-----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, DSBTKjX4StxOo1dXIEIgvm/AWUbVfEaKKevDjKVs7OFl+rNdfWw+NsDBVt+Bnr46 arywkYLejrYyXwWkOWok+A== 0000898430-00-000318.txt : 20000210 0000898430-00-000318.hdr.sgml : 20000210 ACCESSION NUMBER: 0000898430-00-000318 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20000209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIVERSA CORP CENTRAL INDEX KEY: 0001049210 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 223297375 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-92853 FILM NUMBER: 528172 BUSINESS ADDRESS: STREET 1: 10665 SORRENTO VALLEY ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 S-1/A 1 AMENDMENT NO. 4 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 2000 REGISTRATION NO. 333-92853 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- DIVERSA CORPORATION (NAME OF ISSUER IN ITS CHARTER)
DELAWARE 8731 22-3297375 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
10665 SORRENTO VALLEY ROAD SAN DIEGO, CA 92121 (858) 623-5106 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- JAY M. SHORT, PH.D. CHIEF EXECUTIVE OFFICER DIVERSA CORPORATION 10665 SORRENTO VALLEY ROAD SAN DIEGO, CA 92121 (858) 623-5106 (NAME, ADDRESS, TELEPHONE NUMBER OF AGENT FOR SERVICE) COPIES TO: M. WAINWRIGHT FISHBURN, JR., ESQ. FAYE H. RUSSELL, ESQ. NANCY DENYES KRUEGER, ESQ. MARIA P. SENDRA, ESQ. DAVID B. BERGER, ESQ. BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD LLP 550 WEST "C" STREET 4365 EXECUTIVE DRIVE, SUITE 1100 SAN DIEGO, CALIFORNIA 92101 SAN DIEGO, CALIFORNIA 92121 (619) 234-1966 (858) 550-6000
--------------- Approximate date of commencement of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. --------------- If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY + +NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN + +OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY + +THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED FEBRUARY 9, 2000 PRELIMINARY PROSPECTUS 7,000,000 SHARES [LOGO OF DIVERSA] COMMON STOCK ----------- This is an initial public offering of 7,000,000 shares of common stock of Diversa Corporation. We are selling all of the shares of common stock offered under this prospectus. We expect the public offering price for our common stock to be between $20.00 and $22.00 per share. There is currently no public market for our common stock. We have applied to have our common stock approved for listing on the Nasdaq National Market under the symbol "DVSA." SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -----------
Per Share Total -------- -------- Public offering price........................................ $ $ Underwriting discounts and commissions....................... $ $ Proceeds to Diversa.......................................... $ $
----------- We have granted the underwriters a 30-day option to purchase up to an additional 1,050,000 shares of common stock from us at the initial public offering price less the underwriting discount. The underwriters are severally underwriting the shares being offered. The underwriters expect to deliver the shares in New York, New York, on , 2000. ----------- BEAR, STEARNS & CO. INC. CHASE H&Q DEUTSCHE BANC ALEX. BROWN The date of this prospectus is , 2000 [GATEFOLD COVER] [Gatefold Cover: A diagram entitled "Diversa: Innovation from BioDiversity and Gene Evolution" depicting alternative ecosystems, progressing to multiple images depicting the discovery, development and manufacture of novel enzymes and other biologically active compounds through our proprietary processes and technologies, which then leads to photographs representing our four target markets. [Inside Front Cover: Heading reading "Diversa Corporation discovers and develops novel enzymes and other biologically active compounds from diverse environmental sources for use in agricultural, chemical processing, industrial and pharmaceutical applications. We have commercialized our first product for the industrial market and have multiple projects in various stages of development in our target markets," followed by a diagram representing our discovery and evolution processes and technologies, which then leads to photographs representing our four target markets. PROSPECTUS SUMMARY DIVERSA CORPORATION You should read the following summary together with the more detailed information regarding our company and our common stock being sold in this offering and our financial statements and the notes to our financial statements appearing elsewhere in this prospectus before making an investment decision. You should also carefully consider the information discussed in "Risk Factors." OUR BUSINESS AND TECHNOLOGIES We believe that we are a global leader in discovering and developing novel enzymes and other biologically active compounds from diverse environmental sources for use in agricultural, chemical processing, industrial and pharmaceutical applications. Enzymes are proteins that catalyze, or facilitate, one or more chemical reactions. Our processes significantly speed the discovery and development of such commercially valuable new enzymes and biologically active small molecules. For example, we launched our first product for an industrial application within two years of project initiation. Our processes are designed to help our strategic partners and customers reduce cost, reduce waste, improve yield and enhance the quality of end products and manufacturing. We believe that the integration of our capabilities differentiates us from our competitors. We accomplish this integration utilizing our proprietary methods in the following manner: . We collect genetic material from organisms that have not previously been cultured in the laboratory found in diverse natural environments; . We isolate, catalog and store genes and gene pathways, or groups of genes that produce enzymes that act together to synthesize a molecule, in vast DNA libraries; . We screen these libraries to analyze more than a billion genes per day to identify potentially useful enzymes and compounds; . We optimize these enzymes and compounds by applying our DirectEvolution(R) genetic modification technologies, including our Gene Site Saturation Mutagenesis(TM) and GeneReassembly(TM) technologies; and . We develop novel host organisms for the manufacture of resulting products. We believe our ability to construct vast libraries from DNA samples collected from organisms in diverse environments is an important factor of our success. Our use of minute DNA samples results in minimal impact to the surrounding environment and has enabled us to enter into numerous formal genetic resource access agreements. We estimate that our environmental gene libraries currently contain the complete genomes of over 1 million unique microorganisms. Our ultra high-throughput screening technologies, such as SingleCell(TM) screening, and our enrichment technologies, such as biopanning, allow for the rapid discovery and identification of genes with desired biological activity or specific DNA sequences. Our DirectEvolution technologies, Gene Site Saturation Mutagenesis and GeneReassembly, enable us to modify the DNA sequences of genes in order to optimize new genes for commercial applications. We use our Gene Site Saturation Mutagenesis technology to create a family of related genes that all differ from a parent gene by a single amino acid change at each defined position. We use our GeneReassembly technologies for the reassembly of related genes from two or more different species to create a large population of new gene variants. The new genes created through these technologies can then be screened for one or more desired characteristics. We intend to commercialize products discovered or developed utilizing our technologies, both independently and in collaboration with strategic partners. We have successfully commercialized our first product and we have 42 other projects with multiple production applications in various stages of development. 1 Our strategic partners are market leaders across multiple industries and include Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and Finnfeeds International Limited. These partners typically fund research costs and provide various types of payments, which may include exclusivity payments, technology access and development payments, milestone payments, license and commercialization fees and royalties. In addition to $10.7 million received from inception through December 31, 1999, our partners are committed to fund at least $68.0 million under existing agreements over the next five years. Our partners have also invested $9.2 million in our equity securities. OUR TARGET MARKETS AND PRODUCTS We are developing enzymes and other biologically active compounds for a number of industries, including agricultural, chemical processing, industrial and pharmaceutical applications. Our target markets provide both short-term and long-term product revenue opportunities. Within these broad markets we are targeting billion dollar key market segments where we believe our technologies and products will create high value and competitive advantages for our strategic partners and our customers. We are identifying and producing enzymes that exhibit dramatic increases in activity, efficiency and stability. Examples of our product applications include the following: . In agriculture, we are developing a variety of specialty enzymes and engineered genes to improve crop protection, crop yield and nutritional value, as well as to reduce harmful environmental waste. . In chemical processing, we are developing a variety of enzymes to create manufacturing efficiencies, reduce production costs and accelerate generation of new chemical products and processes. . For industrial applications, we successfully commercialized a heat- tolerant enzyme useful for oil and gas recovery and are developing numerous products related to enzymatic processes for detergent, corn processing, textile, pulp and paper processing and fats and oils applications. . In pharmaceuticals, we are working to discover small molecule compounds as candidates for anti-microbials, anti-fungals, anti-virals and other therapeutic drugs. OUR STRATEGY Our goal is to be the leading provider of novel enzymes and biologically active compounds for use in unique, economically attractive applications. The key elements of our strategy are to: . Protect and enhance our technology leadership position; . Expand our existing DNA libraries through access to novel genetic material and utilize our proprietary technologies to discover new genes and gene pathways to provide solutions to market needs; . Deploy our technologies across diverse markets in order to maximize our return on investment; . Pursue additional strategic alliances with market leaders to access funding and industry-specific expertise and to more efficiently develop and commercialize a larger product portfolio; and . Independently develop and commercialize products in selected markets to capture their full economic value. 2 THE OFFERING Common stock offered by Diversa................. 7,000,000 shares Common stock to be outstanding after the offering....................................... 32,811,401 shares Use of proceeds................................. We intend to use the net proceeds from this offering for research and development, capital expenditures, working capital, general corporate purposes and possible future acquisitions. Proposed Nasdaq National Market symbol.......... DVSA
The share amounts in this table are based on shares outstanding as of December 31, 1999. This table excludes: . 5,492,798 shares of our common stock reserved for issuance under our stock option plans of which 3,125,000 shares are subject to outstanding options with a weighted average exercise price of $1.73 per share and 13,937 shares of common stock issuable upon exercise of an outstanding option granted outside our stock option plans with an exercise price of $0.03 per share; . 277,719 shares available for issuance under our Non-Employee Directors' Stock Option Plan; . 416,579 shares available for issuance under our 1999 Employee Stock Purchase Plan; and . 364,120 shares of common stock issuable upon exercise of outstanding warrants with a weighted average exercise price of $1.44 per share. Except as otherwise indicated, information in this prospectus is based on the following assumptions: . the conversion of all outstanding shares of our preferred stock into 22,834,011 shares of common stock upon the closing of this offering; . the issuance of an estimated 32,000 shares of common stock to be issued at the closing of this offering to holders of our series A, B and D preferred stock as payment of a dividend that began to accrue on December 21, 1999; . a 1-for-2.8806 reverse-split in our common stock that was effected on February 8, 2000; and . no exercise of the underwriters' over-allotment option to purchase up to 1,050,000 shares. DIVERSA, Gene Site Saturation Mutagenesis, GSSM, Pyrolase, GeneReassembly, DiverseLibraries, PathwayLibraries, DirectEvolution(R), SingleCell and SciLect are trademarks of Diversa Corporation. This prospectus also refers to trade names and trademarks of other organizations. 3 SUMMARY FINANCIAL DATA The following financial information should be read together with the "Selected Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1995 1996 1997 1998 1999 ------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Total revenue................. $ 25 $ 706 $ 1,155 $ 1,347 $10,272 Total operating expenses...... 8,857 12,125 13,455 15,201 19,506 Operating loss................ (8,832) (11,419) (12,300) (13,854) (9,234) Net loss...................... (8,904) (11,646) (12,392) (13,510) (9,019) Net loss applicable to common stockholders................. $(8,904) $(11,646) $(12,392) $(13,510) $(9,085) ======= ======== ======== ======== ======= Historical net loss per share, basic and diluted............ $ (7.37) $ (7.68) $ (7.72) $ (7.64) $ (3.86) ======= ======== ======== ======== ======= Historical weighted average shares outstanding........... 1,208 1,517 1,606 1,768 2,353 Pro forma net loss per share.. $ (0.36) ======= Pro forma weighted average shares outstanding........... 25,187
AS OF DECEMBER 31, 1999 ------------------------------ PRO PRO FORMA ACTUAL FORMA AS ADJUSTED -------- ------- ------------ (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short term investments................................... $ 5,084 $ 5,084 $140,594 Working capital................................ 13,902 13,902 149,412 Total assets................................... 31,072 31,072 167,412 Capital lease obligations, less current portion....................................... 2,677 2,677 2,677 Redeemable convertible preferred stock......... 48,402 -- -- Stockholders' equity (deficit)................. (42,813) 5,589 141,099
Pro forma net loss per share assumes all our preferred stock had been converted into common stock on the date of original issuance. See our financial statements for a more detailed description. Pro forma balance sheet data assumes the conversion of all our outstanding preferred stock into common stock in conjunction with the closing of this offering. The pro forma as adjusted balance sheet data above reflect the sale of 7,000,000 shares of our common stock in this offering at an assumed initial public offering price of $21.00 per share after deducting estimated underwriting discounts and commissions and estimated expenses of this offering, the conversion of all outstanding preferred stock into common stock and the issuance of an estimated 32,000 shares of common stock to be issued at the closing of this offering to holders of our series A, B and D preferred stock as payment of a dividend that began to accrue on December 21, 1999. See "Use of Proceeds" and "Capitalization" for a discussion about how we intend to use the proceeds from this offering and about our capitalization. 4 RISK FACTORS You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our operations. If any of the following risks actually occurs, our business could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. WE HAVE A HISTORY OF NET LOSSES, WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY. We have incurred net losses since our inception, including a net loss of approximately $11.8 million for the year ended December 31, 1998 and approximately $10.5 million for the year ended December 31, 1999. As of December 31, 1999, we had an accumulated deficit of approximately $56.4 million. We expect to incur additional losses for at least the next several years. The extent of our future losses will depend, in part, on the rate of growth, if any, in our contract revenue and on the level of our expenses. To date, substantially all of our revenue has been derived from strategic alliances and grants, and we expect that substantially all of our revenue for the foreseeable future will result from payments from strategic alliances. Future revenue from strategic alliances are uncertain because our ability to generate revenue will depend upon our ability to enter into new strategic alliances and to meet research, development and commercialization objectives under new and existing agreements. We expect to spend significant amounts to fund research and development and enhance our core technologies. As a result, we expect that our operating expenses will increase significantly in the near term, and, consequently, we will need to generate significant additional revenue to achieve profitability. In order for us to generate revenue, we must not only retain our existing strategic partners and attract new ones, but also develop products or technologies that our partners choose to commercialize and from which we can derive revenue through royalties. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. BECAUSE WE ARE AN EARLY STAGE COMPANY DEVELOPING AND DEPLOYING NEW TECHNOLOGIES, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR TECHNOLOGIES OR PRODUCTS, WHICH COULD CAUSE US TO BE UNPROFITABLE OR CEASE OPERATIONS. You must evaluate our business in light of the uncertainties and complexities affecting an early stage biotechnology company. Our existing proprietary technologies are new and in the early stage of development. We may not be successful in the commercial development of these or any further technologies or products. Successful products require significant development and investment, including testing, to demonstrate their cost-effectiveness prior to regulatory approval and commercialization. To date, we have commercialized only one product, Pyrolase 160, and none of our strategic partners have yet incorporated our technologies or inventions into their own commercial products from which we can generate royalties. Because of these uncertainties, our discovery process may not result in the identification of product candidates that we or our strategic partners will commercialize. If we are not able to use our technologies to discover new materials or products with significant commercial potential, we will not be able to achieve our objectives or build a sustainable or profitable business. WE ARE DEPENDENT ON OUR STRATEGIC PARTNERS, AND OUR FAILURE TO SUCCESSFULLY MANAGE OUR EXISTING AND FUTURE STRATEGIC ALLIANCE RELATIONSHIPS COULD PREVENT US FROM DEVELOPING AND COMMERCIALIZING MANY OF OUR PRODUCTS AND ACHIEVING OR SUSTAINING PROFITABILITY. We currently have strategic alliance agreements with Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc. and The Dow Chemical Company, from which we expect to derive significant future revenue. Since we do not currently possess the resources necessary to independently develop and commercialize all of the potential products that may result from our technologies, we expect to continue to 5 enter into, and in the near-term derive additional revenue from, strategic alliance agreements to develop and commercialize products. We will have limited or no control over the resources that any strategic partner may devote to our products. Any of our present or future strategic partners may not perform their obligations as expected. These strategic partners may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our strategic partners may not develop products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products. If we fail to enter into or maintain strategic alliance agreements, or if any of these events occur, we may not be able to commercialize our products, grow our business or generate sufficient revenue to support our operations. Our present or future strategic alliance opportunities could be harmed if: . We do not achieve our research and development objectives under our strategic alliance agreements; . We develop products and processes or enter into additional strategic alliances that could conflict with the business objectives of our strategic partners; . We disagree with our strategic partners as to rights to intellectual property we develop; . We are unable to manage multiple simultaneous strategic alliances; . Our strategic partners become competitors of ours or enter into agreements with our competitors; . Consolidation in our target markets limits the number of potential strategic partners; or . We are unable to negotiate additional agreements having terms satisfactory to us. WE DO NOT HAVE THE CAPACITY TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE. IF WE ARE UNABLE TO ACCESS THE CAPACITY TO MANUFACTURE PRODUCTS IN SUFFICIENT QUANTITY, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS OR GENERATE SIGNIFICANT SALES. We have only limited experience in enzyme manufacturing and we do not have our own capacity to manufacture products on a commercial scale. We expect to be dependent to a significant extent on third parties for commercial scale manufacturing of our products. We have arrangements with a third party that has the required manufacturing equipment and available capacity to manufacture Pyrolase 160 under our direction and oversight. We also currently lease a pilot facility for process development activities from a third party, which we intend to vacate by March 2000. We plan to construct our own pilot development facility during 2000 and have identified alternative capacity to meet interim requirements. In addition to requiring investment in equipment, construction of this new facility will necessitate compliance with applicable regulations. After we complete the construction of our pilot facility, we will continue to depend on third parties for large-scale commercial manufacturing. If we fail to complete the construction of our pilot facility on time or at all, it could interrupt our research and product development programs and harm our relationships with strategic partners. Any difficulties or interruptions of service with our third party manufacturers or our own planned pilot manufacturing facility could disrupt our research and development efforts, delay our commercialization of products and harm our relationships with our strategic partners or customers. WE HAVE ONLY LIMITED EXPERIENCE IN INDEPENDENTLY DEVELOPING, MANUFACTURING, MARKETING, SELLING AND DISTRIBUTING COMMERCIAL PRODUCTS. We intend to pursue some product opportunities independently. We currently have only limited resources and capability to develop, manufacture, market, sell or distribute products on a commercial scale. We will determine which products to pursue independently based on various criteria, including: investment required, estimated time to market, regulatory hurdles, infrastructure requirements and industry-specific expertise necessary for successful commercialization. At any time, we may modify our strategy and pursue alliances for the development and commercialization of some products. We may pursue products that ultimately require more resources than we anticipate or which may be technically unsuccessful. In order for us to commercialize these products directly, we would need to establish or obtain through outsourcing arrangements the capability to develop, manufacture, market, sell and distribute products. If we are unable to successfully commercialize 6 products resulting from our internal product development efforts, we will continue to incur losses. Even if we successfully develop a commercial product, we may not generate significant sales and achieve profitability. ETHICAL, LEGAL AND SOCIAL CONCERNS ABOUT GENETICALLY ENGINEERED PRODUCTS COULD LIMIT OR PREVENT THE USE OF OUR PRODUCTS AND TECHNOLOGIES AND LIMIT OUR REVENUE. Some of our products are genetically engineered. If we are not able to overcome the ethical, legal and social concerns relating to genetic engineering, our products may not be accepted. Any of the risks discussed below could result in expenses, delays or other impediments to our programs or the public acceptance and commercialization of products dependent on our technologies or inventions. Our ability to develop and commercialize one or more of our technologies and products could be limited by the following factors: . Public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products, which could influence public acceptance of our technologies and products; . Public attitude regarding, and potential changes to laws governing, ownership of genetic material which could harm our intellectual property rights with respect to our genetic material and discourage strategic partners from supporting, developing or commercializing our products and technologies; and . Governmental reaction to negative publicity concerning genetically modified organisms, which could result in greater government regulation of genetic research and derivative products, including labeling requirements. The subject of genetically modified organisms has received negative publicity, which has aroused public debate. The adverse publicity could lead to greater regulation and trade restrictions on imports of genetically altered products. IF WE ARE UNABLE TO CONTINUE TO COLLECT GENETIC MATERIAL FROM DIVERSE NATURAL ENVIRONMENTS, OUR RESEARCH AND DEVELOPMENT EFFORTS AND OUR PRODUCT DEVELOPMENT PROGRAMS COULD BE HARMED. We collect genetic material from organisms found in diverse environments. We collect material from government-owned land in foreign countries and in areas of the United States under formal resource access agreements, and from private lands under individual agreements with private land owners. If our access to materials under access agreements or other arrangements terminates, it could harm our internal and our collaborative research and development efforts. We also collect samples from other environments where agreements are currently not required, such as the deep sea. All of our agreements with foreign countries expire in 2002 or earlier, and they are all subject to earlier termination. Our access agreement with Iceland was terminated, and we have voluntarily ceased collections of further samples in Yellowstone National Park pending their resolution of collection guidelines. ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES COULD HARM OUR COMPETITIVE POSITION. Our intellectual property consists of patents, copyrights, trade secrets, know-how and trademarks. As of January 15, 2000, we owned 24 issued patents relating to our technologies, had received notices of allowance with respect to 7 other patent applications and have over 125 patents pending. In addition, as of January 15, 2000, we had in-licensed more than 25 additional patents or patent applications that we believe strengthen our patent portfolio. Our success depends in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies and products in the United States and other countries. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries. These problems can be caused by, for example, a lack of rules and methods for defending intellectual property rights. The patent positions of biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions. We will be able to protect our proprietary rights from 7 unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will apply for patents covering both our technologies and products as we deem appropriate. However, these applications may be challenged and may not result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, our patents may be challenged, invalidated or fail to provide us with any competitive advantages. WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. Our strategy includes entering into and working on simultaneous projects across multiple industries. We increased the number of our employees from 74 at December 31, 1998 to 102 at December 31, 1999 and expect to significantly increase our rate of growth to meet our strategic objectives. If our growth continues, it will continue to place a strain on us. Our ability to effectively manage our operations, growth, and various projects requires us to continue to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. We may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner. In addition, we may discover deficiencies in existing systems and controls. LITIGATION OR OTHER PROCEEDINGS OR THIRD PARTY CLAIMS OF INFRINGEMENT COULD REQUIRE US TO SPEND TIME AND MONEY AND COULD SHUT DOWN SOME OF OUR OPERATIONS. Our commercial success depends on neither infringing patents and proprietary rights of third parties, nor breaching any licenses or other agreements that we have entered into with regard to our technologies, products and business. The patent positions of biotechnology companies, including our patent position, involve complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. We cannot be sure that relevant patents have not been issued that could block our ability to obtain patents or to operate as we would like. Others may develop similar technologies or duplicate technologies developed by us. We are aware of the existence of patents in some countries that, if valid, may block our ability to commercialize products in these countries if we are unsuccessful in circumventing or acquiring the rights to these patents. We are also aware of the existence of claims in published patent applications in some countries that, if granted and valid, may also block our ability to commercialize products in these countries if we are unable to circumvent or license them. We are not currently a party to any litigation with regard to our patent position. However, the biotechnology industry is characterized by extensive litigation regarding patents and other intellectual property rights. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage. If we became involved in litigation or interference proceedings declared by the United States Patent and Trademark Office, or oppositions or other intellectual property proceedings outside of the United States, to defend our intellectual property rights or as a result of alleged infringement of the rights of others, we might have to spend significant amounts of money. We are aware of a significant number of patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties. Should any of our competitors have filed patent applications or obtain patents that claim inventions also claimed by us, we may have to participate in an interference proceeding declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to a patent for these inventions in the United States. Such a proceeding could result in substantial cost to us even if the outcome is favorable. Even if successful on priority grounds, an interference may result in loss of claims based on patentability grounds raised in the interference. The litigation or proceedings could divert our management time and efforts. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management time and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete. 8 An adverse ruling arising out of any intellectual property dispute, including an adverse decision as to the priority of our inventions, would undercut or invalidate our intellectual property position. An adverse ruling could also subject us to significant liability for damages, prevent us from using processes or products, or require us to license disputed rights from third parties. Although patent and intellectual property disputes in the biotechnology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. Furthermore, necessary licenses may not be available to us on satisfactory terms, if at all. We recently received a letter from a privately held biotechnology company suggesting that we may want to consider licensing patents held by that third party. We believe that we have defenses to any infringement claim with respect to such patents. However, we cannot be certain that the third party will not initiate litigation alleging that our technologies infringe claims of such patent or that a court would not find such claims valid and infringed. CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION. In order to protect our proprietary technology and processes, we also rely in part on trade secret protection for our confidential and proprietary information. We have taken security measures to protect our trade secrets and proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. Our policy is to execute confidentiality agreements with our employees and consultants upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual's relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. There can be no assurance that proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. MANY POTENTIAL COMPETITORS WHO HAVE GREATER RESOURCES AND EXPERIENCE THAN WE DO MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE. The biotechnology industry is characterized by rapid technological change, and the area of gene research is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Rapid technological development by others may result in our products and technologies becoming obsolete. We face, and will continue to face, intense competition. We are not aware of another company that has the scope and integration of technologies and processes that we have. There are, however, a number of companies who compete with us in various steps throughout our technology process. For example, Terragen Discovery is involved in accessing organisms from diverse environments for pharmaceutical applications. A number of companies are performing high- throughput screening of molecules. Maxygen, Inc. and Evotech have alternative evolution technologies. Integrated Genomics, Inc., Myriad Genetics, Inc., ArQule, Inc. and Aurora Biosciences Corporation perform screening, sequencing and/or bioinformatics services. Novo Nordisk and Genencor International, Inc. are involved in the development, overexpression, fermentation and purification of enzymes. There are also a number of academic institutions involved in various phases of our technology process. Many of these competitors have significantly greater financial and human resources than we do. These organizations may develop technologies that are superior alternatives to our technologies. Further, our competitors may be more effective at implementing their technologies for modifying DNA to develop commercial products. 9 Any products that we develop through our technologies will compete in multiple, highly competitive markets. Any products that we develop will compete in highly competitive markets. Many of our potential competitors in these markets have substantially greater financial, technical and marketing resources than we do, and we cannot assure you that they will not succeed in developing products that would render our products or those of our strategic partners obsolete or noncompetitive. In addition, many of these competitors have significantly greater experience than we do in their respective fields. Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner and are technologically superior to and/or are less expensive than other products on the market. Current competitors or other companies may develop technologies and products that are more effective than ours. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. The existing approaches of our competitors or new approaches or technology developed by our competitors may be more effective than those developed by us. STRINGENT LAWS AND REQUIRED GOVERNMENT APPROVALS COULD DELAY OUR INTRODUCTION OF PRODUCTS. All phases, especially the field testing, production and marketing, of our potential products are subject to significant federal, state, local and/or foreign governmental regulation. Regulatory agencies may not allow us to produce and/or market our products in a timely manner or under technically or commercially feasible conditions, or at all, which could harm our business. In the United States, products for our target markets are regulated based on their application, by either the FDA, the Environmental Protection Agency, or EPA, or, in the case of plants and animals, the United States Department of Agriculture, or USDA. The FDA regulates drugs, food and feed, as well as food additives, feed additives and substances generally recognized as safe that are used in the processing of food or feed. While substantially all of our projects to date have focused on non-human applications of our technologies and products outside of the FDA's review, in the future we may pursue strategic alliances for further research and development of drug products for humans that would require FDA approval before they could be marketed in the United States. In addition, any drug product candidates must also be approved by the regulatory agencies of foreign governments before any product can be sold in those countries. Under current FDA policy, our products, or products of our strategic partners incorporating our technologies or inventions, to the extent that they come within the FDA's jurisdiction, may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise safety questions which cannot be satisfactorily answered, if results from pre-clinical or clinical trials do not meet regulatory requirements or if they are deemed to be food additives whose safety cannot be demonstrated. An unfavorable FDA ruling could be difficult to resolve and could prevent a product from being commercialized. Even after investing significant time and expenditures, we may not obtain regulatory approval for any drug products. We have not submitted an investigational new drug application for any product candidate, and no drug product candidate developed with our technologies has been approved for commercialization in the United States or elsewhere. The EPA regulates biologically derived chemical substances not within the FDA's jurisdiction. An unfavorable EPA ruling could delay commercialization or require modification of the production process resulting in higher manufacturing costs, thereby making the product uneconomical. In addition, the USDA may prohibit genetically engineered plants from being grown and transported except under an exemption, or under controls so burdensome that commercialization becomes impracticable. Our future products may not be exempted by the USDA. The European regulatory process for these classes of biologically derived products has been in a state of flux in the recent past, as the EU attempts to replace country by country regulatory procedures with a consistent EU regulatory standard in each case. Some country-by-country regulatory oversight remains. Other than Japan, most other regions of the world generally find adequate either a United States or a European clearance together with associated data and information for a new biologically derived product. 10 IF WE REQUIRE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, WE MAY NEED TO ENTER INTO FINANCING ARRANGEMENTS WITH UNFAVORABLE TERMS OR WHICH COULD ADVERSELY AFFECT YOUR OWNERSHIP INTEREST AND RIGHTS AS COMPARED TO OUR OTHER STOCKHOLDERS. IF SUCH FINANCING IS NOT AVAILABLE, WE MAY NEED TO CEASE OPERATIONS. We currently anticipate that our available cash resources and receivables, committed funding from strategic partners and the net proceeds from this offering will be sufficient to meet our capital requirements for at least the next two years. However, our capital requirements depend on several factors, including: . The level of research and development investment required to maintain our technology leadership position; . Our ability to enter into new agreements with strategic partners or to extend the terms of our existing collaborative agreements, and the terms of any agreement of this type; . The success rate of our discovery efforts associated with milestones and royalties; . Our ability to successfully commercialize products developed independently and the demand for such products; . The timing and willingness of strategic partners to commercialize our products that would result in royalties; . Costs of recruiting and retaining qualified personnel; and . Our need to acquire or license complementary technologies or acquire complementary businesses. If additional capital is required to operate our business, we cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, develop products or technologies or otherwise respond to competitive pressures could be significantly limited. In addition, if financing is not available, we may need to cease operations. If we raise additional funds through the issuance of equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. If we raise additional funds through the issuance of debt securities, such debt securities would have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES. Our quarterly operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. For example, our revenue for the year ended December 31, 1999 was $10.3 million, as compared to $1.3 million for the same period in 1998. This increase was primarily due to revenue from new strategic alliances. Revenue in future periods may be greater or less than revenue in the immediately preceding period or in the comparable period of the prior year. Some of the factors that could cause our operating results to fluctuate include: . Termination of strategic alliances; . The success rate of our discovery efforts associated with milestones and royalties; . The ability and willingness of strategic partners to commercialize royalty-bearing products on expected timelines; . Our ability to enter into new agreements with strategic partners or to extend the terms of our existing strategic alliance agreements, and the terms of any agreement of this type; . Our ability to successfully satisfy all pertinent regulatory requirements; 11 . Our ability to successfully commercialize products developed independently and the demand for such products; and . General and industry specific economic conditions, which may affect our strategic partners' research and development expenditures. If revenue declines or does not grow as anticipated due to the expiration of strategic alliance agreements, failure to obtain new agreements or grants, lower than expected royalty payments or other factors, we may not be able to correspondingly reduce our operating expenses. A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. In addition, we plan to significantly increase operating expenses in 2000. Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for a particular fiscal period. Due to the possibility of fluctuations in our revenue and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline. IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL AS NECESSARY, IT COULD DELAY OUR PRODUCT DEVELOPMENT PROGRAMS AND HARM OUR RESEARCH AND DEVELOPMENT EFFORTS. Our success depends to a significant degree upon the continued contributions of our executive officers, management and scientific staff. If we lose the services of one or more of these people, we may be unable to achieve our business objectives or our stock price could decline. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other technology- based businesses, particularly in the San Diego area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to meet the demands of our strategic partners in a timely fashion or to support our internal research and development programs. In particular, our product development programs depend on our ability to attract and retain highly skilled scientists, including molecular biologists, biochemists and engineers. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our employees are at-will employees, which means that either the employee or Diversa may terminate their employment at any time. Our planned activities will require additional expertise in specific industries and areas applicable to the products developed through our technologies. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. The inability to acquire these services or to develop this expertise could impair the growth, if any, of our business. IF WE ENGAGE IN ANY ACQUISITION, WE WILL INCUR A VARIETY OF COSTS AND MAY POTENTIALLY FACE NUMEROUS OTHER RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS. If appropriate opportunities become available, we may consider acquiring businesses, technologies or products that we believe are a strategic fit with our business. We currently have no commitments or agreements with respect to any material acquisitions. If we do pursue such a strategy, we could: . Issue equity securities which would dilute current stockholders' percentage ownership; . Incur substantial debt; or . Assume contingent liabilities. We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, 12 if at all. In addition, future acquisitions might negatively impact our business relations with our strategic partners. Further, recent proposed accounting changes could result in a negative impact on our results of operations as well as the resulting cost of the acquisition. Any of these adverse consequences could harm our business. WE MAY BE SUED FOR PRODUCT LIABILITY. We may be held liable if any product we develop, or any product which is made with the use of any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. We currently have no product liability insurance. When we attempt to obtain product liability insurance, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our strategic partners. If we are sued for any injury caused by our products, our liability could exceed our total assets. WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions could discourage potential take-over attempts and could adversely affect the market price of our common stock. Because of these provisions, you might not be able to receive a premium on your investment. THERE IS NO PRIOR MARKET FOR OUR COMMON STOCK, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE. Prior to this offering, there has been no public market for shares of our common stock. An active, liquid trading market may not develop following completion of this offering, or if developed, may not be maintained. We will determine the initial public offering price for the shares through negotiations between us and representatives of the underwriters. This price may not be indicative of prices that will prevail later in the trading market. The market price of the common stock may decline below the initial public offering price, and you may not be able to resell your shares at or above the initial public offering price. OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN. The stock market, from time to time, has experienced significant price and volume fluctuations that are unrelated to the operating performance of companies. The market prices of technology companies, particularly life science companies, have been highly volatile. Our stock may be affected by this type of market volatility, as well as by our own performance. The following factors, among other risk factors, may have a significant effect on the market price of our common stock: . Developments in our relationships with current or future strategic partners; . Announcements of technological innovations or new products by us or our competitors; . Developments in patent or other proprietary rights; . Our ability to access genetic material from diverse ecological environments and practice our technologies; . Future royalties from product sales, if any, by our strategic partners; . Fluctuations in our operating results; . Litigation; . Developments in domestic and international governmental policy or regulation; and . Economic and other external factors or other disaster or crisis. 13 Future sales of our common stock could cause our stock price to decline. The market price of our common stock could decline as a result of sales by our existing stockholders of a large number of shares of our common stock in the public market after the closing of this offering, or the perception that these sales could occur. These sales could make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. After this offering, we will have outstanding 32,811,401 shares of common stock. All the shares sold in this offering will be freely tradeable. Of the remaining 25,811,401 shares of common stock outstanding after this offering, all of such shares will be eligible for sale in the public market beginning 180 days after the date of this prospectus. After this offering we also intend to register up to approximately 6,187,096 shares of our common stock for sale upon exercise of outstanding stock options issued pursuant to compensatory benefit plans or reserved for future issuance pursuant to our 1997 Equity Incentive Plan, 1999 Non-Employee Directors' Stock Option Plan and 1999 Employee Stock Purchase Plan. In addition, the market price of our common stock could decline if we sell additional equity securities in connection with financings or strategic alliance arrangements. Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate decisions and depress our stock price. After this offering, our officers, directors and stockholders with at least 5% of our stock will together control approximately 54.5% of our outstanding common stock. If these officers, directors and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions. The interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This concentration of ownership could depress our stock price. As a new investor, you will experience immediate and substantial dilution in the net tangible book value of your shares. We expect the initial public offering price to be substantially higher than the net tangible book value per share of the common stock. Therefore, if you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in pro forma net tangible book value of $16.78 per share. You may incur additional dilution if the holders of outstanding options or warrants exercise those options or warrants. Additional information regarding the dilution to investors in this offering is included in this prospectus under the heading "Dilution." We use hazardous materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly. Our research and development processes involve the controlled use of hazardous materials, including chemical, radioactive and biological materials. Our operations also produce hazardous waste products. We cannot eliminate entirely the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. In addition, compliance with applicable environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or production efforts. 14 YEAR 2000 ISSUES COULD RESULT IN THE INTERRUPTION OF OUR BUSINESS AND NEGATIVELY IMPACT OUR OPERATING RESULTS. We have completed our assessment of the year 2000 readiness of our core information technology systems. Through this process, we contacted key external suppliers of software applications and computer systems to coordinate the evaluation of potential year 2000 issues. To date, we have not encountered any material year 2000 problems with software and information systems provided to us by third parties. We completed minor remediation with regard to software programs, hardware and microprocessor-controlled equipment. We did not experience any year 2000 problems. However, we believe that it is not possible to determine with complete certainty that all year 2000 problems affecting us have been identified or will be corrected. The number of devices and systems that could be affected and the interactions among these devices and systems are too numerous to address. No one can accurately predict which year 2000 problem-related failures will occur, or the severity, timing, duration or financial consequences of these potential failures. If year 2000 problems significantly impact our strategic partners, it could delay our research programs and the commercialization of products, if any. Business disputes alleging that we failed to comply with the terms of contracts or industry standards of performance could result in litigation or contract termination. We could also lose future revenue as a result of network, software or hardware failures. We also could be materially adversely affected if third parties, upon whom we depend in order to run our day-to-day business, experience year 2000 problems. For example, if our supplier of electricity has not made appropriate year 2000 corrections, we could experience a power outage and, consequently an interruption of our research and development. 15 SPECIAL STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks described above and in other parts of this prospectus. These factors may cause our actual results to differ materially from any forward-looking statement. USE OF PROCEEDS We estimate that our net proceeds from this offering will be approximately $135.5 million, based upon an assumed initial public offering price of $21.00 per share, after deducting estimated underwriting discounts and estimated offering expenses. If the underwriters' over-allotment option is exercised in full, we estimate that net proceeds will be $156.0 million. We intend to use the net proceeds of this offering for research and development, capital expenditures, working capital and general corporate purposes. Additionally, a portion of the proceeds may be used for possible future acquisitions. We are not currently a party to any contracts or letters of intent with respect to any acquisitions. Pending such uses, the net proceeds of this offering will be invested in short-term, interest-bearing, investment- grade securities. DIVIDEND POLICY We paid dividends of approximately $31,000 in 1995 and approximately $66,000 in 1997 to our series I preferred stockholders. These dividends were paid pursuant to an agreement related to interest income on escrowed funds, and did not represent a dividend from operating results. Pursuant to our certificate of incorporation, our series A, B and D preferred stockholders are entitled to receive a 5% dividend per annum from December 21, 1999 through the date of completion of this offering. As of December 31, 1999, we have accrued $66,000 related to those dividends, and will accrue approximately $6,500 per day in additional dividends for each day between January 1, 2000 and the completion of this offering. We are entitled to pay this dividend in cash or in shares of common stock valued at the initial public offering price. We intend to pay these dividends in shares of our common stock and estimate that 32,000 shares of common stock will be issued to satisfy this obligation. The annual dividend is $0.05 per share of series A preferred stock, $0.033 per share of series B preferred stock and $0.0425 per share of series D preferred stock. We presently intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions and other factors that the board of directors may deem relevant. CORPORATE INFORMATION We were incorporated in the State of Delaware in December 1992 under the name Industrial Genome Sciences, Inc. In August 1997, we changed our name to Diversa Corporation. Our executive offices are located at 10665 Sorrento Valley Road, San Diego, California 92121, and our telephone number is (858) 453-7020. Our web site is http://www.diversa.com. The information found on our web site is not a part of this prospectus. 16 CAPITALIZATION You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the notes to those statements included elsewhere in this prospectus.
As of December 31, 1999 --------------------------- Pro Forma Pro As Actual Forma Adjusted ------- ------- --------- (in thousands, except share data) Cash, cash equivalents and short-term investments.. $ 5,084 $ 5,084 $140,594 ======= ======= ======== Capital lease obligations, less current portion.... $ 2,677 $ 2,677 $ 2,677 ------- ------- -------- Redeemable convertible preferred stock, par value $0.001; 60,718,183 shares authorized; 60,220,183 shares issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)............................ 48,402 -- -- Stockholders' equity (deficit): Series E convertible preferred stock, par value $0.001; 5,555,556 shares authorized, issued and outstanding (actual) 5,000,000 preferred stock shares authorized, no shares issued or outstanding (pro forma and pro forma as adjusted)........................................ 6 -- -- Common stock, par value $0.001; 28,630,349 shares authorized, 2,945,390 shares issued and outstanding (actual); 65,000,000 shares authorized, 25,811,401 shares issued and outstanding (pro forma); 32,811,401 shares issued and outstanding (pro forma as adjusted).......... 3 26 33 Additional paid-in capital........................ 20,102 68,487 203,990 Deferred compensation............................. (5,520) (5,520) (5,520) Notes receivable from stockholders................ (36) (36) (36) Accumulated deficit............................... (57,351) (57,351) (57,351) Accumulated other comprehensive loss.............. (17) (17) (17) ------- ------- -------- Total stockholders' equity (deficit)........... (42,813) 5,589 141,099 ------- ------- -------- Total capitalization........................... $ 8,266 $ 8,266 $143,776 ======= ======= ========
This table sets forth as of December 31, 1999: . our actual capitalization; . our pro forma capitalization, assuming the conversion of all of our outstanding preferred stock into common stock in conjunction with the closing of this offering; . a 1-to-2.8806 reverse-split in our common stock that will take effect prior to the date of this offering; . our pro forma as adjusted capitalization to give effect to the sale of 7,000,000 shares of our common stock in this offering at an assumed initial public offering price of $21.00 per share after deducting estimated underwriting discounts and commissions and estimated expenses of this offering and the conversion of all of our outstanding preferred stock into common stock in conjunction with the closing of the initial public offering; and . the issuance of an estimated 32,000 shares of common stock to be issued at the closing of this offering to holders of our series A, B and D preferred stock as payment of a dividend that began to accrue on December 21, 1999. This table excludes: . 5,492,798 shares of our common stock reserved for issuance under our stock option plans, of which 3,125,000 shares are subject to outstanding options with a weighted average exercise price of $1.73 per share and 13,937 shares of common stock issuable upon exercise of an outstanding option granted outside of our stock option plans with an exercise price of $0.03 per share; . 277,719 shares available for issuance under our Non-Employee Directors' Stock Option Plan; . 416,579 shares available for issuance under our 1999 Employee Stock Purchase Plan; and . 364,120 shares of common stock issuable upon exercise of outstanding warrants with a weighted average exercise price of $1.44 per share. 17 DILUTION Our historical net tangible book value as of December 31, 1999 was approximately negative $45.3 million, or ($15.38) per share, based on the number of common shares outstanding as of December 31, 1999. Historical net tangible book value per share is equal to the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of December 31, 1999. Our pro forma net tangible book value, as of December 31, 1999, was $3.1 million, or $0.12 per share of common stock, assuming the conversion of all outstanding shares of preferred stock into shares of common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after considering the conversion of all outstanding preferred stock into common stock. After giving effect to our sale of common stock offered hereby at an assumed initial public offering price of $21.00 per share, and our receipt of the estimated net proceeds from the offering, our pro forma net tangible book value as of December 31, 1999 would have been approximately $138.6 million, or $4.22 per share. This represents an immediate increase in net tangible book value of $4.10 per share to existing stockholders and an immediate dilution of $16.78 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share................. $21.00 Historical net tangible book value per share before the offering..................................................... $(15.38) Increase per share attributed to the conversion of preferred stock to common stock........................................ 15.50 ------- Pro forma net tangible book value per share before the offering..................................................... 0.12 Increase per share attributable to new investors.............. 4.10 ------- Pro forma net tangible book value per share after this offering....................................................... 4.22 ------ Dilution per share to new investors............................. $16.78 ======
If the underwriters exercise their over-allotment in full, there will be an increase in pro forma net tangible book value to $4.70 per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $16.30 to new shareholders. Our existing shareholders would own 76.2% and our new public investors would own 23.8% of the total number of shares of our common stock outstanding after this offering. The following table summarizes, on a pro forma basis as of December 31, 1999, the differences between existing stockholders and the new investors with respect to the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid before deducting the underwriting discounts and commissions and our estimated offering expenses.
Shares Purchased Total Consideration ------------------ -------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ------------ ------- ------------- Existing stockholders..... 25,779,401 78.6% $ 58,604,000 28.5% $ 2.27 New public investors...... 7,000,000 21.4% 147,000,000 71.5% $21.00 ---------- ----- ------------ ----- Total................... 32,779,401 100.0% $205,604,000 100.0% ========== ===== ============ =====
The discussion and tables above assume no exercise of stock options or warrants outstanding as of December 31, 1999. As of December 31, 1999, there were options outstanding under our employee stock option plans to purchase a total of 3,125,000 shares of common stock, with a weighted average exercise price of $1.73 per share, 364,120 shares of common stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $1.44 per share, and an option outstanding granted outside our stock option plans to purchase 13,937 shares of common stock at $0.03 per share held by one of our founders. To the extent that any of these options or warrants are exercised, there will be further dilution to new investors. 18 SELECTED FINANCIAL INFORMATION The selected financial data set forth below with respect to the Company's statements of operations for the years ended December 31, 1997, 1998 and 1999, and with respect to the Company's balance sheets at December 31, 1998 and 1999 are derived from our financial statements that have been audited by Ernst & Young LLP, which are included elsewhere in this prospectus, and are qualified by reference to such financial statements. The statement of operations data for the years ended December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived from our audited financial statements that are not included in this prospectus. The selected financial information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and related notes appearing elsewhere in this prospectus.
