-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GmJCcM51AM4FD3baZLPvBgHWje51Ekl9ZOLSd4n5Akep0lDAjSKVm9ekbt6TV1md zdbCxBlGT4qikplfwvlkTw== 0000930661-02-000063.txt : 20020413 0000930661-02-000063.hdr.sgml : 20020413 ACCESSION NUMBER: 0000930661-02-000063 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20020111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGRAQUEST INC CENTRAL INDEX KEY: 0001014455 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 680348328 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-66732 FILM NUMBER: 2507857 BUSINESS ADDRESS: STREET 1: 1530 DREW AVENUE CITY: DAVIS STATE: CA ZIP: 95616 BUSINESS PHONE: 9167500150 MAIL ADDRESS: STREET 1: 1530 DREW AVENUE CITY: DAVIS STATE: CA ZIP: 95616 S-1/A 1 ds1a.txt FORM S-1 AMENDMENT #2 As filed with the Securities and Exchange Commission on January 11, 2002 Registration No. 333-66732 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- AGRAQUEST, INC. (Exact Name of Registrant as Specified in Its Charter) --------------- Delaware 2879 68-0348328 (State or Other Jurisdiction (Primary Standard Industrial (IRS Employer of Incorporation or Organization) Classification Code Number) Identification No.)
1530 Drew Avenue Davis, California 95616 (530) 750-0150 (Address and Telephone Number of Registrant's Principal Executive Offices) --------------- Pamela G. Marrone, Ph.D. President and Chief Executive Officer AgraQuest, Inc. 1530 Drew Avenue Davis, California 95616 (530) 750-0150 (Name, Address, and Telephone Number of Agent For Service) Copies to: Charles S. Farman, Esq. Michael L. Fitzgerald, Esq. Charles C. Kim, Esq. Sidley Austin Brown & Wood llp Donald C. Hunt, Esq. 875 Third Avenue Morrison & Foerster LLP New York, New York 10022 400 Capitol Mall, 23rd Floor Sacramento, California 95814
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Title of Each Class of Amount to be Offering Price Aggregate Amount of Securities to be Registered Registered(1) Per Share Offering Price(2) Registration Fee(3) - ------------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value per share...................... 4,025,000 $13.00 $52,325,000 $12,505.68 - -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Includes shares of common stock that the underwriters have the option to purchase to cover overallotments, if any. (2) Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(a) under the Securities Act of 1933. (3) This amount was previously paid in connection with the initial filing. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion Preliminary Prospectus dated January 11, 2002 PROSPECTUS 3,500,000 Shares [LOGO OF AGRAQUEST, INC.] Common Stock ----------- This is AgraQuest, Inc.'s initial public offering. AgraQuest is selling all of the shares. We expect the public offering price to be between $11.00 and $13.00 per share. Currently, no public market exists for the shares. We have applied to list the shares on the Nasdaq National Market under the symbol "AGRQ." Investing in the common stock involves risks that are described in the "Risk Factors" section beginning on page 7 of this prospectus. -----------
Per share Total ----- ----- Public offering price.......................................... $ $ Underwriting discount.......................................... $ $ Proceeds, before expenses, to AgraQuest........................ $ $
The underwriters may also purchase up to an additional 525,000 shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 2002. ----------- Merrill Lynch & Co. Stephens Inc. ----------- The date of this prospectus is , 2002 TABLE OF CONTENTS
Page ---- Prospectus Summary.................................................... 1 Risk Factors.......................................................... 7 Forward-Looking Statements and Industry Data.......................... 18 Use of Proceeds....................................................... 19 Dividend Policy....................................................... 19 Capitalization........................................................ 20 Dilution.............................................................. 21 Selected Consolidated Financial Data.................................. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 24 Business.............................................................. 30 Management............................................................ 49 Certain Relationships and Related Party Transactions.................. 60 Principal Stockholders................................................ 62 Description of Capital Stock.......................................... 64 Shares Eligible for Future Sale....................................... 67 Underwriting.......................................................... 69 Legal Matters......................................................... 73 Experts............................................................... 73 Where You Can Find More Information................................... 73 Index to Consolidated Financial Statements............................ F-1
---------------- You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. AgraQuest(R), Serenade(R), Sonata(R), Muscodor(TM), Rhapsody(TM), Virtuoso(TM) and Vivace(TM) are trademarks of AgraQuest. i PROSPECTUS SUMMARY This summary highlights information contained in other parts of this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and our consolidated financial statements and related notes, before making an investment decision. References in this prospectus to "AgraQuest," "our company," "we," "our" and "us" refer to AgraQuest, Inc. and its subsidiaries, unless the context indicates otherwise. AgraQuest, Inc. Overview We are a biotechnology company focused on leveraging our proprietary technology platform to discover, develop, manufacture and market effective, safe and environmentally friendly natural pest management products for the agricultural and institutional and home markets. Our proprietary technology platform consists of our microorganism database, screening technology and natural product compound library and enables us to discover and characterize naturally occurring microorganisms that we believe can be developed into natural product solutions to almost any pest or plant disease. We are developing and commercializing a pipeline of natural pest management products that we believe will offer superior alternatives to synthetic chemical pesticides and genetically modified crops. We believe our first product, Serenade, and our initial product candidates can compete favorably with existing pest management products on efficacy, cost effectiveness, pest resistance, shelf life, ease of use, food and worker safety and environmental impact. With Serenade, we have demonstrated our ability to develop and commercialize novel products more quickly and cost effectively than our competitors. As concerns over the effects of synthetic chemical pesticides and genetically modified crops continue to grow, we believe our products will be increasingly adopted into the integrated pest management programs of conventional and organic growers as well as by institutional and home users. We believe we will set the industry standard for natural pest management solutions. Our Proprietary Technology Platform Using our proprietary technology platform, we isolate and screen naturally occurring microorganisms in a highly efficient manner to identify those that may have effective, novel and safe pest management characteristics. We then employ natural product chemistry to analyze and characterize the structures of compounds produced by selected microorganisms to identify product candidates for further development and commercialization. We believe our proprietary technology platform will be the foundation for the discovery and development of natural products for the pest management industry and has the following advantages: . Highly efficient discovery process. We believe we can discover new, effective product candidates faster than other developers of pest management products. To date, we have identified 23 product candidates from the more than 19,000 microorganisms in our database. . Valuable data capture and utilization. We gather valuable data on each microorganism and the natural product compounds it produces. Using this information, we are able to determine which microorganisms may have the highest pest management commercial potential. This information may also be used by chemical, biotechnology, pharmaceutical and consumer products companies to develop natural products for their respective industries. . Cost-effective and rapid new product development. We believe we can bring effective natural pest management products to market at greater speed and cost efficiency than our competitors. 1 Serenade and Our Initial Product Candidates We believe that Serenade is the first and only biofungicide that is effective on a wide variety of plant diseases. We began selling Serenade in the United States in July 2000. On the basis of over 750 field trials, Serenade has generally proven to be as or more effective than synthetic chemical pesticides on a wide variety of plant diseases. We believe Serenade also offers improved safety for the environment, consumers, growers and farm workers as compared with synthetic chemical pesticides. Serenade is currently approved for use on high-value specialty crops, such as grapes, apples, pears, cherries, tomatoes, hops, several vegetables, peanuts and walnuts, and for home and garden uses, and we are targeting other crops such as bananas, citrus, turf and ornamentals. A formulation of Serenade is approved for use in organic agriculture, thereby allowing us to address this increasingly important and rapidly growing market. Our most advanced product candidates include Sonata, a biofungicide, Virtuoso, a bioinsecticide, Muscodor, a biofumigant, and Vivace, an enhancer of Bt, the world's most widely used biopesticide. We believe Serenade and each of these product candidates can compete favorably with existing pest management products because they: . are highly effective; . offer growers an attractive value proposition in terms of cost-effective plant disease and pest control, resulting in increased yields; . have an accelerated time-to-market; . increase food and worker safety and reduce the risk of negative environmental impact; . address the rapidly growing organic foods market; and . reduce the risk of pest resistance. An inability to obtain regulatory approvals, or to comply with ongoing and changing regulatory requirements, could delay or prevent sales of Serenade and other products we are developing. Strategic Collaborations We believe that our proprietary technology platform and product candidates will have broad commercial applications beyond pest management for the discovery and development of natural products for broader applications, including animal health, human health and pharmaceuticals, aquaculture, industrial enzymes and specialty chemicals. We intend to continue establishing strategic collaborations with chemical, biotechnology, pharmaceutical and consumer products companies to support the development and commercialization of natural products for pest management and other applications. To date, we have entered into strategic collaborations with American Home Products Corporation, Athenix Corp., Dow AgroSciences LLC, Dragoco Gerberging & Co. AG and Maxygen, Inc. Our Strategy Our goal is to become the leader in the discovery, development and commercialization of natural pest management products. The key elements of our strategy include: . Utilize our proprietary technology platform to identify new product candidates. By applying our screening technology to our microorganism database and utilizing our natural product compound library, we anticipate that we will continue to discover multiple new natural pest management product candidates annually. An inability to identify new product candidates through our proprietary technology platform could harm our business. . Increase sales of Serenade. We have initiated marketing activities to increase the distribution and sale of Serenade by focusing on high-value specialty crops, targeting early adopters of new pest management 2 technologies, educating growers about the benefits of our natural pest management products, enhancing distribution relationships and developing and leveraging relationships with key industry influencers. Our product revenues would be adversely affected if Serenade is not commercially successful. . Develop and commercialize product candidates. We will continue to allocate significant research and development resources to develop and commercialize new natural pest management products that we have identified using our proprietary technology platform. We initially intend to focus our research and development efforts on Sonata, Virtuoso, Muscodor and Vivace, which each display high levels of activity against insects or plant diseases. We intend to maintain control over product quality, consistency and margins by manufacturing our products at our facility in Tlaxcala, Mexico. An inability to commercialize the products we are developing could impact our ability to achieve profitability. . Focus initially on high-value specialty crops. We are focusing our initial commercialization efforts on high-value specialty crops in the United States. We expect growers of these crops to derive the greatest economic benefit from our natural pest management products, in terms of relative cost, safety and the value of expected yield increases. . Maximize organic market opportunities. To address the rapidly growing organic market, in which there are few pest management alternatives, we will continue to ensure that a formulation of each of our products meets the requirements for organic food production in our target specialty crop markets. . Brand AgraQuest as the leading provider of natural pest management solutions. To enhance industry and public awareness of our company and increase demand for our natural pest management products, including Serenade, we intend to pursue an aggressive brand development strategy. . Leverage our proprietary technology platform in conjunction with strategic collaborators. We believe that our proprietary microorganism database and screening technology may have broad commercial applications beyond pest management. We intend to pursue strategic collaborations with chemical, biotechnology, pharmaceutical and consumer products companies, which we believe will allow us to enhance our market presence as well as our revenue growth. . Pursue select acquisitions. We may acquire businesses, technologies or products that we believe would strategically complement our business and allow us to be a more complete provider of crop production solutions. Additional Information We have a limited operating history and are subject to risks encountered by early stage companies. We have a history of losses, and we are not sure whether or when we may achieve or maintain profitability. We had a net loss of $9.1 million for the year ended December 31, 2000 and $7.1 million for the nine months ended September 30, 2001. Our future success depends in part on our ability to, among other things, expand internationally and protect our patent and proprietary rights. For a discussion of these and other risks which could adversely affect us and our industry, you should read the section of this prospectus entitled "Risk Factors." We were incorporated in the state of Delaware in January 1995. Our principal executive offices are located at 1530 Drew Avenue, Davis, California 95616, and our telephone number is (530) 750-0150. Our web site is located at http://www.agraquest.com. Any information that is included on or linked from our web site is not a part of this prospectus. 3 THE OFFERING Common stock offered by AgraQuest.................. 3,500,000 shares Common stock to be outstanding after the offering.. 12,807,165 shares Use of proceeds.................................... We estimate that our net proceeds from this offering, assuming no exercise of the underwriters' overallotment option, will be approximately $37.8 million. We intend to use the net proceeds from this offering to expand our sales and marketing capabilities and research and development activities, and to enhance our manufacturing facilities. We intend to use the remainder of the net proceeds to repay indebtedness and for working capital and general corporate purposes, including potential acquisitions. Risk factors....................................... See "Risk Factors" and other information included in this prospectus for a discussion of factors that you should carefully consider before deciding to invest in shares of our common stock. Proposed Nasdaq National Market symbol............. AGRQ
The number of shares of common stock to be outstanding after this offering is based on shares outstanding as of September 30, 2001 and excludes: . 1,171,408 shares of common stock issuable upon exercise of options outstanding as of September 30, 2001 at a weighted average exercise price of $3.42 per share; . 19,500 shares of common stock issuable upon exercise of warrants outstanding at an exercise price of $3.40 per share; . 757,352 shares of common stock reserved for future issuance under our stock option plans; and . 175,000 shares of common stock reserved for issuance under our 2002 employee stock purchase plan. In addition, except as otherwise noted, all information in this prospectus is based on the following assumptions: . a one-for-two reverse stock split of our common stock that will be effected prior to this offering; . the conversion of all outstanding shares of preferred stock into 7,451,796 shares of common stock upon the effectiveness of our registration statement; and . no exercise of the underwriters' overallotment option. 4 SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the fiscal years ended December 31, 1998, 1999 and 2000 are derived from, and are qualified by reference to, our audited financial statements included elsewhere in this prospectus. The statement of operations data for the fiscal years ended December 31, 1996 and 1997 are derived from audited financial statements not included in this prospectus. The statement of operations data for the nine month periods ended September 30, 2000 and 2001 and our balance sheet data as of September 30, 2001 are derived from, and are qualified by reference to, our unaudited financial statements included elsewhere in this prospectus. The pro forma net loss per share and shares used in computing pro forma net loss per share are calculated as if all outstanding shares of our preferred stock were converted into shares of our common stock on the date of issuance.
Nine Months Ended September Year Ended December 31, 30, ------------------------------------------- ---------------- 1996 1997 1998 1999 2000 2000 2001 ------ ------- ------- ------- -------- ------- ------- (In thousands, except per share data) Consolidated statement of operations data: Revenues: Product sales........................ $ -- $ -- $ -- $ -- $ 502 $ 339 $ 971 Research revenue..................... 30 55 110 77 218 146 180 ------ ------- ------- ------- -------- ------- ------- Total revenues...................... 30 55 110 77 720 485 1,151 Operating costs and expenses: Cost of product sales................ -- -- -- -- 502 339 983 Manufacturing plant start-up costs... -- -- -- -- -- -- 566 Research and development............. 387 1,780 3,090 4,468 6,300 4,697 3,869 Selling, general and administrative.. 138 403 836 1,749 2,914 1,745 2,595 Stock option compensation............ -- 10 15 12 224 167 496 ------ ------- ------- ------- -------- ------- ------- Total operating costs and expenses.. 525 2,193 3,941 6,229 9,940 6,948 8,509 ------ ------- ------- ------- -------- ------- ------- Loss from operations.................. (495) (2,138) (3,831) (6,152) (9,220) (6,463) (7,358) Interest income, net.................. 4 86 170 68 134 89 263 ------ ------- ------- ------- -------- ------- ------- Net loss.............................. (491) (2,052) (3,661) (6,084) (9,086) (6,374) (7,095) Preferred stock accretion............. -- -- (341) (810) (1,496) (1,051) (2,104) ------ ------- ------- ------- -------- ------- ------- Net loss applicable to common stockholders......................... $ (491) $(2,052) $(4,002) $(6,894) $(10,582) $(7,425) $(9,199) ====== ======= ======= ======= ======== ======= ======= Basic and diluted net loss per share applicable to common stockholders.... $(0.34) $ (1.34) $ (2.61) $ (4.40) $ (6.14) $ (4.34) $ (5.07) ====== ======= ======= ======= ======== ======= ======= Shares used in computing basic and diluted net loss per share applicable to common stockholders............... 1,478 1,534 1,534 1,570 1,725 1,712 1,816 ====== ======= ======= ======= ======== ======= ======= Pro forma basic and diluted net loss per share applicable to common stockholders......................... $ (1.23) $ (0.77) ======== ======= Shares used in computing pro forma basic and diluted net loss per share applicable to common stockholders.... 7,401 9,268 ======== =======
5
As of September 30, 2001 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) Consolidated balance sheet data: Cash and cash equivalents.................... $ 4,841 $ 4,841 $37,601 Working capital.............................. 5,044 5,044 37,804 Total assets................................. 17,336 17,336 50,096 Notes payable and capital lease obligations, net of current portion...................... 5,126 5,126 126 Convertible preferred stock.................. 42,948 -- -- Accumulated deficit.......................... (33,490) (33,490) (33,490) Total stockholders' equity (deficit)......... (32,046) 10,902 48,662
The table above presents consolidated balance sheet data as of September 30, 2001: . on an actual basis; . on a pro forma basis to reflect the automatic conversion of all outstanding shares of preferred stock into 7,451,796 shares of common stock upon the effectiveness of our registration statement; and . on a pro forma as adjusted basis to reflect the automatic conversion of all outstanding shares of preferred stock and the receipt of the estimated net proceeds from the sale of 3,500,000 shares of our common stock in this offering at an assumed initial public offering price of $12.00 per share (the midpoint of the expected price range), after deducting the estimated underwriting discount and estimated offering expenses payable by us, and after the application of a portion of the estimated proceeds to repay indebtedness as described under "Use of Proceeds." 6 RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed, the trading price of our common stock could decline and you may lose all or part of your investment. We have a limited operating history and are subject to risks encountered by early stage companies. We began our operations in January 1995. Accordingly, we have a limited operating history, and our business and prospects must be considered in light of the risks and uncertainties to which early stage companies in the rapidly changing market for pest management products are exposed. These risks include our inability to transition from a company with a research and development focus to a company also capable of supporting the commercial sale of products, including in the areas of regulatory approval and compliance, manufacturing, sales and marketing, distribution and quality control and assurance. Our inability to adequately address these risks could prevent us from becoming profitable or cause us to cease our operations. We have a history of losses since inception, we expect to continue to incur losses and we may not achieve or maintain profitability. We have incurred operating losses since inception, and we expect to continue to incur further operating losses for the foreseeable future. We had an accumulated deficit of $24.3 million at December 31, 2000 and $33.5 million at September 30, 2001. We had a net loss of $9.1 million for the year ended December 31, 2000 and $7.1 million for the nine months ended September 30, 2001. To date, our limited revenues have been derived primarily from research grants and initial commercial sales of our first product, Serenade. We expect our future revenues to be primarily from sales of Serenade and other natural pest management products, and those sales are highly uncertain. We expect to continue to devote substantial resources to expand our research and development activities, enhance our manufacturing facilities and expand our sales and marketing capabilities for the commercialization of Serenade and other product candidates. As a result, we will need to generate significant revenue to achieve and maintain profitability. We may never generate profits and, if we do become profitable, we may be unable to maintain or increase profitability on a quarterly or annual basis. If Serenade is not successful, we may not be able to generate significant product revenues. We introduced Serenade in Chile in October 1999 and began commercial sales in the United States in July 2000. We will be dependent on sales of Serenade for the immediately foreseeable future. We have derived only limited revenues from sales of Serenade to date, and we cannot assure you that Serenade will achieve broad market acceptance and generate increased sales. A number of factors will determine the commercial success of Serenade, including our ability to overcome grower reluctance to switch to natural pest management products, the efficacy and commercial viability of Serenade, our ability to implement and maintain an appropriate pricing policy for Serenade, the success of our commercialization and marketing strategies and the rate and extent that regulatory authorities and the public accept new pest management products. Serenade may not be effective on, or economically viable for, all crops or markets that we are targeting. In addition, because Serenade has not been put to widespread commercial use over significant periods of time, Serenade may have reduced benefits as compared to our field trial results. We may be unable to commercialize the product candidates we are developing, which may adversely impact our ability to achieve or maintain profitability. Our future success will depend in part on our ability to commercialize the natural pest management product candidates we are developing. In addition to Serenade, we have identified 22 product candidates to date using our proprietary technology platform, and we currently are focusing our development and 7 commercialization efforts on three of these product candidates. Successful development of our product candidates will require significant additional investment, including costs associated with research and development, completing field trials and obtaining regulatory approval. In addition, we are subject to inherent risks associated with new products and technologies. These risks include the possibility that any product candidate may: . be ineffective or less effective than anticipated; . fail to receive necessary regulatory approvals; . be difficult to competitively price relative to alternative pest management solutions; . be harmful to consumers, growers, farm workers or the environment; . be difficult or impossible to manufacture on an economically viable scale; . fail to be developed and accepted by the market prior to the successful marketing of similar products by competitors; or . be impossible to market because it infringes on the proprietary rights of third parties. Our inability to obtain regulatory approvals, or to comply with ongoing and changing regulatory requirements, could delay or prevent sales of Serenade and other products we are developing. The field testing, manufacture, sale and use of pest management products, including Serenade and the product candidates we are developing, are regulated extensively by the U.S. Environmental Protection Agency, or the EPA, and state, local and foreign governmental authorities. These regulations substantially increase the time and cost associated with bringing our products to market. If we do not receive the necessary governmental approvals to test, manufacture and market our products, or if regulatory authorities revoke our approvals or grant them subject to restrictions on use, we may be unable to sell our products and our business may fail. The EPA granted us conditional approval in June 2000 to market and sell Serenade in the United States. Within the United States, we are authorized to sell Serenade in every state except Hawaii. Serenade is also approved for sale in Chile, Mexico, Puerto Rico and New Zealand. We are required to obtain regulatory approval from other foreign regulatory authorities before we can market Serenade in those jurisdictions. Some states and foreign countries may apply different criteria than the EPA in their approval processes. If we make significant enhancements to Serenade's design, additional regulatory approvals may be required. We may not obtain regulatory approvals to market other natural pest management products or product extensions we are developing or may develop in the future. Although the EPA and state and foreign regulatory authorities have in place a registration procedure for natural products that is streamlined in comparison to the registration procedure for synthetic chemical pesticides or genetically modified crops, some of our products or product extensions may not be eligible for this streamlined procedure or the EPA or other regulatory authorities may mandate additional requirements, which could make the regulatory approval process more time consuming and costly for our future products. Even if we obtain all necessary regulatory approvals to market and sell our products, they will be subject to continuing review and extensive regulatory requirements. The EPA, as well as state and foreign regulatory authorities, could withdraw a previously approved product from the market upon receipt of newly discovered information, including our inability to comply with regulatory requirements, the occurrence of unanticipated problems with our products or for other reasons. Violations of any regulation could result in civil and criminal penalties, including suspension or revocation of our licenses or registrations, seizure of our inventory or monetary fines, which could adversely affect our operations. 8 Our inability to satisfy the conditions of our EPA registration could limit or prevent sales of Serenade in the United States. The EPA conditioned its approval of our Serenade registration on the requirement that by July 2001 we conduct five additional studies that are designed to further demonstrate Serenade's safety. All of these studies have been completed and submitted to the EPA. We are required to submit one additional study to the EPA by May 2002. If the results of any of these studies are unacceptable to the EPA, the EPA may revoke its approval of Serenade or impose limitations on its use. Because EPA approval is required for commercial sales of Serenade in the United States and will affect sales of Serenade abroad, the loss of EPA approval for any reason, including our inability to satisfy the conditions of our EPA registration, would prevent further sales of Serenade in the United States and in countries that export crops to the United States. If our ongoing or future field trials are unsuccessful, we may be unable to obtain regulatory approval of, or commercialize, our products. The successful completion of multiple field trials in domestic and foreign locations on many crops is critical to the success of our product development and marketing efforts for Serenade and our other product candidates. Regulatory approval of our products could be delayed or we may be unable to commercialize our products if our ongoing or future field trials are unsuccessful or these field trials produce inconsistent results or unanticipated adverse side effects on crops or non-target organisms, or if we are unable to collect reliable data. Although we have conducted successful field trials on a broad range of crops, we cannot be certain that additional field trials conducted on a greater number of acres, or on crops for which we have not yet conducted field trials, will be successful. In addition, the results of our ongoing and future field trials are subject to a number of conditions beyond our control, including weather-related events such as drought or floods, severe heat or frost, hail, tornadoes and hurricanes. We generally pay third parties such as growers, consultants and universities to conduct field tests on our behalf. Incompatible crop treatment practices or misapplication of our products by these third parties could interfere with the success of our field trials. If we are unable to ensure production of high-quality products at acceptable costs, our business will be harmed. To be successful, we will need to manufacture our products in large quantities at acceptable costs while also maintaining high product quality. We ferment all Serenade at our manufacturing facility in Tlaxcala, Mexico, and we currently rely on third-party contract manufacturers to spray dry, a process through which water is removed to produce a powder substance, and package Serenade. We expect our Tlaxcala, Mexico manufacturing facility to be fully operational, including spray drying and packaging capabilities, in 2002. We may encounter difficulties in commercially producing our products, including problems involving: . production yields; . quality control and assurance; . shortage of qualified personnel; . compliance with federal, state, local and foreign regulations; . production costs; . process controls; and . down-time related to plant maintenance and expansion. Even if we are successful in enhancing our manufacturing capabilities and processes, we cannot assure you that we will do so in time to meet our product commercialization schedule or satisfy the requirements of our distributors or customers. 9 Our inability to develop adequate sales and marketing capabilities could prevent us from successfully commercializing Serenade and other products we are developing. We currently have limited sales and marketing experience and capabilities. We will incur substantial costs to further develop our sales and marketing capabilities to successfully commercialize Serenade and other products we are developing. Our internal sales and marketing staff consists primarily of sales and marketing specialists and field development specialists who are trained to educate growers and independent distributors on the uses and benefits of Serenade. These specialists require a high level of technical expertise and knowledge regarding Serenade's capabilities and other pest management products and techniques. Our specialists and other members of our sales and marketing team may not successfully compete against the sales and marketing teams of our current and future competitors, many of which may have more established relationships with distributors and growers and significantly greater financial resources. Our inability to recruit, train and retain sales and marketing personnel or their inability to effectively market and sell Serenade and other products we are developing could impair our ability to gain market acceptance of our products and cause our sales to suffer. We may be unable to maintain and further establish successful relationships with third-party distributors, which could adversely affect our sales. We rely, and will increasingly rely, on third-party distributors of agrichemicals in the United States and foreign markets to distribute and assist us with the marketing and sale of Serenade and other products we are developing. We have signed several agreements, some of which are non-exclusive, with third parties to distribute Serenade and are currently engaged in discussions with several other third-party distributors. These agreements are terminable by either party upon minimal notice, typically 30 days, and do not require the distributors to purchase any of our products. Our future revenue growth will depend in large part on our success in establishing and maintaining these sales and distribution channels. If we are unable to maintain or further establish successful relationships with third-party distributors, we will need to further develop our internal sales and distribution capabilities, which would be expensive and time-consuming and the success of which would be uncertain. If the distributors with which we partner do not focus adequate resources on selling our products or are unsuccessful in selling them, sales of our products would decline. Many of our current and potential distributors sell and, in some cases, manufacture other, possibly competing, pest management products, including natural pest management products. As a result, these distributors may perceive Serenade and other products we may develop as a threat to product lines currently being distributed or manufactured by them. In addition, these distributors may earn higher margins by selling competing products or combinations of competing products. If the distributors with which we partner do not focus adequate resources on selling our products or are unsuccessful in selling them, sales of our products would decline. If we are unable to identify new product candidates through our proprietary technology platform, we may not achieve or maintain profitability. Our future success will depend in part on our ability to utilize our proprietary screening process to identify and commercialize additional microorganisms and natural product compounds that may be considered product candidates. To date, we have identified 23 natural pest management product candidates. We have licensed access to our microorganism database to other companies to develop natural pest management products or natural products for applications beyond pest management. If we are unable to identify additional microorganisms, natural product compounds or product candidates, we may be unable to develop new products or generate revenues through strategic collaborations or licensing agreements. Conflicts with our strategic collaborators could jeopardize the outcome of our strategic collaborations, which would limit our revenue from those collaborations. We have entered into strategic collaborations to identify, develop and commercialize products. We intend to conduct proprietary research programs in specific agricultural and other product areas that are not covered by 10 our collaboration agreements. However, our pursuit of opportunities in these markets could result in conflicts with our collaborators, and disagreements with our collaborators could develop over rights to our intellectual property. Any conflicts with our collaborators could lead to the termination of the relevant strategic collaboration agreement, delay collaborative activities, reduce our ability to renew agreements or enter into future strategic collaborations or result in litigation or arbitration and would negatively impact our relationships with existing collaborators. We have limited or no control over the resources that our collaborators may choose to devote to our joint efforts. Our collaborators may breach or terminate their agreements with us or fail to perform their obligations under these agreements. Further, our collaborators may elect not to develop products arising out of our strategic collaborations or may fail to devote sufficient resources to develop, manufacture, market or sell these products. Some of our collaborators could also become our competitors in the future. If our collaborators develop competing products, preclude us from entering into collaborations with their competitors, fail to obtain necessary regulatory approvals, prematurely terminate their agreements with us or fail to devote sufficient resources to the development and commercialization of our products, our joint product development efforts could be delayed and may fail to lead to commercialized products. We are subject to risks associated with international expansion, which could harm both our domestic and international operations. Our business strategy includes international expansion as we obtain regulatory approvals to market and sell our products in foreign countries, which we believe will allow us to enhance our revenue growth and worldwide market presence. We have conducted field trials in 17 countries and own a manufacturing facility in Tlaxcala, Mexico. International expansion of our operations could impose substantial burdens on our resources, divert management's attention from domestic operations or otherwise harm our business. Furthermore, international operations are subject to risks, including: . different regulatory requirements; . inadequate protection of intellectual property; . difficulties and costs associated with complying with a wide variety of complex foreign laws and treaties; . legal uncertainties regarding, and timing delays associated with, tariffs, export licenses and other trade barriers; . increased difficulty in collecting delinquent or unpaid accounts receivable; . adverse tax consequences; and . currency fluctuations. Any of these or other factors could adversely affect our ability to compete in international markets and our operating results. We depend heavily on the principal members of our management and scientific personnel, the loss of whom could impair our ability to maintain and expand our business. We depend heavily on the principal members of our management and scientific personnel, particularly Dr. Pamela G. Marrone, our President and Chief Executive Officer, the loss of whose services might significantly delay or prevent the achievement of our scientific or business objectives. Our ability to attract and retain qualified scientific personnel is critical to our success. Competition among biotechnology and biopesticide companies for qualified employees is intense, and we may not be able to attract and retain these individuals on acceptable terms or at all, and our inability to do so may significantly harm our business. 11 We have relationships with scientific collaborators at academic and other institutions, some of whom conduct research at our request or assist us in formulating our research and development strategy. These scientific collaborators are not our employees and may have commitments to, or consulting or advisory contracts with, other entities, including competitors, which may limit their availability or loyalty to us. We have limited control over the activities of these scientific collaborators and generally expect these individuals to devote only limited amounts of time to our activities. The inability or unwillingness of any of these persons to devote sufficient time and resources to our scientific programs could harm the development of our business. If we are unable to manage our anticipated growth effectively and efficiently, our business could be harmed. As we add manufacturing, marketing, sales, field development and other personnel, both domestically and internationally, and expand our research and development capabilities and enhance our manufacturing facilities, our operating expenses and capital requirements will increase. Our ability to manage our growth effectively and efficiently requires us to continue to forecast accurately our sales, manufacturing capacity and human resources and to continue to expend funds to improve our operational, financial and management controls, reporting systems and procedures. In addition, we must effectively expand, train and manage our employee base. If we are unable to manage our anticipated growth effectively and efficiently, our business could be harmed. Changes in technology could render our products unmarketable or obsolete. We are engaged in an industry characterized by extensive research and development efforts and rapid technological change. Our competitors, many of which have substantially greater technological and financial resources than we do, may develop pest management technologies and products that are more effective than ours or that render our technologies and products unmarketable or obsolete. To be successful, we will need to continually enhance our products and to design, develop and market new products that keep pace with technological and industry developments. If we are unable to effectively promote the AgraQuest and Serenade brands, we may not be able to attract customers or compete effectively against alternative pest management solutions. We believe that establishing and maintaining the AgraQuest and, initially, the Serenade brands are critical to our success. The importance of brand recognition will increase in part due to the increasing number of companies offering technologies similar to, and products that compete with, ours. We intend to increase our marketing and branding expenditures in an effort to promote awareness of our brands. If our brand building strategy is unsuccessful, these expenses may never be recovered, we may be unable to increase our future revenues and our business could be materially harmed. 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 to resolve. Our research and development activities involve the controlled use of hazardous materials and disposal of biological and other hazardous waste. Some of these materials may be novel, including bacteria with novel properties and bacteria that produce biologically active compounds. We are subject to federal, state, local and foreign laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products. We cannot eliminate the risk of accidental contamination or discharge and any resulting injury from these materials. In the event of an accident, we could be held liable for damages or penalized with fines, and this liability could exceed our cash resources. In addition, given the hazardous nature of the materials used in the manufacturing process of our business, we may be held strictly liable for damages caused by these materials. We may have to incur significant costs to comply with future environmental laws and regulations. New governmental regulations may have an adverse effect on the research, development, production and marketing of our products. We may be required to incur significant costs to comply with current or future laws or regulations. 12 Our strategic collaborators may use hazardous materials in connection with our collaborative efforts. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, hazardous materials used by these parties. Further, we currently are required to indemnify our collaborators under some circumstances against damages and other liabilities, including those that arise out of our development activities or products produced in connection with these collaborations, a breach of any representation or warranty made by us or the conduct of our business. We may need to raise additional capital that may not be available to us when needed or on acceptable terms, which could harm our business. Our future capital requirements will depend on the success of our operations. We may require substantial additional funding to continue our research and development activities, enhance our manufacturing capabilities and commercialize our products. We may seek additional funds from public and private stock offerings, strategic collaborations and licenses, borrowings under lines of credit or other sources. Additional capital may not be available on terms acceptable to us, or at all. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. If we cannot raise more capital when needed, we may have to reduce our capital expenditures, scale back our development of new products and research and development activities, reduce our workforce or license to others products that we otherwise would seek to commercialize ourselves. Our cash used in operations has exceeded cash generated from operations in each period since our inception. We used cash for operating activities of approximately $10.2 million in 2000 and $5.6 million in the nine months ended September 30, 2001. If we are unable to successfully integrate acquisitions, our revenue growth and future profitability may be negatively impacted. As part of our business strategy and growth plan, we may acquire businesses, technologies or products that we believe strategically complement our business. The process of integrating an acquired business, technology or product may result in unforeseen operating difficulties and expenditures and may absorb significant management attention and capital that would otherwise be available for ongoing development of our business. In addition, we may not be able to maintain the levels of operating efficiency that any company we may acquire achieved or might have achieved separately. As a result of difficulties associated with combining operations, we may not be able to achieve cost savings and other benefits that we might expect to achieve with these acquisitions. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities with restrictive covenants or adversely affect our operating results and financial condition. If a natural disaster strikes our facilities, our business may suffer. Our microorganism database and natural product compound library are critical to the success of our business. If these assets are damaged or destroyed by any event or series of events, such as a fire, contamination or other casualty, our business, financial condition and results of operations may be materially adversely affected. Our Davis, California facility is located near a known earthquake fault and our manufacturing facility in Tlaxcala, Mexico is located near a volcano. The impact of a major earthquake, volcanic eruption or other natural disaster on our facilities, infrastructure and overall operations is difficult to predict, and any natural disaster could seriously disrupt our operations. The insurance we maintain may not be adequate to cover losses resulting from natural disasters or other business interruptions. Power outages in California may adversely affect our Davis, California facilities. Our headquarters and research and development facilities are located in Davis, California. California has recently suffered energy shortages that have increased our expenses, and, if continued, could substantially 13 disrupt our operations. In the event of an acute power shortage, that is, when power reserves for the State of California fall below 1.5%, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout the state. Blackouts could intermittently and temporarily affect our ability to continue operations at our facilities. Furthermore, the deregulation of the energy industry instituted in 1996 by the California government and shortages in wholesale electricity supplies have caused power prices to increase. If wholesale prices continue to increase, our operating expenses will likely increase, which will have a negative effect on our operating results. Our inability to comply with regulations applicable to our facilities and procedures could delay, limit or prevent our research and development or manufacturing activities. Our research and development and manufacturing facilities and procedures are subject to ongoing review and periodic inspection. We must dedicate funds, time and effort in the areas of production, safety and quality control and assurance to ensure compliance with the regulations applicable to these facilities and procedures. If the EPA or another regulatory body determines that we are not in compliance with these regulations, regulatory approval of our products could be delayed or we may be required to limit or cease our research and development or manufacturing activities or pay a monetary fine. If we are required to limit or cease our research and development activities, our ability to develop new products would be impaired. If we are required to limit or cease our manufacturing activities, our ability to produce Serenade and other products in commercial quantities would be impaired or prohibited, which would harm our business. The high level of competition in our markets may result in pricing pressures, reduced margins or the inability of our products to achieve market acceptance. The markets for pest management products are intensely competitive, rapidly changing and undergoing consolidation. We may be unable to compete successfully against our current and future competitors, which may result in price reductions, reduced margins and the inability to achieve market acceptance for our products. Many entities are engaged in developing pest management products. Our competitors include major international agrichemical companies, specialized biotechnology companies and research and academic institutions. Many of these organizations have significantly more capital, research and development, regulatory, manufacturing, marketing, human and other resources than we do. As a result, they may be able to devote greater resources to manufacture, promote or sell their products, receive greater resources and support from independent distributors, initiate or withstand substantial price competition or more readily take advantage of acquisition or other opportunities. Further, many of the large agrichemical companies have a more diversified product offering than we do, which may give these companies an advantage in meeting customer needs by enabling them to offer integrated pest management solutions. Our inability to protect our patents and proprietary rights in the United States and foreign countries could limit our ability to compete effectively because third parties may take advantage of our research and development efforts. Our success depends in part on our ability to obtain and maintain patent and other proprietary right protection for our technologies and products in the United States and other countries. We have not yet been issued patents for all of our initial product candidates. If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary rights. We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees, consultants and advisors. It is possible that these agreements may be breached and that any remedies for a breach will not make us whole. We generally control and limit access to, and the distribution of, our product documentation and other proprietary information. Despite our efforts to protect these proprietary rights, our trade secret-protected know-how could fall into the public domain, unauthorized parties may copy aspects of 14 our products and obtain and use information that we regard as proprietary. Other parties may also independently develop our know-how or otherwise obtain access to our technologies. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems and costs in protecting our proprietary rights in these foreign countries. Patent law is still evolving relative to the scope and enforceability of claims in the fields in which we operate. We are like most biotechnology companies in that our patent protection is highly uncertain and involves complex legal and technical questions for which legal principles are not yet firmly established. Our patents and those patents for which we have license rights may be challenged, narrowed, invalidated or circumvented. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage. Our pending patent applications may not issue. Moreover, our competitors could challenge or circumvent our patents or pending patent applications. The U.S. Patent and Trademark Office and the courts have not established a consistent policy regarding the breadth of claims allowed in biotechnology patents. The allowance of broader claims may increase the incidence and cost of patent interference proceedings and the risk of infringement litigation. On the other hand, the allowance of narrower claims may limit the value of our proprietary rights. Other companies may claim that we infringe their intellectual property or proprietary rights, which could cause us to incur significant expenses or prevent us from selling our products. Our success depends in part on our ability to operate without infringing the patents and proprietary rights of third parties. Product development is inherently uncertain in a rapidly evolving technological environment such as ours in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. Patents issued to third parties may contain claims that conflict with our patents and that compete with our products and technologies, and third parties could assert infringement claims against us. Any litigation or interference proceedings, regardless of their outcome, may be costly and may require significant time and attention of our management and technical personnel. Litigation or interference proceedings could also force us to: . stop or delay using our proprietary technologies; . stop or delay selling, manufacturing or using products that incorporate the challenged intellectual property; . pay damages; or . enter into licensing or royalty agreements that may be unavailable on acceptable terms. We may be exposed to product liability claims, which could harm our business. We may be held liable for, or incur costs to settle liability claims, brought by growers to recover the cost of crops lost due to the failure of our products to protect the crops as intended or for damages to their crops caused by our products. We may also be held liable, or incur costs to settle, liability claims for any product we develop, or any product that uses or incorporates any of our technologies or products. These risks exist even with respect to products that have received, or may in the future receive, regulatory approval, registration or clearance for commercial use. Our product liability insurance may not be adequate and, at any time, insurance coverage may not be available on commercially reasonable terms or at all. A product liability claim could result in liability to us greater than our assets or insurance coverage. Even if we have adequate insurance coverage, product liability claims or recalls could result in negative publicity or force us to devote significant time, attention and financial resources to those matters. 15 You will suffer immediate and substantial dilution. We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our outstanding common stock, resulting in immediate and substantial dilution. The pro forma as adjusted net tangible book value of a share of our common stock purchased at an assumed initial public offering price of $12.00 (the midpoint of the expected price range) will be only $3.80. Additional dilution may be incurred if stock options or warrants, whether currently outstanding or subsequently granted, are exercised. Our principal stockholders, executive officers and directors own a significant percentage of our common stock, and these stockholders may take actions that may be adverse to your interests. Our executive officers and directors and entities affiliated with them will, in the aggregate, beneficially own approximately 36.6% of our common stock following this offering. These stockholders, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and approval of significant corporate transactions such as mergers, consolidations and sales of assets. They also could dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control or impeding a merger or consolidation, takeover or other business combination, which could cause the market price of our common stock to fall or prevent you from receiving a premium in such a transaction. Our common stock may experience extreme price and volume fluctuations, which could lead to costly litigation for us and make an investment in us less appealing. We are an early-stage company with a limited operating history and a history of losses. As a result, the market price of our securities could be highly volatile. This volatility may be unrelated to our operating performance. In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Whether or not meritorious, litigation brought against us could result in substantial costs, divert management's attention and resources and harm our business. The market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including: . announcements regarding product sales by us or competitors; . announcements of technological innovations or new products by us or competitors; . media reports and publications about pest management products; . announcements concerning competitors or the pest management industry or the agricultural economy in general; . new regulatory pronouncements and changes in regulatory guidelines; . general and industry-specific economic conditions; and . changes in financial estimates or recommendations by securities analysts. Our operating results are likely to fluctuate, resulting in an unpredictable level of earnings and possibly a decrease in our stock price. Our sales are expected to be highly seasonal. Sales of pest management products used for crop protection are dependent on planting and growing seasons, climatic conditions and other variables, which we expect to result in substantial fluctuations in our quarterly sales and earnings. In contrast, most of our expenses, such as employee compensation and lease payments for facilities and equipment, are relatively fixed. Our expense levels are based in part on our expectations regarding future product sales. As a result, any shortfall in sales relative to our expectations could cause significant changes in our operating results from quarter to quarter, 16 which could result in uncertainty surrounding our earnings and possibly a decrease in our stock price. Other factors may also contribute to the unpredictability of our operating results, including the size and timing of significant customer transactions, the delay or deferral of customer use of our products and the fiscal or quarterly budget cycles of our customers. For example, customers may purchase large quantities of our products in a particular quarter to store and use over long periods of time or time their purchases to coincide with their receipt of revenues or loan proceeds, which may cause significant fluctuations in our operating results for a particular quarter or year. Future sales of our common stock by our stockholders could depress our stock price. Sales of a large number of shares of our common stock, or the availability of a large number of shares for sale, could adversely affect the market price of our common stock and could impair our ability to raise funds in additional stock offerings. Based on shares outstanding as of September 30, 2001, upon completion of this offering, we will have 12,807,165 shares of common stock outstanding, assuming no exercise of options or warrants after September 30, 2001, and the conversion of all shares of outstanding preferred stock into common stock. Substantially all holders of our common stock are subject to agreements with the underwriters that restrict their ability to transfer their stock for 180 days after the date of this prospectus. Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf of the underwriters, may in its sole discretion and at any time waive the restrictions on transfer in these agreements during this period. After these agreements expire, approximately shares will be eligible for sale in the public market assuming no exercise of stock options or warrants after September 30, 2001. We will have broad discretion in how we use the net proceeds from this offering. We intend to use the net proceeds from this offering to expand our sales and marketing capabilities and research and development activities, and to enhance our manufacturing facilities. We intend to use the remainder of the net proceeds to repay indebtedness and for working capital and general corporate purposes, including potential acquisitions. Our management has not designated a specific use for a substantial portion of the net proceeds and will have broad discretion over their use. Our management may allocate the net proceeds differently than investors in this offering would have preferred, or we may not maximize our return on the net proceeds. Our incorporation documents and Delaware law may have anti-takeover provisions that could delay or prevent a change in control of our company, which could negatively affect your investment. Our certificate of incorporation and bylaws will contain and Delaware law contains provisions that could delay or prevent a change in control of our company that stockholders may consider favorable. Some of these provisions: . authorize the issuance of preferred stock that can be created and issued by our board of directors without prior stockholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of our common stock; . provide for a classified board of directors; . limit the persons who can call special stockholder meetings; . provide that a supermajority vote of our stockholders is required to amend our certificate of incorporation or bylaws; and . establish advance notice requirements to nominate directors for election to our board of directors or to propose matters that can be acted on by stockholders at stockholder meetings. These and other provisions in our incorporation documents and Delaware law could allow our board of directors to affect your rights as a stockholder by making it more difficult for stockholders to replace board members. Because our board of directors is responsible for appointing members of our management team, these provisions could in turn affect any attempt to replace the current management team. 17 FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. These forward-looking statements include, among other things, statements about our: . anticipated development and release of new products; . business strategy; . anticipated expenditures for research and development, sales and marketing and general and administrative expenses; . future operating results; . plans for hiring additional personnel; . anticipated sources of funds, including the proceeds from this offering, to fund our operations following the date of this prospectus; and . plans, objectives, expectations and intentions contained in this prospectus that are not historical facts. All statements included in this prospectus, other than statements of historical facts, regarding our strategy, future operations, financial position, estimated revenues or losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this prospectus, the words "will," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward- looking statements, although not all forward-looking statements contain these identifying words. All forward-looking statements speak only as of the date of this prospectus. You should not place undue reliance on these forward-looking statements. The plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this prospectus may not be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus. These cautionary statements qualify all forward- looking statements attributable to us or persons acting on our behalf. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Information regarding market and industry statistics contained in the "Prospectus Summary" and "Business" sections of this prospectus is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. 18 USE OF PROCEEDS We expect to receive approximately $37.8 million in net proceeds from the sale by us of the shares of common stock in this offering (approximately $43.6 million if the underwriters' overallotment option is exercised in full), based on an assumed initial public offering price of $12.00 per share (the midpoint of the expected price range) and after deducting the estimated underwriting discount and estimated offering expenses payable by us. . We intend to use up to $5 million of the net proceeds to expand our sales and marketing capabilities. . We intend to use up to $7 million of the net proceeds to expand our research and development activities. . We intend to use up to $10 million of the net proceeds to increase our manufacturing capacity. . We intend to use approximately $5 million of the net proceeds to repay in full the principal and interest, which has been accruing at 9% per year, on a promissory note that we made in connection with our purchase of a manufacturing facility in Tlaxcala, Mexico in December 2000. This promissory note is due and payable in full upon the receipt of the net proceeds from this offering. . We intend to use the remaining net proceeds for working capital and general corporate purposes. We may also use a portion of the remaining net proceeds to invest in or acquire complementary businesses, products or technologies. From time to time, in the ordinary course of business, we expect to evaluate potential acquisitions of these businesses, products and technologies. At this time, however, we do not have any present understandings, commitments or agreements with respect to any material acquisition. Pending the uses described above, we will invest the net proceeds in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain future earnings for use in the operation and expansion of our business and, therefore, do not anticipate paying any cash dividends for the foreseeable future. 19 CAPITALIZATION The following table sets forth our capitalization as of September 30, 2001: . on an actual basis; . on a pro forma basis to reflect the automatic conversion of all outstanding shares of preferred stock into 7,451,796 shares of common stock upon the effectiveness of our registration statement; and . on a pro forma as adjusted basis to reflect the automatic conversion of all outstanding shares of preferred stock as well as receipt of the net proceeds from the sale of 3,500,000 shares of our common stock in this offering at an assumed initial public offering price of $12.00 per share (the midpoint of the expected price range), after deducting the estimated underwriting discount and estimated offering expenses payable by us, and after the application of a portion of the estimated net offering proceeds to repay indebtedness as described under "Use of Proceeds." You should read the table below in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
September 30, 2001 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (In thousands, except share data) Notes payable and capital lease obligations, net of current portion........................ $ 5,126 $ 5,126 $ 126 Convertible preferred stock--16,000,000 shares authorized; $0.001 par value; 14,903,593 shares issued and outstanding, actual; 3,000,000 authorized, none issued and outstanding, pro forma and pro forma as adjusted...................................... 42,948 -- -- Stockholders' equity (deficit): Common stock--26,000,000 shares authorized; $0.001 par value; 1,855,369 shares issued and outstanding, actual; 9,307,165 shares issued and outstanding pro forma; 30,000,000 authorized, 12,807,165 shares issued and outstanding pro forma as adjusted............. 2,849 45,797 83,557 Deferred stock option compensation............. (1,405) (1,405) (1,405) Accumulated deficit............................ (33,490) (33,490) (33,490) -------- -------- -------- Total stockholders' equity (deficit)......... (32,046) 10,902 48,662 -------- -------- -------- Total capitalization....................... $ 16,028 $ 16,028 $ 48,788 ======== ======== ========
The above information excludes: . 1,171,408 shares of common stock issuable upon exercise of options outstanding as of September 30, 2001 at a weighted average exercise price of $3.42 per share; . 19,500 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2001 at an exercise price of $3.40 per share; . 757,352 shares of common stock reserved for future issuance under our stock option plans; and . 175,000 shares of common stock reserved for issuance under our 2002 employee stock purchase plan. 20 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share and the pro forma as adjusted net tangible book value per share after this offering. Investors participating in this offering will incur immediate, substantial dilution. The pro forma net tangible book value of our common stock as of September 30, 2001 was approximately $10.9 million, or approximately $1.17 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving effect to the conversion of all outstanding shares of our preferred stock into common stock. After giving effect to our sale of 3,500,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share and after deducting the estimated underwriting discount and estimated offering expenses payable by us, and after application of a portion of the estimated proceeds to repay indebtedness as described under "Use of Proceeds," our pro forma as adjusted net tangible book value at September 30, 2001 would have been $48.7 million, or $3.80 per share. This represents an immediate increase in pro forma net tangible book value of $2.63 per share to existing stockholders and an immediate dilution of $8.20 per share to purchasers of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share............... $12.00 Pro forma net tangible book value per share at September 30, 2001....................................................... $1.17 Increase per share attributable to new investors............ 2.63 ----- Pro forma as adjusted net tangible book value per share after this offering................................................ 3.80 ------ Dilution per share to new investors........................... $ 8.20 ======
The following table sets forth on a pro forma as adjusted basis, as of September 30, 2001, the total number of shares of common stock purchased from us, the total consideration paid for these shares and the average price per share paid by existing stockholders and new investors, before deducting the estimated underwriting discount and estimated offering expenses payable by us.
