzymes have
applications in both research and diagnostics markets. Research
applications include the enzymes utilized in molecular techniques such
as amplification of DNA for probe production, gene amplification,
cloning, and sequencing. Diagnostic applications include both
qualitative probe testing and quantitative analyses such as viral load
assays for HIV and Hepatitis B and C. We have identified a large
selection of DNA polymerases with a variety of activities and
performance characteristics and have licensed three DNA polymerases to
Invitrogen Corporation, one of which was commercialized by Invitrogen in
September 2000 for the research reagent market. Furthermore, we are
increasing our discovery and evolution effort for DNA polymerases and
other nucleic acid modifying enzymes for applications in both the
research and diagnostics markets.
Our Strategy
Our goal is to be the leading provider of novel proteins and small
molecules for use in pharmaceutical, agricultural, chemical processing, and
industrial 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, several technologies capable
of screening more than a billion genes per day, multiple evolution
technologies, and manufacturing expertise. We have protected our technologies
with a substantial portfolio of intellectual property, and we will continue to
make investments in developing and protecting these assets.
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 pharmaceutical, agricultural, chemical
processing, and industrial markets. Products and processes utilizing genes,
proteins, small molecules, pathways,
7
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 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. 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.
Maximize the full potential of our joint ventures, Innovase LLC and
Zymetrics, and our dedicated business groups. We have formed two key joint
ventures to date to focus on certain key market segments. We have also
organized internally to focus our employees with specific industry expertise
on target markets. Within these target markets, 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 collected
microbial samples from virtually every ecosystem represented on earth,
including such environments as geothermal and hydrothermal vents, acidic soils
and boiling mud pots, alkaline springs, marine and freshwater sediments,
savanna grasslands, rainforests, montane and subalpine landscapes, industrial
sites, arctic tundra, and dry Antarctic valleys. We have also sampled
microbial communities living in close association with insects, arachnids, and
nematodes, as well as the symbionts residing within marine sponges and soft
corals. All of our samples from the countries within our biodiversity access
network have been acquired through legal agreements that permit broad access
to biologically diverse environments within such countries. These agreements
are generally with domestic land management agencies and scientific research
institutions. Our relationships have been founded on the fundamental
principles of the Convention on Biological Diversity: (1) conservation of
biological diversity; (2) the sustainable use of its resources; and (3) the
fair and equitable sharing of the benefits derived from the utilization of
genetic resources.
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 entered into legal
agreements to obtain samples from Alaska, Bermuda, Costa Rica, Iceland,
Indonesia, Mexico, the Meadowlands Superfund site, Russia, and South Africa.
In 1997, we signed a Cooperative Research and Development Agreement with
Yellowstone National Park, which was the first agreement of its kind for the
U.S. National Park Service. We also access marine and terrestrial samples from
Antarctica, as well as deep-sea hydrothermal vents off the shores of Costa
Rica and our Pacific Northwest. Many of these samples are taken using deep-sea
submersibles such as the ALVIN or remotely operated vehicles like the Jason
and Ventana.
We intend to enter into additional agreements to further strengthen our
biodiversity access program by expanding the network of countries from which
we obtain samples. Using our proprietary techniques to recover the genes from
these samples, we have constructed our DiverseLibrary collections. We intend
to expand this DiverseLibrary collection, which we estimate currently contains
the total genomes of over 2 million unique
8
microorganisms. We are also making a significant effort to expand our
collections of multi-gene pathways, our PathwayLibrary collections. 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.
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. 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 an additional gene library for
our DiverseLibrary collection, which typically represents genomic coverage of
these microorganisms. We estimate that our DiverseLibrary collection contains
the complete genomes of over 2 million different microorganisms, which far
exceeds the estimated 10,000 microorganisms which have been previously
described in the scientific literature in the last 100 years.
PathwayLibrary Generation. We are also developing PathwayLibrary
collections, comprised of multi-gene sets 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(TM) 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
rapid identification of biological activity within a single cell or individual
organism. Our SingleCell screens have been developed to identify clones based
on activity or DNA
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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. Our robotic screening systems use high-density (1536
wells) microtiter plates and are capable of screening and characterizing over 1
million clones per day. We have also developed the GigaMatrix(TM) screening
platform, a new screening technology that uses a microtiter plate sized ultra-
high density array and is capable of screening and characterizing up to 1
billion clones per day.
If the clone expresses an activity or contains a DNA sequence of interest,
we isolate it for further analysis.
We have also developed rapid methods for sequence-based screening for
targeted genes directly from purified DNA. One of these methods, genomic
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
billions of 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.
Our DirectEvolution(R) Technologies
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
almost 4 billion years 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 3 of the possible 19 alternatives. These methods are limited by their
inability to produce all DNA and amino acid 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, our
DirectEvolution technologies, include Gene Site Saturation Mutagenesis (GSSM)
and GeneReassembly. Our GSSM technology is a patented method of creating a
family of related genes that all differ from a parent gene by at least a single
amino acid change at a defined position. By performing GSSM on a gene encoding
a protein, we create all possible single, double, and/or triple amino acid
codon 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.
Additionally, our patented GSSM methodology employs a more cost-effective
approach than other methods of site-directed mutation.
In addition to altering single genes using our patented GSSM technique, we
use our proprietary GeneReassembly technologies for the reassembly of related
or unrelated genes from two or more different species or strains. Our
GeneReassembly technologies recombine multiple genes to create a large
population of
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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. While we have received a patent for one of our processes of gene
shuffling based on interrupted DNA synthesis and reassembly, our suite of
multiple, proprietary evolution technologies is not limited to traditional
shuffling techniques. For instance, unlike widespread shuffling technologies
that require highly related gene sequences to achieve successful
recombination, our proprietary GeneReassembly technologies also allow
unrelated genes to be combined to maximize evolved improvements.
We believe that the ability to selectively apply our GSSM or GeneReassembly
technologies to optimize proteins provides us with a distinct competitive
advantage. GSSM is better suited in some situations, for example, in the
optimization of a protein's stability or its immune response characteristics.
With respect to stability, applying GSSM may significantly improve temperature
tolerance through combining amino acid alterations at defined positions, while
maintaining the protein's overall characteristics, such as specificity. In one
program, we have used this technology to improve enzyme stability by a factor
of 30,000. Similarly, adverse immune system responses may be avoided by the
incremental changes created by GSSM. In contrast, random shuffling
technologies, which cause 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 SciLect(TM) Data Management and Analysis System
We have developed a leading edge, web-based relational scientific database
for internal purposes, the SciLect database. Our SciLect system provides a
secure, reliable, and accurate source for storage, retrieval, and analysis of
vast amounts of proprietary biological data. This 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. The SciLect 2.0 database has been fully developed and is
now being used across the organization. New features are also being developed
to allow visual data navigation of complex data and relationships. This new
tool will allow faster access to data than traditional and commercial tools
that are available. Our SciLect system 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
DiverseLibrary collection and PathwayLibrary collections;
. 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.
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Utilizing the combination of our SciLect system 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
our SciLect system, we have assembled the world's largest proprietary database
of activity screened, and patent-protected, unique gene sequences.
Production--Whole 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 whole 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;
. Evolving the host genome by adding, removing, or modifying genes that,
when substituted or modified, will improve production or permit the host
to grow better under industrial conditions;
. Analyzing RNA dynamics, proteomics, and metabolomics to monitor 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.
As part of our whole cell optimization and pharmaceutical programs, we have
developed extensive DNA sequencing capabilities for sequencing the genomes of
selected microorganisms, both internally and in collaboration with The Celera
Genomics Group. As part of our internal sequencing efforts, we sequenced the
entire genome of Aquifex aeolicus, which was later published as an article
entitled "The complete genome of the hyperthermophilic bacterium Aquifex
aeolicus." This paper, published in Nature in 1997, represented an important
achievement for our microbial genome sequencing program. When the Nature paper
was published, the genome of A. aeolicus was the first high temperature
bacterium sequenced and was one of the first complete genomes to be sequenced.
This allowed scientists to compare its genome sequence, and the way its genes
were organized, to those of other bacteria to see how evolutionarily conserved
different groups of genes were. Since its publication in 1997, this article
has been cited in more than 250 scientific papers. In addition, under a DNA
sequencing collaboration we entered into with The Celera Genomics Group in
December 2000, we obtained the entire genome sequence of the Streptomyces
diversa(TM) microorganism, a proprietary discovery and production host microbe
important to both our whole cell and pharmaceutical programs. The availability
of the genome sequence, together with the application of technologies
permitting the global analysis of gene expression at both the RNA and protein
levels, and the extensive array of tools available for the genetic
manipulation of this organism, will enable us to fully utilize S. diversa for
the production of novel compounds of pharmaceutical interest.
Products
To date, we have successfully commercialized two products for oil and gas
well fracturing operations: Pyrolase 160 enzyme and Pyrolase 200 enzyme. Sales
of Pyrolase 160 enzyme commenced in January 1999, only two years after project
initiation. In 2000, we commercialized Pyrolase 200 enzyme, a second-
generation oil field product that functions at a wider temperature range.
These enzyme breakers allow for improved extraction of oil and gas from
existing wells, resulting in greater production and increased revenue per
well. We believe our independent development of Pyrolase 160 enzyme and
Pyrolase 200 enzyme validates our technologies and illustrates our ability to
develop products rapidly using our proprietary methods, from discovery through
regulatory approval and commercialization.
One of our collaborators, Invitrogen Corporation, has successfully
commercialized ThermalAce(TM) enzyme, a thermostable DNA polymerase that we
identified and developed. We have granted Invitrogen exclusive rights
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to commercialize three thermostable DNA polymerase enzymes for the molecular
biology research supply market, the first of which is ThermalAce. Under the
license agreement, we are entitled to receive royalties on sales of these
enzymes, while retaining rights to the diagnostics market. ThermalAce DNA
Polymerase improves the performance of DNA amplification for the widely used
polymerase chain reaction, or PCR, process.
We intend to continue to commercialize products both independently and in
collaboration with our strategic partners.
As of February 28, 2001, we had 51 projects in various stages of
development in our target markets. Of these, 8 had reached advanced stages of
development, of which three had been commercialized. An additional 10 projects
had already entered the product candidate stage, with 33 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. From inception through February 28, 2001, our
corporate partners had committed to fund over $124 million, excluding equity
investments and future success-based payments. Of this amount, $54.2 million
had been received as of February 28, 2001. Our partners have also purchased
$9.2 million of our equity securities.
To date, we have entered into the following strategic alliances:
Syngenta (formerly Novartis)
In January 1999, we entered the agricultural biotechnology arena through a
strategic alliance with Syngenta (formerly Novartis) Agribusiness
Biotechnology Research, Inc., referred to below as Syngenta. This alliance
covers a multi-project collaborative research and development agreement to
develop products for crop enhancement and improved agronomic performance.
Under the 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. In conjunction with the transaction, Syngenta purchased 5,555,556
shares of our Series E convertible preferred stock, paid a technology access
fee, and provided project research funding to us, for aggregate total proceeds
of $12.5 million. We recognized the research payments on a percentage of
completion basis as research was performed. We recognized the technology
access fee in 1999, as all the research required under the collaboration was
completed by December 31, 1999. During 2000, we expanded our collaboration
agreement with Syngenta to further develop and optimize novel synthesis routes
to crop protection chemicals. Under the terms of the agreement, we will
receive research payments, milestones, and product royalties. We will receive
additional funding as projects are added under this agreement.
In December 1999, we formed a five-year, renewable strategic alliance with
Syngenta (formerly Novartis) Seeds AG, referred to below as Syngenta Seeds.