Year Ended December 31, ----------------------------------------------- 1995 1996 1997 1998 1999 ------- -------- -------- -------- -------- (in thousands, except per share data) Statement of Operations Data: Collaborative revenue........ $ -- $ 200 $ 669 $ 625 $ 9,166 Grant and product revenue.... 25 506 486 722 1,106 ------- -------- -------- -------- -------- Total revenue.............. 25 706 1,155 1,347 10,272 Operating expenses: Research and development..... 5,306 6,496 8,195 10,665 12,149 Selling, general and administrative.............. 3,551 4,465 5,260 4,536 7,357 Restructuring charge......... -- 1,164 -- -- -- ------- -------- -------- -------- -------- Total operating expenses... 8,857 12,125 13,455 15,201 19,506 ------- -------- -------- -------- -------- Operating loss............... (8,832) (11,419) (12,300) (13,854) ( 9,234) Other income (expense)....... (72) (227) (92) 344 215 ------- -------- -------- -------- -------- Net loss..................... (8,904) (11,646) (12,392) (13,510) ( 9,019) Dividends payable to preferred stockholders...... -- -- -- -- (66) Net loss applicable to common stockholders................ $(8,904) $(11,646) $(12,392) $(13,510) $( 9,085) ======= ======== ======== ======== ======== Historical net loss per share, basic and diluted.... $ (7.37) $ (7.68) $ (7.72) $ (7.64) $ (3.86) ======= ======== ======== ======== ======== Historical weighted average shares outstanding.......... 1,208 1,517 1,606 1,768 2,353 Pro forma net loss per share....................... $ (0.36) ======== Pro forma weighted average shares outstanding.......... 25,187 As of December 31, ----------------------------------------------- 1995 1996 1997 1998 1999 ------- -------- -------- -------- -------- (in thousands) Balance Sheet Data: Cash, cash equivalents and short term investments...... $ 622 $ 5,040 $ 16,607 $ 5,552 $ 5,084 Working capital.............. (1,276) 3,584 13,540 2,470 13,902 Total assets................. 4,769 9,973 20,284 8,706 31,072 Capital lease obligations, less current portion........ 2,213 1,725 1,500 2,202 2,677 Redeemable convertible preferred stock............. 10,595 26,182 48,402 48,402 48,402 Stockholders' equity (deficit)................... (10,580) (22,156) (34,024) (45,738) (42,813)
See our financial statements for a description of the computation of the historical and pro forma net loss per share and the number of shares used in the historical and pro forma per share calculations in "Statement of Operations Data" above. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and the related notes to our financial statements and the other financial information included elsewhere in this prospectus. OVERVIEW We were founded in December 1992 and began operations in May 1994. We believe that we are the global leader in discovering and developing novel enzymes and other biologically active compounds from diverse environmental sources for use in agricultural, chemical processing, industrial and pharmaceutical applications. To date, we have generated revenue from research collaborations, government grants and enzyme product sales. Our strategic partners include Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and Finnfeeds International Limited. Our current government grants are from the National Institute of General Medical Sciences, the National Cancer Institute and the National Institute of Environmental Health Sciences. Our enzyme product sales to date are comprised of research kits and Pyrolase 160. We have dedicated substantial resources to the development of our proprietary technologies, which include capabilities for sample collection from the world's microbial populations, generation of environmental gene libraries, screening of these libraries using ultra-high throughput methods capable of analyzing more than a billion genes per day and optimization via our DirectEvolution technologies. Our revenue has increased significantly since our inception, and for the year ended December 31, 1999, we have experienced significant growth compared to the year ended December 31, 1998. This increase was primarily attributable to the addition of new strategic alliances, which included research funding and technology access and development fees. Research funding is recognized as revenue when the services are rendered. Revenue from technology access and development fees is recognized over the term of the strategic alliance. Revenue from milestone payments is recognized when the milestone is achieved. Our strategic partners often pay us before we recognize the revenue, and these payments are deferred until earned. As of December 31, 1999, we had current and long-term deferred revenue totaling $19.6 million. We have incurred substantial operating losses since our inception. As of December 31, 1999, our accumulated deficit was $57.3 million, and total stockholders' equity, after considering the conversion of all outstanding shares of preferred stock to common stock, was $5.6 million. We expect to incur additional operating losses over the next few years as we continue to develop our technologies and fund internal product research and development. RESULTS OF OPERATIONS Years Ended December 31, 1999 and 1998 Revenue Our revenue increased $9.0 million to $10.3 million for the year ended December 31, 1999 from $1.3 million for the year ended December 31, 1998. This increase was primarily attributable to the addition of new strategic alliances with Novartis Agribusiness Biotechnology Research, Inc. and The Dow Chemical Company and, to a much lesser extent, the addition of new government grants and enzyme product sales. Revenue from collaborations accounted for 89% of total revenue for the year ended December 31, 1999 and for 46% of total revenue for the year ended December 31, 1998. Research and Development Expenses Our research and development expenses increased $1.4 million to $12.1 million for the year ended December 31, 1999, from $10.7 million for the year ended December 31, 1998. During 1999, our research efforts 20 were primarily focused on research associated with strategic alliance agreements and continued work on internal products, whereas in 1998, we focused significant resources on development of internal products and proprietary technologies. 1999 expenses also increased over 1998 due to amortization of deferred compensation, as discussed in the paragraphs below. We expect that our research and development expenses will increase substantially to support our collaborative research programs, internal product research and development and technology development. Selling, General and Administrative Expenses Our selling, general and administrative expenses increased $2.9 million to $7.4 million for the year ended December 31, 1999 from $4.5 million for the year ended December 31, 1998. This increase was primarily attributable to expenses related to separation agreements with former employees and amortization of deferred compensation, as discussed in the paragraph below. We expect that our selling, general and administrative expenses will increase to support our growth and requirements as a public company. Other Income (Expense) Other income (expense) primarily consists of interest income and interest expense. Interest income was relatively level at $0.5 million for the year ended December 31, 1999 as compared to $0.6 for the year ended December 31, 1998. Interest expense increased $0.1 million to $0.4 million for the year ended December 31, 1999 from $0.3 million for the year ended December 31, 1998. This increase was primarily attributable to expanded equipment lease financing. Provision for Income Taxes We incurred net operating losses for the year ended December 31, 1999 and 1998, and accordingly, we did not pay any federal or state income taxes. As of December 31, 1999, we had federal net operating loss carryforwards of approximately $45.8 million, which begin to expire in 2009. The net operating loss carryforwards for state tax purposes were approximately $28.9 million, which began to expire in 1999. We also had federal research and development tax credit carryforwards of approximately $1.2 million, which begin to expire in 2009. Our utilization of the net operating losses and credits may be subject to substantial annual limitations pursuant to Section 382 of the Internal Revenue Code, and similar state provisions, as a result of changes in our ownership structure. The annual limitations may result in the expiration of net operating losses and credits prior to utilization. Deferred Compensation and Other Non-Cash Compensation Charges Deferred compensation for options granted to employees has been determined as the difference between the exercise price and the fair value of our common stock, as estimated by us for financial reporting purposes, on the date options were granted. Deferred compensation for options granted to consultants has been determined in accordance with Statement of Financial Accounting Standards No. 123 as the fair value of the equity instruments issued, and is periodically remeasured as the underlying options vest in accordance with EITF 96-18. We recorded non-cash compensation charges of $1.1 million in 1999 in conjunction with the acceleration of vesting for stock options of terminated employees. We calculated the charge as the difference between the exercise price of the stock options and the fair value of our common stock estimated for financial reporting purposes on the date of the modification of the option grants. 21 Years Ended December 31, 1998 and 1997 Revenue Our revenue increased to $1.3 million in 1998 from $1.2 million in 1997. This increase was primarily attributable to the addition of new government grants. Revenue from collaborations accounted for 46% of total revenue for 1998 and 58% of total revenue for 1997. Research and Development Expenses Our research and development expenses increased $2.2 million, or 28%, to $10.2 million for 1998 from $8.0 million for 1997. This increase was primarily attributable to expanded technology development and internal product development. Selling, General and Administrative Expenses Our selling, general and administrative expenses decreased $1.4 million to $3.4 million for 1998 from $4.8 million for 1997. This decrease was primarily attributable to lower staffing and related costs and reduced product advertising and promotions. In addition, 1997 expenses include costs associated with relocating our facilities from Pennsylvania to California. Other Income (Expense) Interest income increased $0.3 million to $0.6 million for 1998 from $0.3 million for 1997. This increase was attributable primarily to higher average cash balances during 1998. Interest expense was level at $0.3 million year over year. Provision for Income Taxes We incurred net operating losses for 1998 and 1997, and accordingly, we did not pay any federal or state income taxes. In connection with the grant of stock options to employees, we recorded deferred compensation of approximately $1.9 million in the year ended December 31, 1998. This amount was recorded as a component of stockholders' equity and is being amortized as a charge to operations over the vesting period of the options. We recorded amortization of deferred compensation of approximately $1.7 million for the year ended December 31, 1998. Included in research and development and selling, general and administrative expenses are $0.5 million and $1.2 million, respectively, of amortization expense. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our business primarily through private placements of preferred stock with net proceeds of $55.7 million, and funding from strategic partners and government grants. As of December 31, 1999, we had cash, cash equivalents and short-term investments of approximately $5.1 million. We expect to receive an additional $15.0 million in January 2000 from Novartis Seeds AG as an initial payment under a strategic alliance agreement signed in December 1999. Our funds are currently invested in U.S. Treasury and government agency obligations and investment-grade corporate obligations. As part of our plan to lease new executive offices and research and development facilities in 2000, we plan to construct a pilot manufacturing facility, which will be used for process development activities. Our costs for fixed assets relating to the pilot manufacturing facility will be approximately $2.4 million, all of which we anticipate financing through equipment leases. As of December 31, 1999, we had no purchase commitments relating to the pilot facility. 22 Our operating activities used cash of $4.0 million in the year ended December 31, 1999, $10.8 million in the year ended December 31, 1998, and $11.2 million in 1997. Our use of cash for all periods primarily resulted from our losses from operations and the changes in our working capital accounts. Our investing activities used cash of $5.4 million in 1999, $1.9 million in 1998 and $0.7 million in 1997. Our investing activities consist primarily of purchases of property and equipment, purchases of investment securities, purchase of technology rights and increases in long-term deferred assets. Our financing activities provided $7.5 million for the year ended December 31, 1999 and provided cash of $0.6 million in 1998 and $23.5 million in 1997. Our financing activities have consisted primarily of the sale of preferred stock to both private investors and strategic partners, and proceeds received and payments made under our capital lease lines and notes payable. We expect that the proceeds from this offering, combined with our current cash and cash equivalents, short-term investments, and funding from existing strategic alliances and grants including committed minimum funding totaling $68.0 million from our collaborators to be received between 2000 and 2004 will be sufficient to fund our operations for at least the next two years. This estimate is a forward-looking statement that involves risks and uncertainties as set forth under the caption "Risk Factors" in this prospectus. Our future capital requirements and the adequacy of our available funds will depend on many factors, including scientific progress in our research and development programs, the magnitude of those programs, our ability to establish strategic alliance relationships, and competing technological and market developments. Therefore, it is possible that we may seek additional financing within this timeframe. If we require additional capital to fund our operations and such financing is not available, we may need to cease operations. Alternatively, we may need to enter into financing arrangements which could dilute some stockholders' ownership interests and adversely affect their rights. YEAR 2000 The year 2000 problem potentially affects the computers, software and other equipment that we use, operate or maintain in our operations. As a result, we have formalized our year 2000 compliance plan to be implemented by a team of employees, led by our internal information technology staff, responsible for monitoring the assessment and remediation status of our year 2000 projects. We have been working on this year 2000 compliance plan for the past six months. Information Technology Systems. As part of our compliance plan, we made an assessment of the year 2000 readiness of our core information technology systems, including our servers, databases, internally developed software, desktop computers and significant microprocessor-controlled equipment. The majority of our computer systems and software are less than 26 months old. Our business system was put into use in 1998 and has been certified year 2000 compliant. We have completed our assessment of the year 2000 readiness of our core information technology systems. Through this process, we contacted key external suppliers of software applications and computer systems to coordinate the evaluation of potential year 2000 issues. We completed minor remediation with regard to software programs, hardware and microprocessor-controlled equipment. When appropriate, we coordinated our remediation efforts with our third party suppliers. Systems Other than Information Technology Systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, telephone switches, security systems and other common devices may be affected by the year 2000 problem. 23 Costs of Remediation. We have spent less than $50,000 to date for remediation and expect to incur minimal additional costs related to any required modifications, upgrades or replacements of our internal systems. To date, we have not experienced any material adverse effect on our business or operating results as a result of any year 2000 problems. In addition, we have not deferred any material information technology projects or equipment purchases, as a result of our year 2000 problem activities. Most Likely Consequences of Year 2000 Problems. We believe we have identified and resolved all year 2000 problems that could materially adversely affect our business operations. However, we believe that it is not possible to determine with complete certainty that all year 2000 problems affecting us have been identified or corrected. The number of devices and systems that could be affected and the interactions among these devices and systems are too numerous to address. In addition, no one can accurately predict which year 2000 problem- related failures will occur or the severity, timing, duration, or financial consequences of these potential failures. As a result, we believe that the following consequences are possible: . Operational inconveniences and inefficiencies for us and our strategic partners that will divert management's time and attention and financial and human resources from ordinary business activities; . Business disputes alleging that we failed to comply with the terms of contracts or industry standards of performance, some of which could result in litigation or contract termination; and . Loss of revenue as a result of network, software or hardware failures. We also could be materially adversely affected if third parties upon whom we depend in order to run our day-to-day business experience year 2000 problems. Contingency Plans. We do not anticipate needing to develop contingency plans to be implemented if our efforts to identify and correct year 2000 problems affecting our internal systems are not effective. If the need arises, we will rapidly develop contingency plans that may include: . Accelerated replacement of affected equipment or software; . Short to medium-term use of backup equipment and software or other redundant systems; . Increased work hours for our personnel or the hiring of additional information technology staff; and . The use of contract personnel to correct, on an accelerated basis, any year 2000 problems that arise or to provide interim alternate solutions for information system deficiencies. Our implementation of any of these contingency plans could harm our business. Disclaimer. The discussion of our efforts and expectations relating to year 2000 compliance contains forward-looking statements. Our ability to achieve year 2000 compliance, and the level of incremental costs associated with our compliance, could be adversely affected by, among other things, the availability and cost of contract personnel and external resources, third-party suppliers' ability to modify proprietary software and unanticipated problems not identified in the ongoing compliance review. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Financial Instruments and for Hedging Activities," which will be effective for our fiscal year 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. SFAS 133 is not anticipated to have a significant impact on our operating results or financial condition when adopted, since we currently do not engage in hedging activities. 24 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of interest expense we must pay with respect to our various outstanding debt instruments. Our risk associated with fluctuating interest expense is limited, however, to our capital lease obligations, the interest rates under which are closely tied to market rates, and our investments in interest rate sensitive financial instruments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We ensure the safety and preservation of our invested principal funds by limiting default risks, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments at December 31, 1998 or December 31, 1999. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest expense. 25 BUSINESS We believe that we are a global leader in discovering and developing novel enzymes and other biologically active compounds, together known as biomolecules, from diverse environmental sources for use in agricultural, chemical processing, industrial and pharmaceutical applications. We apply our fully-integrated and proprietary processes to obtain previously unaccessed genetic material from uncultured organisms found in various natural environments, catalog and store genes in gene libraries, screen these libraries using methods capable of analyzing more than a billion genes per day, optimize selected enzymes and compounds by applying our proprietary DirectEvolution(R) genetic modification technologies, including Gene Site Saturation Mutagenesis(TM) and GeneReassembly(TM), and we develop novel host organisms for the manufacture of resulting products. We have entered into a number of strategic alliances with market leaders across multiple industries, including: Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and Finnfeeds International Limited. INDUSTRY BACKGROUND Introduction Microbes, such as bacteria and fungi, are the world's most abundant and varied organisms and can be found in almost every ecosystem, including oceans, deserts, rain forests and arctic regions. Through generations of natural selection in diverse environments, microbes have developed characteristics that are broader and more varied than those encountered in plants or animals. These characteristics, which include the ability to survive in extreme temperature, tolerate high or low pH and high or low salt environments, are the result of the highly diverse genetic material found in the microbial world. This genetic material, commonly known as DNA, is a fundamental molecule found in the cells of all living organisms and is composed of four different chemical bases called nucleotides. Nucleotides are arranged into units called genes, which are the elements of heredity. Each gene carries the instructions for the production of a protein. One key class of proteins, known as enzymes, carries out the chemical reactions that give each microbe its unique character. Countless microbes, each with their unique enzymes, influence our lives in a multitude of ways. For example, some microbes make the soil fertile, clean up the environment and supply the atmosphere with oxygen, while others are used to produce vitamins and drugs, or improve our food. Commercial Applications Virtually any product or process that utilizes or could utilize proteins can potentially be improved using novel, naturally occurring biomolecules. Consequently, naturally occurring biomolecules are commercially applicable to a broad range of multi-billion dollar industries. For example, enzymes isolated from microorganisms have been used in home laundry detergents and for the production of cheese and sweeteners. While most enzyme applications were developed prior to the era of biotechnology, new commercial applications have been limited in the 1990's primarily because of the lack of new varieties of enzymes. Additionally, a significant portion of the enzymes being used commercially are not optimal for their intended uses. Traditional Approaches and Their Limitations Traditional methods of discovering enzymes and other biologically active molecules do not utilize a DNA-based approach, but are accomplished by screening extracts of plants or culturing microorganisms for the activity of interest. Once an activity is identified, purification is performed and the relevant molecule is isolated. With respect to biologically active molecules, this process is followed by the difficult and time consuming task of determining the chemical structure of the molecule, which requires producing sufficient quantities of the molecule by culturing a sample in the laboratory. To date, modern biochemical science has characterized greater than 3,000 enzymes. Nearly all of such enzymes have been identified from organisms that have been successfully cultured in the laboratory. Therefore, enzymes from only a small fraction of the billions 26 of different species of microorganisms living throughout the world have been characterized. The reasons for this include: . Less than an estimated 1% of the microorganisms in most habitats will grow using standard laboratory techniques because it is so difficult to precisely create the required environmental conditions; . If an extract from a plant or cultured organism is not collected at the appropriate time, the activity of interest may not be present, since enzymes and other bioactive molecules may only be synthesized at specific times during a cell cycle or under specific conditions; and . Even if the enzyme or bioactive molecule is isolated, the targeted recovery of the corresponding gene or genes encoding these molecules is usually difficult. Accordingly, the universe of potentially useful compounds from biodiversity remains largely untapped. Once an enzyme of interest is discovered, its genetic sequence can be studied and genetic variation may be introduced in an attempt to modify its function through this process of evolution. Genetic variation is generated predominantly by two methods: mutation and recombination. Mutation is the introduction of changes into a gene. Mutation can be achieved by several methods, including forcing the DNA to replicate in a manner which intentionally causes random changes. Mutation is typically achieved by randomly introducing single DNA base mutations into a gene in an attempt to alter a single amino acid within the corresponding protein. Each of these methods has deficiencies that make it virtually impossible to generate all 19 possible amino acid changes at each position within the protein. To generate all amino acid changes at each site would require multiple, appropriately positioned DNA base changes. In actual practice, fewer than six changes, on average, are explored due to deficiencies in mutation and sampling methods. Recombination, the other method for producing genetic variation, is the mixing of two or more related genes to form hybrids. However, the generation of improved variants has, to date, been inefficient and laborious, or has allowed only closely related genes to be recombined. Regardless of the method used to generate the variation, mutation or recombination, the improved molecules must be selected from numerous unimproved or defective versions. This selection process requires the ability to quickly screen large numbers of genes to distinguish the improved versions. Once a desired gene is found and optimized, commercial production requires insertion of the gene into a production system or host. Almost all of the current commercial enzymes used in industrial applications today were derived from cultured microorganisms and produced in these or similar organisms. However, genes encoding unique biomolecules may not be able to be expressed and commercially produced in traditional systems. Thus, traditional methods present both the problem of novel biomolecule identification and the challenge of commercial production of any identified biomolecules. DIVERSA'S SOLUTION AND ADVANTAGES Our proprietary technologies and tools address the limitations of traditional approaches for the recovery and modification of novel genes and linked genes comprising novel gene pathways and the manufacture and commercialization of related products. Our fully-integrated process includes the following steps: . We collect small environmental samples containing heterogeneous populations of uncultured microbes from diverse ecosystems and extract the genetic material from these organisms, eliminating the need to grow and maintain the organisms in cultures in the laboratory. Since small samples yield sufficient DNA, we minimize our impact on sensitive environments. . We create gene expression libraries, DiverseLibraries(TM), from the DNA extracted from the organisms found in the specified environment, and PathwayLibraries(TM), libraries of multi-gene pathways responsible for the production of small molecules. We estimate that our gene expression libraries 27 currently contain the complete genomes of over 1 million unique microorganisms, comprising a vast resource of genetic material that can be screened for valuable commercial products. . We employ proprietary methods for quickly and cost-effectively screening large numbers of novel genes and their variants. Our proprietary screening techniques efficiently address the tremendous volume of genetic material captured in our libraries and significantly accelerate the product development process. Our data management and analysis system, SciLect(TM), allows us to store and manipulate the vast amount of information generated from our screening activities. . We utilize our proprietary DirectEvolution technologies, including Gene Site Saturation Mutagenesis and GeneReassemby, to enable a full range of accelerated DNA mutations. This greatly enhances the efficiency of the evolution process, and reduces the laborious nature of current mutation and recombination processes. . We insert a selected gene or pathway into novel hosts for biomolecule production for the manufacture of resulting products, facilitating better gene expression and thereby improving the efficiency of traditional production processes. Innovation From Biodiversity And Gene Evolution Process [Diagram titled Diversa: Innovation from BioDiversity Process] We believe the integration of these capabilities enables us to maintain our leadership in developing and commercializing novel products to address the needs of our target markets. The genetic diversity of our expansive gene libraries and our proprietary high-throughput screening and evolution technologies allow us to shorten the development cycles for novel enzymes and biologically active compounds. Additionally, our processes are designed to help our customers improve their manufacturing processes, reduce costs, reduce waste, improve yield and improve the quality of their end products. 28 MARKET OPPORTUNITIES We are developing products for a number of multi-billion dollar markets, including agricultural, chemical processing, industrial and pharmaceutical applications. Our target markets provide both short-term and long-term product revenue opportunities, with chemical and industrial products having relatively short development and regulatory approval processes, agricultural products having intermediate term development and regulatory approval processes, and pharmaceutical products having longer development and regulatory approval processes. Within these broad markets we are targeting key segments where we believe our technologies and products will create high value and competitive advantages for our strategic partners and our customers. We have been able to identify and produce enzymes that exhibit dramatic increases in efficiency and stability applicable to strategic partners' and customers' unique requirements, such as high or low temperature stability, high or low pH tolerance, high or low salt tolerance, or combinations of these features. Agricultural Products The growth of the agricultural market has been spurred by the world's population growth. This growth has led to the demand for new technology that improves productivity, reduces environmental impact and improves quality, safety and nutritional value of agricultural products. Animal feed crops, such as corn, wheat, barley, rye, oats and soybean, can be improved through the selective development of value-added traits. We estimate that the animal feed market is currently $36 billion in annual revenue. Additionally, in 1997 $5.9 billion was spent on animal feed additives for the purpose of improving feed digestibility and increasing nutritional value. Genetically engineered crops with improved traits are expected to contribute substantially more value to the existing $15 billion agriculture seeds market. In addition, consumer and regulatory demands for alternative pest management solutions will fuel growth in the agrochemical market, estimated at $33 billion in 1998. In agriculture, we are developing a variety of specialty enzymes, engineered genes and small molecules for use in the following applications: . Crop Protection. We have developed enzymes that will be used as biological catalysts to produce building blocks for agricultural chemicals and active ingredients in herbicides and insecticides. We are also developing genes to be inserted into crops to provide them with insect resistance and herbicide tolerance. In addition, we are developing small molecules with anti-fungal properties. These products are designed to increase crop yield and reduce the environmental impact of crop protection techniques. . Animal Feed Additives. Animal feed additives are designed to increase digestibility of essential vitamins and minerals, increase nutritional value and animal product yield and reduce harmful materials in waste. We are developing several classes of enzymes, including phytases, carbohydrases and proteases, for the increased absorption of organic phosphorous and digestibility of carbohydrates, as well as the promotion of weight gain in livestock. We are also developing genes to impart these same qualities into genetically engineered crops. . Agricultural Product Processing. We have developed genes for improving grain processing, nutrition and specialty foods. These applications include starch and oil modification and breakdown of non-starch polysaccharides to increase nutritional and food value. . Animal Health. In addition to the above applications, we intend to develop vaccines and therapeutics to treat and prevent diseases of farm animals. Chemical Processing Annual revenue for the chemical industry currently exceeds $800 billion. Our focus is on both fine chemicals, such as chiral chemicals used as building blocks for pharmaceuticals, and high-performance 29 chemicals. The current market for fine chemical intermediates is approximately $45 billion, of which an estimated $25 billion relates to building blocks useful for the manufacture of chiral and other drugs. In chemical processing, we are developing a variety of specialty enzymes for use in the following applications: . Building Blocks for Production of Chiral Pharmaceuticals. We are developing enzymes for the production of desired, active and essential elements for the manufacture of chiral drugs, including many of the leading revenue generating drugs currently on the market. We believe these enzymes may also reduce production costs and waste associated with manufacturing these compounds. . High Performance Specialty Chemicals and Polymers. We are developing enzymes that act as biological catalysts in the production of specialty chemicals and polymers such as amino acids, anti-oxidants, vitamins and pigments. These enzymes are intended to reduce manufacturing costs both by reducing the amount and number of steps necessary to produce these specialty chemicals and polymers and by reducing the production of unwanted byproducts from these production processes. Industrial Enzymes Industrial enzymes represents a growing market, estimated at $1.8 billion in revenue in 1998. We believe there are a number of applications within this market that could provide us with commercial opportunities. We are currently developing a variety of specialty enzymes for use in the following applications: . Oil and Gas Well Breakers. We have developed thermostable enzyme breakers that improve viscosity control and are designed for use in deep and high temperature wells. These enzyme breakers allow for improved extraction of oil and gas from existing wells, resulting in greater production and increased revenue per well. . Detergents. We are developing more effective enzymes for solving currently unmet needs in fabric care, dishwashing and industrial cleaning. These specialty enzymes are intended to improve removal of oil, protein, starch and other difficult-to-remove stains, as well as maintain the original condition of washed fabrics. . Corn Wet Milling. Corn wet milling enzymes are used to modify the starch found in corn to produce higher value end products, such as high fructose corn syrup and ethanol. We are developing new enzymes that we believe will significantly reduce the costs and energy requirements for this process, by eliminating the need for particular process adjustments and the waste that results from these processes. . Textile Manufacturing. We have developed, and are continuing to develop, enzymes that assist in the removal of starch from textiles in manufacturing and also impart desired appearance qualities to the finished fabric. These enzymes are designed to reduce the manufacturing cost and waste associated with the use of harsh chemicals currently used in this process. . Pulp and Paper Processing. We intend to develop enzymes to aid in pre- bleaching pulp, which reduces the need to use strong oxidizer chemicals, such as chlorine and sulfite, in that process. The enzymes we develop could reduce the cost of pulp processing both by reducing the amount of oxidizer chemicals required and the expense associated with treating the waste resulting from the use of these harsh chemicals. . Production of Modified Oils. We intend to develop enzymes to create custom products, such as margarines, cooking oils and lubricants, through the modification of fats and oils. Our enzymes will be directed to improving product qualities, such as reducing the cholesterol causing components in margarine and cooking oils and improving the heat stability of lubricants. 30 Pharmaceutical Products According to an industry source, the worldwide pharmaceutical market was $300 billion in 1998 and is expected to grow to $415 billion by 2002. Our earlier-stage pharmaceutical program seeks to apply our technologies to the discovery and development of compounds for selected applications within this market. We believe that the initial applications for our technologies will lead to strategic partnerships that include: . Discovery of Small Molecule Compounds. Using our ultra high-throughput screening methods, we are working to discover small molecule compounds as candidates for anti-microbials, anti-fungals, anti-virals and other therapeutic drugs. We believe that our recombinant product methodologies can yield results superior to other approaches because natural pathways can yield more complex chemical structures compared to lab-based synthesis. In addition, naturally-derived molecules have been pre- selected in the environment to perform specific biological functions. Finally, our recombinant small molecule discovery approach permits higher throughput discovery. . Improving Protein Therapeutics, Vaccines and Gene Therapy Products. We intend to apply our technologies to the improvement of protein therapeutics, vaccines and gene therapy products. Our DirectEvolution technologies can be utilized on environmental and human proteins to generate human therapeutics with enhanced activity, reduced side effects and extended patent life. OUR STRATEGY Our goal is to be the leading provider of novel enzymes and biologically active compounds for use in agricultural, chemical processing, industrial and pharmaceutical applications. The key elements of our strategy are to: Protect and enhance our technology leadership position. We are unique relative to our competitors in that we have an end-to-end product solution consisting of access to novel genetic material, assay technologies capable of screening more than a billion genes per day, multiple evolution technologies and manufacturing expertise. We have surrounded our technology with a substantial portfolio of intellectual property, and we will continue to make investments in developing and protecting these assets. Expand our existing DNA libraries through access to novel genetic material and utilize our proprietary technologies to discover new genes and pathways to provide solutions to market needs. We believe our ability to create expanded libraries using minute samples of genetic material collected from diverse environments is an important factor to our success. Our need to use only small environmental samples results in minimal impact to the surrounding ecosystem, enabling us to enter into formal genetic resource access agreements. To date, we have obtained samples under these agreements with Costa Rica, Bermuda, Indonesia, Yellowstone National Park, Mexico and Iceland. We intend to enter into additional agreements to further strengthen our biodiversity access program by expanding both the countries and the types of ecosystems from which we obtain samples. We have also collected samples from private lands in the United States and in areas that do not require formal access agreements, such as the deep sea. Using our proprietary techniques to recover the genes from these samples, we have constructed our DiverseLibraries. We intend to expand these DiverseLibraries, which we estimate currently contain the total genomes of over 1 million unique microorganisms. We are also making a significant effort to expand our collection of multi-gene pathways, our PathwayLibraries. We believe that the application of our proprietary technologies to this vast resource of genetic material will provide us with a myriad of product candidates for attractive commercial applications. Deploy our technologies across diverse markets in order to maximize our return on investment. We are focusing on commercial solutions for a broad range of applications for the agricultural, chemical, industrial processing and pharmaceutical industries. Products and processes utilizing genes, proteins, small molecules, pathways and bioactive molecules are all potential targets. Discoveries or developments made for any particular market may find use in other applications, resulting in enhanced revenues, more efficient use of corporate resources and increased return on investments. 31 Pursue additional strategic alliances with market leaders to access funding and industry-specific expertise and to more efficiently develop and commercialize a larger product portfolio. We will continue to enter into strategic alliances with leading corporations in our target markets. The key components of the commercial terms of such arrangements typically include some combination of the following types of fees: exclusivity fees, technology access fees, technology development fees, research support payments, milestone payments, license or commercialization fees and royalties or profit sharing income from the commercialization of products resulting from the strategic alliances. These partners represent market leaders across multiple industries, and include Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and Finnfeeds International Limited. Independently develop and commercialize products in selected markets to capture their full economic value. In addition to developing enzymes and bioactive molecules through strategic alliances, we have developed and will continue to develop products independently. For example, we successfully introduced our first commercial product, Pyrolase 160, into the oil and gas services market in 1999, and are currently developing Pyrolase 200, a second- generation product with a higher range of temperature stability. We will determine which products to pursue independently based on various criteria, including: investment required, estimated time to market, regulatory hurdles, infrastructure requirements and industry-specific expertise necessary for successful commercialization. Because we will retain commercial rights to independently developed products, we expect that these products will provide attractive margins. TECHNOLOGIES DNA Sampling and Processing Our discovery program begins with access to biodiversity. Biodiversity can be defined as the total variety of life on earth, including genes, species, ecosystems and the complex interactions between them. We have obtained samples from virtually all ecosystems represented on earth including such environments as: geothermal and hydrothermal vents, acidic soils and boiling mud pots, alkaline springs, marine and freshwater sediments, marine symbionts, manure piles, contaminated industrial sites, arctic tundra, dry Antarctic valleys, super cooled sea ice, microbial mats, bacterial communities associated with insects and nematodes, fungi and plant endophytes. We also access genetic material from public and private culture collections. Because we clone DNA directly from environmental sources, we need to collect only minute samples of genetic material, which results in minimal impact on the surrounding ecosystem. As a result, we have been able to obtain broad access to biologically diverse environments around the world. Gene Library Generation To successfully capture the enormous genetic diversity present in uncultured microbial community samples, we have developed a series of techniques, which enable substantial recovery of DNA from a wide range of sample types, while assuring DNA purity. Our methods for analysis of environmental samples give scientists a rapid estimation of the total number of species present and the relative abundance of each species within a sample. DNA recovered from complex environmental samples often represents the genomes of thousands of different microbial species, some of which are generally more abundant than others. We estimate that there may be as much as a 100,000-fold difference in abundance between a dominant species and a rare species in a single sample. To access the genetic material of rare microbial species in a given sample, we have developed proprietary normalization technologies that result in a more equal representation of each species at the genetic level. Because current culturing techniques are generally incapable of capturing this underrepresented genetic material, this potentially valuable source of genetic information has historically not been available to commercialize. DiverseLibrary Generation. We have developed proprietary methods for construction of complex, representative environmental gene libraries. A gene library is a stored collection of DNA fragments or genes. 32 We store these genes in library form by cloning or splicing the DNA fragments into a vector, a piece of DNA that acts as a carrier or a transporter into a host cell. The DNA fragment spliced into the vector DNA is called a recombinant molecule or clone. A collection of clones representing the entire DNA isolated from the organisms in the sample is a representative gene library. In order to capture the complete genomic diversity present in these complex microbial samples, which may contain more than 4,000 distinct genomes, we prepare very large member libraries. The result is the creation of a DiverseLibrary, which typically represents genomic coverage of these microorganisms. We estimate that collectively our DiverseLibraries contain the complete genomes of over 1 million different microorganisms, which far exceeds the estimated 10,000 microorganisms which have been described in the scientific literature. PathwayLibrary Generation. We are also developing PathwayLibraries, collections of multi-gene pathways used in the discovery and production of small molecules. While a single gene is responsible for the production of an enzyme, the production of small molecules, such as antibiotics, typically requires multiple genes working together in a coordinated fashion within a genetic pathway. In addition, whereas the genetic blueprint for the production of an enzyme is generally contained within approximately 1,000 nucleotides of DNA, the blueprint for the production of an antibiotic pathway is typically more than 25,000 nucleotides, and can be greater than 100,000 nucleotides. For this reason, we are developing specific molecular tools that can accommodate and stably maintain such large pieces of DNA in a library. Screening and Enrichment We have developed an array of automated, ultra high-throughput screening technologies and enrichment strategies. Our proprietary rapid screening capabilities are designed to discover novel biomolecules by screening for biological activity, known as expression-based screening, as well as by identifying specific DNA sequences of interest, known as sequence-based screening. We have developed several hundred assays capable of expression-based screening from thousands to over 1 billion clones per day. Our key screening technologies include SingleCell screening and high-throughput robotic-based screening. Our ultra high-throughput SingleCell screening system uses Flouresence Activated Cell Sorting, or FACS, a technology that enables the identification of biological activity within a single cell. Our SingleCell screens have been developed to identify clones based on activity or DNA sequences. This system incorporates a laser with multiple wavelength capabilities and the ability to screen up to 50,000 clones per second, or over 1 billion clones per day. The robotic screening system uses a high density microtiter plate-based format, currently capable of screening and characterizing up to 1 million clones per day. If the clone expresses an activity or contains a DNA sequence of interest, it is isolated for further analysis. We have also developed rapid methods for sequence-based screening for targeted genes directly from purified DNA. One of these methods, biopanning, is a powerful alternative to traditional methods, especially when the gene is toxic or unstable, or when the expression assay is laborious and time consuming. Using our proprietary techniques, it is possible to screen 100 million clones per day for DNA sequences of interest. Because we conduct patented, activity-based screening, we are able to use gene sequences with known function from our proprietary database to identify the function of genes in public databases based on their sequences. These newly identified sequences are then added to the repertoire of proprietary sequences in our own database. As more microbial genomes are sequenced, our ability to associate gene sequence with enzyme function will be enhanced. This sequence database provides us with unique opportunities to find and patent more sequences with similar function and the potential to modify these sequences in order to create optimized catalysts and other biomolecules for various commercial applications. 33 DirectEvolution The genetic code is structured such that a sequence of three nucleotides defines an amino acid. Nature uses 20 common amino acids in proteins arranged in a sequence, defining the protein structure and activity. Over the course of evolution, nature has sampled countless sequence possibilities to evolve enzymes to function optimally within the cell. However, when an enzyme is removed from its natural cellular environment and used to perform reactions, such as in a chemical process, its function may not be optimal. Laboratory methods can accelerate the evolutionary process of optimization outside of the cell by creating a large number of variants for screening. In the traditional method for improving proteins, called site-directed mutation, a single site is typically targeted for change based on prior knowledge of the protein structure. Other traditional techniques, including random mutation, typically produce single nucleotide changes which can only access a limited number of alternative amino acids, typically fewer than 6 of the possible 19 alternatives. These methods are limited by their inability to produce all sequence variations. Furthermore, the large number of resulting sequences presents formidable screening challenges. We believe our techniques overcome the limitations of these traditional methods, not only because of our superior screening capabilities, but also by increasing the number and types of sequence variations we can create. Our evolution technologies used to modify the DNA sequence of the genes, DirectEvolution, include Gene Site Saturation Mutagenesis (GSSM) and GeneReassembly. GSSM creates a family of related genes that all differ from a parent gene by a single amino acid change at a defined position. By performing GSSM on a gene encoding a protein, we create all possible single amino acid substitutions within that protein, removing the need for prior knowledge about the protein structure and allowing all possibilities to be tested in an unbiased manner. The family of variant genes created using GSSM is then available to be screened for proteins with improved qualities, such as increased ability to work at high temperature, increased reaction rate, resistance to deactivating chemicals or other properties important in a chemical process. Individual changes in the gene that cause improvements can then be combined to create a single highly improved version of the protein. In addition to altering single genes using the GSSM technique, we use our proprietary GeneReassembly technologies for the reassembly of related genes from two or more different species. Our GeneReassembly technologies recombine multiple genes to create a large population of new gene variants. The new genes created by GeneReassembly are then screened for one or more desired characteristics. This evolutionary process can be repeated on reassembled genes until new genes expressing the desired properties are identified. GeneReassembly technologies can be used to evolve properties which are coded for by single genes, multiple genes and entire genomes. As illustrated in the table below, we believe the combination of our GSSM and GeneReassembly technologies addresses the broadest range of potential optimization parameters for any enzyme:
CHARACTERISTICS FOR ENZYME OPTIMIZATION OPTIMAL DIRECTEVOLUTION TECHNOLOGY - --------------------------------------------------------------------------------------- Stability GSSM - --------------------------------------------------------------------------------------- Enhancement without inappropriate immune response GSSM - --------------------------------------------------------------------------------------- Activity GeneReassembly/GSSM - --------------------------------------------------------------------------------------- Expression GeneReassembly/GSSM - --------------------------------------------------------------------------------------- Specificity GeneReassembly/GSSM
We believe that the ability to selectively apply our GSSM or GeneReassembly technologies to optimize enzymes provides us with a distinct competitive advantage. GSSM is better suited in some situations, for example, in the optimization of an enzyme's stability or its immune response characteristics. With respect to stability, applying GSSM may significantly improve temperature tolerance through combining single amino acid alterations at defined positions, while maintaining the enzyme's overall characteristics, such as specificity. In one situation, we have used this technology to improve enzyme stability by a factor of 30,000. Similarly, 34 adverse immune system responses may be avoided by the incremental changes created by GSSM. In contrast, random shuffling technologies, which cause dramatic block shifts in DNA structure, are more likely to reduce stability and create undesirable immune response characteristics. On the other hand, when optimizing for activity, expression and specificity, both GSSM and GeneReassembly can produce optimal results. Because we have multiple evolution technologies combined with optimal natural enzymes to which we apply these evolution methodologies, we believe that we are well-positioned to provide the best solutions to our customers. Our Data Management and Analysis System - SciLect We have developed and continue to enhance a leading edge, web-based relational scientific database for internal purposes called SciLect. SciLect provides a secure, reliable and accurate source for storage, retrieval and analysis of vast amounts of proprietary biological data. Our SciLect system includes custom-developed and third-party bioinformatics software tools which assist in the acquisition and analysis of complex data relating to genes, proteins, sequence similarity to known genes, three-dimensional structure prediction and biological pathways. SciLect includes information relating to: . Samples - detailed descriptions of each sample collected; . DNA extractions - the results of separating or isolating DNA molecules directly from samples; . Gene libraries - detailed descriptions of the genetic material in our DiverseLibraries and PathwayLibraries; . Screening events - the results of assays from our high-throughput screening systems; . Novel enzymes - specific properties or characteristics of each enzyme (e.g. optimal temperature, optimal pH, specific activity); . Sequence data and analysis results - the output of raw DNA sequence data from our ultra high-throughput screening technologies and the analytical results from the application of our bioinformatics software tools; . Clone data - descriptions of host organisms containing unique fragments of DNA or copies of DNA optimized for increasing DNA or enzyme yield; . Optimization data - results from GSSM and GeneReassembly; . Expression data - results from the process of optimizing protein production; and . Patents - information on key data, genes and processes relating to our intellectual property portfolio. Utilizing the combination of SciLect and public databases, we are able to first verify that we have a unique gene. We are then able to mine public databases for previously unidentified proteins that can be added to our portfolio of patented proteins. Publicly available databases of proteins and genomic data are imported daily to our secure environment. Through the use of SciLect, we have assembled a large proprietary database of patent-protected, assembled and annotated unique gene sequences of over 1,000 novel enzymes. Production - Host Cell Optimization Production of proteins and pathway products has historically been very challenging due to the difficulty of producing commercial quantities of these products in traditional host organisms. This problem can be overcome by finding or developing a more suitable host organism. In the past, random mutation has been used in an effort to create more efficient hosts. We believe our host cell optimization processes will accelerate this effort. We are working on a number of host organisms to improve their functionality as production hosts by: . Sequencing the complete DNA of a host organism; . Engineering defined changes in the host genome by, for instance, adding or removing genes that, when substituted, will improve production or permit the host to grow better under industrial conditions; 35 . Monitoring the effects of changes on the production of enzymes and pathway products and continuing to engineer changes; and . Applying our screening technologies to rapidly characterize the effects of these changes. PRODUCTS We have successfully commercialized our first product, Pyrolase 160, an enzyme for oil and gas well fracturing operations. Sales of this product commenced in January 1999, only two years after project initiation. We expect to commercialize Pyrolase 200, a second generation oilfield enzyme product that operates at a wider temperature range, in 2000. We believe our independent development of Pyrolase 160 validates our technologies and illustrates our ability to develop products rapidly using our proprietary methods. We intend to commercialize products both independently and in collaboration with strategic partners. The following chart summarizes the stages of development for the portfolio of projects we are pursuing. We anticipate that a single project may lead to multiple commercial product candidates. [DIAGRAM OF A PYRAMID WITH EIGHT LEVELS, EACH INDICATING A STAGE OF DEVELOPMENT AND THE NUMBER OF PROGRAMS THAT HAVE PROGRESSED THROUGH THE SPECIFIED STAGE.] As of January 15, 2000, we had 43 projects in various stages of development in our target markets. Of these, 8 had reached advanced stages of development, of which one had been commercialized. An additional 15 projects had already entered the product candidate stage with 20 more projects in various earlier stages of development. We believe that each of these projects could lead to multiple product solutions across multiple target markets. CURRENT ALLIANCES AND OTHER AGREEMENTS Current Alliances Our strategy includes pursuing strategic alliances with market leaders in our target markets. In exchange for selected rights to future products, these strategic alliances provide us funding and resources to develop and commercialize a larger product portfolio. In various instances, these strategic alliances allow us to leverage our partners' established brand recognition, global market presence, established sales and distribution channels and other industry-specific expertise. The key components of the commercial terms of such arrangements typically include some combination of the following types of fees: exclusivity fees, technology access fees, technology development fees, research support payments, milestone payments, license or commercialization fees and royalties or profit sharing from the commercialization of products. In addition to $10.7 million received from inception through December 31, 1999, our partners are committed to fund $68.0 million under existing agreements over the next five years. Our partners have also purchased $9.2 million of our equity securities. 36 To date, we have entered into the following strategic alliances: Novartis In January 1999, we entered the agricultural biotechnology arena through a strategic alliance with Novartis Agribusiness Biotechnology Research, Inc. This alliance covers a multi-project collaborative research and development agreement to develop products for crop enhancement and improved agronomic performance. Under terms of the agreement, we are utilizing our unique discovery and screening technologies to identify and optimize genes and gene pathways for use in transgenic crops. The initial projects focus on new genomic approaches that will provide improved performance and quality traits in crops and enhance production. Under the agreement, Novartis receives an exclusive option to receive a worldwide license to products developed. At Novartis' election the license may be either exclusive or non-exclusive. In conjunction with the transaction, Novartis purchased 5,555,556 shares of series E preferred stock for gross proceeds of $7.3 million, paid a technology access fee of $3.0 million and provided project research funding of $2.2 million to us, for aggregate total proceeds of $12.5 million. We are recognizing the research payments and the technology access fee on a percentage of completion basis as research is performed. In December 1999, we formed a five-year, renewable strategic alliance with Novartis Seeds AG. Through a contract joint venture, we will jointly pursue opportunities in the field of animal feed and agricultural product processing. We will share in the management of the venture and fund a portion of the sales and marketing costs of this venture. Under the agreements, Novartis receives exclusive, worldwide rights in the field of animal feed and project exclusive, worldwide rights in the field of agricultural product processing. Novartis will pay us for the license granted under this agreement, of which $15.0 million will be due within 30 days of regulatory approval and an additional $5.0 million due at the 18 month anniversary of this agreement. Additionally, we will receive minimum research funding over five years of $33.9 million, as well as milestone payments upon achievement of project objectives totaling up to $7.7 million and license and commercialization fees for any resulting products. We will receive a share of the profits in the form of royalties on any product sales. Either party may terminate these agreements in the event a material breach remains uncured for 90 days. Novartis may terminate these agreements within 60 days of a change of control of Diversa. The Dow Chemical Company In July 1997, we entered into an alliance with The Dow Chemical Company. The alliance was for a project involving biocatalytic discovery and optimization for use in new and existing Dow processes. This initial project was directed towards the incorporation of a high performance enzyme into a modified chemical process. Our staff successfully optimized an enzyme for this project with significantly greater thermostability at a defined temperature, thereby meeting milestones specified in the agreement. In July 1999, we entered into a new, three-year research agreement and a license agreement with Dow. The new agreements significantly broaden the scope of our original alliance. We are applying our discovery and optimization technologies for Dow to develop a variety of novel enzymes for multiple chemical processes on a reaction-exclusive basis. The research agreement involves multiple projects in the field of chemical processing. The three-year agreement requires Dow to make annual technology development payments of $1.5 million. Dow will also fund the research costs for the duration of the contract totaling $10.8 million. We will also receive milestone payments of up to $2.7 million upon achievement of established objectives and license and commercialization fees for any resulting products. We will also receive royalties on sales of our royalty-bearing products sold or sublicensed by Dow. We are amortizing the technology development fees over the minimum guaranteed period of the agreement. In the license agreement, we grant Dow an exclusive, worldwide, royalty-bearing license to use enzymes for research processes. Either party may terminate the research agreement upon failure to pay amounts due for 30 days or material breach if uncured within 60 days. The research agreement may also be terminated by Dow with 180 days written notice or upon a change of control to a Dow competitor 37 with 30 days notice, in both cases upon the payment of defined penalties. We may terminate the license agreement in the event of a material breach if uncured for 30 days. Dow may terminate the license agreement on 3 months written notice. Rhone-Poulenc Animal Nutrition S.A. In June 1999, we entered into a six month collaboration agreement with Rhone-Poulenc Animal Nutrition S.A., RPAN, under which we are using our gene discovery and optimization technologies to develop novel enzymes which can be used for biotransformation as an alternative to chemical synthesis. RPAN will receive an option to obtain an exclusive, worldwide royalty-bearing license to the targeted enzymes for a specified field. If RPAN does not exercise its option, the agreement will expire. If RPAN exercises its option, the term of this agreement will continue until the expiration of all patent rights covering the licensed enzymes. RPAN supports research costs and will pay us a license fee and a royalty based upon cost savings attributable to licensed enzymes. This agreement may be terminated by either party upon material breach if uncured within 30 days. Finnfeeds International Limited In May 1996, we formed an alliance with Finnfeeds International Limited. The companies worked jointly to identify and develop a novel phytase enzyme that when used as an additive in animal feed applications allows higher utilization of phytic acid phosphates from the feed, thereby increasing its nutritional value. The addition of phytase to animal feed reduces the need for inorganic phosphorus supplementation and lowers the level of harmful phosphates that are introduced to the environment through animal waste, resulting in inorganic phosphate cost savings and a significant reduction in environmental pollution. In conjunction with the agreement, we issued 844,444 shares of our series C preferred stock to Finnfeeds for $1,900,000. We received and recognized as revenue $0.8 million in research funding over the period from May 1996 through December 31, 1998. We achieved all milestones under the agreement. Following the completion of the initial objectives of our alliance with Finnfeeds, in December 1998, we entered into a license agreement with Finnfeeds. Under this license agreement, we granted Finnfeeds an exclusive, worldwide license to an enzyme and related technology for specified uses, including manufacturing and sales of the enzyme. Finnfeeds has continuing royalty obligations to us on product sales that incorporate the licensed technology. Finnfeeds can terminate this agreement at any time upon six months notice to us. We can terminate this agreement upon material breach by Finnfeeds if uncured within 60 days. License Agreements In addition to our strategic alliances, we have entered into various agreements whereby we have in-licensed patented technologies to supplement our internally developed methods, the most significant of which we have outlined below. The financial impact of these agreements to us is not significant. Invitrogen Corporation In March 1999, we signed an agreement with Invitrogen Corporation for the exchange of proprietary technologies and products in specified fields of use. Under the terms of the agreement, we have an exclusive license to use Invitrogen's TOPO Cloning technology in the field of cloning nucleic acids from mixed populations and uncultured organisms. Invitrogen has an option to access selected proprietary DNA modifying enzymes for use in the research reagent marketplace. The TOPO Cloning technology broadens our portfolio of cloning technologies. We paid Invitrogen a license fee and will pay an annual maintenance fee in exchange for materials. Each party will have a royalty obligation for the life of the patent rights on product sales that incorporate the licensed technology. We can terminate this agreement with 90 days written notice. Invitrogen 38 can terminate with 90 days written notice upon our failure to make any payment or immediately upon our default if uncured within 90 days. Terragen Discovery, Inc. In November 1999, we signed a royalty-free cross-license agreement with Terragen Discovery, Inc. granting non-exclusive, worldwide license rights for the life of specified patents. We granted rights to our patents protecting accessing genomes of uncultured organisms for the discovery of pathways producing novel small molecules for pharmaceutical applications and Terragen granted us co-exclusive rights to patents protecting generation and screening of combinatorial libraries from mixed populations of organisms for all fields of use. Under the agreement, we paid Terragen a $2.5 million license fee and will pay annual maintenance fees for the remaining life of the patents. The term of the licenses we granted to Terragen and that Terragen granted to us will continue until the expiration of all valid claims within the licensed patent rights. Either party may terminate this agreement in the event a material breach remains uncured for 60 days. Both parties have rights to terminate under special conditions. One Cell Systems, Inc. In December 1997, we entered into a research license agreement with One Cell Systems, Inc. which provided us with non-exclusive access to One Cell's proprietary encapsulation technologies for an initial term of twelve months. This agreement was extended in February 1999. Under the terms of the agreement, we receive equipment and reagents to use the proprietary technology in exchange for annual payments. The extension to the agreement expires on December 31, 1999 but is renewable for a subsequent term at One Cell's option. Mycogen Corporation In December 1997, we signed a license agreement with Mycogen Corporation for access to its proprietary expression system. Under the terms and conditions of the agreement, we have an exclusive, worldwide license to use the system for the production of enzymes in exchange for a license fee and royalties paid to Mycogen. The agreement can be terminated by either party upon material breach if uncured for 60 days. Biodiversity Access Agreements We have obtained genetic material under formal genetic resource access agreements with Costa Rica, Bermuda, Indonesia, Yellowstone National Park, Mexico and Iceland. Pursuant to the terms of these agreements, we have obtained non-exclusive access to collect samples from diverse ecosystems, we own the samples collected and we pay a royalty to the other party on the sale of products derived from the samples. All of these agreements expire in 2002 or earlier, and they are all subject to earlier termination. Our access agreement with Iceland was terminated, and we have voluntarily ceased collections of further samples in Yellowstone National Park pending their resolution of collection guidelines. If an access agreement terminates and a new agreement is not established, we will not be permitted to collect any further materials from the specified location; however, we will retain the right to use any samples we have already collected. The financial impact of these agreements to us is not significant. COMPETITION We believe we are the leader in the field of biomolecule discovery and optimization from biodiversity. We are not aware of another company that has the scope and integration of technologies and processes that we have. There are, however, a number of competitors who are competent in various steps throughout our technology process. For example, Terragen Discovery, Inc. is involved in accessing organisms from diverse environments. A number of companies are performing high-throughput screening of molecules. Maxygen, Inc. and Evotech have alternative evolution technologies. Integrated Genomics Inc., Myriad Genetics, Inc., ArQule, Inc. and Aurora Biosciences Corporation perform screening, sequencing and/or bioinformatics services. Novo 39 Nordisk A/S and Genencor International Inc. are involved in development, overexpression, fermentation and purification of enzymes. There are also a number of academic institutions involved in various phases of our technology process. Many of these competitors have significantly greater financial and human resources than we do. We believe that the principal competitive factors in our market are access to genetic material, technological experience and expertise and proprietary position. We believe that we compete favorably with respect to the foregoing factors. Any products that we develop will compete in multiple, highly competitive markets. Many of our potential competitors in these markets have substantially greater financial, technical and marketing resources than we do, and we cannot assure you that they will not succeed in developing products that would render our products or those of our strategic partners obsolete or noncompetitive. In addition, many of these competitors have significantly greater experience than we do in their respective fields. Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner and are technologically superior to and/or are less expensive than other products on the market. Current competitors or other companies may develop technologies and products that are more effective than ours. Our technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. The existing approaches of our competitors or new approaches or technology developed by our competitors may be more effective than those developed by us. MANUFACTURING STRATEGY Our manufacturing strategy is to secure contract manufacturing relationships with qualified third parties possessing sufficient industrial fermentation capacity to meet our commercial production requirements. We plan to place our own technical personnel on site at contract manufacturing facilities to plan and supervise our production. Our employees have extensive experience in scale- up and production of industrial fermentation products, including industrial enzymes. We have cleared regulatory requirements for our first two commercial enzymes, and are producing our first product at commercial scale. We manufacture Pyrolase 160 pursuant to an arrangement with a third party that has the required manufacturing equipment and available capacity to manufacture the product under our direction and oversight. We also currently lease a pilot facility for process development activities from a third-party, which we intend to vacate by March 2000. We plan to construct our own pilot development facility during 2000 and have identified alternative capacity to meet interim requirements. In addition to requiring investment in equipment, construction of this new facility will necessitate compliance with applicable regulations. After we complete the construction of our pilot facility, we will continue to depend on third parties for large-scale commercial manufacturing. We do not currently depend on any single supplier for the raw materials necessary for the operation of our business. We may become dependent on a single supplier in the future. GOVERNMENT REGULATION Many of our product opportunities, and all of our projects to date, have applications other than as regulated drug products. Non-drug biologically derived products are regulated, in the United States, based on their application, by either the FDA, the Environmental Protection Agency (EPA) or, in the case of plants and animals, United States Department of Agriculture (USDA). In addition to regulating drugs, the FDA also regulates food and food additives, feed and feed additives, and GRAS (Generally Recognized As Safe) substances used in the processing of food. The EPA regulates biologically derived chemicals not within the FDA's jurisdiction. Although the food and industrial regulatory process can vary significantly in time and expense from application to application, the timelines generally are shorter in duration than the drug regulatory process, ranging from six months to three years. The European regulatory process for these classes of biologically derived products has undergone significant change in the recent past, as the EU attempts to replace country by country regulatory procedures 40 with a consistent EU regulatory standard in each case. Some country-by-country regulatory oversight remains. Other than Japan, most other regions of the world generally accept either a United States or a European clearance together with associated data and information for a new biologically derived product. In the United States, transgenic agricultural products may be reviewed, by the FDA, EPA and USDA, depending on the plant and the trait engineered into it. The regulatory process for these agricultural products can take up to five years of field testing under USDA oversight, and up to another two years for applicable agencies to complete their reviews. Outside of the United States, scientifically-based standards, guidelines and recommendations pertinent to transgenic and other products intended for the international marketplace are being developed by, among others, the representatives of national governments within the jurisdiction of the standard-setting bodies, including Codex Alimentarius, the International Plant Protection Convention and the Office des International Epizooties. The use of the existing standard-setting bodies to address concerns about products of biotechnology is intended to harmonize risk-assessment methodologies and evaluation of specific products or classes of products. PROPRIETARY RIGHTS Our intellectual property consists of patents, copyrights, trade secrets, know-how and trademarks. Protection of our intellectual property is a strategic priority for our business. Our ability to compete effectively depends in large part on our ability to obtain patents for our technologies and products, maintain trade secrets and operate without infringing the rights of others and to prevent others from infringing on our proprietary rights. As of January 15, 2000, we owned 24 issued patents relating to our technologies, had received notices of allowance with respect to 7 other patent applications and have over 125 patents pending. In addition, as of January 15, 2000, we have in-licensed more than 25 additional patents or patent applications that we believe strengthen our patent position. The patent positions of biotechnology companies, including our patent position, involve complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. We cannot be sure that relevant patents have not been issued that could block our ability to obtain patents or to operate as we would like to. Others may develop similar technologies or duplicate technologies developed by us. We are aware of the existence of patents in some countries that, if valid, may block our ability to commercialize products in these countries if we are unsuccessful in circumventing or acquiring the rights to these patents. We are also aware of the existence of claims in published patent applications in some countries that, if granted and valid, may also block our ability to commercialize products in these countries if we are unable to circumvent or license them. The biotechnology industry is characterized by extensive litigation regarding patents and other intellectual property rights. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage. Third parties may sue us in the future to challenge our patent rights or claim infringement of their patents. An adverse determination in litigation or interference proceedings to which we may become a party could subject us to significant liabilities to third parties, require us to license disputed rights from third parties or require us to cease using the disputed technology. We are aware of a significant number of patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties. Should any of our competitors have filed patent applications or obtain patents that claim inventions also claimed by us, we may have to participate in an interference proceeding declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to a patent for these inventions in the U.S. Such a proceeding could result in substantial cost to us even if the outcome is favorable. Even if successful on priority grounds, an interference may result in loss of claims based on patentability grounds raised in the interference. Although patent and intellectual property disputes in the biotechnology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. Furthermore, we cannot be certain that the necessary licenses would be available to us on satisfactory terms, if at all. 41 We recently received a letter from a privately held biotechnology company suggesting that we may want to consider licensing patents held by that third party. We believe that we have defenses to any infringement claim with respect to such patents. However, we cannot be certain that the third party will not initiate litigation alleging that our technologies infringe claims of such patent or that a court would not find such claims valid and infringed. We also rely on trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. We have taken security measures to protect our trade secrets, proprietary know-how and technologies and confidential data and continue to explore further methods of protection. Our policy is to execute confidentiality agreements with our employees and consultants upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed or made known to the individual by us during the course of the individual's relationship with us to be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. There can be no assurance that proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets. EMPLOYEES As of December 31, 1999, we had approximately 102 full-time employees, 25 of whom hold Ph.D. degrees. Of these employees, 77 were engaged in research and development and 25 were engaged in business development, finance and general administration. None of our employees are represented by labor unions or covered by collective bargaining agreements. We have not experienced any work stoppages and consider our employee relations to be good. FACILITIES Our executive offices and research and development facilities are currently located in San Diego, California. We lease approximately 24,900 square feet of space. These facilities are leased through January 31, 2002. We are also negotiating a sublease for approximately 3,000 square feet of adjacent laboratory space for use through December 2000. To meet our expected growth needs, we have selected two site alternatives in proximity to our current space and are currently in lease negotiations for approximately 75,000 square feet of space that will be built to our specifications. We plan to occupy the new space in late 2000, at which time we plan to sublease our current space for the remaining term. We will not have any equity interest related to the new facility. LEGAL PROCEEDINGS We are not presently a party to any material legal proceedings. 42 SCIENTIFIC ADVISORY BOARD We have established a select group of scientists to advise us on scientific and technical matters in areas of the Company's business. The scientific advisors are compensated with a $15,000 annual fee, payable quarterly. We have also entered into consulting and other agreements with a number of our scientific advisors under which they have received options to purchase shares of our common stock. None of our scientific advisors is employed by us, and they may have other commitments to, or consulting or advisory contracts with, their employers or other entities that may conflict or compete with their obligations to us. Our scientific advisors include:
NAME TITLE/AFFILIATION - ---- ----------------- Melvin I. Simon, Ph.D.................... Chairman and Professor of Biology California Institute of Technology Karl O. Stetter, Ph.D.................... Chairman and Professor of Microbiology University of Regensburg, Germany Robert M. Kelly, Ph.D.................... Professor of Chemical Engineering North Carolina State University George M. Whitesides, Ph.D............... Chairman and Professor of Chemistry Harvard University
43 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information about our directors and executive officers as of January 15, 2000:
NAME AGE POSITION ---- --- -------- Jay M. Short, Ph.D. .................... 41 President, Chief Executive Officer and Chief Technology Officer, Director William H. Baum......................... 54 Senior Vice President, Business Development Karin Eastham........................... 50 Senior Vice President, Finance, Chief Financial Officer and Secretary R. Patrick Simms........................ 55 Senior Vice President, Operations Carolyn A. Erickson..................... 35 Vice President, Intellectual Property Daniel T. Carroll (1)................... 73 Director James H. Cavanaugh, Ph.D. (1)........... 62 Director Patricia M. Cloherty (1)................ 57 Director Peter Johnson (2)....................... 54 Director Donald D. Johnston (2).................. 74 Director Mark Leschly (2)........................ 31 Director Melvin I. Simon, Ph.D. ................. 62 Director
- -------- (1) Member of human resources (compensation) committee. (2) Member of audit committee. Dr. Jay M. Short was appointed our Chief Executive Officer in February 1999. He has served as our Chief Technology Officer and as a director since September 1994 and also as our President since June 1998. Dr. Short served as President of Stratacyte, Inc. and Vice President of Research & Development and Operations for Stratagene Cloning Systems, both molecular biology companies based in La Jolla, California. Dr. Short serves as a director for Invitrogen Corporation, a gene expression company, and StressGen Biotechnologies Corp., a company engaged in the medical application of stress proteins. Dr. Short received his Ph.D. from Case Western Reserve University and his B.A. from Taylor University. Mr. William H. Baum joined us in August 1997 as Vice President, Sales and Marketing, and was promoted to Senior Vice President, Business Development in November 1999. Mr. Baum was Vice President of Global Sales and Marketing with International Specialty Products, a specialty chemical company, from July 1993 to August 1997. Prior to joining International Specialty, Mr. Baum was with Betz Laboratories, also a specialty chemical company, for 20 years in a variety of international and domestic executive management positions including Executive Vice President of European Operations and as Managing Director of Germany. Mr. Baum received a B.S. from Widener University. Ms. Karin Eastham was appointed Senior Vice President, Finance, Chief Financial Officer and Secretary in May 1999. Ms. Eastham served as Vice President, Finance and Administration and Chief Financial Officer of CombiChem, Inc., a computational chemistry company, from April 1997 to April 1999. From October 1992 through April 1997, Ms. Eastham served as Vice President, Finance and Administration and Chief Financial Officer of Cytel Corporation, a biopharmaceutical company. Ms. Eastham also held several positions, including Vice President, Finance, at Boehringer Mannheim Corporation, from June 1976 to August 1988. Ms. Eastham received a B.S. and an M.B.A. from Indiana University. She is a Certified Public Accountant. Mr. R. Patrick Simms has served as our Senior Vice President, Operations since October 1998. He served as our Vice President, Process Engineering and Manufacturing from February 1997 to October 1998. Mr. Simms served as Senior Vice President, Business Development and Manufacturing, at Biosys, Inc., an 44 agricultural biotechnology company focusing on natural insecticide products, from March 1990 to February 1997. Biosys filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in September 1996. Mr. Simms subsequently filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code in February 1997. From December 1984 to March 1990, Mr. Simms served as Vice President, Commercial Operations, at Genencor, a biotech company focusing on industrial enzymes. Prior to joining Genencor, Mr. Simms spent 18 years with A.E. Staley in a wide range of technical and operational positions. Mr. Simms received a B.S. from West Virginia University . Ms. Carolyn A. Erickson has served as Vice President, Intellectual Property since November 1999. From July 1994 to November 1999, Ms. Erickson held several positions with us, including Director of Intellectual Property, Manager, Business Development & Regulatory Affairs, Senior Patent & Licensing Liaison, Patent & Licensing Liaison and Laboratory Administrator. Prior to joining us, from April 1988 to June 1994 Ms. Erickson held several positions in Business Development/Technology Transfer, Product Management, Marketing and Technical Sales for Stratagene Cloning Systems. Ms. Erickson received a B.A. from the University of California, San Diego. Dr. James H. Cavanaugh has been a director since December 1992 and our Chairman since October 1998. Dr. Cavanaugh is President of HealthCare Ventures LLC, a health care venture capital management company. Dr. Cavanaugh was formerly President of SmithKline & French Laboratories--U.S., the pharmaceutical division of SmithKline Beckman Corporation. Previously, he was President of SmithKline Beckman's clinical laboratory business and, before that, President of Allergan International. Prior to his industry experience, Dr. Cavanaugh served as Staff Assistant to The President for Health Affairs and then Deputy Director of the Domestic Council. Under President Ford, he was appointed Deputy Assistant to the President for Domestic Affairs and Deputy Chief of the White House Staff. Dr. Cavanaugh is on the board of directors of MedImmune, Inc., and non-executive Chairman of the Board of Shire Pharmaceuticals Group PLC. He also serves on the boards of the National Center for Genome Resources and the National Committee for Quality Health Care. Dr. Cavanaugh received a Ph.D. and M.A. from the University of Iowa and a B.S. from Farleigh Dickinson University. Mr. Daniel T. Carroll has been a director since October 1996. Mr. Carroll has been Chairman of The Carroll Group, a management consulting firm, since 1982. From early 1980 until early 1982, he was President and Chief Executive Officer and a director of Hoover Universal, Inc. From 1972 until early 1980, he was President of Gould Inc. He served as President of the Management Consulting Division at Booz Allen & Hamilton, Inc. from 1954 to 1972. He is a director of A.M. Castle & Co., American Woodmark Corporation, Aon Corporation, Comshare, Inc., Oshkosh Truck Corporation, Wolverine World Wide, Incorporated, and Woodhead Industries Inc. Mr. Carroll earned an A.B. from Dartmouth College and an M.A. from the University of Minnesota. Ms. Patricia M. Cloherty has been a director since May 1996. Ms. Cloherty is a Special Limited Partner of Patricof & Co. Ventures, Inc., an international venture capital company. From 1988 through 1999, she was General Partner, and successively, Senior Vice President, President and Co-Chairman of that firm. From 1970 to 1977, she also was General Partner of that firm. She has served in government, as Deputy Administrator of the U.S. Small Business Administration from 1977 through 1978 and as Chairman of the U.S. Russia Investment Fund from 1995 to the present. She is past president and chairman of the National Venture Capital Association and has been honored by the National Association of Small Business Investment Companies for her work with growth companies. She is a director of several privately-held companies and of several philanthropies. She holds a B.A. from the San Francisco College for Women and an M.A. and an M.I.A. from Columbia University. Mr. Peter Johnson has been a director since December 1999. Mr. Johnson was a founder of Agouron Pharmaceuticals, Inc. and has served as President and Chief Executive Officer of Agouron since its inception in 1984. He received a B.A. and an M.A. from the University of California, San Diego. 45 Mr. Donald D. Johnston has been a director since September 1993. Since 1986, Mr. Johnston has worked as a consultant for various companies, including Johnson & Johnson, Human Genome Sciences, Inc. and HealthCare Investment Corporation. He worked in product and general management for Johnson & Johnson from 1962 to 1986, including serving as President of J&J Baby Products Co. from 1972 to 1977. Mr. Johnston also served as a director of Johnson & Johnson from 1975 through 1986. Mr. Johnston currently serves on the board of directors of Osteotech, Inc. Mr. Johnston received a B.A. from the University of Cincinnati. Mr. Mark Leschly has been a director since August 1999. Mr. Leschly is a managing director of Rho Management Company, Inc. Prior to joining Rho in July 1999, beginning in 1994 Mr. Leschly worked at HealthCare Ventures where he was a general partner. Prior to Healthcare Ventures, he worked at McKinsey & Company, a management consulting company. Mr. Leschly is a director of several privately-held companies and is a member of the advisory board of the Harvard AIDS Institute. Mr. Leschly received a B.A. from Harvard University and an M.B.A. from the Stanford Graduate School of Business. Dr. Melvin I. Simon has been a director since May 1994. Dr. Simon is Chairman and has been a professor in the Division of Biology at the California Institute of Technology since 1982, where he is currently the Anne P. and Benjamin F. Biaggini Professor of Biological Sciences. From 1965 to 1982, Dr. Simon was a professor at the University of California, San Diego. He received a B.S. from the City College of New York and a Ph.D. from Brandeis University. CLASSIFIED BOARD Our certificate of incorporation provides for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors will be elected each year. To implement the classified structure, prior to the consummation of the offering, three of the nominees to the board will be elected to one-year terms, two will be elected to two-year terms and three will be elected to three-year terms. After these initial terms, directors will be elected for three-year terms. Messrs. Carroll and Leschly and Ms. Cloherty and have been designated Class I directors whose terms expire at the 2001 annual meeting of stockholders. Messrs. Johnson and Johnston have been designated Class II directors whose terms expire at the 2002 annual meeting of stockholders. Drs. Cavanaugh, Short and Simon have been designated Class III directors whose terms expire at the 2003 annual meeting of stockholders. For additional discussion regarding the effects of our classified board, see "Description of Capital Stock--Possible Anti-Takeover Matters." COMMITTEES OF THE BOARD OF DIRECTORS Our human resources committee reviews and makes recommendations to the board concerning compensation and benefits of all of our executive officers, administers our stock option plan and establishes and reviews general policies relating to compensation and benefits of our employees. The human resources committee currently consists of Mr. Carroll, Dr. Cavanaugh and Ms. Cloherty. The audit committee of the board of directors reviews our internal accounting procedures and consults with and reviews the services provided by our independent accountants. The audit committee currently consists of Messrs. Johnson, Johnston and Leschly. DIRECTOR COMPENSATION Prior to the completion of this offering, our directors did not receive cash compensation for their service as members of the board of directors, except for Messrs. Carroll and Johnston, who each received $10,000 per year, and Dr. Simon, who received $25,000 for his service as a director and as a scientific advisor. Non-employee directors are reimbursed for expenses in connection with attendance at board and committee meetings. Following the completion of this offering, our directors will receive $1,500 for each board meeting 46 attended. Dr. Simon will continue to receive compensation in connection with his service under our consulting agreement with him. We do not provide additional compensation for committee participation or special assignments of the board of directors. From time to time, some of our directors have received grants of options to purchase shares of our common stock under the 1997 Equity Incentive Plan in connection with their employment or consulting agreements. For information concerning options we have granted to our non-employee directors, please see the description under the caption "Certain Transactions-- Agreements with Officers and Directors" included in this prospectus. See "-- Executive Compensation--Employment Agreements" for a description of employment agreements with employee directors. Upon the completion of this offering, all of our non-employee directors will be eligible to receive equity incentives in the form of stock option grants under our 1999 Non-Employee Directors Stock Option Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended December 31, 1999, Mr. Carroll, Dr. Cavanaugh and Ms. Cloherty served as members of our human resources committee. We have never employed any member of the human resources committee of our board of directors. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or our human resources committee of the board of directors. For information on recent purchases of our capital stock by the members of our human resources committee or their respective affiliates, please see the description under the caption "Certain Transactions--Sales of Stock and Notes" included in this prospectus. 47 EXECUTIVE COMPENSATION The following table sets forth the compensation awarded or paid to, or earned or accrued for services rendered to us in all capacities during the fiscal year ended December 31, 1999 to our current and former Chief Executive Officer, the four other most highly compensated officers whose total salary and bonus exceeded $100,000 in fiscal 1999 and our former Chief Financial Officer who departed from Diversa during the last fiscal year. In accordance with SEC rules, the compensation described in the table does not include medical, group life insurance or other benefits which are available generally to all our salaried employees and perquisites and other personal benefits which do not exceed the lesser of $50,000 or 10% of the officers' total salary and bonus disclosed in this table. We refer to these officers as our named executive officers in other parts of this prospectus. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ NUMBER OF ANNUAL COMPENSATION SECURITIES -------------------------- UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS --------------------------- ---- -------- -------- -------- ------------ Jay M. Short, Ph.D. (1)..................... 1999 $262,333 $500,000 -- -- Current President, Chief Executive Officer 1998 $243,000 $545,000 -- 1,292,045 and Chief Technology Officer Terrance J. Bruggeman (2)................... 1999 $ 72,315 $ -- $316,229(3) -- Former Chief Executive Officer 1998 $270,000 $ 65,000 $ 25,000(4) -- William H. Baum............................. 1999 $207,400 $ 10,000 -- 199,609 Senior Vice President, Business Development 1998 $195,000 $ 28,000 -- -- Karin Eastham (5)........................... 1999 $142,100 -- -- 277,718 Current Senior Vice President, Finance, 1998 -- -- -- -- Chief Financial Officer and Secretary R. Patrick Simms............................ 1999 $188,558 $ 10,000 -- 95,465 Senior Vice President, Operations 1998 $173,000 $ 29,000 $ 7,096(6) 34,714 Kathleen H. Van Sleen (7)................... 1999 $ 97,898 $ -- $228,467(8) 34,714 Former Vice President, Finance and 1998 $190,000 $ 36,000 $ 4,949(6) -- Administration, Chief Financial Officer, Treasurer and Secretary
- -------- (1) In 1998, Dr. Short held the title of Chief Technology Officer and, from June 1998, President. At the time of Dr. Short's appointment as President in June 1998, he was awarded a bonus of $1,000,000 payable in two equal installments of $500,000 in 1998 and 1999. In January 2000, our Board granted Dr. Short an option to purchase 206,453 shares of common stock at an exercise price equal to the initial public offering price. (2) Mr. Bruggeman resigned as Chief Executive Officer effective as of February 1999. (3) Consists of $4,200 for reimbursement of relocation costs, $297,500 for severance payments and $14,529 for separation expenses. (4) Consists of $16,700 for reimbursement of relocation costs and $8,300 for a cost of living adjustment for relocation. (5) Ms. Eastham commenced her employment as Senior Vice President, Finance, Chief Financial Officer and Secretary in April 1999 at a base salary of $210,000. 48 (6) For reimbursement of relocation costs. (7) Ms. Van Sleen resigned as Vice President, Finance and Administration, Chief Financial Officer, Treasurer and Secretary effective as of March 1999. (8) Consists of $131,125 for separation payments, $55,443 for payments relating to Ms. Van Sleen's purchase of a residence and $41,900 of forgiveness of indebtedness. OPTION GRANTS The following table sets forth information concerning stock options granted to our named executive officers during the fiscal year ended December 31, 1999: OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE PERCENTAGE VALUE AT ASSUMED OF TOTAL ANNUAL RATES OF NUMBER OF OPTIONS STOCK PRICE SECURITIES GRANTED TO APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OPTION TERM OPTIONS IN FISCAL PRICE EXPIRATION -------------------- NAME GRANTED YEAR (PER SHARE) DATE 5% 10% ---- ---------- ---------- ----------- ---------- --------- ---------- Jay M. Short, Ph.D...... -- -- $ -- -- $ -- $ -- Terrance J. Bruggeman... -- -- -- -- -- -- William H. Baum......... 17,357 1.1% 0.58 01/07/09 569,000 891,000 43,393 2.9% 1.73 06/30/09 1,373,000 2,178,000 138,859 9.2% 2.02 10/26/09 4,355,000 6,931,000 Karin Eastham........... 208,289 13.7% 1.73 04/29/09 6,593,000 10,456,000 69,429 4.6% 2.02 10/26/09 2,177,000 3,465,000 R. Patrick Simms........ 26,036 1.7% 0.58 01/07/09 854,000 1,337,000 69,429 4.6% 2.02 10/26/09 2,177,000 3,465,000 Kathleen H. Van Sleen... 34,714 2.3% 0.58 01/07/09 1,139,000 1,783,000
The figures above represent options granted under our 1997 Equity Incentive Plan. We granted options to purchase 1,515,695 shares of our common stock in 1999. All options were granted at an exercise price equal to the fair market value of the common stock on the date of grant as determined by our board of directors. The options granted to our employees typically vest in 25% increments on each of the four annual anniversaries of the date of grant. The options granted to our consultants generally vest in 33% increments on each of the three annual anniversaries of the date of the grant or in accordance with specified performance goals over a ten-year term. Options granted to the persons listed above expire 10 years from the grant date. The potential realizable value represents amounts, net of exercise price before taxes, that may be realized upon exercise of the options immediately prior to the expiration of their terms assuming appreciation of 5% and 10% over the option term. The 5% and 10% values are calculated based on rules promulgated by the SEC and are applied to an assumed initial public offering price of $21.00 per share and do not reflect our estimate of future stock price growth. The actual value realized may be greater or less than the potential realizable value set forth in the table. We have never granted stock appreciation rights. 49 OPTIONS EXERCISED AND FISCAL YEAR-END VALUES The following table sets forth information concerning the number and value of options exercised by each of the named executive officers as of December 31, 1999 and the value and number of unexercised options held by each of the named executive officers at December 31, 1999. The value of unexercised in-the-money options at December 31, 1999 represents an amount equal to the difference between the assumed initial public offering price of $21.00 per share and the option exercise price, multiplied by the number of unexercised in-the-money options. An option is in-the-money if the fair market value of the underlying shares exceeds the exercise price of the options. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999 SHARES ACQUIRED VALUE -------------------------------- ------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- -------- -------------- --------------- ----------- ------------- Jay M. Short, Ph.D...... 290,300 $397,324 276,816 724,929 $5,758,000 $14,812,000 Terrance J. Bruggeman... 428,676 560,620 -- -- -- -- William H. Baum......... 95,466 152,350 -- 199,609 -- 3,826,000 Karin Eastham........... 69,429 16,667 -- 208,289 -- 3,997,000 R. Patrick Simms........ 19,093 30,470 64,437 159,468 1,323,000 3,161,000 Kathleen H. Van Sleen... -- -- 118,463 19,526 2,434,000 400,000
1994 EMPLOYEE INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN Introduction. On October 12, 1994, our board adopted, and on December 20, 1994, our stockholders approved our 1994 Employee Incentive and Non-Qualified Stock Option Plan. The plan was subsequently amended to, among other things, authorize a total of 2,912,587 shares of common stock for issuance under the plan. The 1994 plan was terminated by our board on August 28, 1997. We will not grant any additional stock options under the 1994 plan; however, termination of the plan did not affect any outstanding options which remained in effect. Since the plan has been terminated, shares subject to stock awards that in the past have expired, and in the future either expire or otherwise terminate, without having been exercised in full, will not be available for grant under the plan. The terminated 1994 plan permitted the grant of options to our directors employed by us, officers, employees and consultants. Outstanding options are either incentive stock options within the meaning of Section 422 of the Internal Revenue Code to employees or nonstatutory stock options. The 1994 plan is administered by the board or a committee appointed by the board. The board has delegated the authority to administer the 1994 plan to its human resources committee. Subject to the limitations set forth in the 1994 plan, the board and the committee exercised the authority to select the eligible persons to whom award grants are to be made, to designate the number of shares to be covered by stock options, to determine whether an option was an incentive stock option or a nonstatutory stock option, to establish vesting schedules, to specify the exercise price of options and the type of consideration to be paid upon exercise and, subject to specified restrictions, to specify other terms of awards. The maximum term of options granted under the 1994 plan is ten years. Stock options granted under the 1994 plan generally are non-transferable. Options exercisable on the date of termination of employment, or such other relationship with us, generally expire three months after the termination of an optionholder's service, except that all unexercised options will be immediately terminated if the optionholder is terminated for cause or if the board makes a determination that the optionee was engaged in disloyalty, convicted of a felony, disclosed company trade secrets or breached a non-competition agreement with us. However, if an optionholder is permanently disabled or dies during his or her service, that person's options exercisable on the date of disability or death generally may be exercised up to 12 months following disability or death unless, in the case of disability, such person commences employment with a competitor during such time. 50 The exercise prices of options granted under the 1994 plan were determined by the board or committee in accordance with the guidelines set forth in the 1994 plan. The exercise prices of incentive stock options granted under the plan could not be less than 100% of the fair market value of the common stock on the date of the grant or 110% of the fair market value on the date of the grant if the optionee, at the time of the grant, owned more than 10% of the total combined voting power of all of our stock. The exercise price of a nonstatutory stock option could not be less than $0.01 per share. In the event of a change in control in our ownership as defined in our plan, all outstanding stock awards under the 1994 plan must either be assumed or substituted by the surviving entity. In the event the surviving entity does not assume or substitute such stock awards, then the vesting and exercisability of outstanding awards will accelerate prior to the change in control and such awards will terminate to the extent not exercised prior to the change in control. Notwithstanding the previously described change in control provision, in the event that a change in control occurs and within one month prior to, or 13 months after, such change in control an employee's employment is involuntarily terminated as defined in the 1994 plan, then the vesting and exercisability of all options held by such employee under the 1994 plan will be accelerated in full on the effective date of his involuntary termination. As of December 31, 1999, we had issued and outstanding under the 1994 plan options to purchase approximately 109,847 shares of common stock and approximately 841,986 shares of common stock had been purchased upon the exercise of options under the 1994 plan. The per share exercise prices of these options range from $0.03 to $0.73. 1997 EQUITY INCENTIVE PLAN On August 28, 1997, our board adopted our 1997 Equity Incentive Plan, and the plan was approved by our stockholders on October 15, 1997. The plan has been subsequently amended, most recently in 1999 to authorize a total of 5,982,633 shares of common stock for issuance under the plan. Shares subject to stock awards that have expired or otherwise terminated without having been exercised in full again become available for grant. The 1997 plan permits the grant of options to our directors, employees and consultants. Options may be either incentive stock options to employees within the meaning of Section 422 of the Internal Revenue Code or nonstatutory stock options. In addition, the 1997 plan permits the grant of stock bonuses and rights to purchase restricted stock. Except in specified circumstances, no person may be granted options covering more than 694,299 shares of common stock in any calendar year. The 1997 plan is administered by the board or a committee appointed by the board. The board has delegated the authority to administer the 1997 plan to its human resources committee. Subject to the limitations set forth in the 1997 plan, the compensation committee and the administrator have the authority to select the eligible persons to whom grants are to be made, to designate the number of shares to be covered by each award, to determine whether an option is to be an incentive stock option or a nonstatutory stock option, to establish vesting schedules, to specify the exercise price of options and the type of consideration to be paid upon exercise and, subject to specified restrictions, to specify other terms of awards. The maximum term of options granted under the 1997 plan is ten years. Incentive stock options granted under the 1997 plan generally are non- transferable. Nonstatutory stock options generally are nontransferable, although the applicable option agreement may permit some transfers. Options generally expire three months after the termination of an optionholder's service. However, if an optionholder is permanently disabled or dies during his or her service, that person's options generally may be exercised up to 12 months following disability or death. The exercise price of options granted under the 1997 plan is determined by the board or committee in accordance with the guidelines set forth in the 1997 plan. The exercise price of an incentive stock option 51 cannot be less than 100% of the fair market value of the common stock on the date of the grant. The exercise price of a nonstatutory stock option cannot be less than 85% of the fair market value of the common stock on the date of grant. The board or the committee will have the authority, with the consent of the affected optionholders, to cancel outstanding options under the plan in return for the grant of new options for the same or a different number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date. Options granted under the 1997 plan vest at the rate determined by the board or committee and specified in the option agreement. The terms of any stock bonuses or restricted stock purchase awards granted under the 1997 plan will be determined by the board or committee. The purchase price of restricted stock under any restricted stock purchase agreement will be determined by the board or committee and will not be less than 85% of the fair market value of our common stock on the date of grant. Stock bonuses and restricted stock purchase agreements awarded under the 1997 plan are generally nontransferable, although the applicable award agreement may permit some transfers. In the event of a change in control in our ownership as defined in our plan, all outstanding stock awards under the 1997 plan must either be assumed or replaced with substitute awards by the surviving entity. In the event the surviving entity does not assume or substitute such stock awards, then the vesting and exercisability of outstanding awards will accelerate prior to the change in control and such awards will terminate to the extent not exercised prior to the change in control. Notwithstanding the previously described change in control provision, in the event that a change in control occurs and within one month prior to, or 13 months after, such change in control an employee's employment is involuntarily terminated as defined in the 1997 plan, then the vesting and exercisability of all options held by such employee under the 1997 plan will be accelerated in full on the effective date of his involuntary termination. The board may amend or terminate the 1997 plan at any time. Amendments will generally be submitted for stockholder approval to the extent required by applicable law. As of December 31, 1999, we had issued and outstanding under the 1997 plan options to purchase approximately 3,014,988 shares of common stock and approximately 599,775 shares had been purchased upon the exercise of options. The per share exercise prices of these options range from $0.43 to $8.65. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN In December 1999, our board adopted our 1999 Non-Employee Directors' Stock Option Plan. We intend to seek stockholder approval of the plan prior to the closing of this offering. The plan provides for the automatic grant of options to purchase shares of common stock to our non-employee directors. The directors' plan is administered by the board, unless the board delegates administration to a committee of at least two disinterested directors. A total of 277,719 shares of common stock have been reserved for issuance under the directors' plan, none of which are currently subject to outstanding options. Pursuant to the terms of the directors' plan: . On the closing of this offering, each person who is then a non-employee director will be granted an option to purchase 27,771 shares of common stock; . Each person who, after the closing of this offering, for the first time becomes a non-employee director automatically will be granted, upon the date of his or her initial appointment or election to be a non-employee director, a one-time option to purchase 27,771 shares of common stock, provided such person has not previously been in our employ; and . On the day following each annual meeting of our stockholders commencing with the 2001 annual meeting of stockholders, each person who is elected to be a non-employee director at such annual meeting automatically will be granted an option to purchase 6,943 shares of common stock, pro-rated to the extent that a director did not serve as a director for a full year prior to the annual meeting. 52 Options granted under the directors' plan shall vest in equal monthly installments over three years from the date of grant and must be exercised within ten years from the date they are granted, subject to earlier termination following the optionee's cessation of service. Options granted under the directors' plan may be exercised prior to vesting, subject to our repurchase. Outstanding options under the plan will vest in full on an accelerated basis upon certain changes in control or ownership of the Company, unless assumed or replaced with substitute options by the successor entity. The exercise price of options under the directors' plan will equal 100% of the fair market value of the common stock on the date of grant. Options granted under the directors' plan are generally transferable to family members and trusts under which the director or members of the director's family are beneficiaries. Unless otherwise terminated or amended by the board of directors, the directors' plan automatically terminates when all of our common stock reserved for issuance under the directors' plan has been issued. EMPLOYEE STOCK PURCHASE PLAN In December 1999, our board adopted the 1999 Employee Stock Purchase Plan. We intend to seek stockholder approval of the plan prior to the closing of this offering. A total of 416,579 shares of common stock initially has been reserved for issuance under the purchase plan. The share reserve will automatically increase on the day of each annual stockholders' meeting by an amount equal to three-fourths of one percent (0.75%) of the total number of outstanding shares of our common stock on the day of the annual stockholders' meeting, or an amount determined by our board, but in no event will any such annual increase exceed 347,149 shares. The purchase plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. Under the purchase plan, the board of directors may authorize participation by eligible employees, including officers, in periodic offering following the commencement of the purchase plan. The initial offering under the purchase plan will commence on the effective date of this offering and terminate on February 28, 2002. Unless otherwise determined by the board, employees are eligible to participate in the purchase plan only if they are employed by us or one of our subsidiaries designated by the board of directors for at least 20 hours per week, are customarily employed for at lest five months per calendar year and do not beneficially own more than 5% of our outstanding capital stock. Employees who participate in an offering may have up to 15% of their earnings withheld pursuant to the purchase plan. The amount withheld is then used to purchase shares of common stock on specified dates determined by the board of directors. The price of common stock purchased under the purchase plan shall be at least 85% of the lower of the fair market value of the common stock at the commencement date of each offering period or the fair market value of the common stock at the relevant purchase date. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment. In the event of a merger, reorganization, consolidation or liquidation, the board of directors has discretion to provide that each right to purchase common stock will be assumed or an equivalent right substituted by the successor corporation or the board of directors may provide for all sums collected by payroll deductions to be applied to purchase stock immediately prior to such merger or other transaction. The board of directors has the authority to amend or terminate the purchase plan, provided, however, that no such action may adversely affect any outstanding rights to purchase common stock. 53 EMPLOYMENT AGREEMENTS In August 1994, we entered into an employment offer letter with Jay M. Short, Ph.D., our President, Chief Executive Officer and Chief Technology Officer. Pursuant to his employment offer letter, Dr. Short's annual compensation was initially set at a base salary of $200,000 and a target bonus of 20% of his base salary. The 20% bonus was guaranteed for the first year. We also paid Dr. Short a signing bonus of $75,000. In addition, we granted Dr. Short 56,847 shares of our common stock and he also received a stock option under our 1994 plan to purchase 34,108 shares of common stock at an exercise price of $0.03 per share. This option vested 25% in September 1995, with the remainder vesting annually over the following three years. In the event Dr. Short's employment is terminated without cause, he will receive severance compensation equal to six months' salary. In June 1998 we entered into a second letter agreement with Dr. Short under which we paid Dr. Short a bonus of $500,000 in each of June 1998 and June 1999 and granted him a stock option under our 1997 plan to purchase 1,001,744 shares of our common stock at an exercise price of $0.58 per share. This option vested 25% in June 1999 with the remainder vesting in equal quarterly installments over the following three years. However, vesting this option will be accelerated in full upon the sale of Diversa or upon Dr. Short's termination of employment without cause. This second offer letter also provides that if Dr. Short's employment is terminated without cause at any time prior to June 25, 2000 he will receive severance compensation equal to twenty-four months' salary. After June 25, 2000, Dr. Short's severance will revert to six months' salary as described in his original offer letter. In January 2000, we granted Dr. Short a stock option under our 1997 plan to purchase 206,453 shares of common stock at an exercise price equal to the initial public offering price. This option vests 25% at the first anniversary of the grant date, with the remainder vesting over the following three years. In February 1997, we entered into an employment offer letter with R. Patrick Simms, our Senior Vice President, Operations. Pursuant to his employment offer letter, Mr. Simms' annual compensation was initially set at a base salary of $165,000 and a bonus of up to 20% of his base salary. The calculation of each annual bonus is based on both Mr. Simms' job performance as well as our performance. In addition, we granted Mr. Simms a stock option under our 1997 plan to purchase 69,429 shares of our common stock at an exercise price of $0.43 per share. This option vests 25% on the first anniversary of the date of grant with the remainder vesting quarterly over the following three years. Mr. Simms was also offered the right to purchase up to $50,000 of our series B preferred stock on the same terms offered to our other series B preferred stock investors. Mr. Simms exercised this right in May 1997 and acquired 39,147 shares of our series B preferred stock in exchange for $25,000 in cash and delivery of a promissory note for $25,000. The note carries an interest rate of 6.64%, is payable in four equal annual installments commencing in March 1998 and is secured by his shares of series B preferred stock. Mr. Simms also was reimbursed $25,000 for relocation costs. In the event that Mr. Simms' employment is terminated without cause, he will receive severance compensation equal to six months' base salary and benefits until he commences new employment. In July 1997, we entered into an employment offer letter with William H. Baum, our Senior Vice President, Business Development. Pursuant to his employment offer letter, Mr. Baum's annual compensation was initially set at a base salary of $195,000 and a target bonus of 20% of his base salary, with a guaranteed bonus of $13,000 for 1997 only. We also paid him a hiring bonus of $30,000, paid in two equal installments on September 1, 1997 and March 1, 1998. In addition, we granted Mr. Baum a stock option under our 1997 plan to purchase 95,466 shares of our common stock at an exercise price of $0.43 per share. This option vests 25% on the first anniversary of his date of hire with the remainder vesting quarterly over the following three years. In the event Mr. Baum's employment is terminated without cause, he will receive severance compensation equal to six months of his then-current base salary and we will continue to pay his employee benefits until he commences new employment. Mr. Baum was reimbursed $50,000 for relocation costs. Mr. Baum was offered the right to purchase up to $50,000 of our series D preferred stock on the same terms offered to our other series D preferred stock investors. Mr. Baum exercised this right in October 1997 and acquired 58,824 shares of our series D preferred stock in exchange for delivery of a promissory note for $50,000. The note carries an interest 54 rate of 6.64%, is payable in four equal annual installments commencing in October 1998 and is secured by his shares of series D preferred stock. In April 1999, we entered into an employment offer letter with Karin Eastham, our Senior Vice President, Finance and Chief Financial Officer. Pursuant to her employment offer letter, Ms. Eastham's annual compensation was initially set at a base salary of $210,000 and a target bonus of 20% of her base salary. The 20% bonus was guaranteed for the first year. In addition, we granted Ms. Eastham a stock option under our 1997 plan to purchase 208,289 shares of our common stock at an exercise price of $1.73 per share. This option vests 25% at the earlier of the first anniversary of the date of hire or the closing of this initial public offering, with the remainder vesting quarterly over three years. For a description of recent severance agreements with Terrance J. Bruggeman and Kathleen H. Van Sleen, see the descriptions provided under the caption "Certain Transactions -- Agreements with Officers and Directors." LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. In addition, our bylaws require us to indemnify our directors and officers, and allow us to indemnify our other employees and agents, to the fullest extent permitted by law. We have also entered into agreements to indemnify some of our directors and executive officers. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 55 CERTAIN TRANSACTIONS SALES OF STOCK AND NOTES Series B Preferred Stock Financing. In May 1997, Mr. Simms, our Senior Vice President, Operations, and Ms. Van Sleen, our former Chief Financial Officer, Vice President, Finance and Administration and Secretary, exercised rights to purchase 37,879 and 75,758 shares, respectively, of our series B preferred stock at a price of $0.66 per share. The shares of series B preferred stock issued to Mr. Simms and Ms. Van Sleen will automatically convert into an aggregate of 39,449 shares of common stock upon the closing of this offering. Mr. Simms paid for a portion of his shares and Ms. Van Sleen paid for all of her shares by delivering full-recourse promissory notes in the amount of $25,000 and $50,000, respectively. The notes are payable over four years in equal annual installments commencing on March 30, 1998, and bear interest at 6.64% per year. In 1999, we forgave the then outstanding balance under the note receivable from Ms. Van Sleen, $37,500, pursuant to the terms of a severance agreement more fully described below. Bridge Loan Financing. In September 1997, we issued and sold $3,432,804 of secured convertible promissory notes to 15 accredited investors. The promissory notes carried an interest rate of 8.0% per year and under their terms automatically converted into 4,038,592 shares of series D preferred stock in October 1997. This series D preferred stock will automatically convert into an aggregate of 1,401,996 shares of common stock upon the closing of this offering. Investors owning 5% or more of our capital stock and directors and officers who participated in this transaction include:
NUMBER OF SHARES OF NUMBER OF SHARES OF COMMON STOCK SERIES D PREFERRED UPON CONVERSION STOCK UPON OF SERIES D INVESTOR PROMISSORY NOTE CONVERSION PREFERRED STOCK -------- --------------- ------------------- --------------- HealthCare Ventures Entities................. $1,001,162 1,177,837 408,885 Patricof & Co. Ventures Entities................. 1,000,000 1,176,470 408,411 Rho Management Trust II... 410,153 482,532 167,510 Donald D. Johnston........ 500,000 588,235 204,205 Melvin I. Simon, Ph.D. ... 20,000 23,529 8,168
Dr. Cavanaugh, one of our directors, is a general partner of HealthCare Partners III, L.P., HealthCare Partners IV, L.P. and HealthCare Partners V, L.P., which are the general partners of HealthCare Ventures III, L.P., HealthCare Ventures IV, L.P. and HealthCare Ventures V, L.P., respectively. Together, these partnerships own greater than 10% of our capital stock. In this prospectus we refer to HealthCare Ventures III, L.P., HeathCare Ventures IV, L.P. and HealthCare Ventures V, L.P., collectively, as entities affiliated with HealthCare Ventures. Ms. Cloherty, one of our directors, is a special limited partner of funds managed by Patricof & Co. Ventures, Inc., including APA Pennsylvania Partners II, L.P., APA Excelsior IV, L.P. and APA Excelsior IV/Offshore, L.P. APA Pennsylvania Partners II, L.P. is the general partner of The P/A Fund, L.P. Patricof & Co. Managers, Inc. is the general partner of APA Excelsior IV Partners, L.P., the general partner of Patricof Private Investment Club, L.P. Collectively, APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P. and Patricof Private Investment Club, L.P. own greater than 10% of our capital stock, and are collectively referred to in this prospectus as entities affiliated with Patricof & Co. Ventures. Mr. Leschly, one of our directors, is a managing director of Rho Management Company, Inc., which serves as the investment advisor to Rho Management Trust II. Mr. Johnston and Dr. Simon are members of our board of directors. Series D Preferred Stock Financing. In October 1997, we issued 24,809,555 shares of series D preferred stock for $0.85 per share to 27 accredited investors. The series D preferred stock will automatically convert 56 into an aggregate of 8,612,620 shares of common stock upon the closing of this offering. Investors owning 5% or more of our shares and directors and officers who participated in this transaction include:
NUMBER OF SHARES OF NUMBER OF COMMON STOCK INVESTOR SERIES D SHARES UPON CONVERSION -------- --------------- --------------- HealthCare Ventures Entities.................... 6,206,103 2,154,446 Patricof & Co. Ventures Entities................ 2,184,999 758,519 Rho Management Trust II......................... 2,336,042 810,856 State of Michigan............................... 5,882,353 2,042,058 William H. Baum................................. 58,824 20,420 Donald D. Johnston.............................. 588,235 204,205 Melvin I. Simon, Ph.D. ......................... 23,529 8,168
Mr. Baum is our Senior Vice President, Business Development. Series E Preferred Stock Financing. In connection with our entering into a collaboration agreement with Novartis Agribusiness Biotechnology Research, Inc. in January 1999, we sold 5,555,556 shares of series E preferred stock to Novartis for $1.32 per share under the terms of a series E preferred stock purchase agreement. The series E preferred stock will automatically convert into an aggregate of 1,928,610 shares of common stock upon the closing of this offering. The stock purchase agreement designates a portion of the total proceeds received of $12.5 million as a technology access fee and another portion as advance payments for research support under the collaboration agreement. The shares of series E preferred stock were subsequently transferred to Novartis Seeds AG, an affiliate of Novartis Agribusiness Biotechnology Research, Inc. In December 1999, we entered into a joint venture agreement with Novartis Seeds AG. For a further description of this joint venture and the collaboration agreement, see "Business--Current Alliances and Other Agreements." Registration Rights. In connection with the preferred stock financings, we granted registration rights to all of our preferred stockholders. See "Description of Capital Stock--Registration Rights" for a more complete description of registration rights we granted to our stockholders. AGREEMENTS WITH OFFICERS AND DIRECTORS In May 1994, we entered into a four year consulting agreement with Melvin I. Simon, Ph.D. under which Dr. Simon agreed to provide us with at least 20 days of service each year. Under his agreement, Dr. Simon will serve as a member and chairman of our scientific advisory board, serve on our board of directors and provide other consulting services. His compensation initially was set at $75,000 per year, payable quarterly. We amended Dr. Simon's consulting agreement in October 1996 to limit Dr. Simon's services to attendance at up to three scientific advisory board meetings and 12 board and board committee meetings per year and reducing his annual compensation to $25,000 per year. In addition, we granted Dr. Simon a stock option to purchase 6,942 shares of our common stock under our 1994 plan in consideration for his agreement to amend the original agreement. This initial 6,942 share option was fully vested and exercisable upon its grant to Dr. Simon and carried an exercise price of $0.42 per share. We also granted Dr. Simon a second stock option to purchase 20,828 shares of common stock having an exercise price of $0.42 per share that vested over a period of three years. This second option grant was fully vested effective as of October 1999. We amended Dr. Simon's consulting agreement a second time in October 1999. This second amendment provides that Dr. Simon's annual compensation will continue at $25,000 per year for an additional three year term. This second amendment also provides that Dr. Simon will attend up to six board meetings and one scientific advisory board meeting per year. We will pay Dr. Simon an additional $1,000 per day for any additional service he performs. We also granted Dr. Simon a stock option to purchase 22,564 shares of our 57 common stock under our 1997 plan, with 8,678 shares vesting in October 2000 and 6,943 shares in each of the following two years. In December 1999, we granted Dr. Simon a stock option under our 1997 plan to purchase 173,574 shares of our common stock with an exercise price of $8.64 per share. One third of the shares subject to this option were vested upon grant and the remaining shares vested in February 2000 when the option vesting schedule was accelerated by our Board. The Company recorded a charge to operations of approximately $1.7 million based on the fair value of the options. In August 1997, we granted Daniel T. Carroll a stock option under our 1997 plan to purchase 5,207 shares of our common stock with an exercise price of $0.43 per share. One-third of the shares vested on October 1, 1997 and one- twelfth vested quarterly thereafter until fully vested. In February 1998 we granted Mr. Carroll a second stock option under our 1997 plan to purchase 5,207 shares of our common stock with an exercise price of $0.58 per share. This option vests in equal annual installments over a period of three years. In December 1999 we granted Mr. Carroll a third stock option under our 1997 plan to purchase 17,357 shares of our common stock with an exercise price of $8.64 per share. This option was fully vested upon grant. In August 1997, we granted Donald D. Johnston a stock option under our 1997 plan to purchase 5,207 shares of our common stock with an exercise price of $0.43 per share. One-third of the shares vested on October 1, 1997 and one- twelfth vested quarterly thereafter until fully vested. In February 1998 we granted Mr. Johnston a second stock option under our 1997 plan to purchase 5,207 shares of our common stock with an exercise price of $0.58 per share. This option vests in equal annual installments over a period of three years. In December 1999 we granted Mr. Johnston a third stock option under our 1997 plan to purchase 17,357 shares of our common stock with an exercise price of $8.64 per share. This option was fully vested upon grant. In February 1999, we entered into a Separation Agreement with Terrance J. Bruggeman, our former Chief Executive Officer. Under this agreement, we agreed to continue to make severance payments to Mr. Bruggeman in the form of continuation of his base salary until the earlier of 12 months following his final day of employment or the date on which he begins employment with another company. We further agreed to pay Mr. Bruggeman an additional $50,000 as an additional severance payment, reimburse him up to an additional $25,700 for various other expenses and pay for up to 18 months of continued health and dental insurance following his final day of employment. In addition, effective as of his last day of employment, we accelerated the vesting of options to purchase an aggregate of 142,892 shares of our common stock having an exercise price of $0.43 per share. In conjunction with this agreement modification, the Company recorded a charge to compensation expense of $557,000. In March 1999, we entered into a Separation Agreement with Kathleen H. Van Sleen, our former Chief Financial Officer, Vice President, Finance and Administration, Treasurer and Secretary. Under this agreement, we paid Ms. Van Sleen $224,000 and forgave outstanding indebtedness of $42,000. We further agreed to pay for up to 12 months of health, dental and life insurance. In addition, we agreed that the term and vesting of options to purchase an aggregate of 208,289 shares of our common stock will continue until March 30, 2000, after which Ms. Van Sleen will have 90 days to exercise her vested options. The extension of vesting on those options will result in the vesting of an additional 62,920 options with an average exercise price of $0.46 per share. In conjunction with this agreement modification and an extension of the exercise date for her previously vested options, the Company recorded a charge to compensation expense of $538,000. Ms. Van Sleen is not required to perform consulting or any other services as part of the separation agreement. Both Mr. Bruggeman and Ms. Van Sleen terminated their employment with Diversa in the ordinary course of business in connection with our continued evolution and growth. In December 1999, we granted Peter Johnson a stock option under our 1997 plan to purchase 41,657 shares of our common stock with an exercise price of $5.76 per share. This option vests in equal annual installments over a period of three years. 58 In November 1999, our Board implemented a program to allow optionees to early exercise stock options prior to vesting. Six optionees, including Jay Short, Karin Eastham, William Baum and Melvin Simon, purchased our common stock pursuant to this program. This stock was subject to repurchase restrictions which lapsed over the same period as the predecessor stock options would have vested. As part of our agreement to amend the options, we agreed to prepare tax election forms for the benefit of the optionees. These tax election forms were not prepared or timely filed and, as a result, the optionees were exposed to substantial potential tax liabilities. In order to minimize the potential adverse tax consequences to the optionees, on February 7, 2000, our Board removed the stock repurchase restrictions and agreed to advance funds to the optionees in an amount necessary to provide the cash to pay the individual tax liabilities that resulted from removal of the repurchase restrictions. After consideration of each optionee's individual tax situation and in order to fairly rectify the effect of our failure to timely prepare these tax election forms, our Board agreed to compensate two optionees, Ms. Eastham and Dr. Simon, directly in amounts of approximately $80,000 and $160,000, respectively, to compensate for the permanent tax liabilities associated with our failure to complete the filings. Our Board also agreed to make full recourse secured loans to the optionees, including approximately $400,000.00 to Dr. Short, $400,000.00 to Ms. Eastham, $250,000.00 to Mr. Baum and $100,000.00 to Dr. Simon, to assist with temporary differences in taxation. The loans carry a market interest rate and are repayable in five years, and prepayment is required in specified circumstances, including if the employee leaves the Company or sells the related shares of stock. All of the shares of preferred stock and promissory notes described under this section were issued in reliance upon the exemption provided by Section 4(2) of the Securities Act and/or Regulation D under the Securities Act. With respect to the issuance of options described under this section, exemption from registration was not necessary in that the transactions did not involve a "sale" of securities as that term is used in Section 2(a)(3) of the Securities Act. 59 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to the beneficial ownership of our common stock as of December 31, 1999, and after the sale of shares in this offering, by: . Each person who is known by us to own beneficially more than 5% of our outstanding common stock; . Each named executive officer; . Each of our directors; and . All of our current directors and executive officers as a group. Except as indicated below, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable. Unless otherwise indicated, the address for each stockholder is c/o Diversa Corporation, 10665 Sorrento Valley Road, San Diego, California 92121. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Percentage of beneficial ownership is based on 25,779,401 shares of common stock outstanding as of December 31, 1999 and assuming 32,811,401 shares of common stock outstanding after completion of this offering. The table assumes no exercise of the underwriters' over-allotment option. If the underwriters' over-allotment option is exercised in full, we will sell up to an aggregate of 1,050,000 shares of our common stock, and up to 33,861,401 shares of common stock will be outstanding after completion of this offering.
BENEFICIAL OWNERSHIP PRIOR TO OFFERING ------------------------------------------------ PERCENTAGE OF SHARES ISSUABLE SHARES DIVERSA SHARES PURSUANT TO MAY REPURCHASE BENEFICIALLY NUMBER OF OPTIONS AND WITHIN 60 DAYS OWNED SHARES WARRANTS EXERCISABLE OF ----------------- BENEFICIALLY WITHIN 60 DAYS DECEMBER 31, BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF DECEMBER 31, 1999 1999(1) OFFERING OFFERING - ------------------------------------ ------------ -------------------- -------------- -------- -------- Funds Affiliated with HealthCare Ventures (2).. 5,744,544 139,265 -- 22.2% 17.4% 44 Nassau St. Princeton, New Jersey 08542 Funds Affiliated with Patricof & Co. Ventures, Inc. (3)............................ 4,616,965 -- -- 17.9% 14.1% 445 Park Avenue, 11th Floor New York, New York 10022 Rho Management Trust II (4).................... 2,353,438 20,461 -- 9.1% 7.2% 767 Fifth Avenue, 43rd Floor New York, New York 10153 State of Michigan ............................. 2,042,058 -- -- 7.9% 6.2% Department of Treasury, Treasury Building 30 West Allegan East Lansing, Michigan 48922 Novartis Seeds AG ............................. 1,928,610 -- -- 7.5% 5.9% Schwarzwaldallee 215 CH-4002 Basel Switzerland Jay M. Short, Ph.D............................. 712,994 338,615 61,803 2.7% 2.2% Terrance J. Bruggeman.......................... 428,676 -- -- 1.7% 1.3% William H. Baum................................ 120,225 4,339 41,767 * * Karin Eastham.................................. 69,429 -- 69,429 * * R. Patrick Simms............................... 110,138 77,456 -- * * Kathleen H. Van Sleen.......................... 153,440 127,461 -- * *
60
BENEFICIAL OWNERSHIP PRIOR TO OFFERING ------------------------------------------------ PERCENTAGE OF SHARES ISSUABLE SHARES DIVERSA SHARES PURSUANT TO MAY REPURCHASE BENEFICIALLY NUMBER OF OPTIONS AND WITHIN 60 DAYS OWNED SHARES WARRANTS EXERCISABLE OF ----------------- NAME AND ADDRESS OF BENEFICIAL BENEFICIALLY WITHIN 60 DAYS DECEMBER 31, BEFORE AFTER OWNER OWNED OF DECEMBER 31, 1999 1999(1) OFFERING OFFERING - ------------------------------ ------------ -------------------- -------------- -------- -------- James H. Cavanaugh, Ph.D. (2).. 5,744,544 139,265 -- 22.2% 17.4% Daniel T. Carroll.............. 26,035 26,035 -- * * Patricia M. Cloherty (3)....... 4,616,968 -- -- 17.9% 14.1% Peter Johnson.................. -- -- -- * * Donald D. Johnston............. 621,667 26,035 -- 2.4% 1.9% Mark Leschly (4)............... 2,353,438 20,461 -- 9.1% 7.2% Melvin I. Simon, Ph.D. ........ 219,048 57,858 22,564 * * All executive officers and directors as a group (12 persons)...................... 14,617,864 713,442 195,563 55.2% 43.6%
- -------- * Less than one percent. (1) On February 7, 2000, our Board approved the removal of these stock repurchase restrictions. See "Certain Transactions." (2) Includes: . 3,229,005 shares held by HealthCare Ventures III, L.P., including 107,659 shares issuable upon exercise of warrants exercisable within 60 days of December 31, 1999, which represents 12.5% and 10.0%, respectively, of the total number of shares outstanding before and after this offering. . 949,145 shares held by HealthCare Ventures IV, L.P., including 31,606 shares issuable upon exercise of warrants exercisable within 60 days of December 31, 1999, which represents 3.7% and 2.9%, respectively, of the total number of shares outstanding before and after this offering. . 1,566,394 shares held by HealthCare Ventures V, L.P., which represents 6.1% and 4.9%, respectively, of the total number of shares outstanding before and after this offering. James H. Cavanaugh, Ph.D. is a managing member of the general partner of each of the above-listed investment funds, and shares investment and voting power over these shares with the other managing members of each of the general partners of these funds, none of whom are affiliated with us. Dr. Cavanaugh disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (3) Includes: . 3,049,566 shares held by APA Excelsior IV, L.P., which represents 11.8% and 9.4%, respectively, of the total number of shares outstanding before and after this offering. . 969,468 shares held by The P/A Fund, L.P., which represents 3.8% and 3.0%, respectively, of the total number of shares outstanding before and after this offering. . 537,510 shares held by APA Excelsior IV/Offshore, L.P., which represents 2.1% and 1.7%, respectively, of the total number of shares outstanding before and after this offering. . 60,422 shares held by Patricof Private Investment Club, L.P., which represents less than 1% of the total number of shares outstanding both before and after this offering. Patricia M. Cloherty is a special limited partner of APA Excelsior IV, L.P., The P/A Fund, L.P., APA Excelsior IV/Offshore, L.P. and Patricof Private Investment Club, L.P., and shares investment and voting power over these shares with the other managing members or general partners of the funds, none of whom are affiliated with us. Ms. Cloherty disclaims beneficial ownership of such shares except to the extent of her pecuniary interest therein. (4) Mark Leschly is a managing director of Rho Management Company, Inc., financial advisor to Rho Management Trust II. Mr. Leschly disclaims beneficial ownership of the shares held by Rho Management Trust II except to the extent of his pecuniary interest therein. 61 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, our authorized capital stock, after giving effect to the conversion of all outstanding preferred stock into common stock, will consist of 65,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value. The following is a summary of various provisions of our common stock, preferred stock, amended and restated certificate of incorporation and bylaws. COMMON STOCK As of December 31, 1999, there were 2,945,390 shares of common stock outstanding, held by approximately 115 stockholders of record. An additional 22,834,011 shares of our common stock will be issued upon conversion of all outstanding shares of the preferred stock on the closing of this offering and an estimated 32,000 shares will be issued related to dividends payable to the holders of our series A, B and D preferred stock for the period between December 21, 1999 and the completion of this offering. All outstanding shares of common stock are, and the common stock to be issued in this offering will be, fully paid and nonassessable. The following summarizes the rights of holders of our common stock: . Each holder of shares of common stock is entitled to one vote per share on all matters to be voted on by stockholders generally, including the election of directors; . There are no cumulative voting rights; . The holders of our common stock are entitled to dividends and other distributions as may be declared from time to time by the board of directors out of funds legally available for that purpose, if any; . Upon our liquidation, dissolution or winding up, the holders of shares of common stock will be entitled to share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities and the payment of the liquidation preference of any outstanding preferred stock; and . The holders of commons stock have no preemptive or other subscription rights to purchase shares of our stock, nor are they entitled to the benefits of any redemption or sinking fund provisions. PREFERRED STOCK Upon the closing of this offering, there will be no shares of preferred stock outstanding. Our certificate of incorporation authorizes our board of directors to create and issue one or more series of preferred stock and determine the rights and preferences of each series within the limits set forth in our certificate of incorporation and applicable law. Among other rights, the board of directors may determine, without further vote or action by our stockholders: . The number of shares constituting the series and the distinctive designation of the series; . The dividend rate on the shares of the series, whether dividends will be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series; . Whether the series will have voting rights in addition to the voting rights provided by law, and if so, the terms of the voting rights; . Whether the series will have conversion privileges and, if so, the terms and conditions of conversion; . Whether or not the shares of the series will be redeemable or exchangeable, and, if so, the dates, terms and conditions of redemption or exchange, as the case may be; . Whether the series will have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of the sinking fund; and 62 . The rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series. Unless otherwise provided by our board of directors, the shares of all series of preferred stock will rank on a parity with respect to the payment of dividends and to the distribution of assets upon liquidation. Although we have no present plans to issue any shares of preferred stock, any future issuance of shares of preferred stock, or the issuance of rights to purchase preferred shares, may have the effect of delaying, deferring or preventing a change in control in our company or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock. REGISTRATION RIGHTS The holders of the 22,866,011 outstanding shares of our common stock which will be issued upon conversion of the preferred stock on the closing of this offering, which are referred to below as our preferred investors, have the right to cause us to register their shares under the Securities Act as follows: . DEMAND REGISTRATION RIGHTS: Each class of our preferred investors, excluding the holders of the series E preferred stock, may make one demand for registration by providing a written demand from the holders of at least 50% of the shares of common stock issued upon conversion of such class of preferred stock demanding registration. All of our preferred investors, including the holders of the series E preferred stock, acting as a single class may make two demands for registration by providing, in each instance, a written demand from the holders of at least 50% of the shares of common stock issued upon conversion of all of the preferred stock. We must use our best efforts to effect such registration as soon as possible after receipt of notice. . PIGGYBACK REGISTRATION RIGHTS: Our preferred investors can request to have their shares registered any time we file a registration statement to register any of our securities for our own account. Such registration opportunities are unlimited but the number of shares that can be registered may be eliminated entirely or cut back by the underwriters. . S-3 REGISTRATION RIGHTS: After we have qualified for registration on Form S-3, our preferred investors can request us to register their shares if the aggregate price of the shares to the public is not less than $500,000. Except for former holders of our series E preferred stock who are limited to only three such registrations, such registration opportunities are unlimited. However, we are not obligated to register the shares of any single stockholder on Form S-3 more than once during any single calendar year. We are required to bear substantially all costs incurred in connection with any such registrations, other than underwriting discounts and commissions. The foregoing registration rights could result in substantial future expenses for us and adversely affect any future equity or debt offerings. POSSIBLE ANTI-TAKEOVER MATTERS Certificate of Incorporation and Bylaws Our certificate of incorporation authorizes our board of directors to establish one or more series of undesignated preferred stock, the terms of which can be determined by the board of directors at the time of issuance. See "--Preferred Stock" for a description of our preferred stock. Our certificate of incorporation also provides that all stockholder action must be effected at a duly called meeting of stockholders and not by a consent in writing. Our bylaws provide that our board of directors will be classified into three classes of directors. Please see "Management--Classified Board" for a list of our directors and the class to which they belong. Our bylaws also require that stockholders give advance notice to our secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting and require a 63 supermajority vote of members of our board of directors and/or stockholders to amend some bylaw provisions. These provisions of our certificate of incorporation and our bylaws could discourage potential acquisition proposals and could delay or prevent a change in control. Such provisions may also have the effect of preventing changes in our management. Delaware Anti-Takeover Statute We are subject to Section 203 of the Delaware General Corporation Law which, subject to specified exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder--defined as any person or entity that is the beneficial owner of at least 15% of a corporation's voting stock--for a period of three years following the time that such stockholder became an interested stockholder, unless: . Prior to that time, the corporation's board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . Upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the corporation's voting stock outstanding at the time the transaction commenced, excluding, for purposes of determining the number of shares outstanding, those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; and . At or subsequent to such time, the business combination is approved by the corporation's board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: . Any merger or consolidation involving the corporation and the interested stockholder; . Any sale, lease, exchange, mortgage, transfer, pledge or other disposition involving the interested stockholder and 10% or more of the assets of the corporation; . Subject to specified exceptions, any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; . Any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and . The receipt by the interested stockholder of the benefit of any loans, advance, guarantees, pledges or other financial benefits provided by or through the corporation. NASDAQ NATIONAL MARKET We have applied to list our common stock on the Nasdaq National Market under the trading symbol "DVSA." TRANSFER AGENT AND REGISTRAR The stock transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. 64 SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after the restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding 32,811,401 shares of common stock, assuming no exercise of the underwriters' over-allotment option. Of these shares, the 7,000,000 shares sold in this offering will generally be freely tradable without restriction or further registration under the Securities Act. Of the remaining 25,811,401 shares, all may be sold in the public market upon expiration of lock-up agreements 180 days after the date this prospectus is declared effective, subject to the volume and other restrictions of Rule 144. In general, under Rule 144 as currently in effect, our affiliates and other stockholders who have beneficially owned restricted shares for at least one year will be entitled to sell in any three-month period a number of shares that does not exceed the greater of: . 1% of the then outstanding shares of our common stock; or . The average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the SEC. Sales pursuant to Rule 144 are subject to requirements relating to manner of sale, notice, and the availability of current public information about us. A stockholder who is not deemed to have been an affiliate of ours at any time during the 90 days immediately preceding the sale and who has beneficially owned restricted shares for at least two years is entitled to sell those shares under Rule 144(k) without regard to the limitations described above. Subject to limitations on the aggregate offering price of a transaction and other conditions, Rule 701 of the Securities Act, as currently in effect, may be relied upon with respect to the resales of securities originally purchased from us by our employees, directors, officers, consultants or advisors prior to the date we become subject to the reporting requirements of the Securities Exchange Act, pursuant to written compensatory benefit plans or written contracts relating to the compensation of those persons. In addition, the SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its minimum holding period requirements. Shortly after this offering, we may also file a registration statement under the Securities Act covering shares of common stock reserved for issuance under our equity incentive plans. Such registration statement will cover approximately 6,187,096 shares. Shares registered under this registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market, unless such shares are subject to the lock-up agreements described above. 65 UNDERWRITING Subject to the terms and conditions set forth in an agreement among the underwriters and us, each of the underwriters named below, through their representatives, Bear, Stearns & Co. Inc., Deutsche Bank Securities Inc. and Hambrecht & Quist LLC, has severally agreed to purchase from us the aggregate number of shares of our common stock set forth opposite its name below:
NUMBER UNDERWRITER OF SHARES ----------- ----------- Bear, Stearns & Co. Inc. ........................................... Deutsche Bank Securities Inc. ...................................... Hambrecht & Quist LLC............................................... ----------- Total........................................................... 7,000,000 ===========
The underwriting agreement provides that the obligations of the several underwriters are subject to approval of various legal matters by their counsel and to various other conditions, including delivery of legal opinions by our counsel, the delivery of a letter by our independent auditors and the accuracy of the representations and warranties made by us in the underwriting agreement. Under the underwriting agreement, the underwriters are obliged to purchase and pay for all of the above shares of our common stock if any are purchased. PUBLIC OFFERING PRICE The underwriters propose to offer the shares of common stock directly to the public at the offering price set forth on the cover page of this prospectus and at that price less a concession not in excess of $ per share of common stock to other dealers who are members of the National Association of Securities Dealers, Inc. The underwriters may allow, and those dealers may reallow, concessions not in excess of $ per share of common stock to other dealers. After this offering, the offering price, concessions and other selling terms may be changed by the underwriters. Our common stock is offered subject to receipt and acceptance by the underwriters and subject to other conditions, including the right to reject orders in whole or in part. The underwriters have informed us that the underwriters do not expect to confirm sales of common stock to any accounts over which they exercise discretionary authority. The following table summarizes the per share and total public offering price of the shares of common stock in the offering, the underwriting compensation to be paid to the underwriters by us and the proceeds of the offering, before expenses, to us. The information presented assumes either no exercise or full exercise by the underwriters of their over-allotment option.
TOTAL ------------------------- WITHOUT WITH OVER- OVER- PER SHARE ALLOTMENT ALLOTMENT --------- ------------ ------------ Public offering price..................... $ $ $ Underwriting discounts and commissions payable by us............................ Proceeds, before expenses, to us..........