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing stockholders ..... 9,307,165 72.7 $39,169,000 48.3 $4.21 New investors.............. 3,500,000 27.3 42,000,000 51.7 12.00 ---------- ------ ----------- ------ Total ................... 12,807,165 100.0% $81,169,000 100.0% $6.34 ========== ====== =========== ======
As of September 30, 2001, we had 1,171,408 shares of common stock issuable upon exercise of options outstanding at a weighted-average exercise price of $3.42 per share and 19,500 shares of common stock issuable upon exercise of outstanding warrants with an exercise price of $3.40 per share. We have reserved 757,352 shares of common stock for future issuance under our stock option plans and 175,000 shares of common stock under our 2002 employee stock purchase plan. To the extent these options or warrants are exercised, and to the extent we issue new options or rights under our stock option plans or issue additional shares of common stock in the future, purchasers of common stock in this offering will experience further dilution. 21 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. We derived the consolidated statement of operations data for the years ended December 31, 1998, 1999 and 2000 and the consolidated balance sheet data as of December 31, 1999 and 2000 from the consolidated financial statements which have been audited by Ernst & Young LLP and included elsewhere in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 2000 and 2001 and the consolidated balance sheet data as of September 30, 2001 have been derived from our unaudited financial statements included elsewhere in this prospectus. We derived the consolidated statement of operations data for the years ended December 31, 1996 and 1997 and the consolidated balance sheet data as of December 31, 1996, 1997 and 1998 from audited consolidated financial statements which are not included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations for these periods and financial condition at those dates. Historical results are not necessarily indicative of future results. See note 2 to the consolidated financial statements for an explanation of the method used to determine the numbers of shares used in computing basic and diluted and pro forma basic and diluted net loss per share.
Nine Months Ended Years Ended December 31, September 30, ------------------------------------------- ---------------- 1996 1997 1998 1999 2000 2000 2001 ------ ------- ------- ------- -------- ------- ------- (In thousands, except per share data) Consolidated statement of operations data: Revenues: Product sales......................... $ -- $ -- $ -- $ -- $ 502 $ 339 $ 971 Research revenue...................... 30 55 110 77 218 146 180 ------ ------- ------- ------- -------- ------- ------- Total revenues...................... 30 55 110 77 720 485 1,151 Operating costs and expenses: Cost of product sales................. -- -- -- -- 502 339 983 Manufacturing plant start-up costs.... -- -- -- -- -- -- 566 Research and development.............. 387 1,780 3,090 4,468 6,300 4,697 3,869 Selling, general and administrative... 138 403 836 1,749 2,914 1,745 2,595 Stock option compensation............. -- 10 15 12 224 167 496 ------ ------- ------- ------- -------- ------- ------- Total operating costs and expenses.. 525 2,193 3,941 6,229 9,940 6,948 8,509 ------ ------- ------- ------- -------- ------- ------- Loss from operations.................... (495) (2,138) (3,831) (6,152) (9,220) (6,463) (7,358) Interest income, net.................... 4 86 170 68 134 89 263 ------ ------- ------- ------- -------- ------- ------- Net loss................................ (491) (2,052) (3,661) (6,084) (9,086) (6,374) (7,095) Preferred stock accretion............... -- -- (341) (810) (1,496) (1,051) (2,104) ------ ------- ------- ------- -------- ------- ------- Net loss applicable to common stockholders........................... $ (491) $(2,052) $(4,002) $(6,894) $(10,582) (7,425) $(9,199) ====== ======= ======= ======= ======== ======= ======= Basic and diluted net loss per share applicable to common stockholders...... $(0.34) $ (1.34) $ (2.61) $ (4.40) $ (6.14) $ (4.34) $(5.07) ====== ======= ======= ======= ======== ======= ======= Shares used in computing basic and diluted net loss applicable to common stockholders........................... 1,478 1,534 1,534 1,570 1,725 1,712 1,816 ====== ======= ======= ======= ======== ======= ======= Pro forma basic and diluted net loss per share applicable to common stockholders........................... $ (1.23) $(0.77) ======== ======= Shares used in computing pro forma basic and diluted net loss per share applicable to common stockholders...... 7,401 9,268 ======== =======
22
As of December 31, As of -------------------------------------------- September 30, 1996 1997 1998 1999 2000 2001 ------ ------- ------- -------- -------- ------------- (In thousands) Consolidated balance sheet data: Cash and cash equivalents............ $1,680 $ 776 $ 2,956 $ 2,849 $ 12,518 $ 4,841 Working capital......... 1,515 656 2,574 2,214 13,422 5,044 Total assets............ 1,712 1,016 3,934 5,436 24,445 17,336 Notes payable and capital lease obligations, net of current portion........ 7 79 433 369 5,340 5,126 Convertible preferred stock.................. 1,877 3,149 9,396 17,252 40,858 42,948 Accumulated deficit..... (761) (2,813) (6,815) (13,709) (24,291) (33,490) Total stockholders' equity (deficit)....... (337) (2,379) (6,366) (13,142) (23,409) (32,046)
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since our inception in January 1995, we have focused on discovering, developing, manufacturing and marketing effective, safe and environmentally friendly pest management products for the agricultural and institutional and home markets. We have devoted substantially all of our efforts toward research and development activities and have commenced marketing and sales efforts for Serenade, our first natural pest management product. We incurred net losses of $3.7 million in 1998, $6.1 million in 1999, $9.1 million in 2000 and $7.1 million for the nine months ended September 30, 2001. As of September 30, 2001, we had an accumulated deficit of $33.5 million. We expect to incur additional losses and to expend substantial financial resources to continue our research and development activities, enhance our manufacturing capabilities, expand our sales and marketing activities and for other general corporate purposes. We anticipate our research and development expenses will increase as we continue to develop new products and conduct field trials. Our selling and marketing expenses will increase as we commercialize Serenade, and general and administrative expenses will increase as we enhance our facilities and increase personnel. We began commercial production of Serenade in the third quarter of 2000. We recognize revenues from product sales upon shipment to distributors, unless contractual obligations, acceptance provisions or other contingencies exist. If these obligations or provisions exist, we recognize revenues after they are fulfilled or expire. Distributors do not have price protection or return rights. We generate research revenues from research and development activities under contracts with other entities. We recognize revenues from "best efforts" research and development contracts as work is performed. If, however, the contracts provide for specific milestones or deliverables, we recognize revenues upon the achievement of those milestones or upon delivery. We record funding received in advance of work performed, including up-front payments, as deferred revenue. We may receive payments under strategic collaboration agreements as collaborators or their sublicensees achieve product development milestones as well as royalty payments based on sales of products that incorporate our proprietary technology. We will recognize any future milestone payments or royalty revenues as earned. We defer the recognition of revenue for some sales transactions that provide for payment terms of relatively longer duration. For transactions with these longer payment terms, our policy is to recognize revenue upon the earlier of cash received or the original invoice due date, assuming it is probable that we will collect at that date. Until we purchased our manufacturing facility in Tlaxcala, Mexico in December 2000, we relied on third-party manufacturers to produce our products. We believe our production costs through our own manufacturing facility will be lower than the costs of using third-party manufacturers. We have recorded deferred stock option compensation in connection with the grant of stock options to employees based on the difference between the exercise price of the options and the fair value of our common stock on the grant date. We determined fair value based on the business factors underlying the value of our common stock on the grant date. We recorded deferred stock option compensation expense of $528,000 for the year ended December 31, 2000 and $1,358,000 for the nine months ended September 30, 2001. These amounts were recorded as a component of stockholders' equity and are being amortized as charges to operations over the vesting periods of the options, generally five years, using a graded-vesting method. We recorded stock option compensation expense of approximately $74,000 for the year ended December 31, 2000 and $407,000 for the nine months 24 ended September 30, 2001. For options granted to employees, we expect to record stock option compensation expense as follows: approximately $215,000 for the remainder of 2001, $621,000 in 2002, $316,000 in 2003, $172,000 in 2004, $71,000 in 2005, and $10,000 in 2006. The amount of stock option compensation expense to be recorded in future periods may decrease if unvested options for which deferred stock option compensation has been recorded are subsequently canceled. We have also recorded stock option compensation for options granted to consultants in accordance with Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." For the years ended December 31, 1998, 1999 and 2000 and for the nine months ended September 30, 2000 and 2001, we recorded stock compensation expense of $15,000, $12,000, $150,000, $142,000 and $89,000, respectively, relating to options granted to consultants. Stock option compensation expense incurred as a result of stock option grants to consultants is an estimate based on the fair market value of our common stock. Results of Operations Nine Months Ended September 30, 2000 and 2001 Revenues Product sales were recorded for the first time in the third quarter of 2000. For the nine months ended September 30, 2000 and 2001, respectively, we recorded $339,000 and $971,000 in revenues for shipments of Serenade. This 186% increase in product sales is due to the higher sales volume during our first full selling season. Four distributors accounted for 90% of product sales during the nine months ended September 30, 2000 and three distributors accounted for 79% of product sales during the nine months ended September 30, 2001. We expect that a relatively small number of distributors will continue to account for a significant percentage of product sales. Research revenues were $146,000 and $180,000 for the nine months ended September 30, 2000 and 2001, respectively, and resulted primarily from research revenues under "best efforts" research and development agreements. Cost of product sales Cost of product sales represents expenses incurred in connection with the manufacture of pre-production batches of Serenade, which yielded saleable quantities of Serenade. Cost of product sales was $339,000 for the nine months ended September 30, 2000 as compared to $983,000 for the nine months ended September 30, 2001. This increase is primarily related to the increase in sales. This change approximates the change in product sales plus distribution and other costs. Manufacturing plant start-up costs Manufacturing plant start-up costs were $566,000 for the nine months ended September 30, 2001 and represent expenses incurred through September 30, 2001 in connection with one-time activities related to opening our new manufacturing facility in Tlaxcala, Mexico. This facility was purchased in December 2000. Costs associated with start-up activities were primarily related to the operating costs incurred during the pre-production period, including a portion of salary-related expenses for employees in Mexico, the cost of unsaleable materials from test runs, travel costs for the implementation team, consulting fees and routine maintenance costs. These costs exclude expenditures relating to constructing and developing long-lived assets and getting these assets ready for their expected use. Research and development Research and development expenses include costs associated with the design, development and testing of Serenade and our product candidates. These costs consist primarily of salaries and other personnel-related expenses, as well as field trial laboratory, pilot plant and equipment expenses. Research and development expenses were $4.7 million and $3.9 million for the nine months ended September 30, 2000 and 2001, 25 respectively, representing a decrease of $800,000. This decrease was primarily due to process development costs for Serenade incurred in 2000 which were not present in 2001. In the absence of these process development costs, research and development expenses would have increased due to higher staffing levels and increases in the number of field trials conducted. Selling, general and administrative Selling, general and administrative expenses include salaries and personnel- related expenses, marketing and recruiting costs, professional service fees and general corporate expenses. Selling, general and administrative expenses were $1.7 million and $2.6 million for the nine months ended September 30, 2000 and 2001, respectively, representing an increase of $900,000. This increase was primarily attributable to increases in marketing expenses and employee compensation costs principally associated with increased sales of Serenade. Stock option compensation Stock option compensation expenses were $167,000 and $496,000 for the nine months ended September 30, 2000 and 2001, respectively. This increase was primarily attributable to the amortization of deferred stock option compensation recorded in 2001. Interest income, net Net interest income increased from $89,000 for the nine months ended September 30, 2000 to $263,000 for the nine months ended September 30, 2001. This increase resulted from increased interest income earned on higher average cash balances as a result of funds received from the sale of our preferred stock in December 2000. Preferred stock accretion The adjustment to accrete the carrying amount of our convertible preferred stock to its redemption amount increased from $1.1 million for the nine months ended September 30, 2000 to $2.1 million for the nine months ended September 30, 2001. This increase is related to the sale of our convertible preferred stock in December 2000. Net loss applicable to common stockholders Net loss applicable to common stockholders increased $1.8 million from $7.4 million for the nine months ended September 30, 2000 to $9.2 million for the nine months ended September 30, 2001. The increase was attributable to marketing expenses, employee compensation costs, including stock option compensation, and accretion of our convertible preferred stock to its redemption amount, partially offset by the decrease in process development costs for Serenade. Years ended December 31, 1998, 1999 and 2000 Revenues Product sales were $502,000 in 2000. Four distributors accounted for 89% of product sales during this period. We did not generate revenues from product sales prior to 2000. Research revenues were $110,000, $77,000 and $218,000 in 1998, 1999 and 2000, respectively, and resulted primarily from research and development activities under "best efforts" contracts for other entities. The fluctuation in research revenues was primarily due to timing of the work performed. Cost of Product Sales Cost of product sales was $502,000 in 2000 and represents expenses incurred in connection with the manufacture of pre-production batches of Serenade, which yielded saleable quantities of Serenade. These expenses were initially capitalized at the lower of cost or market and included in inventories. 26 Research and development Research and development expenses increased from $3.1 million in 1998 to $4.5 million in 1999 to $6.3 million in 2000. These increases were primarily due to increases in the number of personnel as we expanded our product development efforts, costs associated with the development and regulatory approval of Serenade and increases in the number of field trials conducted. Selling, general and administrative Selling, general and administrative expenses increased from $836,000 in 1998 to $1.7 million in 1999 to $2.9 million in 2000. These increases were primarily attributable to increases in the number of personnel and salaries, marketing expenses incurred relating to the introduction of Serenade and increases in professional service fees as a result of growth in our business activities. Stock option compensation Stock compensation expenses were $15,000 in 1998, $12,000 in 1999 and $224,000 in 2000. Expenses incurred primarily represent an estimate of the fair value of options granted to consultants during these periods. Interest income, net Net interest income decreased from $170,000 in 1998 to $68,000 in 1999 and increased to $134,000 in 2000. The decrease in 1999 resulted from lower average cash balances as a result of an increase in cash used in operations. The increase in 2000 resulted from increased interest income earned on higher average cash balances as a result of funds received from the sale of our preferred stock in April 2000. Preferred stock accretion The adjustment to accrete the carrying amount of our convertible preferred stock to its redemption amount increased from $341,000 in 1998 to $810,000 in 1999 to $1.5 million in 2000. These increases are related to sales of our convertible preferred stock in those years. Net loss applicable to common stockholders Net loss applicable to common stockholders increased from $4.0 million in 1998 to $6.9 million in 1999 to $10.6 million in 2000. These increases in net loss were primarily attributable to expanding our product development efforts, increases in personnel and marketing expenses incurred relating to the introduction of Serenade and the adjustments to accrete the carrying amount of our preferred stock to its redemption amount. Income taxes As of December 31, 2000, we had net operating loss carryforwards of approximately $21.5 million for federal and state income tax purposes that expire in the years 2010 through 2020 and 2003 through 2010, respectively. We also had approximately $322,000 and $360,000 in federal and state income tax credits, respectively, which expire in the years 2010 through 2020. Future utilization of the our net operating loss and other credit carryforwards may be subject to limitations set forth in the Internal Revenue Code and similar state provisions. These limitations could result in the expiration of the net operating losses before utilization. Liquidity and Capital Resources Since our inception, we have financed our operations primarily through private sales of our equity securities, resulting in gross proceeds of $39.2 million through September 30, 2001. To a lesser extent, we have financed our operations and other capital requirements through borrowings. As of December 31, 2000, we had cash and cash equivalents of $12.5 million and working capital of $13.4 million. In recent periods, we have also begun to finance a portion of our operations from product sales, amounting to $971,000 for the nine months ended September 30, 2001. As of September 30, 2001, we had cash and cash equivalents of $4.8 million and working capital of $5.0 million. 27 Net cash used in our operating activities was $3.4 million in 1998, $5.9 million in 1999, $10.2 million in 2000, and $5.6 million for the nine months ended September 30, 2001. Net cash used in operating activities resulted primarily from net losses for those periods. Net cash used in investing activities was $701,000 in 1998, $1.l million in 1999, $2.4 million in 2000 and $1.1 million for the nine months ended September 30, 2001. Investing activities consisted of the purchase of plant and equipment. Net cash provided by financing activities was $6.3 million in 1998, $6.9 million in 1999 and $22.2 million in 2000. Net cash provided by financing activities was primarily from the sale of preferred stock and proceeds from long-term borrowings, net of repayments. Net cash used in financing activities was $967,000 for the nine months ended September 30, 2001 primarily for the repayment of notes payable and capital lease obligations and prepaid financing costs. As of December 31, 2000, aggregate principal payments required under notes payable and capital lease obligations totaled $5.7 million. These payments are payable through 2003. We financed a portion of the purchase of our manufacturing facility in Tlaxcala, Mexico with a $5.0 million limited recourse promissory note from the seller. This note is due upon the receipt of proceeds from this offering. Our 10-year facilities lease for office, laboratory and pilot plant space in Davis, California provides for minimum lease payments of approximately $194,000 per year which commenced upon completion of construction in March 1999. As of September 30, 2001, we had capital equipment of $10.8 million less accumulated depreciation of $809,000 to support our research, development, manufacturing and administrative activities. For the twelve months subsequent to September 30, 2001 we expect to incur capital expenditures of approximately $10.0 million as we acquire equipment and expand and upgrade our facilities. Our capital requirements depend on numerous factors, including market acceptance of our products and the resources we devote to develop and support our products. We expect to devote substantial capital resources to expand our sales and marketing capabilities, expand our research and development activities, enhance our manufacturing facilities and for working capital and other general corporate purposes. These additional expenses and expenditures will consume a material amount of our cash resources, including a portion of the net proceeds of this offering. We believe that the net proceeds from this offering, together with our existing cash balances, will be sufficient to fund our currently foreseeable liquidity requirements for the next twelve months. In order to finance planned operations, we will need to raise additional capital, which may not be available on terms acceptable to us, if at all. In this regard, management is actively pursuing additional debt and/or equity financing in amounts sufficient to fund planned operations. Quarterly Results of Operations Our operating results for a particular quarter or year are likely to fluctuate, which could result in uncertainty surrounding our level of earnings and possibly a decrease in our stock price. Numerous factors will contribute to the unpredictability of our operating results. In particular, our sales are expected to be highly seasonal. Sales of pest management products for the agricultural market are dependent on planting and growing seasons, climate conditions and other variables, which we expect to result in substantial fluctuations in quarterly sales and earnings. In addition, most of our expenses, such as employee compensation and lease payments for facilities and equipment, are relatively fixed. Our expense levels are based, in part, on our expectations regarding future sales. As a result, any shortfall in sales relative to our expectations could cause significant changes in our operating results, including the size and timing of significant distributor and grower transactions, the delay or deferral of customer use of Serenade or our future products and the fiscal or quarterly budget cycles of our customers. For example, customers may purchase large quantities of our products in a particular quarter to store and use over long periods of time, or time their purchases to coincide with their receipt of revenue or loan periods, which may cause significant fluctuations in our operating results for a particular quarter or year. 28 Quantitative and Qualitative Disclosures About Market Risk The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then- prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of investments in a variety of securities, including commercial paper, money market funds and government and non-government debt securities. The average duration of all of our investments as of December 31, 1999 and 2000 and September 30, 2001 was less than 90 days. Due to the short-term nature of these investments, we believe that we have no material exposure to interest rate risk arising from our investments. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," or SFAS 133 which, as amended, is required to be adopted in years beginning after June 15, 2000. Because we do not use derivative instruments, the adoption of SFAS 133 did not have an effect on our results of operations, financial position or cash flows. In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations," or SFAS 141 and No. 142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. SFAS 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with existing guidance. We are required to adopt SFAS 142 effective January 1, 2002. Because we have historically not been party to any business combinations and therefore have not recorded related goodwill and intangible assets, the adoption of SFAS 141 and SFAS 142 did not and is not expected to have an effect on our results of operations, financial position or cash flows. 29 BUSINESS Overview We are a biotechnology company focused on leveraging our proprietary technology platform to discover, develop, manufacture and market effective, safe and environmentally friendly natural pest management products for the agricultural and institutional and home markets. Our proprietary technology platform consists of our microorganism database, screening technology and natural product compound library and enables us to discover and characterize naturally occurring microorganisms that we believe can be developed into natural product solutions to almost any pest or plant disease. We are developing and commercializing a pipeline of natural pest management products, including our first product, Serenade, which we believe will offer superior alternatives to synthetic chemical pesticides and genetically modified crops for conventional and organic growers. Using our proprietary technology platform, we isolate and screen naturally occurring microorganisms in a highly efficient manner to identify those that may have novel, effective and safe pest management characteristics. We then employ natural product chemistry to analyze and characterize the compound structures of selected microorganisms to identify product candidates for further development and commercialization. To date, we have screened more than 19,000 microorganisms, which has enabled us to identify 23 product candidates that display high levels of activity against insects, nematodes and plant diseases. These include Serenade, a biofungicide, and our most advanced product candidates, Sonata, a biofungicide, Virtuoso, a bioinsecticide, Muscodor, a biofumigant, and Vivace, an enhancer of Bt, the world's most widely used biopesticide. We believe that Serenade and each of these three initial product candidates can compete favorably with existing pest management products because they: . are highly effective; . offer growers an attractive value proposition in terms of cost-effective plant disease and pest control, resulting in increased yields; . have an accelerated time-to-market; . increase food and worker safety and reduce the risk of negative environmental impact; . address the rapidly growing organic foods market; and . reduce the risk of pest resistance. We began selling Serenade in the United States in July 2000. On the basis of over 750 field trials, Serenade has generally proven to be as or more effective than synthetic chemical pesticides on a wide variety of plant diseases. Serenade is currently approved for use on high-value specialty crops, such as grapes, apples, pears, cherries, tomatoes, hops, several vegetables, peanuts and walnuts, and for home and garden uses, and we are seeking or plan to seek approval for other crops, such as bananas, citrus, turf and ornamentals. A formulation of Serenade is approved for use in organic agriculture, which allows us to address this increasingly important and rapidly growing market. We believe that our proprietary technology platform will be the foundation for the discovery and development of natural products for the pest management industry. We also believe that our proprietary technology platform has broad commercial applications beyond pest management, including animal health, human health and pharmaceuticals (such as antibiotics), aquaculture, industrial enzyme and specialty chemical applications. We intend to continue establishing strategic collaborations with chemical, biotechnology, pharmaceutical and consumer products companies to support the development and commercialization of natural products for pest management and other applications. To date, we have entered into strategic collaborations with American Home Products Corporation, Athenix Corp., Dow AgroSciences LLC, Dragoco Gerberging & Co. AG and Maxygen, Inc. 30 Industry Background Crop Protection Growers are constantly challenged to supply the increasing global demand for food, while reducing the negative impact of crop protection practices on consumers, farm workers and the environment. Growers have historically relied on traditional practices such as cultivation, crop rotation and plant breeding to protect their crops. Although most growers currently rely on synthetic chemical pesticides for crop protection, an increasing number are integrating a combination of traditional practices with synthetic chemical pesticides, genetically modified crops and natural pest management products into a system called integrated pest management. Due to recent technological advances in natural pest management products and increasing environmental, food and worker safety concerns relating to synthetic chemical pesticides and genetically modified crops, natural pest management products are becoming an increasingly important component of the integrated pest management solution. Synthetic Chemical Pesticides According to Wood MacKenzie, consultants to the agricultural biotechnology sector, in 2000, approximately $29 billion was spent globally on synthetic chemical pesticides. Of this amount, approximately $12 billion was spent in 2000 to protect high value specialty crops and turf and for home and garden uses, while the remainder was spent to protect large acreage row crops, according to Industrieverband Agrar e.V., the German Agrichemical Association. Although synthetic chemical pesticides often are effective in controlling pests, many are acutely toxic and are suspected carcinogens. The use of some synthetic chemical pesticides has been shown to have harmful effects on the environment, humans and other animals, including bees, lady beetles and other beneficial insects. We believe consumers are increasingly demanding food that is free of chemical residues and produced in an environmentally friendly manner. As a result, some food and beverage companies such as Campbell's Soup Company, Gerber Products Company and Kendall-Jackson Wine Estates restrict the use of several synthetic chemical pesticides on crops for which they have contracted. In addition, growers incur significant costs when using synthetic chemical pesticides, including the costs of complying with required minimum waiting periods before workers may reenter fields after spraying, limitations on spraying in the period prior to a harvest because of chemical residues and increased susceptibility to pest resistance. According to the National Academy of Sciences, more than 500 pests have developed resistance to synthetic chemical pesticides. When resistance develops, growers must increase the quantity or frequency of pesticide applications to manage pests effectively, which not only increases crop production costs but also increases health and environmental risks associated with synthetic chemical pesticide use. Concerns associated with the use of synthetic chemical pesticides, including adverse environmental effects, food and worker safety and increasing negative public perception, have prompted federal, local, state and foreign governments and regulatory agencies to restrict or eliminate some uses of these pesticides. For example, in 1996, Congress unanimously passed the Food Quality Protection Act of 1996, which has led the EPA to limit and, in some cases, prohibit the use of several synthetic chemical pesticides in and around schools and households and in foods. The EPA has also identified methyl bromide, a synthetic chemical pesticide, as an ozone depleting substance and has prohibited its production and importation beginning January 1, 2005. In addition, the Montreal Protocol on environmental protection calls for developed countries, including the United States, to reduce their use of methyl bromide by 70% in 2003 and by 100% in 2005. The European Union has also enacted legislation to reduce or restrict pesticide use. Development and registration of new synthetic chemical pesticides is costly due to stringent regulatory requirements. Major agrichemical companies typically test hundreds of thousands of chemicals each year to find a single new product that will meet these stringent regulatory requirements. According to the American Crop Protection Association, the average cost and time to bring a new synthetic chemical pesticide to market is now estimated to be at least $70 million to $100 million and seven to ten years. Accordingly, major agrichemical companies focus their product development efforts primarily on pesticides targeted for use on large acreage row crops in an effort to recover their substantial product development costs and achieve economies of scale. It is often uneconomical for major agrichemical companies to develop synthetic chemical 31 pesticides for use in the highly fragmented, specialty crop market, which results in fewer pest management alternatives for growers in this market. Genetically Modified Crops Beginning in the 1980s, major agrichemical companies sought to reduce human health risks associated with synthetic chemical pesticides by investing billions of dollars to develop genetically modified plants that resist pests or have high tolerance to herbicides. Grower acceptance of this technology is evidenced by the fact that, in 2000, growers in the United States planted approximately 78 million acres of genetically modified soy bean, cotton and corn crops, representing approximately 49% of the aggregate acreage of these crops planted in the United States. Despite general acceptance by growers, consumer disapproval of genetically modified crops, especially in Europe and Japan, threatens the future commercial viability of this technology. In response to consumer concerns, several food processors have demanded that their contracted growers supply them with only non-genetically modified crops. Environmental groups have also voiced concerns about the unintended effects of genetically modified crops, including pest resistance, contamination of non-modified crops, allergic reactions in humans and negative impacts on non-target species such as on soil microorganisms and monarch butterfly populations. In addition, growers and food processors have found it difficult and costly to segregate and track modified and non-modified crops within the current commodity distribution system. For example, last year, genetically modified corn approved only for use as animal feed was found in many human foods, causing concern among consumers, food processors, regulators, environmental groups and growers. Some scientific experts have asserted that widespread plantings of genetically modified crops that produce an internal pesticide could lead to the proliferation of pests resistant to that pesticide. As pests become resistant to pesticides produced by genetically modified crops, the effectiveness of these crops is reduced. The U.S. Environmental Protection Agency, or the EPA, requires companies that produce genetically modified crops to submit costly resistance management and monitoring plans with their registration packages. Natural Pest Management Products The development and use of natural pest management products is increasing rapidly in response to consumer, grower and regulatory concerns regarding current pest management practices, pest resistance and food and worker safety. We believe an increasing number of growers are integrating natural pest management products into a more sustainable approach to crop protection. Natural pest management products include biopesticides as well as minerals such as copper and sulfur. Biopesticides consist of or are based on a living organism or a substance produced by a living organism, and they are generally distinguished from synthetic chemical pesticides by their unique modes of action, low toxicity to non-target species, biodegradability and natural occurrence. The EPA classifies biopesticides as microbials or biochemicals. Microbial pesticides contain a microorganism such as a bacterium or fungus as the active ingredient. The most widely used microbial pesticides are various types of the bacterium Bacillus thuringiensis, or Bt, which can control specific insects in vegetables and other crops. Biochemical pesticides are naturally occurring substances that control pests by non-toxic mechanisms. Biochemicals include products that interfere with a pest's growth or mating patterns such as pheromones and plant growth regulators that increase crop yield. The use of natural pest management products is increasing rapidly. For example, according to the California Department of Pesticide Regulation from 1991 to 1999, biopesticide use in California, the state with the largest production of fruits and vegetables, increased at a compound annual growth rate of over 25%. Historically, biopesticide market share has been limited by the perceived relative lack of effectiveness, difficulty in application, constraints in the timing of application and shorter shelf life as compared to synthetic chemical 32 pesticides. We believe that recent advances in biopesticides will continue to overcome these perceived deficiencies and will greatly increase their adoption. Organic Food In order to be certified as organic, food must be produced and processed without the use of synthetic chemicals, bioengineering or any other adulteration. Accordingly, organic growers have few pest management alternatives, other than traditional practices and natural pest management products. Consumer demand for organically grown food has been increasing rapidly. We believe this is principally due to concerns about food safety and the adverse environmental effects of synthetic chemical pesticides and genetically modified crops. In the United States, sales of organically grown food have grown at a compound annual growth rate of more than 20% over the last decade, resulting in an estimated $7.8 billion in sales during 2000. In late 2000, the U.S. Department of Agriculture, or the USDA, approved national production and labeling standards for organic food marketed in the United States. These standards are widely expected to facilitate the continued growth of the organic foods industry. Large food processors and agricultural businesses, such as Dole Food Company, General Mills, Inc., H.J. Heinz Company, Kellogg Company and Gerber Products Company, have entered the organic foods market due to its attractive profit margins and growth potential. Institutional and Home Pest Management According to a 1997 estimate, approximately $2.2 billion was spent annually worldwide on synthetic chemical pesticide products to control pests such as cockroaches, flies and mosquitoes in the institutional market, including in and around schools, parks, golf courses and other public use areas. According to a 1997 estimate, homeowners spent approximately $5.0 billion annually worldwide on pest management products to control pests in their homes, gardens and lawns and to control fleas and ticks on their pets. Producers of livestock such as cattle, swine and poultry use pest management products to control pests and parasites. The Food Quality Protection Act of 1996 has led to the reduction in use or elimination of some synthetic chemical pesticides, including in and around schools and households. Several states and municipalities have restricted pesticide use in and on public use areas. Congress is also considering new legislation to promote school pest management practices that minimize risk to children and provide safety information to parents and school staff when pesticides are used in schools. Homeowners are becoming increasingly concerned about the dangers to their children and pets of spraying synthetic chemical pesticides in their homes and gardens. As a result, institutional and home uses present opportunities for new effective, safe and environmentally friendly natural pest management products. The AgraQuest Solution and Advantages We believe growers and other pesticide users seek pest management products that are effective, competitively priced, safe and environmentally friendly. We are developing and commercializing a pipeline of natural pest management products, including Serenade, which we believe will offer superior alternatives to synthetic chemical pesticides and genetically modified crops in terms of performance, value, safety and environmental impact. We have developed a proprietary technology platform, consisting of a microorganism database, a screening technology and a natural product compound library, which we believe will provide the foundation for the discovery and development of natural products for the pest management industry. We also believe our technology platform can be used to develop products for broader applications, including animal health, human health and pharmaceutical, aquaculture, industrial enzymes and specialty chemicals. 33 Our Proprietary Technology Platform Our proprietary technology platform has the following advantages: . Highly efficient discovery process. We believe we can discover new effective product candidates faster than other developers of pest management products. Our first product, Serenade, was discovered after testing only 713 microorganisms. Major agrichemical companies typically test hundreds of thousands of chemicals each year to discover a single new product. To date, we have identified 23 product candidates from the more than 19,000 microorganisms in our database. We believe these product candidates can compete with synthetic chemical pesticides on performance, cost-effectiveness, shelf life and ease of use. . Valuable data capture and utilization. Our proprietary technology platform allows us to gather data on the source of each microorganism, taxonomy, activity spectrum and the natural product compounds produced by the microorganism. Using this information, we are able to determine which microorganisms may have the highest pest management commercial potential. Expanding the information in our microorganism database and natural product compound library improves the efficiency of our product discovery process. This information may also be valuable to chemical, biotechnology, pharmaceutical and consumer products companies for developing natural products for their respective industries. . Cost-effective and rapid new product development. We believe we can bring effective natural pest management products to market at greater speed and cost efficiency than our competitors. For example, we spent approximately $6 million for the testing, initial development and approval process for Serenade. The cost to bring a new synthetic chemical pesticide or genetically modified crop to market is estimated to be at least $70 million to $100 million. Serenade and Our Initial Product Candidates Serenade and our initial product candidates: . Are highly effective. Laboratory and field trials suggest that Serenade and our initial product candidates are generally more effective than existing biopesticides and generally are as or more effective than synthetic chemicals in controlling targeted pests. These trials also demonstrate that Serenade and Sonata generally have a broader disease control spectrum than synthetic chemical pesticides. . Offer growers an attractive value proposition. We believe by using Serenade and our future natural pest management products, growers can increase profits while increasing food and worker safety and reducing environmental impact. Serenade is easy to use, competitively priced and has a comparable shelf life to synthetic chemical pesticides. In addition, the naturally low toxicity of Serenade allows growers to utilize it safely up to the time of harvest, limiting crop losses caused by the late onset of plant diseases. . Have an accelerated time-to-market. By combining our proprietary technology platform and the favorable regulatory approval process for biopesticides, we have the ability to navigate our products quickly through the development and regulatory approval processes. For example, we were able to receive conditional EPA approval for Serenade within approximately 38 months from the time we first tested the Serenade strain. Conversely, it typically takes approximately seven to ten years to develop and obtain regulatory approval for a synthetic chemical pesticide or genetically modified crop. . Increase safety and reduce risk to the environment. We believe Serenade and our initial product candidates offer a favorable alternative to synthetic chemicals and genetically engineered crops, which have come under heightened scrutiny due to the negative environmental impact and health risks associated with their use. Our product and product candidates are based on naturally occurring microorganisms that we select specifically for their safety and that leave no synthetic chemical residues, increasing food safety. Based upon extensive field trials and independent toxicology studies and risk 34 assessments, we believe that Serenade and Sonata offer improved safety for growers, workers, consumers and the environment. . Provide unique solutions for organic crops. We believe Serenade and our initial product candidates will be of particular benefit by providing organic growers, who have a limited toolbox of crop protection solutions, with a means to grow their crops more productively. . Have novel and complex modes of action that reduce the risk of pest resistance. Pest resistance concerns provide growers with strong motivation for growers to incorporate Serenade and our initial product candidates into their integrated pest management programs. Due to strict regulatory requirements, some synthetic chemical pesticides rely on a single mode of action and are therefore subject to an increased probability of pest resistance. Similarly, genetically modified crops typically contain a single active gene and are also subject to an increased probability of pest resistance. Conversely, biopesticides typically rely on novel and complex modes of action that are more difficult for pests to develop resistance to. We therefore believe that growers can allocate a large portion of their total pesticide use to our natural pest management products without compromising the risk of pest resistance in their fields. . Are produced by environmentally friendly and sustainable production processes. Unlike the production of synthetic chemical pesticides, which requires large volumes of synthetic chemicals and solvents, our products are produced by fermentation using readily available agricultural raw materials such as soy flour and corn starch. Our production process is not only less harmful to the environment than that of synthetic chemical pesticides but also provides farmers with an additional sales channel for their products. Our Strategy Our goal is to become the leader in the discovery, development and commercialization of natural pest management products. The key elements of our strategy include: . Utilize our proprietary technology platform to identify new product candidates. We intend to increase our natural pest management product offerings by identifying new product candidates discovered using our proprietary technology platform. By applying our proprietary screening technology to our microorganism database and utilizing our natural product compound library, we anticipate that we will continue to discover multiple natural pest management product candidates annually. . Increase sales of Serenade. We have initiated marketing activities designed to increase the distribution and sale of Serenade. We intend to expand our distribution arrangements with established agrichemical distributors and retailers in order to leverage their existing sales forces and grower relationships. We also intend to expand our team of field development specialists to maintain close relationships with growers and educate industry leaders and distributors. As we obtain regulatory approvals, we plan to launch Serenade in key foreign markets, including Australia, Canada, Europe, Japan and South and Central America. We are seeking to add additional crops to the permitted uses of Serenade in Chile and the United States, and we may expand the use of Serenade to large acreage row crops. . Develop and commercialize product candidates. We will continue to allocate significant research and development resources to develop and commercialize new natural pest management products that we have identified using our proprietary technology platform. To date, we have identified 23 product candidates, including Sonata, Virtuoso, Muscodor and Vivace, which each display high levels of activity against insects, nematodes and plant diseases. We initially intend to focus our research and development efforts on Sonata, Virtuoso, Muscodor and Vivace, all of which we believe can compete favorably with existing pest management products on efficacy, cost-effectiveness, pest resistance, shelf life, ease of use, food and worker safety and environmental impact. We may also establish strategic collaborations with third parties to support the development and commercialization of those natural pest management product candidates that we choose not to develop internally. We will maintain control over product quality, consistency and margins by manufacturing our products at our facility in Tlaxcala, Mexico. 35 . Focus initially on high-value specialty crops. We are focusing our initial commercialization efforts on high value specialty crops in the United States, such as grapes, apples, pears, tomatoes, vegetables, nuts and ornamentals. We expect growers of high-value specialty crops to derive the greatest economic benefit from our natural pest management products, in terms of relative cost, safety and the value of the expected yield increases. . Maximize organic market opportunities. To address the rapidly growing organic market, in which there are few pest management alternatives, we will continue to ensure that a formulation of each of our products meets the requirements for organic food production in our target, specialty- crop markets. We also intend to conduct field trials in large acreage organic crops, such as cereals, which are well suited for our products but have less competition than conventional large acreage crops. . Brand AgraQuest as the leading provider of natural pest management solutions. We believe that building our corporate brand will foster continued adoption of our natural pest management products by establishing AgraQuest as a leading supplier of effective, safe and environmentally friendly natural pest management products with significant benefits over existing pest management solutions. We also believe that strong brands will increase strategic collaboration opportunities, contributing to potential revenue growth and diversification. To enhance industry and public awareness of our company and increase demand for our natural pest management products, including Serenade, we intend to pursue an aggressive brand development strategy through targeted advertising, conference and trade show appearances, promotions and public relations. . Leverage our proprietary technology platform in conjunction with strategic collaborators. We intend to pursue strategic collaborations with chemical, biotechnology, pharmaceutical and consumer products companies to use our proprietary screening technology and microorganism database to develop products for use in pest management, as well as animal health, human health and pharmaceuticals (such as antibiotics), aquaculture, industrial enzymes and specialty chemicals. Strategic collaborations will allow us to enhance our market presence and visibility and have the potential to generate significant revenues. . Pursue select acquisitions. We may invest in or acquire businesses, technologies or products that we believe would strategically complement our business and allow us to be a more complete provider of crop production solutions. 36 Our Proprietary Technology Platform Our proprietary technology platform consists of three key components: a microorganism database, screening technology and a natural product compound library. Our proprietary technology allows us to quickly and accurately identify microorganisms with the greatest pest management commercial potential. To date, we have identified 23 product candidates from the more than 19,000 microorganisms in our database that display high levels of activity against insects, nematodes and plant diseases. Our product candidates are discovered and developed through the following steps: [A flow chart diagram describing our product candidate discovery and development processes, including the following text: DISCOVERY . Collection and Isolation (sourcing and isolation of microorganism) . Fermentation (produce sufficient testing quantities; maximize pesticidal properties; mimic commercial media) . Primary Screening (test and confirm pesticidal activity and dose response) . Preliminary Toxicology (test for toxic effects) . Natural Product Chemistry (compare natural compounds produced by each selected microorganism with compounds in our natural product compound library; perform stability studies: pH, temperature; identification, purificaton and structure elucidation of active compounds . Pre-Development Testing PRODUCT DEVELOPMENT . Process Development and Formulation . Advanced Toxicology . Commercial Development . Field Testing] 37 Discovery . Collection and isolation. We use information from our existing microorganism database such as taxonomic groups, geographical locations, types of samples, niches and habitats to collect and identify new microorganism samples that may have novel, effective and safe pest management characteristics. We then isolate these selected microorganisms on proprietary media. . Fermentation. Before testing the selected microorganisms for activity against pests, we first ferment them to produce sufficient quantities for testing. We grow the selected microorganisms in proprietary media, which maximizes their pesticidal properties. In addition, we have developed several proprietary fermentation processes that are designed to replicate those that would be required for large-scale fermentation and commercial production and, therefore, we avoid the time and expense of an unsuccessful scale-up. . Primary screening. We use automated, miniaturized biological assays to test the selected microorganism's effectiveness against several insect, mite and nematode pests and plant diseases. We compare those results to synthetic chemical pesticide standards. When a microorganism shows a high level of pesticidal activity, we conduct further tests to determine the spectrum of activity, mode of action, stability and activity on plants. . Natural product chemistry. Using high-performance liquid chromatography with diode array detection technology, we compare the natural product compounds produced by each of the selected microorganisms with the compounds in our natural product compound library. This allows us to eliminate those microorganisms that produce known toxins and select those that we believe are novel and safe. From the selected microorganisms, we identify and characterize the natural product compounds responsible for their pesticidal activity by using high performance liquid chromatography, liquid chromatography-mass spectroscopy and nuclear magnetic resonance equipment. . Pre-development testing. We conduct laboratory, greenhouse and initial small plot field tests to select product candidates for further development. Product Development . Development of the manufacturing process. We have developed proprietary processes that increase the yield of both the microorganism and the natural product compounds produced by the microorganism during fermentation. We have developed proprietary methods for producing and analyzing these compounds, which results in greater product consistency and efficacy than biopesticides produced using conventional techniques. We believe that our process development allows us to produce products that have superior performance and lower cost than existing biopesticides and have comparable or better performance than synthetic chemical pesticides. We then scale up these proprietary processes in progressively larger fermentation tanks. . Formulation. We are able to develop proprietary wettable powder, liquid and granule formulations that allow us to tailor our products to our customers' needs. This allows us to develop product formulations with enhanced performance characteristics, such as effectiveness, value, shelf life, suitability for organic agriculture, dispersibility, wettability, rainfastness, compatibility with other pest management products and ease of use. . Field testing. We conduct hundreds of field trials for each product candidate that we develop. These field trials are conducted in small plots on commercial farms or research stations by our own field development specialists and private and public researchers to determine large-scale effectiveness, use rates, spray timing and crop safety. We conduct field trials globally in both hemispheres to accelerate the results of our field trials and provide alternate season learning opportunities. As the product candidate nears commercialization, we conduct demonstration trials in conjunction with our sales and marketing team. These trials are conducted with distributors, influential growers and food processors on larger acreages in a commercial setting. 38 Serenade and Our Initial Product Candidates The following table sets forth information relating to Serenade and our initial product candidates that are most advanced in development:
- --------------------------------------------------------------------------------------- Use or Primary Modes Product Name Proposed Use of Action Target Markets Regulatory Status - --------------------------------------------------------------------------------------- Serenade Controls many Attacks fungal Registered for Registered in bacterial and spores and use on specialty the United fungal plant bacteria as they crops, including States, diseases germinate; apples, pears, Chile, Mexico, excretes grapes, New Zealand and antifungal cherries, Puerto Rico; compounds; tomatoes, hops, approved for use competes for several in 49 U.S. space and food vegetables, states; filed on the plant's peanuts and registration surface walnuts, and for packages in the home and garden; European Union, also targeting Argentina and bananas, Switzerland ornamentals and turf - --------------------------------------------------------------------------------------- Sonata Controls many Prevents spore Specialty crops, Technical and fungal and some germination on cereals, experimental use bacterial plant's surface; ornamentals and permit diseases; excretes home and garden registrations complementary to antifungal submitted to the Serenade compounds EPA and the California EPA - --------------------------------------------------------------------------------------- Virtuoso Controls Possibly Specialty crops, In development; caterpillar inhibits cell turf, home and registration not pests; fleas, growth in garden, and row yet submitted to some flies and caterpillar crops; animal the EPA mites pests health, pets - --------------------------------------------------------------------------------------- Muscodor Kills fungal and Produces gaseous Specialty crops, In development; bacterial plant compounds that greenhouses, registration not pathogens; kill fungi and seed treatments, yet submitted to inhibits bacteria grain the EPA nematodes and fumigation, insect egg industrial uses incubation (wood and building treatments) - --------------------------------------------------------------------------------------- Vivace Enhances the Increases the Specialty crops In development; activity of Bt effect of Bt in and home and registration not bioinsecticide; destroying the garden yet submitted to complementary to stomach lining the EPA Virtuoso of insects - ---------------------------------------------------------------------------------------
Serenade We believe that Serenade is the first and only biofungicide that is effective on a wide variety of plant diseases. Serenade is based on a novel and patented strain of Bacillus subtilis, which we isolated using our proprietary screening technology. Bacillus subtilis bacteria are known to be non-toxic and not harmful to animals. We began marketing Serenade commercially in the United States in July 2000. Serenade currently is targeted for use on high value specialty crops and is registered for use on apples, pears, grapes, cherries, 39 tomatoes, hops, several vegetables, peanuts and walnuts. We are seeking to expand the permitted uses of Serenade to other specialty crops, turf and ornamentals. Serenade is currently formulated as a wettable powder and a wettable disbursable granule that is topically applied either independently or in conjunction with traditional pesticides. We believe Serenade has the following advantages: . High level of broad spectrum activity against many bacterial and fungal plant diseases; . Can be integrated into pest management programs for both conventional and organic growers; . Improved safety for the environment, applicators and farm workers; . Can be sprayed up until harvest and does not require any special handling or equipment; . No synthetic chemical residues, enhancing food safety; and . Reduced likelihood of pest resistance due to its novel and complex mode of action. To address the rapidly growing organic market, we have developed and registered with the EPA a formulation of Serenade that is included on the Organic Materials Review Institute's list of approved products. Additionally, we have in-house capabilities to develop other formulations of Serenade that specifically address market needs and customer preferences. For example, we are currently developing Rhapsody, a formulation of Serenade targeted for ornamental flowers and foliage. We believe Serenade offers an attractive value proposition to the grower in terms of cost effective plant disease control resulting in increased yields compared to synthetic chemical pesticides. For example, field trials conducted by our customers, the University of Arizona and our own field development specialists to determine the effectiveness of Serenade in controlling Sclerotinia, a major lettuce disease, indicated that Serenade was on average 8% more effective than the leading chemical in controlling Sclerotinia, which implies increased lettuce yields of on average 31%. Serenade has been tested in more than 750 field trials in the United States and 16 other countries worldwide. In addition to conducting our own field trials, we have also conducted field trials with major growers, universities and consultants in order to further validate the performance of Serenade. The compiled field data shows that Serenade is generally as or more effective than synthetic chemical pesticides in preventing a broad spectrum of diseases, such as: Botrytis bunch rot/gray mold, powdery mildews, fire blight, bacterial spot, Sclerotinia rots/blights and black sigatoka. Of particular interest is Serenade's control of fire blight, lettuce drop and tomato bacterial spot for which growers have limited alternatives. In addition to field trials, we also have conducted numerous laboratory and greenhouse experiments. Laboratory and greenhouse experiments show that Serenade works effectively on brown rot in stone fruits such as peaches and almonds and gray mold in strawberries. Laboratory studies and field observations also show that Serenade has curative activity on powdery mildew; unlike most pesticides, it was shown to control the disease after the disease was already present. These potential applications of Serenade are being tested more fully in research field trials. Serenade received registration approval for Chile in October 1999, in the United States in June 2000, in Puerto Rico in March 2001, in Mexico in July 2001 and in New Zealand in November 2001. We are currently seeking regulatory approval for Serenade in the European Union, Costa Rica and other banana producing countries, Argentina, Switzerland, Japan, Australia, South Africa and Canada. In October 2000, we received notice that our Serenade registration package passed the completeness check by the Commission of the European Communities, Director General of Agriculture, and we have commenced national registrations in the European Union. Sonata Sonata is based on a novel and patented strain of Bacillus pumilus, which we isolated using our proprietary screening technology. Bacillus pumilus bacteria are known to be non-toxic and not harmful to 40 animals. Our strain of Bacillus pumilus has a unique, high level of broad spectrum activity against many fungal and some bacterial plant diseases. Laboratory, greenhouse and more than 130 field trials indicate that Sonata is particularly effective against downy mildews, powdery mildews, rusts, Sclerotinia blights/rots and some bacterial diseases. We believe that Sonata is as or more effective, safer and more environmentally friendly than many synthetic chemical pesticides. In addition, while their complex modes of action make it unlikely that product resistance will develop even when used alone, Serenade and Sonata can be rotated or combined with each other or with other pest management products to reduce the likelihood of pest resistance. Growers usually prefer to use multiple products for disease control and typically rotate or tank mix several pest management products within a growing season. Sonata's complementary nature addresses growers' desire to avoid reliance on a single product, reduces the likelihood of resistance development and obtains the best spectrum of disease control. We submitted the technical registration for Sonata to the EPA in May 2000. An experimental use permit that would allow sales on 4,000 acres of some crops was submitted to the EPA and the Department of Pesticide Regulation of the California Environmental Protection Agency in November 2000. Virtuoso Virtuoso is based on a novel and proprietary strain of Streptomyces, which we tested using our proprietary screening technology. This strain, which was licensed exclusively to us for an indefinite term in 1998, has broad spectrum control of caterpillar pests, such as armyworms, codling moths, cotton bollworms and budworms, cabbage loopers and diamondback moths, and it also has activity on fleas, some flies and mites. We believe Virtuoso will be an effective replacement for toxic insecticides such as organophosphates for caterpillar pests. Organophosphates are being restricted by the EPA under the Food Quality Protection Act. In addition, there are major caterpillar pests affecting most of the crops we are targeting with Serenade and Sonata, and Virtuoso would allow us to offer growers of these crops both plant disease and insect control products. Laboratory tests and initial field trials indicate that Virtuoso is generally as effective as synthetic chemical pesticides in controlling some types of pests. Independent laboratory and initial field studies conducted by four major agrichemical companies indicated that Virtuoso has a high level of broad spectrum activity against caterpillar pests. We also believe Virtuoso has applications in the animal health and pet markets because of its activity on fleas and some flies. Muscodor Muscodor is based on a novel and proprietary strain of Muscodor albus fungus, which was isolated from a cinnamon tree. This strain, which was licensed exclusively to us in December 2001, produces a suite of gaseous natural product compounds that kill many species of harmful fungi and bacteria and inhibits nematodes and egg incubation of some insect species. We believe that Muscodor may be a viable substitute for methyl bromide, which, according to the USDA, was one of the five most widely used pesticides in the world in 2001. Eighty-seven percent of methyl bromide is used by farmers prior to planting to eradicate fungal plant pathogens and other pests. Muscador can be used to replace methyl bromide use for this pre-planting control of plant diseases for seed treatment, for nursery stock treatments and for grain fumigation. We also believe that Muscodor may have several industrial uses, including the treatment of "sick building syndrome," toxic mold eradication and wood treatment. In laboratory and greenhouse tests, Muscodor demonstrated effective control of plant diseases on seeds as well as in soil. The use of methyl bromide is facing government restrictions both in the United States and abroad. The EPA has identified methyl bromide as an ozone depleting substance and has prohibited its production and importation beginning January 1, 2005. In addition, the Montreal Protocol on environmental protection calls for developed countries, including the United States, to reduce their use of methyl bromide by 70% in 2003 and by 100% in 2005. 41 In December 2001, we entered into a license agreement with Dr. Gary A. Strobel under which we acquired the exclusive, worldwide rights to manufacture, market and sell Muscodor for agricultural and industrial applications. Under this agreement, we agreed to pay Dr. Strobel a $50,000 license fee as well as make quarterly royalty payments based on product sales and sublicense proceeds until the expiration or invalidity of the last claim within the licensed patents for Muscodor. This agreement terminates upon expiration of the royalty payment obligations and may be terminated by either party for failure to cure a material breach of the agreement within 30 days of notice by the other party. Vivace Vivace is a proprietary and novel suite of natural product compounds that we isolated from a microorganism using our proprietary screening process. Vivace is an early stage product candidate that has been shown to substantially enhance the activity of Bt, which has provided caterpillar pest control for conventional and organic growers for many years. Bt protein genes have been engineered into crop plants and commercialized for caterpillar pest control in cotton and corn. However, Bt sprays and Bt crops are not as effective as synthetic chemical pesticides on some caterpillar pests, such as armyworms. Our studies have shown that Vivace improves the activity of Bt by up to tenfold such that caterpillar pest control generally equals that of synthetic chemical pesticides. Vivace has no insecticidal activity by itself, and is effective against caterpillar pests only in combination with Bt. Vivace's and Virtuoso's complementary natures address growers' desire to avoid reliance on a single product, reduce the likelihood of resistance development and obtain the best spectrum of disease control. We intend to position Vivace and Virtuoso for use together in integrated pest management systems for the specialty crop, turf and home and garden markets. Sales, Marketing and Distribution We have initiated marketing activities designed to promote sales of Serenade and our future natural pest management products by implementing the following strategies: . Target early adopters of new pest management technologies. We intend to target large commercial growers in the United States, who generally set industry standards through early adoption of new pest management technologies. We plan to continue to recruit leading growers and their consultants to participate in field trials, enabling them to become familiar with our natural pest management products and to experience their benefits firsthand. . Educate growers about the benefits of our natural pest management products. We will continue to perform on-farm demonstrations and provide field data packages to support and validate our product claims. We will also continue to participate in trade shows and conferences to educate growers and their licensed pest control advisors about the benefits of our natural pest management products. . Enhance distribution relationships. We will continue using established agrichemical distribution channels to distribute Serenade and our future products. We intend to provide distributors a portfolio of products with attractive profit margins and growth potential. In addition, we will continue to provide distributors access to innovative alternative pest management solutions, which we believe will reduce their dependence on major agrichemical companies. . Develop and leverage relationships with key industry influencers. We will continue to develop relationships early in the product development process with influential members within our target markets, including technical experts at leading agricultural universities, licensed pest control advisors, wineries, baby food manufacturers and other food processors and produce packers. We believe that educating industry influencers about the benefits of Serenade and our future products increases the likelihood that they will recommend our products to their growers and customers. 42 We have signed agreements to distribute Serenade in the United States with leading agricultural distributors United Agri Products, Western Farm Services and Wilbur Ellis, and in Chile with Moviagro, a Monsanto joint venture. These distribution agreements are terminable by either party on minimal notice, typically 30 days, and do not require the distributors to purchase any of our products. To the extent any of these distribution agreements are terminated, we believe we could enter into alternative distribution agreements with minimal disruption to our business. We also have arrangements to develop and distribute Serenade in Japan through SDS Biotech, Japan's largest supplier of biopesticides, and in France with Agtrol. We have a one-year agreement to sell Serenade to consumers through Gardens Alive!, a leading home and garden catalog retailer. We currently have ten employees dedicated to sales and marketing in the United States organized into eight geographic sales territories. We anticipate adding additional sales and marketing personnel in the United States and in international territories. Strategic Collaborations We have entered into, and will continue to pursue, strategic collaborations with chemical, biotechnology, pharmaceutical and consumer products companies to support the development and commercialization of natural pest management product candidates identified through our proprietary technology platform. The terms of strategic collaborations that we undertake depend on the nature and stage of development of the particular product candidate. For example, for product candidates in early stages of development, we may grant a third party the commercial rights to that product candidate in exchange for our use of that party's research, development or marketing resources. We also intend to license our microorganism database for applications beyond pest management, including the discovery and development of natural products for animal health, human health and pharmaceuticals (such as antibiotics), aquaculture, industrial enzyme and specialty chemical products. We believe that these strategic collaborations will allow us to maximize the potential value and reinforce the credibility of our proprietary technology platform, as well as enhance our market presence and revenue growth. We have entered into the following strategic collaborations: Dow AgroSciences. In October 2000, we entered into a research and development agreement with Rohm and Haas Company, the agricultural business of which was subsequently acquired by Dow AgroSciences LLC. Under this agreement, Dow AgroSciences has the exclusive, worldwide rights to commercialize seven of our product candidates for all uses other than human health, animal health and aquaculture. Together with Dow and pay us a royalty on any product sales. In addition, we retain a right of first refusal to manufacture these product candidates for Dow AgroSciences for which we will receive cost reimbursements plus a share in the profits. In November 2000, Dow AgroSciences selected its first product candidate to develop and commercialize under this agreement and began making initial milestone payments to us. In connection with this agreement, Dow AgroSciences purchased 83,333 shares of our Series F preferred stock for $500,000. Maxygen. In December 2000, we entered into an agreement with Maxygen, Inc. under which we granted Maxygen a nonexclusive license to develop and commercialize 3,000 of the more than 19,000 microorganisms in our microorganism database for gene-shuffling uses other than for the development of biopesticides. Maxygen has the right to select which 3,000 microorganisms it wishes to be further developed from our database. Under this agreement, Maxygen paid an up-front collection fee and may make future milestone payments based on the progress of its product development and commercialization of products from these microorganisms. The up-front collection fee is being recognized ratably as we deliver these microorganisms to Maxygen. American Home Products, Fort Dodge Animal Health Division. In November 2000, we entered into an agreement with the Fort Dodge Animal Health Division of American Home Products Corporation under which we agreed to provide Fort Dodge with selected microorganisms from our microorganism database for testing and product development. We will seek to enter into a licensing arrangement with Fort Dodge in the event it 43 desires to commercialize any products based on these microorganisms. The terms of any license resulting from this agreement, including royalty and milestone payments, will be subsequently negotiated by the parties. Dragoco. In July 2001, we entered into a license agreement with Dragoco Gerberding & Co. AG, an international supplier of perfume compositions, aroma chemicals, cosmetic raw materials and active ingredients, under which we granted Dragoco an exclusive license to some of our patents and other proprietary rights to develop natural mosquito and other insect repellants. Under this agreement, Dragoco agreed to make quarterly royalty payments based on product sales and sublicense proceeds until the expiration or invalidity of the last claim within the licensed patents. The agreement terminates upon expiration of the royalty payment obligations and may also be terminated by either party for failure to cure material breaches of the agreement by the other party. Athenix. In September 2001, we entered into agreements with Athenix Corp., a biotechnology company that discovers and develops novel genes, proteins and genetically altered plants for agrichemical, seed, feed and organic fuel industries, under which each party granted the other party access to at least 1,000 of its microbial strains. Athenix agreed to use the microbial strains to evaluate their potential for use in areas other than biopesticides, natural product molecules and human health, and we agreed to use the microbial strains to evaluate their potential for use in pest management. Each party retains all rights to the microbial strains evaluated by the other party. Each of the agreements terminates upon completion of the evaluation process but may be terminated by either party for any reason immediately upon written notice. The terms of any license resulting from these agreements, including royalty and milestone payments, will be subsequently negotiated by the parties. Manufacturing To control product quality and the speed and timing of manufacturing, protect our proprietary position in our products and lower our manufacturing costs, we purchased a manufacturing facility in Tlaxcala, Mexico in December 2000 from Abbott Laboratories, and we ferment all Serenade at this facility. This plant has approximately 208,000 square-feet of manufacturing and support facilities on approximately 35 acres. We have established comprehensive quality control and assurance procedures to ensure that we sell high quality products. The facility includes several seed and fermentation tanks, a downstream processing, recovery and extraction building, several microbiology and quality control laboratories, a waste treatment plant, warehouses and offices. We intend to add spray drying and packaging facilities and equipment, and we expect this facility to be fully operational in 2002. We believe this facility will be adequate to meet our anticipated manufacturing volume requirements for the foreseeable future. In addition, the site is large enough to accommodate additional fermentation and other processing equipment as needed. We have a 3,000 square-foot fermentation pilot plant in our Davis, California facility that we use to scale up new processes and to produce material for field trials. We intend to use a portion of the net proceeds from this offering to expand our Davis facility. Research and Development We currently have 32 employees dedicated to research and development, 16 of whom hold Ph.D. degrees. Our research and development team has technical expertise in microbiology, natural product chemistry, AgroSciences, we will jointly review and direct the process of identifying organisms for testing. If Dow AgroSciences selects a product candidate for further development, it must pay us a fee, reimburse us for our development costs relating to that product candidate and make additional milestone payments based on the progress of product development. Additionally, if Dow AgroSciences determines to further commercialize any of these product candidates, it will make additional milestone payments to us, pay the costs of EPA registration, entomology, plant pathology, fermentation, product formulation and field development. In addition, we have formed a scientific advisory board comprised of individuals specializing in the fields of natural product 44 chemistry, microbiology, biochemistry and fermentation who from time to time provide our management and scientists with specific expertise in both research and product development. Our research and development activities are principally conducted at our Davis, California facility as well as by our field development specialists on crops in their respective regions. We have made, and will continue to make, substantial investments in research and development. Our research and development expenses were $3.1 million in 1998, $4.5 million in 1999, $6.3 million in 2000 and $3.9 million for the nine months ended September 30, 2001. Intellectual Property We rely on patents and other proprietary right protections, including trade secrets and proprietary know-how, to preserve our competitive position. We own 19 issued U.S. patents and have two pending patent applications covering our products, including microorganisms and natural product compounds, uses and related technologies. Also, we own eight foreign patents and have 95 pending foreign patent applications. We have received six trademark registrations and have five trademark applications pending in the United States. We also have received 93 trademark registrations and have 89 trademark applications pending in various other countries. We have been issued three U.S. patents for Serenade and one U.S. patent for Sonata, covering their respective bacterial strains, compounds produced by the strains, their formulations, use against plant pathogens and combinations with other pesticides. These patents will expire between May 2020 and September 2021. The U.S. Patent and Trademark Office has allowed claims to compounds produced by the novel Serenade strain. We have filed an additional U.S. patent application for Sonata and received a notice of allowance in August 2000. If this patent is issued, it will expire 20 years from the date of application. We have also filed a U.S. patent application on our Virtuoso strain, the natural product compounds produced by the strain, its formulations, its use as an insecticide and its combination with other pesticides. In addition, a U.S. patent application has been filed for the Muscodor strain by Dr. Gary A. Strobel, from whom we exclusively licensed Muscodor. Any patent that issues will expire 20 years from the date of application. Our success depends on our ability to operate without infringing the patents and proprietary rights of third parties. We cannot determine with certainty whether patents or patent applications of other parties may materially affect our ability to make, use or sell any products. A number of crop protection and other pest management companies, universities and research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned by or licensed to us. Although we believe our patents and patent applications provide a competitive advantage, the patent positions of crop protection and other pest management companies are highly uncertain and involve complex legal and factual questions. Our patents or those for which we have licensed or will license rights may be challenged, invalidated, infringed or circumvented, and the rights granted in those patents may not provide proprietary protection or competitive advantages to us. We and our collaborators or licensors may not be able to develop patentable products or obtain patents from pending patent applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect the technology owned by or licensed to us. Third-party patent applications and patents could reduce the coverage of the patents owned by or licensed to us. If patents containing competitive or conflicting claims are issued to third parties, we may be enjoined from pursuing commercialization of products or be required to obtain licenses to these patents or to develop or obtain alternative products. In addition, other parties may duplicate, design around or independently develop similar or alternative technologies to ours or our licensors. 45 Litigation may be necessary to enforce patents issued or licensed to us or to determine the scope or validity of another party's proprietary rights. U.S. Patent Office interference proceedings may be necessary if we and another party both claim to have invented the same subject matter. We may not prevail in any of these actions or proceedings, and we could incur substantial costs and our management's attention would be diverted if: . litigation is required to defend against patent suits brought by third parties; . we participate in patent suits brought against or initiated by our licensors; . we initiate similar suits; or . we participate in an interference proceeding. Regulatory Considerations Our activities are subject to extensive federal, state, local and foreign governmental regulations. These regulations may prevent us or our collaborators from developing or commercializing products in a timely manner or under technically or commercially feasible conditions and may impose expenses, delays and other impediments to our product development and registration efforts. In the United States, the EPA regulates our natural pest management products under the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Food, Drug and Cosmetics Act and the Food Quality Protection Act. Additionally, crop protection products must be registered by the appropriate state authority before sale in that state. To register a crop protection product in the United States, a company must demonstrate the product is safe to humans, non-target organisms and to the environment. To demonstrate the biopesticide's safety, required studies must be conducted that evaluate mammalian toxicology, ecotoxicological effects to non- target organisms and physical and chemical properties of the product. To obtain Federal registration, the company is also required to demonstrate product efficacy and safety to the labeled crops. The EPA can require submission of all efficacy and phytotoxicity data the company has acquired. The registration dossier is subject to both scientific and administrative reviews by EPA scientists and management before registration approval. The scientific review involves thorough evaluation of submitted data and completion of risk assessments for human dietary and ecotoxicological exposures. Upon completion of this process, the registration package, including the proposed label, is sent to the Office of General Council for legal review. The final step in the registration process is administrative sign-off by the EPA director of the Biopesticides and Pollution Prevention Division. It typically takes at least 16 months from the time a registration package is submitted to the EPA for the EPA to register a new active ingredient biopesticide Registration processes for state and foreign governments vary between jurisdictions and can take up to nine months for state governments and up to 36 months for foreign governments. We cannot assure you, however, when and if any of our product candidates will receive approval from the EPA or any state or foreign agency. On June 20, 2000, the EPA granted conditional approval for full commercial use of Serenade Biofungicide Wettable Powder. The conditional nature of this approval does not impact our ability to market and sell Serenade, but the approval for Serenade expires two years from the date of issue. For Serenade to continue to be registered after June 20, 2002, we were required to submit to the EPA by July 16, 2001 a two-year storage stability study and additional studies on the effect of Serenade on selected non-target species. All of these studies have been completed and submitted to the EPA, and indicate that Serenade poses no foreseeable hazards to the non-target species. Upon review and acceptance of these data, we believe that the EPA will convert the Serenade registration from conditional to unconditional status. We are required to submit one additional study to the EPA by May 2002. If we are unable to meet the conditions specified by the EPA, however, the EPA could revoke our registration or impose use restrictions that are not currently applicable to Serenade. We submitted the technical registration for Sonata to the EPA in May 2000. An experimental use permit that would allow sales on 4,000 acres was submitted to the EPA and the Department of Pesticide Regulation of the California Environmental Protection Agency in November 2000. 46 As with any pesticide, our pest management products will continue to be subject to review by the EPA and state regulatory agencies. The EPA has the authority to revoke the registration or impose limitations on the use of any of our pest management products if we do not comply with the regulatory requirements, if unexpected problems occur with a product or the EPA receives other newly discovered adverse information. In addition to EPA approval, we are required to obtain regulatory approval from the appropriate state regulatory authority in individual states and foreign regulatory authorities before we can market or sell any pest management product in those jurisdictions. Serenade is currently registered in 49 states in the United States, including California, the largest producer of fruits, nuts and vegetables in the United States. We were also required to submit additional field data for Serenade to the California EPA, which we submitted in July 2001. We have also registered Serenade in Chile, Mexico, New Zealand and Puerto Rico. Our registration package for Serenade in the European Union has been determined to be complete by the EU Commission. However, until the registration is granted within the entire EU, we must obtain provisional authorization approval in each country in order to market and sell products in those countries. We have submitted an application for Serenade registration in Argentina. Our manufacturing operations are also subject to federal, state, local and foreign worker safety, air pollution, water pollution and solid and hazardous waste regulatory programs and periodic inspection. We believe that our facilities are in substantial compliance with all applicable environmental regulatory requirements. Competition For pest management products, performance and value are critical competitive factors. To compete against manufacturers of synthetic chemical pesticides and genetically modified crops, we will need to demonstrate the advantages of our products over these more established pest management products. Many large agrichemical companies are developing and have introduced new chemical pesticides and genetically modified products that they believe are safer and more environmentally friendly than older synthetic chemical products. The pest management market is very competitive and is dominated by multinational chemical and life science companies, such as Aventis Pasteur, BASF AG, Bayer AG, The Dow Chemical Co., E.I. du Pont de Nemours and Co., Monsanto Co., Sumitomo Chemical Co., Ltd. and Syngenta, AG. Universities, research institutes and government agencies may also conduct research, seek patent protection and, through collaborations, develop competitive pest management products. Other companies, including biopesticide companies such as Valent Biosciences Corp., EDEN Bioscience Corporation and Certis USA L.L.C. (formerly Thermo Trilogy Corp.), may prove to be significant competitors in the pest management market. In many instances, agrichemical companies have substantially greater financial, technical, development, distribution and sales and marketing resources than we do. Moreover, these companies may have greater name recognition than we do, and may offer discounts as a competitive tactic. We cannot assure you that our competitors will not succeed in developing pest management products that are more effective or less expensive than ours or that would render our products obsolete or less competitive. Our success will depend in large part on our ability to maintain a competitive position with our technologies and products. Employees As of September 30, 2001, we had 69 full-time employees, of whom 16 hold Ph.D. degrees. Approximately 34 employees are engaged in research and development, 11 in sales and marketing, eight in management, accounting/finance, regulatory and administration in the United States. In addition, we have 16 employees engaged in manufacturing at our facility in Mexico. None of our domestic employees is represented by a labor union. We have entered into a collective bargaining agreement with a labor union that represents two employees at our manufacturing plant in Tlaxcala, Mexico. We consider our employee relations to be good. 47 Facilities We are headquartered in Davis, California, where we occupy approximately 13,000 square-feet of office, research and development, sales and marketing and laboratory space under a lease that expires in July 2008. Our fermentation pilot plant occupies approximately 3,000 square-feet of this facility. We also own a 208,000 square-foot fermentation, manufacturing and extraction facility on approximately 35 acres in Tlaxcala, Mexico. Legal Proceedings We may from time to time become a party to various legal proceedings arising in the ordinary course of our business. We are not currently subject to any legal proceeding. 48 MANAGEMENT Executive Officers and Directors The following table sets forth information regarding our executive officers and directors and our key employees as of September 30, 2001.
Name Age Position ---- --- -------- Pamela G. Marrone, 45 Ph.D. ................. President, Chief Executive Officer and Chairman Donald J. Glidewell..... 45 Vice President, Chief Financial Officer and Secretary James Chambers.......... 35 Director of Sales and Marketing Jennifer Ryder Fox, 52 Ph.D................... Vice President of Regulatory Affairs and Technical Development G. Steven Burrill(2).... 56 Director Jack Hunt(1)............ 56 Director Frank F.C. Kung, 52 Ph.D.(1)............... Director Walter Locher(2)........ 58 Director Lorenzo Nogales......... 30 Director George E. Myers(2)...... 43 Director Ann Partlow(1).......... 57 Director James A. 72 Schlindwein(2)......... Director
- -------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Pamela G. Marrone, Ph.D. has served as our President and Chief Executive Officer and as Chairman of our board of directors since our incorporation in January 1995. From February 1990 to January 1995, Dr. Marrone served as President of Novo Nordisk Entotech, Inc., a subsidiary of the biotechnology company Novo Nordisk A/S. Dr. Marrone has also held various management positions at Monsanto Company, a leading provider of agricultural solutions to growers worldwide. She received her Ph.D. from North Carolina State University and holds a B.S. degree with honors and distinction in Entomology from Cornell University. Donald J. Glidewell has served as our Vice President, Chief Financial Officer and Secretary since May 2000. From November 1994 to May 2000, Mr. Glidewell served as Chief Financial Officer of Bio-Trends International, a biotechnology company. In February 1999, Mr. Glidewell filed a plan of reorganization under Chapter 13 of the federal bankruptcy laws as a result of three separate floods that severely damaged riverfront real estate owned by him, each of which was declared a federal disaster. Mr. Glidewell has been licensed since 1982 by the California State Board of Accountancy and holds a B.S. in Business Administration, Accounting from Arizona State University James Chambers has served as our Director of Sales & Marketing since June 2001. From August 1995 to January 2001, Mr. Chambers held product development, sales and marketing positions with Monsanto Company. Most recently, he was a Product Manager for a biotechnology product. Prior to that, he was a Market Manager for the Dairy Division. He has also managed a family farm. Mr. Chambers has a B.S. in Economics & Marketing from Ohio State University. Jennifer Ryder Fox, Ph.D. has served as our Vice President of Regulatory Affairs and Technical Development since August 2001. From May 1998 to July 2001, she served as our Director of Regulatory Affairs. From November 1994 to May 1998, Dr. Fox served as a Manager of Regulatory Affairs at the agricultural products group of FMC Corporation, an agricultural chemical company. She received her Ph.D. in Agronomy & Horticulture and her M.S. in Soil Science from New Mexico State University and holds a B.S. in Soil Science from California Polytechnic State University. G. Steven Burrill has served as a director since July 1999. Mr. Burrill is the Chief Executive Officer of Burrill & Company, a private merchant bank focused on life science companies, which he founded in January 49 1996. Prior to that, Mr. Burrill spent 27 years with Ernst & Young, including the last 17 years as a partner of the firm. Mr. Burrill currently serves on the boards of directors of DepoMed, Inc., Paradigm Genetics, Inc., Third Wave Technologies, Inc. and Transgene SA. Mr. Burrill holds a B.B.A. degree from the University of Wisconsin, Madison. Jack Hunt has served as a director since March 1998. Since May 1995, Mr. Hunt has served as President and Chief Executive Officer of King Ranch, Inc., a ranching and agricultural business company. Mr. Hunt currently serves as a director of King Ranch, Inc. and St. Mary Land and Exploration Company. Mr. Hunt also currently serves as a member of the Texas Water Development Board. Mr. Hunt is a member of the Board of Trustees of Baylor College of Medicine. He received his M.B.A. from Harvard University and holds a B.A. from Williams College. Frank F.C. Kung, Ph.D. has served as a director since March 1998. Since January 1997, Dr. Kung has served as managing member of BioAsia Investments LLC, a venture capital firm. From January 1984 to May 1996, Dr. Kung served as Chairman and Chief Executive Officer of Genelabs Technologies, Inc., a biopharmaceutical company. He received both his Ph.D. in Molecular Biology and his M.B.A. from the University of California, Berkeley. He holds a B.S. in Chemistry from the National TsingHwa University, Taiwan. Walter Locher has served as a director since November 1999. Since October 1997, Mr. Locher has been a consultant with GSM, LLC, a consulting firm. From December 1990 to September 1997, Mr. Locher served as the Chief Executive Officer of Anderson Clayton Corp., a cotton and cottonseed processor, and concurrently served as President of Volkart International, Inc., an international cotton trading house. He currently serves as President of Volkart America, Inc. He received his Diploma in Management from IMD, Lausanne and holds a Diploma in Commerce from Commercial College, Winterthur, Switzerland. Lorenzo Nogales has served as a director since December 2001. Since September 2000, Mr. Nogales has worked at CDC Capital Partners, an emerging markets venture capital firm, first as a senior executive and most recently as a manager. From September 1995 to June 1999, Mr. Nogales served as an exploration geophysicist and a geotechnical engineer for Rio Tino plc, a mining company. He holds a B.Sc. in Geophysics and an M.Sc. in Geotechnical Engineering from Durham University, England and an M.B.A. from INSEAD in France. George E. Myers has served as a director since May 1997. Since 1995, Mr. Myers has served as President of Ojai Ranch and Investment Co., Inc., a venture capital and agricultural business firm. He holds a B.S. in Agricultural Economics and Business Management from the University of California, Davis. Ann Partlow has served as a director since May 1997. Since April 1974, Ms. Partlow has worked at Rockefeller & Company as a financial advisor and has served as the investment manager of Rockefeller & Company's Odyssey Fund since 1977. She holds a B.A. in Economics from Connecticut College. James A. Schlindwein has served as a director since June 1998. Mr. Schlindwein has served as a consultant to Morgan Stanley since August 1994. Mr. Schlindwein also serves on the board of directors of a number of private companies, including Imperial Sugar Group, Chilay Corp., Eggs Innovation, Alaska Seafood International and Emmpak Foods. Mr. Schlindwein was previously chairman of Sara Lee Corporation and an executive vice president at Sysco Foods. Key Research and Development and Manufacturing Managers Our key research and development and manufacturing managers lead our new product discovery and development and have significant technical expertise in microbiology, natural product chemistry, entomology, plant pathology, fermentation, product formulation and field development. Our key research and development and manufacturing managers are: Denise C. Manker, Ph.D. Dr. Manker has served as our Research Manager since January 1996 and leads our natural product chemistry, microbiology and secondary testing teams. She also co-led the project team that 50 developed Serenade. From September 1990 to November 1995, Dr. Manker served as a staff researcher at Novo Nordisk Entotech, Inc., a subsidiary of the biotechnology company Novo Nordisk A/S, where she established and managed the natural products chemistry laboratory. Dr. Manker holds a Ph.D. from Scripps Institution of Oceanography and served as a post-doctoral research associate at the University of California, Davis. Desmond R. Jimenez, Ph.D. Dr. Jimenez has served as our Staff Scientist since November 1995 and leads our primary screening and entomology teams. From June 1993 to November 1995, he was employed at Novo Nordisk Entotech, Inc. where he led advanced testing of insecticidal natural products, high throughput bioassays, and mode of action studies for Bt bioinsecticide. Dr. Jimenez holds a Ph.D. in Food and Nutritional Sciences from the University of Arizona and served as a post-doctoral research associate at the USDA-ARS Horticultural Research Lab and the Carl Hayden Bee Research Center. Jian-Er Lin, Ph.D. Dr. Lin has served as our Manager of Fermentation/Process Development since July 2000 and is responsible for developing and scaling up manufacturing processes for our natural products. From August 1994 to July 2000, he served as a group leader, applications and technical support for Sybron Chemicals, Inc. Dr. Lin also held technical microbiology and engineering positions at Celgene Corporation, the U.S. EPA Research Laboratory and the Michigan Biotechnology Institute. Dr. Lin holds a Ph.D. in Biotechnology/Biochemical Engineering from the University of Michigan. Donald W. Edgecomb, Ph.D. has served as our Senior Manager for Product Development since September 2001 and leads our field development efforts. From June 1982 to August 2001, Dr. Edgecomb worked for Rohm and Haas Company, where he held various technical and management field development positions. Dr. Edgecomb has a Ph.D. in Herbicide Physiology, Biochemistry and Crop Science from North Carolina State University. Miguel Garibay Perez has served as Director of Tlaxcala Operations since January 2001. From 1999 to January 2001, Mr. Garibay was an independent consultant. From 1984 until 1999, Mr. Garibay was Director, Tlaxcala Plant Operations for Abbott Laboratories, a pharmaceutical company. Previously, he served as General Manager and Plant Manager of ORSABE, S.A. DE C.V. for Beecham Pharmaceuticals and as Section Head, Analytical and Quality Assurance Manager for Syntex, S.A., a biotechnology company. Mr. Garibay has a B.S. degree in Chemical Engineering from the Universidad Nacional Autonoma de Mexico and an M.B.A. from the Universidad Autonoma del Estado de Morelos. Scientific Advisory Board Our Scientific Advisory Board is comprised of individuals specializing in the fields of natural product chemistry, microbiology, biochemistry and fermentation who from time to time provide our management with specific expertise in both research and product development. Non-employee members of our Scientific Advisory Board have received stock options and some have received cash compensation. Our Scientific Advisory Board currently consists of the following individuals: . William Fenical, Ph.D. Professor of Oceanography and Director, Center for Marine Biotechnology and Biomedicine, Scripps Institute of Oceanography, University of California, San Diego; Scientific Founder, Nereus Pharmaceuticals, a marine microbial natural products pharmaceutical company. . Bruce Hammock, Ph.D. Professor, Department of Entomology and Cancer Research Center, University of California, Davis; Program Director, National Institute of Environment and Health Science Superfund Basic Research Project; Member, National Academy of Sciences. . Tadeusz Molinski, Ph.D. Professor, Department of Chemistry, University of California, Davis. . David Block, Ph.D. Associate Professor, Departments of Viticulture and Enology and Chemical Engineering and Materials Science, University of California, Davis. 51 Board of Directors Our board of directors is currently comprised of nine directors. All of our directors hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified. Our certificate of incorporation to be effective prior to this offering will provide that, as of the first annual meeting of stockholders, our board of directors will be divided into three classes, each with staggered three-year terms. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Messrs. Burrill and Nogales and Dr. Kung have been designated as Class I directors, and their terms will expire at the 2003 annual meeting of stockholders; Messrs. Hunt and Myers and Ms. Partlow have been designated as Class II directors, and their terms will expire at the 2004 annual meeting of stockholders; and Messrs. Locher and Schlindwein and Dr. Marrone have been designated as Class III directors, and their terms will expire at the 2005 annual meeting of stockholders. Board Committees The audit committee of the board of directors was formed in May 1998 and currently consists of Mr. Hunt, Dr. Kung and Ms. Partlow. The audit committee reviews the results and scope of the annual audit and other services provided by our independent auditors, reviews and evaluates our internal audit and control functions and monitors transactions between us and our employees, officers and directors. The compensation committee of the board of directors was formed in May 1998 and currently consists of Messrs. Locher, Myers, Burrill and Schlindwein. The compensation committee exercises the authority of our board of directors on all compensation matters, including both cash and equity incentive compensation, and administers our employee benefit plans. Compensation Committee Interlocks and Insider Participation None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. Director Compensation Our directors who are also employees receive no additional compensation for their services as directors. Our non-employee directors do not receive a fee for attendance in person at meetings of our board of directors or committees of our board of directors, but they are reimbursed for travel expenses and other out-of-pocket costs incurred in connection with their attendance at meetings. In addition, our non-employee directors are eligible to receive options and be issued shares of common stock directly under our 2002 non-employee director stock option program. Upon the effective date of the registration statement relating to this offering, each non-employee director will automatically be granted an option to purchase 2,500 shares of our common stock with subsequent annual options to purchase 2,500 shares of our common stock, both at an exercise price per share equal to the fair market value of the common stock at the date of grant. Our directors who are also employees are eligible to receive options and be issued shares of common stock directly under our 2000 stock incentive plan. Executive Compensation The following table sets forth information concerning the compensation that we paid during the fiscal year ended December 31, 2001 for services rendered to us in all capacities to our Chief Executive Officer and our most highly compensated executive officers whose total salary, bonus and other compensation exceeded $100,000 during that fiscal year. We refer to these persons as named executive officers elsewhere in this 52 prospectus. In accordance with the rules of the Securities Exchange Commission, the compensation described in this table does not include perquisites and other personal benefits received by the executive officers named in the table below which do not exceed the lesser of $50,000 or 10% of the total salary and bonus reported for these executive officers. Summary Compensation Table
Annual Compensation Long-Term Compensation ---------------- ----------------------- Securities Underlying All Other Name and Principal Position Salary Bonus Options Compensation - --------------------------- -------- ------- ---------- ------------ Pamela G. Marrone, Ph.D. ............. $168,750 $21,563 -- -- President and Chief Executive Officer Donald J. Glidewell................... $122,250 $10,686 -- -- Vice President, Chief Financial Officer and Secretary
Option Grants in Last Fiscal Year The following table sets forth information concerning grants of stock options to each of the named executive officers during the fiscal year ended December 31, 2001. The percentage of total options set forth below is based on an aggregate of 338,697 options granted to employees in 2001. Our board of directors determined the fair market value of the options on the date of grant, which is based on our financial results and prospects and our share price in arms-length transactions. The exercise price may in some cases be paid by delivery of other shares or by offset of the shares subject to options. The deemed value on the date of grant has been adjusted solely for financial accounting purposes. Potential realizable values are net of exercise price, but before taxes associated with exercise. Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with the rules of the Securities and Exchange Commission and do not represent our estimate or projection of the future common stock price.