Through a contract joint venture, named Zymetrics, we are pursuing
opportunities jointly with Syngenta Seeds in the field of animal feed and
agricultural product processing. Both parties share in the management of the
venture and fund a portion of its sales and marketing costs. Under the
agreement, Syngenta Seeds receives exclusive, worldwide rights in the field of
animal feed and
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project exclusive, worldwide rights in the field of agricultural product
processing. Syngenta Seeds agreed to pay us $20.0 million for the rights
granted under this agreement, of which $15.0 million was paid in February 2000
and an additional $5.0 million is due in June 2001. We initially recorded the
amount due in June 2001 at its present value on the date of the agreement of
$4.0 million. We are recognizing the technology access fee as revenue on a
straight-line basis over the term of the agreement. We recognize research
funding as the research is performed, and milestone payments are recognized as
revenue when earned. 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. Syngenta may terminate these agreements within 60
days of a change of control of Diversa.
Revenue recognized under the Syngenta and Syngenta Seeds agreements was
$12.3 million and $6.0 million for the years ended December 31, 2000 and 1999,
respectively.
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 significantly expanded our existing strategic alliance
with Dow to apply 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 agreements require Dow to make annual
technology development payments, fund research costs, make milestone payments
to us upon achievement of established objectives, and pay us 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 three-year period
of the research agreement. In December 2000, we entered into an agreement with
Dow to license several enzymes for early stage testing of further application
for production of certain chemicals. Under the terms of the agreement, we
received license fees and are entitled to receive specified royalties upon
commercialization of certain products using the licensed enzymes. 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 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 with three months written notice.
In June 2000, we formed a 50/50 joint venture with Dow, named Innovase LLC,
to develop and commercialize innovative products for the industrial enzyme
market segment. Our technologies permit the development of enzymes with
improved stability against the conditions limiting the use of today's enzymes.
Innovase will employ Dow's world-class process development and manufacturing
capabilities to deliver useful products for meeting consumer needs. We have
contributed several late-stage product candidates that we expect Innovase to
commercialize within 12 to 30 months. Under the various joint venture related
agreements, we receive exclusivity fees, technology development fees, and
research and development payments over a five-year period.
In November 2000, we signed an agreement with Dow's Contract Manufacturing
Services business unit to jointly market our respective abilities to
pharmaceutical companies to develop and produce chiral compounds for active
pharmaceutical ingredients, pharmaceutical intermediates, and other fine
chemicals. Chiral technologies permit the separation of an active ingredient
from its undesired counterpart. This affords lower toxicity, higher efficacy,
lower manufacturing costs, and patent life extensions to the pharmaceutical
industry. Under the terms of the agreement, we will receive technology access
fees, research and development payments, milestone payments, and royalty
payments from sales of end products by Dow.
14
Revenue recognized under the Dow agreements was $9.0 million and $2.5
million for the years ended December 31, 2000 and 1999, respectively.
Aventis (formerly Rhone-Poulenc) Animal Nutrition S.A.
In June 1999, we entered into a six-month collaboration agreement with
Aventis (formerly Rhone-Poulenc) Animal Nutrition S.A., 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. This agreement was extended in 2000. Aventis will receive an option
to obtain an exclusive, worldwide royalty-bearing license to the targeted
enzymes for a specified field. If Aventis does not exercise its option, the
agreement will expire, and we will recover full rights to the enzymes. If
Aventis exercises its option, the term of this agreement will continue until
the expiration of all patent rights covering the licensed enzymes. Aventis
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 Ltd
In May 1996, we entered into a collaboration agreement with Finnfeeds
International Ltd, a unit of Danisco Cultor, to jointly 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 redeemable convertible preferred stock
to Finnfeeds for $1.9 million. We received and recognized as revenue $0.8
million in research funding over the period from May 1996 through December
1998. The only obligation of ours under this agreement was to perform research
activities.
Following the completion of the initial objectives of our agreement with
Finnfeeds, in December 1998, we entered into a license agreement with
Finnfeeds to commercialize an enzyme developed under the collaboration
agreement. Under the terms of the license agreement, we granted Finnfeeds an
exclusive license to manufacture, use, and sell the developed enzyme. In
consideration for the license, we will be paid a royalty on related product
sales made by Finnfeeds. 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.
GlaxoSmithKline plc
In December 2000, we entered into a drug discovery research collaboration
with Glaxo Research and Development Limited, a wholly owned subsidiary of
GlaxoSmithKline plc, to identify pharmaceuticals derived from our recombinant
multi-gene PathwayLibraryTM collections. Under this non-exclusive research
agreement, we will perform research jointly with Glaxo to identify novel small
molecules from our PathwayLibrary collections, and to screen these molecules
for specific pharmaceutical activity. Glaxo will receive exclusive worldwide
rights to designated biomolecules selected for commercialization. The
agreement may be terminated at any time upon mutual written consent of both
parties or on 30 days' notice by either party following the one-year
anniversary of the agreement.
Celera Genomics
In December 2000, we entered into a collaborative DNA sequencing agreement
with The Celera Genomics Group, an Applera Corporation business, to sequence
the genomes and discover the genes of selected, uncultured microorganisms
contained in our environmental libraries. The terms of the agreement include a
cross-royalty arrangement for products developed under the collaboration.
Either party may terminate this agreement in the event a material breach
remains uncured for 60 days.
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Celanese Ltd.
In August 2000, we signed an agreement with Celanese Ltd. for an evaluation
project to discover and develop microorganisms capable of producing chemical
products at rates substantially higher than traditional microbial strains.
Under the terms of the agreement, we will receive research and development
payments and royalties on the sale of products utilizing improved strains.
This agreement was originally scheduled to expire on October 31, 2000, but the
agreement has been extended twice for 90-day and 60-day periods, respectively.
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 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 selected 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 and again in 2000. Under the
terms of the agreement, we receive equipment and reagents to use the
proprietary technology in exchange for annual payments. The second extension
to the agreement expired on December 31, 2000 but is renewable for a
subsequent one-year term at One Cell's option.
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Dow AgroScience LLC, formerly Mycogen Corporation
In December 1997, we signed a license agreement with Mycogen Corporation,
now Dow AgroScience LLC, 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
Through formal genetic resource access agreements, we have obtained genetic
material from Alaska, Bermuda, Costa Rica, Iceland, Indonesia, Mexico, Russia,
South Africa, and Yellowstone National Park. Pursuant to the terms of these
agreements, we have obtained non-exclusive access to collect samples from
diverse ecosystems, we own products developed and discoveries made from our
use of the samples, and we pay a royalty to the other party on the sale of
products derived from the samples. All of these agreements expire in 2004 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 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 are a 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, Cubist Pharmaceuticals, Inc. is involved in
accessing organisms from diverse environments. Maxygen, Inc., Evotec, Phylos,
and Applied Molecular Evolution, Inc. have alternative evolution technologies.
Integrated Genomics Inc., Myriad Genetics, Inc., ArQule, Inc., and Aurora
Biosciences Corporation perform screening, sequencing, and/or bioinformatics
services. Novozymes 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. Some 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 may
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.
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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 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 enzyme and Pyrolase 200 enzyme 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. In 2000, we began construction of our own pilot development
facility, and we anticipate that this facility will be fully operational in
the second quarter of 2001. In addition to requiring investment in equipment,
construction of this new facility will necessitate compliance with applicable
regulations. This pilot facility will be used for development of new
manufacturing processes, to provide developmental quantities of products for
internal and external use and for production of commercial quantities of
smaller-scale specialty products. 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. However, 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 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.
18
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, to maintain trade secrets, to operate without infringing the
rights of others, and to prevent others from infringing on our proprietary
rights. As of March 14, 2001, we owned 44 issued patents relating to our
technologies, had received notices of allowance with respect to 6 other patent
applications, and have over 165 patents pending. In addition, as of March 14,
2001, we have in-licensed more than 52 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 United States. Such a proceeding could
result in substantial cost to us even if the outcome is favorable. Even if
successful on priority grounds, an interference may result in loss of claims
based on patentability grounds raised in the interference. Although patent and
intellectual property disputes in the biotechnology area are often settled
through licensing or similar arrangements, costs associated with these
arrangements may be substantial and could include ongoing royalties.
Furthermore, we cannot be certain that the necessary licenses would be
available to us on satisfactory terms, if at all.
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.
19
Employees
As of December 31, 2000, we had approximately 200 full-time employees, 52
of whom hold Ph.D. degrees. Of these employees, 163 were engaged in research
and development and 37 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.
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, except Melvin I. Simon,
Ph.D., 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:
Name Title/Affiliation
---- -----------------
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
20
RISK FACTORS RELATED TO OUR BUSINESS
Except for the historical information contained or incorporated by
reference, this annual report on Form 10-K and the information incorporated by
reference contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed
here. Factors that could cause or contribute to differences in our actual
results include those discussed in the following section, as well as those
discussed in Part II, Item 7 entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere throughout this
annual report, and in any other documents incorporated by reference into this
annual report. You should consider carefully the following risk factors,
together with all of the other information included in this annual report on
Form 10-K. Each of these risk factors could adversely affect our business,
operating results and financial condition, as well as adversely affect the
value of an investment in our common stock.
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 $8.4 million for the year ended December 31, 2000 and
approximately $9.1 million for the year ended December 31, 1999. As of
December 31, 2000, we had an accumulated deficit of approximately $65.7
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 two products ourselves, Pyrolase(TM) 160 enzyme and
Pyrolase(TM) 200 enzyme, and only one of our strategic partners, Invitrogen
Corporation, has incorporated our technologies or inventions into its own
commercial product 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 successfully
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.
21
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 Aventis Animal
Nutrition S.A., Celanese Ltd., Celera Genomics, Finnfeeds International Ltd (a
unit of Danisco Cultor), The Dow Chemical Company, GlaxoSmithKline plc,
IntraBiotics Pharmaceuticals, Inc., Invitrogen Corporation, and Syngenta
(formerly Novartis) Agribusiness Biotechnology Research, Inc. We have also
formed joint ventures with The Dow Chemical Company (named Innovase LLC) and
with Syngenta Seeds AG (named Zymetrics). We expect to derive significant
future revenue from these agreements and joint ventures. 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 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;
. Our strategic partners become less willing to expend their resources on
research and development due to general market conditions or other
circumstances beyond our control;
. 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 enzyme and Pyrolase 200 enzyme under our direction and oversight.
In 2000, we began construction of our own pilot development facility and have
identified alternative capacity to meet interim requirements until the
facility's anticipated completion in the second quarter of 2001. 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
22
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
that we had intended to pursue independently. 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 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 is reduced
or 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 2004 or earlier, and they are all
subject to earlier termination. Our access agreement with Iceland was
23
terminated, and we have voluntarily ceased collections of further samples in
Yellowstone National Park pending the park's 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 March 14, 2001, we owned 44 issued patents
relating to our technologies, had received notices of allowance with respect
to 6 other patent applications, and have over 165 patents pending. In
addition, as of March 14, 2001, we had in-licensed more than 52 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 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
24
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 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 full-time employees
from 102 at December 31, 1999 to approximately 200 at December 31, 2000 and
expect to significantly increase our headcount 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 our 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., Applied
Molecular Evolution, 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. Novozymes A/S and Genencor International, Inc. are
involved in the development, overexpression, fermentation,
25
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.
Any products that we develop through our technologies 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 may 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.
26
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
and committed funding from strategic partners will be sufficient to meet our
capital requirements for the foreseeable future. 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, 2000 was $24.3 million, as compared to $10.3 million for
the same period in 1999. 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;
27
. Our ability to successfully satisfy all pertinent regulatory
requirements;
. 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 2001. 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.