The underwriting discount and commission per share is equal to the public offering price per share of our common stock less the amount paid by the underwriters to us per share of common stock. We estimate total expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $1.2 million. 66 OVER-ALLOTMENT OPTION TO PURCHASE ADDITIONAL SHARES We have granted a 30-day over-allotment option to the underwriters to purchase up to an aggregate of 1,050,000 additional shares of our common stock exercisable at the offering price less the underwriting discounts and commissions, each as set forth on the cover page of this prospectus. If the underwriters exercise this option in whole or in part, then each of the underwriters will be obligated to purchase additional shares of common stock in proportion to their respective purchase commitments as shown in the table set forth above, subject to various conditions. INDEMNIFICATION AND CONTRIBUTION The underwriting agreement provides that we will indemnify the underwriters against liabilities specified in the underwriting agreement under the Securities Act or will contribute to payments that the underwriters may be required to make in respect of those liabilities. LOCK-UP AGREEMENTS Our directors and officers and stockholders holding 25,594,411 shares have agreed that they will not offer, sell or agree to sell, directly or indirectly, or otherwise dispose of any shares of common stock in the public market without the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days from the date of this prospectus. In addition, we have agreed that for a period of 180 days from the date of this prospectus, we will not, without the prior written consent of Bear, Stearns & Co. Inc., offer, sell or otherwise dispose of any shares of common stock, except that we may issue, and grant options to purchase, shares of common stock under our stock option plans and employee stock purchase plan and shares issuable upon exercise of outstanding options granted outside our plans. During this lock-up period, subject to various conditions, we may also issue additional equity securities in connection with collaborative and licensing arrangements or to pay for possible acquisitions, so long as the recipients of such securities are also subject to the 180 day lock-up period. NASDAQ NATIONAL MARKET QUOTATION Prior to this offering, there has been no public market for our common stock. Consequently, the initial offering price for the common stock will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in those negotiations, the primary factors will be our results of operations in recent periods, estimates of our prospects and the industry in which we compete, an assessment of our management, the general state of the securities markets at the time of this offering and the prices of similar securities of generally comparable companies. We have applied for approval for the quotation of our common stock on the Nasdaq National Market, under the symbol "DVSA." We cannot assure you, however, that an active or orderly trading market will develop for the common stock or that the common stock will trade in the public market subsequent to this offering at or above the initial offering price. STABILIZATION, SYNDICATE SHORT POSITION AND PENALTY BIDS In order to facilitate this offering, persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock during and after this offering. Specifically, the underwriters may over-allot or otherwise create a short position in the common stock for their own account by selling more shares of common stock than we have actually sold to them. The underwriters may elect to cover any such short position by purchasing shares of common stock in the open market and may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in this offering are reclaimed if shares of common stock previously distributed in this offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the common stock to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 67 RESERVED SHARE PROGRAM At our request, the underwriters have reserved for sale at the initial public offering price up to 400,000 shares of common stock to be sold in this offering for sale to our directors, officers, employees, business associates, vendors and related persons. Purchases of reserved shares are to be made through an account at Bear, Stearns & Co. Inc. in accordance with Bear, Stearns & Co. Inc.'s procedures for opening an account and transacting in securities. The number of shares available for sale to the general public will be reduced to the extent that any reserved shares are purchased. Any reserved shares not purchased by our directors, officers, employees, business associates, vendors and related persons will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. LEGAL MATTERS Cooley Godward llp, San Diego, California will pass on the validity of the shares of common stock offered by this prospectus for us and certain other legal matters. Upon the completion of this offering, attorneys with Cooley Godward llp, through an investment partnership, will beneficially own a total of 12,252 shares of our common stock. Brobeck, Phleger & Harrison LLP, San Diego, California will pass on legal matters in connection with this offering for the underwriters. EXPERTS The audited financial statements included in this prospectus have been audited by Ernst & Young LLP, independent auditors, as described in their report. We have included our financial statements in this prospectus in reliance upon Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS In August 1999, we dismissed PricewaterhouseCoopers LLP as our independent accountants. The former independent accountants' report did not contain an adverse opinion, a disclaimer of opinion or any qualifications or modifications related to uncertainty, limitation of audit scope or application of accounting principles. The former independent accountants' report does not cover any of our financial statements in this registration statement. There were no disagreements with the former public accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure with respect to our financial statements up through the time of dismissal that, if not resolved to the former accountants' satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their report. In August 1999, we retained Ernst & Young LLP as our independent public accountants. The decision to retain Ernst & Young LLP was approved by resolution of the audit committee of the board of directors. Prior to retaining Ernst & Young LLP, we had not consulted with Ernst & Young LLP regarding accounting principles. 68 WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C., a registration statement on Form S-1 under the Securities Act, with respect to the common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to us and our common stock, reference is made to the registration statement and the exhibits and schedules filed as part of the registration statement. Statements contained in this prospectus as to the contents of any contract or document filed as an exhibit to the registration statement are qualified by reference to the applicable exhibit as filed. A copy of the registration statement, and the exhibits and schedules to the registration statement, as well as reports and other information filed by us with the SEC may be inspected without charge at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the registration statement may be obtained from those offices upon the payment of the fees prescribed by the SEC. You can obtain information about the operation of the public reference facilities by calling the SEC at 1-800- SEC-0330. In addition, registration statements and other filings we make with the SEC through its electronic data gathering, analysis and retrieval, or EDGAR, system, including our registration statement, are publicly available through the Internet. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The SEC's web site is http://www.sec.gov. As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, will file periodic reports, proxy statements and other information with the SEC. 69 DIVERSA CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors....................... F-2 Balance Sheets as of December 31, 1998 and 1999......................... F-3 Statements of Operations for the years ended December 31, 1997, 1998 and 1999................................................................... F-4 Statement of Stockholders' Deficit for the years ended December 31, 1997, 1998 and 1999.................................................... F-5 Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999................................................................... F-6 Notes to Financial Statements........................................... F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Diversa Corporation We have audited the accompanying balance sheets of Diversa Corporation as of December 31, 1998 and 1999, and the related statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Diversa Corporation at December 31, 1998 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP San Diego, California January 12, 2000, except for Note 11, as to which the date is February 8, 2000. F-2 DIVERSA CORPORATION BALANCE SHEETS
PRO FORMA STOCKHOLDERS' DECEMBER 31, EQUITY AS OF -------------------------- DECEMBER 31, 1998 1999 1999 ------------ ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.......... $ 4,473,000 $ 2,490,000 Short-term investments............. 1,079,000 2,594,000 Accounts receivable, net of allowance of $6,000 and $1,000 at December 31, 1998 and 1999, respectively...................... 48,000 15,571,000 Other current assets............... 410,000 659,000 ------------ ------------ Total current assets............. 6,010,000 21,314,000 Property and equipment, net.......... 2,622,000 3,096,000 Acquired technology rights, net...... -- 2,487,000 Other assets......................... 74,000 4,175,000 ------------ ------------ Total assets......................... $ 8,706,000 $ 31,072,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable................... $ 235,000 $ 668,000 Accrued liabilities................ 1,530,000 1,653,000 Deferred revenue................... 301,000 4,491,000 Notes payable...................... 552,000 -- Current portion of capital lease obligations....................... 922,000 600,000 ------------ ------------ Total current liabilities........ 3,540,000 7,412,000 ------------ ------------ Capital lease obligations, less current portion..................... 2,202,000 2,677,000 Deposit from sublessee............... 300,000 300,000 Long-term deferred revenue........... -- 15,094,000 Commitments and contingencies (Note 7) Redeemable Convertible Preferred Stock--$0.001 par value; 60,718,183 shares authorized, 60,220,183 shares issued and outstanding at December 31, 1998 and 1999; no shares issued and outstanding pro forma............. 48,402,000 48,402,000 $ -- Stockholders' equity (deficit): Series E Convertible Preferred Stock--$0.001 par value; 5,555,556 shares authorized, issued and outstanding at December 31, 1999; 5,000,000 shares authorized, no shares issued and outstanding pro forma.......................... -- 6,000 -- Common stock--$0.001 par value; 28,630,349 shares authorized, 1,856,343 and 2,945,390 shares issued and outstanding at December 31, 1998 and 1999, respectively; 65,000,000 shares authorized, 25,779,401 shares issued and outstanding pro forma.............. 2,000 3,000 26,000 Additional paid-in capital.......... 267,000 20,102,000 68,487,000 Deferred compensation............... -- (5,520,000) (5,520,000) Notes receivable from stockholders.. (93,000) (36,000) (36,000) Accumulated deficit................. (45,916,000) (57,351,000) (57,351,000) Accumulated other comprehensive income (loss)...................... 2,000 (17,000) (17,000) ------------ ------------ ------------ Total stockholders' equity (deficit)....................... (45,738,000) (42,813,000) $ 5,589,000 ------------ ============ ============ Total liabilities and stockholders' equity (deficit).. $ 8,706,000 $ 31,072,000 ============ ============
See accompanying notes. F-3 DIVERSA CORPORATION STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ------------ ------------ ----------- Revenue: Collaborative revenue.............. $ 669,000 $ 625,000 $ 9,166,000 Grant and product revenue.......... 486,000 722,000 1,106,000 ------------ ------------ ----------- Total revenue........................ 1,155,000 1,347,000 10,272,000 Operating expenses: Research and development........... 8,195,000 10,665,000 12,149,000 Selling, general and administrative.................... 5,260,000 4,536,000 7,357,000 ------------ ------------ ----------- Total operating expenses............. 13,455,000 15,201,000 19,506,000 ------------ ------------ ----------- Loss from operations................. (12,300,000) (13,854,000) (9,234,000) Other income (expense)............... (25,000) 99,000 79,000 Interest income...................... 288,000 553,000 527,000 Interest expense..................... (355,000) (308,000) (391,000) ------------ ------------ ----------- Net loss............................. (12,392,000) (13,510,000) (9,019,000) Dividends payable to preferred stockholders........................ -- -- (66,000) ------------ ------------ ----------- Net loss applicable to common stockholders........................ $(12,392,000) $(13,510,000) $(9,085,000) ============ ============ =========== Historical net loss per share, basic and diluted......................... $ (7.72) $ (7.64) $ (3.86) ============ ============ =========== Shares used in calculating historical net loss per share, basic and diluted............................. 1,606,000 1,768,000 2,353,000 Pro forma net loss per share......... $ (0.36) =========== Shares used in calculating pro forma net loss per share.................. 25,187,000
See accompanying notes. F-4 DIVERSA CORPORATION STATEMENT OF STOCKHOLDERS' DEFICIT
SERIES E CONVERTIBLE NOTES ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE OTHER ----------------- ----------------- PAID-IN DEFERRED FROM ACCUMULATED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT INCOME (LOSS) --------- ------ --------- ------ ----------- ------------ ------------ ------------ ------------- Balance at December 31, 1996........... -- $ -- 1,576,978 $2,000 $ 190,000 $ -- $ (50,000) $(22,298,000) $ -- Issuance of notes receivable from stockholders related to sale of preferred stock ......... -- -- -- -- -- -- (113,000) -- -- Stock options exercised...... -- -- 50,847 -- 18,000 -- -- -- -- Dividends....... -- -- -- -- -- -- -- (66,000) -- Net loss and comprehensive loss........... -- -- -- -- -- -- -- (12,392,000) -- Deferred compensation related to stock options.. -- -- -- -- 2,113,000 (2,113,000) -- -- -- Amortization of deferred compensation... -- -- -- -- -- 685,000 -- -- -- --------- ------ --------- ------ ----------- ----------- ---------- ------------ -------- Balance at December 31, 1997........... -- -- 1,627,825 2,000 2,321,000 (1,428,000) (163,000) (34,756,000) -- Comprehensive income (loss): Net loss........ -- -- -- -- -- -- -- (13,510,000) -- Unrealized gain on available- for-sale securities..... -- -- -- -- -- -- -- -- 2,000 Comprehensive loss........... -- -- -- -- -- -- -- -- -- Stock options exercised...... -- -- 228,518 -- 59,000 -- -- -- -- Payments received on notes receivable..... -- -- -- -- -- -- 70,000 -- -- Deferred compensation related to stock options.. -- -- -- -- 1,929,000 (1,929,000) -- -- -- Amortization of deferred compensation... -- -- -- -- -- 1,665,000 -- -- -- --------- ------ --------- ------ ----------- ----------- ---------- ------------ -------- Balance at December 31, 1998........... -- -- 1,856,343 2,000 4,309,000 (1,692,000) (93,000) (48,266,000) 2,000 Comprehensive income (loss): Net loss........ -- -- -- -- -- -- -- (9,019,000) -- Unrealized loss on available- for-sale securities..... -- -- -- -- -- -- -- -- (19,000) Comprehensive loss........... -- -- -- -- -- -- -- -- -- Issuance of preferred stock, net of issuance costs of $71,000..... 5,555,556 6,000 -- -- 7,248,000 -- -- -- -- Issuance of stock options to former employee as part of severance agreement...... -- -- -- -- 1,095,000 -- -- -- -- Stock options exercised...... -- -- 1,089,047 1,000 607,000 -- -- -- -- Payment of note receivable from stockholders... -- -- -- -- -- -- 13,000 -- -- Forgiveness of notes receivable related to employee terminations... -- -- -- -- -- -- 44,000 -- -- Dividends payable to preferred stockholders... -- -- -- -- -- -- -- (66,000) -- Deferred compensation related to stock options.. -- -- -- -- 6,843,000 (6,843,000) -- -- -- Amortization of deferred compensation... -- -- -- -- -- 3,015,000 -- -- -- --------- ------ --------- ------ ----------- ----------- ---------- ------------ -------- Balance at December 31, 1999........... 5,555,556 $6,000 2,945,390 $3,000 $20,102,000 $(5,520,000) $ (36,000) $(57,351,000) $(17,000) ========= ====== ========= ====== =========== =========== ========== ============ ======== TOTAL STOCKHOLDERS' DEFICIT -------------- Balance at December 31, 1996........... $(22,156,000) Issuance of notes receivable from stockholders related to sale of preferred stock ......... (113,000) Stock options exercised...... 18,000 Dividends....... (66,000) Net loss and comprehensive loss........... (12,392,000) Deferred compensation related to stock options.. -- Amortization of deferred compensation... 685,000 -------------- Balance at December 31, 1997........... (34,024,000) Comprehensive income (loss): Net loss........ (13,510,000) Unrealized gain on available- for-sale securities..... 2,000 -------------- Comprehensive loss........... (13,508,000) Stock options exercised...... 59,000 Payments received on notes receivable..... 70,000 Deferred compensation related to stock options.. -- Amortization of deferred compensation... 1,665,000 -------------- Balance at December 31, 1998........... (45,738,000) Comprehensive income (loss): Net loss........ (9,019,000) Unrealized loss on available- for-sale securities..... (19,000) -------------- Comprehensive loss........... (9,038,000) Issuance of preferred stock, net of issuance costs of $71,000..... 7,254,000 Issuance of stock options to former employee as part of severance agreement...... 1,095,000 Stock options exercised...... 608,000 Payment of note receivable from stockholders... 13,000 Forgiveness of notes receivable related to employee terminations... 44,000 Dividends payable to preferred stockholders... (66,000) Deferred compensation related to stock options.. -- Amortization of deferred compensation... 3,015,000 -------------- Balance at December 31, 1999........... $(42,813,000) ==============
F-5 DIVERSA CORPORATION STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ------------ ------------ ----------- Operating activities: Net loss applicable to common stockholders........................ $(12,392,000) $(13,510,000) $(9,085,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization....... 842,000 1,178,000 1,498,000 Loss on disposal of property and equipment.......................... 86,000 -- -- Dividends payable to Series A, B and D preferred stockholders........... -- -- 66,000 Amortization of deferred compensation....................... 685,000 1,665,000 3,015,000 Issuance of stock options to former employees.......................... -- -- 1,095,000 Forgiveness of notes receivable..... -- -- 44,000 Change in operating assets and liabilities: Accounts receivable, net............ (61,000) 233,000 (664,000) Other current assets................ (64,000) (137,000) (609,000) Other assets........................ 48,000 78,000 (47,000) Accounts payable.................... (10,000) (294,000) 433,000 Accrued liabilities................. (312,000) (335,000) 123,000 Deferred revenue.................... -- 301,000 81,000 ------------ ------------ ----------- Net cash used in operating activities......................... (11,178,000) (10,821,000) (4,050,000) Investing activities: Purchases of property and equipment.. (1,310,000) (1,234,000) (1,421,000) Purchase of acquired technology rights.............................. -- -- (2,500,000) Proceeds from release of restricted investment securities............... 263,000 405,000 -- Purchases of investments............. -- (21,710,000) (26,943,000) Maturities of investments............ -- 20,633,000 25,426,000 Deposit from sublessee............... 300,000 -- -- ------------ ------------ ----------- Net cash used in investing activities......................... (747,000) (1,906,000) (5,438,000) Financing activities: Advances under capital lease obligations......................... 1,024,000 1,624,000 1,075,000 Principal payments on capital leases.............................. (978,000) (1,146,000) (922,000) Proceeds from repayment of notes receivable from stockholders........ 1,402,000 70,000 13,000 Payments on long-term debt/note payable............................. (15,000) (14,000) (552,000) Proceeds from sales of preferred and common stock, net of issuance costs............................... 22,125,000 59,000 7,891,000 Payments of preferred stock dividends........................... (66,000) -- -- ------------ ------------ ----------- Net cash provided by financing activities......................... 23,492,000 593,000 7,505,000 ------------ ------------ ----------- Net (decrease) increase in cash and cash equivalents..................... 11,567,000 (12,134,000) (1,983,000) Cash and cash equivalents at beginning of period............................ 5,040,000 16,607,000 4,473,000 ------------ ------------ ----------- Cash and cash equivalents at end of period............................... $ 16,607,000 $ 4,473,000 $ 2,490,000 ============ ============ =========== Supplemental disclosure of cash flow information: Interest paid........................ $ 363,000 $ 368,000 $ 451,000 ============ ============ =========== Supplemental schedule of noncash activities: Conversion of bridge notes to preferred stock..................... $ 3,433,000 $ -- $ -- ============ ============ =========== Conversion of Series I preferred stock to Series D preferred stock... $ 668,000 $ -- $ -- ============ ============ ===========
See accompanying notes. F-6 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Diversa Corporation (the "Company") was incorporated under the laws of the State of Delaware on December 21, 1992 and received initial funding to commence its operations in May 1994. The Company discovers and develops novel enzymes and other biologically active compounds from diverse environmental sources for use in agricultural, chemical processing, industrial and pharmaceutical applications. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which mature within three months from the date of purchase. The Company generally invests its excess cash in U.S. Government securities and investment grade corporate obligations. Short-term Investments The Company applies Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, to its investments. Under SFAS No. 115, the Company classifies its short-term investments as "Available-for-Sale" and records such assets at estimated fair value in the balance sheet, with unrealized gains and losses, if any, reported in stockholders' equity (deficit). At December 31, 1998, all short-term investments consisted of investments in U.S. government treasury securities. At December 31, 1999, short-term investments consisted of the following:
AMORTIZED MARKET UNREALIZED COST VALUE GAIN (LOSS) --------- ------ ----------- Corporate debt securities.......................... $1,505 $1,496 $ (9) Obligations of U.S. Government agencies............ 1,106 1,098 (8) ------ ------ ---- $2,611 $2,594 $(17) ====== ====== ====
These investments all mature in less than one year. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. The Company limits its exposure to credit loss by placing its cash and investments with high credit quality financial institutions. During the years ended December 31, 1997, 1998 and 1999, the Company had collaborative research agreements that accounted for 58%, 46%, and 89%, respectively, of total revenue. Property and Equipment Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (generally three to five years) using the straight- line method. Amortization of leasehold improvements is computed over the shorter of the lease term or the estimated useful life of the related assets. F-7 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Impairment of Long-Lived Assets In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset. While the Company's current and historical operating and cash flow losses are indicators of impairment, the Company believes the future cash flows to be received from the long-lived assets will exceed the assets' carrying value, and accordingly the Company has not recognized any impairment losses through December 31, 1999. Fair Value of Financial Instruments Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are carried at cost, which management believes approximates fair value because of the short-term maturity of these instruments. Revenue Recognition Strategic alliance revenues are earned and recognized on a percentage of completion basis as research costs are incurred in accordance with the provisions of each strategic alliance agreement. Fees paid to initiate research projects are deferred and amortized over the project period in accordance with SEC Staff Accounting Bulletin (SAB) No. 101. Milestone payments are recognized as revenue upon the completion of the milestone. Revenue from grants is recognized on a percentage of completion basis as related costs are incurred. Revenue from product sales is recognized at the time of shipment to the customer. The Company recognizes revenue only on payments that are non refundable, and defers revenue recognition until performance obligations have been completed. None of the strategic alliances or grants require scientific achievement as a performance obligation. Research and Development Expenditures relating to research and development are expensed in the period incurred. Income Taxes Current income tax expense (benefit) is the amount of income taxes expected to be payable (receivable) for the current year. A deferred income tax asset or liability is computed for the expected future impact of differences between the financial reporting and tax bases of assets and liabilities, as well as the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred income tax expense is generally the net change during the year in the deferred income tax asset or liability. Valuation allowances are established when realizability of deferred tax assets is uncertain. The effect of tax rate changes is reflected in tax expense (benefit) during the period in which such changes are enacted. Stock-Based Compensation As permitted by SFAS No. 123, the Company accounts for common stock options granted to employees using the intrinsic value method and, thus, recognizes no compensation expense for options granted with exercise prices equal to or greater than the fair value of the Company's common stock on the date of the grant. In 1999, the Company recognized deferred stock compensation related to certain stock option grants (see Note 5). F-8 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Deferred compensation for options granted to non-employees has been determined in accordance with SFAS No. 123 and EITF 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Deferred charges for options granted to non-employees are periodically remeasured as the underlying options vest. Comprehensive Income (Loss) As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income (loss) and its components; the Company has disclosed its comprehensive income (loss) as a component of its statement of stockholders' equity (deficit). Net Loss Per Share Basic and diluted net loss per common share are presented in conformity with SFAS No. 128, Earnings per Share, and SAB 98, for all periods presented. Under the provisions of SAB 98, common stock and convertible preferred stock that has been issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per common share as if these shares had been outstanding for all periods presented. To date, the Company has not issued or granted shares for nominal consideration. In accordance with SFAS No. 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Pro forma basic and diluted net loss per common share, as presented in the statements of operations, has been computed for the year ended December 31, 1999 as described above, and also gives effect to the assumed conversion of preferred stock which will automatically convert to common stock immediately prior to the completion of the Company's initial public offering (using the "as if converted" method) from the original date of issuance. The pro forma shares have been adjusted to give effect to the 1-for-2.8806 reverse stock split contemplated in Note 11. The following table presents the calculation of basic, diluted and pro forma basic and diluted net loss per share:
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ------------ ------------ ----------- Net loss applicable to common stockholders......................... $(12,392,000) $(13,510,000) $(9,085,000) Basic and diluted net loss per share.. $ (7.72) $ (7.64) $ (3.86) ============ ============ =========== Weighted-average shares used in computing historical net loss per share, basic and diluted............. 1,606,000 1,768,000 2,353,000 Pro forma: Net loss............................ $(9,085,000) Pro forma net loss per share, basic and diluted (unaudited).............. $ (0.36) =========== Shares used above..................... 2,353,000 Pro forma adjustment to reflect weighted-average effect of assumed conversion of convertible preferred stock (unaudited).................. 22,834,000 ----------- Shares used in computing pro forma net loss per share, basic and diluted (unaudited)................ 25,187,000
F-9 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Company has excluded all convertible preferred stock, outstanding stock options and warrants, and shares subject to repurchase from the calculation of diluted loss per common share because all such securities are antidilutive for all applicable periods presented. The total number of shares excluded from the calculations of diluted net loss per share, prior to application of the treasury stock method for options and warrants, was 23,620,000, 24,231,000 and 25,959,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Such securities, had they been dilutive, would have been included in the computation of diluted net loss per share. Segment Reporting As of January 1, 1998, the Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. SFAS No. 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas, and major customers. The Company has determined that it operates in only one segment. Accordingly, the adoption of this statement had no impact on the Company's financial statements. Effect of New Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which will be effective January 1, 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments imbedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company believes the adoption of SFAS No. 133 will not have a material effect on the financial statements. 2. BALANCE SHEET DETAILS Accounts receivable consist of the following:
DECEMBER 31, -------------------- 1998 1999 ------- ----------- Trade.................................................. $13,000 $ 23,000 Grants................................................. 41,000 204,000 Partnership alliances.................................. -- 15,345,000 ------- ----------- 54,000 15,572,000 Allowance for doubtful accounts........................ (6,000) (1,000) ------- ----------- Total.................................................. $48,000 $15,571,000 ======= ===========
The partnership alliance receivable consists primarily of a receivable from Novartis related to the joint venture discussed in Note 3. This receivable was recorded upon the commencement of the related research efforts in December 1999 after the agreement was signed, and the payment of the receivable is due by February 2000. F-10 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Property and equipment consist of the following:
DECEMBER 31, ------------------------ 1998 1999 ----------- ----------- Laboratory equipment............................... $ 4,228,000 $ 5,720,000 Computer equipment................................. 1,735,000 2,112,000 Furniture and fixtures............................. 274,000 322,000 Leasehold improvements............................. 77,000 132,000 ----------- ----------- 6,314,000 8,286,000 Accumulated depreciation and amortization.......... (3,692,000) (5,190,000) ----------- ----------- Total.............................................. $ 2,622,000 $ 3,096,000 =========== ===========
At December 31, 1999, other assets primarily consisted of a $4.0 million long-term receivable from the Novartis joint venture (See Note 3). This receivable is due in June 2001, and is carried at its present value using a discount rate of 15%. Accrued liabilities consist of the following:
DECEMBER 31, --------------------- 1998 1999 ---------- ---------- Compensation........................................... $ 855,000 $ 929,000 Professional fees...................................... 334,000 287,000 Property taxes......................................... 67,000 85,000 Other.................................................. 274,000 352,000 ---------- ---------- $1,530,000 $1,653,000 ========== ==========
3. SIGNIFICANT STRATEGIC ALLIANCES Novartis Agribusiness Biotechnology Research In January 1999, the Company entered into a strategic alliance with Novartis Agribusiness Biotechnology Research Inc. ("Novartis"). Under the agreement, the Company will receive research funding from Novartis to conduct multiple independent research projects with the intention of identifying and developing biomolecules that meet the scientific specifications of Novartis. In conjunction with the transaction, Novartis purchased 5,555,556 shares of Series E Convertible Preferred Stock for gross proceeds of $7.3 million, paid a technology access fee of $3.0 million, and provided project research funding of $2.2 million to the Company, for aggregate total proceeds of $12.5 million. The Company is recognizing the research payments and the technology access fee on a percentage of completion basis as research is performed. The only obligation of the Company under this agreement is to perform research activities; Novartis did not acquire any rights or privileges other than as disclosed in Note 4 as an owner of Series E preferred stock. All of the research required under the collaboration was completed by December 31, 1999, and accordingly the entire technology access fee of $3.0 million and the research funding of $2.2 million were recognized in 1999. The Company has no further performance obligations related to this alliance. Novartis Joint Venture In December 1999, the Company formed a five-year, renewable strategic alliance with Novartis Seeds AG ("Novartis"). Through a contract joint venture, the Company and Novartis will jointly pursue opportunities in the field of animal feed and agricultural product processing. Both parties will share in the management of the venture and fund a portion of the sales and marketing costs of this venture. Under the agreements, Novartis receives exclusive, worldwide rights in the field of animal feed and project exclusive, worldwide rights in the F-11 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) field of agricultural product processing. Novartis will pay for the license granted under this agreement, of which $15.0 million is due by February 2000 and an additional $5 million due in June 2001. The Company has recorded the receivable at its present value of $4.0 million. The technology access fee will be recognized as revenue on a straight-line basis over the term of the agreement. Additionally, the Company will receive minimum research funding over five years of $33.9 million, as well as milestone payments upon achievement of project objectives totalling up to $7.7 million and license and commercialization fees for any resulting products. Research funding will be recognized as the research is performed, and milestone payments will be recognized as revenue when earned. The Company will receive a share of the profits in the form of royalties on any product sales. Revenue recognized under the Novartis contract joint venture agreement was $0.8 million for the year ended December 31, 1999, consisting of research funding of $0.5 million and amortization of the license fee of $0.3 million. The Dow Chemical Company In July 1999, the Company expanded its existing strategic alliance with The Dow Chemical Company ("Dow"). Under the expanded agreement, the Company will seek to identify and develop enzymes that can be utilized by Dow to manufacture chemical compounds. The three-year agreement requires Dow to make annual technology development payments of $1.5 million each year. Dow will fund the research costs for the duration of the contract totaling $10.8 million. The Company will receive milestone payments of up to $2.7 million upon achievement of established objectives and license and commercialization fees for any resulting products. The Company will receive royalties on product sales. The Company is amortizing the technology development fees over the minimum guaranteed period of the agreement. Revenue recognized under the strategic alliance with Dow was approximately $2.5 million (27% of total collaborative revenues) for the year ended December 31, 1999, consisting of research funding of $1.9 million, and amortization of technology development fees of $0.6 million. In June 1997, the Company entered into an initial agreement with Dow to develop an enzyme to be used in a Dow industrial process. As of December 31, 1998, the Company had successfully achieved the three technical milestones as outlined in the agreement. Finnfeeds International Limited In May 1996, the Company entered into a strategic alliance with Finnfeeds International Limited ("Finnfeeds") to jointly discover new enzymes for the animal feed market. In conjunction with the agreement, the Company issued 844,444 shares of its Series C Redeemable Convertible Preferred Stock to Finnfeeds for $1,900,000. The Company received and recognized as revenue $0.8 million in research funding over the period from May 1996 through December 31, 1998. The only obligation of the Company under this agreement is to perform research activities; Finnfeeds did not acquire any rights or privileges other than as disclosed in Note 4 as an owner of Series C preferred stock. In December 1998, the Company and Finnfeeds entered into a license agreement to commercialize an enzyme developed under the strategic alliance. Under the terms of the agreement, the Company granted Finnfeeds an exclusive license to manufacture, use and sell the developed enzyme. In consideration for the license, the Company will be paid a royalty on related product sales made by Finnfeeds. Terragen Discovery Inc. In November 1999, the Company signed a license agreement with Terragen Discovery Inc. ("Terragen") under which Terragen and the Company agreed to cross license certain technologies. Under the terms of the F-12 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) agreement, the Company made an initial payment of $2.5 million in 1999 and agreed to make annual payments of $100,000 to Terragen to maintain the patent rights over the remaining patent life. The Terragen license was acquired to enhance the Company's intellectual property position in combinational libraries. The Company has capitalized the initial payment as an intangible asset, which will be amortized over the sixteen year patent life. Other Agreements The Company has signed various agreements with research institutions, governmental and commercial entities. Generally these agreements call for the Company to pay research support, cost reimbursement and, in some cases, subsequent royalty payments in the event a product is commercialized. The financial impact of these agreements on the Company is not significant. 4. PREFERRED STOCK AND STOCKHOLDERS' EQUITY Initial Public Offering In December 1999, the board of directors authorized management of the Company to file a registration statement with the Securities and Exchange Commission permitting the Company to sell shares of its common stock to the public. If the initial public offering is closed under the terms presently anticipated, all of the preferred stock outstanding will automatically convert into 22,834,011 shares of common stock. Unaudited pro forma stockholders' equity, as adjusted for the assumed conversion of the preferred stock, is set forth on the balance sheet. Authorization of Preferred Stock In December 1999, the board of directors approved an amendment to the Company's articles of incorporation to authorize an additional 5,000,000 shares of undesignated preferred stock, for which the board of directors is authorized to fix the designation, powers, preferences, and rights, and authorized an additional 5,000,000 shares of common stock. Characteristics and Terms Applicable to Preferred Stock The Company has Series A, B, C, D and E preferred stock (the "Preferred Stock") outstanding at December 31, 1999. All outstanding shares of Preferred Stock automatically convert into Common Stock upon the effective date of an initial public offering ("IPO") with gross proceeds exceeding $25 million and a price per share of not less than $3.00. The Preferred Stock is convertible at any time into Common Stock of the Company at a conversion ratio (one to one) determined based on a formula provided in the Company's Restated Certificate of Incorporation. The conversion ratio will be adjusted to 1-for-2.8806 when the reverse stock split discussed in Note 11 is effected. The Company has reserved the full number of shares of Common Stock issuable upon conversion of the Preferred Stock. F-13 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) A summary of convertible preferred stock issued and outstanding as of December 31, 1999 is as follows:
LIQUIDATION SHARES PREFERENCE ---------- ----------- Series A............................................ 10,000,000 $10,000,000 Series B............................................ 24,566,184 16,873,681 Series C............................................ 844,444 -- Series D............................................ 24,809,555 21,088,122 Series E............................................ 5,555,556 4,722,223 ---------- ----------- 65,775,739 $52,684,026 ========== ===========
The liquidation preference on the Series C Preferred Stock is determined by the board of directors of the Company, and is based on the board's interpretation of the value of the intellectual property rights related to the genes and gene-sequencing technology developed under the Finnfeeds collaboration agreement. Dividends are payable when and if declared by the board of directors for the Series A, B and D Stockholders. Such dividends will be declared so that each of these Stockholders participates equally. From December 21, 1999 until the date of the consummation of the first sale of common shares in an IPO, the Series A, B and D Preferred Stockholders are entitled to a 5% dividend per annum. The Company has accrued $66,000 in dividends payable, as of December 31, 1999, and will continue to accrue approximately $6,500 per day through the completion of an initial public offering. The Company intends to settle the dividend payable through the issuance of shares of common stock valued at the IPO price. The dividend for the Series A, B and D Preferred stock is $0.05, $0.033, and $0.0425 per share, respectively, or such greater amount of dividends as the Preferred Stockholders would be entitled to if converted into Common Stock. Dividends are payable when and if declared by the board of directors on the Series C and E Preferred Stock, but are junior to the dividends on the Series A, B and D Preferred Stock. The Preferred Stockholders have voting rights on an "as if converted" basis on most matters; however, the approval of a majority of the Preferred Stockholders voting as a separate class is required for certain transactions. In the event of a liquidation, the Series A, B and D Preferred Stockholders are entitled to receive on a pro rata basis a liquidation payment in an amount equal to the original issuance price of the Preferred Stock plus any unpaid cumulative dividends plus declared but unpaid dividends, as well as a pro rata distributive share of any remaining assets on an "as if fully converted" basis with the Common Stock. The Company will be required to redeem the Series A, B, C and D Preferred Stock on and after May 2001, upon a written request of the Preferred Stockholders representing not less than 75% of the combined voting power of the Preferred Stock. The redemption price of the Preferred Stock is equal to the original issuance price, plus unpaid cumulative dividends and declared but unpaid dividends. The Series C Preferred Stock will be redeemed only after full redemption of the Series A, B and D Preferred Stock. Series A Redeemable Convertible Preferred Stock During 1994 and 1995, the Company issued a total of 10,000,000 shares of Series A Redeemable Convertible Preferred Stock for aggregate net proceeds of $9,927,000. Series B Redeemable Convertible Preferred Stock In May 1996, the Company issued 18,939,394 shares of Series B Redeemable Convertible Preferred Stock (the "Series B Preferred Stock") for aggregate net proceeds of $11,947,000. In December 1996, the Company F-14 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) issued an additional 4,545,455 shares of Series B Redeemable Convertible Preferred Stock for aggregate proceeds of $3,000,000. In conjunction with the issuance of Series B Redeemable Convertible Preferred Stock, rights were granted to certain key employees and consultants to purchase an additional 1,272,727 shares of Series B Preferred Stock for $840,000. In December 1996, certain of these individuals exercised their rights and purchased 967,698 shares of Series B Preferred Stock for $640,000. In May 1997, two key employees exercised their rights and purchased a total of 113,637 shares of Series B Preferred Stock for $0.66 per share in exchange for promissory notes aggregating $75,000. The notes are payable over four years in equal annual installments commencing March 30, 1998, and bear interest at 6.64% per annum. These notes have been recorded as a separate component of stockholders' equity (deficit). The right to purchase an additional $125,000 in Series B Preferred Stock expired in May 1997. In 1999, the Company forgave $44,000 related to notes receivable from certain employees, and recorded compensation expense for the forgiveness. Series C Redeemable Convertible Preferred Stock In July 1997, the Company issued 844,444 shares of Series C Redeemable Convertible Preferred Stock (the "Series C Preferred Stock") to Finnfeeds for $2.25 per share in conjunction with a collaboration agreement (Note 3). Total issuance costs of $10,000 were netted against the cash proceeds. The rights of the Series C Preferred Stock are junior to the rights of Series A, B and D Preferred Stock, and on par with the Series E Preferred Stock. Series D Redeemable Convertible Preferred Stock In October 1997, the Company issued 24,809,555 shares of Series D Redeemable Convertible Preferred Stock (the "Series D Preferred Stock") for $0.85 per share. The $21,088,000 total issuance price of the Series D Preferred Stock included the conversion of bridge notes in the amount of $3,433,000, the exchange of Series I Preferred Stock in the amount of $688,000 and a $50,000 note receivable from a key employee which is payable over four years in equal annual installments commencing December 1997, and bears interest at 6.64% per annum. Total issuance costs of $165,000 were netted against the cash proceeds. Series E Convertible Preferred Stock In January 1999, in conjunction with a strategic alliance signed with Novartis (Note 3), the Company sold 5,555,556 shares of Series E Convertible Preferred Stock. The terms of the stock purchase agreement designate a portion of the proceeds as a technology access fee, a portion of the proceeds as advance payments for research support under the collaboration agreement, and $7,333,000 for the Series E Convertible Preferred Stock ($1.32 per share). The rights of the Series E Convertible Preferred Stock are junior to the rights of Series A, B and D with respect to dividends and liquidation preferences. 5. STOCK OPTION PLANS AND WARRANTS 1999 Employee Stock Purchase Plan In December 1999, the board of directors adopted the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 416,579 shares of the Company's common stock have been reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods. The price at which stock is purchased under the Purchase Plan is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The initial offering period will commence on the effective date of the F-15 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) offering. In addition, the Purchase Plan provides for annual increases of shares available for issuance under the Purchase Plan beginning with fiscal 2001. 1999 Nonemployee Directors Stock Option Plan In December 1999, the Company adopted the 1999 Nonemployee Directors Stock Option Plan and reserved a total of 277,719 shares of common stock for issuance thereunder. Each nonemployee director who becomes a director of the Company will be automatically granted a nonstatutory stock option to purchase 27,772 shares of common stock on the date on which such person first becomes a director. At each board meeting immediately following each annual stockholders meeting beginning with the first board meeting after the 1999 Annual Stockholders Meeting, each nonemployee director will automatically be granted a nonstatutory option to purchase 1,736 shares of common stock. The exercise price of options under the director plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the director plan is ten years. Each initial grant under the director plan will vest as to 25% of the shares subject to the option one year after the date of grant and at a rate of 25% of the shares at the end of each year. Each subsequent grant will vest in full one year after the date of grant. The director plan will terminate in September 2009, unless terminated earlier in accordance with the provisions of the director plan. The 1997 Equity Incentive Plan In August 1997, the Company adopted the 1997 Equity Incentive Plan (the "1997 Plan") which provides for the granting of incentive or non-statutory stock options, stock bonuses, and rights to purchase restricted stock to employees, directors, and consultants as administered by the human resources committee of the board of directors. Unless terminated sooner by the board of directors, the 1997 Plan will terminate in August 2007. The incentive and non-statutory stock options are granted with an exercise price of not less than 100% and 85%, respectively, of the estimated fair value of the underlying common stock as determined by the board of directors. The 1997 Plan allows a purchase price for each restricted stock purchase that is not less than 85% of the estimated fair value of the Company's common stock as determined by the board of directors. Options granted under the 1997 Plan vest over periods ranging up to four years and are exercisable over periods not exceeding ten years. The aggregate number of shares which may be awarded under the 1997 Plan is 5,836,468, and an equal number of shares of common stock are reserved for the exercise of these options. This aggregate number includes 3,020,204 shares which were authorized by the board of directors in October 1999. The Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan The Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan (the "1994 Plan") provides for the granting of incentive or non-qualified stock options to employees and consultants as administered by the human resources committee of the board of directors. The incentive stock options are granted with an exercise price of not less than the estimated fair value of the underlying common stock as determined by the board of directors. The non- qualified stock options are granted with an exercise price of not less than $0.03. Options granted under the 1994 Plan vest over periods ranging up to four years and are exercisable over periods not exceeding ten years. Options to purchase 951,902 shares have been granted under the 1994 Plan and 110,000 options remain outstanding related to the 1994 Plan. In August 1997, this Plan was terminated and there are no options available for future grant. F-16 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Information with respect to the plans is as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ---------- ---------------- Balance at January 1, 1997...................... 1,279,000 $0.40 Granted....................................... 1,203,000 $0.43 Exercised..................................... (51,000) $0.35 Cancelled..................................... (81,000) $0.46 ---------- Balance at December 31, 1997.................... 2,350,000 $0.43 Granted....................................... 1,185,000 $0.58 Exercised..................................... (228,000) $0.26 Cancelled..................................... (346,000) $0.43 ---------- Balance at December 31, 1998.................... 2,961,000 $0.49 Granted....................................... 1,515,000 $3.14 Exercised..................................... (1,089,000) $0.55 Cancelled..................................... (262,000) $0.49 ---------- Balance at December 31, 1999.................... 3,125,000 $1.73 ==========
At December 31, 1999, options under the plans to purchase approximately 3,125,000 shares were exercisable and approximately 2,368,000 shares remain available for grant. Following is a further breakdown of the options outstanding under the plans as of December 31, 1999:
WEIGHTED WEIGHTED AVERAGE WEIGHED AVERAGE EXERCISE OPTIONS REMAINING LIFE AVERAGE EXERCISE OPTIONS PRICE OF OPTIONS RANGE OF EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE EXERCISABLE ------------------------ ----------- -------------- ---------------- ----------- ---------------- $0.03--$0.49............ 469,000 7.0 $0.40 469,000 $0.40 $0.58................... 1,331,000 8.4 $0.58 1,331,000 $0.58 $1.73--$8.64............ 1,325,000 9.7 $3.43 1,325,000 $3.43 --------- --------- $0.03--$8.64............ 3,125,000 8.8 $1.73 3,125,000 $1.73 ========= =========
The Company has outstanding an option to purchase 13,937 shares of common stock with an exercise price of $0.03 per share that was issued in 1994 to a founder of the Company as consideration for waiving certain rights in conjunction with a previous financing. This option was issued outside of the 1994 and 1997 plans. The option expires at the earlier of the 10th anniversary of the option or eighteen months after the completion of an IPO. Adjusted pro forma information regarding net loss and net loss per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options and stock purchase plan under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using the "Minimum Value" method for option pricing with the following assumptions for 1997, 1998 and 1999; risk-free interest rates of 6.50%; dividend yield of 0%; and a weighted-average expected life of the options of five years. F-17 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period. The Company's adjusted pro forma information is as follows:
YEARS ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ------------ ------------ ----------- Adjusted pro forma net loss....... $(12,466,000) $(13,572,000) $(9,251,000) Adjusted pro forma basic net loss per share........................ $ (7.76) $ (7.68) $ (3.93)
The pro forma effect on net loss for 1997, 1998 and 1999 is not likely to be representative of the pro forma effects on reported net income or loss in future years because these amounts reflect less than four years of vesting. During the years ended December 31, 1997, 1998 and 1999, in connection with the grant of certain stock options to employees, the Company recorded deferred stock compensation totaling approximately $10.8 million, representing the difference between the exercise price and the fair value of the Company's common stock as estimated by the Company's management for financial reporting purposes on the date such stock options were granted. Deferred compensation is included as a reduction of stockholders' equity and is being amortized to expense over the vesting period of the options. During the year ended December 31, 1999, the Company recorded amortization of deferred stock compensation expense of approximately $3.0 million. The Company has a total of approximately 364,000 warrants outstanding, consisting of approximately 174,000 warrants to purchase Series A Preferred Stock at $2.88 per share, and approximately 190,000 warrants to purchase common stock at between $0.03 and $0.43 per share. The common stock warrants were issued in previous years in connection with certain debt and equity financing transactions, and expire through 2006. The Series A Preferred Stock warrants were issued in conjunction with a lease financing agreement, and expire at the later of February 2005, or the fifth anniversary of the completion of an initial public offering. At December 31, 1999, the Company has reserved shares of common stock for future issuance as follows: Conversion of convertible preferred stock......................... 22,834,000 1994 and 1997 Stock Option Plan................................... 5,493,000 Option issued to a founder of the Company......................... 14,000 Warrants.......................................................... 364,000 ---------- 28,705,000 ==========
Employee Terminations During 1999, the Company agreed to separation terms with two former officers. In conjunction with these agreements, the Company agreed to accelerate one year's unvested options for one officer, and extend the vesting period for one year for the other officer. The Company considered each modification to require a remeasurement of the options and accordingly recorded an expense of $1.1 million related to the option modifications. The expense was recorded at the time of the separation as the former officers will perform no services on behalf of the Company after the separation date. 6. BENEFIT PLAN The Company has a 401(k) plan which allows participants to defer a portion of their income through contributions. Such deferrals are fully vested and are not taxable to the participant until distributed from the plan upon termination, retirement, permanent disability or death. During the years ended December 31, 1997, 1998 and 1999, the Company made discretionary contributions of approximately $39,000, $45,000 and $54,000, respectively. F-18 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 7. COMMITMENTS AND CONTINGENCIES The Company leases office and laboratory space as well as equipment under noncancelable leases as follows:
CAPITAL OPERATING LEASES LEASES ---------- ---------- Year ending December 31: 2000................................................ $ 943,000 $ 563,000 2001................................................ 1,012,000 580,000 2002................................................ 1,035,000 49,000 2003................................................ 817,000 -- 2004................................................ 296,000 -- Thereafter............................................ 45,000 -- ---------- ---------- Total minimum lease payments.......................... 4,148,000 $1,192,000 ========== Amount representing interest.......................... 871,000 ---------- Present value of minimum capital lease obligations.... 3,277,000 Current portion....................................... 600,000 ---------- Long-term capital lease obligation.................... $2,677,000 ==========
The operating lease commitment includes rental payments due under the Company's San Diego facility lease and excludes approximately $390,000 in payments due related to a previously occupied facility for which the Company has sublessee rental commitments to meet substantially all required lease payments, and has received a $300,000 deposit from the sublessee. For the years ended December 31, 1997, 1998, and 1999, rent and administrative service expense under operating leases for the San Diego facility was approximately $413,000, $516,000, and $533,000, respectively. Equipment acquired under capital leases is included in property and equipment, and amounted to $4,971,000 and $6,075,000 (net of accumulated amortization of $2,421,000 and $1,916,000) as of December 31, 1998 and December 31, 1999, respectively. The Company's capital lease obligations mature at various dates through 2004 with interest rates ranging from 9.5% to 15.7%. As of December 31, 1999, the Company has $828,000 available under lease financing lines. 8. NOTES PAYABLE In March 1995, the Company issued a $600,000 note payable with a 9% per annum interest rate payable in connection with the acquisition of fixed assets. The note was paid in full in 1999. 9. RELATED PARTY TRANSACTIONS Included in the statement of operations are consulting fees and reimbursed expenses to various stockholders, amounting to approximately $275,000 and $413,000 for the year ended December 31, 1998 and 1999, respectively. F-19 DIVERSA CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) 10. Income Taxes Significant components of the Company's deferred tax assets are shown below. A valuation allowance of $19,269,000 and $22,605,000 has been recognized to offset the deferred tax assets at December 31, 1998 and 1999, respectively, as realization of such assets is uncertain.
December 31, -------------------------- 1998 1999 ------------ ------------ Deferred tax assets: Net operating loss carryforwards.................. $ 16,584,000 $ 17,724,000 Deferred revenue.................................. -- 1,155,000 Licenses.......................................... -- 1,266,000 Start-up costs.................................... 556,000 278,000 Allowances and accrued liabilities................ 574,000 349,000 Federal and state tax credits..................... 1,391,000 1,669,000 Depreciation...................................... 164,000 164,000 ------------ ------------ Total deferred tax assets......................... 19,269,000 22,605,000 Valuation allowance............................... (19,269,000) (22,605,000) ------------ ------------ Net deferred tax assets............................. $ -- $ -- ============ ============
At December 31, 1999, the Company has federal and California net operating loss carryforwards of approximately $45,817,000 and $28,901,000, respectively. The federal net operating loss carryforwards will begin to expire in 2009. The California net operating loss carryforwards will continue to expire in 2000 (approximately $760,000 expired in 1999). The Company also has federal and California tax credits of approximately $1,242,000 and $657,000, respectively, which will expire in 2009. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company's net operating loss and credit carryforwards may be limited in the event of a cumulative change in ownership of more than 50%. However, the Company does not believe such limitation will have a material effect upon the utilization of these carryforwards. 11. Subsequent Events In February 2000, the Company effected a 1-for-2.8806 reverse stock split of the Company's common stock. All share data have been retroactively restated to reflect the reverse stock split. In conjunction with the reverse stock split, the certificate of incorporation was amended to authorize 65,000,000 shares of common stock and 5,000,000 shares of preferred stock. In February 2000, the Company initiated a loan program for 6 employees to loan them monies to pay a personal tax liability. This tax liability resulted from the Company's delayed filing of a Form 83B election related to those employees' exercise of incentive and non qualified stock options during 1999. This failure to timely file the Form 83B election exposed the employees to significant personal tax liability. To limit the tax exposure, the Company has elected to accelerate the vesting of the remaining unvested options, totaling approximately 207,000 options, and will loan the employees a total of $1.6 million in full recourse promissory notes. The loans carry a market interest rate, and will be repaid over a five year term. In addition, the proceeds from any sale of stock or realization of the individuals' tax credit carryforward will first be used to repay the outstanding loan. In February 2000, the Company accelerated the vesting on 104,145 stock options previously granted to a director of the Company who also serves as Chairman of the Scientific Advisory Board and as a consultant. To the extent the option grants were for consulting services, the Company will record a charge to operations of $1.7 million in the first quarter of 2000 in accordance with SFAS 123 and EITF 96-18. F-20 [LOGO OF DIVERSA] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Until , 2000, all dealers that effect trans- actions of these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. --------------------- TABLE OF CONTENTS ---------------------
PAGE ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 5 Special Statement Regarding Forward-Looking Statements................... 16 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 16 Corporate Information.................................................... 16 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Financial Information........................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 20 Business................................................................. 26 Management............................................................... 44 Certain Transactions..................................................... 56 Principal Stockholders................................................... 60 Description of Capital Stock............................................. 62 Shares Eligible for Future Sale.......................................... 65 Underwriting............................................................. 66 Legal Matters............................................................ 68 Experts.................................................................. 68 Where You Can Find More Information...................................... 69 Index to Financial Statements............................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO OF DIVERSA] 7,000,000 SHARES COMMON STOCK ------------------------- PROSPECTUS ------------------------- BEAR, STEARNS & CO. INC. CHASE H&Q DEUTSCHE BANC ALEX. BROWN , 2000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses payable by the Registrant in connection with the sale of the common stock being registered. All the amounts shown are estimates except for the SEC registration fee and the NASD filing fee. Registration fee.................................................... $ 46,755 NASD filing fee..................................................... 18,210 Nasdaq National Market listing fee.................................. 95,000 Printing and engraving expenses..................................... 200,000 Legal fees and expenses............................................. 450,000 Accounting fees and expenses........................................ 250,000 Blue Sky fees and expenses.......................................... 10,000 Transfer agent and registrar fees................................... 10,000 Miscellaneous....................................................... 120,035 ---------- Total........................................................... $1,200,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Bylaws require that directors and officers be indemnified to the maximum extent permitted by Delaware law. The Delaware General Corporation Law (the "Delaware GCL") provides that a director or officer of a corporation (i) shall be indemnified by the corporation for all expenses of litigation or other legal proceedings when he is successful on the merits, (ii) may be indemnified by the corporation for the expenses, judgments, fines and amounts paid in settlement of such litigation (other than a derivative suit) even if he is not successful on the merits if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation (and, in the case of a criminal proceeding, had no reason to believe his conduct was unlawful), and (iii) may be indemnified by the corporation for expenses of a derivative suit (a suit by a stockholder alleging a breach by a director or officer of a duty owed to the corporation), even if he is not successful on the merits, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, provided that no such indemnification may be made in accordance with this clause (iii) if the director or officer is adjudged liable to the corporation, unless a court determines that, despite such adjudication but in view of all of the circumstances, he is entitled to indemnification of such expenses. The indemnification described in clauses (ii) and (iii) above shall be made upon order by a court or a determination by (i) a majority of disinterested directors or by such committee such disinterested directors may designate, (ii) if there are no such directors or if such directors so direct, by independent legal counsel in a written opinion or (iii) the stockholders that indemnification is proper because the applicable standard of conduct is met. Expenses incurred by a director or officer in defending an action may be advanced by the corporation prior to the final disposition of such action upon receipt of an undertaking by such director or officer to repay such expenses if it is ultimately determined that he is not entitled to be indemnified in connection with the proceeding to which the expenses relate. The Company's Certificate of Incorporation includes a provision eliminating, to the fullest extent permitted by Delaware law, director liability for monetary damages for breaches of fiduciary duty. The Company has entered into indemnity agreements (the "Indemnity Agreements") with each director or officer designated by the Board of Directors. The Indemnity Agreements require that the Company indemnify II-1 directors and officers who are parties thereto in all cases to the fullest extent permitted by our bylaws and by Delaware law. Under the Delaware GCL, except in the case of litigation in which a director or officer is successful on the merits, indemnification of a director or officer is discretionary rather than mandatory. Consistent with the Company's Bylaw provision on the subject, the Indemnity Agreements require the Company to make prompt payment of litigation expenses at the request of the director or officer in advance of indemnification provided that he undertakes to repay the amounts if it is ultimately determined that he is not entitled to indemnification for such expenses. The advance of litigation expenses is mandatory; under the Delaware GCL such advance would be discretionary. Under the Indemnity Agreements, the director or officer is permitted to bring suit to seek recovery of amounts due under the Indemnity Agreements and is entitled to recover the expenses of seeking such recovery if such suit for recovery is successful in whole or in part. Without the Indemnity Agreements, the Company would not be required to pay the director or officer for his expenses in seeking indemnification recovery against the Company. Under the Indemnity Agreements, directors and officers are not entitled to indemnity or advancing of expenses (i) if such director or officer has recovered payment under an insurance policy for the subject claim, or has otherwise been indemnified against the subject claim, (ii) for actions initiated or brought by the director or officer and not by way of defense (except for actions seeking indemnity or expenses from the Company), (iii) if the director or officer violated section 16(b) of the Exchange Act or similar provisions of law, (iv) if a court of competent jurisdiction determines that the director or officer failed to act in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any proceeding which is of a criminal nature, determines that the director or officers' conduct was knowingly fraudulent, deliberately dishonest or constituted willful misconduct or (v) if indemnification is unlawful. Absent the Indemnity Agreements, indemnification that might be made available to directors and officers could be changed by amendments to the Company's Certificate of Incorporation or Bylaws. The underwriting agreement provides that the underwriters are obligated, under some circumstances, to indemnify our directors, officers and controlling persons against specified liabilities, including liabilities under the Securities Act. Reference is made to the form of underwriting agreement filed as Exhibit 1.1 to this registration statement. In addition, we have an existing directors and officers liability insurance policy. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since January 1, 1997, the Registrant has sold and issued the following unregistered securities: (a) On July 14, 1997, the Registrant issued and sold 844,444 shares of its Series C Preferred Stock to Finnfeeds International Limited for a purchase price of $1,900,000, in connection with the Registrant's Collaboration Agreement with Finnfeeds International Limited. The Registrant relied on the exemption provided by Section 4(2) and/or Regulation D promulgated under the Securities Act. The sale was made without general solicitation or advertising. The purchaser was a sophisticated investor with access to all relevant information necessary to evaluate the investment and represented to the Registrant that the securities were being acquired for investment. (b) On September 2, 1997, the Registrant issued to 15 investors, secured promissory notes for an aggregate of $3,432,804 that were convertible into shares of the Registrant's Series D Preferred Stock. The Registrant relied on the exemption provided by Section 4(2) and/or Regulation D promulgated under the Securities Act. The issuances were made without general solicitation or advertising. Each investor was a sophisticated investor with access to all relevant information necessary to evaluate the investment and represented to the Registrant that the securities were being acquired for investment. (c) On October 22, 1997, the Registrant issued and sold an aggregate of 24,809,555 shares of its Series D Preferred Stock to 27 investors for an aggregate purchase price of $21,088,122, which reflected the conversion of all of the Registrant's outstanding Series I Preferred Stock and convertible, secured promissory notes into Series D Preferred Stock. The Registrant relied on the exemption provided by Section 4(2) and/or II-2 Regulation D promulgated under the Securities Act. The sales were made without general solicitation or advertising. Each purchaser was a sophisticated investor with access to all relevant information necessary to evaluate the investment and represented to the Registrant that the securities were being acquired for investment. (d) On January 25, 1999, the Registrant issued and sold 5,555,556 shares of its Series E Preferred Stock to Novartis Agribusiness Biotechnology Research, Inc. for a purchase price of $7,333,334 in connection with a Collaboration Agreement between the parties. The Registrant relied on the exemption provided by Section 4(2) and/or Regulation D promulgated under the Securities Act. The sale was made without general solicitation or advertising. The purchaser was a sophisticated investor with access to all relevant information necessary to evaluate the investment and represented to the Registrant that the securities were being acquired for investment. (e) From time to time since January 1, 1997, the Registrant has granted stock options to purchase shares of its common stock to various employees and consultants pursuant to its 1994 Employee Incentive and Non-Qualified Stock Option Plan. With respect to all grants of options, exemption from registration was unnecessary in that the transactions did not involve a "sale" of securities as that term is used in Section 2(a)(3) of the Securities Act. (f) From time to time since August 28, 1997, the Registrant has granted stock options to purchase shares of its common stock to various employees and consultants pursuant to its 1997 Equity Incentive Plan. With respect to all grants of options, exemption from registration was unnecessary in that the transactions did not involve a "sale" of securities as that term is used in Section 2(a)(3) of the Securities Act. (g) As of December 31, 1999, the Registrant had issued and sold, in the aggregate, 62,949 shares of its common stock for per share exercise prices ranging from $0.58 to $2.02 to employees and consultants pursuant to their exercise of stock options granted under the Registrant's 1994 Employee Incentive and Non-Qualified Stock Option Plan. The Registrant relied on the exemption provided by Rule 701 under the Securities Act. (h) As of December 31, 1999, the Registrant had issued and sold, in the aggregate, 702,386 shares of its common stock for per share exercise prices ranging from $0.04 to $1.73 to employees and consultants pursuant to their exercise of stock options granted under the Registrant's 1997 Equity Incentive Plan. The Registrant relied on the exemption provided by Rule 701 under the Securities Act. The common stock amounts and per share exercise prices in the descriptions above reflect the 1-for-2.8806 reverse stock split of the Registrant's common stock which will take place prior to effectiveness of this offering. The recipients of the above-described securities represented their intention to acquire the securities for investment only and not with a view to distribution thereof. Appropriate legends were affixed to the stock certificates issued in such transactions. All recipients had adequate access, through employment or other relationships, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
NUMBER EXHIBIT DESCRIPTION OF DOCUMENT ------- ---------------------------------------------------------------------- 1.1** Form of Underwriter's Agreement. 3.1** Registrant's Certificate of Incorporation, as amended, as currently in effect. 3.2** Registrant's Bylaws, as amended, as currently in effect. 3.3** Form of Amended and Restated Certificate of Incorporation, to be filed prior to the Closing. 3.4** Form of Registrant's Amended and Restated Certificate of Incorporation, to be effective upon the closing of this offering. 3.5** Form of Registrant's Amended and Restated Bylaws, to be effective upon the closing of this offering.
II-3
NUMBER EXHIBIT DESCRIPTION OF DOCUMENT ------- ---------------------------------------------------------------------- 4.1** Form of Common Stock Certificate of Registrant. 5.1** Opinion of Cooley Godward LLP. 10.1** Form of Indemnity Agreement entered into between the Company and its directors and executive officers. 10.2** 1994 Employee Incentive and Non-Qualified Stock Option Plan, as amended. 10.3** Form of Stock Option Agreement under the 1994 Employee Incentive and Non-Qualified Stock Option Plan. 10.4** 1997 Equity Incentive Plan. 10.5** Form of Stock Option Grant Notice and Stock Option Agreement under the 1997 Equity Incentive Plan. 10.6** 1999 Non-Employee Directors' Stock Option Plan. 10.7** Form of Stock Option Grant Notice and Related Stock Option Agreement under the 1999 Non-Employee Directors' Stock Option Plan. 10.8** 1999 Employee Stock Purchase Plan. 10.9 Amended and Restated Stockholders' Agreement by and among the Company and the Stockholders identified therein, dated January 25, 1999.+ 10.10** Form of Warrant Agreement to purchase Series A Preferred Stock (with schedule of holders attached). 10.11** Form of Warrant Agreement to purchase Common Stock (with schedule of holders attached). 10.12** Form of Warrant Agreement to purchase Common Stock (with schedule of holders attached). 10.13** Multi-Tenant Office R&D Building Lease by and between the Company and Sycamore/San Diego Investors, dated September 24, 1996. 10.14** Master Lease Agreement by and between the Transamerica Business Credit Corporation and the Company, dated April 4, 1997. 10.15 License Agreement by and between the Company and The Dow Chemical Company, dated July 20, 1997 and July 22, 1997.+ 10.16 Collaborative Research Agreement by and between the Company and The Dow Chemical Company, dated July 20, 1999 and July 22, 1999.+ 10.17 License Agreement by and between the Company and Finfeeds International Limited, dated December 1, 1998.+ 10.18 Collaboration Agreement by and between the Company and Novartis Agribusiness Biotechnology Research, Inc., dated January 25, 1999, as amended.+ 10.19 Stock Purchase Agreement by and between the Company and Novartis Agribusiness Biotechnology Research, Inc., dated January 25, 1999.+ 10.20 Collaboration Agreement by and between the Company and Rhone-Poulenc Animal Nutrition S.A., dated June 28, 1999.+ 10.21 License Agreement by and between the Company and Invitrogen Corporation, dated March 29, 1999.+ 10.22 License Agreement by and between the Company and Mycogen Corporation, dated December 1997, as amended on March 6, 1998 and December 19, 1997.+ 10.23 Patent Cross-License Agreement by and between the Company and Terragen Discovery Inc., dated November 18, 1999.+
II-4
NUMBER EXHIBIT DESCRIPTION OF DOCUMENT ------- --------------------------------------------------------------------- 10.24 Joint Venture Agreement by and between the Company and Novartis Seeds AG, dated December 1, 1999.+ 10.25 Research Lease by and between the Company One Cell Systems, Inc., dated February 16, 1999. 10.26 Research and Development Agreement by and between the Company and Novartis Enzymes, Inc., dated December 1, 1999.+ 10.27** Employment Offer Letter to Patrick Simms, dated February 3, 1997. 10.28** Employment Offer Letter to Jay Short, dated August 30, 1994. 10.29** Employment Offer Letter to Karin Eastham, dated April 2, 1999. 10.30** Employment Offer Letter to William H. Baum, dated July 31, 1997. 10.31** Separation Agreement by and between the Company and Terrance J. Bruggeman, effective as of April 12, 1999. 10.32** Separation Agreement by and between the Company and Kathleen H. Van Sleen, effective as of May 10, 1999. 10.33** Letter Agreement with Jay M. Short, Ph.D., dated June 25, 1998. 16.1** Letter from PricewaterhouseCoopers LLP to the Securities and Exchange Commission, dated January 28, 2000. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1** Power of Attorney. 27.1** Financial Data Schedule.