Potential Realizable Value at Assumed Annual Rates of Stock Number of Percent of Price Appreciation Securities Total Options for Option Term Underlying Granted to Exercise Expiration --------------------- Name Options Employees Price Date 5% 10% - ---- ---------- ------------- -------- ---------- ---------- ---------- Pamela G. Marrone, Ph.D. ................. -- -- -- -- -- -- Donald J. Glidewell..... -- -- -- -- -- --
The following table sets forth information concerning exercisable and unexercisable stock options held by each of the named executive officers at the fiscal year ended December 31, 2001. The value realized upon exercise is based on the estimated fair value of our common stock at the time of exercise less the per share exercise price, multiplied by the number of shares acquired upon exercise. The value of unexercised in-the-money options is based on the assumed initial public offering price of $12.00 per share less the per share exercise price, multiplied by the number of shares underlying the options. An option is in-the-money if the fair market value of the underlying shares exceeds the exercise price of the option. Aggregate Option Exercises in Last Fiscal Year and Year-End Option Values
Number of Securities Value of Unexercised Underlying Options at In-the-Money Options at Shares December 31, 2001 December 31, 2001 Acquired Value ------------------------- ------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- Pamela G. Marrone, Ph.D. ................. -- -- 11,500 40,000 $ 35,900 $ 80,000 Donald J. Glidewell..... -- -- 37,500 62,500 397,500 662,500
53 Employee Benefit Plans 1995 Stock Option Plan Our 1995 stock option plan was approved by our board of directors and our stockholders in May 1995. We have reserved a total of 1,250,000 shares of common stock for issuance under our 1995 plan. As of September 30, 2001, options to purchase 321,240 shares of common stock had been exercised, options to purchase 827,086 shares of common stock were outstanding and options to purchase 101,674 shares of common stock remained available for grant. Awards under our 1995 plan may consist of incentive stock options, which are stock options that qualify under Section 422 of the Internal Revenue Code, or non-qualified stock options, which are stock options that do not qualify under Section 422 of the Internal Revenue Code. Incentive stock options may be granted to employees, including officers and employee directors of our company or any parent, subsidiary or affiliate of our company. Non-qualified stock options and restricted stock may be granted to employees, directors, consultants, independent contractors and advisers of our company or any parent, subsidiary or affiliate of our company. A committee consisting of our board or appointed by our board administers our 1995 plan. Subject to the terms of our 1995 plan, this committee has authority to determine the terms and conditions of option grants. The exercise price of options granted under our 1995 plan may not be less than 100% of the fair market value of our common stock on the date of grant and the term of an option may not exceed 10 years. If, however, options are granted to a person owning more than 10% of the total combined voting power of all classes of stock of our company or any parent or subsidiary of our company, the exercise price of such options may not be less than 110% of the fair market value of our common stock on the date of grant. If an option granted to such a person is an incentive stock option, the term of the option may not exceed 5 years. In the case of incentive stock options, the aggregate fair market value of stock for which the options are exercisable for the first time by an optionee may not exceed $100,000. If the value of the stock exceeds $100,000, the options for the amount in excess of $100,000 shall be granted as nonqualified stock options. Options issued under our 1995 plan generally are not transferable, though the plan administrator may approve the transfer of nonqualified stock options by non-insider optionees to family members, trusts and charitable institutions. Our 1995 plan provides that optionees who cease to be employed by our company or any parent, subsidiary or affiliate of our company must exercise their incentive stock options within 90 days, or twelve months in the case of death or disability, and only to the extent they would have been exercisable upon the date of termination. In the event of one of the following, options under our 1995 plan will become fully vested and exercisable, unless the successor corporation assumes or substitutes the options: . a dissolution, liquidation or sale of all or substantially all of our assets; . a merger or consolidation in which we are not the surviving entity; or . a corporate transaction wherein our stockholders give up all of their equity interest in our company. Our 1995 plan will terminate automatically in 2005 unless terminated earlier by our board of directors. The board of directors has the authority to amend or terminate our 1995 plan, subject to stockholder approval of some amendments. However, no action may be taken which will affect any shares of common stock previously issued and sold or any option previously granted under our 1995 plan, without the optionee's consent. 54 2000 Stock Incentive Plan Our board of directors and our stockholders initially approved our 2000 stock incentive plan in December 2000. Our amended and restated 2000 stock incentive plan was adopted by our board of directors in January 2001 and will be submitted for approval by our stockholders prior to the completion of this offering. We have reserved 1,000,000 shares of our common stock for issuance under our 2000 stock incentive plan. As of September 30, 2001, options to purchase 344,322 shares of common stock were outstanding and options to purchase 655,678 shares of common stock remained available for grant under our 2000 stock incentive plan. The number of shares reserved for issuance under our 2000 stock incentive plan will increase annually on the first business day of each calendar year beginning in January 2003 by an amount equal to 250,000 shares. Our 2000 stock incentive plan provides for the grant of: . incentive stock options to our employees, including officers and employee directors; . nonqualified stock options to our employees, directors and consultants; and . other types of awards. We anticipate that all future option grants will be made solely under our 2000 stock incentive plan. The board of directors or a committee designated by the board will administer our 2000 stock incentive plan, including selecting the optionees, determining the number of shares to be subject to each option, determining the exercise price of each option and determining the vesting and exercise periods of each option. The exercise price of all incentive stock options granted under our 2000 stock incentive plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of all nonqualified stock options granted under our 2000 stock incentive plan will be determined by the plan administrator, but in no event may this price be less than 100% of the fair market value of the common stock on the date of grant. If, however, incentive stock options are granted to a person who owns stock possessing more than 10% of the voting power of all our classes of stock, the exercise price must equal at least 110% of the fair market value of the common stock on the grant date and the maximum term of any of these options must not exceed five years. The maximum term of an incentive stock option granted to any person who does not own stock possessing more than 10% of the total combined voting power of all our classes of stock must not exceed ten years. The plan administrator will determine the term of all other awards granted under our 2000 stock incentive plan. Except as determined by the plan administrator, an option holder's initial grant will vest at a rate no less than 25% per year, over four years from the date the option is granted. Subsequent options will vest in the same manner. In the event a participant in our 2000 stock incentive plan terminates employment or is terminated by us for any reason, any options which have become exercisable prior to the time of termination will remain exercisable for twelve months from the date of termination if termination was caused by death or disability, or three months from the date of termination if termination was caused by reasons other than death or disability. In no event may an optionee exercise the option after the expiration date of the term of an award in the award agreement. In the event of a corporate transaction or a change of control where the acquiror assumes or replaces options granted under our 2000 stock incentive plan, none of the options issued under this plan will be subject to accelerated vesting under the plan. In the event of a corporate transaction or a change of control where the acquiror does not assume or replace options granted under our 2000 stock incentive plan, all of these options become fully vested upon consummation of the corporate transaction or change of control. Assumed or replaced options will automatically become fully vested if the grantee is terminated by the acquiror without cause or terminates employment for good reason within twelve months of a corporate transaction or a change of control. Under our 2000 stock incentive plan, a corporate transaction or a change in control is defined as: . acquisition of 50% or more of our stock by any individual or entity including by tender offer or a reverse merger; 55 . change of a majority of the members on our board of directors; . a sale, transfer or other disposition of all or substantially all of our assets; . a merger or consolidation in which we are not the surviving entity; or . approval by our stockholders of a plan of complete liquidation or dissolution. Unless terminated sooner, our 2000 stock incentive plan will automatically terminate in 2010. Our board of directors will have authority to amend or terminate our 2000 stock incentive plan, provided that this type of action would not impair the rights of any participant without the written consent of that participant. 2002 Non-Employee Director Stock Option Program Our 2002 non-employee director stock option program was adopted as part of the 2000 stock incentive plan and will be subject to the terms and conditions of the 2000 stock incentive plan. Our 2002 non-employee director stock option program was approved by our board of directors in January 2001. The 2002 non- employee director stock option program will become effective as of the effective date of this prospectus, and no awards will be made under this program until that time. The purpose of the 2002 non-employee director stock option program will be to enhance our ability to attract and retain the best available non-employee directors, to provide them additional incentives and, therefore, to promote the success of our business. The 2002 non-employee director stock option program will establish an automatic option grant program for the grant of awards to non-employee directors. Under this program, each then-existing non-employee director upon the effective date of this prospectus will automatically be granted an option to acquire 2,500 shares of our common stock at an exercise price per share equal to the fair market value of our common stock at the date of grant. Each non-employee director first elected to our board of directors following the closing of this offering will automatically be granted an option to acquire 5,000 shares of our common stock at an exercise price per share equal to the fair market value of our common stock at the date of grant. Upon the date of each annual stockholders' meeting, each non-employee director who continues as a member of our board of directors following the stockholders' meeting will receive an automatic grant of options to acquire 2,500 shares of our common stock at an exercise price equal to the fair market value of our common stock at the date of grant. These options will vest on a quarterly basis and become fully exercisable on the first anniversary of the grant date. The term of each automatic option grant and the extent to which it will be transferable will be provided in the agreement evidencing the option. The consideration for the option may consist of cash, shares of our common stock, the assignment of part of the proceeds from the sale of shares acquired upon exercise of the option or any combination of these forms of consideration. The 2002 non-employee director stock option program will be administered by the board or a committee designated by the board so that such awards would be exempt from Section 16(b) of the Exchange Act. The program administrator shall determine the terms and conditions of awards, and construe and interpret the terms of the program and awards granted under the program. Non-employee directors may also be granted additional incentives, subject to the discretion of the board or the committee. Unless terminated sooner, the 2002 non-employee director stock option program will terminate automatically in 2010 when the 2000 stock incentive plan terminates. Our board of directors will have the authority to amend, suspend or terminate the 2002 non-employee director stock option program provided that no such action may affect awards to non-employee directors previously granted under the program unless agreed to by the affected non-employee directors. 56 2002 Employee Stock Purchase Plan Our 2002 employee stock purchase plan was adopted by our board of directors in January 2001 and will be submitted for approval by our stockholders prior to the completion of this offering. Our 2002 employee stock purchase plan is intended to qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code in order to provide our employees with an opportunity to purchase common stock through payroll deductions. An aggregate of 175,000 shares of common stock will be reserved for issuance and will be available for purchase under our 2002 employee stock purchase plan, pending adjustment for a stock split or any future stock dividend or other similar change in our common stock or our capital structure. Our 2002 employee stock purchase plan will provide for annual increases in the number of shares of common stock subject to the plan equal to the lesser of: . 100,000 shares; . the number of shares equal to 0.75% of the total number of shares outstanding; or . a lesser number of shares as determined by the administrator of our 2002 employee stock purchase plan. All of our employees who are regularly employed for more than five months in any calendar year and work more than 20 hours per week will be eligible to participate in our 2002 employee stock purchase plan and will be automatically enrolled in the initial offer period. Employees hired after the consummation of our initial public offering will be eligible to participate in our 2002 employee stock purchase plan following a three day waiting period after hiring. Non-employee directors, consultants and employees subject to the rules or laws of a foreign jurisdiction that prohibit or make impractical their participation in an employee stock purchase plan will not be eligible to participate in our 2002 employee stock purchase plan. Our 2002 employee stock purchase plan will designate offer periods, purchase periods and exercise dates. Offer periods will generally be overlapping periods of 24 months. The initial offer period will begin on the effective date of our 2002 employee stock purchase plan, which is the effective date of the registration statement relating to this offering, and ends on January 31, 2004. Additional offer periods will commence each February 1 and August 1. Purchase periods will generally be six month periods, with the initial purchase period commencing on the effective date of our 2002 employee stock purchase plan and ending on June 30, 2002. Thereafter, purchase periods will commence each January 1 and July 1. Exercise dates are the last day of each purchase period. In the event we merge with or into another corporation, sell all or substantially all of our assets or enter into other transactions in which all of our stockholders before the transaction own less than 50% of the total combined voting power of our outstanding securities following the transaction, the administrator of our 2002 employee stock purchase plan may elect to shorten the offer period then in progress. On the first day of each offer period, a participating employee will be granted a purchase right. A purchase right is a form of option to be automatically exercised on the forthcoming exercise dates within the offer period during which authorized deductions are to be made from the pay of participants and credited to their accounts under our 2002 employee stock purchase plan. When the purchase right is exercised, the participant's withheld salary is used to purchase shares of common stock. The price per share at which shares of common stock are to be purchased under our 2002 employee stock purchase plan during any purchase period is the lesser of: . 85% of the fair market value of the common stock on the date of the grant of the option, which is the commencement of the offer period; or . 85% of the fair market value of the common stock on the exercise date, which is the last day of a purchase period. The participant's purchase right is exercised in this manner on each exercise date arising in the offer period unless, on the first day of any purchase period, the fair market value of the common stock is lower than the fair market value of the common stock on the first day of the offer period. If so, the participant's participation in the original offer period is terminated and the participant is automatically enrolled in the new offer period effective the same date. 57 Payroll deductions may range from 1% to 10% in whole percentage increments of a participant's regular base pay, exclusive of bonuses, overtime, shift- premiums, commissions, reimbursements or other expense allowances. Participants in the first purchase period must purchase shares through a direct cash payment. Once the shares reserved for issuance under our 2002 employee stock purchase plan have been registered on Form S-8 under the Securities Act, participants in the first purchase period may elect to purchase shares through payroll deductions. After the first purchase period, participants may not make direct cash payments to their accounts. The maximum number of shares of common stock that any employee may purchase under our 2001 employee stock purchase plan during the initial purchase period is 750 shares, and the maximum number that may be purchased during any subsequent purchase period is 500 shares. The Internal Revenue Code imposes additional limitations on the amount of common stock that may be purchased during any calendar year. Our 2002 employee stock purchase plan will be administered by our board of directors or a committee designated by our board, which will have the authority to terminate or amend our 2002 employee stock purchase plan, subject to specified restrictions, and otherwise to administer our 2002 employee stock purchase plan and to resolve all questions relating to the administration of our 2002 employee stock purchase plan. 401(k) Plan In 1996, we implemented a 401(k) plan covering some of our employees. Under the 401(k) plan, eligible employees may elect to reduce their current compensation up to the prescribed annual limit, which was $10,500 in 2001 and is $11,000 in 2002, and contribute these amounts to the 401(k) plan. We may make contributions to the 401(k) plan on behalf of eligible employees. Employees become fully vested in these contributions immediately, subject to limitations on access to the contributions during the duration of employment. The 401(k) plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees or by us to the 401(k) plan, and income earned on the 401(k) plan contributions, are not taxable to employees until withdrawn from the 401(k) plan and so that contributions by us, if any, will be deductible by us when made. The trustee under the 401(k) plan, at the direction of each participant, invests the 401(k) plan employee salary deferrals in selected investment options. We made no contributions to the 401(k) plan in 1996, 1997, 1998, 1999, 2000 or 2001. We currently do not expect to make contributions to the 401(k) plan in 2002. Limitations on Liability and Indemnification Our certificate of incorporation and bylaws provide that we will indemnify our directors, officers, employees and agents to the fullest extent permitted by Delaware law. We intend to enter into agreements to indemnify our directors and officers, in addition to indemnification provided for in our charter documents. These agreements, among other things, will provide for the indemnification of our directors and officers for expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by any person in any action or proceeding, including any action by or in the right of our company, arising out of that person's services as a director or officer of our company or any other company or enterprise to which that person provides services at our request to the fullest extent permitted by applicable law. We believe that these provisions and agreements will assist us in attracting and retaining qualified persons to serve as directors and officers. Delaware law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for any breach of the director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for liability arising under Section 174 of the Delaware General Corporation Law or for any transaction from which the director derived an improper personal benefit. Our certificate of incorporation provides for the elimination of personal liability of a director for breach of fiduciary duty, as permitted by Delaware law. 58 Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of our company in accordance with the provisions contained in our charter documents, Delaware law or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against these liabilities, other than the payment by us of expenses incurred or paid by a director, officer or controlling person of our company in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person, we will, unless, in the opinion of our counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and we will follow the court's determination. We intend to purchase and maintain insurance on behalf of our officers and directors, insuring them against liabilities that they may incur in such capacities or arising out of this status. There is no pending litigation or proceeding involving any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. 59 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Since January 1999, we issued the following securities to various investors in private placement transactions: . 3,015,306 shares of our Series D preferred stock, as adjusted for our July 1999 stock split, at a purchase price of $2.35 per share between April 1999 and September 1999; . 2,251,919 shares of our Series E preferred stock at a purchase price of $3.20 per share in April 2000; and . 2,979,333 shares of our Series F preferred stock at a weighted-average purchase price of $5.03 per share in December 2000. Each share of preferred stock will convert automatically into common stock on the basis of two shares of preferred stock for one share of common stock upon the closing of this offering. The investors in these financings included the following directors, executive officers and holders of more than 5% of our outstanding stock and their affiliates:
Preferred Stock ----------------------- Series Series Series Purchasers D E F ---------- ------- ------- ------- Odyssey Fund Rockefeller & Co., Inc.(1)............... 425,531 156,250 100,000 BioAsia Investments, LLC and its affiliates(2)........ 212,766 62,500 50,000 Milagro de Ladera, L.P.(3)............................ 319,147 78,360 100,000 Burrill Agbio Capital Fund L.P.(4).................... 851,064 -- 200,000 Swiss Reinsurance Company............................. -- 781,250 200,000 Volkart Holdings Ltd. and its affiliates(5)........... 106,382 78,318 400,000 King Ranch Investments, L.P.(6)....................... 106,382 78,425 -- J.S.S. Management Co., Ltd. and its affiliates(7)..... 106,383 62,688 100,000 SAM Sustainability Private Equity, L.P. and its affiliate(8)......................................... -- -- 800,000 CDC Financial Services (Mauritius) Limited(9)......... -- -- 550,000
- -------- (1) Ann Partlow serves on our board of directors and is the investment manager of Odyssey Fund Rockefeller & Co., Inc. (2) Includes 141,486 shares of Series D preferred stock held of record by Biotechnology Development Fund III, L.P., 71,280 shares of Series D preferred stock held of record by Biotechnology Development Fund, L.P., 62,500 shares of Series E preferred stock held of record by Biotechnology Development Fund, L.P., and 50,000 shares of Series F preferred stock held of record by Biotechnology Development Fund, L.P. Dr. Kung serves on our board of directors and is the managing member of these entities. (3) George E. Myers serves on our board of directors and is a limited partner of Milagro de Ladera, L.P. (4) G. Steven Burrill serves on our board of directors and is the chief executive officer of Burrill & Company, which is the general partner of Burrill Agbio Capital Fund, L.P. (5) Includes 106,382 shares of Series D preferred stock and 78,318 shares of Series E preferred stock held of record by Volkart Holdings Ltd., 300,000 shares of Series F preferred stock held of record by Volkart Foundation and 100,000 shares of Series F preferred stock held of record by Andreas Reinhart, who is the president of the Volkart entities. 60 (6) Jack Hunt serves on our board of directors and is the president and chief executive officer of King Ranch, Inc. Running W, Ltd. is the general partner of King Ranch Investments, L.P. and is a wholly-owned subsidiary of King Ranch, Inc. (7) Includes 40,000 shares of Series F preferred stock, 62,688 shares of Series E preferred stock and 85,106 shares of D preferred stock held of record by J.S.S. Management Co., Ltd., 20,000 shares of Series F preferred stock and 21,277 shares of Series D preferred stock held of record by Suzanne S. Schlindwein and 40,000 shares of Series F preferred stock held of record by James A. Schlindwein. Mr. Schlindwein serves on our board of directors and is a trustee of J.S.S. Management Co., Ltd. Suzanne Schlindwein is the wife of James Schlindwein. (8) Includes 400,000 shares of Series F preferred stock held of record by SAM Sustainability Private Equity, L.P. and 400,000 shares of Series F preferred stock held of record by Sustainable Performance Group N.V. Walter Locher serves on our board of directors and is a principal of SAM Equity Partners Ltd., which is the general partner of SAM Sustainability Private Equity, L.P. and manages the Sustainable Performance Group N.V. (9) Lorenzo Nogales serves on our board of directors and is a manager at CDC Capital Partners, a division of CDC Group Plc. CDC Group Plc is the parent company of CDC Financial Services (Mauritius) Limited. We have entered into agreements with holders of our preferred stock whereby we granted them registration rights with respect to their shares of common stock, including common stock issuable upon conversion of their preferred stock. See "Description of Capital Stock--Registration Rights." We intend to enter into indemnification agreements with each of our directors and officers. These indemnification agreements will require us to indemnify these individuals to the fullest extent permitted by Delaware law. We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. We intend that all future transactions, including loans, between us and our officers, directors, principal stockholders and their affiliates will be approved by a majority of our board of directors, including a majority of the independent and disinterested outside directors on our board of directors, and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 61 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to the beneficial ownership of our common stock as of September 30, 2001 by: . each person or entity known by us to own beneficially more than five percent of our common stock; . each of our directors and named executive officers; and . all of our directors and named executive officers as a group. This table calculates applicable percentage ownership based on 9,307,165 shares of our common stock issued and outstanding as of September 30, 2001, assuming the conversion of all outstanding shares of preferred stock into common stock on the basis of two shares of preferred stock for one share of common stock, which will occur automatically upon the effectiveness of this offering. It also calculates applicable percentage ownership based on 12,807,165 shares of common stock outstanding immediately following the completion of this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares issuable upon the exercise of options that are currently exercisable or become exercisable within 60 days of September 30, 2001 are considered outstanding for the purpose of calculating the percentage of outstanding shares of our common stock held by the individual, but not for the purpose of calculating the percentage of outstanding shares of our common stock held by any other individual. Except as indicated in the footnotes to this table and as affected by applicable community property laws, all persons listed below have sole voting and investment power for all shares shown as beneficially owned by them. Except as otherwise noted, the address of each person or entity in the following table is c/o AgraQuest, Inc., 1530 Drew Avenue, Davis, California 95616.
Percentage of Shares Beneficially Number of Owned Shares ----------------- Beneficially Before After Beneficial Owner Owned Offering Offering ---------------- ------------ -------- -------- 5% Stockholders Odyssey Fund Rockefeller & Co., Inc.(1)........ 918,622 9.9% 7.2% BioAsia Investments, LLC and its affiliates(2)................................. 750,868 8.1% 5.9% Milagro de Ladera, L.P.(3)..................... 663,320 7.1% 5.2% Burrill Agbio Capital Fund L.P.(4)............. 525,532 5.6% 4.1% Swiss Reinsurance Company(5)................... 490,625 5.3% 3.8% Volkart Holdings Ltd. and its affiliates(6).... 484,926 5.2% 3.8% Named Executive Officers and Directors Pamela G. Marrone, Ph.D.(7).................... 678,725 7.3% 5.3% Donald J. Glidewell(8)......................... 37,500 * * G. Steven Burrill(9)........................... 533,532 5.7% 4.2% Jack Hunt(10).................................. 400,522 4.3% 3.1% Frank F.C. Kung, Ph.D.(11)..................... 765,868 8.2% 6.0% Walter Locher(12).............................. 408,000 4.4% 3.2% Lorenzo Nogales(13)............................ -- * * George E. Myers(14)............................ 685,820 7.4% 5.4% Ann Partlow(15)................................ 941,122 10.1% 7.3% James A. Schlindwein(16)....................... 232,977 2.5% 1.8% All named executive officers and directors as a group (10 persons)............................ 4,684,066 50.3% 36.6%
- -------- * Less than 1%. (1) The business address of Odyssey Fund Rockefeller & Co., Inc. is 30 Rockefeller Plaza, Room 5425, New York, NY 10112. 62 (2) Includes 462,802 shares held of record by Biotechnology Development Fund III, L.P. and 288,066 shares held of record by Biotechnology Development Fund, L.P. The business address of BioAsia Investments, LLC is 575 High Street, Suite 201, Palo Alto, CA 94301. (3) The business address of Milagro de Ladera, L.P. is 1114 State Street, Suite 232, Santa Barbara, CA 93101. (4) The business address of Burrill Agbio Capital Fund L.P. is 120 Montgomery Street, #1370, San Francisco, CA 94104. (5) The business address of Swiss Reinsurance Company is Mythenquai 50/60, P.O. Box 8022, Zurich, Switzerland. (6) Includes 284,926 shares held of record by Volkart Holdings Ltd., 150,000 shares held of record by Volkart Foundation and 50,000 shares held of record by Andreas Reinhart, who is the president of the Volkart entities. The business address of Volkart Holdings Ltd. is Turnerstr. 1, 8401 Winterthur, Switzerland. (7) Includes 1,500 shares issuable upon exercise of options within 60 days of September 30, 2001. (8) Includes 6,250 shares issuable upon exercise of options within 60 days of September 30, 2001. (9) Includes 8,000 shares issuable upon exercise of options within 60 days of September 30, 2001 and 525,532 shares held of record by Burrill Agbio Capital Fund L.P. Mr. Burrill is the chief executive officer of Burrill & Company, which is the general partner of Burrill Agbio Capital Fund L.P. Mr. Burrill disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. (10) Includes 14,000 shares issuable upon exercise of options within 60 days of September 30, 2001 and 386,522 shares held of record by King Ranch Investments, L.P. Running W, Ltd. is the general partner of King Ranch Investments, L.P. and a wholly-owned subsidiary of King Ranch, Inc., of which Mr. Hunt is the president and chief executive officer. Mr. Hunt disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. (11) Includes 6,000 shares held of record by Dr. Kung, 8,000 shares issuable upon exercise of options within 60 days of September 30, 2001 and 750,868 shares held of record by BioAsia Investments, LLC and its affiliates, of which Dr. Kung is the managing member. Dr. Kung disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. (12) Includes 4,000 shares held of record by Mr. Locher, 4,000 shares issuable upon exercise of options within 60 days of September 30, 2001, 200,000 shares held of record by SAM Sustainability Private Equity, L.P. and 200,000 shares held of record by Sustainable Performance Group N.V. Mr. Locher is a principal of SAM Equity Partners Ltd., which is the general partner of SAM Sustainability Private Equity, L.P. and manages the Sustainable Performance Group N.V. Mr. Locher disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. (13) Excludes 275,000 shares held of record by CDC Financial Services (Mauritius) Limited. Mr. Nogales is a manager at CDC Capital Partners, a division of CDC Group Plc. CDC Group Plc is a parent company of CDC Financial Services (Mauritius) Limited. (14) Includes 17,500 shares held of record by Mr. Myers, 5,000 shares issuable upon exercise of options within 60 days of September 30, 2001 and 663,320 shares held of record by Milagro de Ladera L.P., of which Mr. Myers is a limited partner. Mr. Myers disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. (15) Includes 22,500 shares issuable upon exercise of options within 60 days of September 30, 2001 and 918,622 shares held of record by Odyssey Fund Rockefeller & Co., Inc., of which Ms. Partlow is the investment manager. Ms. Partlow disclaims beneficial ownership of these shares except to the extent of her pecuniary interest therein. (16) Includes 11,000 shares held of record by Mr. Schlindwein, 1,000 shares issuable upon exercise of options within 60 days of September 30, 2001, 200,339 shares held of record by J.S.S. Management Co., Ltd., of which Mr. Schlindwein is a trustee, and 20,638 shares held of record by Suzanne Schlindwein, who is the wife of Mr. Schlindwein. Mr. Schlindwein disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. 63 DESCRIPTION OF CAPITAL STOCK The following information describes our common stock and preferred stock, as well as options to purchase our common stock, and provisions of our certificate of incorporation and our bylaws. This description is only a summary. You should also refer to our certificate of incorporation and bylaws that have been filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. Upon the completion of this offering, we will be authorized to issue up to 33,000,000 shares of capital stock, $0.001 par value per share. Of these authorized shares, 30,000,000 shares will be designated as common stock and 3,000,000 shares will be designated as preferred stock. Common Stock As of September 30, 2001, there were 1,855,369 shares of common stock outstanding that were held of record by approximately 73 stockholders. After giving effect to the sale of the common stock we are offering, there will be 12,807,165 shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and conversion of all outstanding shares of preferred stock into common stock. The holders of our common stock are entitled to one vote for each share held of record upon such matters and in such manner as may be provided by law. Subject to preferences applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive dividends ratably, if any, as may be declared by our board of directors out of funds legally available for dividend payments. In the event we liquidate, dissolve or wind up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and liquidation preferences of any outstanding shares of the preferred stock. Holders of common stock have no preemptive rights or rights to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are validly issued, fully paid and nonassessable, and the shares of common stock to be issued in this offering will be validly issued, fully paid and nonassessable. Preferred Stock As of September 30, 2001, there were 7,451,796 shares of preferred stock outstanding that were held of record by approximately 55 stockholders. In connection with the closing of this offering, all outstanding shares of our preferred stock will automatically be converted into common stock on a basis of two shares of preferred stock for one share of common stock. Upon the closing of this offering, we will be authorized to issue 3,000,000 shares of preferred stock that will not be designated as a particular class. Our board of directors will have authority to issue the undesignated preferred stock in one or more series and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued series of undesignated preferred stock and to fix the number of shares constituting any series and the designation of the series, without any further vote or action by our stockholders. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. We have no present plans to issue any shares of preferred stock. Warrants In December 1998, in connection with a financing arrangement, we issued a warrant to purchase (a) 15,600 shares of our Series C preferred stock to MMC/GATX Partnership No. 1 and (b) 3,900 shares of our Series C preferred stock to Silicon Valley Bank, each with an exercise price of $3.40 per share. These warrants are exercisable at any time prior to the earlier of December 23, 2008 or five years after the closing of this offering. Upon the closing of this offering, these warrants will be exercisable for an aggregate of 19,500 shares of our common stock at an exercise price of $3.40 per share. 64 Registration Rights After the closing of this offering, the holders of approximately 8,488,778 shares of our common stock will be entitled to registration rights with respect to their shares. Beginning three months after the closing of this offering, the holders of approximately 30% of these securities may require us to register all or part of their shares. In addition, these holders may require us to include their shares in future registration statements that we file and may require us to register their shares on Form S-3. Upon registration, these shares will be freely tradable in the public market without restriction. All expenses in effecting these registrations, with the exception of underwriting discounts and selling commissions, will be borne by us. These registration rights are subject to some conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in the registration. We have agreed to indemnify the holders of these registration rights, and each selling holder has agreed to indemnify us, against liabilities under the Securities Act, the Securities Exchange Act or other applicable federal or state law. Anti-Takeover Effects of Provisions of our Charter Documents and Bylaws and Delaware Law Provisions of Delaware law and our certificate of incorporation and bylaws could make our acquisition by means of a tender offer, a proxy contest, or otherwise, and the removal of incumbent officers and directors more difficult. These provisions are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweighs the disadvantages of discouraging proposals, including proposals that are priced above the then current market value of our common stock, because, among other things, negotiation of these proposals could result in an improvement of their terms. Delaware Law We are subject to Section 203 of the Delaware General Corporation Law. Under this provision, we may not engage in any business combination with any interested stockholder for a period of three years following the date that stockholder became an interested stockholder, unless: . prior to that date the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock outstanding at the time the transaction began; or . on or following that date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines "business combination" to include: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, pledge or other disposition of assets with an aggregate market value equal to 10% or more of the aggregate market value of all assets of the corporation or the aggregate market value of all outstanding stock of the corporation involving the interested stockholder; . subject to some exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; . any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. 65 In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person. Certificate of Incorporation and Bylaws Our certificate of incorporation and bylaws will contain provisions that could have the effect of discouraging potential acquisition proposals or tender offers or delaying or preventing a change in control of our company. In particular, our certificate of incorporation and bylaws, as applicable, among other things, will: . provide that our board of directors will be divided into three classes of directors, as nearly equal in number as is reasonably possible, serving staggered terms so that directors' initial terms will expire at the first, second and third succeeding annual meeting of the stockholders following our initial public offering, respectively. At each such succeeding annual meeting, directors elected to succeed those directors whose terms are expiring at such meeting shall be elected for a three-year term of office. A vote of at least 80% of our capital stock would be required to amend this provision; . provide that special meetings of the stockholders may be called only by our president, our secretary or at the direction of the board. Advance written notice of a stockholder proposal or director nomination that the stockholder desires to present at a meeting of stockholders is required and generally must be received by the secretary not less than 45 days nor more than 75 days prior to the date the proxy materials are mailed for the meeting; . not include a provision for cumulative voting in the election of directors. Under cumulative voting, a minority stockholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of limiting the ability of minority stockholders to effect changes in the board and, as a result, may have the effect of deterring a hostile takeover or delaying or preventing changes in control or management of our company; . provide that vacancies on our board may be filled by a majority of directors in office, although less than a quorum, and not by the stockholders; and . allow us to issue up to 3,000,000 shares of undesignated preferred stock with rights senior to those of the common stock and that otherwise could adversely affect the rights and powers, including voting rights, of the holders of common stock. In some circumstances, this issuance could have the effect of decreasing the market price of the common stock as well as having the anti-takeover effect discussed above. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board and in the policies formulated by them and to discourage certain types of transactions that may involve an actual or threatened change in control of us. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management. Transfer Agent and Registrar The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. Its address is 59 Maiden Lane, Plaza Level, New York, NY 10038, and its telephone number is (212) 936-5100. Quotation on the Nasdaq National Market We have applied to list our common stock on the Nasdaq National Market under the symbol "AGRQ." 66 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public offering for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices. Only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale. Accordingly, sales of substantial amounts of our common stock in the public market after these restrictions lapse could adversely affect prevailing market prices and our ability to raise equity capital in the future. Upon completion of this offering, we will have 12,807,165 shares of common stock outstanding, assuming no exercise of options or warrants after September 30, 2001 and assuming the conversion of all shares of preferred stock outstanding into common stock, based on shares outstanding as of September 30, 2001. Of these shares, the 3,500,000 shares of common stock sold in this offering, plus any shares issued upon exercise of the underwriters' over- allotment option, will be freely transferable without restriction or registration under the Securities Act, except for shares purchased by any of our existing "affiliates," which generally include officers, directors or 10% stockholders, as that term is defined in Rule 144 under the Securities Act. The remaining 9,307,165 shares of common stock outstanding upon completion of this offering are "restricted securities" within the meaning of Rule 144 under the Securities Act. These shares may be sold in the public market only if registered, or if they qualify for an exemption from registration under Rule 144, Rule 144(k) or 701 promulgated under the Securities Act, each of which is summarized below. Including our directors and executive officers, holders of a total of approximately shares of common stock, including shares issuable upon automatic conversion of the outstanding preferred stock, have entered into lock-up agreements generally providing that they will not, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, subject to some exceptions, for a period of 180 days after the date of this prospectus. We have entered into a similar agreement with Merrill Lynch. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144, Rule 144(k) and 701, shares subject to lock-up agreements will not be eligible for sale until these agreements expire or are waived by Merrill Lynch. Taking into account the lock-up agreements, and assuming Merrill Lynch does not release the parties from these agreements, the following shares will be eligible for sale in the public market at the following times: . Beginning on the effective date of this offering, shares will be immediately available for sale in the public market; . Beginning 90 days after the date of this prospectus, approximately shares will be eligible for sale under Rules 144 and 701; . Beginning 180 days after the date of this prospectus, the expiration date of the lock-up agreements, approximately shares will be eligible for sale under Rules 144, 144(k) and 701; and . An additional shares will become eligible for sale under Rule 144 during the period beginning 180 days after the date of this prospectus through , 2002, upon the expiration of various one-year holding periods. Shares eligible to be sold by affiliates under Rule 144 are subject to the volume restrictions below. Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person, or persons whose shares are aggregated, who has beneficially owned restricted securities for at least one year, including the holding period of any prior owner other than an affiliate, is entitled to sell within any three-month period a number of shares that does not exceed the greater of (a) 1% of our then outstanding shares of common stock, approximately 128,072 shares immediately after this offering, or (b) the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar 67 weeks preceding the date on which notice of sale is filed with the SEC. Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, may sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701. Beginning 90 days after the effective date of this prospectus, subject to contractual restrictions, any of our employees, consultants or advisors who purchased shares from us prior to the closing of this offering under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that persons other than affiliates may sell shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitations or notice provisions of Rule 144. Stock plan. As of September 30, 2001, 757,352 shares of common stock remain available for grant under our stock plans and 175,000 shares of common stock are reserved for future issuance under our 2001 employee stock purchase plan. No shares have been issued to date under our 2002 employee stock purchase plan. After the closing of this offering, we intend to file a registration statement under the Securities Act to register shares to be issued under our stock plans. This registration statement is expected to become effective immediately upon filing, and shares covered by the registration statement will then become eligible for sale in the public market. As a result, shares issued under our 1995 stock option plan, our 2000 stock incentive plan and our 2002 employee stock purchase plan, after the effectiveness of the registration statement, also will be freely tradeable in the public market, subject to Rule 144 limitations applicable to affiliates, vesting restrictions and expiration of lock-up agreements. Lock-up agreements. All of our executive officers and directors and holders of over 98% of our stock have signed lock-up agreements. Under these agreements, they have agreed, among other things, not to transfer or dispose of any shares of our common stock, or securities convertible into shares of common stock, for a period of 180 days after the date of this prospectus. Transfers or dispositions can be made sooner with the prior written consent of Merrill Lynch. This consent may be given at any time without public notice. 68 UNDERWRITING Merrill Lynch, Pierce, Fenner & Smith Incorporated and Stephens Inc. are acting as representatives of the underwriters named below. Subject to the terms and conditions described in a purchase agreement between us and the underwriters, we have agreed to sell to the underwriters, and the underwriters severally and not jointly have agreed to purchase from us, the number of shares listed opposite their names below.
Number Underwriter of Shares ----------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated.................................................. Stephens Inc. ..................................................... --------- Total ........................................................ 3,500,000 =========
Subject to the terms and conditions in the purchase agreement, the underwriters have agreed to purchase all the shares of our common stock being sold under the purchase agreement if any of these shares of our common stock are purchased. If an underwriter defaults, the purchase agreement provides that the purchase commitments of the nondefaulting underwriter may be increased or the purchase agreement may be terminated. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities. The underwriters are offering the shares of our common stock, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreement, such as the receipt by the underwriters of officers' certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Commissions and Discounts The representatives have advised us that the underwriters propose initially to offer the shares of our common stock to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the underwriters of their overallotment option.