28
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, 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 limited product liability insurance that may not fully
cover our potential liabilities. In addition, if we attempt to obtain
additional product liability insurance coverage, this additional 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 and have adopted a shareholder rights
plan 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. In addition, we adopted a share
purchase rights plan that has anti-takeover effects. The rights under the plan
will cause substantial dilution to a person or group that attempts to acquire
us on terms not approved by our board of directors. The rights should not
interfere with any merger or other business combination approved by our board,
since the rights may be amended to permit such an acquisition or may be
redeemed by us. These provisions in our charter documents, under Delaware law,
and in our rights plan 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.
Our stock price has been and may continue to 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 has been and may
continue to 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.
29
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.
Our officers, directors, and stockholders with at least 5% of our stock
together control approximately 50.5% 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.
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.
Item 2. Properties
Our executive office and research and development facility is currently
located in San Diego, California. We lease approximately 75,000 square feet of
space. This facility is leased through November 15, 2015. To meet our expected
growth needs, we have entered into an additional lease agreement for an
adjacent 60,000 square foot research and development facility that will be
built to our specifications. We plan to occupy the additional space in April
2002. The lease will commence upon completion of the facility and continue for
a period of fifteen years. We believe that our facilities currently are
adequate to meet our requirements.
Item 3. Legal Proceedings
We are not currently a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2000.
30
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Our common stock has been traded on the Nasdaq National Market since
our initial public offering on February 14, 2000 under the symbol DVSA. Prior
to such time, there was no public market for our common stock. The following
table sets forth the high and low sale prices for our common stock for the
periods indicated, as reported on the Nasdaq National Market. Such quotations
represent inter-dealer prices without retail markup, markdown, or commission
and may not necessarily represent actual transactions.
2000 High Low
---- ---- ---
First Quarter (from February 14, 2000)..................... $169.19 $34.00
Second Quarter............................................. 49.00 15.56
Third Quarter.............................................. 47.38 22.50
Fourth Quarter............................................. 30.50 15.63
As of March 26, 2001, there were approximately 231 holders of record of our
common stock. We have never declared or paid any cash dividends on our capital
stock. We currently intend to retain future earnings, if any, for development
of our business and, therefore, do not anticipate that we will declare or pay
cash dividends on our capital stock in the foreseeable future.
We made the following unregistered sales of our securities during the year
ended December 31, 2000:
From January 1, 2000 until February 24, 2000, options to purchase 367,476
shares of common stock were exercised for aggregate consideration of
approximately $475,000. The sale and issuance of securities and the exercise
of options were deemed to be exempt from registration under the Securities Act
of 1933, as amended, by virtue of Rule 701 promulgated thereunder in that they
were offered and sold either pursuant to a written compensatory benefit plan
or pursuant to a written contract relating to compensation, as provided in
Rule 701. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received
adequate information about us or had access, through employment or other
relationships, to such information.
(b) The effective date of our first registration statement, filed on Form
S-1 under the Securities Act (No. 333-30290) relating to our initial public
offering of common stock, was February 14, 2000. We sold a total of 8,337,500
shares of our common stock at a price of $24.00 per share to an underwriting
syndicate led by Bear, Stearns & Co. Inc., Chase H&Q, and Deutsche Banc Alex.
Brown. Of these 8,337,500 shares, 1,087,500 were issued upon exercise of the
underwriters' over-allotment option. The initial public offering resulted in
gross proceeds of $200.1 million, $14.0 million of which was applied toward
the underwriting discount. Expenses related to the offering totaled
approximately $1.6 million. Net proceeds to us were approximately $184.5
million. From the time of receipt through December 31, 2000, the proceeds were
applied primarily toward cash and cash equivalents and short term investments.
Item 6. Selected Financial Data
The selected financial data set forth below with respect to our statements
of operations for the years ended December 31, 2000, 1999, and 1998, and with
respect to our balance sheets at December 31, 2000 and 1999 are derived from
our financial statements that have been audited by Ernst & Young LLP, which
are included elsewhere in this report, and are qualified by reference to such
financial statements. The statement of operations data for the years ended
December 31, 1997 and 1996 and the balance sheet data as of December 31, 1998,
1997, and 1996 are derived from our audited financial statements that are not
included in this report. The selected financial information set forth below
should be read in conjunction with "Management's Discussion and Analysis
31
of Financial Condition and Results of Operations" and our financial statements
and related notes appearing elsewhere in this report.
Year Ended December 31,
-----------------------------------------------
2000 1999 1998 1997 1996
-------- ------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Collaborative revenue........ $ 22,883 $ 9,166 $ 625 $ 669 $ 200
Grant and product revenue.... 1,418 1,106 722 486 506
-------- ------- -------- -------- --------
Total revenue.............. 24,301 10,272 1,347 1,155 706
Operating expenses:
Research and development..... 26,427 11,275 10,165 7,834 6,496
Selling, general and
administrative.............. 7,094 4,121 3,371 4,376 4,465
Non-cash, stock-based
compensation................ 9,869 4,110 1,665 1,245 --
Restructuring charge......... -- -- -- -- 1,164
-------- ------- -------- -------- --------
Total operating expenses... 43,390 19,506 15,201 13,455 12,125
Operating loss............... (19,089) (9,234) (13,854) (12,300) (11,419)
Other income (expense)....... 11,025 215 344 (92) (227)
-------- ------- -------- -------- --------
Net loss................... (8,064) (9,019) (13,510) (12,392) (11,646)
Dividends payable to
preferred stockholders...... (310) (66) -- -- --
Net loss applicable to common
stockholders................ $ (8,374) $(9,085) $(13,510) $(12,392) $(11,646)
======== ======= ======== ======== ========
Historical net loss per
share, basic and diluted.... $ (0.27) $ (3.86) $ (7.64) $ (7.72) $ (7.68)
======== ======= ======== ======== ========
Historical weighted-average
shares outstanding.......... 30,836 2,353 1,768 1,606 1,517
Pro forma net loss per
share....................... $ (0.25)
========
Pro forma weighted-average
shares outstanding.......... 33,570
As of December 31,
-----------------------------------------------
2000 1999 1998 1997 1996
-------- ------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and
short-term investments...... $211,256 $ 5,084 $ 5,552 $ 16,607 $ 5,040
Working capital.............. 199,223 13,902 2,470 13,540 3,584
Total assets................. 235,261 31,072 8,706 20,284 9,973
Long-term debt, less current
portion..................... 8,182 2,677 2,202 1,500 1,725
Redeemable convertible
preferred stock............. -- 48,402 48,402 48,402 26,182
Stockholders' equity
(deficit)................... 194,074 (42,813) (45,738) (34,024) (22,156)
32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this report.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. These statements speak only as of the date on which they are
made, and we undertake no obligation to update any forward-looking statement.
Forward-looking statements include statements related to investments in our
core technologies, investments in our internal product candidates, and our
future capital requirements, all of which are prospective. Such statements are
only predictions, and the actual events or results may differ materially from
those projected in the forward-looking statements. Factors that could cause or
contribute to differences include, but are not limited to, risks involved with
our new and uncertain technologies, risks associated with our dependence on
patents and proprietary rights, risks associated with our protection and
enforcement of our patents and proprietary rights, our dependence on existing
collaborations, our ability to enter into and/or maintain collaboration and
joint venture agreements, and the development or availability of competitive
products or technologies, as well as other risks and uncertainties set forth
below and in the section of this report entitled "Risk Factors Related to Our
Business."
Overview
We were incorporated in December 1992 and began operations in May 1994. We
are applying proprietary technologies to discover and evolve novel genes and
gene pathways from diverse environmental sources. We use our fully integrated
approach to develop novel enzymes and other biologically active compounds,
such as small molecule drugs. Our proprietary evolution technologies
facilitate the optimization of genes found in nature to enable product
solutions for the pharmaceutical, agricultural, chemical, and industrial
markets. To date, we have generated revenue from research collaborations,
government grants, and enzyme product sales and royalties. Our strategic
partners include Aventis Animal Nutrition S.A., Celanese Ltd., Celera
Genomics, Finnfeeds International Ltd (a unit of Danisco Cultor), The Dow
Chemical Company, GlaxoSmithKline plc, IntraBiotics Pharmaceuticals, Inc.,
Invitrogen Corporation, and Syngenta (formerly Novartis). We have also formed
joint ventures with The Dow Chemical Company and with Syngenta Seeds AG. Our
current government grants are from the National Science Foundation, the
National Institute of General Medical Sciences, the National Cancer Institute,
and the National Institute of Environmental Health Sciences. Our product
related revenues to date are comprised of research kits, Pyrolase 160 enzyme
and Pyrolase 200 enzyme, enzymes used in oil and gas recovery, and royalties
from sales of ThermalAce(TM), a DNA polymerase licensed to Invitrogen
Corporation for molecular biology research applications.
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 one billion genes per day, and optimization
based on our gene evolution technologies.
Our revenue has increased significantly since our inception, and for the
year ended December 31, 2000, revenue grew 137% compared to the year ended
December 31, 1999. This increase was primarily attributable to the addition of
new strategic collaborations, which included exclusivity fees, technology
access and development fees, and research funding. 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 received to initiate research projects are deferred
and recognized over the project period. Fees received for exclusivity in a
field are deferred and recognized over the period of exclusivity. Milestone
payments are recognized when earned, as evidenced by written acknowledgement
from the collaborator, provided that (i) the milestone event is substantive
and its achievement was not reasonably assured at the inception of the
agreement and (ii) our performance obligations after the milestone achievement
will continue to be funded by the collaborator at a level comparable to the
level before the milestone achievement. Our strategic partners often pay us
before we recognize the revenue, and these payments are deferred until earned.
As of December 31, 2000, we had current and long-term deferred revenue
totaling $22.3 million.
33
We have incurred substantial operating losses since our inception. As of
December 31, 2000, our accumulated deficit was $65.7 million. We expect to
incur additional operating losses over the next few years as we continue to
develop our technologies and fund internal research and development efforts.
Our results of operations have fluctuated from period to period and likely
will continue to fluctuate substantially in the future based upon the timing
and composition of funding under our existing and future collaboration
agreements, the initiation and expansion of research and development programs,
and the acquisition of new technologies and proprietary rights. Results of
operations for any period may be unrelated to results of operations for any
other period. In addition, we believe that our historical results are not a
good indicator of our future operating results.
Results of Operations
Years Ended December 31, 2000 and 1999
Revenue
Our revenue increased $14.0 million to $24.3 million for the year ended
December 31, 2000 from $10.3 million for the year ended December 31, 1999.
This increase was primarily attributable to the addition of several new
collaboration agreements signed in 1999 and 2000. Revenue from collaborations
accounted for 94% of total revenue for the year ended December 31, 2000 and
89% of total revenue for the year ended December 31, 1999.
Research and Development Expenses
Our research and development expenses increased $15.1 million to $26.4
million for the year ended December 31, 2000 from $11.3 million for the year
ended December 31, 1999. This increase was primarily attributable to expansion
of collaborative research activities and investment in several key internal
programs and technologies. We expect that our research and development
expenses will increase substantially to support our collaborative research
programs and our increased investments in core technologies and internal
product candidates. Research and development expenses for the years ended
December 31, 2000 and 1999 are net of non-cash, stock-based compensation
charges of $2.1 million and $0.9 million, respectively.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $3.0 million to
$7.1 million for the year ended December 31, 2000 from $4.1 million for the
year ended December 31, 1999. This increase was primarily attributable to the
expansion of administrative infrastructure to support our growth and
requirements as a public company and to support our expanded business
development activities. Selling, general and administrative expenses for the
years ended December 31, 2000 and 1999 are net of non-cash, stock-based
compensation charges of $7.7 million and $3.2 million, respectively.
Non-Cash, Stock-Based 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.
For the year ended December 31, 2000, we recorded amortization of deferred
compensation of approximately $3.4 million compared to $3.0 million for the
year ended December 31, 1999. We also recorded aggregate non-cash compensation
charges of $6.5 million for the year ended December 31, 2000, consisting of
$4.1 million in conjunction with the acceleration of vesting for stock options
held by certain employees and $2.4 million for common stock, stock options,
and warrants granted to consultants.