- -------- * To be filed by amendment. ** Previously filed as an exhibit to this Registration Statement. + Confidential Treatment will be requested with respect to portions of this exhibit. Omitted portions will be filed separately with the Securities and Exchange Commission. (b) Schedules All schedules are omitted because they are not required, are not applicable or the information is included in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant pursuant to provisions described in Item 14 or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 The undersigned Registrant hereby undertakes: (1) That, for purposes of determining any liability under the Act, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (2) That, for purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (3) For the purpose of determining any liability under the Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Amendment No. 4 to the Registration Statement to be signed on its behalf by the undersigned, in the City of San Diego, County of San Diego, State of California, on the 9th day of February, 2000. By:/s/ Karin Eastham ----------------------------------- Karin Eastham Senior Vice President, Finance and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 4 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Jay M. Short* President, Chief Executive February 9, 2000 _________________________________ Officer, Chief Technology Jay M. Short, Ph.D. Officer and Director (Principal Executive Officer) /s/ Karin Eastham Senior Vice President, February 9, 2000 ____________________________________ Finance and Chief Financial Karin Eastham Officer (Principal Financial Officer) /s/ James H. Cavanaugh* Director February 9, 2000 ____________________________________ James H. Cavanaugh, Ph.D. /s/ Daniel T. Carroll* Director February 9, 2000 ____________________________________ Daniel T. Carroll /s/ Patricia M. Cloherty* Director February 9, 2000 ____________________________________ Patricia M. Cloherty /s/ Donald D. Johnston* Director February 9, 2000 ____________________________________ Donald D. Johnston /s/ Mark Leschly* Director February 9, 2000 ____________________________________ Mark Leschly /s/ Melvin I. Simon* Director February 9, 2000 ____________________________________ Melvin I. Simon, Ph.D. /s/ Peter Johnson* Director February 9, 2000 ____________________________________ Peter Johnson *By: /s/ Karin Eastham ____________________________________ Karin Eastham Attorney-in-Fact and Agent
II-7 EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION OF DOCUMENT ------- ---------------------------------------------------------------------- 1.1** Form of Underwriter's Agreement. 3.1** Registrant's Certificate of Incorporation, as amended, as currently in effect. 3.2** Registrant's Bylaws, as amended, as currently in effect. 3.3** Form of Amended and Restated Certificate of Incorporation, to be filed prior to the Closing. 3.4** Form of Registrant's Amended and Restated Certificate of Incorporation, to be effective upon the closing of this offering. 3.5** Form of Registrant's Amended and Restated Bylaws, to be effective upon the closing of this offering. 4.1** Form of Common Stock Certificate of Registrant. 5.1** Opinion of Cooley Godward LLP. 10.1** Form of Indemnity Agreement entered into between the Company and its directors and executive officers. 10.2** 1994 Employee Incentive and Non-Qualified Stock Option Plan, as amended. 10.3** Form of Stock Option Agreement under the 1994 Employee Incentive and Non-Qualified Stock Option Plan. 10.4** 1997 Equity Incentive Plan. 10.5** Form of Stock Option Grant Notice and Stock Option Agreement under the 1997 Equity Incentive Plan. 10.6** 1999 Non-Employee Directors' Stock Option Plan. 10.7** Form of Stock Option Grant Notice and Related Stock Option Agreement under the 1999 Non-Employee Directors' Stock Option Plan. 10.8** 1999 Employee Stock Purchase Plan. 10.9 Amended and Restated Stockholders' Agreement by and among the Company and the Stockholders identified therein, dated January 25, 1999.+ 10.10** Form of Warrant Agreement to purchase Series A Preferred Stock (with schedule of holders attached). 10.11** Form of Warrant Agreement to purchase Common Stock (with schedule of holders attached). 10.12** Form of Warrant Agreement to purchase Common Stock (with schedule of holders attached). 10.13** Multi-Tenant Office R&D Building Lease by and between the Company and Sycamore/San Diego Investors, dated September 24, 1996. 10.14** Master Lease Agreement by and between the Transamerica Business Credit Corporation and the Company, dated April 4, 1997. 10.15 License Agreement between the Company and The Dow Chemical Company, dated July 20, 1997 and July 22, 1997.+ 10.16 Collaborative Research Agreement by and between the Company and The Dow Chemical Company, dated July 20, 1999 and July 22, 1999.+ 10.17 License Agreement by and between the Company and Finfeeds International Limited, dated December 1, 1998.+ 10.18 Collaboration Agreement by and between the Company and Novartis Agribusiness Biotechnology Research, Inc., dated January 25, 1999, as amended.+ 10.19 Stock Purchase Agreement by and between the Company and Novartis Agribusiness Biotechnology Research, Inc., dated January 25, 1999.+
NUMBER EXHIBIT DESCRIPTION OF DOCUMENT ------- ---------------------------------------------------------------------- 10.20 Collaboration Agreement by and between the Company and Rhone-Poulenc Animal Nutrition S.A., dated June 28, 1999.+ 10.21 License Agreement by and between the Company and Invitrogen Corporation, dated March 29, 1999.+ 10.22 License Agreement by and between the Company and Mycogen Corporation, dated December 1997, as amended on March 6, 1998 and December 19, 1997.+ 10.23 Patent Cross-License Agreement by and between the Company and Terragen Discovery Inc., dated November 18, 1999.+ 10.24 Joint Venture Agreement by and between the Company and Novartis Seeds AG, dated December 1, 1999.+ 10.25 Research Lease by and between the Company One Cell Systems, Inc., dated February 16, 1999. 10.26 Research and Development Agreement by and between the Company and Novartis Enzymes, Inc., dated December 1, 1999.+ 10.27** Employment Offer Letter to Patrick Simms, dated February 3, 1997. 10.28** Employment Offer Letter to Jay Short, dated August 30, 1994. 10.29** Employment Offer Letter to Karin Eastham, dated April 2, 1999. 10.30** Employment Offer Letter to William H. Baum, dated July 31, 1997. 10.31** Separation Agreement by and between the Company and Terrance J. Bruggeman, effective as of April 12, 1999. 10.32** Separation Agreement by and between the Company and Kathleen H. Van Sleen, effective as of May 10, 1999. 10.33** Letter Agreement with Jay M. Short, Ph.D., dated June 25, 1998. 16.1** Letter from PricewaterhouseCoopers LLP to the Securities and Exchange Commission, dated January 28, 2000. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1. 24.1** Power of Attorney. 27.1** Financial Data Schedule.
- -------- * To be filed by amendment. ** Previously filed as an exhibit to this Registration Statement. + Confidential Treatment will be requested with respect to portions of this exhibit. Omitted portions will be filed separately with the Securities and Exchange Commission. EX-10.9 2 AMENDED & RESTATED STOCKHOLDERS' AGREEMENT EXHIBIT 10.9 Amended and Restated Stockholders' Agreement Dated as of January 25, 1999 by and among DIVERSA CORPORATION and the Stockholders named herein Table of Contents
Page 1. Definitions............................................ 1 2. Representations and Certain Covenants.................. 10 2.1 By the Company................................. 10 2.2 By the Stockholders............................ 10 2.3 By the Series A Preferred Stockholders......... 10 2.4 Covenants of the Stockholders.................. 11 3. Legend on Shares and Notice of Transfer................ 11 3.1 Restrictive Legends............................ 11 3.2 Notice of Transfer............................. 12 3.3 Prohibited Transfers........................... 13 3.4 Right of First Refusal; Tag-Along Rights....... 13 4. Rights to Purchase Additional Stock.................... 16 5. Board of Directors..................................... 17 5.1 Number of Directors............................. 17 5.2 Agreement to Vote for Directors................. 17 5.3 Default of Agreement to Vote.................... 18 5.4 Board Observation Rights........................ 18 6. Affirmative Covenants of the Company................... 18 6.1 Use of Proceeds................................. 19 6.2 Consent as to Issuance of Common Stock.......... 19 6.3 Financial Information........................... 19 6.4 Other Reports and Inspection.................... 20 6.5 Corporate Existence............................. 21 6.6 Insurance....................................... 21 6.7 Maintenance of Properties....................... 21 6.8 Compliance with Obligations..................... 21 6.9 Taxes........................................... 21 6.10 Compliance with Law............................. 21 6.11 Environmental Matters........................... 22 6.12 Accounting System............................... 22
i. Table of Contents (Continued)
Page 6.13 Reservation of Common Stock................................... 22 6.14 Confidentiality Agreements with Employees and Consultants..... 22 6.15 Board of Directors Meetings................................... 22 6.16 Publicity..................................................... 22 6.17 Registration Rights........................................... 22 6.18 Key Man Life Insurance........................................ 23 6.19 Voting Agreement with Common Stockholders..................... 23 6.20 Option Exercises.............................................. 23 6.21 Proprietary Rights............................................ 23 6.22 Approval of Budget............................................ 23 6.23 Repayment of Loan Agreement and Release of Encumbrances....... 23 7. Negative Covenants of the Company.................................... 23 7.1 Indebtedness; Commitments..................................... 24 7.2 Restriction on Dividends...................................... 24 7.3 Restriction on Issuances of Shares............................ 24 7.4 Protective Provisions......................................... 24 7.5 Business...................................................... 24 7.6 Guarantees.................................................... 24 7.7 Conflicting Agreements........................................ 24 7.8 No Acquisitions............................................... 24 7.9 No Dispositions............................................... 24 7.10 Employee Stock and Stock Options.............................. 25 8. Confidentiality...................................................... 25 9. Events of Noncompliance.............................................. 26 9.1 Occurrence of Event of Noncompliance.......................... 26 9.2 Remedies...................................................... 27 10. Filing of Reports Under the Exchange Act............................. 27 11. Registration Rights.................................................. 28 11.1 Demand Registration Rights..................................... 28
ii. Table of Contents (Continued)
PAGE 11.2 Registration Requested by Holders......................... 30 11.3 "Piggyback" Registrations................................. 31 11.4 Registrations on S-3...................................... 33 11.5 Company's Obligations in Registration..................... 33 11.6 Payment of Registration Expenses.......................... 35 11.7 Information from Holders of Registrable Securities........ 36 11.8 Indemnification........................................... 36 12. Small Business Matters............................................ 38 12.1 Generally: Certain SBIC Covenants......................... 38 12.2 Regulatory Compliance Cooperation......................... 39 12.3 Information Rights and Related Covenants.................. 40 12.4 Remedies.................................................. 40 13. Duration of Agreement.............................................. 41 14. Additional Remedies................................................ 41 15. Successors and Assigns; Limitation on Assignment................... 41 16. Entire Agreement................................................... 42 17. Notices............................................................ 42 18. Changes............................................................ 43 19. Counterparts....................................................... 43 20. Headings........................................................... 43 21. Nouns and Pronouns................................................. 43 22. Severability....................................................... 43 23. Governing Law; Jurisdiction........................................ 43 24. New York Life Insurance Company Compliance Obligations............. 43
iv. AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT This Amended and Restated Stockholders' Agreement dated as of January 25, 1999 by and among Diversa Corporation, a Delaware corporation (the "Company"), and those stockholders of the Company whose names appear on the signature pages hereof. R E C I T A L S Whereas, the Company and the holders of the Series A Preferred Stock have previously entered into a Stockholders' Agreement dated as of December 21, 1994 by and among the Company (formerly known as Industrial Genome Sciences, Inc.) and those stockholders whose names appear on the signature pages thereof, as amended by Amendment No. 1 thereto (the "Original Stockholders' Agreement"); Whereas, the Company and the holders of the Series A, Series B, Series C and Series D Preferred Stock have previously entered into a Stockholders' Agreement dated as of May 13, 1996, as amended on July 14, 1997 and October 22, 1997, by and among the Company and those stockholders whose names appear on the signature pages thereof (the "Prior Stockholders' Agreement"), which superceded and replaced in its entirety the Original Stockholders' Agreement; Whereas, the Company is entering, or will enter into, a Stock Purchase Agreement with the Series E Investors pursuant to which the Company will sell shares of its Series E Preferred Stock to the Series E Investors; Whereas, in connection with the sale of the Series E Preferred Stock to the Series E Investors, the Company and the Stockholders desire to (i) amend and restate the Prior Stockholders' Agreement to make certain covenants with the Series E Investors and to grant the Series E Investors certain rights and (ii) terminate the Prior Stockholders' Agreement in its entirety with such Prior Stockholders' Agreement being superseded and replaced in its entirety with this Agreement; Now, Therefore, in consideration of the foregoing and of the respective covenants and undertakings hereunder, the parties hereto do hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "1997 Plan" shall mean the Company's 1997 Equity Incentive Plan. "Affiliate" shall mean, with respect to any Person, (i) a director, officer or stockholder of such Person, (ii) a spouse, parent, sibling or descendant of such Person (or spouse, parent, sibling or descendant of any director or executive officer of such Person), and (iii) any other Person that, 1. directly or indirectly through one or more intermediaries, Controls, or is Controlled by, or is under common Control with, such Person. "Applicable Environmental Law" shall mean CERCLA, RCRA, the Federal Waste Pollution Control Act, 33 U.S.C. (S) (S) 1261 et seq., the Clean Air Act, 42 U.S.C. (S) (S) 7401 et seq., any similar provisions of state or local law in the countries and jurisdictions where the properties of the Company are located and where the Company conducts its business and the regulations thereunder and any other local, state and/or federal laws or regulations, whether currently in existence or hereafter enacted, that govern: (a) the existence, cleanup and/or remediation of contamination on property; (b) the protection of the environment from spilled, deposited or otherwise emplaced contamination; (c) the control of hazardous wastes; or (d) the use, generation, transport, handling, treatment, storage, disposal, removal or recovery of Hazardous Materials, including building materials. "Board of Directors" shall mean the Board of Directors of the Company. "Budget" shall have the meaning set forth in Section 6.3(d). "Business" shall have the meaning set forth in Section 12.1. "Business and Condition" shall mean the business, operations, properties, assets, prospects or condition (financial or otherwise) of the Company. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks located in the City of New York are authorized or required to be closed. "By-laws" shall mean the By-laws of the Company, as amended. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)(S) 6901 et seq. "Capital Stock" shall mean any (i) shares of Common Stock, Preferred Stock or any other equity security of the Company, (ii) debt securities convertible into or exchangeable for any equity security of the Company, (iii) any debt security or capitalized lease with any equity feature with respect to the Company, or (iv) options, warrants or other rights to subscribe for, purchase or otherwise acquire any such equity security or debt security of the Company. "Charter" shall mean the Seventh Restated Certificate of Incorporation of the Company, as filed on December 30, 1998 with the Secretary of State of Delaware, as the same may be restated and amended from time to time. "CIT/VC" shall mean The CIT Group/Venture Capital, Inc. and any successor thereto. 2 "CIT/VC Group" shall mean any entity or Person now existing or hereafter formed which is affiliated with The CIT Group/Venture Capital, Inc. and any successors or assigns of any of the foregoing Persons. "Commission" shall mean the Securities and Exchange Commission or any other Federal agency administering the Securities Act at the applicable time. "Commitment" shall mean all obligations of the Company and its Subsidiaries pursuant to long-term leases or similar agreements relating to the use of personal property. "Common Shares" shall mean the issued and outstanding shares of the Company's Common Stock, $.001 par value per share, at the applicable time. "Common Stock" shall mean the Company's authorized Common Stock, $.001 par value per share. "Common Stockholder" shall mean each Person who has purchased Common Stock from the Company or who acquires Common Stock upon the conversion of preferred stock, by Transfer or otherwise and who becomes a party to this Agreement. "Control" shall mean, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Covenant Preferred Shares" shall mean the issued and outstanding shares of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, and, for purposes of Section 6 only with respect to Sections 6.1, 6.2, 6.3(a) and (b), 6.4 and 6.13, the Series E Preferred Stock. "Covenant Preferred Stockholders" shall mean any holder of Covenant Preferred Shares and any person to whom Covenant Preferred Shares (or the Common Stock issued upon conversion thereof) are Transferred. "Equity Stock" shall have the meaning set forth in Rule 3a11-l under the Exchange Act. "Event of Noncompliance" shall have the meaning set forth in Section 9.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor statute and the rules and regulations thereunder, as shall be in effect from time to time. "Excluded Stock" shall mean (a) the Preferred Shares, (b) the Option Shares, (c) Common Stock issuable upon conversion of the Preferred Shares, (d) securities issued pursuant to the acquisition of another corporation, partnership, joint venture, trust or other entity by the Company by merger, consolidation, stock acquisition, reorganization, or otherwise, (e) Common Stock issuable upon exercise of options granted pursuant to the Restricted Stock Option Agreements, (f) Common Stock issuable as a result of stock dividends, stock splits, stock combinations or other similar transactions by the Company and (g) securities issued in connection with bank credit facilities, equipment financing transactions, other leasing lines of 3. credit or collaborative arrangements not primarily intended to provide equity financing to the Company. "GAAP" shall mean generally accepted accounting principles of the United States. "Governmental Body" shall mean any United States or state government body, any agency, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory or taxing authority thereunder. "Group" shall mean as to (a) a Preferred Stockholder that is a limited partnership, any and all of the venture capital limited partnerships now existing or hereafter arising that are "affiliates" (as defined by Rule 405 promulgated under the Securities Act), in whole or in part, of one or more general partners or of one or more general partners of a general partner of such Stockholder and any predecessor or successor partnership and any limited and general partners of any such partnership; (b) a Preferred Stockholder that is a trust, any of the beneficiaries, settlors or grantors now existing or hereafter arising of, or any Person under common control with, such trust; (c) in the case of HCV I, HCV II, HCV III and HCV IV, the HCV Group; (d) in the case of Everest Trust, any grantor or beneficiary thereof, or any other trust, corporate entity or partnership under common control with Everest Trust for which Rho Management Company, Inc. acts as investment adviser; (e) in the case of APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P., and the Patricof Private Investment Club, L.P., the Patricof Group; (f) in the case of the Series E Investors, any affiliates, in whole or in part, of such Series E Investor; and (g) any Preferred Stockholder, any other Preferred Stockholder. "Hazardous Materials" shall mean any substance which as of the date of this Agreement shall be identified as "hazardous" or "toxic" or otherwise regulated under CERCLA or RCRA or which has been or shall be determined at any time by any agency or court to be a hazardous or toxic substance under Applicable Environmental Law. The term "Hazardous Material" shall also include, without limitation, raw materials, building components (including asbestos), the products of any manufacturing or other activities on the properties, wastes, petroleum, and source, special nuclear or by-product material as defined by the Atomic Energy Act of 1954, as amended (42 U.S.C. (S)(S) 3011 et seq., as amended.) "HCV Group" shall mean, collectively, (i) HCV I, (ii) HCV II, (iii) HCV III, (iv) HCV IV, (v) any venture capital limited partnership now existing or hereafter formed which is affiliated with or under common control with one or more general partners of any general partner of HCV I, HCV II, HCV III and HCV IV (an "HCV Fund") (including, without limitation, the other HCV Funds); (vi) any limited partners or affiliates of HCV I, HCV II, HCV III, HCV IV or any other HCV Fund; and (vii) any successors or assigns of any of the foregoing persons. "HCV I" shall mean HealthCare Ventures I, L.P., a Delaware limited partnership, including any successor thereto. "HCV II" shall mean HealthCare Ventures II, L.P., a Delaware limited partnership, including any successor thereto. "HCV III" shall mean HealthCare Ventures III, L.P., a Delaware limited partnership, including any successor thereto. 4. "HCV IV" shall mean HealthCare Ventures IV, L.P., a Delaware limited partnership, including any successor thereto. "Initial Public Offering" shall mean the Company's initial distribution of Common Stock in an underwritten Public Offering to the general public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act at a price per share which is not less than 300% of the Conversion Price (as defined in the Charter) of the Series B Preferred Stock in effect at the time of such public offering and resulting in gross proceeds (before underwriting commissions and offering expenses) to the Company of not less than $15 million. "Indebtedness" shall mean all liabilities for money borrowed, or for the deferred portion of the purchase price, payable by the Company or its Subsidiaries. "Key Man Life Insurance" shall have the meaning set forth in Section 6.19. "Non-Scientific Founders" shall mean Dr. Peter Korn and Gary Friedman. "Offer" shall have the meaning set forth in Section 4(b) hereof. "Offered Shares" shall have the meaning set forth in Section 4(a) hereof. "Option Shares" shall mean up to 11,275,624 shares of Common Stock issued, available for issuance or subject to options, warrants, awards or rights granted or authorized to be granted to employees, consultants and others who provide services to the Company pursuant to any Stock Plan. "Patricof Group" shall mean, collectively, (i) APA Excelsior IV, L.P., (ii) APA Excelsior IV/Offshore, L.P., (iii) The P/A Fund, L.P., (iv) the Patricof Private Investment Club, L.P., (v) any venture capital limited partnership or entity (a "Patricof Fund") now existing or hereafter formed which is affiliated with or under common control with (x) one or more general partners of any general partner of APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P., or the Patricof Private Investment Club, L.P., or (y) managed or advised by Patricof & Co. Ventures, Inc. or any affiliate thereof (including, without limitation, the other Patricof Funds); (vi) any limited partners or affiliates of APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P., or the Patricof Private Investment Club, L.P., or any other Patricof Fund; and (vii) any successors or assigns of any of the foregoing persons. Any reference to APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P., and the Patricof Private Investment Club, L.P., shall mean such entity and any successor to such entity. "Person" shall mean any individual, corporation, partnership, a limited liability company, joint venture, trust, association, unincorporated organization, other entity, or Governmental Body. "Preferred Shares" shall mean the issued and outstanding shares of the Company's Series A Preferred Stock, $.001 par value per share, Series B Peferred Stock, $.001 par value 5 per share, Series C Preferred Stock, $.001 par value per share, Series D Preferred Stock, $.001 par value per share, and Series E Preferred Stock, $.001 par value per share. "Preferred Stockholder" shall mean any holder of Preferred Shares and any Person to whom Preferred Shares (or the Common Stock issued upon conversion thereof) are Transferred. "Pro Rata Fraction" shall have the meaning set forth in Section 3.4(b). "Public Offering" shall mean a distribution of Common Stock in an underwritten public offering to the general public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act. "RCRA" shall mean Resource Conservation and Recovery Act, 42 U.S.C. (S)(S) 6901 et seq. "Registrable Securities" shall mean the aggregate of Series A Registrable Securities, the Series B Registrable Securities, the Series C Registrable Securities, the Series D Registrable Securities and the Series E Registrable Securities. "Regulated Holder" shall mean any holder of the Company's Securities that is (or that is a subsidiary of a bank holding company that is) subject to the various provisions of Regulation Y of the Board of Governors of the Federal Reserve Systems, 12 C.F.R., Part 225 (or any successor to Regulation Y). "Regulatory Problem" shall mean (i) any set of facts or circumstances wherein it has been asserted by any governmental regulatory agency (or CIT/VC reasonably believes that there is a significant risk of such assertion) that such Person (or any bank holding company that controls such Person) is not entitled to hold, or exercise any material right with respect to, all or any portion of the Securities of the Company which such Person holds or (ii) when such Person and its Affiliates would own, control or have power (including voting rights) over a greater quantity of Securities of the Company than is permitted under any law or regulation or any requirement of any governmental authority applicable to a Person or to which such Person is subject. "Restricted Securities" shall mean the aggregate of Series A Restricted Securities, the Series B Restricted Securities, the Series C Restricted Securities, the Series D Restricted Securities and the Series E Restricted Securities. "Restricted Stock Option Agreements" shall mean the Restricted Stock Option Agreements dated December 21, 1994 between the Company and each of the Scientific Founders and the Non-Scientific Founders (except Barry Marrs) and the Restricted Stock Option Agreement dated December 19, 1994 between the Company and Barry Marrs. "SBA" shall have the meaning set forth in Section 12.1. "SBIA" shall have the meaning set forth in Section 12.1. "SBIC" shall have the meaning set forth in Section 12.1. 6 "Scientific Founders" shall mean Dr. Melvin Simon, Dr. Jeffrey H. Miller, Dr. Barry Marrs and Dr. Karl Stetter. "Securities" shall mean, with respect to any Person, such Person's capital stock or any options, warrants or other Securities which are directly or indirectly convertible into, or exercisable or exchangeable for, such Person's capital stock (whether or not such derivative Securities are issued by the Company). Whenever a reference herein to Securities refers to any derivative Securities, such reference shall apply to such derivative Securities and all underlying Securities directly or indirectly issuable upon conversion, exchange or exercise of such derivative Securities. "Securities Act" shall mean the Securities Act of 1933, as amended, and any successor statute and the rules and regulations of the Commission thereunder, as shall be in effect at the applicable time. "Series A Preferred Stock" shall mean the Series A Preferred Stock, $.001 par value per share, of the Company. "Series A Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series A Restricted Securities, or constituting a portion of the Series A Restricted Securities. "Series A Restricted Securities" shall mean the Series A Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series A Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the holders of the Series A Preferred Stock (other than Series B Preferred Stock) which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series A Preferred Stock or any Common Stock which has been issued on conversion of Series A Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series A Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of December 21, 1994 by and among the Company and the parties thereto, as amended by the Stock Purchase Agreement and Amendment to Stock Purchase Agreement, dated March 15, 1995 by and among the Company and the parties thereto, as amended by the Stock Purchase Agreement and Amendment to Stock Purchase Agreement dated July 28, 1995 by and among the Company and the parties thereto, as amended by Amendment No. 3 to the Stock Purchase Agreement dated May 13, 1996 by and among the Company and the parties thereto. "Series B Preferred Stock" shall mean the Series B Preferred Stock, $.001 par value per share, of the Company. "Series B Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series B Restricted Securities, or constituting a portion of the Series B Restricted Securities. 7. "Series B Restricted Securities" shall mean the Series B Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series B Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the holders of the Series B Preferred Stock (other than Series A Preferred Stock) which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series B Preferred Stock or any Common Stock which has been issued on conversion of Series B Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series B Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of May 13, 1996, by and among the Company and the purchasers of the Series B Preferred Stock named as Investors therein. "Series C Preferred Stock" shall mean the Series C Preferred Stock, $.001 par value per share, of the Company. "Series C Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series C Restricted Securities, or constituting a portion of the Series C Restricted Securities. "Series C Restricted Securities" shall mean the Series C Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series C Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the holders of the Series C Preferred Stock which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series C Preferred Stock or any Common Stock which has been issued on conversion of Series C Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series C Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of July 14, 1997 by and among the Company and the parties thereto. "Series D Preferred Stock" shall mean the Series D Preferred Stock, $.001 par value per share, of the Company. "Series D Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series D Restricted Securities, or constituting a portion of the Series D Restricted Securities. "Series D Restricted Securities" shall mean the Series D Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series D Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the 8. holders of the Series D Preferred Stock which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series D Preferred Stock or any Common Stock which has been issued on conversion of Series D Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series D Stock Purchase Agreement" shall mean the Stock Purchase Agreement and Agreement and Plan or Reorganization, dated as of October 22, 1997 by and among the Company and the parties thereto. "Series E Investors" shall mean the investor(s) listed on the Schedule of Series E Investors attached hereto. "Series E Preferred Stock" shall mean the Series E Preferred Stock, $.001 par value per share, of the Company. "Series E Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series E Restricted Securities, or constituting a portion of the Series E Restricted Securities. "Series E Restricted Securities" shall mean the Series E Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series E Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the holders of the Series E Preferred Stock which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series E Preferred Stock or any Common Stock which has been issued on conversion of Series E Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series E Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of January 25, 1999, or any additional stock purchase agreement for the purchase and sale of Series E Preferred Stock, by and among the Company and the parties thereto. "Shares" shall mean and include all shares of voting capital stock of the Company now owned or hereafter acquired by any Stockholder or transferee of such Stockholder. "Stockholder" shall mean each Person who has purchased Shares from the Company or who acquires Shares upon conversion of the Preferred Shares, the exercise of options, Transfer or otherwise and who is a party to this Agreement. "Stock Plan" shall mean any stock award or option plan, agreement or arrangement for officers, directors, consultants, employees and others who render services to the Company. 9. "Subsidiary" shall mean, with respect to any Person, any corporation of which securities having the power to elect a majority of that corporation's Board of Directors (other than securities having that power only upon the happening of a contingency that has not occurred) are held by such Person or one or more of its Subsidiaries. "Taxes" shall mean all taxes, duties, charges, fees, levies, interest, penalties, additions to tax or other assessments, including, but not limited to, foreign, federal, state and local income, excise, employment, property, sales, use, occupation, value added and franchise taxes and customs duties, imposed by any Governmental Body and any payments with respect thereto required under any tax-sharing agreement. "Transfer" shall include any sale, assignment, transfer, pledge, encumbrance, or other disposition of, or the subjecting to a security interest of, any Restricted Securities, or any disposition of any Restricted Securities or of any interest therein which would constitute a sale thereof within the meaning of the Securities Act. "Voting Agreement" shall mean the Amended and Restated Voting Agreement dated as of even date herewith, by and among the Company, the Preferred Stockholders and certain Common Stockholders, as the same may be amended from time to time. 2. Representations and Certain Covenants. 2.1 By the Company. The Company represents to each Stockholder that: (a) The execution, delivery and performance by the Company of this Agreement and each other agreement to be entered into by the Company in connection with this Agreement have been duly authorized by all action required by law, its Charter, its By-laws or otherwise. (b) This Agreement and such other agreements have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against it in accordance with their terms. 2.2 By the Stockholders. Each Stockholder, as to itself or himself, represents to the Company and the other Stockholders that: (a) The execution, delivery and performance by such Stockholder of this Agreement and each other agreement to be entered into by such Stockholder in connection with this Agreement have been duly authorized by all action required by law, and by the certificate of incorporation and by-laws, partnership agreement or other governing instrument of such Stockholder. (b) This Agreement and such other agreements have been duly executed and delivered by such Stockholder and constitutes the legal, valid and binding obligations of such Stockholder enforceable against it or him in accordance with their terms. 2.3 By the Series A Preferred Stockholders. Each holder of the Series A Preferred Stock agrees to waive any prior breach of the Series A Preferred Stock Purchase Agreement and 10. each other agreement between the Company and the holders of Series A Preferred Stock. The right of the holders of Series A Preferred Stock are as set forth in this Agreement, the Series A Stock Purchase Agreement and the Charter; for the avoidance of doubt, the Series A Stockholders shall not be deemed to have waived any rights available to them in the future under either of said agreements or the Charter. 2.4 Covenants of the Stockholders. Each of the Stockholders hereby waives any default or Event of Noncompliance that may have occurred prior to the date hereof with respect to the late reporting or presentation of financial materials and/or budgets pursuant to Sections 6.3 and 6.22 herein. 3. Legend on Shares and Notice of Transfer. 3.1 Restrictive Legends. (a) Each certificate evidencing Shares, and each certificate evidencing Shares held by subsequent transferees of any such certificate, shall (unless otherwise permitted by the provisions of Section 3.2 hereof) be stamped or otherwise imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE PLEDGED, HYPOTHECATED, SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW. (b) Each certificate evidencing Shares, and each certificate evidencing Shares held by subsequent transferees of any such certificate, shall also be stamped or otherwise imprinted with a legend in substantially the following form: ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE TERMS AND CONDITIONS OF AN AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT, BY AND AMONG DIVERSA CORPORATION, THE HOLDER OF RECORD OF THIS CERTIFICATE AND CERTAIN OTHER SIGNATORIES THERETO, AND NO TRANSFER OF SUCH SECURITIES SHALL BE VALID OR EFFECTIVE EXCEPT IN ACCORDANCE WITH SUCH AGREEMENT AND UNTIL SUCH TERMS AND CONDITIONS HAVE BEEN FULFILLED. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD 11. OF THIS CERTIFICATE TO THE SECRETARY OF DIVERSA CORPORATION. 3.2 Notice of Transfer. (a) Each of the Stockholders, and any other holder of any Shares by acceptance thereof, agrees that, prior to any Transfer of any Shares, such holder will give written notice to the Company of such holder's intention to effect such Transfer and to comply in all other respects with the provisions of this Section 3.2 and all of the provisions of Section 3.4 hereof. Each such notice shall contain (i) a statement setting forth the intention of said holder's prospective transferee with respect to its retention or disposition of said Shares, and (ii) unless waived by the Company, an opinion of counsel (reasonably satisfactory to the Company and its counsel) for said holder (who may be the inside or staff counsel employed by said holder), as to the necessity or non-necessity for registration under the Securities Act and applicable state securities laws in connection with such Transfer and stating the factual and statutory bases relied upon by counsel. The following provisions shall then apply: (i) If the proposed Transfer of Shares may be effected without registration or qualification under the Securities Act and any applicable state securities laws, then the registered holder of such Shares shall be entitled to Transfer such Shares in accordance with Section 3.3 and the intended method of disposition specified in the statement delivered by said holder to the Company. (ii) If the proposed Transfer of such Shares may not be effected without registration under the Securities Act or registration or qualification under any applicable state securities laws, the registered holder of such Shares shall not be entitled to Transfer such Shares until the requisite registration or qualification is effective. (b) Notwithstanding the provisions of Section 3.2, (i) in the case of a Transfer by a holder to a member of such holder's Group, no such opinion of counsel shall be necessary, provided that the transferee agrees in writing to be subject to Section 3 hereof to the same extent as if such transferee were originally a signatory to this Agreement, and (ii) in the case of any holder of Restricted Securities that is a partnership, no such opinion of counsel shall be necessary for a Transfer by such holder to a partner of such holder, or a retired partner of such holder who retires after the date hereof, or the estate of any holder who retires after the date hereof, or the estate of any such partner or retired partner if, with respect to such Transfer by a partnership, such Transfer is made in accordance with the partnership agreement of such partnership, and the transferee agrees in writing to be subject to the terms of Section 3 hereof to the same extent as if such transferee were originally a signatory to this Agreement. Transfers pursuant to this Section 3.3(b) are not subject to the provisions of Section 3.4. (c) Each certificate evidencing the Shares issued upon such Transfer (and each certificate evidencing any untransferred balance of such Shares) shall bear the legends set forth in Section 3.1 hereof unless the Shares are no longer subject to this Stockholders' Agreement and (i) in the opinion of counsel (reasonably acceptable to the Company) addressed to the Company the registration of future Transfers is not required by the applicable provisions of the Securities Act or applicable state securities laws; (ii) the Company shall have waived the 12. requirement of such legend; or (iii) in the reasonable opinion of counsel to the Company, such Transfer shall have been made in connection with an effective registration statement filed pursuant to the Securities Act or in compliance with the requirements of Rule 144 or Rule 144A (or any similar or successor rule) promulgated under the Securities Act, and in compliance with applicable state securities laws, to a person who is not an affiliate (as such term is defined in the Securities Act) of the Company. 3.3 Prohibited Transfers. (a) Each Stockholder agrees that it or he shall not Transfer any of its or his Shares without the prior written consent of the holders of at least 75% in interest of the Preferred Shares, voting together as a class (without counting the Shares held by such transferring Stockholder) except as provided for in Section 3. (b) Notwithstanding anything to the contrary contained herein, a Stockholder may Transfer all or any of its Shares to a member of its Group and, in the case of any stockholder which is a partnership, to a partner of such holder, or a retired partner of such holder who retires after the date hereof, or the estate of any holder who retires after the date hereof, or the estate of any such partner or retired partner if, with respect to such Transfer by a partnership, such Transfer is made in accordance with the partnership agreement of such partnership provided that any such transferee shall agree in writing with the Company, prior to and as a condition precedent to such transfer, to be bound by all of the provisions of this Agreement. (c) If requested in writing by the managing underwriters, if any, of any Public Offering, each Stockholder agrees not to offer, sell, contract to sell or otherwise dispose of any Shares except as part of such Public Offering within thirty (30) days before or one hundred and eighty (180) days after the effective date of the registration statement filed with respect to said offering, and the Company hereby also so agrees; provided, however, that this restriction will not apply to transfers permitted under Section 3.3(b). (d) Each Transfer of Shares which is permitted by Section 3 of this Stockholders' Agreement shall be by written agreement (the "Transfer Agreement"), in a form reasonably satisfactory to the Company and its counsel, pursuant to which the transferee (other than a Stockholder who is already a party to this Stockholders' Agreement) agrees to execute a counterpart copy of this Stockholders' Agreement, and to abide by, and hold the transferred Shares subject to, the terms of this Agreement that are applicable to the transferring Stockholder as of the time of the Transfer and that would have been applicable to such transferring Stockholder had the transferring Stockholder retained such transferred Shares. 3.4 Right of First Refusal; Tag-Along Rights. (a) If a Stockholder (for purposes of this Section, the "Selling Stockholder") desires to sell all or any part of his Shares pursuant to a bona fide, arm's-length offer from a creditworthy third party (the "Proposed Transferee"), the Selling Stockholder shall submit a written offer (the "Offer") to sell such Shares (the "Offered Shares") to the other Stockholders and the Company, on terms and conditions, including price, not less favorable to the other Stockholders and the Company than those on which the Selling Stockholder proposes to sell the 13. Offered Shares to the Proposed Transferee. The Offer shall disclose the identity of the Proposed Transferee, the number of Offered Shares proposed to be sold, the total number of Shares owned by the Selling Stockholder, the terms and conditions, including price, of the proposed sale, the address of the Selling Stockholder and any other material facts relating to the proposed sale. (b) Subject to and in accordance with the priorities of rights established in subsection (c) below, each Stockholder shall have the right (the "Right of First Refusal") to purchase that number of Offered Shares as shall be equal to the number of Offered Shares multiplied by a fraction, the numerator of which shall be the number of Shares then owned by such Stockholder and the denominator of which shall be the aggregate number of Shares then owned by all of the Stockholders less those owned by the Selling Stockholder (the "Pro Rata Fraction"). For the purpose of calculating the Pro Rata Fraction, each Preferred Share shall be deemed to represent the number of Common Shares into which the Preferred Share is then convertible. (c) Stockholders shall have a right of oversubscription such that if any Stockholder fails to accept the Offer as to its or his full Pro Rata Fraction, the other Stockholders, among them, shall have the right to purchase up to the balance of the Offered Shares not so purchased. Such right of oversubscription may be exercised by a Stockholder by accepting the Offer as to more than its or his Pro Rata Fraction. If, as a result thereof, such oversubscriptions exceed the total number of Offered Shares available in respect of such oversubscription privilege, the oversubscribing Stockholders shall be cut back with respect to their oversubscriptions so as to sell the Offered Shares as nearly as possible in accordance with their respective Pro Rata Fractions or as they may otherwise agree among themselves. (d) If a Stockholder desires to purchase all or any part of the Offered Shares, such Stockholder (a "Purchasing Stockholder") shall communicate in writing its or his election to purchase (an "Acceptance") to the Selling Stockholder, which Acceptance shall state the number of Offered Shares the Purchasing Stockholder desires to purchase and shall be delivered in person or mailed to the Selling Stockholder at the address set forth in the Offer, with a copy to the Company and the other Stockholders, within twenty (20) days of the date the Offer was made. (e) If the other Stockholders do not accept the Offer for all of the Offered Shares, the Company shall have the right to purchase all of the remaining Offered Shares (including any Tag-Along Shares being offered pursuant to paragraph (j) below). If the Company desires to purchase all of the remaining Offered Shares it shall seek the approval of the holders of at least 75% in interest of the Preferred Shares (excluding those Preferred Shares owned or held by the Selling Stockholder and any Tag-Along Stockholder pursuant to paragraph (j) below), voting together as a class. Upon obtaining the requisite approval from the Preferred Stockholders, the Company shall communicate in writing its acceptance to the Selling Stockholder and the other Stockholders, which Acceptance shall be delivered in person or mailed to the Selling Stockholder and the other Stockholders within thirty (30) days of the date the Offer was made. (f) Sale of the Offered Shares pursuant to this Section 3.4 shall be made at the offices of the Company no later than the thirtieth (30) day following the expiration of the 30-day 14. period after the Offer is made (or if such thirtieth (30) day is not a Business Day, then on the next succeeding Business Day). Such sales shall be effected by the Selling Stockholder's delivery to each Purchasing Stockholder or the Company, as the case may be, of a certificate or certificates evidencing the Offered Shares to be purchased by it or him, duly endorsed for transfer to the Purchasing Stockholder or the Company, as the case may be, which Offered Shares shall be delivered free and clear of all liens, charges, claims and encumbrances of any nature whatsoever, against payment to the Selling Stockholder of the purchase price therefor by the Purchasing Stockholder or Company, as the case may be. Payment for the Offered Shares shall be made as provided in the Offer or by wire transfer or certified check. (g) If the Purchasing Stockholders and the Company do not agree to purchase all of the Offered Shares, then the Offered Shares may be sold by the Selling Stockholder at any time within 120 days after the date the Offer was made. Any such sale shall be to the Proposed Transferee, at not less than the price and upon other terms and conditions, if any, not more favorable to the Proposed Transferee than those specified in the Offer. Any Offered Shares not sold within such 120-day period shall continue to be subject to the requirements of a prior offer pursuant to this Section 3.4. (h) If any Selling Stockholder becomes obligated to sell any Shares (a "Defaulting Stockholder") to the Company or any Purchasing Stockholder under this Agreement and fails to deliver such Shares in accordance with the terms of this Agreement, the Company or the Purchasing Stockholder, as the case may be, may, at its or his option, in addition to all other remedies it or he may have, send to the Defaulting Stockholder the purchase price for such Shares as is herein specified. Thereupon, the Company, upon written notice to the Defaulting Stockholder, if applicable, shall (x) cancel on its books the certificate or certificates representing the Shares to be sold and (y) issue, in lieu thereof, in the name of the Purchasing Stockholder, a new certificate or certificates representing such Shares, and thereupon all of the Defaulting Stockholder's rights in and to such Shares shall terminate, except for the right to receive payment of the purchase price therefor. (i) Notwithstanding anything herein to the contrary, the Selling Stockholder shall not be obligated to sell any Shares to the Company or the other Stockholders, and will be free to sell all of the Shares to the Proposed Transferee, if the Company and the Stockholders do not elect to buy all of the Shares specified in the Offer. (j) In lieu of exercising the Right of First Refusal, each of the other Stockholders (for the purposes of this paragraph, the "Tag-Along Stockholder") shall have the irrevocable right (the "Tag-Along Right") to require the Selling Stockholder to cause the Proposed Transferee to purchase from such Tag-Along Stockholder that number of Shares held by such Tag-Along Stockholder as is equal to the product of the Offered Shares, multiplied by a fraction, the numerator of which is the number of Shares held by such Tag-Along Stockholder and the denominator of which is the number of Shares owned by such Tag-Along Stockholder plus the sum of the number of Shares owned by the Selling Stockholder and all other Tag-Along Stockholders who are exercising their Tag- Along Rights (the "Tag-Along Shares"). The sale of the Offered Shares (as reduced by the Tag-Along Shares, the "Remaining Offered Shares") and the Tag- Along Shares shall be for the same consideration and otherwise on the same terms and conditions for all holders. The Tag-Along Right shall be exercised by a Tag- Along Stockholder 15. by notifying the Selling Stockholder and the Company in writing (the "Tag-Along Notice") within twenty (20) calendar days of receiving the Offer of his intention to sell his Tag-Along Shares. Failure by any Stockholder to deliver a Tag-Along Notice during such twenty (20) calendar day period shall be deemed to constitute the election of such Stockholder not to exercise his Tag-Along Rights. If the Proposed Transferee does not consummate the purchase of all of the Remaining Offered Shares and the Tag-Along Shares within 120 calendar days from the receipt by the Selling Stockholder of a Tag-Along Notice from each of the other Stockholders, the Offered Shares and Tag-Along Shares shall again become subject to the terms of this Section 3. 4. Rights to Purchase Additional Stock. (a) Except for Excluded Stock, the Covenant Preferred Stockholders shall have the right to subscribe to any and all issuances of Capital Stock of the Company ("Company Offered Shares"). Each Covenant Preferred Stockholder shall have the right to purchase that number of Company Offered Shares as shall be equal to the number of Company Offered Shares multiplied by a fraction, the numerator of which shall be the number of Shares then owned by such Covenant Preferred Stockholder and the denominator of which shall be the aggregate number of Shares then owned by all of the Covenant Preferred Stockholders (the "Fraction"). For purposes of calculating the Fraction, all issued and outstanding securities held by the Covenant Preferred Stockholders that are convertible into or exercisable or exchangeable for shares of Common Stock (including any issued and issuable Covenant Preferred Shares) or for any such convertible, exercisable or exchangeable securities, shall be treated as having been so converted, exercised or exchanged. (b) In the event the Company shall propose to issue Capital Stock except for Excluded Stock, the Company shall give written notice (the "Offer of Shares") to each Covenant Preferred Stockholder, which shall set forth the number and kind or class of shares of Capital Stock proposed to be issued, the terms and conditions thereof and the price therefor. Such notice shall be given at least twenty (20) days prior to the issuance of such Capital Stock. (c) The Offer of Shares by its terms shall remain open and irrevocable for a period of twenty (20) days from the date of its delivery to such Covenant Preferred Stockholder ("20-Day Period"). (d) Each Covenant Preferred Stockholder shall evidence its acceptance of the Offer of Shares by delivering a written notice ("Notice of Acceptance"), signed by the Covenant Preferred Stockholder, setting forth the number of Company Offered Shares which the Covenant Preferred Stockholder elects to purchase. The Notice of Acceptance must be delivered to the Company prior to the end of the 20-Day Period. (e) If the Covenant Preferred Stockholders do not tender Notices of Acceptance for all of the Company Offered Shares, the Company shall have ninety (90) days from the expiration of the 20-Day Period to sell all or any part of the Company Offered Shares refused by the Covenant Preferred Stockholders to any Person(s), but only upon terms and conditions which are in all material respects no more favorable to such other Person(s) than those set forth in the Offer of Shares. 16. (f) Upon the closing of the sale of Company Offered Shares to any third party (which shall include full payment of the purchase price to the Company), each Covenant Preferred Stockholder shall (i) purchase from the Company, and the Company shall issue and sell to such Covenant Preferred Stockholder, any Company Offered Shares for which such Covenant Preferred Stockholder tendered a Notice of Acceptance upon the terms specified in the Offer of Shares and (ii) execute and deliver an agreement restricting transfer of such Company Offered Shares substantially as set forth in Section 3 of this Agreement. (g) In each case, any Company Offered Shares not purchased either by the Covenant Preferred Stockholders or by any other Person in accordance with this Section 4 may not be sold or otherwise disposed of until they are again offered to the Covenant Preferred Stockholder under the procedures specified in this Section 4. (h) If the Capital Stock to be issued by the Company is to be issued pursuant to a Public Offering (i) notwithstanding the time periods set forth above, the Company may require that the Covenant Preferred Stockholders make an election to either (A) commit to purchase shares of Capital Stock from the Company at a price no higher than the public offering price at the closing of the Public Offering or (B) waive their rights to subscribe for additional shares of Common Stock to be issued in the Public Offering, (ii) the subscription right shall not be applicable to shares issuable if the underwriters exercise their over-allotment option; and (iii) the amount to be purchased pursuant to this Section 4(h) may be reduced if in the written opinion of the managing underwriters of the Public Offering, the purchase of such number of shares by the Covenant Preferred Stockholders would adversely impact the Public Offering. Such election shall be made sufficiently in advance of the filing of the registration statement relating to the Public Offering as shall be reasonably requested by the Company. (i) The rights provided by this Section 4 may be assigned by any Covenant Preferred Stockholder which is a limited partnership or a trust to any and all members of its Group, provided, that all such rights of any assignee to purchase Company Offered Shares will be subject to receipt of appropriate representations from such assignee as reasonably requested by the Company to ensure compliance with all applicable securities laws. 5. Board of Directors. 5.1 Number of Directors. In accordance with Section A.6(b)(i) of the Charter of the Company, the holders of a majority in voting power of the Covenant Preferred Shares, voting together as a separate class, have been granted the exclusive right to elect to the Board of Directors that number of the directors which shall equal a majority of the total number of directors on the Board of Directors. The Company and each of the other parties hereto hereby agree to take such actions as are necessary, so that the whole Board of Directors consists of nine members. 5.2 Agreement to Vote for Directors. The Company hereby agrees to take such actions as are necessary, and each of the other parties hereto agrees to vote his, her or its Covenant Preferred Shares (and any other shares of the Capital Stock of the Company over which he, she or it exercises voting control), and take such other actions as are necessary, so as to elect and thereafter continue in office as Directors of the Company (i) two nominees of the 17. holders of the Series A Preferred Stock, (ii) one nominee of the holders of the Series B Preferred Stock, (iii) one nominee of APA Excelsior IV, L.P., and (iv) one nominee mutually agreed upon by the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class. Each nominating Stockholder may replace any nominee designated by such nominating Stockholder who has been elected to the Board of Directors with a new nominee upon notice to the Board of Directors and to the other stockholders of the Company. If there is any increase in size of the Board of Directors, such that there shall be more than five Preferred Directors (as such term is defined in the Charter of the Company), then, with respect to such additional directors ("Additional Preferred Directors"), the Company hereby agrees to take such actions as are necessary, and each of the other parties hereto agrees to vote his, her or its Covenant Preferred Shares (and any other shares of the Capital Stock of the Company over which he, she or it exercises voting control), and take such other actions as are necessary, so as to elect and thereafter continue in office as Directors of the Company (i) the nominee(s) of the holders of the Series A Preferred Stock with respect to one-half of the Additional Preferred Directors, (ii) the nominee(s) of the holders of the Series B Preferred Stock with respect to one- half of the Additional Preferred Directors, and (iii) if there is an odd number of Additional Preferred Directors, a nominee mutually agreed upon by the holders at least 75% in interest of the Covenant Preferred Shares, voting together as a class. 5.3 Default of Agreement to Vote. In case any of the covenants set forth in this Section 5 shall have been breached by any party hereto, the party or parties entitled to the benefit of such covenants or agreements may proceed to protect and enforce their rights either by proceeding in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Section 5 and/or a temporary or permanent injunction, in any case without showing any actual damage and without establishing, in the case of an equitable proceeding, that the remedy at law is inadequate. 5.4 Board Observation Rights. For so long as CIT/VC or any member of the CIT/VC Group is a holder of Shares, CIT/VC shall have the right to appoint a designee as an observer to the Board of Directors. For so long as Benefit Capital Management Corporation is a holder of Shares, Benefit Capital Management Corporation shall have the right to appoint a designee as an observer to the Board of Directors. For so long as New York Life Insurance Company is a holder of Shares, New York Life Insurance Company shall have the right to appoint a designee as an observer to the Board of Directors. For so long as they hold observation rights under this Section 5.4, each of CIT/VC, Benefit Capital Management and New York Life Insurance Company shall be given notice of all such meetings at the same time and in the same manner as Directors of the Company are informed. 6. Affirmative Covenants of the Company. Subject to Sections 13 and 15, the Company covenants and agrees that, so long as any Covenant Preferred Shares are outstanding, except to the extent the Company receives the approval of the holders at least 75% in interest of the Covenant Preferred Shares, voting together as a class: 18. 6.1 Use of Proceeds. The proceeds of the sale of the Preferred Stock sold in connection with this Agreement and the Original Stockholders' Agreement shall be used by the Company to continue the identification and commercialization of products and processes by genomic analysis of diverse microbes and for working capital purposes related thereto. 6.2 Consent as to Issuance of Common Stock. The Company will use its best efforts to obtain any authorization, consent, approval or other action by and make any filing with any court or Governmental Body that may be required under applicable state securities laws in connection with the issuance of any shares of Common Stock upon conversion of the holder of Covenant Preferred Shares. 6.3 Financial Information. The Company, except as otherwise indicated, will deliver to each Covenant Preferred Stockholder: (a) As soon as practicable and in any event within 90 calendar days after the close of each fiscal year of the Company, copies of (i) the balance sheet of the Company as of the end of such fiscal year, (ii) statements of operations of the Company for such fiscal year, and (iii) statements of changes in cash flows of the Company for such fiscal year, setting forth in each case in comparative form the corresponding figures of the previous annual period and the most recent Budget (as defined in clause (d) below), all in reasonable detail, prepared in accordance with GAAP consistently applied throughout the periods involved and certified (except for the comparison to the most recent Budget), without qualification, by Coopers & Lybrand, LLP or another firm of independent certified public accountants of recognized national standing. (b) As soon as practicable, and in any event within 45 calendar days after the end of each of the first three fiscal quarters of the Company, an unaudited balance sheet of the Company as at the end of each such fiscal quarter and unaudited statements of operations, and changes in cash flows for such fiscal quarter, setting forth in each case in comparative form corresponding figures for the preceding year's respective fiscal quarter and for the Budget, all in reasonable detail, prepared in accordance with GAAP consistently applied throughout the period involved and certified as being correct and complete and fairly presenting the results of operations of the Company for the quarter indicated, subject to year-end audit adjustment, by the principal financial officer of the Company. In addition, as soon as practicable, and in any event within 20 calendar days after the end of each fiscal quarter of the Company, the principal financial officer of the Company will complete and sign a quarterly financial summary in the form attached hereto as Exhibit A. (c) For each calendar month, as soon as practicable and in any event within 20 calendar days after the close of each month, copies of (i) the balance sheet of the Company as of the end of such month, (ii) statements of operations of the Company for such month, and (iii) statements of changes in cash flows of the Company for such month setting forth in each case in comparative form the corresponding figures for the preceding month and for the Budget, for the year to date and for the comparable periods in the preceding year, all in reasonable detail, prepared in accordance with GAAP consistently applied throughout the periods involved and certified as being correct and complete and fairly presenting the results of operations of the 19. Company for the month indicated, subject to year-end audit adjustment, by the principal financial officer of the Company. (d) As soon as practicable and in any event no later than the end of each fiscal year of the Company (or by January 30, 1999 for fiscal year 1999), a proposed annual operating budget for the Company for the succeeding fiscal year, containing forecasts of profit and loss and cash flow with monthly and quarterly breakdowns and management's reasonably estimated projections of Indebtedness and Commitments for the succeeding fiscal year (the "Budget"). The portions of the Budget relating to Indebtedness, Commitments, acquisitions and dispositions shall be approved by at least 75% of the Board of Directors. If less than 75% of the Board of Directors vote to approve the portions of the Budget relating to Indebtedness, Commitments, acquisitions and dispositions, then those portions of the Budget shall be adopted if approved by the vote of (i) more than 50% of the Board of Directors, and (ii) the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class. Furthermore, any acquisition described in Section 7.8 and any disposition described in Section 7.9 shall require approval in accordance with those Sections. (e) Simultaneously with the delivery of the monthly statements required by clause (c), copies of a certificate of the principal financial officer of the Company giving a narrative analysis of operations and trends in the business of the Company during such month. (f) Promptly upon, and in any event within 10 calendar days after, their becoming available, a copy of (i) all reports, proxy statements, financial statements and other materials delivered or sent by the Company to its stockholders, (ii) all minutes of the proceedings of the Board of Directors of the Company and all committees thereof and all written consents signed by directors in lieu of meetings of the Board of Directors and committees thereof, and (iii) all management letters reviewing the Company's accounting and control procedures that the Company receives from its independent certified public accountants. (g) Concurrently with the furnishing of the reports pursuant to Section 6.3(a) and (b) hereof, an Officer's Certificate stating that the Company is not in default under, and has not breached, any material agreements or obligations, including, without limitation, this Agreement, or if any such default or breach exists, specifying the nature thereof and what actions the Company has taken and proposes to take with respect thereto. If for any period the Company shall have any Subsidiary or Subsidiaries whose accounts are consolidated with those of the Company, then the financial statements delivered for such period pursuant to the foregoing clauses (a), (b) and (c) of this Section 6.3 shall be the consolidated and consolidating financial statements of the Company and all such consolidated Subsidiaries and if the financial statements of such Subsidiary or Subsidiaries are not consolidated with those of the Company, separate financial statements for such Subsidiary or Subsidiaries shall be provided. 6.4 Other Reports and Inspection. The Company, upon reasonable prior notice, will make available to each Covenant Preferred Stockholder or its representatives or designees during normal business hours (a) all assets, properties and business records of the Company for inspection and copying and (b) the directors, officers, employees and public accountant (and by 20. this provision the Company hereby authorizes and instructs said accountants to discuss with such holder and such designees its affairs, finances and accounts and the responses of attorneys representing the Company to inquiries made by the Company on behalf of said accountants in connection with their audit of the financial affairs of the Company) of the Company for interviews concerning the business, affairs and finances of the Company. 6.5 Corporate Existence. The Company will, and will cause each of its Subsidiaries to, maintain preserve and renew its corporate existence and all material licenses, authorizations and permits necessary to the conduct of its business. 6.6 Insurance. The Company will maintain policies of insurance, including but not limited to, fire, liability, worker's compensation, directors' & officers' and company reimbursement, business interruption, and product liability, in such amounts and covering such risks as are customarily carried by businesses comparable to the business conducted by the Company. The Company has developed and implemented a risk assessment and insurance program appropriate for its business; and in connection therewith, to the extent that the insurance referred to in the forgoing sentence is either not currently maintained or not maintained in appropriate amounts, the Company will obtain such insurance. 