Per Share Without Option With Option --------- -------------- ----------- Public offering price................. $ $ $ Underwriting discount................. $ $ $ Proceeds, before expenses, to AgraQuest............................ $ $ $
The expenses of this offering, not including the underwriting discount, are estimated at $1.3 million and are payable by us. 69 Overallotment Option We have granted an option to the underwriters to purchase up to 525,000 additional shares of our common stock at the initial public offering price less the underwriting discount. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreement, to purchase a number of additional shares of our common stock proportionate to that underwriter's initial amount reflected in the above table. Reserved Shares At our request, the underwriters have reserved for sale, at the initial public offering price, up to 350,000 shares of our common stock offered hereby to be sold as part of the underwritten offering to certain individuals and entities designated by us. We have reserved shares for certain of our employees and their families and friends and certain individuals and entities with which we have a business relationship. If these individuals and entities purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. No Sales of Similar Securities We, our executive officers and directors, and certain existing shareholders have agreed, with exceptions, not to sell or transfer any shares of our common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, we and these other individuals have agreed not to directly or indirectly: . offer, pledge, sell or contract to sell any common stock; . sell any option or contract to purchase any common stock; . purchase any option or contract to sell any common stock; . grant any option, right or warrant for the sale of any common stock; . lend or otherwise dispose of or transfer any common stock; . request or demand that we file a registration statement related to any common stock; or . enter into any swap or other agreement that transfers, in whole or in part, the economic consequences of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise. This lock-up provision applies to shares of our common stock and to securities convertible into, or exchangeable or exercisable for, or repayable with, shares of our common stock. Subject to certain exceptions, it also applies to shares of our common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us and Merrill Lynch. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are: . the valuation multiples of publicly traded companies that the representatives believe to be comparable to us; . our financial information; . the history of, and the prospects for, our company and the industry in which we compete; . an assessment of our management, our past and our present operations, and the prospects for, and timing of, our future revenues; 70 . the present state of our development; and . the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. An active trading market for the shares of our common stock may not develop. It is also possible that after this offering the shares will not trade in the public market at or above the initial public offering price. The underwriters do not expect to sell more than 5% of the shares of our common stock in the aggregate to accounts over which they exercise discretionary authority. Quotation on the Nasdaq National Market We have applied to list our common stock on the Nasdaq National Market under the symbol "AGRQ." Price Stabilization, Short Positions and Penalty Bids Until the distribution of the shares of our common stock is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price. In connection with the offering, the underwriters may make short sales of our common stock. Short sales involve the sale by the underwriters at the time of the offering of a greater number of shares than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the public offering price at which they may purchase the shares through the over-allotment option. Naked short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Similar to other purchase transactions, the purchases by the underwriters to cover syndicate short positions may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than it would otherwise be in the absence of these transactions. The representatives may also impose a penalty bid on underwriters and selling group members. This means that if the representatives purchase shares of our common stock in the open market to reduce the underwriter's short position or to stabilize the price of such shares, they may reclaim the amount of the selling commission from the underwriters and selling group members who sold those shares. The imposition of a penalty bid may also affect the price of the shares of our common stock in that it discourages resales of those shares. Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the representatives or the lead managers will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice. 71 Electronic Distribution Merrill Lynch will be facilitating Internet distribution for this offering to some of its Internet subscription customers. Merrill Lynch intends to allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the Internet Web site maintained by Merrill Lynch. Other than the prospectus in electronic format, the information on the Merrill Lynch Web site is not a part of this prospectus. Other Relationships Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us. They have received customary fees and commissions for these transactions. As of September 30, 2001, Stephens Group, Inc., the parent company of Stephens Inc., one of the underwriters, held 781,250 shares of our Series E preferred stock through Stephens-AgraQuest LLC, a limited liability company controlled by Stephens Group, Inc. These shares were purchased in April 2000 at $3.20 per share and represent approximately 4.2% of our outstanding equity securities prior to this offering. 72 LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Morrison & Foerster llp, Sacramento, California. Certain legal matters will be passed on for the underwriters by Sidley Austin Brown & Wood llp, New York, New York. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 1999 and 2000, and for each of the three years in the period ended December 31, 2000, as set forth in their report. We have included our consolidated financial statements in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, or the SEC, in Washington, D.C. a registration statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document that has been filed as an exhibit to the registration statement are qualified by reference to the copy of that contract, agreement or document that has been filed. Anyone may inspect the registration statement and its exhibits and schedules without charge at the public reference facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of all or any part of these materials from the SEC upon the payment of certain fees prescribed by the SEC. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect these reports and other information without charge at a Web site maintained by the SEC. The address of this site is http://www.sec.gov. Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act and will be required to file reports, proxy statements and other information with the SEC. You will be able to inspect and copy these reports, proxy statements and other information at the public reference facilities maintained by the SEC and at the SEC's regional offices at the addresses noted above. You also will be able to obtain copies of this material from the Public Reference Section of the SEC as described above, or inspect them without charge at the SEC's Web site. 73 AGRAQUEST, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors....................... F-2 Consolidated balance sheets as of December 31, 1999 and 2000 (audited) and as of September 30, 2001 (unaudited)......................................... F-3 Consolidated statements of operations for each of the three years in the period ended December 31, 2000 (audited) and for the nine months ended September 30, 2000 and 2001 (unaudited)................................ F-4 Consolidated statements of changes in convertible preferred stock, common stock and other stockholders' equity (deficit) for each of the three years in the period ended December 31, 2000 (audited) and for the nine months ended September 30, 2001 (unaudited)....................... F-5 Consolidated statements of cash flows for each of the three years in the period ended December 31, 2000 (audited) and for the nine months ended September 30, 2000 and 2001 (unaudited)................................ F-6 Notes to consolidated financial statements.............................. F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders AgraQuest, Inc. We have audited the accompanying consolidated balance sheets of AgraQuest, Inc. as of December 31, 1999 and 2000, and the related consolidated statements of operations, changes in convertible preferred stock, common stock and other 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. Since the date of completion of our audit of the accompanying financial statements and initial issuance of our report thereon dated January 19, 2001, the Company, as discussed in Note 1, believes that additional funding will be needed to finance planned operations. Note 1 describes management's plans to address these issues. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AgraQuest, Inc. at December 31, 1999 and 2000, and the consolidated 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. /s/ Ernst & Young LLP Sacramento, California January 19, 2001, except for the second paragraph of Note 1, as to which the date is January 11, 2002 F-2 AGRAQUEST, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
Pro Forma Stockholders' December 31, Equity at ------------------ September 30, September 30, 1999 2000 2001 2001 -------- -------- ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents.... $ 2,849 $ 12,518 $ 4,841 Accounts receivable.......... 95 261 55 Other receivables............ -- 1,033 221 Inventories.................. 204 1,198 1,163 Other current assets......... 23 68 72 -------- -------- -------- Total current assets....... 3,171 15,078 6,352 Plant and equipment............ 2,079 9,181 10,047 Other assets................... 186 186 937 -------- -------- -------- Total assets............... $ 5,436 $ 24,445 $ 17,336 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable............. $ 265 $ 502 $ 547 Accrued liabilities.......... 457 731 453 Deferred revenue............. -- 100 15 Current portion of notes payable..................... 139 219 242 Current portion of capital lease obligations........... 96 104 51 -------- -------- -------- Total current liabilities.. 957 1,656 1,308 Long-term liabilities: Seller promissory note....... -- 5,000 5,000 Notes payable, net of current portion..................... 253 295 91 Capital lease obligations, net of current portion...... 116 45 35 -------- -------- -------- Total liabilities.......... 1,326 6,996 6,434 Commitments and contingencies (Notes 1 and 6) Convertible preferred stock-- 16,000 shares authorized, $0.001 par value; 9,676 shares issued and outstanding at December 31, 1999, 14,904 shares issued and outstanding at December 31, 2000 and September 30, 2001, none issued and outstanding pro forma (aggregate liquidation preference of $41,137 and $43,241 at December 31, 2000 and September 30, 2001)....... 17,252 40,858 42,948 $ -- Stockholders' equity (deficit): Common stock--26,000 shares authorized, $0.001 par value; 1,674, 1,776 and 1,855 shares issued and outstanding at December 31, 1999 and 2000 and September 30, 2001, 9,307 shares issued and outstanding pro forma....... 567 1,336 2,849 45,797 Deferred stock option compensation................ -- (454) (1,405) (1,405) Accumulated deficit.......... (13,709) (24,291) (33,490) (33,490) -------- -------- -------- -------- Total stockholders' equity (deficit)................. (13,142) (23,409) (32,046) $ 10,902 -------- -------- -------- ======== Total liabilities and stockholders' equity (deficit)................. $ 5,436 $ 24,445 $ 17,336 ======== ======== ========
See accompanying notes. F-3 AGRAQUEST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Nine Months Ended September Year Ended December 31, 30, -------------------------- ---------------- 1998 1999 2000 2000 2001 ------- ------- -------- ------- ------- (Unaudited) Revenues: Product sales................... $ -- $ -- $ 502 $ 339 $ 971 Research revenue................ 110 77 218 146 180 ------- ------- -------- ------- ------- Total revenues................. 110 77 720 485 1,151 Operating costs and expenses: Cost of product sales........... -- -- 502 339 983 Manufacturing plant start-up costs.......................... -- -- -- -- 566 Research and development........ 3,090 4,468 6,300 4,697 3,869 Selling, general and administrative................. 836 1,749 2,914 1,745 2,595 Stock option compensation (Note 8)............................. 15 12 224 167 496 ------- ------- -------- ------- ------- Total operating costs and expenses...................... 3,941 6,229 9,940 6,948 8,509 ------- ------- -------- ------- ------- Loss from operations............. (3,831) (6,152) (9,220) (6,463) (7,358) Interest income.................. 190 155 218 135 300 Interest and other expense....... (20) (87) (84) (46) (37) ------- ------- -------- ------- ------- Net loss......................... (3,661) (6,084) (9,086) (6,374) (7,095) Preferred stock accretion........ (341) (810) (1,496) (1,051) (2,104) ------- ------- -------- ------- ------- Net loss applicable to common stockholders.................... $(4,002) $(6,894) $(10,582) $(7,425) $(9,199) ======= ======= ======== ======= ======= Basic and diluted net loss per share applicable to common stockholders.................... $ (2.61) $ (4.40) $ (6.14) $ (4.34) $ (5.07) ======= ======= ======== ======= ======= Shares used in computing basic and diluted net loss per share applicable to common stockholders.................... 1,534 1,570 1,725 1,712 1,816 ======= ======= ======== ======= ======= Pro forma basic and diluted net loss per share applicable to common stockholders (unaudited)..................... $ (1.23) $ (0.77) ======== ======= Shares used in computing pro forma basic and diluted net loss per share applicable to common stockholders (unaudited)........ 7,401 9,268 ======== =======
See accompanying notes. F-4 AGRAQUEST, INC. CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY (DEFICIT) (In thousands)
Convertible Preferred Stock Common Stock Deferred Total -------------- ------------- Stock Option Accumulated Stockholders' Shares Amount Shares Amount Compensation Deficit Equity (Deficit) ------ ------- ------ ------ ------------ ----------- ---------------- Balance at December 31, 1997................... 3,137 $ 3,149 1,534 $ 434 $ -- $ (2,813) $ (2,379) Sale of Series C preferred stock, net of issuance costs of $85.. 3,524 5,906 -- -- -- -- -- Fair value of options granted to non- employees.............. -- -- -- 15 -- -- 15 Preferred stock accretion.............. -- 341 -- -- -- (341) (341) Net loss................ -- -- -- -- -- (3,661) (3,661) ------ ------- ----- ------ ------- -------- -------- Balance at December 31, 1998................... 6,661 9,396 1,534 449 -- (6,815) (6,366) Sale of Series D preferred stock, net of issuance costs of $39.. 3,015 7,046 -- -- -- -- -- Exercise of employee stock options.......... -- -- 140 98 -- -- 98 Fair value of options granted to non- employees.............. -- -- -- 20 -- -- 20 Preferred stock accretion.............. -- 810 -- -- -- (810) (810) Net loss................ -- -- -- -- -- (6,084) (6,084) ------ ------- ----- ------ ------- -------- -------- Balance at December 31, 1999................... 9,676 17,252 1,674 567 -- (13,709) (13,142) Sale of Series E preferred stock, net of issuance costs of $35.. 2,252 7,168 -- -- -- -- -- Exercise of employee stock options.......... -- -- 102 91 -- -- 91 Fair value of stock options granted to non- employees.............. -- -- -- 150 -- -- 150 Deferred stock option compensation........... -- -- -- 528 (528) -- -- Amortization of deferred stock option compensation........... -- -- -- -- 74 -- 74 Sale of Series F preferred stock, net of issuance costs of $23.. 2,976 14,942 -- -- -- -- -- Preferred stock accretion.............. -- 1,496 -- -- -- (1,496) (1,496) Net loss................ -- -- -- -- -- (9,086) (9,086) ------ ------- ----- ------ ------- -------- -------- Balance at December 31, 2000................... 14,904 40,858 1,776 1,336 (454) (24,291) (23,409) Exercise of employee stock options (unaudited)............ -- -- 79 66 -- -- 66 Fair value of stock options granted to non- employees (unaudited).. -- -- -- 89 -- -- 89 Additional Series F issuance costs (unaudited)............ -- (14) -- -- -- -- -- Deferred stock option compensation (unaudited)............ -- -- -- 1,358 (1,358) -- -- Amortization of deferred stock option compensation (unaudited)............ -- -- -- -- 407 -- 407 Preferred stock accretion (unaudited).. -- 2,104 -- -- -- (2,104) (2,104) Net loss (unaudited).... -- -- -- -- -- (7,095) (7,095) ------ ------- ----- ------ ------- -------- -------- Balance at September 30, 2001 (unaudited)....... 14,904 $42,948 1,855 $2,849 $(1,405) $(33,490) $(32,046) ====== ======= ===== ====== ======= ======== ========
See accompanying notes. F-5 AGRAQUEST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (In thousands)
Nine Months Ended September Year Ended December 31, 30, ------------------------- ---------------- 1998 1999 2000 2000 2001 ------- ------- ------- ------- ------- (Unaudited) Operating activities Net loss......................... $(3,661) $(6,084) $(9,086) $(6,374) $(7,095) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.. 61 184 296 218 228 Stock option and stock warrant expenses...................... 15 20 224 167 496 Changes in operating assets and liabilities: Accounts receivable............ (16) (79) (166) (101) 206 Other receivables.............. -- -- (1,033) (45) 812 Inventories.................... -- (204) (994) (1,262) 35 Other assets................... (26) (136) (45) (3) (4) Accounts payable............... 132 77 237 (58) 45 Accrued liabilities............ 58 327 274 (319) (278) Deferred revenue............... -- -- 100 38 (85) ------- ------- ------- ------- ------- Net cash used in operating activities...................... (3,437) (5,895) (10,193) (7,739) (5,640) Investing activities Purchases of plant and equipment....................... (701) (1,122) (2,357) (153) (1,070) Financing activities Proceeds from issuance of notes payable......................... 459 -- 300 300 -- Repayment of notes payable....... (38) (142) (178) (120) (181) Repayment of capital lease obligations..................... (9) (92) (104) (77) (87) Proceeds from sale of common stock........................... -- 98 91 76 66 Proceeds from sale of convertible preferred stock................. 5,906 7,046 22,110 7,168 -- Increase in other non-current assets.......................... -- -- -- -- (765) ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities............ 6,318 6,910 22,219 7,347 (967) ------- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents............ 2,180 (107) 9,669 (545) (7,677) Cash and cash equivalents at beginning of period............. 776 2,956 2,849 2,849 12,518 ------- ------- ------- ------- ------- Cash and cash equivalents at end of period....................... $ 2,956 $ 2,849 $12,518 $ 2,304 $ 4,841 ======= ======= ======= ======= ======= Supplementary disclosures of cash flow information and non-cash transactions: Cash paid for interest........... $ 20 $ 79 $ 84 $ 46 $ 397 ======= ======= ======= ======= ======= Borrowings for the purchase of plant and equipment............. $ 56 $ 252 $ 5,041 $ 41 $ 24 ======= ======= ======= ======= =======
See accompanying notes. F-6 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1999 and 2000 and for each of the three years in the period ended December 31, 2000 (information as of September 30, 2000 and 2001 and for the nine months then ended is unaudited) 1. Business and Significant Accounting Policies Description of Business and Plan of Operations AgraQuest, Inc. (the "Company") was incorporated under the laws of the State of Delaware on January 24, 1995. The Company is focused on discovering, developing, manufacturing and marketing effective, safe and environmentally friendly pest management products for agricultural and institutional and home markets. The Company has devoted substantially all of its efforts towards research and development activities and has commenced marketing and sales efforts of its first product. The Company is subject to a number of risks and uncertainties, including that: the Company may not be able to identify or commercialize product candidates, obtain regulatory approvals or develop adequate sales and marketing capabilities or distribution relationships; the markets for pest management products are intensely competitive; the Company depends on its principal management and scientific personnel; and the Company may not be able to protect its patents and proprietary rights. The Company has financed its operations primarily through the sale of preferred stock and various debt financing arrangements. Management believes that additional funding will be needed to finance planned operations. In this regard, management is actively pursuing additional debt and/or equity financing in amounts sufficient to fund planned operations. There is no assurance, however, that these efforts will be successful. Basis of Presentation The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiary, AgraQuest de Mexico, S.A. de C.V. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 period. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents for the purpose of balance sheet and statement of cash flows presentation. Cash equivalents consist primarily of funds invested in money market accounts at the balance sheet dates. The carrying value of cash and equivalents approximates market value at the balance sheet dates. Concentrations of Risk Financial instruments which subject the Company to potential credit risk consist of its cash equivalents and accounts receivable. The Company invests with high credit quality financial institutions. The Company believes the financial risks associated with these financial instruments are minimal. F-7 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's Serenade product has accounted for all of the Company's product sales for the year ended December 31, 2000 and for the nine months ended September 30, 2001. For the year ended December 31, 2000, four distributors accounted for 34%, 25%, 17% and 13% of total product sales. As of December 31, 2000, two of these distributors represent 48% and 37% of total accounts receivable. For the nine months ended September 30, 2001, three distributors accounted for 48%, 20% and 11% of total product sales. In the opinion of management, these distributors represent the leading national agricultural distributors in the United States in the Company's markets. The Company generally does not require collateral. The Company may provide reserves for potential credit losses but has not experienced significant losses to date. Inventories Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market value. At December 31, 2000, inventory consisted of the following: raw materials of $156,000, work-in-process of $325,000 and finished goods of $717,000. Plant and Equipment Plant and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the lesser of the estimated useful lives of the assets or the lease term. The estimated useful lives of the Company's assets are as follows: Manufacturing plant and equipment 3 to 25 years Laboratory equipment and pilot plant 4 to 10 years Leasehold improvements 5 to 10 years Office furniture and equipment 3 to 10 years Vehicles 3 to 5 years
Revenue Recognition The Company recognizes revenue from product sales upon shipment to its distributors, unless contractual obligations, acceptance provisions or other contingencies exist. If such obligations or provisions exist, revenue is recognized after such obligations or provisions are fulfilled or expire. Distributors do not have price protection or return rights. The Company generates research revenues from research and development activities under contracts with other entities. The Company recognizes revenue from "best efforts" research and development contracts as work is performed. If, however, the contracts provide for specific milestones or deliverables, the Company recognizes revenue upon the achievement of such milestones or upon delivery. Funding received in advance of work performed, including up-front payments, is recorded as deferred revenue. Costs incurred under these "best efforts" research and development contracts are expensed to operations as incurred and included as a component of research and development expense in accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs." The Company may also receive payments under strategic collaboration agreements as the collaborators or their sublicensees achieve product development milestones as well as royalty payments based on sales of products that incorporate its proprietary technology. The Company will recognize any future milestone payments or royalty revenues as earned. In December 2000, the Company entered into an agreement with Maxygen, Inc. under which the Company granted Maxygen a right to access a definitive number of strains of microorganisms from the Company's proprietary database for uses other than for the development of biopesticides. Maxygen paid an up-front collection fee and may make future milestone payments based on its progress of product development and commercialization of products from these microorganisms. The up-front collection fee is being recognized ratably as the Company delivers these microorganisms to Maxygen. F-8 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company defers recognition of revenue for some sales transactions that provide for payment terms of relatively longer duration. For transactions with these longer payment terms, the Company's policy is to recognize revenue upon the earlier of cash received or the original invoice due date, assuming collectibility is deemed probable at that date. Shipping and Handling Costs Amounts billed for shipping and handling are included as a component of product sales. Related costs for shipping and handling have been included as a component of cost of product sales. Research and Development Research and development costs are expensed to operations as incurred in accordance with Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs." The cost of product manufactured in pre- production batches yielding saleable quantities of Serenade has been included in inventories. These quantities have been recorded at the lower of cost or net realizable value. Advertising The Company expenses advertising costs as incurred. Advertising costs for the year ended December 31, 2000 and for the nine months ended September 30, 2001 were $357,000 and $265,000. No such costs were incurred prior to fiscal 2000. Stock Option Compensation As permitted under the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), for stock options granted to its employees, the Company has elected to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations ("APB 25"). Under the intrinsic value method, compensation cost is the excess, if any, of the fair value of the stock at the grant date, or other measurement date, over the amount an employee must pay to acquire the stock. Segment Disclosures The Company operates in one segment, the development, manufacture and marketing of effective, safe and environmentally friendly pest management products for agricultural and institutional and home markets. For the year ended December 31, 2000, sales to the U.S. and Chile accounted for 75% and 25% of total product sales. For the nine months ended September 30, 2001, the U.S. accounted for 100% of total product sales. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") which, as amended, is required to be adopted in years beginning after June 15, 2000. Because the Company does not use derivative instruments, the adoption of SFAS 133 did not have an effect on the results of operations, financial position or cash flows of the Company. Unaudited Interim Financial Information The financial information at September 30, 2001 and for the nine months ended September 30, 2000 and 2001 is unaudited but in the opinion of management includes all adjustments, consisting of normal recurring F-9 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) adjustments, which the Company considers necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Results of the September 30, 2001 interim period are not necessarily indicative of the results for the entire fiscal year or future periods. 2. Unaudited Pro Forma Stockholders' Equity and Net Loss Per Share The Board of Directors has authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. If the initial public offering contemplated by the Company is consummated, all of the preferred stock outstanding will automatically be converted into shares of common stock on a basis of two shares of preferred stock for one share of common stock. Unaudited pro forma stockholders' equity at September 30, 2001 is set forth in the accompanying consolidated balance sheet and reflects the adjustment for the assumed conversion of preferred stock outstanding at September 30, 2001. Upon the completion of this offering, the Company will be authorized to issue up to 33,000,000 shares of capital stock, $0.001 par value per share. Of these authorized shares, 30,000,000 shares will be designated as common stock and 3,000,000 shares will be designated as preferred stock. Basic and diluted net loss per share applicable to common stockholders have been computed using the weighted-average number of shares of common stock outstanding during the period. Pro forma basic and diluted net loss per share applicable to common stockholders, as presented in the statements of operations, have been computed as described above and also give effect to the conversion of the convertible preferred stock (using the if-converted method) from the original date of issuance. To date, the Company has not had any issuances of shares for nominal consideration as that term is used in the Securities and Exchange Commission's Staff Accounting Bulletin No. 98, "Earnings Per Share." F-10 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents the calculation of basic and diluted net loss per share and pro forma basic and diluted net loss per share (in thousands, except per share amounts):
Nine Months Ended September Year Ended December 31, 30, -------------------------- ---------------- 1998 1999 2000 2000 2001 ------- ------- -------- ------- ------- (Unaudited) Numerator used for basic and diluted net loss per share applicable to common stockholders................... $(4,002) $(6,894) $(10,582) $(7,425) $(9,199) ======= ======= ======== ======= ======= Denominator used for basic and diluted net loss per share applicable to common stockholders--weighted average common shares outstanding...... 1,534 1,570 1,725 1,712 1,816 ======= ======= ======== ======= ======= Basic and diluted net loss per share applicable to common stockholders................... $ (2.61) $ (4.40) $ (6.14) $ (4.34) $ (5.07) ======= ======= ======== ======= ======= Potentially dilutive securities excluded from diluted net loss per share applicable to common stockholders computation because they are anti- dilutive....................... 4,095 5,578 8,569 6,946 8,642 ======= ======= ======== ======= ======= Numerator used for pro forma basic and diluted net loss per share applicable to common stockholders (unaudited)....... $ (9,086) $(7,095) ======== ======= Shares used in computing pro forma basic and diluted net loss per share applicable to common stockholders (unaudited): Shares used above............. 1,725 1,816 Pro forma adjustments to reflect weighted effect of the assumed conversion of preferred stock (unaudited).. 5,676 7,452 -------- ------- 7,401 9,268 ======== ======= Pro forma basic and diluted net loss per share applicable to common stockholders (unaudited).................... $ (1.23) $ (0.77) ======== =======
3. Other Receivables Other receivables consist of the following at December 31, 2000 (in thousands): VAT refund........................................................... $ 836 Refund due from supplier............................................. 164 Other................................................................ 33 ------ $1,033 ======
F-11 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Plant and Equipment Plant and equipment consists of the following (in thousands):
December 31, -------------- 1999 2000 ------ ------ Land......................................................... $ -- $1,237 Manufacturing plant and equipment............................ -- 5,992 Laboratory equipment and pilot plant......................... 1,672 1,751 Leasehold improvements....................................... 562 564 Office furniture and equipment............................... 117 175 Vehicles..................................................... 13 43 ------ ------ 2,364 9,762 Less accumulated depreciation and amortization............... (285) (581) ------ ------ $2,079 $9,181 ====== ======
The Company has granted to third parties interests in specific plant and equipment as part of certain financing arrangements (Note 5). In December 2000, the Company purchased a manufacturing facility in Tlaxcala, Mexico for $7.0 million. A portion of the purchase price was financed with a promissory note from the seller (Note 5). During the nine months ended September 30, 2001, the Company incurred costs for one-time activities related to opening this new facility as well as costs required to ready the purchased long-lived assets for their intended use. As of September 30, 2001, activities necessary to prepare this facility for its intended use were in progress. Manufacturing plant start-up costs were $566,000 for the nine months ended September 30, 2001 and represents expenses incurred through September 30, 2001 in connection with one-time activities related to opening the new manufacturing facility in Tlaxcala, Mexico. These costs have been accounted for in accordance with Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." Costs associated with start-up activities are primarily related to the operating costs incurred during the pre-production period which include a portion of salary-related expenses for employees in Mexico, cost of unsaleable materials from test runs travel costs for the implementation team, consulting fees and routine maintenance costs. These start-up costs exclude expenditures relating to constructing and developing long-lived assets and other necessary activities to prepare these assets for their intended use. Of total interest costs of $375,000 incurred during the nine months ended September 30, 2001, $338,000 has been capitalized as part of the Company's new manufacturing facility in accordance with Statement of Financial Accounting Standards No. 34, "Capitalization of Interest Cost." 5. Notes Payable and Capital Lease Obligations In December 2000, the Company purchased a manufacturing facility in Tlaxcala, Mexico for $7.0 million. A portion of the purchase price, $5.0 million, has been financed with a promissory note from the seller which bears interest at a rate of 9.0% per annum. The maturity date of this note is the earlier of: December 2002, the receipt of proceeds from an underwritten initial public offering, the receipt of proceeds from a private placement financing specifically designated for the financing of the facility or debt financing of the facility. F-12 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Other notes payable consist of the following (in thousands):
December 31, ------------ 1999 2000 ----- ----- Note payable, bearing interest at an effective rate of 13.5% per annum, payable through July 2002, collateralized by equipment with a net book value of $388 at December 31, 2000........................................................ $ 345 $ 496 Note payable, bearing interest at 19.4% per annum, payable through October 2001, collateralized by equipment with a net book value of $38 at December 31, 2000...................... 47 18 ----- ----- 392 514 Less current portion......................................... (139) (219) ----- ----- $ 253 $ 295 ===== =====
As of December 31, 2000, aggregate contractual future principal payments by year on notes payable are due as follows: 2001-$219,000; 2002-$5.2 million; and 2003-$59,000. In accordance with Statement of Financial Accounting Standard No. 13, "Accounting for Leases," the Company accounts for certain equipment acquired under financing arrangements as capital leases. This equipment is included in plant and equipment and related amortization is included in depreciation expense. The cost of this equipment was $317,000 and $358,000 and the related accumulated amortization was $38,000 and $67,000 as of December 31, 1999 and 2000. The Company's aggregate commitment under these lease arrangements as of December 31, 2000 is as follows (in thousands): 2001.................................................................. $ 126 2002.................................................................. 24 2003.................................................................. 6 ----- Total minimum payment required........................................ 156 Less: amount representing interest.................................... (7) ----- Present value of future payments...................................... 149 Less: current portion................................................. (104) ----- $ 45 =====
The carrying values of these obligations approximate their fair values as of December 31, 1999 and 2000. The fair value of long-term debt is estimated based on current interest rates available to the Company for debt instruments with similar terms, degrees of risk and remaining maturities. 6. Commitments and Contingencies Lease Commitments The Company has executed a 10 year lease agreement on a building in Davis, California for office, laboratory and pilot plant space. The lease agreement provides for annual minimum lease payments of approximately $194,000 which commenced upon completion of construction in March 1999. Rental expense charged to operations for all operating leases was approximately $100,000, $208,000 and $244,000 for the years ended December 31, 1998, 1999 and 2000 and $189,000 for the nine months ended September 30, 2001. F-13 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Contingencies The Company may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is not currently subject to any legal proceeding. 7. Convertible Preferred Stock The Company's convertible preferred stock is classified as mezzanine financing, outside of permanent equity, due to the liquidation rights upon a change in control, as this condition is not solely within the control of the Company. Given the liquidation rights of the Company's convertible preferred stock, these securities have been accounted for as if they were redeemable preferred stock. As such, the redemption value of the convertible preferred stock is its liquidation preference, and the carrying value of the convertible preferred stock is adjusted to its redemption amount at each balance sheet date through corresponding debits and credits to accumulated deficit and convertible preferred stock, respectively. At December 31, 2000, the Company was authorized to issue up to 16,000,000 shares of convertible preferred stock, issuable in series, with the rights and preferences of each designated series to be determined by the Board of Directors. The outstanding shares of convertible preferred stock automatically convert into common stock upon the closing of an underwritten public offering of common stock provided the offering meets certain minimum proceeds requirements. Convertible preferred stock as of December 31, 2000 is as follows (in thousands):
Shares Issued and Gross Net Designated Outstanding Proceeds Proceeds ---------- ----------- -------- -------- Series A............................ 150 138 $ 97 $ 91 Series B............................ 3,000 2,999 3,149 3,058 Series C............................ 3,575 3,524 5,991 5,906 Series D............................ 3,025 3,015 7,085 7,046 Series E............................ 3,250 2,252 7,203 7,168 Series F............................ 3,000 2,976 14,965 14,942 ------ ------ ------- ------- 16,000 14,904 $38,490 $38,211 ====== ====== ======= =======
Each share of Series A, B, C, D, E and F convertible preferred stock is convertible, at the option of the holder, into common stock on a basis of two shares of preferred stock for one share of common stock, subject to certain adjustments for dilution, if any, resulting from future stock issuances. The Series A, B, C, D, E and F convertible preferred stockholders are entitled to noncumulative dividends, before and in preference to any dividends paid on common stock. Dividends will be paid only when and if declared by the Board of Directors. No dividends have been declared through December 31, 2000. Beginning on October 1, 2002 for Series C, October 1, 2003 for Series D, October 1, 2004 for Series E and October 1, 2005 for Series F, cumulative dividends will accrue at rates from 8% to 12% per annum and will be payable, quarterly in cash, beginning on January 1, 2003 for Series C, January 1, 2004 for Series D, January 1, 2005 for Series E and January 1, 2006 for Series F. The liquidation preference of Series A, B, C, D, E and F convertible preferred stock is nonparticipating and the stockholders are entitled to receive $0.70; $1.05; $1.70 plus 8% of this amount per annum from the date of issuance; $2.35 plus 8% of this amount per annum from the date of issuance; $3.20 plus 8% of this amount per annum from the date of issuance; and $5.00 plus 8% of this amount per annum from the date of F-14 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) issuance, respectively. As of September 30, 2001, the aggregate liquidation preference was $43.2 million. The aggregate liquidation preference was calculated based on the contractual amount per share to be received by each stockholder at the time of a qualifying liquidation event. For Series A and B convertible preferred stockholders, this amount represents the original purchase price of the stock. For Series C, D, E and F convertible preferred stockholders, this amount represents the original purchase price of the stock plus 8% of the original purchase price per annum from the date of issuance. The Series A, B, C, D, E and F convertible preferred stockholders have voting rights equal to the shares of common stock issuable upon conversion. 8. Stockholders' Equity (Deficit) Common Stock As of December 31, 2000, the Company has reserved shares of common stock for the conversion of preferred stock, the exercise of warrants, and the issuance of options granted under the Company's stock option plans as follows (in thousands): Convertible preferred stock............................................ 7,452 Warrants............................................................... 205 Stock option plans..................................................... 1,907 ----- 8,979 =====
Subsequent to December 31, 2000, an additional 1,000,000 shares of the Company's common stock has been reserved for future issuance pursuant to its 2000 stock incentive plan. Warrants In December 1998, in connection with entering into a credit agreement, the Company issued warrants, which were immediately exercisable, to purchase 19,500 shares of common stock at an exercise price of $3.40 per share. These warrants expire in December 2008. The Company determined the fair value of these warrants using the Black-Scholes option pricing model assuming a fair value of the Company's common stock at the date of issuance of $0.35 per share, volatility factor of 0.75, risk-free interest rate of 5.4%, contractual life of 10 years and no dividend yield. The fair value of $8,000 was fully amortized in 1999 as interest expense. Stock Option Plans The Company established a stock option plan in 1995 under which employees, consultants and directors may be granted Incentive Stock Options ("ISOs") or Nonstatutory Stock Options ("NSOs") to purchase shares of the Company's common stock. This plan permits ISOs to be granted at an exercise price not less than the fair value of the Company's stock on the date of grant and NSOs at an exercise price not less than 85% of the fair value of the Company's common stock on the date of grant. Options granted under this plan generally expire 10 years from the date of grant. Options generally vest 20% on the first anniversary from the date of grant and 1/20 per quarter thereafter, however, options may be granted with different vesting terms as determined by the Board of Directors. A total of 1,250,000 shares of common stock have been authorized for issuance pursuant to this stock option plan. In December 2000, the Company adopted the 2000 stock incentive plan, which was amended and restated in January 2001. The Company originally reserved 500,000 shares of common stock pursuant to this plan and an additional 500,000 shares upon its amendment and restatement. F-15 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company adopted the 2002 non-employee director stock program as part of the 2000 stock incentive plan. In addition, the Company adopted the 2002 employee stock purchase plan and has reserved 175,000 shares under this plan. These programs will become effective as of the effective date of the initial public offering. A summary of stock option activity is as follows (in thousands, except per share data):
Options Outstanding ------------------- Weighted- Average Number of Exercise Shares Price --------- --------- Balance as of December 31, 1997............................. 492 $0.70 Granted................................................... 253 0.70 ----- Balance as of December 31, 1998............................. 745 0.70 Granted................................................... 117 0.70 Exercised................................................. (140) 0.70 Forfeited................................................. (2) 0.70 ----- Balance as of December 31, 1999............................. 720 0.70 Granted................................................... 510 3.06 Exercised................................................. (102) 0.88 Forfeited................................................. (30) 0.94 ----- Balance as of December 31, 2000............................. 1,098 1.78 Granted (unaudited)....................................... 327 8.66 Exercised (unaudited)..................................... (79) 0.86 Forfeited (unaudited)..................................... (175) 4.18 ----- Balance as of September 30, 2001 (unaudited)................ 1,171 3.42 =====
The weighted-average remaining contractual life of options outstanding as of December 31, 1999 was approximately 8 years. Options to purchase 366,000 shares of common stock at a weighted-average exercise price of $0.70 per share were outstanding and vested at December 31, 1999. The following table summarizes information concerning options outstanding and vested as of December 31, 2000 (in thousands, except per share and remaining contractual life data):
Options Outstanding Options Vested ------------------------------- ------------------- Weighted Average Weighted- Weighted- Remaining Average Average Number of Contractual Exercise Number of Exercise Exercise Prices Shares Life Price Shares Price - --------------- --------- ----------- --------- --------- --------- $0.35....................... 658 7 $0.70 452 $0.70 $0.70 to $1.50.............. 318 9 1.66 95 1.52 $2.25 to $5.00.............. 122 10 6.70 -- -- ----- --- 1,098 8 1.78 547 0.84 ===== ===
F-16 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information concerning options outstanding and vested as of September 30, 2001 (unaudited, in thousands, except per share and remaining contractual life data):
Options Outstanding Options Vested ------------------------------- ------------------- Weighted Average Weighted- Weighted- Remaining Average Average Number of Contractual Exercise Number of Exercise Exercise Prices Shares Life Price Shares Price - --------------- --------- ----------- --------- --------- --------- $0.70....................... 525 6 $0.70 418 $0.70 $1.40 to $3.00.............. 287 9 1.68 125 1.56 $4.50 to $7.00.............. 130 9 6.72 -- -- $8.50 to $10.00............. 229 10 9.98 49 9.86 ----- --- 1,171 8 3.42 592 1.64 ===== ===
As of December 31, 2000 and September 30, 2001, approximately 414,000 and 757,000 shares of common stock were available for future grant under the Company's option plans. Stock Option Compensation For the year ended December 31, 2000 and for the nine months ended September 30, 2001, the Company recorded deferred stock option compensation of $528,000 and $1,358,000 in connection with the grant of stock options to employees. Deferred stock option compensation is the difference between the exercise price of the options and the fair value of the common stock at the date of grant. Fair value was determined based on the business factors underlying the value of the Company's common stock on the date of grant. These amounts were recorded as a component of stockholders' equity(deficit) and are being amortized as charges to operations over the vesting period of the options, generally five years using a graded-vesting method. The Company has recorded compensation expense for options granted to consultants in accordance with Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." The Company determined the fair value of these options using the Black-Scholes option pricing model, the estimated fair value of the Company's common stock at the date of issuance, volatility factor of 0.75, risk-free rate of interest of 5.4%, maximum term of 10 years and no dividend yield. The Company has recorded stock option compensation expense as follows (in thousands):
Nine Months Year Ended Ended December 31, September 30, -------------- ------------- 1998 1999 2000 2000 2001 ---- ---- ---- ------ ------ (Unaudited) Research and development......................... $ 15 $ 12 $199 $ 158 $ 344 Selling, general and administrative.............. -- -- 25 9 152 ---- ---- ---- ------ ------ $ 15 $ 12 $224 $ 167 $ 496 ==== ==== ==== ====== ====== Amortization of deferred stock option compensation.................................... $ -- $ -- $ 74 $ 25 $ 407 Fair value of options granted to non-employees... 15 12 150 142 89 ---- ---- ---- ------ ------ $ 15 $ 12 $224 $ 167 $ 496 ==== ==== ==== ====== ======
In addition, during the year ended December 31, 1999, the Company recognized interest expense of $8,000 for the fair value of warrants issued in connection with a credit agreement. F-17 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Pro Forma Information Pro forma information regarding net loss applicable to common stockholders is required by SFAS 123, as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. Option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options. For purposes of the SFAS 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The weighted-average fair value of these options was $0.46 per share, $0.46 per share and $3.02 per share for the years ended December 31, 1998, 1999 and 2000, respectively, and $9.92 per share for the nine months ended September 30, 2001. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model and a graded-vesting approach using the following weighted-average assumptions: volatility factor of 0.75, risk-free interest rate of 5.4%, weighted-average expected option life of 5 years; and no annual dividends. The Company's SFAS 123 pro forma net loss applicable to common stockholders was $4.1 million, $7.0 million, and $10.9 million for the years ended December 31, 1998, 1999 and 2000, respectively, and $10.6 million for the nine months ended September 30, 2001. The Company's SFAS 123 pro forma net loss per share applicable to common stockholders was $2.66, $4.46 and $6.32 for the years ended December 31, 1998, 1999 and 2000, respectively and $5.84 for the nine months ended September 30, 2001. Future pro forma results of operations may be materially different from amounts reported as future years will include the effects of additional stock option grants. 9. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
December 31, ---------------- 1999 2000 ------- ------- Deferred tax assets: Net operating loss carryforwards......................... $ 4,951 $ 8,589 Tax credits.............................................. 297 559 Other.................................................... 108 141 ------- ------- 5,356 9,289 Valuation allowance for deferred tax assets................ (5,282) (9,142) ------- ------- 74 147 Deferred tax liabilities: Depreciation............................................. (74) (147) ------- ------- (74) (147) ------- ------- Net deferred tax asset................................. $ -- $ -- ======= =======
Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. The valuation allowance increased by $1.6 million and $2.5 million during the years ended December 31, 1998 and 1999, respectively. As of December 31, 2000, the Company had net operating loss carryforwards of approximately $21.5 million for federal and state income tax purposes which expire in the years 2010 through 2020 and 2003 through 2010, respectively. The Company also had approximately $322,000 and $360,000 in federal and state income tax credits which expire in the years 2010 through 2020. F-18 AGRAQUEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The principal reasons for the difference between the effective income tax rate and the federal statutory income tax rate of 34% in each year are as follows:
Year Ended December 31, ------------------------- 1998 1999 2000 ------- ------- ------- Federal benefit expected at statutory rate....... $(1,245) $(2,069) $(3,092) Net operating loss with no current benefit....... 1,245 2,069 3,092 ------- ------- ------- Income tax benefit............................... $ -- $ -- $ -- ======= ======= =======
Future utilization of the Company's net operating loss and other credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses and credits before utilization. 10. 401(k) Plan Substantially all of the Company's full-time employees are eligible to participate in a tax deferred investment plan (the "401(k) Plan") established by the Company. The 401(k) Plan permits each employee to contribute up to 15% of compensation on a pre-tax basis, to a maximum amount per calendar year. The Company may provide a discretionary matching contribution to the 401(k) Plan, which is determined each year by the Company. The Company has provided no matching contributions to the 401(k) Plan to date. F-19 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Through and including , 2002 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. Shares [LOGO OF AGRAQUEST, INC.] Common Stock ---------------- PROSPECTUS ---------------- Merrill Lynch & Co. Stephens Inc. , 2002 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The expenses to be paid by the Registrant in connection with the distribution of the securities being registered, other than underwriting discounts and commissions, are as follows:
Amount* ---------- Securities and Exchange Commission Filing Fee.................... $ 12,506 NASD Filing Fee.................................................. 8,000 Nasdaq National Market Listing Fee............................... 5,000 Accounting Fees and Expenses..................................... 400,000 Blue Sky Fees and Expenses....................................... 35,000 Legal Fees and Expenses.......................................... 500,000 Transfer Agent and Registrar Fees and Expenses................... 10,000 Printing Expenses................................................ 225,000 Miscellaneous Expenses........................................... 104,494 ---------- Total.......................................................... $1,300,000 ==========
- -------- * All amounts are estimates except the SEC filing fee, the NASD filing fee and the Nasdaq National Market listing fee. Item 14. Indemnification of Directors and Officers. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to officers, directors and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's certificate of incorporation and bylaws provide that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant intends to enter into separate indemnification agreements with its directors, officers and certain employees which would require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status as directors, officers or certain other employees. The Registrant also intends to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreement to be entered into between the Registrant and its officers and directors may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The underwriting agreement, which is Exhibit 1.1 to this registration statement, provides in Section 6 for indemnification by the underwriters of the Registrant's officers and directors who sign the Registration Statement for certain liabilities arising under the Securities Act or otherwise. Item 15. Recent Sales of Unregistered Securities. Since January 1, 1999, the Registrant has issued and sold the following unregistered securities: 1. Between January 1, 1999 and September 30, 2001, the Registrant granted options to purchase 955,068 shares of common stock (assuming a one- for-two reverse stock split of the Registrant's common stock that will be effected prior to this offering) at prices ranging from $0.70 to $10.00 to employees, directors and consultants pursuant to its 1995 stock option plan and 2000 stock incentive plan. These issuances were made in reliance on Rule 701 of the Securities Act. II-1 2. From April to September 1999, the Registrant issued and sold an aggregate of 3,015,306 shares of its Series D preferred stock to a total of 29 investors for an aggregate purchase price of $7,085,000. These sales were made solely to "accredited investors" in reliance on Section 4(2) of the Securities Act. 3. In April 2000, the Registrant issued and sold an aggregate of 2,251,919 shares of its Series E preferred stock to a total of 13 investors for an aggregate purchase price of $7,203,000. These sales were made solely to "accredited investors" in reliance on Section 4(2) of the Securities Act. 4. In December 2000, the Registrant issued and sold an aggregate of 2,976,333 shares of its Series F preferred stock to a total of 24 investors for an aggregate purchase price of $14,965,000. These sales were made solely to "accredited investors" in reliance on Section 4(2) of the Securities Act. The issuances of the securities in the transactions above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act promulgated thereunder as transactions by an issuer not involving a public offering, where the purchasers represented their intention to acquire the securities for investment only and not with a view to distribution and received or had access to adequate information about the Registrant, or Rule 701 promulgated under the Securities Act as transactions pursuant to a compensatory benefit plan or a written contract relating to compensation. Appropriate legends were affixed to the stock certificates issued in the above transactions. Similar legends were imposed in connection with any subsequent sales of any such securities. No underwriters were employed in any of the above transactions. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits The exhibits are as set forth in the Exhibit Index. (b) Financial Statement Schedules. All schedules have been omitted because they are not required or are not applicable or the required information is shown in the financial statements or related notes. Item 17. Undertakings. The Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sacramento, State of California on the 11th day of January 2002. AgraQuest, Inc. By: /s/ Pamela G. Marrone ____________________________ PAMELA G. MARRONE, PH.D. President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Pamela G. Marrone President, Chief Executive January 11, 2002 ____________________________________ Officer and Chairman PAMELA G. MARRONE, PH.D. (Principal Executive Officer) ** Chief Financial Officer January 11, 2002 ____________________________________ (Principal Financial and DONALD J. GLIDEWELL Accounting Officer) ** Director January 11, 2002 ____________________________________ ANN PARTLOW ** Director January 11, 2002 ____________________________________ GEORGE E. MYERS ** Director January 11, 2002 ____________________________________ FRANK F.C. KUNG, PH.D. ** Director January 11, 2002 ____________________________________ JACK HUNT ** Director January 11, 2002 ____________________________________ JAMES A. SCHLINDWEIN ** Director January 11, 2002 ____________________________________ WALTER LOCHER
II-4
Signature Title Date --------- ----- ---- ** Director January 11 , 2002 ____________________________________ G. STEVEN BURRILL Director January , 2002 ____________________________________ LORENZO NOGALES
**By: /s/ Pamela G. Marrone __________________________ PAMELA G. MARRONE, PH.D. (Attorney-in-fact) II-5 EXHIBIT INDEX
Exhibit Number Document ------- -------- 1.1* Form of Underwriting Agreement 3.1* Form of Certificate of Incorporation of the Registrant 3.2* Bylaws of the Registrant 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Specimen Stock Certificate of the Registrant 4.3** Fourth Amended and Restated Investors' Rights Agreement, dated as of December 11, 2000, among the Registrant, certain holders of the Registrant's preferred stock, certain holders of warrants to purchase the Registrant's capital stock and certain of the Registrant's founders 5.1* Opinion of Morrison & Foerster LLP 10.1 Form of Indemnification Agreement between the Registrant and each of its executive officers and directors 10.2** Registrant's 1995 Stock Option Plan, as amended 10.3** 2000 Stock Incentive Plan, as amended 10.4 2002 Employee Stock Purchase Plan, including forms of agreements thereunder 10.5** Lease, dated as of July 8, 1998, between the Registrant and Jim Joseph, as trustee for the Jim Joseph Revocable Trust 10.7+ Research and Development Agreement, dated as of October 30, 2000, between the Registrant and Rohm and Haas Company 10.8+ Strain Access Agreement, dated as of December 21, 2000, between the Registrant and Maxygen, Inc. 10.9+ License Agreement dated July 1, 2001 between the Registrant and Dragoco Gerberding & Co. AG 21.1 List of subsidiaries 23.1* Consent of Morrison & Foerster LLP. Reference is made to Exhibit 5.1 23.2 Consent of Ernst & Young LLP, Independent Auditors 24.1** Powers of Attorney.