34
Other Income (Expense)
Other income (expense) primarily consists of interest income and expense.
Interest income increased to $11.7 million for the year ended December 31,
2000 from $0.5 million for the year ended December 31, 1999, due to higher
average cash balances as a result of our initial public offering in February
2000. Interest expense increased to $0.6 million for the year ended December
31, 2000 from $0.4 million for the year ended December 31, 1999. This increase
was primarily attributable to the interest on borrowings under our new
equipment financing line of credit.
Provision for Income Taxes
For the year ended December 31, 2000, we recorded no provision for income
taxes, as we utilized approximately $11.1 million and $11.0 million in federal
and state net operating loss carryforwards, respectively, to offset taxable
income. As of December 31, 2000, we had federal net operating loss
carryforwards of approximately $36.0 million, which begin to expire in 2009.
The net operating loss carryforwards for state tax purposes were approximately
$21.6 million, which began to expire in 1999. We also had federal and state
research and development tax credit carryforwards of approximately $1.5
million and $0.7 million, respectively, 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.
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 Syngenta 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 46% of total revenue
for the year ended December 31, 1998.
Research and Development Expenses
Our research and development expenses increased $1.1 million to $11.3
million for the year ended December 31, 1999 from $10.2 million for the year
ended December 31, 1998. During 1999, our research efforts 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.
Research and development expenses for the years ended December 31, 1999 and
1998 are net of non-cash, stock-based compensation charges of $0.9 million and
$0.5 million, respectively.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $0.7 million to
$4.1 million for the year ended December 31, 1999 from $3.4 million for the
year ended December 31, 1998. This increase was primarily attributable to
expenses related to separation agreements with former employees. Selling,
general and administrative expenses for the years ended December 31, 1999 and
1998 are net of non-cash, stock-based compensation charges of $3.2 million and
$1.2 million, respectively.
Non-Cash, Stock-Based Compensation Charges
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
35
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 compared to $1.7 million for the year ended December 31, 1998.
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.
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 compared to $0.6 million 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 years ended December 31, 1999 and
1998, and, accordingly, we did not pay any federal or state income taxes.
Liquidity and Capital Resources
Since inception, we have financed our business primarily through the sale
of common and preferred stock and over $51 million of funding received from
collaborators. As of December 31, 2000, we had cash, cash equivalents, and
short-term investments of approximately $211.3 million. Our funds are
currently invested in U.S. Treasury and government agency obligations and
investment-grade corporate securities. During 2000, we entered into an
equipment financing line of credit agreement with a lender to finance up to
$12.0 million in equipment purchases through March 31, 2001. As of December
31, 2000, we had $4.6 million available under the credit agreement.
We relocated to our new executive offices and research and development
facility in November 2000. As part of the move, we constructed a pilot
manufacturing plant to be used for process development activities. The pilot
manufacturing plant includes two 500-litre fermenters and occupies
approximately 3,000 square feet of the new facility. Our costs for property
and equipment relating to the pilot manufacturing plant were approximately
$3.6 million, all of which we anticipate funding through our equipment
financing line of credit in the second quarter of 2001. Additionally, we used
working capital to fund $1.5 million in enhancements to our SciLect project in
2000.
Our operating activities provided cash of $27.0 million in the year ended
December 31, 2000 compared to $4.1 million of cash used in the year ended
December 31, 1999. Our cash provided by operating activities in 2000 resulted
primarily from collections on accounts receivable and interest income earned
on our cash and short-term investments. Our use of cash for 1999 primarily
resulted from our loss from operations and the changes in our working capital
accounts.
Our investing activities used cash of $159.9 million in 2000 compared to
$5.4 million in 1999. Our investing activities consist primarily of purchases
of investment securities, purchases of property and equipment, and purchase of
technology rights.
Our financing activities provided cash of $192.8 million in 2000 compared
to $7.5 million in 1999. Our financing activities for these years consisted
primarily of the sale of common stock in our initial public offering in
February 2000, the private placement of preferred stock to a strategic
collaborator prior to our initial public offering, and proceeds received and
payments made under our capital lease lines and notes payable.
36
We expect that our current cash and cash equivalents, short-term
investments, and funding from existing strategic alliances and grants will be
sufficient to fund our operations for the foreseeable future. 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 new
strategic alliance relationships, and competing technological and market
developments. Therefore, it is possible that we may seek additional financing
in the future, whether through private or public equity offerings, debt
financings, or strategic alliances. 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.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and 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.
Item 7A. 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 and notes payable, 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 risk, market risk, and reinvestment risk. We
mitigate default risk by investing in short-term investment grade securities.
A hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would decrease the fair value of our interest
sensitive financial instruments at December 31, 2000 by $1.3 million. Declines
in interest rates over time will reduce our interest income, while increases
in interest rates over time will increase our interest expense.
37
Item 8. Financial Statements and Supplementary Data
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, 2000 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2000. 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, 2000 and 1999 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
San Diego, California
January 26, 2001
38
DIVERSA CORPORATION
BALANCE SHEETS
December 31,
--------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 62,382,000 $ 2,490,000
Short-term investments........................... 148,874,000 2,594,000
Accounts receivable.............................. 587,000 15,571,000
Other current assets............................. 5,849,000 659,000
------------ ------------
Total current assets........................... 217,692,000 21,314,000
Property and equipment, net........................ 14,903,000 3,096,000
Acquired technology rights, net.................... 2,331,000 2,487,000
Other assets....................................... 335,000 4,175,000
------------ ------------
Total assets................................... $235,261,000 $ 31,072,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $ 2,002,000 $ 668,000
Accrued liabilities.............................. 6,108,000 1,653,000
Deferred revenue................................. 8,101,000 4,491,000
Current portion of capital lease obligations..... 819,000 600,000
Current portion of notes payable................. 1,439,000 --
------------ ------------
Total current liabilities...................... 18,469,000 7,412,000
------------ ------------
Capital lease obligations, less current portion.... 2,688,000 2,677,000
Notes payable, less current portion................ 5,494,000 --
Deposit from sublessee............................. 300,000 300,000
Long-term deferred revenue......................... 14,236,000 15,094,000
Commitments and contingencies (Note 6)
Redeemable convertible preferred stock--$0.001 par
value; no shares issued and outstanding at
December 31, 2000; 60,220,183 shares authorized,
issued and outstanding at December 31, 1999....... -- 48,402,000
Stockholders' equity (deficit):
Series E convertible preferred stock--$0.001 par
value; no shares issued and outstanding at
December 31, 2000; 5,555,556 shares authorized,
issued and outstanding at December 31, 1999..... -- 6,000
Common stock--$0.001 par value; 65,000,000 shares
authorized, 34,890,806 and 2,945,390 shares
issued and outstanding at December 31, 2000 and
1999, respectively.............................. 35,000 3,000
Additional paid-in capital ...................... 260,929,000 20,102,000
Deferred compensation ........................... (2,137,000) (5,520,000)
Notes receivable from stockholders .............. -- (36,000)
Accumulated deficit ............................. (65,725,000) (57,351,000)
Accumulated other comprehensive income (loss) ... 972,000 (17,000)
------------ ------------
Total stockholders' equity (deficit) .......... 194,074,000 (42,813,000)
------------ ------------
Total liabilities and stockholders' equity
(deficit) .................................... $235,261,000 $ 31,072,000
============ ============
See accompanying notes.
39
DIVERSA CORPORATION
STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------------
2000 1999 1998
------------ ----------- ------------
Revenue:
Collaborative ...................... $ 22,883,000 $ 9,166,000 $ 625,000
Grant and product .................. 1,418,000 1,106,000 722,000
------------ ----------- ------------
Total revenue .................... 24,301,000 10,272,000 1,347,000
Operating expenses:
Research and development (net of
non-cash, stock-based compensation
charges of $2,137,000, $874,000 and
$500,000 in 2000, 1999, and 1998,
respectively) ..................... 26,427,000 11,275,000 10,165,000
Selling, general and administrative
(net of non-cash, stock-based
compensation charges of $7,732,000,
$3,236,000 and $1,165,000 in 2000,
1999, and 1998, respectively) ..... 7,094,000 4,121,000 3,371,000
Non-cash, stock-based compensation
................................... 9,869,000 4,110,000 1,665,000
------------ ----------- ------------
Total operating expenses ......... 43,390,000 19,506,000 15,201,000
------------ ----------- ------------
Loss from operations ................. (19,089,000) (9,234,000) (13,854,000)
Other income (expense) ............... (110,000) 79,000 99,000
Interest income ...................... 11,735,000 527,000 553,000
Interest expense ..................... (600,000) (391,000) (308,000)
------------ ----------- ------------
Net loss ............................. (8,064,000) (9,019,000) (13,510,000)
Dividends payable to preferred
stockholders ........................ (310,000) (66,000) --
------------ ----------- ------------
Net loss applicable to common
stockholders ........................ $ (8,374,000) $(9,085,000) $(13,510,000)
============ =========== ============
Historical net loss per share, basic
and diluted ......................... $ (0.27) $ (3.86) $ (7.64)
============ =========== ============
Shares used in calculating historical
net loss per share, basic and diluted
..................................... 30,836,000 2,353,000 1,768,000
Pro forma net loss per share ......... $ (0.25)
============
Shares used in calculating pro forma
net loss per share................... 33,570,000
See accompanying notes.
40
DIVERSA CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
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)
---------- ------- ---------- ------- ------------ ------------ ------------ ------------ -------------
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 from
stockholders..... -- -- -- -- -- -- 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
employees as part
of severance
agreements ...... -- -- -- -- 1,095,000 -- -- -- --
Stock options
exercised........ -- -- 1,089,047 1,000 607,000 -- -- -- --
Payments received
on notes
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)
Comprehensive
income (loss):
Net loss........ -- -- -- -- -- -- -- (8,064,000) --
Unrealized gain
on available-
for-sale
securities...... -- -- -- -- -- -- -- -- 989,000
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
Issuance of
common stock, net
of issuance costs
of $15,584,000... -- -- 8,337,500 8,000 184,516,000 -- 36,000 -- --
Conversion of
convertible
preferred stock
to common stock
upon completion
of initial public
offering......... (5,555,556) (6,000) 22,834,042 23,000 48,385,000 -- -- -- --
Issuance of
common stock for
payment of
dividends to
preferred
stockholders..... -- -- 15,641 -- 376,000 -- -- (310,000) --
Stock options and
warrants
exercised........ -- -- 747,438 1,000 1,064,000 -- -- -- --
Issuance of
common stock and
warrants for
services......... -- -- 10,795 -- 700,000 -- -- -- --
Non-cash
compensation
related to stock
options.......... -- -- -- -- 5,786,000 -- -- -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 3,383,000 -- -- --
---------- ------- ---------- ------- ------------ ----------- --------- ------------ --------
Balance at
December 31,
2000............. -- $ -- 34,890,806 $35,000 $260,929,000 $(2,137,000) $ -- $(65,725,000) $972,000
========== ======= ========== ======= ============ =========== ========= ============ ========
Total
Stockholders'
Equity
(Deficit)
--------------
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 from
stockholders..... 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
employees as part
of severance
agreements ...... 1,095,000
Stock options
exercised........ 608,000
Payments received
on notes
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)
Comprehensive
income (loss):
Net loss........ (8,064,000)
Unrealized gain
on available-
for-sale
securities...... 989,000
--------------
Comprehensive
loss............ (7,075,000)
Issuance of
common stock, net
of issuance costs
of $15,584,000... 184,560,000
Conversion of
convertible
preferred stock
to common stock
upon completion
of initial public
offering......... 48,402,000
Issuance of
common stock for
payment of
dividends to
preferred
stockholders..... 66,000
Stock options and
warrants
exercised........ 1,065,000
Issuance of
common stock and
warrants for
services......... 700,000
Non-cash
compensation
related to stock
options.......... 5,786,000
Amortization of
deferred
compensation..... 3,383,000
--------------
Balance at
December 31,
2000............. $194,074,000
==============
See accompanying notes.