6.7 Maintenance of Properties. The Company will, and will cause each of its Subsidiaries to, maintain and keep its properties in good repair, working order and condition, and from time to time make all necessary or desirable repairs, renewals and replacements, so that its businesses may be properly and advantageously conducted at all times. 6.8 Compliance with Obligations. The Company will, and will cause each of its Subsidiaries to, comply with all other material obligations which it incurs pursuant to any contract or agreement, whether oral or written, express or implied, as such obligations become due to the extent to which the failure to so comply would reasonably be expected to have a material adverse effect upon the Business and Condition of the Company and its Subsidiaries taken as a whole, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and adequate reserves (as determined in accordance with GAAP consistently applied) have been established on its books with respect thereto. 6.9 Taxes. The Company will, and will cause each of its Subsidiaries to, pay when due (i) all Taxes imposed upon it or any of its properties or income, other than Taxes which are being contested in good faith and which Taxes in the aggregate do not involve material amounts, and (ii) all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons which, if unpaid, might result in the creation of a lien upon any of its properties other than claims or demands which are being contested in good faith. 6.10 Compliance with Law. The Company will, and will cause each of its Subsidiaries to, comply, in all material respects, with all applicable statutes, rules, regulations and orders of all Governmental Bodies, with respect to the conduct of its business and the ownership of its properties, provided that the Company shall not be deemed to be in violation of this Section 6.10 as a result of any failure to comply with any provisions of such statutes, rules, regulations and orders, the noncompliance with which would not result in fines, penalties, injunctive relief or other civil or criminal liabilities which, in the aggregate, would materially and 21. adversely affect the Business and Condition of the Company and its Subsidiaries taken as a whole. 6.11 Environmental Matters. The Company shall promptly advise each Covenant Preferred Stockholder in writing of any pending or threatened claim, demand or action by any governmental authority or third party relating to any Hazardous Materials affecting any properties owned or leased by the Company of which it has knowledge. The Company shall not discharge, place, release, spill or dispose of any Hazardous Materials or any other pollutants or effluents upon any properties owned or leased by the Company or elsewhere (including, but not limited to, underground injection of such substances) other than in compliance with the Applicable Environmental Laws and the Company shall not discharge into the air any emission which would require a permit under the Clean Air Act or its state counterparts or any other Environmental Laws unless any and all such permit(s) are obtained prior to any discharge. The stockholders of the Company shall have no control over, or authority with respect to, the waste disposal operations of the Company. 6.12 Accounting System. The Company will maintain a system of accounting and proper books of record and account, in accordance with GAAP, and will set aside on its books reserves for depreciation, depletion, obsolescence, amortization, pending and threatened litigation and otherwise as may be appropriate in conformance with procedures and recommendations of the Company's independent public accountants. 6.13 Reservation of Common Stock. The Company shall reserve and keep available out of its authorized but unissued Common Stock the number of shares of Common Stock required for issuance upon the conversion of all of the Preferred Stock (including any additional shares of Common Stock which may become so issuable by reason of the operation of anti-dilution provisions of the Preferred Stock). 6.14 Confidentiality Agreements with Employees and Consultants. The Company will enter into confidentiality agreements approved by a majority of the Board of Directors with employees and consultants of the Company retained after the date hereof who should have or are proposed to have access to confidential or proprietary information. 6.15 Board of Directors Meetings. The Company shall call, and use its best efforts to have, regular meetings of the Board of Directors on a quarterly basis. The Company shall pay all reasonable travel expenses and other out-of- pocket expenses incurred by Directors who are not employed by the Company in connection with attending meetings of the Board or any committee thereof or in connection with attendance at meetings related to the business of the Company. 6.16 Publicity. The Company shall not identify any of the Covenant Preferred Stockholders as a stockholder or affiliate of the Company in any advertising or promotional material without the prior written consent of such Covenant Preferred Stockholder. 6.17 Registration Rights. The Company shall not hereafter grant to any persons any rights to register or qualify stock of the Company under Federal or state securities laws, unless it shall have first obtained the written consent of the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class. 22. 6.18 Key Man Life Insurance. The Company has obtained and will maintain "key man" life insurance policies (the "Key-Man Life Insurance") covering the lives of such officers of the Company as are designated by the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, in the amount of $1,000,000, the sole beneficiary of which shall be the Company. 6.19 Voting Agreement with Common Stockholders. (a) Upon the exercise of any outstanding option or warrant of the Company (including, without limitation, any options currently outstanding under the Company's Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan (the "1994 Plan")), the Company will request that such exercising optionee or warrant holder become a signatory to the Voting Agreement with respect to the Common Stock exercisable thereof. (b) The Company shall not hereafter issue any Common Stock or other voting security (excluding Common Stock issuable upon the exercise of currently outstanding options granted pursuant to the 1994 Plan) or any security (including any options under any Stock Plan of the Company) which is convertible into or exercisable for Common Stock or any other voting security unless, as a condition precedent to such issuance, the holder of such security agrees to become a signatory to the Voting Agreement. 6.20 Option Exercises. Upon the exercise of any option issued under the 1994 Plan, the optionee shall execute a Stock Purchase and Restriction Agreement in substantially the form of Exhibit B, as amended, to the 1994 Plan. 6.21 Proprietary Rights. The Company has developed and implemented a policy, satisfactory to the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class, with regard to noncompetition, nonsolicitation of employees, suppliers and customers of the Company by current and future employees of, or consultants to, the Company. It is contemplated that current and future employees of, or consultants to, the Company will be required to execute appropriate forms of agreement implementing the foregoing policy. 6.22 Approval of Budget. The Company shall obtain the approval required by Section 6.3(d) of the portions of the Budget relating to Indebtedness, Commitments, acquisitions and dispositions prior to the beginning of each fiscal year beginning with fiscal year 1998. 6.23 Repayment of Loan Agreement and Release of Encumbrances. The Company shall repay all amounts outstanding under the Loan Agreement prior to May 15, 1996 and in connection therewith shall obtain and promptly file such forms including, without limitation, UCC-3 termination statements as would be required to release any liens or encumbrances granted by the Company pursuant to the Loan Agreement. 7. Negative Covenants of the Company. Subject to Section 13 hereof, the Company covenants and agrees with the Covenant Preferred Stockholders and their transferees that, without the approval of the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class: 23. 7.1 Indebtedness; Commitments. The Company shall not incur any Indebtedness or Commitments at any time which exceeds by 10% or more of the amount of Indebtedness or Commitments included in a Budget approved by the Board of Directors (and the Covenant Preferred Stockholders, if required) in accordance with Section 6.3(d) hereof. If the Company determines to incur Indebtedness or Commitments in an amount which exceeds by 10% or more the amount of Indebtedness or Commitments included in an approved Budget, then the Company must seek an additional approval in accordance with Section 6.3(d) hereof. 7.2 Restriction on Dividends. The Company shall not declare or make any dividend payment or other distribution of assets, properties, cash rights, obligations or securities on account or in respect of any of its shares of Common Stock or any shares of preferred stock other than those which are both (x) required by the Charter, and (y) relate to the Preferred Shares of the Company. 7.3 Restriction on Issuances of Shares. The Company shall not issue any shares of Capital Stock; provided, however, that the Company may issue shares of Capital Stock pursuant to the options, warrants and rights listed on Schedule 7.3 hereof. 7.4 Protective Provisions. The Company shall not engage in any of the actions specified in Sections A.6(c), B.6(c), C.6(c) or D.6(c) of Article III of its Charter without the written consent in lieu of a meeting, or the affirmative vote at a meeting called for such purpose, of the holders of Preferred Stock, as provided in such Sections. 7.5 Business. The Company will only engage in the businesses of the identification and commercialization of products and processes by genomic analysis of diverse microbes and other living materials. 7.6 Guarantees. The Company will not incur any guarantee or similar contingent obligation in respect of the indebtedness of others, whether or not classified on the Company's balance sheet as a liability (a "Guarantee"). 7.7 Conflicting Agreements. The Company will not enter into any agreement which by its terms might restrict the performance of the Company's obligations pursuant to the terms of this Agreement or the provisions relating to the Preferred Stock included in the Charter, including but not limited to registration rights, and the payment of dividends on, the redemption, voting or conversion of, the Preferred Stock. 7.8 No Acquisitions. The Company shall not, nor shall it permit any of its Subsidiaries to, acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof without the approval of the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class. 7.9 No Dispositions. Other than in the ordinary course of business and other than dispositions of obsolete assets, the Company will not, nor shall it permit any of its Subsidiaries to, sell, lease, encumber or otherwise dispose of or agree to sell, lease, encumber or otherwise dispose of, in any transaction or series of related transactions, any substantial assets of the 24. Company without the approval of the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class. 7.10 Employee Stock and Stock Options. Other than options to purchase up to 11,275,624 shares of Common Stock which may be issued under the 1994 Plan or the 1997 Plan, the Company will not issue Common Stock or stock options to its officers, directors, employees or others who render services to the Company (the "Employees") unless such Common Stock or options, as the case may be, are issued pursuant to a stock option plan approved by holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, and an agreement in form and substance satisfactory to holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, except for immaterial changes thereto as shall be approved from time to time by officers of the Company. 8. Confidentiality. The Preferred Stockholders agree to keep the information heretofore or hereafter furnished to the Preferred Stockholders by the Company or on the Company's behalf (the "Confidential Material") confidential. Notwithstanding the foregoing, the term Confidential Material does not include information that (i) is or becomes publicly available other than through breach of this Agreement by the Preferred Stockholders; (ii) is already known to the Preferred Stockholders at the time of disclosure; (iii) is received by the Preferred Stockholders from a third party not under an obligation of confidentiality to the Company or (iv) is independently developed by the Preferred Stockholders without reference to the Confidential Material. The Preferred Stockholders agree to take reasonable precautions to safeguard the Confidential Material from disclosure to anyone other than appropriate employees, officers, directors, partners and representatives, including auditors and attorneys, of the Preferred Stockholders, which persons shall be advised of the confidential nature of such information. In the event that any Preferred Stockholder or any of such Preferred Stockholder's representatives receive a request or demand to disclose all or any part of the Confidential Material under the terms of a subpoena or order issued by a court of competent jurisdiction or otherwise, the Preferred Stockholders shall (i) promptly notify the Company of the existence, terms and circumstances surrounding such request or demand so that the Company may seek a protective order or other appropriate relief or remedy or waive compliance with the terms hereof, (ii) consult with the Company on the advisability of taking legally advisable steps to resist or narrow such request or demand, and (iii) if disclosure of such Confidential Material is required, disclose such Confidential Material and, subject to reimbursement by the Company of Preferred Stockholder's reasonable expenses, including legal fees, cooperate with the Company in its efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such portion of the disclosed Confidential Material which the Company may so designate. If, in the opinion of Preferred Stockholder's counsel, disclosure by the Preferred Stockholders of all or any part of the Confidential Material is required by law, the Preferred Stockholders shall (i) promptly notify the Company of the proposed disclosure, (ii) disclose only such Confidential Material which is required by law, in the reasonable opinion of the Preferred Stockholders' counsel, to be disclosed and (iii) subject to reimbursement by the Company of the Preferred Stockholders' reasonable expenses, including legal fees, take all legally advisable steps to obtain an order or other reliable assurance that confidential treatment will be accorded to the disclosed Confidential Material to the maximum extent possible or to obtain such other protection under law of the confidential 25. nature of such Confidential Material to the maximum extent possible. Any Preferred Stockholder who is entitled to receive information concerning the Company pursuant to Sections 6.3 and 6.4, shall as a condition to receipt of such confidential information, agree to be bound by this Section 8. 9. Events of Noncompliance. 9.1 Occurrence of Event of Noncompliance. An event of noncompliance (an "Event of Noncompliance") hereunder shall occur if: (a) the Company fails in any material respect to perform or observe any of the covenants contained in the Company fails in any material respect to perform or observe any of the covenants contained in this Stockholders' Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement or the Series D Stock Purchase Agreement, or fails in any material respect to comply with any of the provisions of this Stockholders' Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, the Series D Stock Purchase Agreement or of its Charter applicable to the Covenant Preferred Shares or the Registrable Securities (other than the Series E Registrable Securities); (b) the Company's representations and warranties contained in this Stockholders' Agreement, the Series A Stock Purchase Agreement (including the Schedules and Exhibits attached thereto), the Series B Stock Purchase Agreement (including the Schedules and Exhibits attached thereto), the Series C Stock Purchase Agreement (including the Schedules and Exhibits attached thereto) or the Series D Stock Purchase Agreement (including the Schedules and Exhibits attached thereto) shall be untrue or misleading in any material respect as of the time when made or as of the closings of such agreements; (c) the Company shall become insolvent, make an assignment for the benefit of its creditors, call a meeting of its creditors to obtain any general financial accommodation or suspend business; any material obligation of the Company shall be accelerated or shall not be paid when due; any judicial judgment or settlement shall be outstanding, or a case under any provision of Title 11 of the United States Code, 11 U.S.C. (S) 101 et seq. (the "Bankruptcy Code"), or any comparable law of any jurisdiction, including provisions for receivership or reorganization, shall be commenced by or against the Company which, in the case of an action being commenced against the Company under the Bankruptcy Code, shall remain unstayed or undismissed for a period of sixty (60) days; (d) the Company fails to complete, within five years from the date of the Series B Stock Purchase Agreement either: (i) an Initial Public Offering, (ii) a sale, liquidation or dissolution of the Company, or (iii) a sale, transfer or disposition of substantially all of the assets of the Company; (e) the Company (x) incurs Indebtedness or Commitments in violation of Section 7.1 hereto, (y) pays dividends in violation of Section 7.2 hereto, and/or (z) issues shares of Capital Stock in violation of Section 7.3 hereto; 26. (f) a default or an event of default shall occur or exist with respect to any debt or indebtedness of the Company; or (g) a default or an event of default shall occur or exist with respect to any material contract of the Company, which default could give rise to a material claim by a third party against the Company or the Company's assets. 9.2 Remedies. In the event of the occurrence and continuation of an Event of Noncompliance, the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, may: (a) demand, and be entitled to, in accordance with the provision of Sections A.8, B.8, C.8 and D.8 of Article III of the Charter of the Company, an immediate (i) redemption of all of the Covenant Preferred Shares held by them (or a portion of such shares pro rata), and (ii) immediate payment of all accrued but unpaid dividends and all declared but unpaid dividends; (b) declare an Event of Noncompliance and elect all members of the Board of Directors, which Board may sell, dispose of, or liquidate the assets and/or business of the Company in whatever manner it believes will maximize the return to the Preferred Stockholders, or cause the Company to issue additional securities in a private placement or Public Offering. If the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, declare that an Event of Noncompliance exists, the Company may, for a period of 30 days after receipt of such declaration of an Event of Noncompliance, pay the entire redemption amount (including immediate payment of all accrued but unpaid dividends and all declared but unpaid dividends), in cash, of the Preferred Stock. The holders of the Preferred Stock shall, upon receipt of the full payment of the redemption amount (including immediate payment of all accrued but unpaid dividends and all declared but unpaid dividends), transfer and surrender all of their Preferred Stock to the Company, as instructed, and they shall thereafter no longer have any rights as stockholders of the Company. If the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class, shall send written notice of their redemption request to the Company, the Company shall promptly give each of the other holders of Covenant Preferred Shares written notice of the redemption (the "Redemption Notice"). The exercise of the foregoing contractual remedies shall be in addition to all other legal and equitable remedies available to the Preferred Stockholders. 10. Filing of Reports Under the Exchange Act. (a) The Company shall give prompt notice to the Preferred Stockholders of (i) the filing of any registration statement (an "Exchange Act Registration Statement") pursuant to the Exchange Act, relating to any class of equity securities of the Company, (ii) the effectiveness of such Exchange Act Registration Statement, and (iii) the number of shares of such class of equity securities outstanding as reported in such Exchange Act Registration Statement, in order to enable the Preferred Stockholders to comply with any reporting requirements under the 27. Exchange Act or the Securities Act. Upon the written request of a majority in interest of the holders of Preferred Shares, the Company shall, at any time after the Company has registered any shares of Common Stock under the Securities Act, file an Exchange Act Registration Statement relating to any class of equity securities of the Company then held by the holders of Preferred Shares or issuable upon conversion or exercise of any class of debt or equity securities or warrants or options of the Company then held by the holders of Preferred Shares, whether or not the class of equity securities with respect to which such request is made shall be held by the number of persons which would require the filing of a registration statement under Section 12(g)(1) of the Exchange Act. (b) If the Company shall have filed an Exchange Act Registration Statement or a registration statement (including an offering circular under Regulation A promulgated under the Securities Act) pursuant to the requirements of the Securities Act, which shall have become effective (and in any event, at all times following the initial public offering of any of the securities of the Company), then the Company shall comply with all the reporting requirements of the Exchange Act (whether or not it shall be required to do so) and shall comply with all other public information reporting requirements of the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any of the Restricted Securities by any holder of Restricted Securities (including any such exemption pursuant to Rule 144 or Rule 144A thereof, as amended from time to time, or any successor rule thereto or otherwise). The Company shall cooperate with each holder of Restricted Securities in supplying such information as may be necessary for such holder of Restricted Securities to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act (under Rule 144 or Rule 144A thereunder or otherwise) for the sale of any of the Restricted Securities by any holder of Restricted Securities. 11. Registration Rights. 11.1 Demand Registration Rights. (a) Upon written request at any time by holders of Series A Registrable Securities representing in the aggregate at least 50% of the total number of Series A Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Series A Registrable Securities, as requested by the holders of Series A Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Series A Registrable Securities may require the Company to effect no more than one registration under the Securities Act upon the request of the holders of the Series A Registrable Securities pursuant to this Section 11.1(a). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute a registration pursuant to this Section 11.1(a). A request by a holder of Series A Registrable Securities to have the Company effect the registration of Series A Registrable Securities shall not obligate the holder to convert them into Common Stock, whether or not the registration of the Series A Registrable Securities shall become effective, unless and until the Series A Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(a) are in addition to those provided for in Section 11.1(e). 28. (b) Upon written request at any time by holders of Series B Registrable Securities representing in the aggregate at least 50% of the total number of Series B Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Series B Registrable Securities, as requested by the holders of Series B Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Series B Registrable Securities may require the Company to effect no more than one registration under the Securities Act upon the request of the holders of the Series B Registrable Securities pursuant to this Section 11.1(b). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute a registration pursuant to this Section 11.1(b). A request by a holder of Series B Registrable Securities to have the Company effect the registration of Series B Registrable Securities shall not obligate the holder to convert them into Common Stock, whether or not the registration of the Series B Registrable Securities shall become effective, unless and until the Series B Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(b) are in addition to those provided for in Section 11.1(e). (c) Upon written request at any time by holders of Series C Registrable Securities representing in the aggregate at least 50% of the total number of Series C Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Series C Registrable Securities, as requested by the holders of Series C Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Series C Registrable Securities may require the Company to effect no more than one registration under the Securities Act upon the request of the holders of the Series C Registrable Securities pursuant to this Section 11.1(c). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute a registration pursuant to this Section 11.1(c). A request by a holder of Series C Registrable Securities to have the Company effect the registration of Series C Registrable Securities shall not obligate the holder to convert them into Common Stock, whether or not the registration of the Series C Registrable Securities shall become effective, unless and until the Series C Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(c) are in addition to those provided for in Section 11.1(e). (d) Upon written request at any time by holders of Series D Registrable Securities representing in the aggregate at least 50% of the total number of Series D Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Series D Registrable Securities, as requested by the holders of Series D Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Series D Registrable Securities may require the Company to effect no more than one registration under the Securities Act upon the request of the holders of the Series D Registrable Securities pursuant to this Section 11.1(d). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute a registration pursuant to this Section 11.1(d). A request by a holder of Series D Registrable Securities to have the Company effect the registration of Series D Registrable Securities shall not obligate the holder to convert them into Common Stock, whether or not the 29. registration of the Series D Registrable Securities shall become effective, unless and until the Series D Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(d) are in addition to those provided for in Section 11.1(e) (e) Upon written request at any time by holders of Registrable Securities representing in the aggregate at least 50% of the total number of Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Registrable Securities, as requested by the holders of Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Registrable Securities may require the Company to effect no more than two registrations under the Securities Act, in the aggregate, upon the request of the holders of Registrable Securities pursuant to this Section 11.1(e). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute one of the two registrations which the Company is obligated to effect pursuant to this Section 11.1(e). A request by a holder of Shares to have the Company effect the registration of Registrable Securities shall not obligate the holder of Shares to convert them into Common Stock, whether or not the registration of the Registrable Securities shall become effective, unless and until the Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(e) are in addition to those provided for in Sections 11.1(a), (b), (c) and (d). 11.2 Registration Requested by Holders. Whenever the Company shall be requested, pursuant to Section 11.1 hereof, to effect the registration of any of the Registrable Securities under the Securities Act (a "Request for Registration"), the Company shall promptly give notice of such proposed registration to all holders of Registrable Securities and thereupon shall, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act and under all applicable state securities laws of: (a) all Registrable Securities which the Company has been requested to register pursuant to the Request for Registration; and (b) all other Registrable Securities which holders of Registrable Securities have, within thirty (30) days after the Company has given such notice, requested the Company to register; (c) all to the extent requisite to permit the sale or other disposition by the holders of the Registrable Securities so to be registered. If the holders of Registrable Securities who requested the registration of Registrable Securities engage one or more underwriters to distribute such Registrable Securities, the Company shall permit the managing underwriter(s) and counsel to the underwriter(s) at the Company's expense to visit and inspect any of the properties of the Company, examine its books, take copies and extracts therefrom and discuss the affairs, finances and accounts of the Company with its officers, employees and public accountants (and by this provision the Company hereby authorizes said accountants to discuss with such underwriter(s) and such counsel its affairs, finances and accounts), at reasonable times and upon reasonable notice, with or without a representative of the Company being present. The Company shall have the right to include in any registration of Registrable Securities required 30. pursuant to this Section 11.2 additional shares of its Common Stock to be issued by the Company ("Company Securities") or shares of Common Stock ("Third Party Registrable Securities") that have the benefit of duly exercised registration rights contractually binding on the Company, provided that if any Registrable Securities to be so registered for sale are to be distributed by or through underwriters, then all Registrable Securities to be so registered for sale and Company Securities and Third Party Registrable Securities, if any, shall be included in such underwriting on the same terms and provided, however, that if, in the written opinion of the managing underwriter(s), the total amount of such securities to be registered will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially and adversely affecting the entire offering, then the Company shall exclude from such underwriting (x) first, the maximum number of Company Securities and Third Party Registrable Securities as is necessary in the opinion of the managing underwriter(s) to reduce the size of the offering and (y) then, the minimum number of Registrable Securities, pro rata to the extent practicable, on the basis of the number of Registrable Securities requested to be registered among the participating holders of Registrable Securities, as is necessary to reduce the size of the offering. A registration that covers both Registrable Securities, Company Securities and Third Party Registrable Securities shall be deemed to have been requested pursuant to a Request for Registration pursuant to the applicable subsection Section 11.1 if the Registrable Securities of the type covered by such subsection constitute at least 50% of the total offering on the effective date of the registration statement but shall not be deemed to be one of the registrations referred to in the applicable subsection of Section 11.1 hereof if Registrable Securities of the type covered by such subsection constitute less than 50% of the total offering on the effective date of the registration statement. 11.3 "Piggyback" Registrations. (a) If the Company at any time proposes other than in accordance with a Request for Registration to register any of its securities under the Securities Act on Form S-1, S-2 or S-3 or on any other form upon which the Registrable Securities may be registered for sale to the general public, whether for its own account or for the account of others, the Company will at each such time give notice to all holders of Registrable Securities of such proposal at least thirty (30) days before the Company files a registration statement. Upon the request of any holder of Registrable Securities given within twenty (20) days after the Company has given such notice, the Company will cause the Registrable Securities which the Company has been requested to register by such holder of Registrable Securities to be registered under the Securities Act, all to the extent requisite to permit the sale or other disposition by such holder of Registrable Securities of the Registrable Securities so registered. (b) If securities are to be registered for sale under a registration not initiated by a Request for Registration and are to be distributed by or through a firm of underwriters, then any Registrable Securities which the Company has been requested to register pursuant to clause (a) of this Section 11.3 shall also be included in such underwriting on the same terms as other securities of the same class as the Registrable Securities included in such underwriting, provided that if, in the written opinion of the managing underwriter(s), the total amount of such securities to be so registered, when added to the Registrable Securities and the securities held by holders of securities other than the Registrable Securities, if any, will exceed the maximum amount of the 31. Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially and adversely affecting the entire offering, then (subject to clause (d) of this Section 11.3) the Company shall exclude from such underwriting (x) first, the maximum number of securities, if any, other than Registrable Securities, being sold for the account of persons other than the Company as is necessary to reduce the size of the offering and (y) second, the minimum number of Registrable Securities, if any, as is necessary in the opinion of the managing underwriter(s) to reduce the size of the offering (any such reduction in Registrable Securities to be made pro rata to the extent practicable on the basis of the number of Registrable Securities requested to be registered among the participating holders of Registrable Securities). (c) If securities are to be registered for sale under a registration not initiated by a Request for Registration and are to be distributed for the account of holders of Third Party Registrable Securities or holders (other than the Company) of other securities of the Company other than Registrable Securities by or through a firm of underwriters of recognized standing under underwriting terms appropriate for such transaction, then any Registrable Securities which the Company has been requested to register pursuant to clause (a) of this Section 11.3 shall also be included in such underwriting on the same terms as other securities included in such underwriting, provided that if, in the written opinion of the managing underwriter or underwriters, the total amount of such securities to be so registered, when added to such Registrable Securities, will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially and adversely affecting the entire offering, then the Company shall exclude from such underwriting the number of Registrable Securities and other securities, pro rata to the extent practicable, on the basis of the number of securities requested to be registered, as is necessary in the opinion of the managing underwriter(s) to reduce the size of the offering. (d) Notwithstanding Section 11.3 (a) and (b), the Company shall not exclude more Registrable Securities from registration than is necessary to reduce the number of Registrable Securities to be registered to one-fifth of the total number of securities to be registered, provided, however, that the Company may exclude all Registrable Securities from registration in connection with the Company's Initial Public Offering in its sole discretion, whether or not such exclusion is required in the opinion of the managing underwriter(s). (e) Notwithstanding anything to the contrary contained herein, the provisions of clause (y) of Section 11.3(b) and the provisions of Section 11.3(d) limiting the amount of the Registrable Securities requested to be registered that may be excluded from such registration may be waived by the affirmative vote of holders of 50% of the Registrable Securities requested to be registered. If, by reason of the provisions of Section 11.3(b) or Section 11.3(d), in any public offering other than the Company's Initial Public Offering, more than 10% of the Registrable Securities requested to be registered are excluded from such registration statement, then, in each such case, the holders of the Registrable Securities shall be entitled to an additional demand registration pursuant to Section 11.1(e) and shall be entitled to an additional registration pursuant to Section 11.1 at the Company's expense, without reimbursement, in accordance with Section 11.6. 32. 11.4 Registrations on S-3. At such time as the Company shall have qualified for the use of Form S-3 (or any successor form promulgated under the Securities Act), each holder of Registrable Securities shall have the right to request in writing an unlimited number of registrations on Form S-3 (except that the holders of Series E Registrable Securities shall only have the right to request in writing three (3) registrations on Form S-3), provided that the Registrable Securities proposed to be included in each such registration statement have a proposed aggregate offering price of at least $500,000 and that no holder shall have a right to request that Registrable Securities be registered on Form S-3 during any calendar year if Registrable Securities of such holder were included in a registration statement on Form S-3 pursuant to a request made by such holder during such calendar year. Each such request by a holder shall: (a) specify the number of Registrable Securities which the holder intends to sell or dispose of, and (b) state the intended method by which the holder intends to sell or dispose of such Registrable Securities. Upon receipt of a request pursuant to this Section 11.4, the Company shall use its best efforts to effect such registration or registrations on Form S-3. 11.5 Company's Obligations in Registration. Whenever the Company is obligated to effect the registration of any Registrable Securities under the Securities Act, as expeditiously as possible the Company will use its best efforts to: (a) prepare and file with the Commission, a registration statement with respect to such Registrable Securities and cause such registration statement to become and remain effective, provided, that the Company shall not be required to keep such registration statement effective, or to prepare and file any amendments or supplements thereto, after the later of (i) the last business day of the ninth month following the date on which such registration statement becomes effective under the Securities Act or such longer period during which the holders of the Registrable Securities registered thereunder shall pay all expenses reasonably incurred to keep such registration statement effective with respect to any of the Registrable Securities so registered or (ii) the date on which all of the Registrable Securities registered pursuant to such registration statement have been sold; provided further that in the event the Commission shall have declared any other registration statement with respect to an offering of securities of the Company to be effective within four months prior to the Company's receiving a Request for Registration, the Company may delay the effective date of the registration statement filed in response to the Request for Registration until six months after the effective date of the previous registration statement; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement whenever the holders of Registrable Securities covered by such registration statement shall desire to dispose of the same; (c) furnish to the holders of Registrable Securities for whom such Registrable Securities are registered or are to be registered such number of copies of a printed prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act, and such other documents as such holders of 33. Registrable Securities may reasonably request in order to facilitate the disposition of such Registrable Securities; (d) notify each holder of Registrable Securities, at any time when a prospectus relating to the Registrable Securities covered by such registration statement is required to be delivered under the Securities Act, of the Company's becoming aware that the prospectus in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and at the request of any holder of Registrable Securities, prepare and furnish to such holder any reasonable number of copies of any supplement to or amendment of such prospectus necessary so that, as thereafter delivered to any purchaser of the Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (e) register or qualify the Registrable Securities covered by such registration statement under such securities or blue sky laws of such jurisdictions as the holders of Registrable Securities for whom such Registrable Securities are registered or are to be registered shall reasonably request, and do any and all other reasonable acts and things which may be necessary or advisable to enable such holders of Registrable Securities to consummate the disposition in such jurisdictions of such Registrable Securities; provided, however, that the Company shall not be required to consent to general service of process for all purposes in any jurisdiction where it is not then subject to process, qualify to do business as a foreign corporation where it would not be otherwise required to qualify or submit to liability for state or local taxes where it is not otherwise liable for such taxes; (f) furnish to the holders of Registrable Securities for whom such Registrable Securities are registered or are to be registered an agreement satisfactory in form and substance to them by the Company and each of its officers, directors and holders of 5% or more of any class of capital stock, that during the thirty (30) days before and the 180 days after the effective date of any underwritten public offering, the Company and such officers, directors and 5% security holders shall not offer, sell, contract to sell or otherwise dispose of any shares of capital stock or securities convertible into capital stock, except as part of such underwritten public offering and except that gifts may be made to relatives or their legal representatives upon the condition that the donees agree in writing to be bound by the restrictions contained in this clause (f) of Section 11.5; (g) furnish to the holders of Registrable Securities for whom such Registrable Securities are registered or are to be registered at the closing of the sale of such Registrable Securities by such holders of Registrable Securities a signed copy of (i) an opinion or opinions of counsel for the Company acceptable to such holders of Registrable Securities in form and substance as is customarily given to underwriters in public offerings, and (ii) a "cold comfort" letter from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accounts to underwriters in an underwritten public offering, to the extent that such "cold comfort" letters are then available to selling stockholders; 34. (h) otherwise use its efforts to comply with all applicable rules and regulations of the Commission, and, if required, make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first day of the Company's first calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (i) use its best efforts to cause all Registrable Securities covered by such registration statement to be listed on the principal securities exchange on which similar equity securities issued by the Company are then listed, if the listing of such Registrable Securities is then permitted under the rules of such exchange or, if similar equity securities are not listed, to include the Registrable Securities on the National Association of Securities Dealers Automated Quotation System; (j) in connection with any underwritten offering, enter into an underwriting agreement with the underwriter(s) of such offering in the form customary for such underwriter(s) for similar offerings, including such representations and warranties by the Company, provisions regarding the delivery of opinions of counsel for the Company and accountants' letters, provisions regarding indemnification and contribution, and such other terms and conditions as are at the time customarily contained in such underwriter's underwriting agreements for similar offerings (and, at the request of any holder of Registrable Securities that are to be distributed by such underwriter(s), any or all (as requested by such holder) of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriter(s) shall also be made to and for the benefit of such holder); and (k) permit any holder of Registrable Securities who, in the sole judgment, exercised in good faith, of such holder, might be deemed to be a controlling person of the Company, to participate in the preparation of such registration statement and to require the insertion therein of material, furnished to the Company in writing, that in the judgment of such holder, as aforesaid, should be included, except to the extent that the Company shall reasonably object to the inclusion of such material. 11.6 Payment of Registration Expenses. The costs and expenses of all registrations and qualifications under the Securities Act, and of all other actions which the Company is required to take or effect pursuant to this Section 11, shall be paid by the Company or holders of Third Party Registrable Securities or other securities of the Company other than Registrable Securities, if any (including, without limitation, all registration and filing fees, printing expenses, expenses incident to filings with the National Association of Securities Dealers, Inc., auditing costs and expenses, and the reasonable fees and disbursements of counsel for the Company and one special counsel for the holders of Registrable Securities) and the holders of Registrable Securities shall pay only the underwriting discounts and commissions and transfer taxes, if any, relating to the Registrable Securities sold by them; provided that the Company shall pay without reimbursement such costs and expenses of (i) no more than two registrations which become effective under the Securities Act as a result of Requests for Registration pursuant to Section 11.1 and (ii) no more than three registrations which become effective under the Securities Act as a result of registrations on Form S-3 pursuant to the request of the holders of Series E Registrable Securities under Section 11.4, and provided, further, that in the event more 35. than two registrations as described in clause (i) above or three registrations as described in clause (ii) above, as applicable, become effective under the Securities Act, the holders of Registrable Securities and other securities, if any, included in such registrations shall reimburse the Company pro rata for all registration and filing fees, reasonable printing expenses, reasonable auditing costs and expenses (excluding costs and expenses of the Company's annual audit) and the reasonable fees and expenses of counsel for the Company and the selling stockholders and such reimbursement shall be made to the Company within five (5) business days after the effective date of such a registration statement. 11.7 Information from Holders of Registrable Securities. Notices and requests delivered by holders of Registrable Securities to the Company pursuant to this Section 11 shall contain such information regarding the Registrable Securities to be so registered and the intended method of disposition thereof as shall reasonably be required in connection with the action to be taken. Each holder of Registrable Securities hereby agrees to provide the Company, or its agents or designees, with all information reasonably required in connection with the registration under the Securities Act or any applicable state securities law of any Registrable Securities. 11.8 Indemnification. In the event of any registration under the Securities Act of any Registrable Securities pursuant to this Section 11, the Company shall indemnify and hold harmless each holder of Registrable Securities disposing of such Registrable Securities and each other person, if any, which controls (within the meaning of the Securities Act) such holder of Registrable Securities and each other person (including underwriters) who participates in the offering of such Registrable Securities, against any losses, claims, damages or liabilities, joint or several, to which such holder of Registrable Securities or controlling person or participating person may become subject under the Securities Act or otherwise, to the extent that such losses, claims, damages or liabilities (or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such Registrable Securities were registered under the Securities Act, in any preliminary prospectus or final prospectus contained therein, or in any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein (in the case of a prospectus, in the light of the circumstances under which they were made) or necessary to make the statements therein not misleading, and will reimburse such holder of Registrable Securities and each such controlling person or participating person for any legal or any other expenses reasonably incurred by such holder of Registrable Securities or such controlling person or participating person in connection with investigating or defending any such loss, claim, damage, liability or proceeding, provided, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, preliminary or final prospectus or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such holder of Registrable Securities or such controlling or participating person, as the case may be, specifically for use in the preparation thereof. Each such holder of Registrable Securities will, if requested by the Company prior to the initial filing of any such registration statement, agree in writing, severally but not jointly, to indemnify and hold harmless the Company and each person which controls (within the meaning of the Securities Act) the Company and each other person (including underwriters) who participates in the offering of such 36. Registrable Securities against all losses, claims, damages and liabilities to which the Company or such controlling person or participating person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such Registrable Securities were registered under the Securities Act, or in any preliminary prospectus or final prospectus contained therein, or in any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, to the extent that any such loss, claim, damage or liability arises out of or is based upon any such statement or omission made in such registration statement, preliminary or final prospectus or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such holder of Registrable Securities and specifically stated to be for use in the preparation thereof. Each indemnified party shall cooperate with each indemnifying party in defending any loss, claim, damage, liability or proceeding. (a) Indemnification similar to that specified in the preceding clause of this Section 11.8 (with appropriate modifications) shall be given by the Company and, at the Company's request, each holder of Registrable Securities with respect to any registration or other qualification of securities under any state securities and "blue sky" laws. (b) If the indemnification provided for in clauses (a) and (b) of this Section 11.8 is unavailable or insufficient to hold harmless an indemnified party, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party referred to in clauses (a) and (b) of this Section 11.8 in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand in connection with statements or omissions which resulted in losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statements or omissions. The parties agree that it would not be just and equitable if contributions pursuant to this clause were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this clause. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this clause shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any loss, claim, damage, liability or proceeding which is the subject of this clause. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (c) Each indemnified party shall notify the indemnifying party in writing within ten (10) days after its receipt of notice of the commencement of any action against it in respect of which indemnity may be sought from the indemnifying party pursuant to this 37. Section 11.8. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party, the indemnifying party will be entitled to participate in the defense with counsel satisfactory to such indemnified party. Each indemnified party shall cooperate with each indemnifying party in defending any loss, claim, damage, liability or proceeding. (d) Notwithstanding clauses (a) through (c) of this Section 11.8, the aggregate amount which may be recovered by the Company, controlling persons of the Company or underwriters from each holder of Registrable Securities pursuant to the indemnification and contribution provided for in this Section 11.8 shall be limited to the total net proceeds for which the Registrable Securities were sold by such holder of Registrable Securities. (e) Notwithstanding any of the foregoing, if, in connection with an underwritten public offering of Registrable Securities, the Company, the selling stockholders and the underwriter(s) enter into an underwriting or purchase agreement relating to such offering which contains provisions covering indemnification and contribution among the parties, the indemnification and contribution provisions of this Section 11.8 shall be deemed inoperative for purposes of such offering. 12. Small Business Matters. 12.1 Generally: Certain SBIC Covenants. CIT/VC is a Small Business Investment Company ("SBIC") licensed by the United States Small Business Administration ("SBA"). In order for CIT/VC to acquire and hold the Series B Preferred Stock, it obtained from the Company certain representations and rights as set forth below. As a material inducement to CIT/VC to purchase the Series B Preferred Stock pursuant to the Series B Stock Purchase Agreement, the Company made, and hereby makes the following representations and warranties and agrees to comply with the following covenants: (a) Assuming that CIT/VC's investment in the Company satisfies the requirements of 13 C.F.R. (S)107.865(d), and has complied with the requirements of 13 C.F.R. (S)107.865(e), the Company, together with its "affiliates" (as that term is defined in 13 C.F.R. (S)121.103), is a "small business concern" within the meaning of the Small Business Investment Act of 1958, as amended ("SBIA"), and the regulations thereunder, including Title 13, Code of Federal Regulations, (S)121.301(c). The information set forth in the SBA Forms 480, 652 and Part A of Form 1031 regarding the Company and its affiliates, when it was delivered to CIT/VC at the closing of the sale of the Series B Preferred Stock under the Series B Stock Purchase Agreement, was accurate and complete. (b) The proceeds from the sale of the Series B Preferred Stock were or will be used by the Company to (1) finance working capital and other corporate needs and (2) pay expenses related to the transactions contemplated by the Series B Stock Purchase Agreement. No portion of such proceeds (i) were or will be used to provide capital to a corporation licensed under the SBIA, (ii) were or will be used to acquire farm land, (iii) were or will be used to fund production of a single item or defined limited number of items, generally over a defined production period, and such production constituted or will constitute the majority of the activities of the Company and its Subsidiaries (examples include motion pictures and electric generating 38. plants), or (iv) were or will be used for any purpose contrary to the public interest (including, but not limited to, activities which are in violation of law) or inconsistent with free competitive enterprise, in each case, within the meaning of 13 C.F.R. (S)107.720. (c) Neither the Company's nor any of its Subsidiaries' primary business activity involves, directly or indirectly, providing funds to others, the purchase or discounting of debt obligations, factoring or long-term leasing of equipment with no provision for maintenance or repair, and neither the Company nor any of its Subsidiaries is classified under Major Group 65 (Real Estate) of the SIC Manual. The assets of the business of the Company and its Subsidiaries (the "Business") will not be reduced or consumed, generally without replacement, as the life of the Business progresses, and the nature of the business does not require that a stream of cash payments be made to the Business' financing sources, on a basis associated with the continuing sale of assets (examples of such businesses would include real estate development projects and oil and gas wells). (See 13 C.F.R. 107.720) (d) The proceeds from the sale of the Series B Preferred Stock were not or will not be used substantially for a foreign operation. This subsection (d) does not prohibit such proceeds from being used to acquire foreign materials and equipment or foreign property rights for use or sale in the United States. 12.2 Regulatory Compliance Cooperation. (a) CIT/VC agrees to use commercially reasonable best efforts to avoid the occurrence of a Regulatory Problem. In the event that CIT/VC determines that it has a Regulatory Problem, the Company agrees to use commercially reasonable efforts to take all such actions as are reasonably requested by CIT/VC in order (A) to effectuate and facilitate any transfer by CIT/VC of any Securities of the Company then held by CIT/VC to any Person designated by CIT/VC (subject, however, to compliance with Section 3 of this Agreement), (B) to permit CIT/VC (or any Affiliate of CIT/VC) to exchange all or any portion of the voting Securities of the Company then held by such Person on a share-for-share basis for shares of a class of non-voting Securities of the Company, which non-voting Securities shall be identical in all respects to such voting Securities, except that such new Securities shall be non-voting and shall be convertible into voting Securities on such terms as are requested by CIT/VC in light of regulatory considerations then prevailing, and (C) to continue and preserve the respective allocation of the voting interests with respect to the Company arising out of CIT/VC's ownership of voting Securities of the Company and/or provided for in this Agreement before the transfers and amendments referred to above (including entering into such additional agreements as are requested by CIT/VC to permit any Person(s) designated by CIT/VC to exercise any voting power which is relinquished by CIT/VC upon any exchange of voting Securities for nonvoting Securities of the Company); and the Company shall enter into such additional agreements, adopt such amendments to this Agreement, the Company's Charter and the Company's By-laws and other relevant agreements and taking such additional actions, in each case as are reasonably requested by CIT/VC in order to effectuate the intent of the foregoing. If CIT/VC elects to transfer Securities of the Company to a Regulated Holder in order to avoid a Regulatory Problem, the Company shall enter into such agreements with such Regulated Holder as it may reasonably request in order to assist such Regulated Holder in complying with applicable laws, and regulations to which it is subject. Such agreements may include restrictions on the 39. redemption, repurchase or retirement of Securities of the Company that would result or be reasonably expected to result in such Regulated Holder holding more voting securities or total securities (equity and debt) than it is permitted to hold under such laws and regulations. (b) In the event CIT/VC has the right to acquire any of the Company's Securities from the Company or any other Person (as the result of Sections 3 or 4 of this Agreement or otherwise), at CIT/VC's request the Company will offer to sell to CIT/VC non-voting Securities (or, if the Company is not the proposed seller, will arrange for the exchange of any voting securities for non-voting securities immediately prior to or simultaneous with such sale) on the same terms as would have existed had CIT/VC acquired the Securities so offered and immediately requested their exchange for non-voting Securities pursuant to Section 12.1(a) above. (c) In the event that any Subsidiary of the Company ever offers to sell any of its Securities to CIT/VC, then the Company will cause such Subsidiary to enter into agreements with CIT/VC on substantially similar terms as this Section 12. 12.3 Information Rights and Related Covenants. (a) Promptly after the end of each fiscal year (but in any event prior to February 28 of each year), the Company shall provide to CIT/VC a written assessment, in form and substance satisfactory to CIT/VC, of the economic impact of CIT/VC's financing under the Series B Stock Purchase Agreement, specifying the full-time equivalent jobs created or retained, the impact of the financing on the consolidated revenues and profits of the Business and on taxes paid by the Business and its employees (See 13 C.F.R. 107.630(e)). (b) Upon the request of CIT/VC (or any Affiliate of CIT/VC to whom CIT/VC has Transferred any Securities of the Company), the Company will (A) provide to such Person such financial statements and other information as such Person may from time to time reasonably request for the purpose of assessing the Company's financial condition and (B) furnish to such Person all information reasonably requested by it in order for it to prepare and file SBA Form 468 and any other information reasonably requested or required by the SBA or any successor entity thereto. (c) The Company will at all times comply with the non-discrimination requirements of 13 C.F.R., Parts 112, 113 and 117. 12.4 Remedies. The Company understands that its violation of this Agreement may result in CIT/VC being required by the SBA to sell the Series B Preferred Stock, and such sale may be at depressed prices due to the circumstances and timing of the sale. Therefore, in addition to all other remedies available to CIT/VC for the Company's violation of this Agreement, the Company agrees that CIT/VC shall be entitled to seek specific enforcement or other equitable relief to prevent a violation by the Company of the terms of this Agreement, and the Company waives any requirement that CIT/VC posts any bond as a condition to seeking or obtaining equitable relief. CIT/VC acknowledges and agrees that the remedies available to CIT/VC for the Company's violation of this Agreement shall be limited to whatever equitable relief may be available (such as specific performance, injunctive relief and rescission), damages 40. resulting from CIT/VC being required to divest the Series B Preferred Stock and costs of enforcement. CIT/VC expressly waives any claims for damages resulting from any loss of, or restrictions imposed upon the use of, its SBIC license as a result of the Company's breach of Section 12 of this Agreement. 13. Duration of Agreement. The rights and obligations of each Stockholder, except the rights and obligations contained in Sections 3.1, 3.2, 3.3(c), 10, 11 and 12 hereof, and the covenants hereunder to that Stockholder shall terminate as to each Stockholder upon the closing of the Initial Public Offering by the Company. The obligations contained in Sections 8, 11 and 12 shall survive indefinitely until, by their respective terms, they are no longer applicable. 14. Additional Remedies. In case any one or more of the covenants and/or agreements set forth in this Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, the Series D Stock Purchase Agreement and/or the Series E Stock Purchase Agreement shall have been breached by any party hereto, the party or parties entitled to the benefit of such covenants or agreements may proceed to protect and enforce their rights either by proceeding in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach; and/or an action for specific performance of any such covenant or agreement contained in this Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, the Series D Stock Purchase Agreement and/or the Series E Stock Purchase Agreement and/or a temporary or permanent injunction, in any case without showing any actual damage and without establishing, in the case of an equitable proceeding, that the remedy at law is inadequate. The rights, powers and remedies of the parties under this Agreement are cumulative and not exclusive of any other right, power or remedy which such parties may have under any other agreement or law. No single or partial assertion or exercise of any right, power or remedy of a party hereunder shall preclude any other or further assertion or exercise thereof. Any purported Transfer in violation of the provisions of this Agreement shall be void ab initio. 15. Successors and Assigns; Limitation on Assignment. Except as otherwise expressly provided herein, this Agreement shall bind and inure to the benefit of the Company, each of the Stockholders and the respective successors or heirs and personal representatives and permitted assigns of the Company and each of the Stockholders. Each Stockholder agrees further that, it shall not sell any Shares to any Person not a party to this Agreement unless such Person contemporaneously with such sale executes and delivers to the Company an agreement to be bound by the Stockholders' obligations hereunder, whereupon such Person shall have the same obligations as the Preferred Stockholders under this Agreement. The terms, representations, warranties and covenants contained in Sections 6 and 7 hereof shall be binding upon and shall inure to the benefit of and be enforceable by, the Preferred Stockholders and their respective successors, transferees and assignees, provided, that the rights granted to the Preferred Stockholders by Sections 6.3 and 6.4 may not be transferred or assigned to, and shall not inure to the benefit of, a successor, transferee or assignee of the Preferred Stockholders which is engaged in any business which directly competes with the Company in any line of business engaged in, or planned to be engaged in, by the Company. It is understood and agreed among the parties hereto that this Agreement and the representations, warranties, and covenants made herein are made expressly and solely for the benefit of the other party or parties hereto (or their respective 41. successors or permitted assigns), and that no other person shall be entitled or be deemed to be a third-party beneficiary of any party's rights under this Agreement. 16. Entire Agreement. This Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, the Series D Stock Purchase Agreement, the Series E Stock Purchase Agreement, the Charter and the By-Laws of the Company and each of the other documents delivered in connection with the sale by the Company of its Series E Preferred Stock pursuant to the Series E Stock Purchase Agreement contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior stockholders' agreements, including the Prior Stockholders' Agreement and the Original Stockholders' Agreement, and all other prior and contemporaneous arrangements or understandings with respect thereto. The parties hereto, including the Company and the holders of at least 75% in interest of the outstanding shares of Series A, B, C and D Preferred Stock, voting together as a class, hereby agree that all rights granted and covenants made under the Prior Stockholders' Agreement are hereby waived, released and terminated in their entirety and shall have no further force or effect whatsoever. The rights and covenants provided herein set forth the sole and entire agreement between the parties hereto with respect to the subject matter hereof. 17. Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person, duly sent by first class registered or certified mail, postage prepaid, or telecopied or telexed, addressed or telecopied to such party at the address or telecopier number set forth below, or such other address or telecopier number as may hereafter be designated in writing by the addressee in a notice complying as to delivery with the terms of this Section 17; provided, however, that if the Stockholder is foreign, notice shall be sent by both air courier, and telecopied or telexed to such Stockholder: If to the Company: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Attention: Chief Executive Officer Telecopier No.: (619) 623-5180 with a copy to: Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, CA 92121 Telecopier: (619) 453-3555 Attention: M. Wainwright Fishburn, Esq. If to any other party to this Stockholders' Agreement, to the address listed for such party on Schedule 17 hereto, or for persons who become party to this Stockholders' Agreement after 42. its initial execution, to the address listed for such person on the signature page to this Stockholders' Agreement. All such notices, requests, consents and communications shall be deemed to have been given (a) in the case of personal delivery, on the date of such delivery, (b) in the case of telex or telecopier transmission, on the date on which the sender receives machine confirmation of such transmission, and (c) in the case of mailing, on the fifth business day following the date of such mailing. 18. Changes. The terms and provisions of Sections 5, 6 and 7 of this Agreement may not be modified or amended, or any of the provisions thereof waived, temporarily or permanently, except pursuant to the written consent of (a) the Company, and (b) the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class. Except as expressly set forth in the preceding sentence and Section 11.3(e), the terms and provisions of this Agreement may not be modified or amended, or any of the provisions hereof waived, temporarily or permanently, except pursuant to the written consent of (i) the Company, and (ii) the holders of at least 75% in interest of the Preferred Shares, voting together as a class. 19. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 20. Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 21. Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of names and pronouns shall include the plural and vice-versa. 22. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability. Such prohibition or unenforceability in any one jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 23. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed wholly therein. 24. New York Life Insurance Company Compliance Obligations. Nothing in this Agreement shall diminish the continuing obligations of New York Life Insurance Company to comply with applicable requirements of law that it maintain responsibility for the disposition of, and control over its admitted assets, investments and property, including (without limiting the generality of the foregoing) the provisions of Section 1411(b) of the New York Insurance Law, as amended, and as hereinafter from time to time in effect. 43. In Witness Whereof, the parties hereto have executed this Agreement on the date first above written, in the case of corporations by their respective officers thereunto duly authorized. Diversa Corporation By: /s/ Terrance J. Bruggeman ----------------------------- Name: Terrance J. Bruggeman --------------------------- Title: Chief Executive Officer -------------------------- Stockholders: HealthCare Ventures III, L.P. By: HealthCare Partners III, L.P. its: General Partner By: /s/ Jeffrey Steinberg ----------------------------- Name: Jeffrey Steinberg --------------------------- Title: General Partner -------------------------- HealthCare Ventures IV, L.P. By: HealthCare Partners IV, L.P. its: General Partner By: /s/ Jeffrey Steinberg ----------------------------- Name: Jeffrey Steinberg --------------------------- Title: General Partner -------------------------- HealthCare Ventures V, L.P. By: HealthCare Partners V, L.P. its: General Partner By: /s/ Jeffrey Steinberg ----------------------------- Name: Jeffrey Steinberg --------------------------- Title: General Partner -------------------------- 44. APA Excelsior IV/Offshore, L.P. By: Patricof & Co. Ventures, Inc. its: Investment Advisor By: /s/ Patricia M. Cloherty ----------------------------- Name: Patricia M. Cloherty --------------------------- Title: Co. Chairman -------------------------- APA Excelsior IV, L.P. By: APA Excelsior IV Partners, L.P. its: General Partner By: Patricof & Co. Managers, Inc. its: General Partner By: /s/ Patricia M. Cloherty ----------------------------- Name: Patricia M. Cloherty --------------------------- Title: President -------------------------- The P/A Fund, L.P. By: APA Pennsylvania Partners II, L.P. its: General Partner By: /s/ Patricia M. Cloherty ----------------------------- Name: Patricia M. Cloherty --------------------------- Title: General Partner -------------------------- Patricof Private Investment Club, L.P. By: Patricof & Co. Managers, Inc. its: General Partner By: /s/ Patricia M. Cloherty ----------------------------- Name: Patricia M. Cloherty --------------------------- Title: President -------------------------- 45. Larry Abrams /s/ Jeffrey Steinberg ---------------------------------- Aetna Life Insurance Company By: /s/ [ILLEGIBLE] ------------------------------- Name:_____________________________ Title: Vice President ---------------------------- Axiom Venture Partners, L.P. By:_______________________________ Name:_____________________________ Title:____________________________ William Baum /s/ William Baum ---------------------------------- Benefit Capital Management Corporation By: /s/ Sue Decarlo ------------------------------- Name: Sue Decarlo ----------------------------- Title: Senior Vice President & CFO ---------------------------- Terrance J. Bruggeman /s/ Terrance J. Bruggeman ---------------------------------- Lee S. Casty /s/ Lee S. Casty ---------------------------------- 46. The Cit Group/Venture Capital, Inc. By: /s/ [ILLEGIBLE] ------------------------------- Name: [ILLEGIBLE] ----------------------------- Title: [ILLEGIBLE] ---------------------------- CSK Venture Capital Co., Ltd By:_______________________________ Name:_____________________________ Title:____________________________ The Donald D. Johnston Trust By: /s/ Donald D. Johnston ------------------------------- Donald D. Johnston, Trustee Finfeeds International Limited By:_______________________________ Name:_____________________________ Title:____________________________ Donald C. Garaventi /s/ Donald C. Garaventi --------------------------------- GC&H Investments By: /s/ John L. Cardoza ------------------------------ Name: John L. Cardoza ---------------------------- Title: Executive Partner --------------------------- Barry Glickman /s/ Barry Glickman --------------------------------- 47. Hudson Trust By: Scott M. Ciccor ------------------------------ Name: Scott M. Ciccor ---------------------------- Title: Trustee --------------------------- Frank Landsberger /s/ Frank Landsberger ---------------------------------- Kenneth F. Logue /s/ Kenneth F. Logue ---------------------------------- Mentus Money Purchase Plan By: /s/ Guy J. Ionnuzzi ------------------------------- Name: Guy J. Ionnuzzi ----------------------------- Title: President ---------------------------- For: New York Life Insurance By: /s/ Richard F. Drake ------------------------------- Name: Richard F. Drake ----------------------------- Title: Director, Venture Capital ---------------------------- Novartis Agribusiness Biotechnology Research, Inc. By: /s/ Stephen V. Evola ------------------------------- Name: Stephen V. Evola ----------------------------- Title: Co - President ---------------------------- 48. Rho Management Trust II By: /s/ Peter Klakanis ------------------------------ Name: Peter Klakanis ---------------------------- Title: C.F.O. --------------------------- Raymond D. Rice /s/ Raymond D. Rice --------------------------------- Jay M. Short /s/ Jay M. Short --------------------------------- R. Patrick Simms /s/ R. Patrick Simms --------------------------------- Melvin I. Simon /s/ Melvin I. Simon --------------------------------- State of Michigan By:______________________________ Name:____________________________ Title:___________________________ Kathleen H. Van Sleen /s/ Kathleen H. Van Sleen --------------------------------- 49. SCHEDULE 17 NOTICES If to HealthCare Ventures III, L.P., HealthCare Ventures IV, L.P. and HealthCare Ventures, V, L.P.: Twin Towers at Metro Park 379 Thornall Street Edison, New Jersey 08837 Fax No.: (908) 906-1450 Attention: Jeffrey Steinberg with a copy to: Pepper, Hamilton & Scheetz LLP 1235 Westlakes Drive, Suite 400 Berwyn, Pennsylvania 19312-2401 Fax No.: (610) 640-7835 Attention: Chris Miller If to APA Excelsior IV, L.P.; APA Excelsior IV/Offshore, L.P.; The P/A Fund, L.P.; or Patricof Private Investment Club, L.P.: Patricof & Co. Ventures, Inc. 445 Park Avenue 11th Floor New York, New York 10022 Fax No.: (212) 319-6155 Attention: Patricia M. Cloherty with a copy to: Shereff, Friedman, Hoffman & Goodman, LLP 919 Third Avenue 20th Floor New York, NY 10022 Fax No.: (212) 758-9526 Attention: Robert M. Friedman, Esq. If to Mr. Larry Abrams: 24 Central Park South New York, New York 10019 Fax No.: (212) 758-2976 If to Aetna Life Insurance Company: Aetna Life Insurance Company 151 Farmington Avenue, - RC21 Hartford, CT 06156-9000 Fax No.: (860) 273-8650 Attention: David M. Clarke If to Axiom Venture Partners, L.P.: Axiom Venture Partners, L.P. City Place II, 17/th/ Floor 185 Asylum Street Hartford, Connecticut 06103 Attention: Samuel F. McKay Fax No.: (203) 548-7797 If to William Baum: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to Benefit Capital Management Corporation: 39 Old Ridgebury Road Danbury, CT 06817 Fax No.: (203) 794-2693 Attention: Susan DeCarlo If to Terrance J. Bruggeman: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to Mr. Lee S. Casty: c/o French-American Securities, Inc. 200 West Adams Street Suite No. 1500 Chicago, IL 60606 Fax No.: (312) 407-5746 If to The CIT Group/Venture Capital, Inc.: The CIT Group/Venture Capital, Inc. 650 CIT Drive Livingston, NJ 07039 Fax No.: (201) 740-5555 Attention: Bruce Schackman If to CSK Venture Capital Co., Ltd.: Kenchiku Kaikan 7/th/ Floor 5-26-20 Shiba Minatoku, Tokyo 108 Japan Fax No.: 81.03.3457.7070 Attention: Fumio Takahashi If to The Donald D. Johnston Trust: The Donald D. Johnston Trust 18 Oyster Shell Lane Hilton Head Island, SC 29926 Fax No.: (803) 681-6493 Attention: Donald P. Johnston, Trustee If to Finnfeeds International Limited: Finnfeeds International Limited P.O. Box 777 Marlborough, Wiltshire, UK Fax No.: 44(0)1672517778 Attention: Richard Cooper with a copy to: Carter, Ledyard & Milburn 2 Wall Street New York, NY 10005 Fax No.: (212) 732-3232 Attention: Kirstin T. Knight, Esq. If to Donald C. Garaventi: 330 Indian Harbor Boulevard Vero Beach, FL 32963 Fax No.: (561) 234-2374 If to GC&H Investments: c/o Cooley Godward llp 4365 Executive Drive Suite 1100 San Diego, CA 92121-2128 Fax No.: (619) 453-3555 Attention: Wain Fishburn, Esq. If to Barry Glickman: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to Hudson Trust: c/o Summit Asset Management Company, Inc. 666 Plainsboro Road Suite 445, The Office Center Plainsboro, NJ 08536 Fax No.: (609) 275-1892 Attention: Irene S. March If to Frank Landsberger: Mojave Therpeutic, Inc. 715 Olde Saw Mill River Road Terrytown, NY 10591 Fax No.: (914) 347-0292 If to Kenneth F. Logue: Logue and Rice 8000 Towers Crescent Drive Suite 650 Vienna, VA 22182-2700 Fax No.: (703) 761-4248 If to Mentus Money Purchase Plan: Aventine 8910 University Center Lane Suite 750 San Diego, CA 92122-1085 Fax No.: (619) 455-6872 Attention: Guy Iannuzzi If to New York Life Insurance: 51 Madison Avenue New York, NY 10010 Fax No.: (212) 447-4122 Attention: Himi Kittner If to Novartis Agribusiness Biotechnology Research, Inc.: Novartis Agribusiness Biotechnology Research, Inc. 3054 Cornwallis Road Research Triangle Park, NC 27709 Fax No.: (919) 541-8585 Attention: Dr. Juanjo Estruch with a copy to: Novartis Seeds, Inc. 7240 Holsclaw Road Gilroy, CA 95020-8027 Fax No.: (408) 848-8129 Attention: Allen E. Norris, Esq. If to Rho Management Trust II: Rho Management Trust II 767 Fifth Avenue 43rd Floor New York, New York 10153 Fax No.: (212) 751-3613 Attention: Joshua Ruch with a copy to: Gregory F.W. Todd, Esq. 888 Seventh Avenue, Suite 4500 New York, NY 10019 Fax No.: (212) 246-5151 If to Raymond D. Rice: Logue and Rice 8000 Towers Crescent Drive Suite 650 Vienna, VA 22182-2700 Fax No.: (703) 761-4248 If to Jay M. Short: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to R. Patrick Simms: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to Melvin I. Simon 1075 Old Mill Road Pasadena, CA 91108 Fax No.: (818) 577-9266 If to State of Michigan: Acting Administrator State of Michigan Department of Treasury Treasury Building 430 West Allegan Lansing, MI 48922 Fax No.: (517) 335-3668 Attention: Garry Neal If to Kathleen H. Van Sleen: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 LIST OF SCHEDULES Schedule of Series E Investors Schedule 7.3 - Outstanding Options, Warrants and Rights Schedule 17 - Notices LIST OF EXHIBITS Exhibit A - Quarterly Financial Summary iv. SCHEDULE OF SERIES E INVESTORS