- -------- * To be filed by amendment + Confidential treatment has been requested with regard to certain portions of this agreement ** Previously filed EX-4.2 3 dex42.txt SPECIMEN STOCK CERTIFICATE Exhibit 4.2 (Logo) Agra Quest Innovative natural product solutions for pest management NUMBER SHARES AQ INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 00849E 10 4 THIS CERTIFIES THAT is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF AgraQuest, Inc. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: (Donald J. Glidewell) VICE PRESIDENT AND CHIEF FINANCIAL OFFICER [Seal] (Pamela G. Marrone) PRESIDENT AND CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY (New York, New York) Transfer Agent and Registrar By Authorized Signature AgraQuest, Inc A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of determination, and the number of shares constituting each class or series and the designations thereof, may be obtained by any stockholder of the Corporation upon written request and without charge from the Secretary of the Corporation at the principal office of the Corporation. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common COM PROP - as community property UNIF GIFT MIN ACT- ____Custodian ____ (Cust) (Minor) under Uniform Gifts to Minors Act ____ (State) UNIF TRF MIN ACT- ____Custodian (until age ____) (Cust) ____ under Uniform Transfers (Minor) to Minors Act ____ (State) Additional abbreviations may also be used though not in the above list. For value received, ____ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE shares of the Common Stock represented by the within certificate, and do hereby irrevocably constitute and appoint Attorney, to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ____, ____ X X Notice: The signature(s) to this assignment must correspond with the name(s) written upon the face of this certificate in every particular, without alteration or enlargement or any change whatever. Signature(s) Guaranteed By THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.1 4 dex101.txt FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 AGRAQUEST, INC. INDEMNIFICATION AGREEMENT THIS AGREEMENT is entered into, effective as of ____________, 2002 by and between AgraQuest, Inc., a Delaware corporation (the "Company"), and ___________________ ("Indemnitee"). WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available; WHEREAS, Indemnitee is a director and/or officer of the Company; and WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued and effective service to the Company, and in order to induce Indemnitee to provide services to the Company as a director and/or officer, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted by Delaware law and as set forth in this Agreement, and, to the extent insurance is maintained, for the coverage of Indemnitee under the Company's directors' and officers' liability insurance policies. NOW, THEREFORE, in consideration of the above premises and of Indemnitee's continuing to serve the Company directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties agree as follows: 1. Certain Definitions. ------------------- (a) Board: the Board of Directors of the Company. (b) Change In Control: shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company (collectively "excluded persons"), is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company's then outstanding Voting Securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to 1 represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company's assets. (c) Expenses: any expense, liability, or loss, including attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be paid in settlement, any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposes as a result of the actual or deemed receipt of any payments under this Agreement, paid or incurred in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding relating to any Indemnifiable Event. (d) Indemnifiable Event: any event or occurrence that takes place either prior to or after the effective date of this Agreement, related to the fact that Indemnitee is or was a director or an officer of the Company, or while a director or officer is or was serving at the request of the Company as a director, officer, employee, trustee, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation that was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, or related to anything done or not done by Indemnitee in any such capacity. (e) Independent Counsel: the person or body appointed in connection with Section 3. (f) Potential Change In Control: shall be deemed to have occurred if (i) the Company enters into an agreement or arrangement, the consummation of which would result in the occurrence of a Change in Control, (ii) any person (including the Company) publicly announces an intention to take or to consider taking actions that, if consummated, would constitute a Change in Control, (iii) any person (other than an Excluded Person) who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person on the date hereof, or (iv) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (g) Proceeding: (i) any threatened, pending, or complete action, suit, or proceeding, whether civil, criminal, administrative, investigative, or other, or (ii) any inquiry, hearing, or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, or proceeding. 2 (h) Reviewing Party: the person or body appointed in accordance with Section 3. (i) Voting Securities: any securities of the Company that vote generally in the election of directors. 2. Agreement To Indemnify. ---------------------- (a) General Agreement. In the event Indemnitee was, is, or become a ----------------- party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Proceeding by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee from and against any and all Expenses to the fullest extent permitted by law, as the same exists or may hereafter be amended or interpreted (but in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the Company to provide broader indemnification rights than were permitted prior thereto). The parties hereto intend that this Agreement shall provide for indemnification in excess of that expressly permitted by statute, including, without limitation, any indemnification provided by the Company's Amended and Restated Certificate of Incorporation, its bylaws, vote of its stockholders or disinterested directors, or applicable law. (b) Initiation Of Proceeding. Notwithstanding anything in this ------------------------ Agreement to the contrary, Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Proceeding initiated by Indemnitee against the Company or any director or officer of the Company unless (i) the Company has joined in or the Board has consented to the initiation of such Proceeding, (ii) the Proceeding is one to enforce indemnification rights under Section 5, or (iii) the Proceeding is instituted after a Change in Control and Independent Counsel has approved its initiation. (c) Expense Advances. If so requested by Indemnitee, the Company ---------------- shall advance (within ten business days of such request) any and all Expenses to Indemnitee (an "Expense Advance"); provided that such request shall be accompanied by reasonable evidence of the expenses incurred by Indemnitee and that, if and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid. If Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, as provided in Section 4, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or have lapsed). (d) Mandatory Indemnification. Notwithstanding any other provision of ------------------------- this Agreement (other than Section 2(f) below), to the extent that Indemnitee has been successful on the merits in defense of any Proceeding relating in whole or in part to an 3 Indemnifiable Event or in defense of any issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. (e) Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. (f) Prohibited Indemnification. No indemnification pursuant to this -------------------------- judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Act or similar provisions of any federal, state or local laws. 3. Reviewing Party. --------------- Prior to any Change in Control, the Reviewing Party shall be any appropriate person or body consisting of a member or members of the Board or any other person or body appointed by the Board who is not a party to the particular Proceeding with respect to which Indemnitee is seeking indemnification; after a Change in Control, the Reviewing Party shall be the Independent Counsel referred to below. With respect to all matters arising after a Change in Control (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control) concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any other agreement or under applicable law or the Company's Amended and Restated Certificate of Incorporation or bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events, the Company shall seek legal advice only from Independent Counsel selected by Indemnitee and approved by the Company and who has not otherwise performed services for the Company or the Indemnitee (other than in connection with indemnification matters) within the last five years. The Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent the Indemnitee should be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Independent Counsel and to indemnify fully such counsel against any and all expenses (including attorney's fees), claims, liabilities, loss, and damages arising out of or relating to this Agreement or the engagement of Independent Counsel pursuant hereto. 4. Indemnification Process And Appeal. ---------------------------------- (a) Suit To Enforce Rights. Regardless of any action by the Reviewing ---------------------- Party, if Indemnitee has not received full indemnification within 60 days after making a request in accordance with Section 2(c), Indemnitee shall have the right to enforce its indemnification rights under this Agreement by commencing litigation, in any 4 appropriate court having subject matter jurisdiction thereof and in which venue is proper, seeking an initial determination by the court or challenging any determination by the Reviewing Party or any aspect thereof, provided, however, that such 60-day period shall be extended for reasonable time, not to exceed another 60 days, if the reviewing party in good faith requires additional time for the obtaining or evaluating of documentation and information relating thereto. The Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party not challenged by the Indemnitee shall be binding on the Company and Indemnitee. The remedy provided for in this Section 4 shall be in addition to any other remedies available to Indemnitee in law or equity. (b) Defense To Indemnification, Burden Of Proof, And Presumptions. It ------------------------------------------------------------- shall be a defense to any action brought by Indemnitee against the Company to enforce this Agreement (other than an action brought to enforce a claim for Expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the Company) that is not permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. In connection with any such action or any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proving such a defense or determination shall be on the Company. Neither the failure of the Reviewing Party or the Company (including its Board, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action by Indemnitee that indemnification of the claimant is proper under the circumstances because Indemnitee has met the standard of conduct set forth in applicable law, nor an actual determination by the Reviewing Party or Company (including its Board, independent legal counsel, or its stockholders) that the Indemnitee had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. For purposes of this Agreement, the termination of any claim, action, suit, or proceeding, by judgment, order, settlement (whether with or without court approval), conviction, or upon a plea of nolo contendere, or its equivalent shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 5. Indemnification For Expenses Incurred In Enforcing Rights. --------------------------------------------------------- The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten business days of such request), advance such Expenses to Indemnitee, that are incurred by Indemnitee in connection with any claim asserted against or covered action brought by Indemnitee for (i) indemnification of Expenses or Expense Advances by the Company under this Agreement or any other agreement or under applicable law or the Company's Amended and Restated Certificate of Incorporation or bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events, and or (ii) recovery under directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advances, or insurance recovery, as the case may be. 5 6. Notification And Defense Of Proceeding. -------------------------------------- (a) Notice. Promptly after receipt by Indemnitee of notice of the ------ commencement of any Proceeding, Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof, but the omission so to notify the Company will not relieve the Company from any liability that it may have to Indemnitee, except as provided in Section 6(c). (b) Defense. With respect to any Proceeding as to which Indemnitee ------- notifies the Company of the commencement thereof, the Company shall be entitled to participate in the Proceeding at its own expense and except as otherwise provided below, to the extent the Company so wishes, it may assume the defense thereof with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election to assume the defense of any Proceeding, the Company shall not be liable to Indemnitee under this Agreement or otherwise for any Expenses subsequently incurred by Indemnitee in connection with the defense of such Proceeding other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ his or her own legal counsel in such Proceeding, but all Expenses related thereto incurred after notice from the Company of its assumption of the defense shall be at Indemnitee's expense unless: (i) the employment of legal counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee has reasonably determined that there may be a conflict of interest between Indemnitee and the Company in the defense of the Proceeding, (iii) after a Change in Control, the employment of counsel by Indemnitee has been approved by the Independent Counsel, or (iv) the Company shall not in fact have employed counsel to assume the defense of such Proceeding, in each of which case all Expenses of the Proceeding shall be borne by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the determination provided for in (ii) above. (c) Settlement Of Claims. The Company shall not be liable to -------------------- indemnify Indemnitee under this Agreement or otherwise for any amounts paid in settlement of any Proceeding effected without the Company's written consent, provided, however, that if a Change in Control has occurred, the Company shall be liable for indemnification of Indemnitee for amounts paid in settlement if the Independent Counsel has approved the settlement. The Company shall not settle any Proceeding in any manner that would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. The Company shall not be liable to indemnify the Indemnitee under this Agreement with regard to any judicial award if the Company was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action; the Company's liability hereunder shall not be excused if participation in the Proceeding by the Company was barred by this Agreement. 7. Non-Exclusivity. --------------- The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company's Amended and Restated Certificate of 6 Incorporation, bylaws, applicable law, or otherwise. To the extent that a change in applicable law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Company's Amended and Restated Certificate of Incorporation, bylaws, applicable law, or this Agreement, it is the intent of the parties that Indemnitee enjoy by this Agreement the greater benefits so afforded by such change. 8. Liability Insurance. -------------------To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer. 9. Amendment Of This Agreement. --------------------------- No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall operate as a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically provided herein, no failure to exercise or any delay in exercising any right or remedy hereunder shall constitute a waiver thereof. 10. Subrogation. ----------- In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 11. No Duplication Of Payments. -------------------------- The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise received payment (under any insurance policy, bylaw, or otherwise) of the amounts otherwise indemnifiable hereunder. 12. Binding Effect. -------------- This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business and/or assets of the Company), assigns, spouses, heirs, and personal and legal representatives. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity pertaining to an Indemnifiable Event even though he or she may have ceased to serve in such capacity at the time of any Proceeding. 7 13. Severability. ------------ If any provision (or portion thereof) of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void, or otherwise unenforceable, that is not itself invalid, void, or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, void, or unenforceable. 14. Governing Law. ------------- This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. 15. Notices. ------- All notices, demands, and other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand, against receipt, or mailed, postage prepaid, certified or registered mail, return receipt requested, and addressed to the Company at: AgraQuest, Inc. 1530 Drew Avenue Davis, CA 95616 Attention: Chief Executive Officer Notice of change of address shall be effective only when given in accordance with this Section. All notices complying with this Section shall be deemed to have been received on the date of delivery or on the third business day after mailing. 16. Counterparts. ------------ This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Indemnification Agreement as of the day specified above. AGRAQUEST, INC. By:________________________ Name:______________________ Title:_____________________ INDEMNITEE By:________________________ Name:______________________ 9 EX-10.4 5 dex104.txt 2002 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.4 AGRAQUEST, INC. 2002 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- The following constitute the provisions of the 2002 Employee Stock Purchase Plan of AgraQuest, Inc. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Parents or Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. As used herein, the following definitions shall ----------- apply: (a) "Administrator" means either the Board or a committee of the ------------- Board that is responsible for the administration of the Plan as is designated from time to time by resolution of the Board. (b) "Applicable Laws" means the legal requirements relating to the --------------- administration of employee stock purchase plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to participation in the Plan by residents therein. (c) "Board" means the Board of Directors of the Company. ----- (d) "Change in Control" means a change in ownership or control of the ----------------- Company effected through the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities. (e) "Code" means the Internal Revenue Code of 1986, as amended. ---- (f) "Common Stock" means the common stock of the Company. ------------ (g) "Company" means AgraQuest, Inc., a Delaware corporation. ------- (h) "Compensation" means an Employee's base salary from the Company ------------ or one or more Designated Parents or Subsidiaries, including such amounts of base salary as are deferred by the Employee (i) under a qualified cash or deferred arrangement described in Section 401(k) of the Code, or (ii) to a plan qualified under Section 125 of the Code. Compensation does 1 not include overtime, bonuses, annual awards, other incentive payments, reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation, contributions (other than contributions described in the first sentence) made on the Employee's behalf by the Company or one or more Designated Parents or Subsidiaries under any employee benefit or welfare plan now or hereafter established, and any other payments not specifically referenced in the first sentence. (i) "Corporate Transaction" means any of the following transactions: --------------------- (1) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (2) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations); (3) the complete liquidation or dissolution of the Company; (4) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or (5) acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities (whether or not in a transaction also constituting a Change in Control), but excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction. (j) "Designated Parents or Subsidiaries" means the Parents or ---------------------------------- Subsidiaries which have been designated by the Administrator from time to time as eligible to participate in the Plan. (k) "Effective Date" means the effective date of the Registration -------------- Statement relating to the Company's initial public offering of its Common Stock. However, should any Designated Parent or Subsidiary become a participating company in the Plan after such date, then such entity shall designate a separate Effective Date with respect to its employee-participants. (l) "Employee" means any individual, including an officer or -------- director, who is an employee of the Company or a Designated Parent or Subsidiary for purposes of Section 423 of the Code. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the individual's 2 employer. Where the period of leave exceeds ninety (90) days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated on the ninety-first (91st) day of such leave, for purposes of determining eligibility to participate in the Plan. (m) "Enrollment Date" means the first day of each Offer Period. --------------- (n) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (o) "Exercise Date" means the last day of each Purchase Period. ------------- (p) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation The Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination (or, if no closing sales price or closing bid was reported on that date, as applicable, on the last trading date such closing sales price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (2) If the Common Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a recognized securities dealer, but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on date of determination (or, if no such prices were reported on that date, on the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (3) In the absence of an established market for the Common Stock of the type described in (1) and (2), above, the Fair Market Value thereof shall be determined by the Administrator in good faith and in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations which requires that consideration be given to (A) the price at which securities of reasonably comparable corporations (if any) in the same industry are being traded, or (B) if there are no securities of reasonably comparable corporations in the same industry being traded, the earnings history, book value and prospects of the issuer in light of market conditions generally; or (4) On the initial Effective Date of the Plan, the Fair Market Value shall be the price at which the Board, or if applicable, the Pricing Committee of the Board, and the underwriters agree to offer the Common Stock to the public in the initial public offering of the Common Stock. 3 (q) "Offer Period" means an Offer Period established pursuant to ------------ Section 4 hereof. (r) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (s) "Participant" means an Employee of the Company or Designated ----------- Parent or Subsidiary who is actively participating in the Plan. (t) "Plan" means this Employee Stock Purchase Plan. ---- (u) "Purchase Period" means a period of approximately six months, --------------- commencing on February 1 and August 1 of each year and terminating on the next following July 31 or January 31, respectively; provided, however, that the first Purchase Period shall commence on the Effective Date and shall end on July 31, 2002. (v) "Purchase Price" shall mean an amount equal to 85% of the Fair -------------- Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (w) "Reserves" means the sum of the number of shares of Common Stock -------- covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (x) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Eligibility. ----------- (a) General. Any individual who is an Employee on a given Enrollment ------- Date shall be eligible to participate in the Plan for the Offer Period commencing with such Enrollment Date. (b) Limitations on Grant and Accrual. Any provisions of the Plan to -------------------------------- the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (taking into account stock owned by any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Parent or Subsidiary, or (ii) which permits the Employee's rights to purchase stock under all employee stock purchase plans of the Company and its Parents or Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand U.S. Dollars (U.S.$25,000) worth of stock (determined at the Fair Market Value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. The determination of the accrual of the right to purchase stock shall be made in accordance with Section 423(b)(8) of the Code and the regulations thereunder. 4 (c) Other Limits on Eligibility. Notwithstanding Subsection (a), --------------------------- above, the following Employees shall not be eligible to participate in the Plan for any relevant Offer Period: (i) Employees whose customary employment is 20 hours or less per week; (ii) Employees whose customary employment is for not more than 5 months in any calendar year; (iii) Employees who have been employed for fewer than three business days; and (iv) Employees who are subject to rules or laws of a foreign jurisdiction that prohibit or make impractical the participation of such Employees in the Plan. 4. Offer Periods. ------------- (a) The Plan shall be implemented through overlapping or consecutive Offer Periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated in accordance with Section 19 hereof. The maximum duration of an Offer Period shall be twenty-seven (27) months. Initially, the Plan shall be implemented through overlapping Offer Periods of twenty-four (24) months' duration commencing each February 1 and August 1 following the Effective Date (except that the initial Offer Period shall commence on the Effective Date and shall end on January 31, 2004). (b) A Participant shall be granted a separate option for each Offer Period in which he or she participates. The option shall be granted on the Enrollment Date and shall be automatically exercised in successive installments on the Exercise Dates ending within the Offer Period. (c) If on the first day of any Purchase Period in an Offer Period in which a Participant is participating, the Fair Market Value of the Common Stock is less than the Fair Market Value of the Common Stock on the Enrollment Date of the Offer Period (after taking into account any adjustment during the Offer Period pursuant to Section 18(a)), the Offer Period shall be terminated automatically and the Participant shall be enrolled automatically in the new Offer Period which has its first Purchase Period commencing on that date, provided the Participant is eligible to participate in the Plan on that date and has not elected to terminate participation in the Plan. (d) Except as specifically provided herein, the acquisition of Common Stock through participation in the Plan for any Offer Period shall neither limit nor require the acquisition of Common Stock by a Participant in any subsequent Offer Period. 5. Participation. ------------- (a) All Employees eligible to participate in the Plan as of the first Enrollment Date of the Plan shall automatically become a Participant in the initial Offer Period and be eligible to make a direct payment for shares of the Common Stock on the Exercise Date of the first Purchase Period of the initial Offer Period in an amount equal to the lesser of the aggregate Purchase Price for seven hundred fifty (750) shares of the Common Stock (such number of shares shall not be subject to adjustment pursuant to Section 18 hereof to reflect the one-for-two reverse stock split which occurs prior to the Effective Date) or ten percent (10%) of the Compensation that he or she receives during the first Purchase Period of the initial Offer Period, unless a change of status notice in the form of Exhibit C to this Plan (or such 5 other form (including electronic forms) as determined by the Administrator from time to time) is filed to the contrary or the Participant withdraws from the Plan as provided in Section 10. No subscription agreement need be filed by the Participant with the Company in order to participate in the initial Offer Period. (b) After the initial Offer Period, an eligible Employee may become a Participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan (or such other form (including electronic forms) as determined by the Administrator from time to time) and filing it with the designated payroll office of the Company at least five (5) business days prior to the Enrollment Date for the Offer Period in which such participation will commence, unless a later time for filing the subscription agreement is set by the Administrator for all eligible Employees with respect to a given Offer Period. (c) No payroll deductions shall be made for Participants during the first Purchase Period of the initial Offer Period, unless a change of status notice in the form of Exhibit C to this Plan (or such other form (including electronic forms) as determined by the Administrator from time to time) authorizing the commencement of payroll deductions is filed by the Participant with the Company after a registration statement on Form S-8 has been filed with the Securities Exchange Commission with respect to the shares being offered under the Plan. If so elected, the rate of payroll deductions during the first Purchase Period of the initial Offer Period may exceed the maximum permitted rate under Section 6(a) to make-up for missed payroll deductions that would otherwise have been made prior to the filing of the Form S-8 with respect to the Plan. Payroll deductions for a Participant in the initial Offer Period shall commence at the rate elected by the Participant under Section 6(a) with the first partial or full payroll period beginning on the first day of the second Purchase Period of the initial Offer Period and shall end on the last complete payroll period during the initial Offer Period, unless a change of status notice in the form of Exhibit B (or such other form (including electronic forms) as determined by the Administrator from time to time) is filed to the contrary or the Participant withdraws from the Plan as provided in Section 10. No direct payment for shares shall be permitted after the first Purchase Period of the initial Offer Period. Therefore, Participants in the initial Offer Period must file the change of status notice in the form of Exhibit C to this Plan (or such other form (including electronic forms) as determined by the Administrator from time to time) prior to the commencement of the second Purchase Period of the initial Offer Period to assure maximum participation rights under the Plan. (d) For Offer Periods, other than the initial Offer Period, payroll deductions for a Participant shall commence with the first partial or full payroll period beginning on the Enrollment Date and shall end on the last complete payroll period during the Offer Period, unless sooner terminated by the Participant as provided in Section 10. 6. Payroll Deductions. ------------------ (a) At the time a Participant files a subscription agreement, the Participant shall elect to have payroll deductions made during the Offer Period in amounts between one percent (1%) and not exceeding ten percent (10%) of the Compensation which the Participant receives during the Offer Period. 6 (b) All payroll deductions made for a Participant shall be credited to the Participant's account under the Plan and will be withheld in whole percentages only. A Participant may not make any additional payments into such account. (c) A Participant may discontinue participation in the Plan as provided in Section 10, or may increase or decrease the rate of payroll deductions during the Offer Period by completing and filing with the Company a change of status notice in the form of Exhibit B to this Plan (or such other form (including electronic forms) as determined by the Administrator from time to time) authorizing an increase or decrease in the payroll deduction rate. During the first Purchase Period of the initial Offer Period, a Participant may discontinue participation in the Plan as provided in Section 10 or initiate payroll deductions by completing and filing with the Company a change of status notice in the form of Exhibit C to this Plan (or such other form (including electronic forms) as determined by the Administrator from time to time). Any increase or decrease in the rate of a Participant's payroll deductions shall be effective with the first full payroll period commencing five (5) business days after the Company's receipt of the change of status notice unless the Company elects to process a given change in participation more quickly. A Participant's subscription agreement (as modified by any change of status notice) shall remain in effect for successive Offer Periods unless terminated as provided in Section 10. The Administrator shall be authorized to limit the number of payroll deduction rate changes during any Offer Period. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a Participant's payroll deductions shall be decreased to 0%. Payroll deductions shall recommence at the rate provided in such Participant's subscription agreement, as amended, at the time when permitted under Section 423(b)(8) of the Code and Section 3(b) herein, unless such participation is sooner terminated by the Participant as provided in Section 10. 7. Grant of Option. On the Enrollment Date, each Participant shall --------------- be granted an option to purchase (at the applicable Purchase Price) up to a number of shares of the Common Stock determined by dividing ten percent (10%) of such Participant's Compensation receivable during the Offer Period by the applicable Purchase Price, subject to adjustment as provided in Section 18 hereof; provided (i) that such option shall be subject to the limitations set forth in Sections 3(b), 6 and 12 hereof, and (ii) the maximum number of shares of Common Stock a Participant shall be permitted to purchase in any Purchase Period shall be five hundred (500) shares, except as set forth in Section 5(a) and subject to adjustment as provided in Section 18 hereof (provided that adjustment shall not be made pursuant to Section 18 hereof to reflect the one-for-two reverse stock split which occurs prior to the Effective Date). Exercise of the option shall occur as provided in Section 8, unless the Participant has withdrawn pursuant to Section 10, and the option, to the extent not exercised, shall expire on the last day of the Offer Period. 8. Exercise of Option. Unless a Participant withdraws from the Plan ------------------ as provided in Section 10, below, the Participant's option for the purchase of shares will be exercised automatically on each Exercise Date, by applying the accumulated payroll deductions in the Participant's account to purchase the number of full shares subject to the option by dividing such Participant's payroll deductions accumulated prior to such Exercise Date and retained in the Participant's account as of the Exercise Date by the applicable Purchase Price, 7 provided, however, that if a Participant is eligible to purchase any shares on the first Exercise Date of the initial Offer Period by direct payment, the Participant's option for the purchase of shares will be exercised to the extent possible by applying the direct payment amount made by the Participant to purchase the number of full shares subject to the option by dividing such direct payment amount by the applicable Purchase Price and, provided, further, in no event may the accumulated payroll deductions and direct payment amounts applied to the purchase of shares on the first Exercise Date of the initial Offer Period exceed the amount specified in Section 5(a). No fractional shares will be purchased; any payroll deductions accumulated in a Participant's account which are not sufficient to purchase a full share shall be carried over to the next Purchase Period or Offer Period, whichever applies, or returned to the Participant, if the Participant withdraws from the Plan. Any direct payment amounts which are not sufficient to purchase a full share shall be returned to the Participant. Notwithstanding the foregoing, any amount remaining in a Participant's account or any excess direct payment amount following the purchase of shares on the Exercise Date due to the application of Section 423(b)(8) of the Code or Section 7, above, shall be returned to the Participant and shall not be carried over to the next Offer Period or Purchase Period. During a Participant's lifetime, a Participant's option to purchase shares hereunder is exercisable only by the Participant. 9. Delivery. Upon receipt of a request from a Participant after each -------- Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to such Participant, as promptly as practicable, of a certificate representing the shares purchased upon exercise of the Participant's option. 10. Withdrawal; Termination of Employment. ------------------------------------- (a) A Participant may either (i) withdraw all but not less than all the payroll deductions credited to the Participant's account and not yet used to exercise the Participant's option under the Plan or (ii) terminate future payroll deductions, but allow accumulated payroll deductions to be used to exercise the Participant's option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan (or such other form (including electronic forms) as determined by the Administrator from time to time). During the first Purchase Period of the initial Offer Period, a Participant may elect to withdraw from the Plan and not purchase shares by direct payment by giving written notice to the Company in the form of Exhibit C to this Plan (or such other form (including electronic forms) as determined by the Administrator from time to time). If the Participant elects withdrawal alternative (i) described above, all of the Participant's payroll deductions credited to the Participant's account will be paid to such Participant as promptly as practicable after receipt of notice of withdrawal, such Participant's option for the Offer Period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the Offer Period. If the Participant elects withdrawal alternative (ii) described above, no further payroll deductions for the purchase of shares will be made during the Offer Period, all of the Participant's payroll deductions credited to the Participant's account will be applied to the exercise of the Participant's option on the next Exercise Date, and after such Exercise Date, such Participant's option for the Offer Period will be automatically terminated. If a Participant withdraws from an Offer Period, payroll deductions will not resume at the beginning of the succeeding Offer Period unless the Participant delivers to the Company a new subscription agreement. 8 (b) Upon termination of a Participant's employment relationship (as described in Section 2(k)) at a time more than three (3) months from the next scheduled Exercise Date, the payroll deductions credited to such Participant's account during the Offer Period but not yet used to exercise the option will be returned to such Participant or, in the case of his/her death, to the person or persons entitled thereto under Section 14, and such Participant's option will be automatically terminated. Upon termination of a Participant's employment relationship (as described in Section 2(k)) within three (3) months of the next scheduled Exercise Date, the payroll deductions credited to such Participant's account during the Offer Period but not yet used to exercise the option will be applied to the purchase of Common Stock on the next Exercise Date, unless the Participant (or in the case of the Participant's death, the person or persons entitled to the Participant's account balance under Section 14) withdraws from the Plan by submitting a change of status notice in accordance with subsection (a) of this Section 10. In such a case, no further payroll deductions will be credited to the Participant's account following the Participant's termination of employment and the Participant's option under the Plan will be automatically terminated after the purchase of Common Stock on the next scheduled Exercise Date. 11. Interest. No interest shall accrue on the payroll deductions -------- credited to a Participant's account under the Plan. 12. Stock. ----- (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 18 (except with respect to the one-for-two reverse stock split which occurs prior to the Effective Date), the maximum number of shares of Common Stock which shall be made available for sale under the Plan shall be one hundred seventy fifty thousand (175,000) shares, plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2003 equal to the lesser of (i) one hundred thousand (100,000) shares, (ii) three-quarters of one percent (0.75%) of the outstanding shares of Common Stock on such date, or (iii) a lesser number of shares determined by the Administrator. If the Administrator determines that on a given Exercise Date the number of shares with respect to which options are to be exercised may exceed (x) the number of shares then available for sale under the Plan or (y) the number of shares available for sale under the Plan on the Enrollment Date(s) of one or more of the Offer Periods in which such Exercise Date is to occur, the Administrator may make a pro rata allocation of the shares remaining available for purchase on such Enrollment Dates or Exercise Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine to be equitable, and shall either continue all Offer Periods then in effect or terminate any one or more Offer Periods then in effect pursuant to Section 19, below. (b) A Participant will have no interest or voting right in shares covered by the Participant's option until such shares are actually purchased on the Participant's behalf in accordance with the applicable provisions of the Plan. No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase. (c) Shares to be delivered to a Participant under the Plan will be registered in the name of the Participant or in the name of the Participant and his or her spouse. 9 13. Administration. The Plan shall be administered by the -------------- Administrator which shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Administrator shall, to the full extent permitted by Applicable Law, be final and binding upon all persons. 14. Designation of Beneficiary. -------------------------- (a) Each Participant will file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant's account under the Plan in the event of such Participant's death. If a Participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the Participant (and the Participant's spouse, if any) at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living (or in existence) at the time of such Participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Administrator), the Administrator shall deliver such shares and/or cash to the spouse (or domestic partner, as determined by the Administrator) of the Participant, or if no spouse (or domestic partner) is known to the Administrator, then to the issue of the Participant, such distribution to be made per stirpes (by right of representation), or if no issue are known to the Administrator, then to the heirs at law of the Participant determined in accordance with Section 27. 15. Transferability. Neither payroll deductions credited to a --------------- Participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in Section 14 hereof) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Administrator may treat such act as an election to withdraw funds from an Offer Period in accordance with Section 10. 16. Use of Funds. All payroll deductions received or held by the ------------ Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each ------- Participant in the Plan. Statements of account will be given to Participants at least annually, which statements will set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization; Corporate ----------------------------------------------------- Transactions. - ------------ (a) Adjustments Upon Changes in Capitalization. Subject to any ------------------------------------------ required action by the stockholders of the Company, the Reserves, the Purchase Price, the maximum 10 number of shares that may be purchased in any Offer Period or Purchase Period, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, (ii) any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company, or (iii) as the Administrator may determine in its discretion, any other transaction with respect to Common Stock to which Section 424(a) of the Code applies; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator and its determination shall be final, binding and conclusive. Except as the Administrator determines, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the Reserves and the Purchase Price. (b) Corporate Transactions. In the event of a proposed Corporate ---------------------- Transaction, each option under the Plan shall be assumed by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator, in the exercise of its sole discretion and in lieu of such assumption, determines to shorten the Offer Period then in progress by setting a new Exercise Date (the "New Exercise Date"). If the Administrator shortens the Offer Period then in progress in lieu of assumption in the event of a Corporate Transaction, the Administrator shall notify each Participant in writing at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the Participant's option has been changed to the New Exercise Date and that either: - ------ (i) the Participant's option will be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offer Period as provided in Section 10; or (ii) the Company shall pay to the Participant on the New Exercise Date an amount in cash, cash equivalents, or property as determined by the Administrator that is equal to the difference in the Fair Market Value of the shares subject to the option and the Purchase Price due had the Participant's option been exercised automatically under Subsection (b)(i) above. For purposes of this Subsection, an option granted under the Plan shall be deemed to be assumed if, in connection with the Corporate Transaction, the option is replaced with a comparable option with respect to shares of capital stock of the successor corporation or Parent thereof. The determination of option comparability shall be made by the Administrator prior to the Corporate Transaction and its determination shall be final, binding and conclusive on all persons. 19. Amendment or Termination. ------------------------ (a) The Administrator may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18, no such termination can affect options previously 11 granted, provided that the Plan or any one or more Offer Periods may be terminated by the Administrator on any Exercise Date or by the Administrator establishing a new Exercise Date with respect to any Offer Period and/or any Purchase Period then in progress if the Administrator determines that the termination of the Plan or such one ore more Offer Periods is in the best interests of the Company and its stockholders. Except as provided in Section 18 and this Section 19, no amendment may make any change in any option theretofore granted which adversely affects the rights of any Participant without the consent of affected Participants. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other Applicable Law), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any Participant rights may be considered to have been "adversely affected," the Administrator shall be entitled to limit the frequency and/or number of changes in the amount withheld during Offer Periods, change the length of Purchase Periods within any Offer Period, determine the length of any future Offer Period, determine whether future Offer Periods shall be consecutive or overlapping, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participant's Compensation, and establish such other limitations or procedures as the Administrator determines in its sole discretion advisable and which are consistent with the Plan. 20. Notices. All notices or other communications by a Participant to ------- the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Administrator at the location, or by the person, designated by the Administrator for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the Participant to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned Applicable Laws. In addition, no options shall be exercised or shares issued hereunder before the Plan shall have been approved by stockholders of the Company as provided in Section 23. 22. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board or its approval by the stockholders of the Company. It shall continue in effect for a term of twenty (20) years unless sooner terminated under Section 19. 12 23. Stockholder Approval. Continuance of the Plan shall be subject -------------------- to approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws. 24. No Employment Rights. The Plan does not, directly or indirectly, -------------------- create any right for the benefit of any employee or class of employees to purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the Company or a Designated Parent or Subsidiary, and it shall not be deemed to interfere in any way with such employer's right to terminate, or otherwise modify, an employee's employment at any time. 25. No Effect on Retirement and Other Benefit Plans. Except as ----------------------------------------------- specifically provided in a retirement or other benefit plan of the Company or a Designated Parent or Subsidiary, participation in the Plan shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Designated Parent or Subsidiary, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of 1974, as amended. 26. Effect of Plan. The provisions of the Plan shall, in accordance -------------- with its terms, be binding upon, and inure to the benefit of, all successors of each Participant, including, without limitation, such Participant's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Participant. 27. Governing Law. The Plan is to be construed in accordance with and ------------- governed by the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code, or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties, except to the extent the internal laws of the State of California are superseded by the laws of the United States. Should any provision of the Plan be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. 28. Dispute Resolution. The provisions of this Section 28 (and as ------------------ restated in the Subscription Agreement) shall be the exclusive means of resolving disputes arising out of or relating to the Plan. The Company and the Participant, or their respective successors (the "parties"), shall attempt in good faith to resolve any disputes arising out of or relating to the Plan by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has not been resolved by negotiation, the parties agree that any suit, action, or proceeding arising out of or 13 relating to the Plan shall be brought in the United States District Court for the Eastern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of Yolo) and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 28 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. 14 Exhibit A AgraQuest, Inc. 2002 Employee Stock Purchase Plan SUBSCRIPTION AGREEMENT Effective with the Offer Period beginning on: [_] (February 1, 200__) or [_] (August 1, 200__) 1. Personal Information (modify data requested as appropriate) Legal Name (Please Print)______________________________________________________ ________________ ________________ (Last) (First) (MI) Location Department Street Address_________________________________________________________________ __________________________________ Daytime Telephone City, State/Country, Zip_______________________________________________________ __________________________________ E-Mail Address Social Security No. __ __ __ - __ __ - __ __ __ __ Employee I.D. No._________ __________________________________ Manager Mgr. Location