41
DIVERSA CORPORATION
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
2000 1999 1998
------------- ------------ ------------
Operating activities:
Net loss applicable to common
stockholders .................... $ (8,374,000) $ (9,085,000) $(13,510,000)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization .. 2,988,000 1,498,000 1,178,000
Dividends to Series A, B and D
preferred stockholders......... 310,000 66,000 --
Non-cash, stock-based
compensation .................. 9,869,000 3,015,000 1,665,000
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 ..... 14,984,000 (664,000) 233,000
Other current assets ......... (5,190,000) (609,000) (137,000)
Other assets ................. 3,840,000 (47,000) 78,000
Accounts payable ............. 1,335,000 433,000 (294,000)
Accrued liabilities .......... 4,520,000 123,000 (335,000)
Deferred revenue ............. 2,751,000 81,000 301,000
------------- ------------ ------------
Net cash provided by (used
in) operating activities .. 27,033,000 (4,050,000) (10,821,000)
Investing activities:
Purchases of property and
equipment ....................... (14,639,000) (1,421,000) (1,234,000)
Purchase of acquired technology
rights .......................... -- (2,500,000) --
Proceeds from release of
restricted investment
securities....................... -- -- 405,000
Purchases of investments ......... (168,365,000) (26,943,000) (21,710,000)
Sales and maturities of
investments ..................... 23,074,000 25,426,000 20,633,000
------------- ------------ ------------
Net cash used in investing
activities ................ (159,930,000) (5,438,000) (1,906,000)
Financing activities:
Advances under capital lease
obligations ..................... 819,000 1,075,000 1,624,000
Principal payments on capital
leases .......................... (589,000) (922,000) (1,146,000)
Proceeds from repayment of notes
receivable from stockholders .... 36,000 13,000 70,000
Proceeds from notes payable ...... 7,334,000 -- --
Principal payments on notes
payable ......................... (401,000) (552,000) (14,000)
Proceeds from sales of preferred
and common stock, net of issuance
costs ........................... 185,590,000 7,891,000 59,000
------------- ------------ ------------
Net cash provided by
financing activities ...... 192,789,000 7,505,000 593,000
------------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents .................. 59,892,000 (1,983,000) (12,134,000)
Cash and cash equivalents at
beginning of year ................. 2,490,000 4,473,000 16,607,000
------------- ------------ ------------
Cash and cash equivalents at end of
year .............................. $ 62,382,000 $ 2,490,000 $ 4,473,000
============= ============ ============
Supplemental disclosure of cash flow
information:
Interest paid .............. $ 564,000 $ 451,000 $ 368,000
============= ============ ============
See accompanying notes.
42
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 is developing and applying
its proprietary technologies to discover and evolve novel genes and gene
pathways from diverse environmental sources. The Company is utilizing its
fully integrated approach to develop novel enzymes and other biologically
active compounds, such as small molecule drugs. The Company's proprietary
evolution technologies facilitate the optimization of genes found in nature to
enable product solutions in the pharmaceutical, agricultural, chemical, and
industrial markets.
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. Treasury and government agency obligations and investment-grade
corporate securities.
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).
Short-term investments consist of the following:
Amortized Unrealized
Cost Market Value Gain (Loss)
------------ ------------ -----------
December 31, 2000
Corporate debt securities................ $106,788,000 $107,444,000 $656,000
U.S. Government and agency obligations... 41,114,000 41,430,000 316,000
------------ ------------ --------
$147,902,000 $148,874,000 $972,000
============ ============ ========
December 31, 1999
Corporate debt securities................ $ 1,505,000 $ 1,496,000 $ (9,000)
U.S. Government and agency obligations... 1,106,000 1,098,000 (8,000)
------------ ------------ --------
$ 2,611,000 $ 2,594,000 $(17,000)
============ ============ ========
At December 31, 2000, these investments had an average maturity of less
than one year.
43
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 2000, 1999, and 1998, the Company had
collaborative research agreements that accounted for 94%, 89%, and 46%,
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 seven 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.
Acquired Technology Rights
In accordance with APB 17, Accounting for Intangible Assets, the acquired
technology rights are recorded at cost. The acquired rights related to patents
(see Note 3) and will be amortized over the remaining life of the patents at
acquisition (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. Acquired technology
rights are presented net of accumulated amortization of $169,000 and $13,000
as of December 31, 2000 and 1999, respectively.
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. 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, 2000.
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
The Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. 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 received to initiate research projects are deferred
and amortized over the project period. Fees received for exclusivity in a
field are deferred and recognized over the period of exclusivity. Milestone
payments are recognized when earned, as evidenced by written
44
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
acknowledgement from the collaborator, provided that (i) the milestone event
is substantive and its achievement was not reasonably assured at the inception
of the agreement, and (ii) the Company's performance obligations after the
milestone achievement will continue to be funded by the collaborator at a
level comparable to the level before the milestone achievement. 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 recognition until performance obligations have been
completed.
Research and Development
Expenditures related 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.
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 and 1998, the Company recognized deferred stock compensation
related to certain stock option grants (see Note 8).
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 (see
Note 8).
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB 25 ("FIN 44"). FIN 44, which has been
adopted prospectively as of July 1, 2000, clarifies the application of APB 25
with respect to stock related compensation. Management believes the Company's
accounting for its stock options is in compliance with the guidelines provided
in FIN 44, and, therefore, the adoption of FIN 44 did not affect the Company's
results of operations.
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).
45
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Net Loss Per Share
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
net loss per common share, as presented in the statements of operations, has
been computed for the year ended December 31, 2000 as described above, and
also gives effect to the assumed conversion of preferred stock (using the "as
if converted" method), which automatically converted to common stock upon
completion of the Company's initial public offering in February 2000, at the
original date of issuance.
The following table presents the calculation of basic, diluted, and pro
forma basic and diluted net loss per share:
Years Ended December 31,
--------------------------------------
2000 1999 1998
----------- ----------- ------------
Net loss applicable to common
stockholders.......................... $(8,374,000) $(9,085,000) $(13,510,000)
Historical net loss per share, basic
and diluted........................... $ (0.27) $ (3.86) $ (7.64)
=========== =========== ============
Weighted-average shares used in
computing historical net loss per
share, basic and diluted.............. 30,836,000 2,353,000 1,768,000
Pro forma:
Net loss............................. $(8,374,000)
Pro forma net loss per share, basic and
diluted............................... $ (0.25)
-----------
Shares used above...................... 30,836,000
Pro forma adjustment to reflect
weighted-average effect of assumed
conversion of convertible preferred
stock............................... 2,734,000
-----------
Shares used in computing pro forma
net loss per share, basic and
diluted............................. 33,570,000
The Company has excluded all convertible preferred stock, outstanding stock
options and warrants, and shares subject to repurchase from the calculation of
diluted net loss per 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 4,151,000, 25,959,000, and
24,231,000 for the years ended December 31, 2000, 1999, and 1998,
respectively. Such securities, had they been dilutive, would have been
included in the computation of diluted net loss per share.
Segment Reporting
The Company has determined that it operates in only one segment.
Accordingly, no segment disclosures have been included in the accompanying
notes to the 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 became
effective January 1, 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. The Company believes the
adoption of SFAS No. 133 will not have a material effect on the financial
statements.
46
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain reclassifications of prior year balances have been made to conform
to the current format.
2. Balance Sheet Details
Accounts receivable consist of the following:
December 31,
--------------------
2000 1999
-------- -----------
Trade................................................. $ 48,000 $ 22,000
Grants................................................ 239,000 204,000
Collaborators......................................... 300,000 15,345,000
-------- -----------
$587,000 $15,571,000
======== ===========
Property and equipment consist of the following:
December 31,
------------------------
2000 1999
----------- -----------
Laboratory equipment............................. $14,039,000 $ 5,720,000
Computer equipment............................... 6,514,000 2,112,000
Furniture and fixtures........................... 1,473,000 322,000
Leasehold improvements........................... 803,000 132,000
----------- -----------
22,829,000 8,286,000
Accumulated depreciation and amortization........ (7,926,000) (5,190,000)
----------- -----------
$14,903,000 $ 3,096,000
=========== ===========
At December 31, 2000, other current assets included a receivable of $4.9
million from Syngenta (see Note 3). This receivable is due in June 2001 and is
carried at its present value using a discount rate of 15%. At December 31,
1999, the receivable was recorded at its present value of $4.0 million and was
included in other non-current assets.
Accrued liabilities consist of the following:
December 31,
---------------------
2000 1999
---------- ----------
Compensation......................................... $2,556,000 $ 929,000
Outside services..................................... 1,142,000 77,000
Professional fees.................................... 396,000 287,000
Property taxes....................................... 105,000 85,000
Capital purchases.................................... 612,000 --
Other................................................ 1,297,000 275,000
---------- ----------
$6,108,000 $1,653,000
========== ==========
47
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Significant Strategic Alliances
Syngenta
In January 1999, the Company entered into a strategic alliance with
Syngenta (formerly Novartis) Agribusiness Biotechnology Research Inc.
("Syngenta"). Under the agreement, the Company received research funding from
Syngenta to conduct multiple independent research projects with the intention
of identifying and developing biomolecules that meet the scientific
specifications of Syngenta. In conjunction with the transaction, Syngenta
purchased 5,555,556 shares of Series E convertible preferred stock, paid a
technology access fee, and provided project research funding to the Company,
for aggregate total proceeds of $12.5 million. The Company recognized the
research payments on a percentage of completion basis as research was
performed. The technology access fee was recognized in 1999, as all the
research required under the collaboration was completed by December 31, 1999.
During 2000, the Company expanded its collaboration agreement with Syngenta to
further develop and optimize novel synthesis routes to crop protection
chemicals. Under the terms of the agreement, the Company will receive research
payments, milestones, and product royalties.
In December 1999, the Company formed a five-year, renewable strategic
alliance with Syngenta (formerly Novartis) Seeds AG ("Syngenta Seeds").
Through a contract joint venture, named Zymetrics, the Company and Syngenta
Seeds are jointly pursuing opportunities in the field of animal feed and
agricultural product processing. Both parties share in the management of the
venture and fund a portion of the sales and marketing costs of this venture.
Under the agreement, Syngenta Seeds receives exclusive, worldwide rights in
the field of animal feed and project exclusive, worldwide rights in the field
of agricultural product processing. Syngenta Seeds agreed to pay $20.0 million
for the rights granted under this agreement, of which $15.0 million was paid
in February 2000 and an additional $5.0 million is due in June 2001. The
Company initially recorded the amount due in June 2001 at its present value on
the date of the agreement of $4.0 million. The technology access fee is being
recognized as revenue on a straight-line basis over the term of the agreement.
Research funding is recognized as the research is performed, and milestone
payments are recognized as revenue when earned. The Company will receive a
share of the profits in the form of royalties on any product sales. The
Company does not own a majority interest in the joint venture and, therefore,
accounts for the results of the joint venture utilizing the equity method.
Revenue recognized under the Syngenta and Syngenta Seeds agreements was
$12.3 million and $6.0 million for the years ended December 31, 2000 and 1999,
respectively.