Name and Address No. of Shares Novartis Agribusiness 5,555,556 Biotechnology Research, Inc. 3054 Cornwallis Road Research Triangle Park, NC 27709 ____________ Total 5,555,556
SCHEDULE 7.3 OUTSTANDING OPTIONS, WARRANTS AND RIGHTS SCHEDULE 4.2 - CAPITALIZATION DIVERSA CORPORATION CAPITALIZATION TABLE Projected After Series E Closing
Total Total Shares Fully-Diluted Shares -------------------------------------------------------------------------------------------------------- Series A Series B Series C Series D Common Warrants(a) Options(b) # % -------------------------------------------------------------------------------------------------------- PATRICOF FUNDS: APA Excelsior IV, L.P. The P/A Fund, L.P. APA Excelsior IV/Offshore, L.P. Patricof Private Investment Club, L.P. - ----------------------------------------------------------------------------------------------------------------------------------- Total Patricof Funds - ----------------------------------------------------------------------------------------------------------------------------------- HEALTHCARE FUNDS: HealthCare Ventures III, L.P. HealthCare Ventures IV, L.P. HealthCare Ventures V, L.P. - ----------------------------------------------------------------------------------------------------------------------------------- Total HealthCare Funds - ----------------------------------------------------------------------------------------------------------------------------------- OTHER INVESTORS: Benefit Capital Management Corporation New York Life Insurance Company CSK Venture Capital Co., Ltd. State of Michigan GC&H Investments Mentus Money Purchase Plan Logue, Kenneth F. Rice, Raymond D. Finnfeeds International Limited Abrams, Larry Axiom Venture Partners, L.P. Comdisco Warrant Johnston, Donald Rho Management Trust II Aetna Life Insurance Company Landsberger, Frank Casty, Lee Hudson Trust The CIT Group/Venture Capital, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Total Other Investors - ----------------------------------------------------------------------------------------------------------------------------------- FOUNDERS: The Institute for Genomic Research, et al. Haseltine, Wm. Miller, Jeffrey H. Simon, Melvin I. Stetter, Karl O. Kom, Peter, et al. Friedman, Gary, et al. - ----------------------------------------------------------------------------------------------------------------------------------- Total Founders - ----------------------------------------------------------------------------------------------------------------------------------- EMPLOYEES & CONSULTANTS: CURRENT EMPLOYEES Bruggeman, Terrance Short, Jay Van Sleen, Kathleen Simms, Patrick Baum, Bill - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal Management - ----------------------------------------------------------------------------------------------------------------------------------- Other Employees Pool Available (c) - ----------------------------------------------------------------------------------------------------------------------------------- Total Current Employees - ----------------------------------------------------------------------------------------------------------------------------------- TERMINATED EMPLOYEES Marrs, Barry Garaventi, Don Other Terminated Employees - ----------------------------------------------------------------------------------------------------------------------------------- Total Terminated Employees - ----------------------------------------------------------------------------------------------------------------------------------- Glickman, Bary Carroll, Daniel (Director) Other Consultants - ----------------------------------------------------------------------------------------------------------------------------------- Total Employees and Consultants - ----------------------------------------------------------------------------------------------------------------------------------- Grand Total ===================================================================================================================================
FOOTNOTES: (a) [****] (b) [****] (c) [****] * CONFIDENTIAL TREATMENT REQUESTED Exhibit A FORM OF QUARTERLY FINANCIAL SUMMARY Request to CFO's for Quarterly Financial Information Company:_______________________________________________________ Submitted By:_______________ Period Ending:______________ Qtly. Payroll Taxes Paid Yes [ ] No [ ]
- ------------------------------------------------------------------------------------------------------------------------------ Quarterly Financial Report ($000) - ------------------------------------------------------------------------------------------------------------------------------ Current Financial YTD Financial - ------------------------------------------------------------------------------------------------------------------------------ Actual Budget Actual YTD Budget YTD - ------------------------------------------------------------------------------------------------------------------------------ Current Prior Year Current Prior Year. Qtr. Qtr. Qtr. Qtr. Current Prior Year Current Prior Year - ------------------------------------------------------------------------------------------------------------------------------ Revenues - ------------------------------------------------------------------------------------------------------------------------------ Net Income (loss) - ------------------------------------------------------------------------------------------------------------------------------ Gross Margin $ - ------------------------------------------------------------------------------------------------------------------------------ Gross Margin % - ------------------------------------------------------------------------------------------------------------------------------ EBITDA - ------------------------------------------------------------------------------------------------------------------------------ Cash Flow from Operations - ------------------------------------------------------------------------------------------------------------------------------ Current Qtr. Prior Year Qtr. Previous Qtr. - ------------------------------------------------------------------------------------------------------------------------------ Cash & Cash Equivalents - ------------------------------------------------------------------------------------------------------------------------------ Total Current Assets - ------------------------------------------------------------------------------------------------------------------------------ Total Current Liabilities - ------------------------------------------------------------------------------------------------------------------------------ Long Term Debt - ------------------------------------------------------------------------------------------------------------------------------ Backlog - ------------------------------------------------------------------------------------------------------------------------------ # of Employees/Stores - ------------------------------------------------------------------------------------------------------------------------------ Cash Used (Burn Rate) - ------------------------------------------------------------------------------------------------------------------------------ (**If you've attached your cap table, you don't need to complete this section Current Qtr. Prior Year Qtr. Previous Qtr. Capitalization - ------------------------------------------------------------------------------------------------------------------------------ Common Shares Outstanding - ------------------------------------------------------------------------------------------------------------------------------ Common equivalent after conversion - ------------------------------------------------------------------------------------------------------------------------------ Common equivalent of Warrants & Options - ------------------------------------------------------------------------------------------------------------------------------ Total shares fully diluted - ------------------------------------------------------------------------------------------------------------------------------
By: (CFO): __________________________ EX-10.15 3 LICENSE AGREEMENT EXHIBIT 10.15 Confidential Treatment Requested Under 17 C.F.R. (S)(S) 200.80 (b) (4) 200.83 and 230.406 LICENSE AGREEMENT BETWEEN THE DOW CHEMICAL COMPANY AND DIVERSA CORPORATION *Confidential Treatment Requested 1
ARTICLE TITLE PAGE NUMBER - ------------------------------------------------------------------------------------------------- I DEFINITIONS 1 - ------------------------------------------------------------------------------------------------- II PATENT LICENSE GRANT 4 - ------------------------------------------------------------------------------------------------- III PAYMENTS 6 - ------------------------------------------------------------------------------------------------- IV PATENT RIGHTS 9 - ------------------------------------------------------------------------------------------------- V CONFIDENTIALITY 11 - ------------------------------------------------------------------------------------------------- VI ASSIGNMENT 12 - ------------------------------------------------------------------------------------------------- VII THIRD PARTY INFRINGEMENT CLAIMS 12 - ------------------------------------------------------------------------------------------------- VIII PATENT ENFORCEMENT & LITIGATION 13 - ------------------------------------------------------------------------------------------------- IX U.S. EXPORT CONTROL AND GOVERNMENT LICENSES 14 - ------------------------------------------------------------------------------------------------- X PRODUCT LIABILITY AND INDEMNIFICATION 15 - ------------------------------------------------------------------------------------------------- XI WARRANTY & DISCLAIMER, 16 - ------------------------------------------------------------------------------------------------- XII TERM AND TERMINATION 17 - ------------------------------------------------------------------------------------------------- XIII FORCE MAJEURE 18 - ------------------------------------------------------------------------------------------------- XIV DISPUTE RESOLUTION 19 - ------------------------------------------------------------------------------------------------- XV NOTICES 20 - ------------------------------------------------------------------------------------------------- XVI MISCELLANEOUS PROVISIONS 21 - -------------------------------------------------------------------------------------------------
APPENDIX TITLE PAGE - ------------------------------------------------------------------------------------------------- A PATENT RIGHTS A - ------------------------------------------------------------------------------------------------- A-1 DIVERSA PATENT RIGHTS A-1 - ------------------------------------------------------------------------------------------------- A-2 DIVERSA PATENT RIGHTS [****] A-2 - -------------------------------------------------------------------------------------------------
i
ROYALTY BEARING PRODUCTS - -------------------------------------------------------------------------------------------------------------------- A-3 DIVERSA PATENT RIGHT [****] A-3 - -------------------------------------------------------------------------------------------------------------------- B JOINT PATENT RIGHTS B-1 - -------------------------------------------------------------------------------------------------------------------- C LICENSED PRODUCT C-1 - -------------------------------------------------------------------------------------------------------------------- D ROYALTY BEARING PRODUCT D-1 - -------------------------------------------------------------------------------------------------------------------- E ROYALTY BEARING PRODUCT CLASSIFICATION E-1 - -------------------------------------------------------------------------------------------------------------------- F ROYALTY SCHEDULE F-1 - -------------------------------------------------------------------------------------------------------------------- G OPTION AGREEMENT G-1 - --------------------------------------------------------------------------------------------------------------------
ii This LICENSE AGREEMENT (including the Appendices hereto, the "License") is by and between THE DOW CHEMICAL COMPANY, a corporation duly formed and existing under the laws of the State of Delaware, having a place of business at 2030 Dow Center, Midland, Michigan 48674, United States of America ("DOW" or a "Party"), and DIVERSA CORPORATION, a corporation duly formed and existing under the laws of the State of Delaware, having a place of business at 10665 Sorrento Valley Road, San Diego, California 92121, United States of America ("DIVERSA" or a "Party"). R E C I T A L S A. DIVERSA has discovered and developed enzymes and has expertise in the rearrangement of DNA to produce and discover genes utilizing proprietary technologies for the rapid discovery, development and optimization of enzymes. B. DOW has expertise in the discovery, development and production of chemical compounds. C. DOW and DIVERSA are concurrently with this License entering into a separate Collaborative Research and Development Agreement ("Agreement") in order to perform research together to discover and optimize the function of new genes, processes and products resulting thereupon that can be used by DOW to produce certain, desired commercial chemical compounds. D. DIVERSA represents that it has Patent Rights and Know-How that pertain to this License. E. DOW is desirous of obtaining, and DIVERSA wishes to grant to DOW, a worldwide, exclusive royalty-bearing license to use Patent Rights and Licensed Products in Research Target Processes. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the Parties hereby agree as follows: ARTICLE I DEFINITIONS ----------- When used in this License, the following terms shall have the meanings set out below, unless the context requires otherwise. The singular shall be interpreted as including the plural and vice versa, unless the context clearly indicates otherwise. 1 1.1 "Affiliate" means any corporation, firm, limited liability company, partnership or other entity that directly or indirectly controls or is controlled by or is under common control with a Party to this License. Control for this purpose means ownership, directly or through one or more affiliated entities, of 50 percent (50%) or more of the shares of stock entitled to vote for the election of directors in the case of a corporation, or 50 percent (50%) or more of the equity interests in the case of any other type of legal entity, or any other arrangement whereby a Party controls or has the right to control the board of directors or equivalent governing body of a corporation or other entity. 1.2 "Agreement" means the Collaborative Research Agreement between DOW and DIVERSA, executed concurrently with this License. 1.3 "Areas of Interest" means the development of Improved Enzymes (as defined below) for use in the following [****] specific areas: (a) [****] (b) [****] (c) [****] 1.4 "Confidential Information" means all information, Know-How, scientific, technical, or non-technical data, samples and Materials, business plans, and marketing and sales information disclosed by one Party to the other under this License, and including information disclosed under the Agreement regarding Licensed Products, whether disclosed or provided in oral, written (including but not limited to electronic, facsimile, paper or other means), graphic, photographic or any other form, except to the extent that such information: (a) as of the date of disclosure is known to the receiving Party as shown by written documentation, other than by virtue of a prior confidential disclosure from the disclosing Party to the receiving Party; (b) as of the date of disclosure is in, or subsequently enters, the public domain through no fault or omission of the receiving Party; (c) as of the date of disclosure or thereafter is obtained from a Third Party free from any obligation of confidentiality; or (d) as of the date of disclosure or thereafter is developed by the receiving Party independent of the disclosure by the disclosing Party as evidenced by written documentation. 1.5 "Controls" or "Controlled" means, with respect to intellectual property, possession by DIVERSA (other than by virtue of this License) of the ability to grant licenses or sublicenses to DOW without violating the terms of any agreement or other arrangement with any Third Party and to the reasonable, good faith knowledge and belief of DIVERSA, without violating the rights of a Third Party. *Confidential Treatment Requested 2 1.6 [****] means a [****] that is not [****] whereupon the [****] shall be [****] on the [****] and [****] of the [****] including a [****] of [****] an [****]. 1.7 "Effective Date" means the date of last signature of the Parties at the end of this License. 1.8 "Field" means [****] 1.9 "Improved Enzyme" means an enzyme or enzymes, either ex vivo or in vivo, provided to DOW by DIVERSA which is within the claims of Patent Rights or Joint Patent Rights or that incorporates, is derived from, or is identified, discovered, developed or made through the use of Know-How, which is developed in the Areas of Interest under the Agreement. 1.10 "Joint Patent Rights" means patent rights, which are jointly developed or invented by both Parties under the Agreement in accordance with its terms, as shown in Appendix B, which Appendix B-1 may be modified to include joint patent rights obtained during the Research Term under the Agreement, and which rights pertain to a Licensed Product. Joint Patent Rights concern only the scope of the claims that have not been held invalid or unenforceable after all appeals have been exhausted. Claims shall be deemed valid unless held otherwise. 1.11 "Know-How" means all Research Results, as defined and obtained under the Agreement, and all know-how, nonpatented inventions, improvements, discoveries, data, instructions, processes, formulas, sequences, information (including, without limitation, chemical, physical and analytical, safety, manufacturing and quality control data and information), procedures, devices, methods and trade secrets which are conceived, discovered or invented during the term of the Agreement, and which are necessary or appropriate to develop and commercialize Licensed Products. (Know-How does not include inventions within the Patent Rights or Joint Patent Rights.) 1.12 "Licensed Product" means (i) any Improved Enzyme which is used to convert a Research Target (as defined in the Agreement) into a product using a Research Target Process, or (ii) any Improved Enzyme which is based on or incorporates or is identified, discovered, or developed under the Agreement, for which both (i) and (ii) are designated by the RMC, and encompassed *Confidential Treatment Requested 3 within DIVERSA Patent Rights or Joint Patent Rights and listed on Appendix C, which is attached hereto and made a part hereof and which is identical to Appendix G of the Agreement. 1.13 "Material" means the original, tangible materials of any type provided by DOW or DIVERSA to the other Party in order that the recipient can perform its obligations under this License. 1.14 "Net Sales" means the amount invoiced on sales of Royalty Bearing Product by DOW and its Affiliates to a Third Party, less the following deductions to the extent included in the amounts invoiced: (a) [****] and (b) [****] and (c) [****] and (d) [****] and (e) [****] Net Sales shall not include sales between or among DOW and its Affiliates. 1.15 "Patent Rights" means patent and patent applications Controlled solely by DIVERSA as shown in Appendix A, including: (a) all patents and patent applications which are conceived of under the Agreement, and which are necessary (but for this License DOW would infringe these patents) for DOW to make, use or sell the Royalty Bearing Products; and are listed on Appendix A-1, attached hereto and made a part hereof, which Appendix A-1 may be modified to include Patent Rights obtained during this License; (b) the patents and patent applications listed on Appendix A-2, attached hereto and made a part hereof, are patent rights of DIVERSA that [****] and (c) any divisions, continuations, continuations-in-part, reissues, reexaminations, extensions or other governmental actions which extend any of the subject matter of the patent applications or patents in *Confidential Treatment Requested 4 (i) or (ii) above, and any substitutions, confirmations, patents-of- addition, registrations or revalidations of any of the foregoing, which Patent Rights are necessary (but for this License DOW would infringe these patents) for DOW to make, use or sell the Royalty Bearing Products, which shall be listed on Appendix A-1 or A-2, respectively; (d) [****] in each case, which are Controlled by DIVERSA. All patents and patent applications subject to this definition are listed on Appendix A or will be included on Appendix A as they are developed or obtained under the Agreement and this License. Patent Rights concern only the scope of the claims that have not been held invalid or unenforceable after all appeals have been exhausted. Claims shall be deemed valid unless held otherwise. 1.16 "Royalty Bearing Product" means the material resulting from the application of a Licensed Product or a Licensed Product in a Research Target Process (defined in the Agreement), which shall be classified by its Royalty Bearing Product Classification and listed in Appendix D, attached hereto and made a part hereof. (If DIVERSA manufactures for DOW a Licensed Product using an in vivo Improved Enzyme, it shall be subject to a separate agreement.) 1.17 "Royalty Bearing Product Classification" means the [****] in accord with Appendix E, as attached hereto and made a part hereof. The Royalty Bearing Product [****] 1.18 "Royalty Schedule" means the [****] Royalty Bearing Product, as determined by the [****] read from the [****] on Appendix F, attached hereto and made a part hereof. 1.19 "Territory" means the world. 1.20 "Third Party" means anyone other than DOW or DIVERSA, or their respective Affiliates. *Confidential Treatment Requested 5 ARTICLE II PATENT LICENSE GRANT -------------------- 2.1 Grant of License to DOW - Subject to the terms and conditions of this License, DIVERSA hereby grants to DOW, and DOW hereby accepts: (a) an a exclusive, royalty-bearing, worldwide license, including the right to grant sublicenses pursuant to Section 2.4, under the DIVERSA Patent Rights and Joint Patent Rights to make, have made, import, have imported, use, have used, sell, have sold and otherwise exploit Royalty Bearing Products; (b) an exclusive, world-wide license, including the right to grant sublicenses pursuant to Section 2.4, under DIVERSA's enzymes [****] to use enzymes to convert Research Target(s) into products via Research Target Processes (Research Target and Research Target Processes are defined as in the Agreement). The royalty for this grant is obtained by DIVERSA under (a); (c) a non-exclusive, royalty-bearing, world-wide license to [****] and (d) a royalty-free license to any Know-How required to exploit the rights granted under (a), (b), and (c), and for DOW or its Affiliates to perform research on any Improved Enzyme. 2.2 Grant of Right to DIVERSA - If DOW desires that any Licensed Product be further modified after DIVERSA supplies it to DOW under the terms of the Agreement, then DOW may request that: (a) DIVERSA perform such added modification under the Agreement, if it is still in effect; or (b) if the Agreement is no longer in effect, then using good faith, the Parties shall negotiate terms consistent with the intent of obtaining a Licensed Product; or (c) if DIVERSA declines to do such modification within thirty (30) days or an agreement is not reached within three (3) months having terms similar to the Agreement and providing for the work to commence within thirty (30) days of the signature date, [****] *Confidential Treatment Requested 6 Notwithstanding the above, [****] if (i) a transfer or sale of substantially all of the business of DIVERSA to which this License relates occurs, whether by merger, sale of stock, sale of assets or otherwise, to a [****] or (ii) bankruptcy, insolvency, dissolution or winding up of DIVERSA (other than dissolution or winding up for the purposes of reconstruction or amalgamation). [****]. DOW would continue to pay DIVERSA for any Royalty Bearing Product under this License. 2.3 Grant of Rights to Use Licensed Products for New Research Targets within the Field after Termination of the Agreement - In the event DOW desires to obtain exclusive or non-exclusive rights to Licensed Products to make, have made, use, sell, offer for sale and import products in new Research Targets within the Field, DIVERSA and DOW agree to negotiate such rights in good faith, subject to any prior obligations DIVERSA has regarding the granting of said rights. If DIVERSA becomes aware of new Research Targets for Licensed Products within the Field, then DIVERSA shall notify DOW of such Licensed Product application, and [****]. If DOW declines to negotiate a license and DIVERSA and a Third Party desire to use a Licensed Product for a new Research Target, DIVERSA and DOW agree to negotiate for DIVERSA to pay DOW royalties on net sales of such Licensed Product in such Research Target consistent with the royalties DOW pays to DIVERSA under this License as indicated in Table 1 of Appendix F attached hereto. 2.4 Sublicensing - The exclusive license granted under Section 2.1(a) to DOW includes the right to sublicense Third Parties, whether or not Affiliates of DOW, including the right to enter into distributor contracts, manufacturing contracts, or other commercial transactions, including but not limited to sublicensing a competitor of DOW. DOW will be responsible for all payments due to DIVERSA as a result of any sublicensee and Affiliate Net Sales in the Field in the Territory. DOW will be responsible for the observance by all sublicensees of all applicable provisions of this License and will use its reasonable good faith efforts to cause all sublicensees to observe the covenants in this License (i.e., regarding confidentiality, maintaining records, reporting Net Sales, and governmental regulations). All sublicenses, other than a label license for DOW Net Sales, shall be in writing. DOW shall notify DIVERSA in writing within thirty (30) days of the grant of any *Confidential Treatment Requested 7 sublicense hereunder. Notwithstanding the foregoing, DOW shall have no right under any circumstances to sublicense any rights to the DIVERSA Patent Rights listed on Appendix A-3, and licensed to DOW hereunder. 2.5 Reservations by DOW - DOW reserves the right to work with Third Parties outside the Areas of Interest, or after the Agreement terminates within the Areas of Interest, or to conduct its own research within the Areas of Interest. 2.6 Ex vivo Improved Enzyme Production - If DOW chooses not to exclusively manufacture a Licensed Product, DIVERSA shall be given a right of first refusal to manufacture such Licensed Product. DIVERSA must submit a bid which is competitive with any other Third Party supplier. Any bid received by DIVERSA shall be held confidential by DOW. If DIVERSA is the lowest cost, most effective producer of the Licensed Product, DOW and DIVERSA shall negotiate in good faith a separate manufacturing agreement for DIVERSA to provide the relevant Licensed Product to or on behalf of DOW. Such agreement may include the development of additional technology for such production. If such an agreement is negotiated, it shall contain at a minimum terms for a worldwide, non-exclusive license for the Know-How and any Patent Rights required (whether under this License in Appendix B-2 or developed separately). This [****]. 2.7 Prior Option Agreement - DOW exercised its rights under a prior Option (copy attached for reference as Appendix H) for a license to a precursor for an Improved Enzyme and paid DIVERSA the exercise fee. This License shall also be a grant to the technology and the precursor Improved Enzyme(s) developed under that Option in the same manner for a Licensed Product. ARTICLE III PAYMENTS -------- 3.1 Milestone Payment for Option under Section 2.7 - To meet the milestone payment due DIVERSA under the Option in accord with Section 2.7, DOW shall pay DIVERSA Two Hundred Thousand Dollars ($200,000) within thirty (30) days from the Effective Date. This License shall suffice for the exercise of the Option for a license. *Confidential Treatment Requested 8 3.2 License Product Nomination - When an Improved Enzyme is identified by the RMC under the Agreement as being adequately developed for commercialization, then DOW must inform DIVERSA in writing within sixty (60) days whether such Improved Enzyme shall become a Licensed Product under this License. If DOW desires to designate an Improved Enzyme as a Licensed Product, then it shall be listed on either Appendix C or D under the terms of this License and classified by DOW under the Royalty Bearing Product Classification of Appendix E as to which Royalty Schedule applies in accord with Appendix F. Up to three (3) Improved Enzymes per Royalty Bearing Product can be designated as Licensed Product(s). Within [****] of designation of more than one Improved Enzyme as a Licensed Product, DOW will select [****] Licensed Product for each Royalty Bearing Product, and all other Licensed Product(s) shall revert to Improved Enzyme status. If DOW does not designate an Improved Enzyme as a Licensed Product, then DIVERSA may license such Improved Enzyme to a Third Party for other than any Research Target without further obligation to DOW, unless Section 3.8 applies. 3.3 License Fees - Within thirty (30) days of the identification by the RMC of a Licensed Product in accordance with Section 3.2, DOW shall pay to DIVERSA a license fee of [****] dollars. Only [****]. 3.4 Commercialization Fees - Within thirty (30) days of the first commercial sale by DOW of each Royalty Bearing Product from a commercial scale plant, DOW shall pay to DIVERSA [****] dollars. Only [****]. 3.5 Royalty Payments - Royalties owed for each Royalty Bearing Product are subject to Section 4.8 and shall vary according to Table 1 in the Royalty Schedule set forth on Appendix F. Upon pilot plant evaluation for each Royalty Bearing Product, DOW will propose to DIVERSA the Royalty Bearing Product Classification and specific royalty from Table 1 in the Royalty Schedule in Appendix F. DIVERSA and DOW shall discuss the proposal. The proposal shall be subject to DIVERSA approval, which shall not be unreasonably withheld. In the [****]. *Confidential Treatment Requested 9 3.6 Method of Payment - All payments due under this License shall be made in with the respective sections of Article III by check or by bank wire transfer in immediately available funds to a bank account designated in writing to DOW by DIVERSA. In the event that the due date of any payment subject to this Article III hereof is a Saturday, Sunday or national holiday, such payment may be paid on the following business day. Any late payments shall bear interest, to the extent permitted by applicable law, at the prime rate (as reported by the Bank of America, San Francisco, California or its successor bank) on the date such payment is due plus two (2%) percent, calculated on the number of days such payment is delinquent. The rights provided in this Section 3.6 shall in no way limit any other remedies available to DIVERSA hereunder. 3.7 Sublicense Payments - Any sublicense agreement for Royalty Bearing Product shall contain royalty provisions that at a minimum provide for the payment of the same running royalty as would similarly be paid to DIVERSA by DOW in accord with Section 3.5. DOW will be responsible for any auditing for performance for similar terms and conditions by a sublicensee. 3.8 [****]. 3.9 [****]. 3.10 Exchange Rate and Payment - Royalty payments shall be paid to DIVERSA in US dollars in funds to be deposited in a US account as instructed in writing by DIVERSA in accordance with Section 3.6. If DOW receives payment on Royalty Bearing Products in currency other than US dollars, such payments shall be converted to US dollars on the last day of the calendar quarter using an exchange rate established by a leading New York bank, such as CitiBank, and published in The Wall Street Journal, but are not due for sixty (60) days from the last day of each calendar quarter for each Royalty Bearing Product. *Confidential Treatment Requested 10 If DOW receives payment in a form other than a currency, it shall be estimated at its fair market value and converted to U.S. dollars. 3.11 Quarterly Royalty Reports and Payments - Within sixty (60) days after the close of each calendar quarter, DOW shall submit a report on the Net Sales on Royalty Bearing Product for the Territory in sufficient detail to enable a calculation of the royalty due in accord with Article III and payment of the royalty (if any) due. The quarterly reports will also specify the calculations based on Sections 3.7 and 3.10, Royalty Bearing Product Classifications made, the royalty rate from Table 1 of the Royalty Schedule in Appendix F for a given Royalty Bearing Product, and identification of any Licensed Products that are returned as Improved Enzymes. 3.12 Books of Account - DOW shall maintain true and complete books of account containing an accurate record of all data necessary for the proper computation of royalty payments due from it or on behalf of any Affiliate. Such records shall be maintained for at least five (5) years after the date of the pertinent royalty payment. 3.13 Audit Right - DIVERSA shall have the right through a firm of independent public accountants to whom DOW has no reasonable objection, to examine the books of account of DOW at reasonable times within three (3) years after the end of the calendar year to which they relate (but not more than once in each calendar year) for the purpose of verifying the correctness of any report concerning payment of royalties under Article III. Such examination shall be made during normal business hours at the place of business of DOW. The information provided as a result of any such examination shall be maintained in confidence on the terms specified in Article V. The fees and expenses of such an audit shall be borne by DIVERSA, unless such audit discloses an underpayment of more than five percent (5%) of the amount due under this License. In such case, DOW shall bear the full cost of such audit. If any such audit shows any underpayment or overcharge, a correcting payment or credit against future royalties shall be made. Any payment required from DOW to DIVERSA from such audit shall be made within thirty (30) days of DIVERSA's receipt of the auditors' statement. DOW shall be subject to a penalty as if the payment were deemed late in accord with Section 3.6. 3.14 Withholding Tax Payments - If any taxes for DIVERSA's account, withholding or otherwise, are levied by any taxing authority in the Territory in connection with the receipt by DIVERSA of any amounts payable under Article III of this License according to any tax treaty or agreement between the United States and any country in the Territory, then DOW shall have the 11 right to pay such taxes to the local tax authorities and the payment to DIVERSA shall be the net amount due after reduction by the amount of such taxes, together with (a) evidence of payment of such taxes and a translation thereof into English, (b) indication of the amount of such tax paid, and (c) indication of the country in the TERRITORY and the authority to whom it was paid, and (d) other information required for DOW to comply with DOW's royalty reporting obligations under this License. ARTICLE IV PATENT RIGHTS ------------- 4.1 DIVERSA to Maintain Patent Rights - DIVERSA shall have the obligation and be responsible at its own cost and expense for prosecuting the patent applications in Patent Rights for maintaining and extending those Patent Rights for the term of this License. DIVERSA shall use good faith efforts to prosecute, issue and maintain all Patent Rights. DIVERSA shall supply DOW with a copy of all Patent Rights applications, their published texts, and issued patents. Where available a translation into English shall be provided. 4.2 Joint Patent Rights - In those instances where joint inventors (as defined by 35 U.S.C. et seq.) between DOW (or its Affiliate) and DIVERSA (or its Affiliate) result in a patentable invention, then DOW and DIVERSA shall mutually determine, using their good faith efforts: (a) whether DOW or DIVERSA shall file a patent application; (b) whether the patent application has joint ownership and joint claim structure; and (c) which Party should prosecute the patent application and pay the annuities. Thus DOW shall have joint ownership rights to such Joint Patent Rights in accord with Article II. If either Party desires exclusive rights to Joint Patent Rights, then such Party must notify the other and both Parties shall negotiate in good faith. Should such joint inventorship arise, then the Parties shall discuss in good faith how the costs are shared, which Party should file the Joint Patent Rights, where the Joint Patent Rights should be 12 filed, and, if term extension or restoration is available, who should extend the patent. DIVERSA shall use its reasonable good faith efforts to obtain the Joint Patent Rights and secure the broadest scope reasonably possible in view of the commercial intent of DOW. Each Party shall supply the other Party with a copy of all joint patent applications, their published texts, and issued patents included in the Joint Patent Rights under its control and their official actions and shall advise the other Party on the content of any responses. Where available a translation into English shall be provided. 4.3 Notice of Patent Lapse of Patent Rights and Joint Patent Rights -DIVERSA shall promptly advise DOW of the grant, lapse, nullification, revocation, surrender, or invalidation of any of the Patent Rights and Joint Patent Rights under its control at least in advance of any abandonment to enable DOW to assume that prosecution, at DOW's expense, should DOW not agree to such abandonment. If under these facts, DOW succeeds in issuing the Patent, then patent costs shall be credited against royalty payments. DOW shall promptly advise DIVERSA of the grant, lapse, nullification, revocation, surrender, or invalidation of any of the Joint Patent Rights under its control at least in advance of any abandonment to enable DIVERSA to assume that prosecution, at DIVERSA's expense, should DIVERSA not agree to such abandonment. 4.4 Validity, Non-Infringement - DIVERSA does not warrant that the manufacture, use and sale of Licensed Products do not fall within the scope of Third Party patents or the industrial property rights of a Third Party. However, to the best of DIVERSA's knowledge, information and belief, that as of the Royalty Bearing Product Classification, the [****] for the [****] does not fall within the scope of Third Party patents which are not owned or licensed by DIVERSA. 4.5 Disclaimer of Warranties as to Patent Rights - Other than as stated in Section 4.4, DIVERSA makes no representation that the inventions covered in any Patent Rights are patentable or that the Patent Rights are or will be valid or enforceable, nor does DIVERSA warrant or represent that the exercise of the rights licensed hereunder is free of infringement of patent rights of Third Parties. 4.6 Hold Harmless - [****] agrees to hold [****] harmless for patent infringement under [****] *Confidential Treatment Requested 13 which may be [****] under this License so long as this License is in effect and is not terminated. 4.7 Cooperation - DIVERSA and DOW shall use good faith efforts to cooperate with respect to any issues that concern the development of the Licensed Product under this License. DOW is aware that competition in the Territory is likely if no Patent Rights or Joint Patent Rights exist or are obtained, and DOW accepts this License with that knowledge. DIVERSA shall promptly inform DOW of any references of which DIVERSA becomes aware which might significantly impact the scope of the Patent Rights or Joint Patent Rights or dominate Patent Rights or Joint Patent Rights. 4.8 Patent Rights Issues - DOW [****] owes DIVERSA under Article III for Royalty Bearing Products made using Licensed Products [****] DIVERSA agrees that it [****] 4.9 Country list for Global Filing Issues - DIVERSA shall file all Patent Rights at least in the US and PCT [****] 4.10 DOW technology and patents - DOW may develop and patent technology in the Field or Areas of Interest during this License. DOW does not need to pay any royalty to DIVERSA on such technology or patents unless it is dominated by any DIVERSA patents. [****] ARTICLE V CONFIDENTIALITY --------------- 5.1 Efforts - Each Party shall use good faith efforts to retain in confidence and not disclose to any Third Party each other's Confidential Information *Confidential Treatment Requested 14 disclosed pursuant to the terms of this License. Such "good faith efforts" shall mean the same degree of care, but no less than a reasonable degree of care, as the receiving Party uses to protect its own Confidential Information of a like nature. All Confidential Information initially received in a non-written form shall be reduced to writing within thirty (30) days by the disclosing Party and such writing provided to the receiving Party. The receiving Party shall not be obligated if such writing is not received timely. DOW shall continue to use the same good faith efforts with respect to the DIVERSA Confidential Information already in its possession under the Agreement. Each Party may use Confidential Information of the other Party only to the extent required to accomplish the purposes of this License. 5.2 Notwithstanding the provisions of Section 5.1, if the receiving Party becomes legally compelled to disclose any of the disclosing Party's Confidential Information, the receiving Party shall promptly advise the disclosing Party of such required disclosure in order that the disclosing Party may seek a protective order confidential treatment or such other remedy as the disclosing Party may consider appropriate in the circumstances. The receiving Party shall disclose only that portion of the Confidential Information which it is legally required to disclose. Such a disclosure shall not release the receiving Party with respect to the Confidential Information so disclosed except to the extent of permitting the required disclosure. 5.3 Disclosure to Affiliates, Contractors - DOW may disclose Confidential Information to its Affiliates, sublicensees, consultants, contractors (parties under contract with DOW for the custom manufacturing or shipping of Royalty Bearing Product or obtention of registration in the Territory), as may be necessary to exercise the rights granted hereunder and to register and prepare for commercialization of Royalty Bearing Product, and to commercialize Royalty Bearing Product under this License, under conditions of confidentiality at least as stringent as those set out in Article V. 5.4 Survival of Confidentiality - Termination of this License for any reason shall not relieve the Parties of their obligations under Article V. The provisions of Article V shall survive termination of this License for ten (10) years. 15 ARTICLE VI ASSIGNMENT ---------- 6.1 DOW - DOW shall have the right to assign its rights in this License (or any part hereof) to an Affiliate: provided, however, that DOW shall continue to be responsible for the obligations of any such Affiliate. DOW may assign its rights hereunder in connection with the transfer or sale of all or substantially all of the business of DOW to which this License relates, whether by merger, sale of stock, sale of assets or otherwise. 6.2 DIVERSA - DIVERSA shall have the right to assign its rights in this License (or any part hereof) to an Affiliate: provided, however, that DIVERSA shall continue to be responsible, using its reasonable best efforts, for the obligations of any such Affiliate, including honoring the terms of this License. DIVERSA may assign its rights hereunder in connection with the transfer or sale of all or substantially all of the business of DIVERSA to which this License relates, whether by merger, sale of stock, sale of assets or otherwise. ARTICLE VII THIRD PARTY INFRINGEMENT CLAIMS ------------------------------- 7.1 Defense of Third Party Patent Claims - If a claim is brought by a Third Party that the manufacture, use or the sale of a Royalty Bearing Product in the Territory (regardless of use) infringes a patent of such Third Party, DOW will give prompt written notice to DIVERSA of such claim if it concerns Patent Rights or Joint Patent Rights. The Parties shall confer in accord with Section 7.2. 7.2 Mutual Decisions - From the Effective Date and using their good faith efforts, DIVERSA and DOW shall discuss any claim or suit brought by a Third Party for patent infringement and mutually evaluate whether that Third Party's patent is infringed by the manufacture, use or sale of Royalty Bearing Product by DOW or its Affiliates in the Territory. Specifically, DIVERSA and DOW shall mutually try to agree on: 16 (a) the strategy for such suit or claim, e.g. whether to negotiate a settlement, sue or withdraw selling Royalty Bearing Product from the country in the Territory in which infringement is claimed; (b) the basis to be determined for sharing the costs of litigation, damages awarded, and royalty to be paid to the Third Party. [****]. (c) which Party should conduct the defense or if both DIVERSA and DOW should jointly defend; and the consequences of such decisions, such as amendment to this License with regard to royalties due to DIVERSA. 7.3 Third Party License - The Parties shall use their good faith efforts (either individually or together) to [****]. As of the Royalty Bearing Product Classification, DIVERSA is not aware of the need for any such Third Party license. ARTICLE VIII PATENT ENFORCEMENT & LITIGATION ------------------------------- 8.1 Prosecution by DIVERSA - 8.1.1 DIVERSA, at its sole discretion, may take action on its own behalf and expense to institute any action or proceeding by reason of infringement of any of the Patent Rights related to a Royalty Bearing Product. If either Party learns of any infringement of Patent Rights by a Third Party, it shall promptly notify the other Party. DIVERSA shall have the first right, at its own expense, to prosecute all litigation against a Third Party infringer. DOW shall provide all reasonable cooperation, including [****] required to prosecute such litigation. DOW shall be consulted concerning the litigation. DIVERSA gets to [****]. 8.1.2 If the possible infringement concerns a Licensed Product for the Research Target that is [****] then DIVERSA shall [****] and removal from the market place of all infringing *Confidential Treatment Requested 17 Third Party products. DIVERSA will bear the costs and shall be entitled to any recovery obtained from such litigation, settlement or compromise thereof. If DIVERSA elects not to take action for such infringement, then DOW may do so at DOW's expense and shall be entitled to any recovery obtained from such litigation, settlement or comprise thereof and DOW retains all damages received. 8.1.3 If the infringement of the Licensed Product is in areas that are [****] then DIVERSA shall [****] 8.1.4 If a Patent Right is finally declared invalid or unenforceable in a judicial or administrative proceeding from which no appeal is or can be taken, then from and after that date with respect to that Patent Right in that country of the Territory, [****] If no other Patent Right is providing protection in that country of the Territory, then [****] 8.2 Neither Party Defends - If neither DIVERSA nor DOW will defend the Patent Rights in a particular country in the Territory, then for that Patent Rights in that country the royalty under Article III is [****] upon that decision. 8.3 Joint Patent Rights Suits - If the litigation concerns Joint Patent Rights, then both DIVERSA and DOW shall mutually work together and divide equally any recovery, but each shall pay their own costs. 8.4 Settlement - Any settlement of an infringement suit, whether brought by DOW or by DIVERSA, shall be subject to the consent of both Parties, which consent shall not be unreasonably withheld. 8.5 Cooperation - Each Party shall cooperate with the other Party to the extent reasonably requested in any legal action: (i) brought by a Third Party against one Party; or (ii) brought by a Third Party against both Parties; or (iii) taken against a Third Party by either Party regarding Patent Rights or Joint Patent Rights in the Field in the Territory, and each Party shall have the right to participate in any defense, compromise or settlement to the extent that, in its judgment, it may be prejudiced thereby. *Confidential Treatment Requested 18 In addition, DOW shall not settle any claim or suit in any manner that shall adversely affect any Patent Rights or Joint Patent Rights, require any payment by DIVERSA or reduce the royalty due to DIVERSA hereunder without the prior written consent of DIVERSA. ARTICLE IX EXPORT CONTROL AND GOVERNMENT REGULATIONS ----------------------------------------- 9.1 Compliance by DIVERSA - DIVERSA agrees to comply with all governmental regulations for shipping Improved Enzyme, whether in vivo or in vitro, to DOW or any regulation for safety of the culture. 9.2 Compliance by DOW - DOW agrees to comply with all necessary United States, European and other country's governmental regulations in the Territory with respect to export of Know-How and any Royalty Bearing Product. DOW agrees to not export or re-export any Know-How or Royalty Bearing Product received from DIVERSA or the direct products of such technology to any prohibited country listed in the U.S. Export Administration Regulations (15 C.F.R. (S)700 et seq.) unless properly authorized by the U.S. Government. 9.3 Clearances - DOW agrees to obtain all necessary clearances from any government in the Territory for export or re-export with respect to the Know-How or Royalty Bearing Product. ARTICLE X PRODUCT LIABILITY AND INDEMNIFICATION ------------------------------------- 10.1 Indemnity by DIVERSA - DIVERSA shall indemnify and hold DOW, its agents, directors, officers, employees and Affiliates harmless from and against any and all liabilities, claims, demands, damages, costs, expenses or money judgments (including reasonable attorneys' fees and expenses) incurred by or rendered against any of them for personal injury, sickness, disease or death or property damage which directly arise out of: (a) the intentional misconduct or negligence of DIVERSA; or 19 (b) the breach by DIVERSA of its representations, warranties or agreements given in this License; or (c) any activity carried out with Licensed Product by DIVERSA other than through DOW and its Affiliates under this License or other written agreements between the Parties; provided, however, that DOW shall give DIVERSA notice in writing as soon as practicable of any such claim or lawsuit and shall permit DIVERSA to undertake the defense thereof (including the right to settle the claim solely for monetary consideration)at DIVERSA's expense. However, (i) DOW will cooperate in such defense by providing access to witnesses and evidence available to it. DOW shall have the right to participate in any defense to the extent that in its judgment, DOW may be prejudiced thereby; and (ii) in any claim or suit in which DOW seeks indemnification by DIVERSA, DOW shall not settle, offer to settle or admit liability or damages in any such claim or suit without the prior written consent of DIVERSA. 10.2 Indemnity by DOW - DOW shall defend, indemnify and hold DIVERSA and its Affiliates, and their respective agents, directors, officers, and employees harmless from and against any and all losses, liabilities, claims, demands, damages, costs, expenses or money judgments (including reasonable attorneys' fees and expenses) incurred by or rendered against any of them for personal injury, sickness, disease or death or property damage which arise out of (i) the [****] of Royalty Bearing Product by DOW or its Affiliates, except for those instances provided in Section 10.1 for which DIVERSA is obligated to indemnify DOW; or (ii) the breach by DOW of any of its representations, warranties or covenants contained in this License or any agreement contemplated by the terms of this License; or (iii) the intentional misconduct or gross negligence of DOW; provided, however, that DIVERSA shall give DOW notice in writing in accord with Article XV as soon as practicable of any such claim or lawsuit and shall permit DOW to undertake the defense thereof at DOW's expense. However, (i) DIVERSA will cooperate in such defense by providing access to witnesses and evidence available to it. DIVERSA shall have the right to participate in any defense to the extent that in its judgment, DIVERSA may be prejudiced thereby; and (ii) In any claim or suit in which DIVERSA seeks indemnification by DOW, DIVERSA shall not settle, offer to settle or admit liability or damages in any such claim or suit without the prior written consent of DOW. *Confidential Treatment Requested 20 ARTICLE XI WARRANTY AND DISCLAIMER ----------------------- 11.1 Belief of Accuracy - DIVERSA represents that the [****] and any [****] transferred or provided to DOW hereunder are believed to be accurate and complete as of their then current status at DIVERSA at the date when the Licensed Product is added to Appendix C or D or as of the Effective Date and that DIVERSA's interpretations and conclusions drawn therefrom were made in good faith and in the exercise of DIVERSA's scientific judgment as of the dates of the documents contained therein, and that to the best of DIVERSA's knowledge, data subject to regulations is in compliance with such regulations. 11.2 Reliance - DOW represents that it will be solely relying on its own evaluation of the Licensed Product and the other Confidential Information transferred or provided to it hereunder and on its scientific expertise in using the same in its development and commercialization of Royalty Bearing Product. 11.3 Mutual Representations - DIVERSA and DOW each represents and warrants as follows: 11.3.1 Organization - It is a corporation duly organized, validly existing and is in good standing under the laws of the jurisdiction of its incorporation, is qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the performance of its obligations hereunder requires such qualification and has all requisite power and authority, corporate or otherwise, to conduct its business as now being conducted, to own, lease and operate its properties and to execute, deliver and perform this License. 11.3.2 Authorization - The execution, delivery and performance by it of this License have been duly authorized by all necessary corporate action and do not and will not: (a) require any consent or approval of its stockholders or (b) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to it or any provision of its charter documents. 11.3.3 Binding Agreement - This Agreement is a legal, valid and binding obligation of it, enforceable against it in accordance with its terms and conditions. *Confidential Treatment Requested 21 11.3.4 Warranty Disclaimer - EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS License, NEITHER Party MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO ANY Confidential Information, Patent Rights, Know-How, Improved Enzymes, Licensed Products, OR OTHER TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER SUBJECT MATTER OF THIS License AND HEREBY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON- INFRINGEMENT, OR VALIDITY OF TECHNOLOGY OR PATENT CLAIMS, ISSUED OR PENDING, WITH RESPECT TO ANY AND ALL OF THE FOREGOING. 11.3.5 Limited Liability - EXCEPT AS EXPRESSLY PROVIDED HEREIN, NEITHER DIVERSA NOR DOW WILL BE LIABLE TO THE OTHER PARTY WITH RESPECT TO ANY SUBJECT MATTER OF THIS License UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR (i) ANY SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOST PROFITS OR (ii) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES. ARTICLE XII TERM AND TERMINATION -------------------- 12.1 Term - Unless terminated under the provisions of this Article XII, this License shall continue in full force and effect until the expiration of the last to expire Patent Rights and Joint Patent Rights listed on Appendices A and B, subject to the survivorship clause Section 12.7. 12.2 [****] *Confidential Treatment Requested 22 12.3 Termination by DOW - DOW may surrender and terminate this License on three (3) months written notice to DIVERSA, either for specific Royalty Bearing Products or this License as a whole. DOW will disclose to DIVERSA its reasons for any such termination. It is understood that upon evaluation for commercialization some Royalty Bearing Products may be re-designated as Licensed Products and also that some Licensed Products may be re- designated as Improved Enzymes. 12.4 Termination by DIVERSA - DIVERSA shall have the further right to terminate this License immediately, but separately on each Royalty Bearing Product, on written notice to DOW if: (a) DOW shall cease to carry on business or a receiver shall be appointed to DOW's assets; or (b) DOW fails to meet any of its payments in accord with Article III; however, DOW shall be entitled to a period of sixty (60) days from the delivery of a notice of failure to pay in which to remedy or to undertake to remedy the same; or (c) DOW breaches any material provision (e.g., Sections 2.2 and 2.4) of this License and has not cured such breach within thirty (30) days after written notice thereof by DIVERSA. 12.5 On Termination - DOW shall, upon termination of this License by DIVERSA under Section 12.4, termination by DOW under Section 12.3, or termination by either Party under Section 12.8: (a) pay to DIVERSA all payments and royalties due or accrued at the termination date within thirty (30) days after termination; and (b) make no further use of any kind of any and all Know-How and Confidential Information of DIVERSA disclosed hereunder by DIVERSA, except to the extent such information has become public knowledge other than through fault of DOW, and make no further use of the surviving Patent Rights. 12.6 Effect of Termination. (a) Upon termination of this License, all rights to the DIVERSA Intellectual Property as defined in the Agreement shall revert to DIVERSA; and (b) Within thirty (30) days following the termination of this License, but separately on each Royalty Bearing Product, each party shall return to the other Party, or destroy, upon the written request of the other Party, any and all Confidential Information of the other Party in its possession; and (c) Expiration or termination of this License shall not relieve the Parties of any obligation accruing prior to such expiration or termination. 23 12.7 Survival of [****] - On termination of this License: the obligations of confidentiality set forth in Article V shall survive for the time stated therein; Export Control compliance set forth in Article IX shall survive; and the indemnification obligations set forth in Article X and third party infringement claims set forth in Article VII shall also survive as to all claims or actions arising from events which occurred before termination. Article XIV shall survive termination of this License so long as any disputes arising prior to such termination exist. 12.8 Bankruptcy - If either Party (the "Insolvent Party") files for protection under bankruptcy laws, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its property, files a voluntary petition under any bankruptcy or insolvency act or has any such petition filed against it which is not discharged within 60 days of the filing thereof, then the other Party may, at its sole election upon notice to the Insolvent Party, terminate this License by written notice under Section 15.1. All rights and licenses granted under or pursuant to this License shall be deemed to be, for purposes of Section 365(n) of the US Bankruptcy Code, licenses or rights to "intellectual property" as defined under Section 101(52) of the US Bankruptcy Code. The Parties agree that each Party, as a licensee of such rights under this License, shall retain and may fully exercise all of its rights and elections under the US Bankruptcy Code, subject to performance by the licensee of its preexisting obligations under this License. ARTICLE XIII FORCE MAJEURE ------------- 13.1 Event of Force Majeure - In the event that performance under this License, or any obligation hereunder, is hindered, delayed or prevented by reason of acts of God, strikes, lockouts, labor troubles, intervention of any governmental authority, fire, riots, insurrections, invasions, war or other reason of similar nature beyond the reasonable control of the Party and are without its fault or negligence, then performance of that act shall be excused for the period of the delay and the period for the performance of that act shall be extended for an equivalent period. 13.2 Notification. Upon occurrence of an event of force majeure, the affected Party shall promptly notify the other Party in writing, setting forth the nature of the occurrence, its expected duration and how that Party's performance is affected. *Confidential Treatment Requested 24 The affected Party shall resume the performance of its obligations as soon as practicable after the force majeure event ceases. ARTICLE XIV DISPUTE RESOLUTION ------------------ 14.1 Choice of Law - This License shall be governed by the laws of the State of Delaware, excepting its conflict of laws principles, in all respects of validity, construction and performance, except that all questions concerning the construction, validity, coverage or infringement of Patent Rights or Joint Patent Rights shall be decided in accordance with the patent law of the country where the patent was granted. 