2. Eligibility Any Employee whose customary employment is more than 20 hours per week and more than 5 months per calendar year, who has been an Employee for more than 3 business days and who does not hold (directly or indirectly) five percent (5%) or more of the combined voting power of the Company, a parent or a subsidiary, whether in stock or options to acquire stock is eligible to participate in the AgraQuest, Inc. 2002 Employee Stock Purchase Plan (the "ESPP"); provided, however, that Employees who are subject to the rules or laws of a foreign jurisdiction that prohibit or make impractical the participation of such Employees in the ESPP are not eligible to participate. 3. Definitions Each capitalized term in this Subscription Agreement shall have the meaning set forth in the ESPP. 4. Subscription I hereby elect to participate in the ESPP and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the ESPP. I have received a complete copy of the ESPP and a prospectus describing the ESPP and understand that my participation in the ESPP is in all respects subject to the terms of the ESPP. I HEREBY ACKNOWLEDGE THAT NEITHER THE RIGHT TO PURCHASE SHARES OF THE COMPANY'S COMMON STOCK UNDER THE ESPP NOR ANY SHARES OF THE COMPANY'S COMMON STOCK PURCHASED UNDER THE ESPP SHALL BE DEEMED TO BE PART OF MY SALARY OR COMPENSATION. The effectiveness of this Subscription Agreement is dependent on my eligibility to participate in the ESPP. 5. Payroll Deduction Authorization I hereby request and authorize payroll deductions from my Compensation during the Offer Period in the percentage specified below (payroll reductions may not exceed 10% of Compensation nor U.S.$21,250 per calendar year): ----------------------------------------------------------------------------- Percentage to be Deducted (circle one) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% ----------------------------------------------------------------------------- 6. ESPP Accounts and Purchase Price I understand that all payroll deductions will be credited to my account under the ESPP. No additional payments may be made to my account. No interest will be credited on funds held in the account at any time including any refund of the account caused by withdrawal from the ESPP. All payroll deductions shall be accumulated for the purchase of Company Common Stock at the applicable Purchase Price determined in accordance with the ESPP. 7. Withdrawal and Changes in Payroll Deduction I understand that I may discontinue my participation in the ESPP at any time prior to an Exercise Date as provided in Section 10 of the ESPP, but if I do not withdraw from the ESPP, any accumulated payroll deductions will be applied automatically to purchase Company Common Stock. I may increase or decrease the rate of my payroll deductions in whole percentage increments to not less than one percent (1%) on one occasion during any Purchase Period by completing and timely filing a Change of Status Notice. Any increase or decrease will be effective for the full payroll period occurring after five (5) business days from the Company's receipt of the Change of Status Notice. A-1 8. Perpetual Subscription I understand that this Subscription Agreement shall remain in effect for successive Offer Periods until I withdraw from participation in the ESPP, or termination of the ESPP. 9. Taxes I have reviewed the ESPP prospectus discussion of the federal tax consequences of participation in the ESPP and consulted with tax consultants as I deemed advisable prior to my participation in the ESPP. I hereby agree to notify the Company in writing within thirty (30) days of any disposition (transfer or sale) of any shares purchased under the ESPP if such disposition occurs within two (2) years of the Enrollment Date (the first day of the Offer Period during which the shares were purchased) or within one (1) year of the Exercise Date (the date I purchased such shares), and I will make adequate provision to the Company for foreign, federal, state or other tax withholding obligations, if any, which arise upon the disposition of the shares. In addition, the Company may withhold from my Compensation any amount necessary to meet applicable tax withholding obligations incident to my participation in the ESPP, including any withholding necessary to make available to the Company any tax deductions or benefits contingent on such withholding. 10. Dispute Resolution The provisions of this Section 10 and Section 28 of the ESPP shall be the exclusive means of resolving disputes arising out of or relating to the Plan. The Company and I, or our respective successors (the "parties"), shall attempt in good faith to resolve any disputes arising out of or relating to the Plan by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has not been resolved by negotiation, the Company and I agree that any suit, action, or proceeding arising out of or relating to the Plan shall be brought in the United States District Court for the Eastern District of California (or should such court lack jurisdiction to hear such action, suit or proceeding, in a California state court in the County of Yolo) and that we shall submit to the jurisdiction of such court. The Company and I irrevocably waive, to the fullest extent permitted by law, any objection we may have to the laying of venue for any such suit, action or proceeding brought in such court. THE COMPANY AND I ALSO EXPRESSLY WAIVE ANY RIGHT WE HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 10 or Section 28 of the ESPP shall for any reason be held invalid or unenforceable, it is the specific intent of the Company and I that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. 11. Designation of Beneficiary In the event of my death, I hereby designate the following person or trust as my beneficiary to receive all payments and shares due to me under the ESPP: [_] I am single [_] I am married Beneficiary (please print)___________________________________________________ Relationship to Beneficiary (if any) (Last) (First) (MI) Street Address_______________________________________________________________ ____________________________________ City, State/Country, Zip_____________________________________________________
12. Termination of ESPP I understand that the Company has the right, exercisable in its sole discretion, to amend or terminate the ESPP at any time, and a termination may be effective as early as an Exercise Date, including the establishment of an alternative date for an Exercise Date within each outstanding Offer Period. Date:___________________ Employee Signature:_______________________________ _______________________________ spouse's signature (if beneficiary is other than spouse) A-2 Exhibit B AgraQuest, Inc. 2002 Employee Stock Purchase Plan CHANGE OF STATUS NOTICE ______________________________________ Participant Name (Please Print) ______________________________________ Social Security Number ================================================================================ Withdrawal From ESPP I hereby withdraw from the AgraQuest, Inc. 2002 Employee Stock Purchase Plan (the "ESPP") and agree that my option under the applicable Offer Period will be automatically terminated and all accumulated payroll deductions credited to my account will be refunded to me or applied to the purchase of Common Stock depending on the alternative indicated below. No further payroll deductions will be made for the purchase of shares in the applicable Offer Period and I shall be eligible to participate in a future Offer Period only by timely delivery to the Company of a new Subscription Agreement. [_] Withdrawal and Purchase of Common Stock Payroll deductions will terminate, but your account balance will be applied to purchase Common Stock on the next Exercise Date. Any remaining balance will be refunded. [_] Withdrawal Without Purchase of Common Stock Entire account balance will be refunded to me and no Common Stock will be purchased on the next Exercise Date provided this notice is submitted to the Company ten (10) business days prior to the next Exercise Date. ================================================================================ [_] Change in Payroll Deduction I hereby elect to change my rate of payroll deduction under the ESPP as follows (select one): - -------------------------------------------------------------------------------- Percentage to be Deducted (circle one) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% - -------------------------------------------------------------------------------- An increase or a decrease in payroll deduction will be effective for the first full payroll period commencing no fewer than five (5) business days following the Company's receipt of this notice, unless this change is processed more quickly. ================================================================================ B-1 ================================================================================ [_] Change of Beneficiary [_] I am single [_] I am married This change of beneficiary shall terminate my previous beneficiary designation under the ESPP. In the event of my death, I hereby designate the following person or trust as my beneficiary to receive all payments and shares due to me under the ESPP: Beneficiary (please print)_____________________________________________ Relationship to Beneficiary (if any) (Last) (First) (MI) Street Address_________________________________________________________ ____________________________________ City, State/Country, Zip_______________________________________________
================================================================================ Date:___________________ Employee Signature:_____________________________ _____________________________ spouse's signature (if new beneficiary is other than spouse) B-2 Exhibit C AgraQuest, Inc. 2002 Employee Stock Purchase Plan CHANGE OF STATUS NOTICE DURING FIRST PURCHASE PERIOD OF THE INITIAL OFFER PERIOD ___________________________________ Participant Name (Please Print) ___________________________________ Social Security Number ================================================================================ Withdrawal From ESPP I hereby withdraw from the AgraQuest, Inc. 2002 Employee Stock Purchase Plan (the "ESPP") and agree that my option under the applicable Offer Period will be automatically terminated. No payroll deductions will be made for the purchase of shares in the initial Offer Period and I shall be eligible to participate in a future Offer Period only by timely delivery to the Company of a new Subscription Agreement. [_] Withdrawal Without Purchase by Direct Payment I elect not to purchase shares by direct payment during the first Purchase Period of the initial Offer Period. ================================================================================ [_] Initiate Payroll Deduction During First Purchase Period of Initial Offer Period I hereby elect to initiate payroll deduction under the ESPP as follows (select one): - -------------------------------------------------------------------------------- Percentage to be Deducted (circle one) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% - -------------------------------------------------------------------------------- To the extent possible, the rate of payroll deduction will exceed the percentage indicated to yield the correct amount of withholding on the Exercise Date to cover payroll periods during which no withholding for participation in the Plan was made. I understand that this notice and payroll withholding rate shall remain in effect for successive Offer Periods until I withdraw from participation in the ESPP, change withholding rates, or the ESPP terminates. An increase or a decrease in payroll deduction or direct payment percentage will be effective for the first full payroll period commencing no fewer than five (5) business days following the Company's receipt of this notice, unless this change is processed more quickly. ================================================================================ C-1 ================================================================================ Designation of Beneficiary In the event of my death, I hereby designate the following person or trust as my beneficiary to receive all payments and shares due to me under the ESPP: [_] I am single [_] I am married Beneficiary (please print)_______________________________________________ Relationship to Beneficiary (if any) (Last) (First) (MI) Street Address___________________________________________________________ ____________________________________ City, State/Country, Zip_________________________________________________
================================================================================ Date:__________________ Employee Signature:_____________________________ _____________________________ spouse's signature (if new beneficiary is other than spouse) EX-10.7 6 dex107.txt RESEARCH AND DEVELOPMENT AGREEMENT EXHIBIT 10.7 RESEARCH AND DEVELOPMENT AGREEMENT This Research and Development Agreement ("Agreement") is made this 30th day of October 2000, between Rohm and Haas Company, a Delaware corporation, having its principal office at 100 Independence Mall West, Philadelphia, Pennsylvania, 19106-2399, United States of America ("RandH") and AgraQuest, Inc., a Delaware corporation, having its principal place office at 1530 Drew Avenue, Davis, California 95616, United States of America ("AQ"). ARTICLE 1 BACKGROUND 1.1. AQ has conducted research in the areas of biopesticide microbials and biochemicals to develop environmentally friendly natural pesticide products. From this microbial and biochemical research initiative, AQ has identified a number of product leads. 1.2. RandH possesses considerable expertise in research, development, registration and commercialization of agricultural chemical products. Using this expertise, RandH is interested in assessing AQ's product leads to identify those materials which RandH and AQ, will develop, register and bring to market. 1.3. To advance these goals, RandH and AQ have determined to enter into a commercial relationship regarding the future development, registration and commercialization of AQ's product leads. ARTICLE 2 DEFINITIONS 2.1 "Actual Costs" means the out-of-pocket costs, including labor costs and indirect overhead expenses (head-count driven facilities and administrative allocation). 2.2. "Affiliate" means, in relation to a party to this Agreement, a body corporate which from time to time is directly or indirectly controlled by or in control of such party and, for these purposes, "control" shall consist of the ownership of over fifty percent (50%) of the voting stock of a body corporate. 2.3 "AQ's Field" means use in the areas of Animal Health which is limited to therapeutics and pharmaceuticals for animal diseases, products for controlling internal and external parasites and pests, probiotics, animal feed additives, Human Health which is limited to pharmaceuticals, therapeutics, nutritional supplements and nutriceuticals and Aquaculture which is limited to growth enhancers, nutritional supplements and products for controlling external or internal parasites and diseases of fish, shellfish and mollusks. [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. 2.4. "Biopesticide" means a biochemical or microbial pesticide as defined at 40 C.F.R. (S) 158.65. 2.5. "Confidential Information" means, as to either party and without limitation, the Technology Rights, and any other data, know-how, formulas, compositions, processes, documents, designs, sketches, photographs, plans, graphs, drawings, specifications, equipment, samples, reports, findings, inventions, ideas and information, including business information related to the Lead Candidates and the Project. 2.6 "Damages" means any and all losses, liabilities, obligations, costs, expenses, damages or judgments of any kind or nature whatsoever (including reasonable attorney's, accountant's and expert's fees, disbursements of counsel, and other costs and expenses incurred in pursuing or defending claims under Article 13). 2.7. "Effective Date" means the date first written above. 2.8. "EPA" means the United States Environmental Protection Agency. 2.9. "Gated Process" means the research and development process set forth in Article 6 of this Agreement and as described in further detail in the Gated Process Template set forth at Exhibit D to this Agreement. 2.10. "Improvements" means any invention, improvement, modification, new application or enhancement whether patentable or not, relating solely to a specific Lead Candidate or Licensed Technology, but expressly excluding the combination of such Lead Candidate with any RandH product. 2.11. "Lead Candidates" means those product leads from AQ's biopesticide microbial and biochemical research and development (including any analogs and homologs, which may qualify as a Biopesticide) identified at Exhibit A, attached hereto and made a part hereof. Such Exhibit A may be updated from time to time as provided herein. 2.12. "Net Sales" means, for any given quarter, the net sales of a technical grade or formulated product containing a given Lead Candidate during such period, including products containing any Improvements, as such net sales are determined after deducting industry standard discounts, rebates, chargebacks, sales freight and taxes. With respect to RandH, Net Sales shall include the Net Sales to permitted sublicensees. 2.13. "Patent Prosecution" means, with respect to any Technology Right, the prosecution and maintenance (before the United States Patent and Trademark Office or the 2 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. applicable counterpart agency in a foreign country) of any patent or patent application, or any divisions, continuations, extensions or renewals relating to such Technology Right. 2.14. "Patent Rights" means all rights under any U.S. or foreign patent or patent application which may issue with claims directed to a Lead Candidate, a method to isolate or manufacture a Lead Candidate or a method to use a Lead Candidate, as the case may be, in each case together with any divisionals, continuations, continuations-in-part, reissues, re- registrations or extensions thereof. 2.15. "Project" means the activities of RandH and AQ to assess, develop, register and commercialize the Lead Candidates as Biopesticide products, including the Gated Process described in Article 6 of this Agreement. 2.16. "Registration" means approval by the EPA or European Union ("EU") or Japan of a microbial, a substance or mixture of substances as a Biopesticide pursuant to the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"). 2.17. "Technology Rights" means any and all ideas, inventions, formulae, processes, trade secrets and substantial know-how, intellectual property, techniques, methods, specifications, practices, data and other forms of information relating to the processes, methods and techniques for manufacturing, formulating and using the Lead Candidates, whether patentable or not and whether or not reduced to practice, including Patent Rights. ARTICLE 3 REPRESENTATIONS, WARRANTIES AND COVENANTS OF AQ AQ hereby represents, warrants and covenants to RandH as follows: 3.1 Corporate Power and Authority. ----------------------------- AQ has the corporate power and authority to execute and deliver this Agreement, the Convertible Note Purchase Agreement, the Convertible Note and perform its obligations hereunder and thereunder, and the execution, delivery and performance of this Agreement, the Convertible Note Purchase Agreement, and the Convertible Note have been duly and validly authorized by AQ, and upon execution and delivery by AQ, this Agreement, the Convertible Note Purchase Agreement, and the Convertible Note will constitute valid and binding agreements of AQ enforceable against it in accordance with their respective terms. 3.2 No Conflict. ------------ 3 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. Neither the execution and delivery of this Agreement, the Convertible Note Purchase Agreement, the Convertible Note, nor the consummation of the transactions contemplated hereunder or thereunder, requires AQ to obtain any permits, authorizations or consents from any governmental body or from any other person, firm or corporation, and such execution, delivery and consummation will not result in the breach of or give rise to any termination of any agreement or contract to which AQ may be a party. 3.3 Compliance with Law. -------------------- AQ will conduct its activities and operations in material compliance with all applicable laws, statutes, rules or regulations. 3.4 Effort ------ During the term of this Agreement, AQ shall use commercially reasonable efforts to fulfill its obligation as set forth in this Agreement. 3.5 Patent Prosecution; Infringement. -------------------------------- AQ is obligated to, at AQ's expense, prepare and file one or more patent application(s) for any Lead Candidate(s) and Improvements and is obligated to pursue Patent Prosecution of such patent application(s) and patent(s) which issue from such application(s). AQ shall pursue any Patent Prosecution in a manner that it in good faith believes to be scientifically and commercially reasonable; provided, however, that (i) AQ shall determine in consultation with the Joint Project Team the timing and manner of such Patent Prosecution and the amount of resources, personnel, and effort, devoted by AQ to such Patent Prosecution, patent protection or the scope of the protection afforded by any allowed patent claim and (ii) provided that AQ diligently and in good faith pursues Patent Prosecution of a particular Lead Candidate, AQ shall have no liability or obligation to RandH for the failure to obtain any patent protection relating to any Lead Candidate or the scope of the protection afforded by any allowed patent claim. AQ shall pursue the prosecution of any actual or alleged infringement by a third party of any of the Licensed Technology (as defined in Section 9.1 below). ARTICLE 4 REPRESENTATIONS, WARRANTIES AND COVENANTS OF RANDH RandH represents, warrants and covenants the following to AQ: 4.1 Corporate Power and Authority. ------------------------------ 4 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. RandH has the corporate power and authority to execute and deliver this Agreement and the Convertible Note Purchase Agreement, and to perform its obligations hereunder and thereunder, and the execution, delivery and performance of this Agreement and the Convertible Note Purchase Agreement have been duly and validly authorized by RandH, and upon execution and delivery by RandH, this Agreement and the Convertible Note Purchase Agreement will constitute valid and binding agreements of RandH enforceable against it in accordance with their respective terms. 4.2 No Conflict. ----------- Neither the execution and delivery of this Agreement or the Convertible Note Purchase Agreement, nor the consummation of the transactions contemplated hereunder or thereunder, requires RandH to obtain any permits, authorizations or consents from any governmental body or from any other person, firm or corporation, and such execution, delivery and consummation will not result in the breach of or give rise to any termination of any agreement or contract to which RandH may be a party. 4.3 Source of Funds. --------------- No payment to AQ hereunder will be made with government funds. 4.4. Effort. ------ During the term of this Agreement, RandH shall use commercially reasonable efforts to fulfill its obligations under this Agreement. 4.5. Compliance with Law. ------------------- RandH will conduct its activities and operations in material compliance with all applicable laws, statutes, rules or regulations. 4.6. Patent Prosecution; Infringement. -------------------------------- RandH shall cooperate with AQ's efforts regarding the Patent Prosecution, notify AQ of any possible claims of infringement of the Licensed Technology and cooperate with AQ in the prosecution of any actual or alleged infringement by a third party of any of the Licensed Technology. ARTICLE 5 CERTAIN OBLIGATIONS 5.1. Supply of Lead Candidates. -------------------------- 5 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. AQ will supply the needed quantities of Lead Candidates (as determined by the Joint Project Team) for entry into the Gated Process. Until such time as [***] Lead Candidates are [***]. 5.2. Exclusivity; Reservation of Right. ---------------------------------- (a) AQ shall not work, collaborate or coordinate with any third party to develop a Lead Candidate or any analog or homolog of a Lead Candidate as a Biopesticide, unless such Lead Candidate (i) has been abandoned by RandH as provided at section 6.1(c) herein or (ii) is within AQ's Field. Any such work, collaboration or coordination shall be considered a material breach of this agreement. (b) Notwithstanding anything herein to the contrary, AQ reserves the right to conduct research and development in conjunction with third parties on analogs and homologs of Lead Candidates which do not and will not qualify as Biopesticides. 5.3. Sale of Convertible Note. ------------------------- Concurrently with the execution of this Agreement, AQ will sell to RandH and RandH will purchase from AQ, pursuant to a Convertible Note Purchase Agreement attached hereto as Exhibit B, a Convertible Note (as defined therein) --------- in the principal amount of five hundred thousand dollars ($500,000) made within five (5) days of the Effective Date by wire transfer of immediately available funds to an account designated in writing by AQ. The entire outstanding principal balance of, and all accrued but unpaid interest on, the Convertible Note shall be converted automatically into fully paid nonassessable shares of the equity security (the "Next Financing Securities") sold by AQ in its next equity financing involving the receipt by AQ of at least $3,000,000, including the amounts received on conversion of debt (the "Next Financing"). The number of shares of Next Financing Securities to be issued to RandH upon such conversion shall be equal to the quotient obtained by dividing (i) the entire principal amount of the Convertible Note by (ii) the price per share of the Next Financing Securities multiplied by 1.2, rounded to the nearest whole share. The issuance of such shares upon such conversion shall be upon and subject to the same terms and conditions applicable to the Next Financing and, except as set forth in the preceding sentence, such shares shall have the same rights and preferences as the Next Financing Securities and such shares shall be upon and subject to terms and conditions no less favorable than any share issued by AQ prior to the Effective Date. If AQ does not complete a Next Financing within six months of the Effective Date, the Convertible Note shall be converted into shares of preferred stock of AQ (the "Next Equity Securities") at a purchase price to be determined by AQ's Board of Directors immediately prior to such conversion. Except as to purchase price, the Next Equity Securities will have the same rights and preferences as the Series E Preferred Stock. 5.4. Additional Investment. --------------------- During the Term, RandH may, [***], purchase additional shares of AQ equity securities, subject to the approval of the Board of Directors of AQ. ARTICLE 6 GATED RESEARCH AND DEVELOPMENT FOR LEAD CANDIDATES 6 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. 6.1. The Gated Process and General Governing Principles for the Gated Process ------------------------------------------------------------------------ (a) RandH and AQ will assess, review, and develop the Lead Candidates through the Gated Process described below and as set forth in greater detail in the Gated Process Template at Exhibit D attached hereto and made --------- a part hereof. (b) RandH, in its sole and exclusive discretion, will determine whether a particular Lead Candidate will move from one gate in the Gated Process to a subsequent Project Stage or gate. (c) RandH reserves the right to abandon a particular Lead Candidate at any time in the Gated Process. Subject to the following two sentences, a Lead Candidate shall be considered abandoned by RandH [***]. If AQ does not receive written determination within sixty (60) days from the date of such request, such Lead Candidate shall be considered abandoned by RandH. 6.2. Project Stage 1. ---------------- (a) From time to time during the Term, RandH will evaluate the currently available data on the Lead Candidates and in its sole discretion select a Lead Candidate from Exhibit A for assessment in Project Stage 2 of the --------- Gated Process by written notification thereof to AQ; provided, however, that selection of the first Lead Candidate shall occur no later than the [***] of the Effective Date. (b) At the time that a Lead Candidate is selected to move to Project Stage 2, RandH shall pay AQ [***] in immediately available funds to an account designated by AQ. 6.3. Project Stage 2. ---------------- AQ will provide sufficient quantities of each Lead Candidate in order for RandH to evaluate the efficacy of such Lead Candidate in the laboratory. AQ will also provide a preliminary assessment for the novelty of the Lead Candidate, including dereplication with AQ's natural product database, and literature search of known chemistry and taxonomy. 6.4. Project Stage 3. ---------------- (a) Upon written notification by RandH to advance a Lead Candidate to Project Stage 3 and the concurrent advancement of [***] to AQ for reimbursement of Actual Costs of the Pre-Development Activities, AQ will immediately commence the Pre-Development Activities. If at any time AQ becomes aware that the Actual Costs of such development activities for any individual Lead Candidate will [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. exceed [***], AQ shall notify RandH and obtain prior written approval from RandH to continue with the activities for such Lead Candidate. "Pre- Development Activities" means those activities identified as such in Project Stage 3 of the Gated Process Template. (b) Upon request by RandH and as a part of AQ's obligation pursuant to the Gated Process, AQ will conduct fractionation/purification and characterization (structure elucidation) to determine the active component molecules of the particular Lead Candidate. If these analyses demonstrate that the molecules are: (i) lipophilic compounds, RandH will pay [***] to AQ; (ii) water soluble compounds, RandH will pay [***] to AQ. Any payments made pursuant to this Section 6.4(b) and 6.4(c) shall be made in immediately available funds to an account designated by AQ within thirty (30) days of written notification thereto by AQ. (c) AQ will develop an analytical method suitable for meeting Registration requirements for the Lead Candidate in major market countries as determined by the Joint Project Team. RandH will pay a total of [***] upon completion of such analytical method. 6.5. Project Stage 4. ---------------- (a) If AQ exercises its right of first refusal and undertakes the Commercial Manufacture of a Lead Candidate pursuant to Section 9.2(a) below, AQ in accordance with Project Stage 4 will conduct final process development on such Lead Candidate and manufacture [***] batches of such Lead Candidate to support Registration of the Lead Candidate. RandH will reimburse AQ for reasonable costs and expenses incurred in the process development under Project Stage 4 and manufacture of the [***] batches of the Lead Candidate within [***] days of submission of an invoice therefore. (b) RandH, at RandH's expense, will prepare and file with EPA an application for Registration and petition for tolerance or exemption from tolerance, if required, of the Lead Candidate. AQ shall have the right to review such application for Registration prior to filing. Upon submission of the application for Registration and petition, if required, as a Biopesticide to EPA or Japan or the EU, RandH shall pay AQ [***]. (c) Upon issuance by EPA of a Biopesticide Registration by EPA or Japan or the EU for the Lead Candidate, RandH shall pay to AQ [***]. 8 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. (d) RandH may request AQ to continue process optimization research for a Lead Candidate prior to commercialization, but after the [***] analysis and submission for Registration. If such request is made by RandH, RandH will reimburse AQ for reasonable costs and expenses incurred in this optimization. 6.6. Special Payment to AQ. AQ shall receive a one time, lump sum payment of ---------------------- [***] of RandH's Net Sales for each Lead Candidate for which Registration is obtained for sales of such registered Lead Candidate(s) made during the fifth after the first year in which a commercial sale occurs, and such lump sum payment will be made during the first quarter of in the year following. 6.7. Audit; Inspection of Records. Each party, including a permitted ---------------------------- sublicensee, shall keep full and accurate books and records of its Actual Costs, Net Sales, and any other expenses or disbursements relating to this Agreement. Each party shall permit the other party, at its own expense, to examine such books and records at any reasonable time. ARTICLE 7 JOINT PROJECT TEAM 7.1. Composition and Duties of Team. ------------------------------- The parties will establish a multifunctional team (the "Joint Project Team") which will meet as needed at a mutually agreeable location to review and direct the Project. Specifically, the Joint Project Team shall have among its principal duties to review the status of Lead Candidates in the Gated Process and review and discuss all draft and final data, studies and reports generated through the Gated Process. At a minimum, the Joint Project Team will meet [***]. The Joint Project Team will be consultative in nature and, except as otherwise set forth herein, all decisions regarding the Project will remain in the sole and exclusive discretion of RandH. 7.2. Obligations of the Parties. --------------------------- Each party to this Agreement working through the Joint Project Team will have the responsibility and obligation to supply appropriate personnel and all relevant data and other information needed to implement and accomplish the objectives of the Project. ARTICLE 8 PROPRIETARY RIGHTS, RIGHTS TO STUDIES, REGISTRATIONS, REGISTRATION DATA AND TRADEMARKS 8.1. Proprietary Rights. ------------------ 9 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. Except as expressly provided to the contrary herein, as between the parties, all proprietary rights, title, and interest with respect to the Lead Candidates, including the Technology Rights and Improvements as set forth in Section 10.1 shall be and remain solely with AQ. 8.2. RandH Data. ---------- All data and studies obtained, conducted or paid for by RandH for each individual Lead Candidate shall remain the exclusive property of RandH; provided, however, that notwithstanding anything else in this Agreement, AQ shall have access to all filings and all information and data relevant thereto for use by AQ in AQ's Field. If AQ uses such data or study in AQ's Field, AQ shall pay RandH [***] of the Actual Costs incurred by RandH in the generation of such data or study within thirty (30) days of receipt of supporting documentation therefor. The parties agree however that AQ, with prior written approval from RandH, may use the data or studies without payment to RandH solely for the purpose of providing information to its current or prospective investors , and such approval shall not unreasonably withheld or delayed. Notwithstanding the foregoing, if for any reason and at any time during the Gated Process described in Article 6, RandH determines to abandon a Lead Candidate as set forth in Section 6.1(c) of this Agreement, RandH will provide AQ with a copy of all data and studies generated by or on behalf of RandH in the Gated Process up to the date of RandH's notice of abandonment. However, if AQ at any time receives an economic benefit from the commercial sale of such abandoned Lead Candidate, AQ will [***]. 8.3 Lead Candidate Registrations. ---------------------------- RandH shall be entitled to submit all regulatory filings in its name and shall own all such filings and Registrations, and subject to Section 8.2, AQ shall have access to all filings and all information and data relevant thereto. 8.4. RandH Trademarks. ----------------- RandH will obtain and maintain trademarks for the Lead Candidates as RandH sees fit in RandH's sole discretion and at its own expense. RandH will retain sole and exclusive ownership of such trademarks at all times. Nothing in this Agreement shall be construed as conferring on AQ the right to use in advertising, publicity or other promotional activities any name, trademark or tradename of RandH or its existing products. 8.5. AQ Trademarks. ------------- 10 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. Nothing in this Agreement shall be construed as conferring on RandH the right to use in advertising, publicity or other promotional activities any name, trademark or tradename of AQ or its existing products. ARTICLE 9 LICENSE AND MANUFACTURING RIGHTS 9.1. License Grant. -------------- AQ hereby grants an exclusive, worldwide, non-cancellable right and license in and to the Technology Rights to make, use, offer for sale, import, export and distribute any and all Lead Candidates of products embodying a Lead Candidate for all uses except in AQ's Field (the "Licensed Technology"). Such license includes the right to sublicense; provided, however, that such sublicense (i) is subject to any restrictions set forth in this Agreement and (ii) prior to such sublicense, RandH provides written notification to AQ of its intent to effect such sublicense and a copy of such sublicensing agreement. The license described herein shall be in effect until such time as the Lead Candidate that is the subject of the license is abandoned as set forth in Section 6.1(c) or until such time as the latest of any patent relating to such Lead Candidate expires, at which time RandH shall have a [***]. 9.2. Commercial Manufacture. ---------- ------------ (a) "Commercial Manufacture" means the manufacture of a Lead Candidate for the purpose of commercial sale of such Lead Candidate, whether in its technical form or in a product formulation. (b) RandH hereby grants AQ the right of first refusal to the Commercial Manufacture of the Lead Candidates by AQ at a facility owned or leased and operated by AQ ( "AQ's Manufacturing Right"); provided, however, that AQ must advise RandH of its decision to exercise AQ's Manufacturing Right within thirty (30) days of RandHs determination to advance a Lead Candidate to Project Stage 4. If AQ exercises AQ's Manufacturing Right, the Total Costs (as defined in Section 9.3(a)) shall be paid by RandH to AQ within thirty (30) days of submission of an invoice for such costs and expenses. AQ represents and warrants that if AQ exercises AQ's Manufacturing Right, AQ will manufacture the Lead Candidate at the lowest commercially reasonable cost possible. (c) If AQ decides to exercise AQ's Manufacturing Right, RandH and AQ agree to negotiate in good faith a Supply Agreement for such Lead Candidate. (d) If AQ decides not to exercise AQ's Manufacturing Right (i) RandH has [***] to Commercial Manufacture of the Lead Candidate; (ii) AQ will provide RandH with any and all data and information it possesses pertaining to the Lead Candidate to be manufactured, including but not limited to all information about the Commercial Manufacture of such Lead Candidate and; (iii) AQ will provide any advice and consultation reasonably requested by RandH pertaining to the Commercial 11 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. Manufacture of such Lead Candidate. The parties agree that the information and advice provided pursuant to this Section 9.2(d) constitutes "Confidential Information" and all process information and rights remain the property of AQ. 9.3. Total Gross Margin Split. ------------------------- (a) If AQ exercises AQ's Manufacturing Right and the parties enter into a Supply Agreement as set forth in Section 9.2(c), RandH will pay to AQ [***], which shall be defined as the difference between (i) Net Sales and (ii) Total Costs. Total Costs shall mean the fully allocated costs associated with the Commercial Manufacture by AQ of Lead Candidates, including but not limited to labor, fermentation, recovery, formulation and packaging expenses, raw materials, taxes, direct depreciation and the allocable portion of utilities. (b) With respect to a Lead Candidate manufactured pursuant to Section 9.2(d), RandH shall pay to AQ a royalty of [***] on RandH's Net Sales of such Lead Candidate. (c) Any payments made pursuant to this Section 9.3 shall be made by RandH in immediately available funds to an account designated by AQ within thirty (30) days of the end of RandH's fiscal quarter. ARTICLE 10 INVENTIONS, IMPROVEMENTS OR NEW APPLICATIONS 10.1. By AQ. ------ AQ shall promptly inform RandH in writing of any Improvements made by AQ. Such Improvements shall be the sole property of AQ; provided, however, that such Improvements shall be included within the meaning of the "Licensed Technology" licensed to RandH hereunder. 10.2 By RandH. --------- RandH shall promptly inform AQ in writing of any Improvements, whether patentable or not, made by RandH relating solely to a specific Lead Candidate or Licensed Technology. Such Improvements shall be the sole property of RandH; provided, however, that RandH hereby grants to AQ an exclusive (except as to RandH), royalty-free, worldwide, non-cancellable right and license, with the right to sublicense, to make, use, sell, offer for sale, import, export and distribute such Improvements in AQ's Field. 10.3. Joint Improvements. ------------------- 12 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. Any Improvements, whether patentable or not, made jointly by the parties shall be jointly owned by RandH and AQ ("Joint Improvements"). The parties will mutually agree in good faith which party will be responsible for development and Patent Prosecution of such Joint Improvement. ARTICLE 11 CONFIDENTIALITY 11.1 Scope. During the period of this Agreement and for ten (10) years ----- thereafter, RandH and AQ agree: (a) not to disclose to any third party, except as specifically allowed by this Agreement, any Confidential Information, (b) to limit disclosure of Confidential Information within its own organization to individuals whose duties justify the need to know such information and who are legally obligated to comply with the terms of this Agreement. (a) To the extent practical, Confidential Information shall be disclosed in tangible form and marked "Confidential". Information disclosed in non- tangible form, such as orally or by visual inspection, shall not be considered confidential unless the disclosing party confirms in writing the fact and general nature of the disclosure within one (1) month after it is made. (b) The recipient of Confidential Information shall be under no obligation with respect to any information which: (i) at the time of disclosure is available to the public (ii) after disclosure becomes available to the public through no fault of the recipient, provided that the obligation of the recipient shall cease only after the date on which such information has become available to the public (iii) the recipient can demonstrate through tangible evidence was in its possession before receipt from the disclosing party (iv) is disclosed to the recipient without restriction on disclosure by a third party who has the lawful right to disclose such information. Confidential Information shall not be deemed to be within the foregoing exceptions merely because it is (i) specific and embraced by more general information in the public domain or the recipient's possession or (ii) a combination which can be pieced together to reconstruct the Confidential Information from multiple sources, none of which shows the whole combination, its principle of operation, or method of use. ARTICLE 12 TERM AND TERMINATION 12.1. Term. ----- The term of this Agreement shall be for a period of [***] from the Effective Date (the "Term"); provided, however, that for any Lead Candidate(s) that has proceeded beyond Gate 2 of the Gated Process Template, the terms and conditions of this Agreement shall remain in effect solely with respect to such Lead Candidate(s) until such time as (i) RandH 13 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. has abandoned such Lead Candidate(s) as set forth in Section 6.1(c); (ii) a Biopesticide Registration for such Lead Candidate is issued by EPA or EU. 12.2. Material Breach. ---------------- Should either RandH or AQ, at any time during the term of this Agreement, commit a material breach of any provision hereunder, and fail to rectify such breach within sixty (60) days from receipt of written notice from the other party, such other party may terminate this Agreement by notice in writing to the breaching party provided that such notifying party is not in material breach of this Agreement. Failure to make any payment under this Agreement when due shall constitute a material breach of the Agreement. Upon termination, provision for clearance of unsold stocks and related issues would be made in good faith between the parties. 12.3. Proceedings in Bankruptcy. -------------------------- Should either party be adjudicated bankrupt or petition for or consent to any relief under any bankruptcy, reorganization, receivership, liquidation, compromise or arrangement or any moratorium statute whether now or hereinafter in effect, or should either party make an assignment for the benefit of its creditors, or petition for the appointment of a receiver, liquidator, trustee or custodian for all or a substantial part of its assets, or should a receiver, liquidator, trustee or custodian be appointed for all or a substantial part of such party's assets, the other party to this Agreement shall have the right to immediately terminate this Agreement. Notwithstanding any proceedings in bankruptcy, it is the express intent of the parties that each party shall retain any and all rights granted to such party in Articles 9 and 10 of this Agreement. 12.4 Survival. --------- Termination or expiration of this Agreement shall be without prejudice to any accrued rights or obligations of either party. Notwithstanding any provision in this Agreement, the provisions of Articles 8, 9, 10 and 11 shall survive any termination of this Agreement. ARTICLE 13 INDEMNIFICATION 13.1 Indemnification. Subject to Section 13(c) below: --------------- (a) RandH hereby agrees to defend, indemnify and hold harmless AQ and each of its officers, directors, shareholders, employees, agents, representatives, attorneys, or advisors from and against any Damages arising out of or resulting from (i) RandH's failure to perform any of its obligations hereunder, (ii) any 14 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. breach of or inaccuracy in any representation or warranty made by RandH herein, (iii) the use or commercialization by RandH (or its sublicensees and assignees) of the Licensed Technology, or (iv) the conduct of RandH's business. (b) AQ agrees to defend, indemnify and hold harmless RandH and each of its officers, directors, shareholders, employees, agents, representatives, attorneys, or advisors from and against any Damages arising out of or resulting from (i) AQ's failure to perform any of its obligations hereunder or (ii) any breach of or inaccuracy in any representation or warranty made by AQ herein and (iii) the conduct of AQ's business. (c) LIMITATIONS ON LIABILITY. EXCEPT TO THE EXTENT SET FORTH ABOVE (WITH ------------------------ RESPECT TO DAMAGES ASSERTED BY THIRD PARTIES), IN NO EVENT SHALL EITHER PARTY (OR ITS AGENTS, EMPLOYEES, REPRESENTATIVES, OFFICERS, DIRECTORS, SHAREHOLDERS, ATTORNEYS OR ADVISORS) BE LIABLE TO THE OTHER PARTY (OR ITS AGENTS, REPRESENTATIVES, OFFICERS, DIRECTORS OR SHAREHOLDERS) OR ANY THIRD PARTY FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES RESULTING FROM THE USE, OR INABILITY TO USE, THE LICENSED TECHNOLOGY, THE COMMERCIALIZATION OF THE LICENSED TECHNOLOGY OR OTHERWISE ARISING OUT OF THIS AGREEMENT. ARTICLE 14 MISCELLANEOUS 14.1. Governing Law. -------------- This Agreement shall be governed by the laws of the state of Delaware. 14.2. Assignment. ----------- RandH and AQ shall have the right to assign this Agreement without consent of the other party; provided, however, that the assigning party will use its best efforts to provide the earliest notification possible to the non- assigning party. 14.3. Notices. -------- All notices, requests or consents required or permitted under this Agreement shall be made in writing and shall be given to the other party by personal delivery, registered or certified mail (with return receipt), overnight air courier (with receipt signature) or facsimile transmission (with "answerback" confirmation of transmission), sent to such party's address or telecopy numbers set forth below, or such other addresses or telecopy numbers of which 15 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. the parties have given notice pursuant to this section 14.3. Each such notice, request or consent shall be deemed effective upon the date of actual receipt, receipt signature or confirmation of transmission, as applicable. If to RandH: Rohm and Haas Company 100 Independence Mall West Philadelphia, PA 19106-2399 USA Attn: Dr. James B. Ryan Phone: (215) 641-7397 Facsimile: (215) 619-1614 If to AQ; AgraQuest, Inc. 1530 Drew Avenue Davis, California, 95616 Attn: Dr. Pamela Marrone Phone: (530) 750-0150 Facsimile: (530) 750-0153 14.4. Entire Agreement. ---------------- This Agreement constitutes the entire agreement of the parties with respect to the subject matter herein, supersedes all prior agreements with respect thereto, and may be amended only in writing signed by both parties. 14.5. Severability. ------------ If a court or regulatory authority of competent jurisdiction determines that one or more of the paragraphs or provisions of this Agreement are or may be invalid or unenforceable such decision shall not affect the remainder of the Agreement. 14.6. Force Majeure. -------------- The parties shall not be liable for any delay in or failure of performance hereunder due to any contingency beyond its reasonable control including but not limited to an act of God, war, mobilization, insurrection, rebellion, civil commotion, riot, act of extremist or public enemy, sabotage, labor dispute, lockout, strike explosion, fire, flood, storm, accident, drought, equipment failure, power failure, shortage of cars, delay of carrier, embargo, law, 16 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. ordinance, rule or regulation, whether valid or invalid, including priority requisition, allocation, or price control. 14.7. Waiver. ------- Failure by either party hereto to exercise or enforce any rights conferred upon it by this Agreement shall not be deemed to be a waiver of any such rights or operate so as to bar the exercise or enforcement thereof or of any other rights at any subsequent time or times. 14.8. Status of the Parties. ---------------------- Nothing in this Agreement shall be construed as to constitute a partnership or joint venture between the parties or authorize either to represent the other party or contract any liability on behalf of the other party. 14.9. Dispute Resolution; Arbitration. -------------------------------- The parties failure to comply with the terms of the license grant in Sections 9.1, 10.1 or 10.2 shall constitute a material breach of this Agreement for which the parties respectively will be entitled to injunctive relief from a court of competent jurisdiction. In the event of a dispute between the parties as to any matter arising in connection with this Agreement, such matter shall be referred to the Vice President, Agricultural Chemicals Business Unit Director at RandH and Chief Executive Officer at AQ for resolution. If the dispute cannot be settled amicably through negotiation by these individuals, then the parties agree in good faith to submit the dispute to mediation in accordance with the Center for Public Resources Model Procedure for Mediation of Business Disputes. If the dispute cannot be settled through mediation, the parties agree to submit the dispute to binding arbitration in accordance with Title 9 of the United States Code and the Commercial Arbitration Rules of the American Arbitration Association (the "Association"). If the parties are unable to agree upon a single arbitrator, the arbitrator shall be a single, independent arbitrator selected by the Association. Arbitration shall take place at a location mutually agreeable to the parties. The fees and expenses of the mediator and arbitrator shall be paid equally by the parties to such mediation or arbitration. 14.10 Joint Press Release. -------------------- Upon execution of this Agreement or as soon as practicable thereafter, the parties will issue a joint press release, the text of which shall be mutually acceptable to the parties. Agreed to by: 17 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. AGRAQUEST, INC. ROHM AND HAAS COMPANY By: /s/ Pamela G. Marrone By: /s/ Carlos A. Estevez --------------------- --------------------- Name: Dr. Pam Marrone Name: Carlos A. Estevez Title: President & CEO Title: Vice-President and World Wide Agricultural Chemicals Business Unit Director 18 of 18 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. EX-10.8 7 dex108.txt STRAIN ACCESS AGREEMENT EXHIBIT 10.8 STRAIN ACCESS AGREEMENT This Strain Access Agreement (the "Agreement"), effective as of December 21, 2000 (the "Effective Date"), is made by and between Maxygen, Inc., a Delaware corporation ("Maxygen"), and AgraQuest, Inc., a Delaware corporation ("AgraQuest"). Maxygen shall mean Maxygen and its Affiliates. BACKGROUND A. AgraQuest has an extensive collection of organisms in its biodiversity collection ("Collection") and is willing to provide access to Maxygen, on a non-exclusive basis to at least three thousand (3,000) strains of organisms in the Collection. B. Maxygen wishes to obtain samples of strains in the Collection in order to utilize the strains and material derived from the strains for its benefit. Now Therefore, for and in consideration of the covenants, conditions and undertakings set forth, it is agreed by and between the parties as follows: 1. DEFINITIONS 1.1 "Affiliate" means any corporation, firm, limited liability company, partnership or other entity that directly or indirectly controls or is controlled by or is under common control with another person. 1.2 "Biopesticide" means a product intended for use as a Pesticide that (i) contains a microorganism as the active component or (ii) consists of an extract from a microorganism as the active component that contains a naturally occurring substance that controls pests by non-toxic mechanisms. For the purposes of this definition, "Biopesticide" shall not include any pesticidal substance that a plant or plant cells produce from genetic material that has been introduced into the plant or plant cells (nor shall it include such plant or plant cells). 1.3 "Collection Strain" means a strain of organism found in the Collection. 1.4 "Confidential Information" means any (i) proprietary or confidential information or material in tangible form disclosed by one party to the other hereunder that is marked as "Confidential" at the time it is delivered to the receiving party, or (ii) proprietary or confidential information disclosed orally hereunder that is identified as confidential or proprietary when disclosed and confirmed in writing as confidential within [***] days after such oral disclosure. 1.5 "Derived Material" means any material, genetic or otherwise, obtained from any Selected Strain and any derivatives or modifications made by or for Maxygen or any of its sublicensees from any Selected Strain or material obtained therefrom. 1.6 "Liability" means any liabilities, damages, settlements, claims, penalties, fines, and reasonable costs or reasonable expenses (including, without limitation, reasonable attorneys' fees and other expenses of litigation). 1.7 "Pesticide" is as defined in the Federal Insecticide, Fungicide and Rodenticide Act (Section 136(u) of Title 7, Chapter 6 of the United States Code). 1.8 "Selected Strain" means a Collection Strain selected by Maxygen to be received from AgraQuest pursuant to this Agreement. 1 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. 1.9 "Shuffling" means the recombination and/or rearrangement and/or mutation of genetic material for the creation of genetic diversity using intellectual property and/or tangible property owned or controlled by Maxygen. 1.10 "Strain Information" means all information on a Collection Strain, including, without limitation, taxonomic information, information regarding biological and/or biochemical activities and any information concerning intellectual property rights relating to the strain, including rights owned or controlled by AgraQuest and any rights of third parties. Strain Information will include, without limitation, information sufficient for Maxygen to be able to identify strains of interest for its various research projects. Strain Information will also include, without limitation, information identifying the source of the strain, including the country of original collection and the date of collection. 2. ACCESS TO STRAINS 2.1 Samples. 2.1.1 Sample Size. Maxygen will have the right to select which Collection Strains it is to receive from AgraQuest. AgraQuest will supply Maxygen with samples of at least three thousand (3,000) different Collection Strains. 2.1.2 Timing/Rate of Delivery. AgraQuest will deliver to Maxygen the Selected Strains within thirty (30) days after delivery of notice to AgraQuest of which Collection Strains Maxygen chooses to receive. It is anticipated that concurrently with the execution of this Agreement, Maxygen will notify AgraQuest of (i) up to [***] Collection Strains Maxygen chooses to receive within thirty (30) days of the Effective Date and (ii) an additional [***] Collection Strains Maxygen chooses to receive within sixty (60) days of the Effective Date. Thereafter, Maxygen will notify AgraQuest of an additional [***] to [***] Collection Strains per month that Maxygen chooses to receive. 2.1.3 Preparation of Samples. Each Selected Strain provided to Maxygen by AgraQuest pursuant to this Agreement will be provided as follows: Each Selected Strain will be delivered as glycerol stocks in 2 ml vials. The vials will be delivered frozen. Shipments of samples of Selected Strains will be provided in sample boxes shipped in dry ice. Shipments shall be packaged so as to arrive at Maxygen with the samples still frozen. [***]. 2.2 Information 2.2.1 Delivery of Information. Prior to the Effective Date, or as soon as practicable thereafter, AgraQuest will provide to Maxygen all Strain Information within its possession or control concerning each Collection Strain currently in the Collection. 