The Dow Chemical Company
In July 1999, the Company expanded its existing strategic alliance with The
Dow Chemical Company ("Dow") to identify and develop enzymes that could be
utilized by Dow to manufacture chemical compounds. The Company will receive
royalties on product sales. The Company is amortizing the technology
development fees over the period of the agreement. In December 2000, the
Company entered into an agreement with Dow to license several enzymes for
early stage testing of further application for production of certain
chemicals. Under the terms of the agreement, the Company received license fees
and is entitled to receive specified royalties upon commercialization of
certain products using the licensed enzymes.
In June 2000, the Company formed a 50/50 joint venture with Dow, named
Innovase LLC, to develop and commercialize innovative products for the
industrial enzyme market segment. Under the various joint venture related
agreements, the Company receives exclusivity fees, technology development
fees, and research and development payments over a five-year period. The
Company does not own a majority interest in the joint venture and, therefore,
accounts for the results of the joint venture utilizing the equity method.
In November 2000, the Company and Dow, through its Contract Manufacturing
Services business unit, signed an agreement to jointly market their respective
abilities to pharmaceutical companies to develop and
48
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
produce chiral compounds for active pharmaceutical ingredients, pharmaceutical
intermediates, and other fine chemicals. Under the terms of the agreement, the
Company will receive technology access fees, research and development
payments, milestone payments, and royalty payments from sales of end products
by Dow.
Revenue recognized under the Dow agreements was $9.0 million and $2.5
million for the years ended December 31, 2000 and 1999, respectively.
GlaxoSmithKline plc
In December 2000, the Company entered into a drug discovery research
collaboration with Glaxo Research and Development Limited ("Glaxo"), a wholly
owned subsidiary of GlaxoSmithKline plc, to identify pharmaceuticals derived
from the Company's recombinant multi-gene PathwayLibrary(TM) collections.
Under this non-exclusive research agreement, the Company and Glaxo will
jointly perform research to identify novel small molecules from the Company's
PathwayLibrary collections, and to screen these molecules for specific
pharmaceutical activity. Glaxo will receive exclusive worldwide rights to
designated biomolecules selected for commercialization.
Celera Genomics
In December 2000, the Company entered into a collaborative DNA sequencing
agreement with The Celera Genomics Group ("Celera"), an Applera Corporation
business, to sequence the genomes and discover the genes of selected,
uncultured microorganisms contained in the Company's environmental libraries.
The terms of the agreement include a cross-royalty arrangement for products
developed under the collaboration.
Celanese Ltd.
In August 2000, the Company signed an agreement with Celanese Ltd.
("Celanese") for an evaluation project to discover and develop microorganisms
capable of producing chemical products at rates substantially higher than
traditional microbial strains. Under the terms of the agreement, the Company
will receive research and development payments and royalties on the sale of
products utilizing improved strains.
Finnfeeds International Ltd
In May 1996, the Company entered into a strategic alliance with Finnfeeds
International Ltd ("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
$1.9 million. The Company received and recognized as revenue $0.8 million in
research funding over the period from May 1996 through December 1998. The only
obligation of the Company under this agreement was to perform research
activities.
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.
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-transferable access to a Terragen technology which could
be valuable to
49
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
competitors. 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
Terragen license was acquired to enhance the Company's intellectual property
position in combinational libraries. The Company believes the benefits
associated with preventing competitors 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 is being amortized over the
sixteen year patent life.
Other Agreements
The Company has signed various agreements with research institutions, as
well as 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. Notes Payable
In June 2000, the Company entered into an equipment financing line of
credit agreement with a lender to finance up to $12.0 million in equipment
purchases through March 31, 2001. Under the terms of the agreement, equipment
purchases are structured as notes and are to be repaid over 48 months at
interest rates ranging from 8.99% to 9.35%. The notes are secured by the
related equipment. As of December 31, 2000, the Company had $4.6 million
available under the line of credit agreement.
At December 31, 2000, the Company's future minimum principal payments under
the equipment financing arrangements are as follows:
Year ending December 31:
2001 ....................................................... $ 1,439,000
2002 ....................................................... 1,571,000
2003 ....................................................... 1,720,000
2004 ....................................................... 2,203,000
Thereafter................................................ --
-----------
6,933,000
Less current portion...................................... (1,439,000)
-----------
$ 5,494,000
===========
5. Related Party Transactions
In February 2000, the Company initiated a loan program for six employees to
pay personal tax liabilities resulting from the failure to file Form 83(b)
elections with the Internal Revenue Service related to those employees'
exercise of incentive and non-qualified stock options during 1999. This
failure to timely file the Form 83(b) elections exposed the employees to
significant personal tax liabilities. To limit the tax exposure, the Company
elected to accelerate the vesting of the approximately 207,000 unvested
options, and agreed to loan the employees a total of $1.6 million in full
recourse promissory notes. The acceleration of the unvested options resulted
in a non-cash compensation charge to the Company of approximately $4.1
million. Additionally, the
50
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company agreed to directly compensate two individuals a total of approximately
$240,000 in cash. As of December 31, 2000, the Company had loaned a total of
$28,000 to these employees.
Included in the statements of operations are consulting fees and reimbursed
expenses to various stockholders, amounting to approximately $737,000 and
$413,000 for the years ended December 31, 2000 and 1999, respectively.
6. Commitments and Contingencies
Leases
The Company leases office and laboratory space as well as equipment under
noncancelable leases as follows:
Capital Operating
Leases Leases
---------- -----------
Year ending December 31:
2001 .......................................... $1,168,000 $ 2,563,000
2002 .......................................... 1,281,000 2,563,000
2003 .......................................... 1,086,000 2,720,000
2004 .......................................... 566,000 2,399,000
2005 .......................................... 270,000 2,566,000
Thereafter................................... -- 30,551,000
---------- -----------
Total minimum lease payments................. 4,371,000 $43,362,000
===========
Amount representing interest..................... 864,000
----------
Present value of minimum capital lease
obligations..................................... 3,507,000
Less current portion............................. (819,000)
----------
Long-term capital lease obligations.............. $2,688,000
==========
In November 2000, the Company relocated its San Diego operations to a
75,000 square foot facility that was built to the Company's specifications.
The operating lease commitments include rental payments due under the new San
Diego facility lease, which expires in November 2015. For the years ended
December 31, 2000, 1999, and 1998, rent and administrative service expense
under operating leases was approximately $1,428,000, $533,000, and $516,000,
respectively.
During 2000, the Company entered into a lease agreement for an additional
research and development facility to be built to the Company's specifications.
The facility is expected to be completed in the second quarter of 2002. The
operating lease will become effective upon completion of the facility and
continue for a period of fifteen years.
Equipment acquired under capital leases is included in property and
equipment and amounted to $7,207,000 and $6,389,000 (net of accumulated
amortization of $4,871,000 and $4,409,000) as of December 31, 2000 and
December 31, 1999, respectively. The Company's capital lease obligations
mature at various dates through April 2005, with interest rates ranging from
9.5% to 15.7%.
Litigation
The Company is, from time to time, subject to legal proceedings and claims
which arise in the normal course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions
will not have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
51
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Preferred Stock and Stockholders' Equity
Reverse Stock Split
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.
Initial Public Offering
On February 17, 2000, the Company completed its initial public offering of
8,337,500 shares of common stock at $24.00 per share, which includes 1,087,500
shares of common stock issued pursuant to the underwriters' over-allotment
option. The combined gross proceeds raised by the Company from the offering
and over-allotment option were $200.1 million.
Redeemable and Convertible Preferred Stock
In January 1999, in conjunction with a strategic alliance signed with
Syngenta (see 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).
A summary of redeemable and convertible preferred stock issued and
outstanding as of December 31, 1999 is as follows:
Liquidation
Shares Preference
---------- -----------
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
========== ===========
From December 21, 1999 through the date of the Company's initial public
offering, the Series A, B, and D preferred stockholders were entitled to a 5%
dividend per annum. As of December 31, 1999, the Company had accrued $66,000
in dividends payable. In February 2000, the Company issued 15,641 shares of
common stock for payment of $376,000 of dividends payable to preferred
stockholders.
Concurrent with the Company's initial public offering, all of the Company's
redeemable and convertible shares of preferred stock were converted into
22,834,042 shares of common stock.
Shareholder Rights Plan
On December 13, 2000, the Board of Directors of the Company approved the
adoption of a shareholder rights plan (the "Rights Plan"). Under the Rights
Plan, the Board of Directors declared a dividend of one right to purchase one
one-hundredth of a share of Series A junior participating preferred stock (a
"Right") for each share of Company common stock outstanding as of December 22,
2000. The exercise price of each Right is $125.00.
52
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Initially, the Rights trade with the Company's common stock and are not
separately transferable. However, subject to certain exceptions, the Rights
will become exercisable (i) at such time that a person (or group of affiliated
persons) acquires beneficial ownership of 15% or more of the outstanding
Company common stock (an "Acquiring Person") or (ii) on the tenth business day
after a person or entity commences, or expresses an intention to commence, a
tender or exchange offer that would result in such person acquiring 15% or
more of the outstanding Company common stock.
In the event a person becomes an Acquiring Person, each Right held by all
persons other than the Acquiring Person will become the right to acquire one
share of Company common stock at a price equal to 50% of the then-current
market value of the Company common stock. Furthermore, in the event an
Acquiring Person effects a merger of the Company, each Right will entitle the
holder thereof to purchase one share of common stock of the Acquiring Person
or the Acquiring Person's ultimate parent at a price equal to 50% of the then-
current market value of the Acquiring Person's or the Acquiring Person's
ultimate parent's common stock.
The Board of Directors can redeem the Rights at any time prior to a person
becoming an Acquiring Person at a redemption price of $0.01 per Right. In
addition, the Board of Directors may, after any time a person becomes an
Acquiring Person, exchange each Right for one share of common stock of the
Company. The Rights will expire on December 12, 2010 if not redeemed prior to
such date.
8. 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"). As of December 31, 2000, 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
Purchase Plan provides for annual increases of shares available for issuance
under the Purchase Plan beginning with 2001.
1999 Non-Employee Directors' Stock Option Plan
In December 1999, the Company adopted the 1999 Non-Employee Directors'
Stock Option Plan (the "Non-Employee Director Plan") and reserved a total of
277,719 shares of common stock for issuance thereunder. Each non-employee
director who becomes a director of the Company will be automatically granted a
non-qualified stock option to purchase 20,000 shares of common stock on the
date on which such person first becomes a director. On the day following each
annual meeting of our stockholders commencing with the 2001 annual meeting of
stockholders each non-employee director will automatically be granted a non-
qualified option to purchase 5,000 shares of common stock. The exercise price
of options under the Non-Employee 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 Non-Employee Director Plan is ten years. Each grant
under the Non-Employee Director Plan will vest in equal monthly installments
over three years from the date of grant.
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
and non-officer option committees of the Board of Directors. Unless terminated
sooner by the Board of Directors, the 1997 Plan will terminate in August 2007.
53
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 the purchase of restricted stock at a price 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. As of December
31, 2000, the aggregate number of shares which may be awarded under the 1997
Plan is 5,982,633, and an equal number of shares of common stock were reserved
for the exercise of these options.
Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan
The Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan
(the "1994 Plan") provided 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
were 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 were 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 16,470
options remain outstanding related to the 1994 Plan. In August 1997, the 1994
Plan was terminated, and there are no options available for future grant.
Information with respect to the stock option plans is as follows:
Weighted-Average
Shares Exercise Price
---------- ----------------
Balance at January 1, 1998 ................... 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
Granted .................................... 1,435,000 $23.84
Exercised .................................. (537,000) $ 1.11
Cancelled .................................. (68,000) $ 2.07
----------
Balance at December 31, 2000 ................. 3,955,000 $ 9.83
==========
At December 31, 2000, options to purchase 3,274,000 shares were
exercisable, and approximately 1,278,597 shares remain available for grant.
54
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Following is a further breakdown of the options outstanding as of December
31, 2000:
Weighted-
Weighted- Average
Average Weighted- Exercise
Remaining Average Price of
Options Life in Exercise Options Options
Range of Exercise Prices Outstanding Years Price Exercisable Exercisable
------------------------ ----------- --------- --------- ----------- -----------
$ 0.42 - $ 0.58........ 1,319,000 7.3 $ 0.56 1,319,000 $ 0.56
$ 1.73 - $ 2.02........ 908,000 8.7 $ 1.92 908,000 $ 1.92
$ 5.76 - $20.81........ 919,000 9.6 $15.76 299,000 $ 8.00
$22.88 - $88.63........ 809,000 9.4 $27.19 748,000 $27.44
--------- ---------
$ 0.42 - $88.63........ 3,955,000 8.6 $ 9.83 3,274,000 $11.89
========= =========
The weighted-average fair value of options granted during 2000, 1999, and
1998 was $13.63, $0.38, and $0.10, respectively. As of December 31, 2000,
1,303,000 options were vested.
A founder of the Company has an option to purchase 13,937 shares of common
stock with an exercise price of $0.03 per share that was issued in 1994 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 in August 2001.
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 of these options was estimated at the date of
grant using the "Minimum Value" method for option pricing with the following
assumptions for 1999 and 1998: risk-free interest rate of 6.50%; dividend
yield of 0%; and a weighted-average expected life of the options of five
years. For 2000, the fair value of these options was estimated using the
Black-Scholes model with the following assumptions: risk-free interest rates
ranging from 5.24% to 6.76%; dividend yield of 0%; volatility factor of 60%;
and a weighted-average expected life of the options of five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period. The Company's pro
forma information is as follows:
Years Ended December 31,
---------------------------------------
2000 1999 1998
------------ ----------- ------------
Pro forma net loss applicable
to common stockholders........ $(11,364,000) $(9,251,000) $(13,572,000)
Pro forma basic net loss per
share......................... $ (0.37) $ (3.93) $ (7.68)
The pro forma effect on net loss for 2000, 1999, and 1998 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, 2000, 1999, and 1998, in connection
with the grant of certain stock options to employees, the Company recorded
deferred stock compensation totaling approximately $8.8 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 in accordance with FASB
Interpretation No. 28, which permits an accelerated amortization methodology.
During the years ended December 31, 2000, 1999, and 1998, the
55
DIVERSA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company recorded amortization of deferred stock compensation expense of
approximately $3.4 million, $3.0 million, and $1.7 million, respectively.
Options Granted to Non-Employees
The Company has granted non-qualified stock options to certain non-
employees in connection with consulting agreements. During the years ended
December 31, 2000 and 1999, the Company recorded non-cash, stock-based
compensation charges of approximately $2.4 million and $1.1 million,
respectively, relating to these grants. Unvested options are re-valued as they
vest in accordance with SFAS No. 123 and EITF 96-18 using the Black-Scholes
model. The options granted and re-valued in 2000 were valued using the
following assumptions: risk-free interest rate of 6.50%; dividend yield of 0%;
volatility factor of 60%; and a weighted-average expected life of the options
of two years.
Warrants
In August 2000, the Company issued 10,795 shares of common stock and
warrants to purchase 21,552 shares of common stock at a weighted-average
exercise price of $32.45 per share for payment of consulting services with an
estimated fair value of $700,000. As of December 31, 2000, warrants to
purchase 182,000 shares of common stock at prices ranging from $0.03 to $38.39
were outstanding. All warrants are exercisable and expire at various dates
through April 2006.
At December 31, 2000, the Company has reserved shares of common stock for
future issuance as follows:
Employee Stock Purchase Plan..................................... 393,000
Stock Option Plans............................................... 5,234,000
Option issued to a founder of the Company........................ 14,000
Warrants......................................................... 182,000
---------
5,823,000
=========
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 of another 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
would not be performing any services on behalf of the Company after the
separation date.
9. 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. The Company matches a
portion of the employee contributions and may, at its discretion, make
additional contributions. During the years ended December 31, 2000, 1999, and
1998, the Company made contributions of approximately $80,000, $54,000, and
$45,000, respectively.
56
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 $22,223,000 and $22,605,000 has been
recognized to offset the deferred tax assets at December 31, 2000 and 1999,
respectively, as realization of such assets is uncertain.
December 31,
--------------------------
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforwards............. $ 13,873,000 $ 17,724,000
Deferred revenue............................. 3,599,000 1,155,000
Licenses..................................... 1,266,000 1,266,000
Start-up costs............................... -- 278,000
Allowance and accrued liabilities............ 1,386,000 349,000
Federal and state tax credits................ 1,954,000 1,669,000
Depreciation................................. 145,000 164,000
------------ ------------
Total deferred tax assets.................... 22,223,000 22,605,000
Valuation allowance.......................... (22,223,000) (22,605,000)
------------ ------------
Net deferred tax assets.................... $ -- $ --
============ ============
At December 31, 2000, the Company has federal and California net operating
loss carryforwards of approximately $36,037,000 and $21,570,000, respectively.
The federal net operating loss carryforwards will begin to expire in 2009. The
California net operating loss carryforwards will continue to expire in 2001
unless utilized. The Company also has federal and California tax credits of
approximately $1,453,000 and $717,000, respectively, which begin to 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 carry-forwards may be limited
due to cumulative changes 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 January 2001, the Company signed a drug discovery, development, and
licensing agreement with IntraBiotics Pharmaceuticals, Inc. Under the terms of
the agreement, the companies will work together to identify and develop novel
small molecule drugs derived from the Company's recombinant natural product
libraries that demonstrate antibacterial or antifungal properties. The Company
will receive technology access fees, research support, and success-based
milestone payments for each drug developed as well as royalties on any
products commercialized under the agreement.
Also in January 2001, the Company obtained an irrevocable standby letter of
credit for $2.2 million from a bank, which was required as security under the
provisions of the Company's San Diego facility lease agreement. The letter
expires in January 2002 and is automatically renewable upon written notice. As
a condition, the bank required the Company to invest $2.2 million in the form
of a 90-day time deposit that will continue to roll over for the term of the
letter.
57
SELECTED QUARTERLY DATA (UNAUDITED)
The following tables set forth certain unaudited quarterly information for
each of the eight fiscal quarters in the two year period ended December 31,
2000. This quarterly information has been prepared on a consistent basis with
the audited financial statements and, in the opinion of management, includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the information for the periods presented. Our
quarterly operating results may fluctuate significantly as a result of a
variety of factors, and operating results for any quarter are not necessarily
indicative of results for a full fiscal year or future quarters.
June
2000 Quarter Ended Dec. 31 Sep. 30 30 Mar. 31
- ------------------ ------- ------- ------ -------
(in thousands, except per
share data)
Total revenue.............................. $ 8,943 $ 5,578 $5,374 $ 4,406
Operating expenses......................... 12,662 10,248 9,047 11,432
Net loss applicable to common
stockholders.............................. (353) (1,386) (637) (5,997)
Basic and diluted net loss per common
share..................................... (0.01) (0.04) (0.02) (0.32)
Pro forma basic and diluted net loss per
common share(1)........................... -- -- -- (0.19)
June
1999 Quarter Ended Dec. 31 Sep. 30 30 Mar. 31
- ------------------ ------- ------- ------ -------
(in thousands, except per
share data)
Total revenue.............................. $ 3,813 $ 3,985 $1,915 $ 559
Operating expenses......................... 5,858 4,121 5,792 3,736
Net loss applicable to common
stockholders.............................. (2,011) (84) (3,805) (3,120)
Basic and diluted net loss per common
share..................................... (0.77) (0.04) (1.78) (1.68)
Pro forma basic and diluted net loss per
common share(1)........................... (0.08) 0.00 (0.15) (0.13)
- --------
(1) Pro forma basic and diluted net loss per common share has been computed
assuming the conversion of preferred stock (using the "as if converted"
method), which automatically converted to common stock upon completion of
the Company's initial public offering in February 2000, at the original
date of issuance.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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 report. 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.
58
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to executive officers and
directors is incorporated by reference from the information under the captions
of "Election of Directors" and "Executive Officers" contained in the proxy
statement to be filed with the SEC pursuant to Regulation 14A in connection
with our 2001 annual meeting of stockholders.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the proxy
statement for our 2001 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the proxy statement for our 2001 annual meeting of
stockholders.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
information under the caption contained in "Certain Transactions" contained in
the proxy statement for our 2001 annual meeting of stockholders.
59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Index to Consolidated Financial Statements
Page
----
Report of Ernst & Young LLP, Independent Auditors....................... 38
Balance Sheets.......................................................... 39
Statements of Operations................................................ 40
Statement of Stockholders' Equity (Deficit)............................. 41
Statements of Cash Flows................................................ 42
Notes to Financial Statements........................................... 43
(a)(2) Financial Statement Schedules: All schedules have been omitted
because they are not applicable or required, or the information required to be
set forth therein is included in the Consolidated Financial Statements or notes
thereto included in Item 8 ("Financial Statements and Supplementary Data").
(a)(3) Index to Exhibits--See (c) below.
(b) Reports on Form 8-K
Report on Form 8-K dated December 12, 2000, reporting our adoption of a
shareholder rights plan under which all stockholders of record as of December
22, 2000 received rights to purchase shares of a new series of preferred stock.
(c) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4.1 Form of Common Stock Certificate of the Company.(2)
4.2 Rights Agreement by and between the Company and American Stock
Transfer and Trust Company, as Rights Agent, dated as of December 13,
2000 (including the Form of Certificate of Designation of Series A
Junior Participating Preferred Stock attached thereto as Exhibit A,
the Form of Right Certificate attached thereto as Exhibit B, and the
Summary of Rights to Purchase Preferred Shares attached thereto as
Exhibit C).(3)
10.1 Form of Indemnity Agreement entered into between the Company and its
directors and executive officers.(4)
10.2* 1994 Employee Incentive and Non-Qualified Stock Option Plan, as
amended.(4)
10.3* Form of Stock Option Agreement under the 1994 Employee Incentive and
Non-Qualified Stock Option Plan.(4)
10.4* 1997 Equity Incentive Plan.(4)
10.5* Form of Stock Option Grant Notice and Stock Option Agreement under the
1997 Equity Incentive Plan. (4)
10.6* 1999 Non-Employee Directors' Stock Option Plan.(4)
10.7* Form of Stock Option Grant Notice and Related Stock Option Agreement
under the 1999 Non-Employee Directors' Stock Option Plan.(4)
10.8* 1999 Employee Stock Purchase Plan.(4)
60
Exhibit
Number Description of Exhibit
------- ----------------------
10.9+ Amended and Restated Stockholders' Agreement by and among the Company
and the Stockholders identified therein, dated January 25, 1999.(4)
10.10 Form of Warrant Agreement to purchase Series A Preferred Stock (with
schedule of holders attached).(4)
10.11 Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).(4)
10.12 Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).(4)
10.13 Multi-Tenant Office R&D Building Lease by and between the Company and
Sycamore/San Diego Investors, dated September 24, 1996.(4)
10.14 Master Lease Agreement by and between the Transamerica Business Credit
Corporation and the Company, dated April 4, 1997.(4)
10.15+ License Agreement by and between the Company and The Dow Chemical
Company, dated July 20, 1997 and July 22, 1997.(4)
10.16+ Collaborative Research Agreement by and between the Company and The
Dow Chemical Company, dated July 20, 1999 and July 22, 1999.(4)
10.17+ License Agreement by and between the Company and Finnfeeds
International Ltd, dated December 1, 1998.(4)
10.18+ Collaboration Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999, as
amended.(4)
10.19+ Stock Purchase Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999.(4)
10.20+ Collaboration Agreement by and between the Company and Rhone-Poulenc
Animal Nutrition S.A., dated June 28, 1999.(4)
10.21+ License Agreement by and between the Company and Invitrogen
Corporation, dated March 29, 1999.(4)
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.(4)
10.23+ Patent Cross-License Agreement by and between the Company and Terragen
Discovery Inc., dated November 18, 1999.(4)
10.24+ Joint Venture Agreement by and between the Company and Novartis Seeds
AG, dated December 1, 1999.(4)
10.25+ Research Lease by and between the Company and One Cell Systems, Inc.,
dated February 16, 1999.(4)
10.26+ Research and Development Agreement by and between the Company and
Novartis Enzymes, Inc., dated December 1, 1999.(4)
10.27 Employment Offer Letter to Patrick Simms, dated February 3, 1997.(4)
10.28 Employment Offer Letter to Jay M. Short, Ph.D., dated August 30,
1994.(4)