2.2.2 Future Information. AgraQuest will provide Maxygen with Strain Information concerning any future strain isolated by AgraQuest, or otherwise added to the Collection, until Maxygen has selected three thousand (3,000) strains of organisms from the Collection. Strain Information on newly isolated strains shall be provided to Maxygen as soon as practicable after being obtained. 2.3 Exploitation. Subject to Section 4.3, Maxygen will have the right to exploit each of the Selected Strains and/or Derived Material in any manner that Maxygen deems appropriate. 3. OWNERSHIP AND RIGHTS IN THE SELECTED STRAINS. 2 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. 3.1 Independent Development. AgraQuest retains the right to continue independent development and investigation of any Selected Strain for which it may provide a sample to Maxygen. [***]. 3.2 Maxygen Ownership. Subject to Section 4.3, by virtue of Maxygen's receipt of a Selected Strain under this Agreement: 3.2.1 Derived Material. [***]. 3.2.2 Intellectual Property. Maxygen shall own all rights to and interest in any idea, invention (whether patentable or not), discovery or improvement made by or for Maxygen and/or its sublicensees and related to the Selected Strains or Derived Material, and any uses of the Selected Strains or Derived Material obtained through use of the Selected Strains or Derived Material by or for Maxygen and/or its sublicensees, and Maxygen and/or its sublicensees shall be free to use any such idea, invention, discovery or improvement, without further obligation to AgraQuest. 4. LICENSES. 4.1 License to Selected Strains. AgraQuest hereby grants Maxygen a non-exclusive, worldwide [***] license, [***] to propagate and use the Selected Strains [***]. Maxygen sublicensees will be bound by the terms of the license granted to Maxygen in this Section 4.1. 4.2 License to Intellectual Property. AgraQuest hereby grants Maxygen a non-exclusive, worldwide [***] license [***]. Maxygen sublicensees will be bound by the terms of the license granted to Maxygen in this Section 4.2. 4.3 AgraQuest Retained Rights. It is understood and agreed that the licenses granted to Maxygen and any of its sublicensees in Sections 4.1 and 4.2 shall not include the right of Maxygen or its sublicensees to use any Selected Strain (with or without modification) as a Biopesticide. AgraQuest also retains (i) the right to use the Selected Strains for any purpose and (ii) its intellectual property rights relating to the Selected Strains. 4.4 No License of Maxygen Property. No rights or licenses with respect to any intellectual property owned by Maxygen or its Affiliates are granted or will be deemed granted to AgraQuest under this Agreement. 5. PAYMENTS TO AGRAQUEST 5.1 Collection Access Fee. Maxygen will pay to AgraQuest a one-time Collection access fee of [***] within ten (10) business days of the Effective Date. 5.2 Milestones. 5.2.1 Commercial Development. Maxygen will pay to AgraQuest a milestone payment of [***] upon the commencement of commercial development by Maxygen or any of its sublicensees of each of its products that contain a gene isolated from a Selected Strain; provided, however, that milestone payments pursuant to this Section 5.2.1 shall [***]. The commencement of commercial development shall occur upon (i) for agricultural products, production of T2 transgenic seeds of the applicable product or (ii) for chemical products, production in a 200-liter fermenter of the applicable product. 5.2.2 Commercial Sale. Maxygen will pay to AgraQuest a milestone payment of [***] upon the first commercial sale by Maxygen or any of its sublicensees of each of its products that contain a gene isolated from a Selected Strain; provided, however, that milestone payments pursuant to this Section 5.2.2 shall [***]. 5.2.3 Gene Isolated from a Collection Strain. For the purposes of this Section 5.2, a "gene isolated from a Collection Strain" means an unmodified gene isolated from a Selected Strain (or a fragment thereof) or a modified form of a gene isolated from a Selected Strain (or a fragment thereof); provided, however, in each case that such gene or fragment thereof provides or allows an activity that cannot be obtained without such gene or fragment. 5.3 Reports and Payments 3 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. 5.3.1 Milestone Reports. Maxygen will provide AgraQuest with reports of the attainment of each milestone described in Section 5.2.1 and Section 5.2.2 as soon as practicable after such event and in any case within sixty (60) days of such event. 5.3.2 Milestone Payment. Concurrently with making the reports described in Section 5.3.1, Maxygen will pay the amounts due under Section 5.2.1 and Section 5.2.2. 6. FUTURE NEGOTIATIONS If Maxygen elects, on or before the third anniversary of the Effective Date, to commercialize a protein product (e.g., an enzyme) expressed from a gene isolated from a Selected Strain as a Biopesticide, then Maxygen will give written notice to AgraQuest of its intention; provided, however, that Maxygen shall have no obligation to breach any duty of confidentiality to a third party. In such event, AgraQuest and Maxygen will negotiate in good faith for a period of up to ninety (90) days from the date of Maxygen's notice, or such further period as the parties may agree in writing, to enter into a written agreement establishing the terms of such commercialization by AgraQuest. If no written agreement is executed within such time Maxygen will have no further obligation to AgraQuest with respect thereto. 7. REPRESENTATIONS 7.1 Sole Owner. AgraQuest represents and warrants that it is the (i) sole and exclusive owner of, or (ii) co-owner and exclusive licensee of, each of the Selected Strains and has the right to provide the Selected Strains and the Strain Information to Maxygen along with any other rights described herein, without violating its obligations to third parties. 7.2 No Payment Obligations. AgraQuest represents and warrants that there are no, and will not be any, payment or other obligations to third parties that would result from the use by Maxygen or its sublicensees of any Selected Strains or Derived Material. 7.3 Power and Authority. Each party represents and warrants that it has the legal power, authority and right to enter into this Agreement and to perform its respective obligations set forth herein. 7.4 No Conflict. Each party represents and warrants that as of the Effective Date of this Agreement it is not a party to any agreement or arrangement with any third party or under any obligation or restriction, including pursuant to its certificate of incorporation or bylaws, that in any way limits or conflicts with its ability to fulfill any of its obligations under this Agreement, and will not enter into any such agreement during the term of this Agreement. 7.5 Power to Grant Rights. Each party represents and warrants that it has the right to grant the other party hereto the rights provided under this Agreement. 8. CONFIDENTIALITY. 8.1 Confidential Information. Except as expressly provided herein, the parties agree that, for the term of this Agreement and for five (5) years thereafter, the receiving party shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose except for the purposes contemplated by this Agreement any Confidential Information furnished to it by the disclosing party hereto, except that to the extent that it can be established by the receiving party by written proof that such Confidential Information: (a) was already known to the receiving party, other than under an obligation of confidentiality, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving party; 4 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving party in breach of this Agreement; (d) was subsequently lawfully disclosed to the receiving party by a person other than a party hereto; or (e) was independently developed by the receiving party without use of or reference to Confidential Information. 8.2 Permitted Use and Disclosures. Each party may disclose Confidential Information disclosed to it by the other party: (a) to the extent such use or disclosure is reasonably necessary in complying with applicable law or regulation or legal process, provided that if a party is required to make any such disclosure of the other party's Confidential Information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the latter party of such disclosure and, will use reasonable efforts to secure confidential treatment of such information prior to its disclosure; or (b) is necessary in (x) filing or prosecuting patent applications, (y) prosecuting or defending litigation, or (z) making a permitted sublicense or otherwise exercising license rights expressly granted by the other party to it under this Agreement. 8.3 Public Disclosures. Either party may disclose that an Agreement exists between them; however, neither party can disclose the terms of this Agreement without written consent from the other party. 8.4 Confidential Terms. Notwithstanding Section 8.3, disclosures may be made to the extent required to advisors so long as the advisors are bound by confidentiality obligations comparable to the parties hereto. 9. INDEMNITY. 9.1 Maxygen Indemnity to AgraQuest. Maxygen shall indemnify, defend and hold harmless AgraQuest from and against any claims, actions or suits by a third party resulting in any Liability arising out of or resulting from (i) a breach of any representation of Maxygen in Section 7 or (ii) Maxygen's use of any Selected Strain or Derived Material or the development or manufacture, use, promotion, marketing, sale or other distribution of any product by Maxygen or its sublicensees including any Selected Strain or Derived Material, except to the extent such Liability resulted from AgraQuest's negligence or wrongdoing. 9.2 AgraQuest Indemnity to Maxygen. AgraQuest shall indemnify, defend and hold harmless Maxygen from and against any claims, actions or suits by a third party resulting in any Liability arising out of or resulting from (i) a breach of any representation of AgraQuest in Section 7 or (ii) Maxygen's use of any Selected Strain or Derived Material or the development or manufacture, use, promotion, marketing, sale or other distribution of any product by Maxygen or its sublicensees including any Selected Strain or Derived Material to the extent such Liability resulted from AgraQuest's negligence or wrongdoing. 10. TERMINATION. 10.1 Term. This Agreement shall be effective as of the Effective Date and, unless otherwise terminated earlier pursuant to the terms of this Section 10, shall continue in full force and effect until the [***] of the Effective Date. 10.2 Termination for Cause. Either party may terminate this Agreement in the event the other party has materially breached or defaulted in the performance of any of its obligations hereunder, and such default has continued for sixty (60) days after written notice thereof was provided to the breaching party by the nonbreaching party. 5 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. Any termination shall become effective at the end of such sixty (60) day period unless the breaching party has cured any such breach or default prior to the expiration of such period. 10.3 Effect of Termination. 10.3.1 Accrued Rights and Obligations. Termination of this Agreement for any reason shall not release any party hereto from any liability that, at the time of such termination, has already accrued to the other party or that is attributable to a period prior to such termination, nor preclude either party from pursuing any rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement. 10.3.2 Material Breach by Maxygen. If AgraQuest terminates this Agreement pursuant to Section 10.2, the licenses granted to Maxygen in Sections 4.1 and 4.2 shall terminate and the provisions of Sections 4.3 and 5 shall survive; provided, however, that if the material breach or default causing the termination relates only to certain Selected Strains and/or certain products, the licenses granted to Maxygen in Sections 4.1 and 4.2 shall terminate only in regard to such Selected Strains and/or products and shall survive as to all other Selected Strains and products. 10.3.3 Material Breach by AgraQuest. If Maxygen terminates this Agreement pursuant to Section 10.2: (i) AgraQuest shall pay to Maxygen an access termination fee equal to [***] pursuant to Section 2.1.1 and (ii) the provisions of Sections 4, 5 and 6 shall not survive. 10.3.4 Other Termination. If this Agreement terminates according to Section 10.1, the provisions of Sections 2.3, 4 and 5 shall survive the termination of this Agreement. 10.3.5 Survival. The provisions of Sections 3, 4.4, 7, 8, 9, 10 and 11 shall survive the expiration or termination of this Agreement for any reason. 11. MISCELLANEOUS. 11.1 Governing Law; Venue. This Agreement and any dispute arising from the performance or breach hereof shall be governed by and construed and enforced in accordance with the laws of the state of California, without reference to conflicts of laws principles. The exclusive venue of any dispute arising out of or in connection with the performance or breach of this Agreement shall be the California state courts in or U.S. district court for the County of San Mateo, CA, and the parties hereby consent to the personal jurisdiction of such courts. 11.2 Assignment; Successors. This Agreement shall not be assignable by either party to any third party without the written consent of the other party; except either party may assign this Agreement, without such consent, to (i) an Affiliate of such party; or (ii) an entity that acquires all or substantially all of the business or assets of such party, whether by merger, reorganization, acquisition, sale, or otherwise, which agrees in writing to be bound by the terms and conditions of this Agreement. The terms and conditions of this Agreement shall be binding on and inure to the benefit of the permitted successors and assigns of the parties. 11.3 Notices. Any notices, requests and other communications hereunder shall be in writing and shall be personally delivered or sent by international express delivery service, registered or certified mail, return receipt requested, postage prepaid, in each case to the respective address specified below, or such other address as may be specified in writing to the other party hereto: Maxygen: Maxygen, Inc. 515 Galveston Drive Redwood City, CA 94063 Attn: General Counsel AgraQuest: AgraQuest, Inc. 6 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. 1530 Drew Avenue Davis, CA 95616 Attn: President 11.4 Independent Contractors. The relationship of the parties is that of independent contractors. The parties are not deemed to be agents, partners or joint venturers of the other for any purpose as a result of this Agreement or the transactions contemplated hereby. 11.5 Further Assurances. Each party shall execute and cause to be delivered to the other party such instruments and other documents, and shall take such other actions, as such other party may reasonably request in order for the requesting party to obtain the full benefits of this Agreement and the transactions contemplated hereby. 11.6 Compliance with Laws. In exercising their rights under this license, the parties shall fully comply in all material respects with the requirements of any and all applicable laws, regulations, rules and orders of any governmental body having jurisdiction over the exercise of rights under this Agreement. 11.7 Entire Agreement; Amendment. This Agreement constitutes the entire agreement, both written and oral, with respect to the subject matter hereof, and supersedes all prior or contemporaneous understandings or agreements, whether written or oral, with respect to such subject matter. This Agreement may only be amended in a writing signed by both parties. 11.8 Headings. The captions to the Sections are not a part of this Agreement, but are included merely for convenience of reference and shall not affect its meaning or interpretation. 11.9 Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original and which together shall constitute one instrument. In Witness Whereof, the parties have executed and delivered this Agreement as of the date first above written. Maxygen, Inc. AgraQuest, Inc. By:/s/ John R. Bedbrook By: /s/ Pamela G. Marrone -------------------- ---------------------- Name:John R. Bedbrook Name: Pamela G. Marrone Title: President of Agriculture Title: President & CEO 7 [***] Confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R. Section 230.406. EX-10.9 8 dex109.txt LICENSE AGREEMENT AGRAQUEST, INC. AND DRAGOCO GERBERDING & CO. AG LICENSE AGREEMENT Certain confidential information contained throughout this document, marked by "[***]" has been omitted and filed with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406, General Rules and Regulations, Securities Act of 1933. LICENSE AGREEMENT THIS LICENSE AGREEMENT, including the exhibits referred to herein and attached hereto (the "Agreement"), effective as of July 1, 2001 (the "Effective Date"), is made and entered into by and between AgraQuest, Inc., a Delaware corporation having a principal place of business located at 1530 Drew Avenue, Davis, California 95616 ("AgraQuest") and Dragoco Gerberding & Co. AG having a principal place of business located at Dragocostrasse, D 36703 Holzminnden, Germany ("Licensee"). RECITALS A. WHEREAS AgraQuest owns or has the right to grant licenses under certain patents, patent applications, technology, trade secrets, data, know-how and other intellectual property relating to [***] insect repellant and any derivatives, analogs, or combinations with other repellant materials; and B. WHEREAS Licensee desires to obtain from AgraQuest, and AgraQuest is willing to grant to Licensee, a license under such technology and intellectual property for the development and commercialization of certain products and services under the terms and conditions herein. NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, AgraQuest and Licensee hereby agree as follows: 1. DEFINITIONS As used in this Agreement, the following terms shall have the meanings indicated: 1.1. "Confidential Information" shall have the meaning set forth in Section 10.1 below. 1.2. "Deductible Expenses" "shall mean the following items of expense actually incurred in connection with Sales of Licensed Products to the extent paid or allowed by Licensee or Sublicensees and included in accordance with recognized principles of accounting (consistently applied) in the gross sales price billed: (a) sales, use or turnover taxes; (b) excise, value added or other taxes, custom duties or consular fees; (c) transportation, freight, and handling charges, and insurance on shipments to customers; (d) trade, cash or quantity discounts or rebates to the extent actually granted; (e) agent fees or commissions; and (f) refunds and credits for any rejected or returned Licensed Products or because of retroactive price reductions, rebates or chargebacks. 1.3. "Field" shall mean the manufacture, use and sale of insect repellents in toiletries and cosmetics. 1.4. "Improvements" shall mean the improvements, modifications, or enhancements to the Licensed Patents. 1.5. "Joint Inventions" means inventions made or conceived jointly by or for employees of AgraQuest and Licensee during the term of this Agreement and which, under principles arising under the patent laws and regulations of the United States governing inventorship, would be found to be jointly [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 1 invented by AgraQuest and Licensee, and all intellectual property and proprietary rights therein, thereto and thereunder. 1.6. "Licensed Patents" shall mean those patents, inventors' certificates and patent applications set forth in Exhibit A, together with any renewal, division, continuation, continued prosecution application or continuation-in-part of any of such patents, certificates and applications, any and all patents or certificates of invention issuing thereon, and any and all reissues, reexaminations, extensions, divisions, renewals of or to any of the foregoing, and any foreign counterparts of any of the foregoing. 1.7. "Licensed Product" shall mean any material, composition, product, device, or procedure the manufacture, use or sale of which would infringe a Valid Claim in the country of such manufacture, use or sale, but for a license granted hereunder. 1.8. "Net Revenues" shall mean the combined amounts (whether in cash or in non-cash consideration) received or invoiced by Licensee and Sublicensees, whichever is earlier, from Sales of Licensed Products to third parties, less Deductible Expenses. 1.9. "Sale" or "Sold" shall mean the sale, transfer, exchange or other disposition of Licensed Products by or for Licensee of a Sublicensee whether by gift or otherwise, including but not by way of limitation, the use of Licensed Products. Any commercial use of a Licensed Product by Licensee or a Sublicensee shall be considered a Sale hereunder for accounting and royalty purposes. Sales of Licensed Products shall be deemed consummated upon the first to occur of: (a) receipt of payment from the purchaser; (b) delivery of Licensed Products to the purchaser or a common carrier at the risk of the purchaser; (c) release of Licensed Products from consignment; (d) if deemed sold by use, when first put to such use; or (e) if otherwise transferred, exchanged or disposed of whether by gift or otherwise when such transfer, exchange, gift or other disposition occurs 1.10. "Sublicensee(s)" shall mean any third party to whom Licensee has sublicensed any or all of the rights in, to and under the Licensed Patents licensed to Licensee hereunder. 1.11. "Sublicense Income" shall mean any proceeds, whether cash or non- cash consideration, received by Licensee in connection with a grant of a sublicense to the Licensed Patents, including without limitation any license fee payments, milestone payments, royalty payments or other cash revenues related to such sublicense grant. For the avoidance of doubt, Sublicense Income does not include amounts received by Sublicensee for Sales of Licensed Products, which shall constitute Net Revenues. In addition, Sublicense Income shall not include amounts received (a) in consideration of equity or dept securities of Licensee (with the exception of equity premiums) or (b) in consideration for the license or sublicense of any intellectual property other than Licensed Patents. [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 2 1.12. "Valid Claim" shall mean (a) any claim of an issued and unexpired patent within the Licensed Patents which has not been held unenforceable or invalid by a court or other governmental agency of competent jurisdiction in an unappealed or unappealable decision, and which has not been disclaimed or admitted to be invalid or unenforceable through reissue or otherwise, or (b) a claim in a pending patent application within the Licensed Patents. 2. LICENSES 2.1. License Grant. Subject to the terms and conditions of this Agreement, AgraQuest hereby grants to Licensee a [***], royalty bearing, exclusive license, including the right to grant sublicenses in accordance with Section 2.3, under the Licensed Patents to [***] (and to have such rights exercised on Licensee's behalf by third parties). 2.2. Ownership; Reservation of Rights. Licensee acknowledges and agrees that AgraQuest shall retain ownership of the Licensed Patents, and the Improvements, subject only to the rights and licenses expressly granted herein. Except as expressly provided herein, no right, title, or interest is granted by AgraQuest to Licensee, implied or otherwise, in to or under the Licensed Patents, or the Improvements. 2.3. Sublicenses. Subject to the terms and conditions of this Agreement, Licensee shall have the right to sublicense any or all of the rights granted to Licensee under Section 2.1; provided that any such sublicense (a) shall be made pursuant to a binding and written agreement which protects AgraQuest's interests and rights in its proprietary information and intellectual property to at least the same extent as this Agreement, (b) shall contain provisions for the benefit of AgraQuest substantially similar in language and scope to Articles 4, 5, 8, 9, 10, and 11, and Sections 2.3, 3.3, 7.3 of this Agreement and (c) shall be of no greater scope than the license granted to Licensee in Section 2.1. Licensee shall provide AgraQuest with a copy of each fully executed sublicense agreement in which Licensee sublicenses any or all of the rights set forth in Section 2.1 which Licensee may enter into during the term of this Agreement. 3. PAYMENTS AND RELATED OBLIGATIONS 3.1. Royalty Payments. In consideration for the rights and licenses granted pursuant to Article 2 above, Licensee shall make royalty payments to AgraQuest as follows: 3.1.1. Licensee shall pay to AgraQuest each calendar quarter running royalties in the amount of [***]. 3.1.2. Licensee shall pay to AgraQuest each calendar quarter running royalties in the amount of [***]. 3.1.3. [***] shall be due or payable because the manufacture, use, offer for sale, sale or import of any Licensed Product is or shall be covered by more than one Valid Claim. 3.2. Royalty Term. Licensee's obligation to pay royalties to AgraQuest under Section 3.1 shall continue on a Licensed Product by Licensed Product, country by country basis, until the expiration or final determination of invalidity of the last Valid Claim within the Licensed Patents. Notwithstanding the above, Licensee shall be obligated after expiration of the royalty term to pay any royalty amounts that accrued under Section 3.1 prior to such expiration. Licensee acknowledges and agrees that Licensee shall [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 3 be solely responsible for paying all royalties owed to AgraQuest on account of Net Revenues and Sublicensee Income by any and all Sublicensees. 3.3. Royalty Reports. Licensee shall deliver to AgraQuest, within [***] days after the end of each calendar quarter in which Licensed Products are Sold, a written report setting forth in reasonable detail (a) the calculation of the royalties payable to AgraQuest for such calendar quarter under Section 3.1, including the number and types of Licensed Products Sold and distributed in each country, gross sales, Net Revenues thereof and Deductible Expenses, and (b) all Sublicensee Income received on a Sublicensee by Sublicensee basis and further organized based on the type of payment (e.g., royalty, license fee, milestone). 3.4. Payment Terms. 3.4.1. Licensee shall pay all royalties due and payable on [***] pursuant to Section 3.1.1 within [***] days after the last day of each quarter in which the applicable Licensed Products are Sold by Licensee or Sublicensees. 3.4.2. Licensee shall pay all royalties due and payable on Sublicensee Income pursuant to Section 3.1.2 within [***] days after the last day of each quarter in which such Sublicense Income is due and payable to Licensee. 3.4.3. Except as otherwise expressly provided herein, all other payments due to AgraQuest pursuant to the terms and conditions of this Agreement shall be due and payable within [***] after receipt of a proper invoice therefor from AgraQuest. Any sums not paid when due, including amounts determined to be due under Section 3.6, shall automatically accrue interest from the date when due until actually paid at a rate of [***]. 3.4.4. All payments made by Licensee under this Agreement shall be made in United States dollars, and such payments shall be made by check or wire transfer to one or more bank accounts to be designated in writing by AgraQuest. In the event that Licensed Products are sold in currencies other than United States dollars, Net Revenues shall be calculated by Licensee by conversion of foreign currency to U.S. dollars at the conversion rate existing in the United States (referencing the "U.S. dollar noon buying rates", or its equivalent, published in the Wall Street Journal) on the last working day of each period during which royalties are calculated, net of applicable exchange related charges, or otherwise in accordance with generally accepted accounting principles consistently applied. 3.5. Taxes. Licensee shall pay, and shall indemnify and hold AgraQuest harmless from, all taxes, duties and levies directly imposed by all foreign, federal, state, local or other taxing authorities (including, without limitation, export, sales, use, excise, and value-added taxes) based on the transactions or payments under this Agreement, other than taxes imposed or based on AgraQuest's net income. All amounts payable hereunder by Licensee shall be paid without deduction or withholding for or on account of any present or future tax, levy, impost, fee, assessment, deduction or charge by any taxing authority. Notwithstanding the foregoing, if Licensee is required by law to deduct or withhold any taxes, levies, imposts, fees, assessments, deductions or charges from or in respect of any amounts payable hereunder to AgraQuest, (a) Licensee shall pay the relevant taxation authority the minimum amounts necessary to comply with the applicable law, (b) Licensee shall make such payment prior to the date on which interest or penalty is attached thereto, and (c) the amounts payable by Licensee to AgraQuest under this Agreement shall be increased as may be necessary so that, after Licensee makes all required deductions or [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 4 withholdings, AgraQuest shall receive amounts equal to the amounts it would have received had no such deductions or withholdings been required. 3.6. Inspection of Books and Records. Licensee shall maintain, and require its Sublicensees to maintain, complete and accurate books and records which enable the calculation of royalties and other payments payable hereunder to be verified. Licensee and its Sublicensees shall retain such books and records for each quarterly period for ten (10) years after the submission of the corresponding report under this Section 3.6. Upon two weeks prior notice to Licensee, AgraQuest or independent accountants selected by AgraQuest may have access to such books and records to conduct a review or audit no more than twice per calendar year at AgraQuest's discretion, for the sole purpose of verifying the accuracy of Licensee's payments, any Sublicensees' payments and Licensee's compliance with this Agreement. Such access shall be permitted during Licensee's normal business hours during the term of this Agreement and for three (3) years after the expiration or termination of this Agreement. In the event of any underpayment, Licensee shall promptly pay to AgraQuest the difference between the amount actually paid by Licensee and the amount determined to be owing under this Section 3.6. Any such inspection or audit shall be at AgraQuest's expense, unless the inspection or audit results in a determination that Licensee's payment obligations to AgraQuest have been understated, or that Licensee's payments have been underpaid, by more than five percent (5%) of the amount actually paid by Licensee for the period examined, in which case Licensee shall pay all reasonable costs and expenses incurred by AgraQuest in the course of making such determination, including the fees and expenses of such accountant. 4. DUE DILIGENCE 4.1. Development Reports. Licensee shall deliver to AgraQuest, within [***] following the Effective Date, a written report setting forth in reasonable detail (a) the identity of all Licensed Products or prototype products in research or manufacturing, (b) the stage of development for each such Licensed Product or prototype licensed and (c) the partnership or collaboration status, if any, of Licensee's efforts in connection with such Licensed Products. 4.2. Efforts. Licensee agrees to [***] develop and commercialize Licensed Products and to obtain such approvals as may be necessary for the sale of Licensed Products in the United States and in other major countries. Licensee may conduct such activities itself or through third parties. Without limiting and in addition to the foregoing, to satisfy its diligence obligations under this Article 4, Licensee must (a) provide written reports to AgraQuest in accordance with Section 4.1 and (b) upon AgraQuest's written and reasonable request, demonstrate to AgraQuest's satisfaction that it is proceeding with a Licensed Product in a manner consistent with moving such. If AgraQuest determines that Licensee is not making suitable progress towards commercialization of Licensed Products, AgraQuest shall have the right in its sole discretion to terminate this Agreement pursuant to Section 9.2. 5. IMPROVEMENTS AND JOINT INVENTIONS. 5.1. Disclosure. As soon as reasonably possible, either upon creation, development of an Improvement or conception or reduction to practice of a Joint Invention, as the case may be, each party shall disclose the same in writing to the other. All such disclosures shall be maintained in confidence by the receiving party. 5.2. Improvements. [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 5 5.2.1. In the event that AgraQuest develops or creates Improvements, and subject to the terms and conditions of this Agreement, [***]. 5.2.2. In the event that Licensee develops or creates Improvements, and subject to the terms and conditions of this Agreement, Licensee agrees to grant and hereby grants to AgraQuest a worldwide, royalty-free, sublicensable, non-cancellable, exclusive right and license, under Licensee's right, title and interest to and under the Improvements to make, use, sell, distribute, offer to sell, import and export such Improvements (and to have such rights exercised on AgraQuest's behalf by third parties) outside the Field. 5.3. Patent Prosecution. 5.3.1. AgraQuest shall have the initial right but not the obligation to file, prosecute and maintain all patents, patent applications and inventors' certificates claiming or covering Joint Inventions (the "Joint Patents"). In the event that AgraQuest elects to file, prosecute and maintain a Joint Patent, (a) Licensee agrees to assign and hereby assigns to AgraQuest all of it right, title and interest in and to such Joint Patent and (b) AgraQuest agrees that such Joint Patent shall be included in the license granted under Section 2.1 herein. AgraQuest shall add such Joint Patent to Exhibit A attached hereto. AgraQuest shall provide Licensee with all material documentation and correspondence from, sent to or filed with patent offices regarding such Joint Patents and with a reasonable opportunity to review and comment upon all filings with such patent offices in advance. [***]. All expenses to be paid or reimbursed by Licensee pursuant to this Section 5.3.1 shall be obligations that are separate and apart from other payment obligations described in this Agreement and shall be invoiced and paid separately. 5.3.2. In the event that AgraQuest elects to not to file, prosecute and maintain a Joint Patent, or thereafter elects not to continue prosecution of any such patent application, or elects not to maintain any patent that may issue therefrom Licensee shall have the right but not the obligation, at Licensee's option and expense, to file for and prosecute such patent application and maintain such patent. In such event, (a) AgraQuest agrees to assign and hereby assigns to AgraQuest all of it right, title and interest in and to such Joint Patent and (b) Licensee agrees to grant and hereby grants to AgraQuest an exclusive, royalty-free, non-cancellable, worldwide license in, to and under Licensee's right, title and interest to such Joint Patent outside the Field, it being understood that Licensee retains exclusively all rights under such Joint Patent within the Field. Licensee shall provide AgraQuest with all material documentation and correspondence from, sent to or filed with patent offices regarding such Joint Patents and with a reasonable opportunity to review and comment upon all filings with such patent offices in advance. [***]. 5.4. Cooperation. Each party will cooperate with the other party to execute all lawful papers and instruments and to make all rightful oaths and declarations as may be necessary in the preparation and prosecution of all patents and other filings referred to in this Article 5. 6. PATENT MAINTENANCE AND ENFORCEMENT 6.1. Patent Enforcement. 6.1.1. If either party hereto becomes aware that any Licensed Patents or Joint Patents are being or have been infringed by any third party in the Field, such party shall promptly notify the other party hereto in writing describing the facts relating thereto in reasonable detail. AgraQuest shall have the [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 6 initial right, but not the obligation, as to Licensee to institute, prosecute and control any action, suit or proceeding (an "Action") with respect to such infringement in the Field, including any declaratory judgment action, at its expense, using counsel of its choice and Licensee shall cooperate reasonably with AgraQuest, at AgraQuest's request, in connection with any such Action. [***]. 6.1.2. In the event AgraQuest fails to initiate any Action involving the Licensed Patents or Joint Patents within [***] of receiving notice of any commercially significant infringement, Licensee shall have the right, but not the obligation, to initiate and/or maintain such Action at its expense, and AgraQuest shall cooperate reasonably with Licensee, at Licensee's request, in connection with any such Action. [***]. 6.1.3. If Licensee initiates and maintains an infringement action on AgraQuest's behalf pursuant to Section 6.1.2 with respect to the infringement of any Licensed Patents or Joint Patents, Licensee' reasonable and customary expenses for such action (including attorneys' fees and expert fees) shall be [***]. 6.1.4. If Licensee initiates and maintains an infringement action on AgraQuest's behalf pursuant to Section 6.1.2, and subsequently decides to abandon such an action other than pursuant to a settlement with the alleged infringer, Licensee shall give AgraQuest timely notice so that AgraQuest or its licensor may, at its option and if it so desires, continue such action. 6.2. Cooperation. In any Action, the parties shall provide each other with reasonable cooperation and assistance, including agreeing to be named as a party to such Action, and, upon the request and at the expense of the party bringing such Action, the other party shall make available, at reasonable times and under appropriate conditions, all relevant personnel, records, papers, information, samples, specimens, and the like in its possession. Notwithstanding any other provision of this Article 6, neither party shall make any settlements of any suit, proceeding or action relating to an infringement of any Licensed Patents in the Field or Joint Patents that would materially and adversely affect the other party or the rights and licenses granted hereunder without first obtaining such other party's prior written consent, such consent not to be unreasonably withheld or delayed. 7. REPRESENTATIONS, WARRANTIES AND COVENANTS 7.1. Representations, Warranties and Covenants of AgraQuest. AgraQuest represents and warrants that, as of the Effective Date: 7.1.1. AgraQuest is a corporation, duly organized, validly existing and in good standing under the laws of its state of incorporation; 7.1.2. AgraQuest has the right and authority to grant the rights and licenses granted to Licensee under this Agreement; 7.1.3. The execution, delivery and performance of this Agreement has been duly authorized by all necessary corporate action on the part of AgraQuest. 7.2. Representations, Warranties and Covenants of Licensee. Licensee represents, warrants and covenants that, as of the Effective Date: [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 7 7.2.1. Licensee is a corporation, duly organized validly existing and in good standing under the laws of its state of incorporation; 7.2.2. The execution, delivery and performance of this Agreement has been duly authorized by all necessary corporate action on the part of Licensee; and 7.2.3. Licensee will not practice any of the rights in, to or under the Licensed Patents or Joint Patents outside of the Field. 7.3. Nothing in this Agreement shall be construed as conferring, by implication, estoppel or otherwise, any license or rights under any patents of AgraQuest other than the Licensed Patents, regardless of whether such patents are dominant or subordinate to the Licensed Patents. 7.4. Disclaimer. EXCEPT AS EXPRESSLY PROVIDED FOR IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY DISCLAIMS, ANY AND ALL REPRESENTATIONS AND WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT AND ANY WARRANTY ARISING OUT OF PRIOR COURSE OF DEALING AND USAGE OF TRADE. 8. INDEMNIFICATION 8.1. Indemnity. Licensee shall indemnify, defend and hold harmless AgraQuest and its directors, officers, employees, agents and consultants (each an "Indemnitee") from and against any and all liabilities, damages, losses, costs or expenses (including reasonable attorneys' and professional fees and other expenses of litigation and/or arbitration) (a "Liability") resulting from or arising out of a claim, suit or proceeding brought by a third party against an Indemnitee for personal injury, death, product liability or property damage arising out of or related to the manufacture, use, or sale of Licensed Products except to the extent such claim is caused by the gross negligence or willful misconduct of AgraQuest. 8.2. Procedure. For purposes of Section 8.1, the Indemnitee shall give prompt written notice to Licensee of any claims, suits or proceedings by third parties which may give rise to any claim for which indemnification may be required under this Article 8. Licensee shall be entitled to assume the defense and control of any such claim at its own cost and expense; provided, however, that the Indemnitee shall have the right to be represented by its own counsel at its own cost in such matters. Neither Licensee nor the Indemnitee shall settle or dispose of any such matter in any manner which would adversely affect the rights or interests of the other party (including the obligation to indemnify hereunder) without the prior written consent of the other party, which shall not be unreasonably withheld or delayed. Each party shall reasonably cooperate with the other party and its counsel in the course of the defense of any such suit, claim or demand, such cooperation to include without limitation using reasonable efforts to provide or make available documents, information and witnesses. 9. TERM AND TERMINATION 9.1. Term. The term of this Agreement shall commence on the Effective Date and continue in full force and effect until expiration or termination of Licensee' royalty payment obligations as [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 8 specified under Section 3.1, unless and until terminated at an earlier date in accordance with Section 9.2 below. 9.2. Termination for Cause. If either party materially breaches any term or condition of this Agreement, including without limitation Sections 4.2 and 7.2 and the failure of Licensee to meet the minimum royalty payment of [***], the other party may notify the breaching party in writing of such breach, setting forth the nature of the breach in reasonable detail. [***]. 9.3. Effect of Termination; Survival. Section 9.3 and Articles 3 (to the extent provided therein), 7 (to the extent provided therein), 8, 9, 10 and 11 shall survive expiration or termination of this Agreement. [***]. All other provisions of this Agreement shall be of no further force and effect upon such expiration or termination of this Agreement. Notwithstanding the foregoing, expiration or termination of this Agreement shall not release either party from any obligation that has accrued prior to such expiration or termination, including without limitation any obligation to pay any amount which became due and payable under the terms and conditions of this Agreement prior to such expiration or termination. 10. CONFIDENTIAL INFORMATION 10.1. Confidentiality. In connection with this Agreement, the parties will provide to each other Confidential Information, including but not limited to each party's know-how, invention disclosures, proprietary materials and/or technologies, economic information, business or research strategies, trade secrets and material embodiments thereof. As used herein, "Confidential Information" means any information of a confidential or proprietary nature disclosed by a party to this Agreement to the other party in written or oral form. 10.2. Confidentiality and Non-Use. The recipient of a disclosing party's Confidential Information shall maintain such Confidential Information in confidence, and shall disclose such Confidential Information only to those of its employees, agents, consultants, sublicensees, attorney's, accountants and advisors who have a reasonable need to know such Confidential Information and who are bound by obligations of confidentiality and non-use no less restrictive then those set forth herein. The recipient of the disclosing party's Confidential Information shall use such Confidential Information solely to exercise its rights and perform its obligations under this Agreement (including, without limitation, the right to use and disclose such Confidential Information in regulatory applications and filings), unless otherwise mutually agreed in writing. The recipient of the other party's Confidential Information shall take the same degree of care that it uses to protect its own confidential and proprietary information of a similar nature and importance (but in any event no less than reasonable care). 10.3. Exclusions. Confidential Information shall not include information that: (a) is in the recipient's possession prior to receipt from the disclosing party as demonstrated by contemporaneous documentation; (b) is or becomes, through no fault of the recipient, publicly known; (c) is furnished to the recipient by a third party without breach of a duty to the disclosing party; (d) is independently developed by the recipient without use of, application of or reference to the disclosing party's Confidential Information as demonstrated by contemporaneous documentation. 10.4. Legal Disclosures. It shall not be a violation of this Article 10 to disclose Confidential Information required to be disclosed under applicable law, but such disclosure shall be only for the sole purpose of and solely to the extent required by such law, and provided that the recipient, to the extent possible, shall give the disclosing party prior written notice of the proposed disclosure and cooperate fully [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 9 with the disclosing party to minimize the scope of any such required disclosure, to the extent possible and in accordance with applicable law. 10.5. Termination. All obligations of confidentiality and non-use imposed under this Article 10 shall expire three (3) years after the termination of this Agreement. 11. MISCELLANEOUS 11.1. Use of Name. Licensee agrees that it shall not use the name of the AgraQuest in any advertising or publicity material, or make any form of representation or statement which would constitute an express or implied endorsement by AgraQuest of any Licensed Product, and that it shall not authorize others to do so, without first having obtained written approval from AgraQuest, except as may be required by governmental law, rule or regulation. 11.2. Press Releases. The parties may agree to issue a joint press release upon execution of this Agreement or as promptly as practicable thereafter. The content of any such joint press release will be agreed upon by both parties. 11.3. Marking Requirement. Licensee agrees to mark the appropriate patent number or numbers on all Licensed Products made or Sold in accordance with all applicable governmental laws, rules and regulations to the extent reasonably possible, and to require its Sublicensees to do the same. 11.4. Governing Law. This Agreement shall be governed by, and construed and interpreted, in accordance with the internal laws of the State of California (as permitted by Section 1646.5 of the California Civil Code or any similar successor provision) without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties. 11.5. Export Regulations. Licensee agrees that this Agreement is subject in all respects to the laws and regulations of the United States of America, including the Export Administration Act of 1979, as amended, and any regulations thereunder. 11.6. Limitation of Liability. EXCEPT WITH RESPECT TO EACH PARTY'S INDEMNITY OBLIGATIONS UNDER ARTICLE 8 AND CONFIDENTIALITY OBLIGATIONS UNDER ARTICLE 11, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT, PUNITIVE OR SPECIAL DAMAGES OF THE OTHER PARTY ARISING OUT OF OR RELATED TO THIS AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF LIABILITY EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 11.7. Arbitration. All disputes arising between the parties under this Agreement will be settled by arbitration conducted in the English language in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The parties will cooperate with each other in causing the arbitration to be held in as efficient and expeditious a manner as practicable. Any arbitration proceeding instituted under this Agreement will be brought in a mutually agreeable neutral territory. Any award rendered by the arbitrators will be final and binding upon the parties hereto. Judgment upon the award may be entered in any court of record of competent jurisdiction. Each party will pay its own expenses of arbitration and the expenses of the arbitrators will be equally shared unless the arbitrators assess as part of their award all or any part of the arbitration expenses of one party (including reasonable attorneys' fees) against the other party. Each party irrevocably and unconditionally consents to the jurisdiction of any [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 10 such proceeding and waives any objection that it may have to personal jurisdiction or the laying of venue of any such proceeding. 11.8. Force Majeure. Neither party shall be held responsible for any delay or failure in performance (with the exception of the payment of money) hereunder to the extent caused by strikes, embargoes, unexpected government requirements, civil or military authorities, acts of God, earthquake, or by the public enemy or other causes reasonably beyond such party's control and without such party's fault or negligence; provided that the affected party notifies the unaffected party as soon as reasonably possible, and resumes performance hereunder as soon as reasonably possible following cessation of such force majeure event. 11.9. Independent Contractors. The relationship of AgraQuest and Licensee established by this Agreement is that of independent contractors. Nothing in this Agreement shall be constructed to create any other relationship between AgraQuest and Licensee. Neither party shall have any right, power or authority to bind the other or assume, create or incur any expense, liability or obligation, express or implied, on behalf of the other. 11.10. Assignment. The parties agree that their rights and obligations under this Agreement may not be transferred or assigned to a third party without the prior written consent of the other party hereto. Notwithstanding the foregoing, a party may transfer or assign its rights and obligations under this Agreement, without consent, to a successor to all or substantially all of its business or assets relating to this Agreement whether by sale, merger, operation of law or otherwise. Any assignment not in conformance with this Section 12.10 shall be null, void and of no legal effect. 11.11. Notices. Any notice, report, communication or consent required or permitted by this Agreement shall be in writing and shall be sent (a) by prepaid registered or certified mail, return receipt requested, (b) by overnight express delivery service by a nationally recognized courier, or (c) via confirmed facsimile or telecopy, followed within five (5) days by a copy mailed in the preceding manner, addressed to the other party at the address shown below or at such other address for which such party gives notice hereunder. Such notice will be deemed to have been given when delivered or, if delivery is not accomplished by some fault of the addressee, when tendered. If to AgraQuest: AgraQuest, Inc. 1530 Drew Avenue Davis, CA 95616 Attn: Dr. Pamela G. Marrone Main: (530) 750-0150 Facsimile: (530) 750-0153 If to License e: Dragoco, Inc. One Gordon Drive Totowa, New Jersey 07512 Attn: Klaus Stanzl, Ph.D Facsimile: _____________ 11.12. Modification; Waiver. This Agreement may not be altered, amended or modified in any way except by a writing signed by both parties. The failure of a party to enforce any rights or provisions of the Agreement shall not be construed to be a waiver of such rights or provisions, or a waiver by such [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 11 party to thereafter enforce such rights or provision or any other rights or provisions hereunder. No waiver shall be effective unless made in writing and signed by the waiving party. 11.13. Severability. If any provision of any provision of this Agreement shall be found by a court to be void, invalid or unenforceable, the same shall be reformed to comply with applicable law or stricken if not so conformable, so as not to affect the validity or enforceability of this Agreement; provided that no such reformation or striking shall be effective if the result materially changes the economic benefit of this Agreement to either AgraQuest or Licensee. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be void, invalid or unenforceable, and reformation or striking of such provision would materially change the economic benefit of this Agreement to either AgraQuest or Licensee, AgraQuest and Licensee shall modify such provision in accordance with this Section 11.13 to obtain a legal, valid and enforceable provision and provide an economic benefit to AgraQuest and Licensee that most nearly effects AgraQuest's and Licensee' intent on entering into this Agreement. 11.14. Entire Agreement. The parties hereto acknowledge that this Agreement, together with the exhibits attached hereto, set forth the entire agreement and understanding of the parties as to the subject matter hereto, and supersedes all prior and contemporaneous discussions, agreements and writings in respect hereto. 11.15. Headings. The article, section and paragraph headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of the articles, sections or paragraphs to which such headings apply. 11.16. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 12 IN WITNESS WHEREOF, AgraQuest and Licensee have executed this Agreement by their respective duly authorized representatives. AgraQuest, Inc. DragocoGerberding & Co.AG ("AgraQuest") ("Licensee") By: /s/ Pam Marrone By: /s/ Klaus Stanzl --------------------------- -------------------------- Name: Pam Marrone Name: Klaus Stanzl --------------------------- -------------------------- Title: President, CEO Title: Corp. Vice President --------------------------- -------------------------- 8/20/01 Head of Cosmetics Division Aug. 20, 2001 Worldwide [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 13 Exhibit A Licensed Patents ---------------- [***] [***] [***] [***] [***] [***] Confidential information has beem omitted and filed separately with the Securities and Exchange Commission pursuant to 17 C.F.R (S) 230.406. 14 EX-21.1 9 dex211.txt LIST OF SUBSIDIARIES Exhibit 21.1 AgraQuest, Inc. List of Subsidiaries 1. AgraQuest de Mexico, S.A. de C.V. (Mexico) EX-23.2 10 dex232.txt CONSENT OF ERNST AND YOUNG LLP Exhibit 23.2 Consent of Ernst & Young LLP, Independent Auditors We consent to the references to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated January 19, 2001 (except for the second paragraph of Note 1, as to which the date is January 11, 2002) in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-66732) and related Prospectus of AgraQuest, Inc. for the registration of 4,025,000 shares of its common stock. /s/ Ernst & Young LLP Sacramento, California January 11, 2002 -----END PRIVACY-ENHANCED MESSAGE-----