10.29 Employment Offer Letter to Karin Eastham, dated April 2, 1999.(4)
10.30 Employment Offer Letter to William H. Baum, dated July 31, 1997.(4)
10.31 Separation Agreement by and between the Company and Terrance J.
Bruggeman, effective as of April 12, 1999.(4)
10.32 Separation Agreement by and between the Company and Kathleen H. Van
Sleen, effective as of May 10, 1999.(4)
61
Exhibit
Number Description of Exhibit
------- ----------------------
10.33 Letter Agreement by and between the Company and Jay M. Short, Ph.D.,
dated June 25, 1998.(4)
10.34 Lease Agreement, dated February 11, 2000, by and between the Company
and KR-Gateway Partners, LLC.(1)
10.35 Lease Agreement, dated February 11, 2000, by and between the Company
and KR-Gateway Partners, LLC.(1)
10.36+ Limited Liability Company Agreement of New Venture LLC, dated June 29,
2000.(5)
10.37+ Industrial Enzymes Research Agreement by and between New Venture LLC
and the Company, dated June 29, 2000.(5)
10.38+ Industrial Enzyme License Agreement by and between New Venture LLC and
the Company, dated June 29, 2000.(5)
10.39+ Addendum to the "Collaboration Agreement" between Novartis
Agribusiness Biotechnology Research, Inc. and the Company, dated
September 1, 2000.(6)
10.40++ Master Collaboration Agreement by and between the Company and The Dow
Chemical Company, effective as of September 30, 2000.
10.41++ Project Agreement by and between The Dow Chemical Company and the
Company, effective as of September 30, 2000.
10.42++ Collaborative DNA Sequencing Agreement by and between the Company and
PE Corporation (NY),
through its Business Unit Celera Genomics, effective as of December 1,
2000.
10.43++ Collaboration Agreement by and among the Company, Glaxo Research and
Development Limited, and Glaxo Group Limited, made as of December 8,
2000.
16.1 Letter from PricewaterhouseCoopers LLP to the Securities and Exchange
Commission, dated January 28, 2000.(7)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 64.
- --------
* Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000, filed with the Securities and Exchange
Commission on May 12, 2000, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 333-92853) originally filed with the Securities and Exchange
Commission on December 21, 1999, as amended, and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's current report on Form 8-K, filed
with the Securities and Exchange Commission on December 15, 2000, and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 333-92853) originally filed with the Securities and Exchange
Commission on December 16, 1999, as amended, and incorporated herein by
reference.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, filed with the Securities and Exchange
Commission on August 14, 2000, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, filed with the Securities and Exchange
Commission on November 14, 2000, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 333-92853) originally filed on February 8, 2000, as amended, and
incorporated herein by reference.
- --------
+ Confidential treatment has been granted with respect to portions of this
exhibit. A complete copy of the agreement, including the redacted terms,
has been separately filed with the Securities and Exchange Commission.
++ Confidential treatment will be requested with respect to portions of this
exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
(d) Financial Statement Schedules
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DIVERSA CORPORATION
/s/ Karin Eastham
By: _________________________________
Karin Eastham
Senior Vice President, Finance and
Chief Financial Officer
Date: March 30, 2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Karin Eastham and Jay M. Short, Ph.D.,
and each of them, as his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him or her and in his
or her name, place, and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming that all said attorneys-in-fact and agents, or any of
them or their or his substitute or substituted, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Jay M. Short, Ph.D. President, Chief Executive March 30, 2001
____________________________________ Officer, Chief Technology
Jay M. Short, Ph.D. Officer, and Director
(Principal Executive Officer)
/s/ Karin Eastham Senior Vice President, Finance March 30, 2001
____________________________________ and Chief Financial Officer
Karin Eastham (Principal Financial and
Accounting Officer)
/s/ James H. Cavanaugh, Ph.D. Director March 30, 2001
____________________________________
James H. Cavanaugh, Ph.D.
/s/ Daniel T. Carroll Director March 30, 2001
____________________________________
Daniel T. Carroll
/s/ Patricia M. Cloherty Director March 30, 2001
____________________________________
Patricia M. Cloherty
/s/ Donald D. Johnston Director March 30, 2001
____________________________________
Donald D. Johnston
/s/ Mark Leschly Director March 30, 2001
____________________________________
Mark Leschly
/s/ Melvin I. Simon, Ph.D. Director March 30, 2001
____________________________________
Melvin I. Simon, Ph.D.
/s/ Peter Johnson Director March 28, 2001
____________________________________
Peter Johnson
64
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4.1 Form of Common Stock Certificate of the Company.(2)
4.2 Rights Agreement by and between the Company and American Stock
Transfer and Trust Company, as Rights Agent, dated as of December 13,
2000 (including the Form of Certificate of Designation of Series A
Junior Participating Preferred Stock attached thereto as Exhibit A,
the Form of Right Certificate attached thereto as Exhibit B, and the
Summary of Rights to Purchase Preferred Shares attached thereto as
Exhibit C).(3)
10.1 Form of Indemnity Agreement entered into between the Company and its
directors and executive officers.(4)
10.2* 1994 Employee Incentive and Non-Qualified Stock Option Plan, as
amended.(4)
10.3* Form of Stock Option Agreement under the 1994 Employee Incentive and
Non-Qualified Stock Option Plan.(4)
10.4* 1997 Equity Incentive Plan.(4)
10.5* Form of Stock Option Grant Notice and Stock Option Agreement under the
1997 Equity Incentive Plan. (4)
10.6* 1999 Non-Employee Directors' Stock Option Plan.(4)
10.7* Form of Stock Option Grant Notice and Related Stock Option Agreement
under the 1999 Non-Employee Directors' Stock Option Plan.(4)
10.8* 1999 Employee Stock Purchase Plan.(4)
10.9+ Amended and Restated Stockholders' Agreement by and among the Company
and the Stockholders identified therein, dated January 25, 1999.(4)
10.10 Form of Warrant Agreement to purchase Series A Preferred Stock (with
schedule of holders attached).(4)
10.11 Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).(4)
10.12 Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).(4)
10.13 Multi-Tenant Office R&D Building Lease by and between the Company and
Sycamore/San Diego Investors, dated September 24, 1996.(4)
10.14 Master Lease Agreement by and between the Transamerica Business Credit
Corporation and the Company, dated April 4, 1997.(4)
10.15+ License Agreement by and between the Company and The Dow Chemical
Company, dated July 20, 1997 and July 22, 1997.(4)
10.16+ Collaborative Research Agreement by and between the Company and The
Dow Chemical Company, dated July 20, 1999 and July 22, 1999.(4)
10.17+ License Agreement by and between the Company and Finnfeeds
International Limited, dated December 1, 1998.(4)
10.18+ Collaboration Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999, as
amended.(4)
10.19+ Stock Purchase Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999.(4)
10.20+ Collaboration Agreement by and between the Company and Rhone-Poulenc
Animal Nutrition S.A., dated June 28, 1999.(4)
Exhibit
Number Description of Exhibit
------- ----------------------
10.21+ License Agreement by and between the Company and Invitrogen
Corporation, dated March 29, 1999.(4)
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.(4)
10.23+ Patent Cross-License Agreement by and between the Company and Terragen
Discovery Inc., dated November 18, 1999.(4)
10.24+ Joint Venture Agreement by and between the Company and Novartis Seeds
AG, dated December 1, 1999.(4)
10.25+ Research Lease by and between the Company and One Cell Systems, Inc.,
dated February 16, 1999.(4)
10.26+ Research and Development Agreement by and between the Company and
Novartis Enzymes, Inc., dated December 1, 1999.(4)
10.27 Employment Offer Letter to Patrick Simms, dated February 3, 1997.(4)
10.28 Employment Offer Letter to Jay M. Short, Ph.D., dated August 30,
1994.(4)
10.29 Employment Offer Letter to Karin Eastham, dated April 2, 1999.(4)
10.30 Employment Offer Letter to William H. Baum, dated July 31, 1997.(4)
10.31 Separation Agreement by and between the Company and Terrance J.
Bruggeman, effective as of April 12, 1999.(4)
10.32 Separation Agreement by and between the Company and Kathleen H. Van
Sleen, effective as of May 10, 1999.(4)
10.33 Letter Agreement by and between the Company and Jay M. Short, Ph.D.,
dated June 25, 1998.(4)
10.34 Lease Agreement, dated February 11, 2000, by and between the Company
and KR-Gateway Partners, LLC.(1)
10.35 Lease Agreement, dated February 11, 2000, by and between the Company
and KR-Gateway Partners, LLC.(1)
10.36+ Limited Liability Company Agreement of New Venture LLC, dated June 29,
2000.(5)
10.37+ Industrial Enzymes Research Agreement by and between New Venture LLC
and the Company, dated June 29, 2000.(5)
10.38+ Industrial Enzyme License Agreement by and between New Venture LLC and
the Company, dated June 29, 2000.(5)
10.39+ Addendum to the "Collaboration Agreement" between Novartis
Agribusiness Biotechnology Research, Inc. and the Company, dated
September 1, 2000.(6)
10.40++ Master Collaboration Agreement by and between the Company and The Dow
Chemical Company, effective as of September 30, 2000.
10.41++ Project Agreement by and between The Dow Chemical Company and the
Company, effective as of September 30, 2000.
10.42++ Collaborative DNA Sequencing Agreement by and between the Company and
PE Corporation (NY),
through its Business Unit Celera Genomics, effective as of December 1,
2000.
10.43++ Collaboration Agreement by and among the Company, Glaxo Research and
Development Limited, and Glaxo Group Limited, made as of December 8,
2000.
16.1 Letter from PricewaterhouseCoopers LLP to the Securities and Exchange
Commission, dated January 28, 2000.(7)
Exhibit
Number Description of Exhibit
------- ----------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. Reference is made to page 64.
- --------
* Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(c).
(1) Filed as an exhibit to the Company's Quarterly Report Form 10-Q for the
quarter ended March 31, 2000, filed with the Securities and Exchange
Commission on May 12, 2000, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 333-92853) originally filed with the Securities and Exchange
Commission on December 21, 1999, as amended, and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's current report on Form 8-K, filed
with the Securities and Exchange Commission on December 15, 2000, and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 333-92853) originally filed with the Securities and Exchange
Commission on December 16, 1999, as amended, and incorporated herein by
reference.
(5) Filed as an exhibit to the Company's Quarterly Report Form 10-Q for the
quarter ended June 30, 2000, filed with the Securities and Exchange
Commission on August 14, 2000, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Quarterly Report Form 10-Q for the
quarter ended September 30, 2000, filed with the Securities and Exchange
Commission on November 14, 2000, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 333-92853) originally filed on February 8, 2000, as amended, and
incorporated herein by reference.
- --------
+ Confidential treatment has been granted with respect to portions of this
exhibit. A complete copy of the agreement, including the redacted terms,
has been separately filed with the Securities and Exchange Commission.
++ Confidential treatment will be requested with respect to portions of this
exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.