14.2 Disputes - Both Parties shall make good faith efforts to resolve any questions concerning construction and performance under this License, excluding Patent Rights and antitrust issues, by: 14.2.1 Notice, contact and negotiation, all proceedings and documents in English, between the Parties listed under Article 15.1 within one hundred twenty (120) days from the date of the notice by negotiation either by telephone or by meeting in Denver, CO; and 14.2.2 If unsuccessful under Article 14.2.1, then senior executive management with settlement authority and counsel of DOW and DIVERSA shall meet at a mutually agreeable location within sixty (60) days from a date of notice that Article 14.2.1 failed to resolve the issues. Counsel shall present the legal and factual arguments to such executives in English, with supporting evidence if necessary, and resolution by these executives is expected within ten (10) days, which may be reduced to writing in English as an amendment to this License; and 14.2.3 If such executives have not met or resolved the issues under Article 14.2.2, then within seventy five (75) days from the date of the notice under Article 14.2.1, the Parties shall submit the issues to mediation in Chicago, IL, in English, in accordance with the Rules of the American Arbitration Association ("AAA"), which may be modified by the Parties, and judgment shall not be binding. The Parties agree that the following procedures shall be adhered to even though they may, in part, not be in full conformance with said Rules: (a) Three Mediators shall be selected from a list of at least 20 arbitrators selected by the AAA composed of counsel with 25 chemistry, molecular biology or pharmaceutical expertise who are practicing or retired partners in law firms or in-house corporate counsel not affiliated with the Parties with at least 15 years of experience in law and knowledge of the pertinent laws of any country relevant to the dispute. The mediation proceedings and reports shall be in English. The time from the beginning of submission for mediation and conclusion of any oral or written proceedings shall not exceed six (6) months; and (b) Limited discovery to only that which each Party has a substantial, demonstrable need, and shall be conducted in the most expeditious and cost-effective manner. The Mediators shall resolve any issues with regard to the discovery. Decision by the Mediators shall be given in writing within thirty (30) days from the end of oral proceedings; and (c) The decision by the Mediators is binding, but should either Party then need to have a Court of competent jurisdiction for the Parties enforce the decision, either Party may introduce into court the decision reached by Mediation with its supporting evidence. ARTICLE XV NOTICES ------- 15.1 Official -Any notice, request or communication specifically provided for or permitted to be given under this License must be in writing and may be delivered by hand delivery, overnight courier service, or electronic transmission such as facsimile, and shall be deemed effective as of the time of actual delivery thereof to the addressee. For purposes of notice the addresses of the Parties shall be as follows: If to DIVERSA: Diversa Corporation 10665 Sorrento Valley Road San Diego, California 92121 Attention: Jay M. Short, PhD Chief Executive Officer 26 Telephone: 619-623-5135 Facsimile: 619-623-5180 With a copy to: Diversa Corporation 10665 Sorrento Valley Road San Diego, California 92121 Attention: Carolyn Erickson Director, Intellectual Property Telephone: 619-623-5104 Facsimile: 619-453-9133 If to DOW: The Dow Chemical Company Patent Department 1790 Building, Washington Street Midland, Michigan 48674 Attention: Karen L. Kimble Senior Counsel [****] *Confidential Treatment Requested 27 15.2 Development Issues - For purposes of commercial development reporting, the addresses of the Parties shall be as follows: If to DIVERSA: Diversa Corporation 10665 Sorrento Valley Road San Diego, California 92121 Attention: Jay M. Short, PhD Chief Executive Officer Telephone: 619-623-5135 Facsimile: 619-623-5180 If to DOW: The Dow Chemical Company 1707 Building, Washington Street Midland, Michigan 48674 Attention: William Dowd Biomaterials Platform Director [****] ARTICLE XVI MISCELLANEOUS PROVISIONS ------------------------ 16.1 Amendments - This License may be amended only in writing executed by both Parties. 16.2 Entirety of Agreement - This License together with the Agreement sets forth the entire agreement and understanding between the Parties hereto with respect to the commercialization of Royalty Bearing Products in the Territory. 16.3 Severability - If any term or provision under this License is deemed invalid under the laws of a particular country or jurisdiction, the invalidity shall not invalidate *Confidential Treatment Requested 28 the whole License but it shall be construed as if not containing that particular term or provision and the rights and obligations of the Parties shall be construed and enforced accordingly. The Parties shall negotiate in good faith a substitute provision in compliance with the law to as nearly as possible retain the Parties intent in legally valid language. 16.4 Waivers, Cumulative Remedies - A waiver by either Party of any term or condition of this License in any one instance shall not be deemed construed to be a waiver of such term or condition for any similar instance in the future or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this License shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either Party. 16.5 Headings - Headings in this License are included herein for ease of reference and shall not affect the meaning of the provisions of this License, nor shall they have any other legal effect. 16.6 Other Documents - Each Party agrees to execute such additional papers or documents in customary legal form and to make such governmental filings or applications as may be necessary or desirable to effect the purposes of this License and carry out its provisions. 16.7 Publicity - Neither DOW nor DIVERSA shall make the financial terms of this License public, except as required by law or by mutual consent. Either Party may make such disclosure of the existence of this License to its attorneys, advisors, investors, prospective investors, leaders and other financing sources, under circumstances that reasonably ensure confidentiality. In the event that a filing of a copy of this License with the US Securities and Exchange Commission is required, then DIVERSA shall seek confidential treatment of information considered confidential by DOW and shall redact the financial and as much other information as possible. Any press release or publicity of this License shall be reviewed and approved by both Parties prior to any release. It is expected that a Q&A outline for use in responding to inquires about this License shall be prepared and used by both Parties. Thereafter both Parties may disclose the information contained in such press release and Q&A outline without the need for further approval. In no event shall the financial terms of this License be publicly disclosed, except as note in the first paragraph of Section 16.7. 29 In addition, DIVERSA may make public statements regarding the Licensed Products by announcing in general terms that DOW has exercised its license to them. 16.8 Interpretation - DOW and DIVERSA acknowledge and agree that: (i) each Party and its counsel reviewed and negotiated the terms and provisions of this License and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting Party shall not be employed in the interpretation of this License; and (iii) the terms and provisions of the License shall be construed fairly as to all Parties hereto and not in favor of or against any Party, regardless of which Party was generally responsible for the preparation of this License. 16.9 Counterparts - This License may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original. 16.10 No Agency or Partnership - Nothing contained in this License shall give either Party the right to bind the other Party, or be deemed to constitute either Party as an agent for the other Party or as a partner with the other Party or any Third Party. 30 IN WITNESS WHEREOF, the Parties have caused this License to be executed in duplicate originals as of the last signature date below, by their duly authorized representatives. This License is intended to be signed concurrently with the Agreement and shall not be effective until the Agreement has also been executed by both Parties. Such License may be subject to management and/or Board approval by each Party. Upon signature such Board approval is indicated to have been obtained. DIVERSA CORPORATION THE DOW CHEMICAL COMPANY By ________________________ By_________________________________ Name Jay M. Short, PhD Name Fernand Kaufmann Title Chief Executive Officer Title Vice President New Businesses and Strategic Development Date__________________________ Date______________________________ 31 Appendix A-3 ------------ Diversa Patent Rights [****] [****] *Confidential Treatment Requested Appendix E Royalty Bearing Product Classification Product Classifications: The Royalty Bearing Product shall be classified according to the following definitions: . [****] . [****] . [****] *Confidential Treatment Requested Appendix F ---------- Royalty Schedule [****] [****] [****] [****] [****] [****] *Confidential Treatment Requested [****] [****] [****] [****] OPTION AGREEMENT THIS option agreement (hereinafter "OPTION") is made between THE DOW CHEMICAL COMPANY (hereinafter "DOW" or a "Party"), a corporation duly formed and existing under the laws of the State of Delaware, having a place of business at 2030 Dow Center, Midland, Michigan 48674, United States of America, and Recombinant BioCatalysis Inc. (hereinafter "RBI" or a "Party"), a corporation duly formed and existing under the laws of Delaware, having a place of business at 10665 Sorrento Valley Road, San Diego, CA 92121; WITNESSETH: WHEREAS, DOW possess an enzyme for use in a recycle process or with a reaction coproduct produced by DOW; and WHEREAS, DOW has proprietary rights in this enzyme and desires that the enzyme be improved; and WHEREAS, RBI desires to undertake the further evaluation of this enzyme under the terms of this OPTION and, if RBI is able to improve on this enzyme, RBI is willing to grant DOW an exclusive or non-exclusive license to such improvements; WHEREAS, DOW desires to obtain an exclusive or non-exclusive, global license to this improved enzyme; and WHEREAS, RBI desires to supply DOW with such improved enzyme. NOW, THEREFORE, DOW and RBI, in consideration of the mutual covenants contained herein, agree as follows: ARTICLE 1 - DEFINITIONS When used in this OPTION, the following terms shall have the meanings set out below, unless the context requires otherwise. The singular shall be interpreted as including the plural and vice versa, unless the context clearly indicates otherwise. 1.1 "AFFILIATE" means a corporation or any other entity that at any time during the term of this OPTION directly or indirectly through one or more intermediaries is CONTROLLED by the designated Party, but only for so long as the relationship exists. A corporation or other entity shall no longer be an AFFILIATE when through loss, divestment, dilution or other reduction of a Party's ownership, the Party loses CONTROL of such corporation or other entity. 1.2 "CANDIDATE ENZYMES" means those ENZYMES which meet the criteria of exhibiting initial hydrolysis rates (Vmax) significantly higher than the wild type (wt) recombinant ENZYME [*****]. *Confidential Treatment Requested [****] 1.3 "CDA" means a Confidential Disclosure Agreement between the Parties effective August 27, 1996, a copy attached hereto as Appendix E. 1.4 "CONFIDENTIAL INFORMATION" means any proprietary information of a Party that is submitted to the other Party hereunder, including, but not limited to PATENTS, JOINT PATENTS, ENZYME, sample of ENZYME, TECHNOLOGY, the FIELD, financial terms of this OPTION, business information of RBI or DOW and business development plans for an ENZYME. 1.5 "CONTROL" or "CONTROLLED" shall mean, in the case of a corporation, ownership or control, directly or indirectly, of more than fifty percent (50%) of the shares of stock entitled to vote for the election of directors and, in the case of an entity other than a corporation, ownership or control, directly or indirectly, of more than 50% of the assets or the ability in the case of either a corporate or non-corporate entity to direct the management and affairs of such entity. 1.6 "EFFECTIVE DATE" means June 30,1997. 1.7 "ENZYME" means any enzyme supplied by DOW to RBI for use under this OPTION in the FIELD, including TECHNOLOGY such as its amino acid or DNA sequence, or expression system; and any improvements to such enzyme (e.g., where the productivity of the enzyme is increased and/or where the product inhibition is lowered) when done by RBI. 1.8 "EVOLVED ENZYMES" means those ENZYMES which meet the criteria of exhibiting initial hydrolysis rates at least 6-fold that of the wild type (wt) recombinant ENZYME for a multiply halogenated organic molecule in aqueous buffer in the presence of the product as an inhibitor. Kinetically, an EVOLVED ENZYME is characterized as having a Vmax (at 100 mM of product) > - 6.0 times Vmax (recombinant ENZYME at 0 mM of product). 1.9 "FIELD" means the use of ENZYME in a recycle process or with a reaction coproduct produced by DOW where the ENZYME [*****]. 1.10 "IMPROVED ENZYMES" means those ENZYMES which meet the criteria of [*****]. 1.11 "LETTER OF INTENT" means the agreement signed between DOW and RBI, effective May 27, 1997, a copy attached hereto for reference as Appendix A. *Confidential Treatment Requested 1.12 "LICENSE" means a license agreement contemplated under Section 5.2 to be granted by RBI to DOW if, by no later than the end of the OPTION TERM, DOW notifies RBI in writing of its desire to exercise its rights to obtain a license. 1.13 "JOINT PATENTS" means those PATENTS in the FIELD which are jointly owned by and have claims present by employees of both DOW and RBI during the term of this OPTION and, if they exist, shall be listed in Appendix B, which shall be reviewed and updated [*****], to be attached hereto and made a part hereof. 1.14 "OPTION TERM" means until December 1, 1998 for an exclusive LICENSE and until January 31, 1999 for a non-exclusive LICENSE, unless extended in writing by the Parties. 1.15 "PATENTS" means all patent applications and patents to which RBI has rights which claim improvements to the ENZYME made by RBI (or other inventions, including but not limited to, apparatus, made by RBI in the course of performing work under the RESEARCH PLAN) during this OPTION TERM, together with any continuations, continuations-in-part, divisions, reissues, registrations, confirmations, patents-of -addition, and extensions of the foregoing, which claims cover the preparation, use or per se ENZYME in the TERRITORY, which shall be listed in Appendix C (such patents to be mutually agreed upon to be listed if regarding other inventions), to be attached hereto and made a part hereof, and reviewed and updated annually as of the EFFECTIVE DATE. 1.16 "PRODUCTIVITY ENZYMES" means those ENZYMES which meet the criteria of exhibiting at least [*****]. 1.17 "RESEARCH PLAN" means a mutually agreed upon plan for RBI to perform research activities to improve ENZYME for commercial use to achieve TARGET ACTIVITY in the FIELD during the OPTION TERM in accord with Appendix D, attached hereto and made a part hereof. 1.18 "SIGNATURE DATE" means the date of the last signature of the Parties to this OPTION. 1.19 "TARGET ACTIVITY" refers to the Milestone [*****] target for the [*****]. It is determined at the [*****] and projected from the Milestone 2 data to be sufficient for a [*****]. It is defined in terms of [*****]. *Confidential Treatment Requested 1.20 "TECHNOLOGY" means data for ENZYME, including for example physical properties, DNA sequence, Vmax and Ki and process to make them 1.21 "TERRITORY" means the world. ARTICLE 2 - GRANT OF OPTION 2.1 Grant of OPTION - RBI hereby grants to DOW, and DOW hereby accepts either: (1) an exclusive right during the OPTION TERM to acquire an exclusive LICENSE to make, have made, use, sell, import and have sold ENZYME(S) for the FIELD in the TERRITORY under the PATENTS, JOINT PATENTS and TECHNOLOGY and subject to Section 5.3; or (2) a non-exclusive right during the OPTION TERM to acquire a nonexclusive LICENSE to make, have made, use, sell, import and have sold ENZYME(S) for the FIELD in the TERRITORY under the PATENTS, JOINT PATENTS and TECHNOLOGY and subject to Section 5.3. Whether (1) or (2) above is selected is solely DOW's choice during the OPTION TERM. 2.2 Reservation - DOW reserves for itself and its AFFILIATES the right to do internal research on ENZYMES (excluding any improvements to the ENZYMES made by RBI) within the FIELD during the OPTION TERM. 2.3 Expansion of FIELD - In the event that DOW wishes to expand the FIELD at the time of exercise of the LICENSE, the Parties agree to discuss in good faith the proposed expansion of the FIELD and the terms therefore. 2.4 Exercise of OPTION for LICENSE - DOW may exercise its rights under Section 2.1 by providing written notice to RBI of its election under Section 2.1 (1) or (2) on or before the last day of the OPTION TERM. ARTICLE 3 - OPTION PAYMENTS 3.1 Initial Payment for OPTION - Within fifteen (15) business days from the EFFECTIVE DATE, DOW shall pay RBI [*****]. 3.2 Additional Payments during OPTION TERM - The further payments to RBI by DOW are tied to the achievement of milestone technical events in accord with Article 4. DOW shall be invoiced one (1) month prior to any payment due to RBI for each of these milestones. The payments for each milestone are: 3.2.1 Milestone 1 - [*****] - [*****], if RBI is technically successful as defined in Article 4; plus [*****], if RBI accomplishes this Milestone 1 in less than [*****] from the date of receipt by RBI of [*****] from DOW; *Confidential Treatment Requested 3.2.2 Milestone 2 - [*****] - [*****], payable within [*****] of receipt by DOW of the ENZYME [*****] by DOW that RBI has provided DOW with [*****] (DOW shall use its reasonable good faith efforts to conclude such evaluation within [*****] the CANDIDATE [*****]); plus [*****], if RBI provides DOW with [*****] CANDIDATE ENZYMES and/or [*****] ENZYME [*****]; and 3.2.3 Milestone 3 - [*****] (A) [*****] payable within [*****] of receipt by DOW of the ENZYME [*****] by DOW that RBI has provided DOW [*****]; plus (B) [*****] payable within [*****] of receipt by DOW of the ENZYME [*****] by DOW that RBI has provided DOW [*****] ENZYME (for both (A) and (B) of this Section 3.2.3 DOW shall use its reasonable good faith efforts to conclude such evaluations [*****] of the ENZYMES), plus a bonus of - (i) [*****] if either of the criteria for (B) [*****] are met within [*****] from the EFFECTIVE DATE, plus (ii) [*****] if the [*****] exceeds [*****], plus (iii) [*****] if the [*****] exceeds [*****]. It is agreed that if any of these milestones categories in Section 3.2 is surpassed by an ENZYME providing performance at a higher category that the payments for those surpassed categories will still be made. The [*****]. These payments are tied to performance under the RESEARCH PLAN described in Article 4. 3.3 Payments to RBI - All payments under this Article 3 are to be made to: Recombinant BioCatalysis, Inc. and sent by wire transfer to: *Confidential Treatment Requested Account Name: [*****]. ARTICLE 4 - ENZYME USE AND RESEARCH PLAN 4.1 RBI Obligations - RBI shall maintain sole physical control of the ENZYME which shall be treated as CONFIDENTIAL INFORMATION under the terms of Article 7 of this OPTION. RBI shall use any information provided to it by DOW solely to improve ENZYME in the FIELD. RBI shall provide a written report with a summary of the data to DOW on a quarterly basis or at a milestone achievement in accord with Section 4.3 in a quarter, whichever occurs first. (If clarification of a report is requested by DOW to more fully understand such report, then a meeting of respective personnel is permitted.) A final written report shall be provided of the results obtained by RBI on its improvement efforts for the ENZYME, including its sequence, within thirty (30) days at the end of the OPTION TERM or within thirty (30) days upon termination. 4.2 Development Efforts - During the OPTION TERM, RBI shall perform research activities to improve the ENZYME to achieve TARGET ACTIVITY in the FIELD in a diligent manner as specified in Article 3 and described in detail in a RESEARCH PLAN. Such improvement can be met by any manner acceptable to the Parties. The ENZYME is to be improved for commercial use in a manner agreed upon between the Parties. The RESEARCH PLAN may be amended by mutual, written consent of the Parties. However, either Party may terminate the research and this OPTION at any technical milestone specified in Section 4.3 for any reason; but if RBI terminates, then DOW has thirty (30) days to notify RBI whether DOW desires either an exclusive or nonexclusive LICENSE in accord with Section 2.1 for the ENZYME until that termination. If DOW terminates the research and this OPTION and any of the milestones beyond Milestone 1 have been achieved and completed in accord with each milestone requirement in accordance with Section 4.3, then RBI shall have the rights described in Section 5.2.3. 4.3 Milestones - 4.3.1 Milestone 1 DOW completes preliminary [*****] and defines general parameters for the ENZYME, [*****] RBI develops of a suitable [*****]. 4.3.2 Milestone 2 *Confidential Treatment Requested RBI [*****] ENZYME by [*****] to obtain CANDIDATE ENZYME, transfers to DOW the [*****] CANDIDATE ENZYMES and [*****] of each CANDIDATE ENZYME. DOW confirms [*****] CANDIDATE ENZYMES and evaluates their performance attributes [*****]. (DOW and RBI scientists shall discuss the relationship between [*****] in performance of the [*****] CANDIDATE ENZYME and improvement in productivity of the CANDIDATE ENZYME as a supported catalyst. After such discussions, the Parties shall mutually agree on [*****] i.e. TARGET ACTIVITY, prior to starting Milestone 3.) 4.3.3 Milestone 3 (A) RBI increases productivity as stated in Article 3 for [*****] ENZYMES and transfers [*****] of all such ENZYMES to DOW together with each ENZYME's [*****]. DOW confirms [*****] ENZYMES and evaluates their performance attributes [*****]. If [*****] ENZYME [*****], then part (B) below shall occur. (B) RBI [*****]as stated in Article 3 for [*****] ENZYMES and transfers [*****] of [*****] ENZYMES to DOW together with each ENZYME's [*****]. DOW confirms [*****] ENZYMES and evaluates their performance attributes [*****]. 4.4 RESEARCH PLAN and Payments are tied - The events under Section 4.3 for performance under the RESEARCH PLAN are tied to payments under Article 3. 4.5 DOW Obligations - DOW shall provide the assay mentioned in Section 4.3.1, Milestone 1, analytical information or know-how, including evaluation of the modified ENZYME at DOW facilities, the identity of the gene for the host interaction desired, and the DNA sequence of the gene. All information supplied by DOW to RBI shall be treated as confidential under Article 7. ARTICLE 5 - LICENSE TERMS The following terms are contemplated by the Parties to be included in a LICENSE if, by no later than the end of the OPTION TERM, DOW exercises its right to such LICENSE. *Confidential Treatment Requested 5.1 Exercise Payment - Upon exercise of the right to a LICENSE, a payment shall be due to RIBI depending upon whether DOW elects rights under Section 2.1 (1) or (2) as follows. If DOW elects Section 2.1 (1) for an exclusive LICENSE, then a one time fee of Two Hundred Thousand Dollars (US$200,000) Dollars is payable within thirty (30) days from exercise of the exclusive LICENSE but no sooner than December 1, 1998. If DOW elects Section 2.1(2) for a non-exclusive LICENSE, then terms shall be negotiated using reasonable good faith efforts by the Parties by January 31, 1999. 5.2 Exercise for LICENSE - The OPTION TERM shall be for the term of the Research Plan, including any mutually agreed upon extensions. At present both Parties agree that the OPTION TERM for an exclusive LICENSE shall run from the EFFECTIVE DATE until December 1, 1998 and for a nonexclusive LICENSE until January 31, 1999. In addition, DOW has eighteen (18) months from its receipt by DOW to evaluate the TECHNOLOGY and improved ENZYME provided by RBI before execution of the LICENSE. 5.2.1 By the end of the OPTION TERM, DOW, at its sole discretion, may negotiate an exclusive LICENSE to the ENZYME and gene coding for the ENZYME in the FIELD from RBI, or purchase the ENZYME or immobilized ENZYME from RBI or an alternate supplier in accord with Section 5.3. Upon execution of the LICENSE, manufacturing licenses and terms of sale for any ENZYME shall be on commercially reasonable terms, mutually agreed upon, and shall include, without limitation, royalties and minimum payments (as negotiated by the Parties in good faith taking into account the value created by the respective contributions of the Parties, e.g., monetary, scientific and capital contributions). If DOW exercises the OPTION for a nonexclusive LICENSE, RBI shall also have the non-exclusive right to make, have made, use, sell, import, and have sold ENZYME for the FIELD in the TERRITORY under the PATENTS, JOINT PATENTS and TECHNOLOGY. 5.2.2 In the event that the ENZYME is improved and DOW has had eighteen (18) months from the time the TECHNOLOGY and improved ENZYME was delivered to DOW in accord with Milestone 3(B) of Section 3.2.3 to test it, and DOW then provides written notice to RBI in accord with Section 12.1 of DOW's lack of interest in commercial use of the improved ENZYME provided by RBI, then, RBI shall have the rights described in Section 5.2.3. 5.2.3 RBI Rights - Under the circumstances described in Sections 4.2 and 5.2.2 and in the event that RBI terminates the OPTION in accord with Section 10.2 upon material breach by DOW, DOW shall have no LICENSE (but shall have the right for internal research use of ENZYME, TECHNOLOGY, PATENTS and JOINT PATENTS) and RBI shall have all commercial rights to make, have made, use, sell, import and have sold ENZYME for the FIELD in the TERRITORY under the PATENTS, JOINT PATENTS and TECHNOLOGY by notifying DOW in writing in accord with Section 12.1 and making the following payments (at RBI's sole option): (A) RBI shall pay DOW as a [****] fee for DOW's total investment in the ENZYME (which fee shall be computed from the time of such request by RBI, but in no event would be less than [****] Such payment would be due to DOW within thirty (30) days from invoice by DOW; or (B) RBI agrees to pay to DOW reasonable royalty and payments for all income received from RBI's commercialization or sale of the TECHNOLOGY or PATENTS using the ENZYME. Such payments shall be negotiated as an agreement by the Parties using their good faith efforts. RBI must elect between (A) and (B) within one hundred and eighty (180) days from DOW's written notification of lack of interest and convey their election in writing to DOW in accord with Section 12.1. Any payments to DOW under this Section 5.2.3 shall be made to. The Dow Chemical Company, and be sent by wire transfer to: [*****]. 5.3 Supply of ENZYME - In the event that the ENZYME is improved and is of further interest to DOW and DOW exercises its rights to a LICENSE under Section 2.1, then DOW shall have [****] from the time the improved ENZYME is delivered in a practicable form to DOW in accord with Milestone 3(B) under Section 4.3.3 (B) to provide written notice under Section 12.1 to RBI of DOW's intent to either: (A) have RBI supply the improved ENZYME commercially to DOW. If this course is mutually agreed upon then a commercial agreement shall be negotiated using reasonable good faith efforts by the Parties; or (B) inform RBI that DOW will use an alternate supplier (not RBI) for the improved ENZYME. RBI agrees to provide to a qualified third party under appropriate, reasonable licensing terms for the industry, the information and rights required to supply the ENZYME to DOW; or (C) If DOW does not desire any commercial supply of the improved ENZYME, then refer to Section 5.2.2. 5.4 DOW Evaluation - DOW has the right, during the OPTION TERM and the [*****] evaluation period, for its purposes of evaluation only, to produce sufficient ENZYME for its needs. *Confidential Treatment Requested 5.5 Other terms - Other customary and negotiated terms are expected to be included in the LICENSE and are permitted. ARTICLE 6 - PATENT RIGHTS 6.1 RBI to Maintain PATENTS - Any improvements to the ENZYME made by RBI during this OPTION TERM shall belong to RBI, if within the claimed scope of any PATENT. DOW shall be informed of all such PATENTS and be provided with a copy thereof, and provided with their publication numbers or patent numbers and each country where filing was done. If requested by DOW, a completed file wrapper for a given application or patent shall be provided to DOW. An annual status of the concerned PATENTS shall be provided to DOW until all have issued or are abandoned. If DOW exercises its rights for a LICENSE, then rights to any PATENTS shall be granted in the LICENSE for the FIELD for the TERRITORY. If RBI obtains rights under Section 5.2.3, then such rights shall include rights to any PATENTS for the FIELD for the TERRITORY. 6.2 Notice of Patent Lapse - RBI shall advise DOW of the grant, lapse, nullification, revocation, surrender, or invalidation of any of the PATENTS at the annual update of the PATENT listing for Appendix C. 6.3 JOINT PATENTS - Although unlikely to occur, in those instances where joint inventions between DOW and RBI result in a patentable invention, then DOW and RBI shall mutually determine, using their good faith efforts, whether the patent application has joint ownership and joint claim structure, and which Party should prosecute the patent application and pay the annuities. Both Parties shall elect any countries in which filing shall be done. If DOW exercises its rights for a LICENSE, then rights to any JOINT PATENTS shall be granted in the LICENSE for the FIELD for the TERRITORY. If RBI obtains rights under Section 5.2.3, then such rights shall include rights to JOINT PATENTS for the FIELD for the TERRITORY. 6.4 TECHNOLOGY - TECHNOLOGY developed during the OPTION TERM or known as of the LETTER OF INTENT by either Party shall remain that Party's property. Any use by one Party of the other's TECHNOLOGY shall be under the confidentiality provisions of Article 7. 6.5 DOW Patents - No rights are granted by DOW to RBI to use any DOW intellectual property rights including patents (such as sole DOW patents), trade secrets, confidential information and computer programs, except in providing the contemplated services under the RESEARCH PLAN. If Section 5.2.3 pertains, then rights to commercial use of the JOINT PATENTS and ENZYME are granted by DOW to RBI. ARTICLE 7 - CONFIDENTIALITY 7.1 Each Party shall use good faith efforts to retain in confidence and not disclose to any third party each other's CONFIDENTIAL INFORMATION. Such "good faith efforts" shall mean the same degree of care, but no less than a reasonable degree of care, as the receiving Party uses to protect its own CONFIDENTIAL INFORMATION of a like nature. This obligation shall be effective from August 29, 1996 upon the SIGNATURE DATE and shall cease five (5) years from termination of this OPTION. This OPTION shall supersede the CDA upon the SIGNATURE DATE. 7.2 Excepted from the obligation of confidentiality under Section 7.1 is that information which: (a) is available, or becomes available, to the general public without fault of the receiving Party; or (b) is obtained by the receiving Party without an obligation of confidence from a third party (other than a governmental agency) who is rightfully in possession of such information and is under no obligation of confidentiality to the disclosing Party concerning such information; or (c) is released from confidentiality in writing by the disclosing Party; or (d) is permitted to be disclosed by Section 7.4. For the purpose of Section 7.1, a specific CONFIDENTIAL INFORMATION shall not be deemed to be within the foregoing exceptions merely because it is embraced by more general information in the public domain, or in the possession of the receiving Party. In addition, any combination of features shall not be deemed to be within the foregoing exceptions merely because individual features are in the public domain or in the possession of the receiving Party, but only if the combination itself and its principle of operation and process to make it are in the public domain or in the possession of the receiving Party. 7.3 Notwithstanding the provisions of Section 7.1, if the receiving Party becomes legally compelled to disclose any of the disclosing Party's CONFIDENTIAL INFORMATION, the receiving Party shall promptly advise the disclosing Party of such required disclosure in order that the disclosing Party may seek a protective order or such other remedy as the disclosing Party may consider appropriate in the circumstances. The receiving Party shall disclose only that portion of the CONFIDENTIAL INFORMATION which it is legally required to disclose. Such a disclosure shall not release the receiving Party with respect to the CONFIDENTIAL INFORMATION so disclosed except to the extent of permitting the required disclosure. In addition, the receiving Party may disclose CONFIDENTIAL INFORMATION of the disclosing Party to the extent such disclosure is reasonably necessary in connection with the filing or prosecution of JOINT PATENTS. If DOW CONFIDENTIAL INFORMATION is reasonably necessary to be disclosed in connection with the filing or prosecution of PATENTS, then DOW's prior written consent must be obtained in accord with Section 12.1. 7.4 Disclosure to AFFILIATES - RBI or DOW may disclose CONFIDENTIAL INFORMATION to its AFFILIATES, and consultants as may be necessary to exercise the rights granted hereunder, but only under conditions of confidentiality at least as stringent as those set out in Sections 7.1, 7.2 and 7.3. 7.5 Document Return - In the event of termination of this OPTION under Article 10, without exercise of a LICENSE, then: (a) RBI will cease its use of the ENZYMES in accord with Section 10.3, and (b) each Party will cease its use of all CONFIDENTIAL INFORMATION of the other Party provided hereunder and, on the disclosing Party's request, within sixty (60) days either return all such CONFIDENTIAL INFORMATION, including any copies thereof, ENZYMES in whatever media or form, or will promptly destroy the same and certify such destruction to the disclosing Party. Notwithstanding the above, a Party may retain one copy of any CONFIDENTIAL INFORMATION of the other Party in its legal files, but shall return or destroy any DOW samples of ENZYME or ENZYME provided by the other Party. The foregoing provisions shall not apply to RBI to the extent it exercises its rights under Section 5.2.3. ARTICLE 8 - U.S. EXPORT CONTROL AND GOVERNMENT LICENSES 8.1 Compliance - Both Parties agree to comply, at their expense, with all necessary United States governmental regulations with respect to export of ENZYMES and TECHNOLOGY in the TERRITORY. Both Parties agree to not export or re-export any ENZYME or TECHNOLOGY received from the other or the direct products of such TECHNOLOGY to any prohibited country listed in the U.S. Export Administration Regulations unless properly authorized by the U.S. Government. Each Party shall be responsible for the acts of its AFFILIATES, contractors, and consultants and assumes all liability if it or its AFFILIATES, fails to obtain any of the necessary licenses or commits any violations of the United States Export Laws or Regulations (15 C.F.R. (S)700 et seq.). Each Party shall indemnify the other for its acts and for any breach of compliance. 8.2 Licenses and Clearances - Both Parties agree to obtain all necessary licenses or clearances, at its expense, and to comply with all applicable regulations of agencies in the TERRITORY. ARTICLE 9 - WARRANTY, DISCLAIMER, GUARANTEE 9.1 Belief of Accuracy - Each Party represent that ENZYME, TECHNOLOGY and any other CONFIDENTIAL INFORMATION transferred or provided to the other Party hereunder are believed to be accurate and complete as of their current status on the EFFECTIVE DATE and that each Party's interpretations and conclusions drawn therefrom were made in good faith and in the exercise of its scientific judgment as of the dates of the documents contained therein. However, neither Party warrants or represents that such information is or will be sufficient to market ENZYME or to commercially produce ENZYME, or to commercialize ENZYME in the TERRITORY or that DOW or RBI shall be free to practice or sell any ENZYME. 9.2 DOW Representation - DOW will be solely relying on its own evaluation of ENZYME, TECHNOLOGY and the other CONFIDENTIAL INFORMATION transferred or provided to it hereunder and on its own scientific expertise in using the same in its development and evaluation of ENZYME. 9.3 Validity, Non-Infringement - No warranty is provided that the manufacture, use and sale of ENZYME falls outside the scope of third party patents or the industrial property rights of a third party. 9.4 Disclaimer of Warranties as to PATENTS - RBI makes no representation that the inventions covered in any PATENTS are patentable or that the PATENTS are or will be valid or enforceable, nor does RBI warrant or represent that the exercise of the rights hereunder is free from infringement of patent rights of third parties. ARTICLE 10 - TERM AND TERMINATION 10.1 Term - Unless terminated under the provisions of this Article 10, this OPTION shall continue in effect until the end of the OPTION TERM, unless mutually agreed upon in writing by the Parties to be extended. 10.2 Termination for Breach - In the event of a material breach by either DOW or RBI of any of the obligations contained in this OPTION, the other Party shall be entitled to terminate this OPTION by notice in writing under Section 12.1, provided that such notice shall specify the breach or breaches. If the said breach or breaches are capable of remedy, the Party committing such breach or breaches shall be entitled to a period of sixty (60) days from the delivery of such notice in which to remedy or to undertake to remedy the same. In the case the defaulting Party shall fail to remedy the breach or to undertake to remedy the breach to the satisfaction of the injured Party, the injured Party shall have the right to cancel this OPTION in whole or only terminate those rights and obligations relating to the particular breach by simple notification to the Party in default. Failure of a Party to exercise its rights under this Section 10.2 shall not be construed as a waiver as to future breaches whether or not they are similar. 10.3 Termination by RBI or DOW - Either Party may terminate this OPTION at the end of any Milestone in Section 4.3 by written notice to the other. Each will disclose to the other its reasons for any such termination. Upon such termination, both Parties shall refrain from further use of CONFIDENTIAL INFORMATION received from the other Party, including ENZYME, except that this provision shall not apply to RBI if it exercises its rights under Section 5.2.3. 10.4 Termination by DOW - DOW shall have the further right to terminate this OPTION immediately on written notice to RBI if: (a) RBI shall cease to carry on business or shall go into liquidation or a receiver shall be appointed to RBI's assets; or (b) RBI shall become bankrupt or insolvent or unable to meet any of its performance obligations; or (c) RBI fails to conduct testing on the ENZYMES for more than sixty (60) days from any Milestone. 10.5 On Termination - DOW shall, upon termination of this OPTION under Article 10: (a) pay to RBI all payments due or accrued at the termination date within thirty (30) days after termination; and (b) make no further use of, or permit any use by any third party of any kind of any and all ENZYMES disclosed hereunder by RBI, and make no further use of the surviving PATENTS in the FIELD. 10.6 Survival of Certain Obligations - On termination of this OPTION: the obligations of confidentiality set forth in Article 7 shall survive for the time stated therein; payments due under Article 3 shall survive for the terms specified; and Export Control compliance set forth in Article 8 shall survive indefinitely. ARTICLE 11 - FORCE MAJEURE 11.1 Event of Force Majeure - In the event that performance under this OPTION, or any obligation hereunder, is hindered, delayed or prevented by reason of acts of God, strikes, lockouts, labor troubles, intervention of any governmental authority, fire, riots, insurrections, invasions, war or other reason of similar nature beyond the reasonable control of the Party and are without its fault or negligence, then performance of that act shall be excused for the period of the delay and the period for the performance of that act shall be extended for an equivalent period. 11.2 Notification. Upon occurrence of an event of force majeure, the affected Party shall promptly notify the other Party in writing, setting forth the nature of the occurrence, its expected duration and how that Party's performance is affected. The affected Party shall resume the performance of its obligations as soon as practicable after the force majeure event ceases. ARTICLE 12 - NOTICES 12.1 Official -Any notice, request or communication specifically provided for or permitted to be given under this OPTION must be in writing and may be delivered by hand delivery, courier service, or electronic transmission such as telex, facsimile, or telegram, and shall be deemed effective as of the time of actual delivery thereof to the addressee. For purposes of notice the addresses of the Parties shall be as follows: DOW: The Dow Chemical Company 2030 Dow Center Midland, Michigan 48674 USA Attention: William Dowd Director Biocatalysis Laboratory [*****] *Confidential Treatment Requested with a copy to: The Dow Chemical Company Patent Department 1790 Building, Washington Street Midland, Michigan 48674 USA Attention: Karen L. Kimble, JD Senior Counsel [*****] RBI: Recombinant BioCatalysis, Inc. 10665 Sorrento Valley Road San Diego, CA 92121 USA Attention: Donald C. Garaventi President [*****] 12.2 For purposes of scientific reporting, the Parties designate as their respective principle contacts: DOW: The Dow Chemical Company Building 1707 Washington Street Midland, MI 48674 USA Attention: Joseph Affholter, PhD Research Leader [*****] RBI: Recombinant BioCatalysis, Inc. 10665 Sorrento Valley Road San Diego, CA 92121 USA Attention: Dan Robertson, PhD Director of Enzymologys *Confidential Treatment Requested [*****] 12.3 Each Party may change its address and its representative for notice by the giving of notice thereof in the manner provided in Section 12.1. ARTICLE 13 - ASSIGNMENT 13.1 Assignment - Neither Party to this OPTION shall assign or sublicense any rights hereunder without the prior written consent of the other Party, such consent not to be unreasonably withheld. It being agreed, however, that without such consent being required from RBI, DOW may assign to its AFFILIATES, but RBI must be notified in writing in accord with Section 12.1. 13.2 Consolidation, Reorganization or Merger - Should RBI be consolidated, reorganized or merged with another entity, this OPTION and all rights and obligations arising under this OPTION may be assigned to the successor entity or the assignee of all or substantially all of RBI's business and assets without DOW's prior written consent. However, RBI shall promptly notify DOW prior to such action in accord with Section 12.1. Effect on Successors and Assignees - This OPTION shall inure to the benefit of and be binding upon such successors and permitted assignees. ARTICLE 14 - LIABILITY 14.1 DOW Liability to RBI - Neither DOW, any of its AFFILIATES, nor the respective agents, servants, officers, directors, and employees of each shall be liable to RBI, or RBI's employees, directors, officers, agents or legal heirs, for any personal injury, death, or property damage that occurs while RBI is performing under this OPTION, except to the extent such injury, death, or property damage is caused by the sole negligence of DOW. 14.2 RBI Liability to DOW - Neither RBI, any of its subsidiaries, nor the respective agents, servants, officers, directors, and employees of each shall be liable to DOW, or DOW's employees, directors, officers, agents or legal heirs, for any personal injury, death, or property damage that occurs while DOW is performing under the OPTION, except to the extent such injury, death, or property damage is caused by the sole negligence of RBI. 14.3 Safety by RBI - RBI personnel agree to observe the same safety and other rules required of DOW employees while RBI is on premises owned, operated, leased or under the control of DOW. 14.4 Safety by DOW - DOW personnel agree to observe the same safety and other rules required of RBI employees while LOW is on premises owned, operated, leased or under the control of RBI. ARTICLE 15 - MISCELLANEOUS PROVISIONS *Confidential Treatment Requested 15.1 Amendments - This OPTION may be amended only in writing executed by both Parties. 15.2 Disputes - Both Parties shall make good faith efforts to resolve any questions concerning construction and performance under this OPTION 15.3 Entirety of Agreement - This OPTION sets forth the entire agreement and understanding between the Parties hereto with respect to ENZYME for its evaluation in the TERRITORY for use in the FIELD. This OPTION shall be deemed to be in compliance with the LETTER OF INTENT and should any differences exist, this OPTION shall control. 15.4 Severability - If any term or provision under this OPTION is deemed invalid under the laws by a United States court of competent jurisdiction, the invalidity shall not invalidate the whole OPTION but it shall be construed as if not containing that particular term or provision for that particular country or jurisdiction and the rights and obligations of the Parties shall be construed and enforced accordingly. The Parties shall negotiate in good faith a substitute provision as an addendum to this OPTION for that particular country or jurisdiction in compliance with the law to as nearly as possible retain the Parties intent in legally valid language. 15.5 Waivers, Cumulative Remedies - A waiver by either Party of any term or condition of this OPTION in any one instance shall not be deemed construed to be a waiver of such term or condition for any similar instance in the future or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this OPTION shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either Party. 15.6 Publicity - Neither DOW nor RBI shall make the financial terms of this OPTION public, except as required by law. In the event that a filing of a copy of this OPTION with the US Securities and Exchange Commission is required, then RBI shall seek confidential treatment of information considered confidential by DOW. Any press release or publicity of this OPTION shall be reviewed and approved by both Parties prior to any release. 15.7 Choice of Law - This OPTION shall be governed by the laws of the State of Michigan, excepting its conflict of laws principles, in all respects of validity, construction and performance; except that all questions concerning the construction, validity, coverage or infringement of PATENTS or JOINT PATENTS shall be decided in accordance with the patent law of the country where the PATENT or JOINT PATENT was granted. 15.8 Headings - Headings in this OPTION are included herein for ease of reference and shall not affect the meaning of the provisions of this OPTION, nor shall they have any other legal effect. 15.9 Cooperation - RBI and DOW shall use good faith efforts to cooperate with respect to any issues that concern the development of the ENZYME under this OPTION. 15.10 RBI's Status - RBI's status hereunder is that of an independent contractor, and not that of an agent of DOW. As such RBI is responsible of all Income Tax withholding and the payment of any other appropriate taxes on all payments to RBI by DOW. IN WITNESS WHEREOF, the Parties have duly executed duplicate originals of this OPTION by their appropriate authorized representative. Such OPTION may be subject to management and/or Board approval by each Party. Separate signature pages are acceptable in facsimile form and shall be accepted in lieu of original signatures, provided each Party receives a dated, signed, legible facsimile indicating the signator for the other Party. Upon the SIGNATURE DATE, this OPTION shall be effective as of the EFFECTIVE DATE. If requested by either Party, duplicate originals, bearing the same date as the facsimile signature or in lieu of facsimile signatures may be provided. THE DOW CHEMICAL COMPANY RECOMBINANT BIOCATALYSIS, INC. By:__________________________________ By:___________________________________ Name: R.J. Pangborn Name: T.J. Bruggeman Title: Vice President Title: CEO Central & New Businesses R & D Date:________________________________ Date:_________________________________ APPENDIX A May 27, 1997 Donald C. Garaventi President Recombinant BioCatalysis, Inc. 10665 Sorrento Valley Road San Diego, CA 92121 USA LETTER OF INTENT Dear Mr. Garaventi: The purpose of this Letter of Intent is to summarize the present arrangements and intent between The Dow Chemical Company ("DOW") and Recombinant BioCatalysis Inc. ("RBI") for use of an enzyme provided by DOW. The Parties intend to negotiate an option agreement ("Option") encompassing this intent. RBI and DOW shall negotiate in good faith to result in an Option having at least the following terms and conditions: 1. Option Territory - The Option shall be for the world. 2. Permitted Use by RBI - RBI shall use any information provided to it by DOW solely to improve an enzyme identified by DOW for use in recycle process or with a reaction coproduct produced by DOW [*****]. [This enzyme and any improvements thereto (e.g., where the productivity of the enzyme is increased and/or where the product inhibition is lowered) are referred to as "Enzyme".] 3. Option Grant - The Option, if DOW requests an exclusive grant for the Field to make, have made, use, sell, import and have sold the Enzyme for the Field in the Territory, shall include the patents and technology on the Enzyme in the Field subject to the terms of the Option and any manufacturing license agreement. The fee for this exclusive Option is a one time fee of [*****] payable no sooner than December 1, 1998. If DOW requests a non-exclusive grant for the Field to make, have made, use, sell, import and have sold the Enzyme for the Field in the Territory, including the patents and technology on the Enzyme In the Field, then the terms shall be negotiated using reasonable good faith efforts by the Parties by January 31, 1999. In either event the Option shall be executed by the Parties no later than December 1, 1998 if exclusive or January 31, 1999 if non-exclusive. *Confidential Treatment Requested 1. 4. Option Term - The Option term shall be for the term of the research plan ("Plan"), including any mutually agreed upon extensions ("Term"). At present both Parties agree that the Term for an exclusive license shall run from the letterhead date of this Letter of Intent until December 1, 1998 and for a nonexclusive until January 31, 1999. By the end of the Term DOW, at its sole discretion, may negotiate an exclusive license to the Enzyme and gene coding for the Enzyme in the Field from RBI, or purchase the Enzyme or immobilized Enzyme from RBI or an alternate supplier in accord with Paragraph 8. Upon exercise of the license, manufacturing licenses and terms of sale for any Enzyme shall be on commercially reasonable terms, mutually agreed upon, and shall include, without limitation, royalties and minimum payments. In the event that the Enzyme is improved and DOW has had [*****] from the time the technology and improved Enzyme is delivered to DOW in accord with Milestone 3(B) to test it, and DOW then provides written notice to RBI of DOW's lack of interest in commercial use of the improved Enzyme provided by RBI, then, at RBI's sole option, either: (a) RBI shall pay DOW as a one time fee for DOW's total investment in the Enzyme (which fee shall be computed from the time of such request by RBI, but in no event would be less than [*****]). Such payment would be due to DOW within thirty (30) days from invoice by DOW; or (b) RBI agrees to pay to DOW reasonable royalty and payments for all income received from RBI's commercialization or sale of the technology or patents using the Enzyme. Such payments shall be negotiated as an agreement by the Parties using good faith efforts. RBI must elect between (a) and (b) within [*****] from DOW's written notification of lack of interest and convey their election in writing to DOW. DOW has the right, during the Term and the eighteen (18) month evaluation period, for purposes of evaluation only, to produce sufficient Enzyme for its needs. 5. Payments - Within fifteen (15) days from execution of the Option DOW shall pay RBI [*****]. For subsequent payments DOW shall be invoiced one (1) month prior to any payment due to RBI. The further payments are tied to achievement of milestone technical events. The technical events for each milestone payment are described in Paragraph 6. The payments for each milestone are: Milestone 1 - [*****] [*****] if RBI is technically successful as defined in Paragraph 6; plus [*****] if RBI accomplishes this Milestone 1 in less than [*****] days from the date on which RBI receives the assay from DOW; Milestone 2 - Productivity Calibration Definitions for Milestone 2: "Candidate Enzymes" are those which meet the criteria of exhibiting initial hydrolysis rates (Vmax) significantly higher than the wild type (wt) recombinant enzyme toward a [*****]. *Confidential Treatment Requested 2. Kinetically, a Candidate Enzyme that is significantly higher is characterized as having a Vmax [*****]. "Evolved Enzymes" are those which meet the criteria of exhibiting [*****]. Payments for Milestone2: [*****] payable within thirty (30) days of receipt by DOW of the Enzyme sequences and validation by DOW that RBI has provided DOW with at least [*****]: and Milestone 3 - Productivity Enhancement Definitions for Milestone 3: "Improved Enzymes" are those which meet the criteria of, exhibiting at least; plus [****] if RBI provides DOW with at least [*****]. "Productivity Enzymes" are those which meet the criteria of exhibiting at least [*****]. "Target Activity" refers to the Milestone 3 improvement target for the initial hydrolysis rate (Target Vmax) toward a [*****]. It is determined at the conclusion of Milestone 2 and projected from the Milestone 2 data to be sufficient for a commercial catalyst. It is defined in terms of fold-improvement over the wild-type (wt) recombinant Enzyme activity under [*****]. Payments for Milestone 3: (A) [*****] payable within thirty (30) days of receipt by DOW of the Enzyme sequence and validation by DOW that RBI has provided DOW with at least [*****] plus (B) [*****] payable within thirty (30) days of receipt by DOW of the Enzyme sequence and validation by DOW that RBI has provided DOW with at least [*****] *Confidential Treatment Requested 3. [****] (i) [*****] (ii) [*****] (iii) [*****] [*****] [*****] These payments are tied to performance under the Plan described in Paragraph 6. 6. Plan - During the Term, RBI shall perform research activities to improve the Enzyme to achieve Target Activity in the Field in a diligent manner as specified in Paragraph 5 and described in detail in a protocol attached to the Option. Such improvement can be met by any manner acceptable to the Parties. The Enzyme is to be improved for commercial use in a manner agreed upon between the Parties. The protocol may be amended by written consent of the Parties. However, either Party may terminate the research and the Option at any technical milestone specified below for any reason; but if RBI terminates, then DOW has thirty (30) days to notify RBI whether DOW desires either an exclusive or non-exclusive license for the Enzyme until that termination. . Milestone 1 = [*****]. . Milestone 2 = [*****]. 4. [****] . Milestone 3 = [*****]. (B) RBI increases productivity as stated in Paragraph 5 for Productivity Enzymes and transfers as UCA [*****] DOW confirms [****]. These events for performance under the Plan are tied to payments under Paragraph 5. 7. Patents - Any improvements to the Enzyme made by RBI during the Option shall belong to RBI, if within the claimed scope of an issued RBI patent or pending patent application. DOW shall be informed of all such patents or pending applications and be provided with a copy thereof, and provided with their publication numbers or patent numbers and each country where filing was done. If requested by DOW, a completed file wrapper for a given application or patent shall be provided to DOW. An annual status of the concerned patents shall be provided to DOW until all have issued or are abandoned. Although unlikely to occur, in any instance where a Joint patent between DOW and RBI results in a patentable invention, then DOW and RBI shall mutually determine, using good faith efforts, whether DOW or RBI shall file and prosecute the patent application and pay the annuities. If DOW exercises its Option for exclusive rights for the joint patent shall be granted in the Option to DOW for the Field for the Territory. Know-how developed under the Option or known as of the Letter of Intent by either Party shall remain that Party's property. Any use by one Party of the other's know-how shall be under the confidentiality provisions of Paragraph 14. 8. [*****] - In the event that the Enzyme is improved and is of further interest to DOW and DOW exercises its Option, then DOW shall have [*****] from the time the improved Enzyme is delivered in a practicable form to DOW in accord with Milestone 3(B) to provide by written notice to RBI of DOW's intent to either: *Confidential Treatment Requested 5. (a) [*****]. If this course is mutually agreed upon then a commercial agreement shall be negotiated using reasonable good faith efforts by the Parties; or (b) inform RBI that DOW will use an alternate supplier (not RBI) for the improved Enzyme. RBI agrees to provide to a qualified third party under appropriate, reasonable licensing terms for the industry, the information and rights required to supply the Enzyme to DOW. If DOW does not desire any commercial supply of the improved Enzyme, then refer to Paragraph 4. 9. RBI Obligations - RBI shall provide a written report with a summary of the data to DOW on a quarterly basis or at a milestone achievement in a quarter, whichever occurs first. (If clarification of a report is requested by DOW to more fully understand such report, then a meeting of respective personnel permitted.) A final written report shall be provided of the results obtained by RBI on its improvement efforts for the Enzyme, including its sequence, within thirty (30) days at the end of the Term or within thirty (30) days upon termination, and [*****]. 10. DOW Obligations - DOW shall provide the [*****]. 11. Safety - RBI personnel agree to observe the same safety and other rules required of DOW employees while RBI is on premises owned, operated, leased or under the control of DOW. DOW personnel agree to observe the same safety and other rules required of RBI employees while DOW is on premises owned, operated, leased or under the control of RB1. 12. Liability - Neither DOW, any of its subsidiaries, nor the respective agents, servants, and employees of each shall be liable to RBI or RBI's employees, directors, agents or legal heirs, for any personal injury, death, or property damage that occurs while RBI is performing under the Option, except to the extent such injury, death, or property damage is caused by the sole negligence of Dow. Neither RBI, any of its subsidiaries, nor the respective agents, servants, and employees of each shall be liable to DOW, or DOW's employees, directors, agents or legal heirs, for any personal injury, death, or property damage that occurs while DOW is performing under the Option, except to the extent such injury, death, or property damage is caused by the sole negligence of RBI. *Confidential Treatment Requested 6. 13. RBI's Status - RBI's status hereunder is that of an independent contractor, and not that of an agent of DOW. As such RBI is responsible of all Income Tax withholding and the payment of any other appropriate taxes on all payment to RBI by DOW. 14. Confidentiality - The Parties agree to maintain confidential all discussions and information obtained from the other regarding the Enzyme, the Field, business information of RBI or DOW since August 29, 1996, and to maintain confidential any discussions on terms for the Option, except for information: (a) which was known to RBI prior to receipt or development hereunder; (b) which is, or without fault of RBI becomes, generally known to the public; or (c) which is acquired by RBI, without an obligation of confidence, from a third party having a legal right to make such disclosure. No rights are granted by DOW to RBI to use any DOW intellectual property rights including patents, trade secrets, confidential information and computer programs, except in providing the contemplated Plan services. Each Party's obligations for confidentiality shall cease five (5) years from termination of this Letter of Intent or Option, which ever time is later. Confidentiality terms and conditions shall also be included and continued in the Option. 15. Publicity - Neither DOW nor RBI shall make public the financial terms of this Letter of Intent. Any press release or publicity concerning this Letter of Intent shall be reviewed and approved by both Parties prior to any release. 16. Entire Agreement - This Letter of Intent document contains the entire agreement between the Parties and supersedes all preexisting agreements between them respecting its subject matter. Modification of this Letter of Intent shall only be binding if made in writing and signed by both Parties. 17. Choice of Law - This Agreement shall be subject to the laws of the State of Michigan, excepting its conflict of laws provisions. 18. Other Items - Other customary terms and conditions in the Option are also expected and modifications of this Letter of Intent that form a part of the Option are permitted. Upon signature by both Parties, the letterhead date is the effective date for this Letter of Intent. This Letter of Intent shall be void ab initio if not signed by both Parties no later than June 16, 1997. The negotiations for the Option shall then begin, using good faith efforts, to complete the Option no later than forty-five (45) days from this letterhead date. Such Option is subject to management and/or Board approval by each Party, which shall be secured by each Party prior to exercise of and/or signing the Option, if required. Should the Parties fail to reach agreement for the Option by that date, then either the date may be extended by mutual written consent or the negotiations may be terminated. 7. Sincerely, Fred P. Carson Vice President Research and Development AGREED TO AND ACCEPTED BY: Recombinant BioCatalysis Inc. _______________________________ Donald G. Garaventi President Date________________ 8. This Appendix is blank as of the SIGNATURE DATE. Additions during the OPTION TERM are possible. 1. This Appendix is blank as of the SIGNATURE DATE. Additions during the OPTION TERM are possible. 1. APPENDIX D [DOW PARTNERSHIP PROJECT SPREADSHEET] 1. APPENDIX E CONFIDENTIALITY AGREEMENT August 27, 1996 In order to protect certain proprietary, confidential information (Information) which may be exchanged between them, The Dow Chemical Company (DOW), having an address of: Patent Department, P.O. Box 1967, 1790 Building, Midland, Michigan 48641-1967, Attn: Karen L. Kimble; and Recombinant Biocatalysis, Inc., Elmwood Court Two, 512 Elmwood Avenue, Sharon Hill, PA 19079-1005 (RBI), and together hereafter called the Parties, agree that: 1. The effective date of this Agreement is August 27, 1996. 2. The Discloser(s) of Information is (are): Both Parties. 3. The Recipient(s) of Information is (are): Both Parties. 4. The Information disclosed under this Agreement is: any and all information including but not limited to, data, know-how, any and all subject matter (whether patentable or not) pertaining to the Parties research, inventions, development, materials, technology, businesses plans, processes, protocols, enzymes, expression systems, the commercial applications of enzymes which the parties consider to be of value, and all information generated by RBI as a result of carrying out the purpose set forth in paragraph 5. 5. The purpose for disclosing Information is to see if RBI's proprietary technology might be used to improve performance of Dow proprietary [****] enzymes, or if RBI's proprietary collection of enzymes contains any enzymes of commercial interest to DOW, or if RBI and DOW should enter into a relationship to identify novel enzymes of commercial interest to DOW. 6. This Agreement covers only Information disclosed between Effective Date and August 27, 1997. Recipient's obligations shall expire on August 27, 1999. 7. Recipient agrees to maintain Information in confidence and not disclose Information to any third party except as expressly provided in this Agreement. Recipient will not use Information except as provided for in Paragraph 5. Recipient shall use the same degree of care, but no less than a reasonable degree of care, as the Recipient uses to protect its own confidential information of a like nature to prevent disclosure of Information to third parties. Third parties include all governmental patent offices. 8. Recipient's obligations will apply only to Information that is: (a) disclosed in tangible form clearly identified as confidential at the time of disclosure; (b) disclosed initially in non-tangible form and identified as confidential at the time of disclosure and, within thirty (30) days of the initial disclosure, is summarized and designated as confidential in writing and delivered to Recipient; or (c) generated by Recipient as set forth in Paragraph 4. *Confidential Treatment Requested 1. 9. Recipient has no obligation with respect to any Information disclosed hereunder which: (a) was in Recipient's possession before receipt from Discloser; (b) is or becomes a matter of general public knowledge through no fault of Recipient; (c) is rightfully received by Recipient from a third party without an obligation of confidence; (d) is disclosed by Discloser to a third party without an obligation of confidence on the third party; (e) is independently developed by Recipient's representatives who have not had access to such Information; or (f) is disclosed without obligation of confidence under operation of law, governmental regulation, or court order, provided Recipient first gives Discloser notice and uses all reasonable effort to secure confidential protection of such Information. Specific confidential Information shall not be considered to fall within the above exceptions merely because it is within the scope of more general information within an exception. A combination of features shall not be considered to fall within the above exceptions unless the combination itself, including its principles of operation, are within the exceptions. 10. All Information shall be provided at the sole discretion of Discloser. With respect to Information, DISCLOSER MAKES NO WARRANTIES OF ACCURACY, RELIABILITY, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PURPOSE. INFORMATION IS PROVIDED ON AN "AS-IS" BASIS AND DISCLOSER EXPRESSLY DISCLAIMS ANY WARRANTIES WITH RESPECT TO THE INFORMATION. Discloser shall not be liable for any consequential, punitive, exemplary or incidental damages arising out of the evaluation or use of Information by Recipient. 11. Neither Party transfers any rights in Information. No rights are granted under any intellectual property rights of either Party. This Agreement does not create any other obligations, including agency or partnership obligations, between the parties. This Agreement does not constitute an offer to sell Information. Results obtained by Recipient upon evaluation of Information shall be disclosed to Discloser. Copyrights on reports of results transferred to Discloser generated by Recipient based on the evaluation of Information shall be owned by Discloser. 12. Recipient will not knowingly export or reexport any Information or software received from Discloser or the direct products of such Information or software to any country or entity or for any use prohibited by the U.S. Export Administration Regulations unless properly authorized by the U.S. Government. 13. The parties may disclose Information received from Discloser to their Affiliates, consultants or third-party contractors on a need-to-know basis, subject to confidentiality terms consistent with this Agreement. The Parties warrant that their Affiliates, consultants or third-party contractors will comply with the terms of this Agreement. Affiliates means companies wherein either Party owns or controls, directly or indirectly, greater than fifty percent of the equity interest of the company or in which a Party has management control. 14. This Agreement can only be changed by a written document signed by all parties. The terms of this Agreement shall become effective upon the Effective Date when executed 2. by all parties. This Agreement shall become voidable upon written notice by DOW in the event it is not executed by all parties within 120 days of the date first written above. This Agreement shall be governed according to the laws of the State of Michigan. The parties have caused this Agreement to be executed in duplicate and this Agreement may be signed in separate counterparts. THE DOW CHEMICAL COMPANY RECOMBINANT BIOCATALYSIS, INC. By: ___________________________ By: _____________________________ Name: _________________________ Name: ___________________________ Title: ________________________ Title: __________________________ Date: _________________________ Date: ___________________________ 3. EX-10.16 4 COLLABORATIVE RESEARCH AGREEMENT EXHIBIT 10.16 Confidential Treatment Requested Under 17 C.F.R. (S)(S) 200.80(b)(4) 200.83 and 230.406 COLLABORATIVE RESEARCH AGREEMENT BETWEEN THE DOW CHEMICAL COMPANY AND DIVERSA CORPORATION TABLE OF CONTENTS
- --------------------------------------------------------------------------------------------------- ARTICLE TITLE PAGE NUMBER - --------------------------------------------------------------------------------------------------- 1 DEFINITIONS 1 - --------------------------------------------------------------------------------------------------- 2 R&D PROGRAM 6 - --------------------------------------------------------------------------------------------------- 3 LICENSE RIGHTS 14 - --------------------------------------------------------------------------------------------------- 4 PAYMENTS 16 - --------------------------------------------------------------------------------------------------- 5 LICENSE AGREEMENT; DEVELOPMENT REPORTS 17 - --------------------------------------------------------------------------------------------------- 6 TREATMENT OF CONFIDENTIAL INFORMATION 17 - --------------------------------------------------------------------------------------------------- 7 INTELLECTUAL PROPERTY RIGHTS 20 - --------------------------------------------------------------------------------------------------- 8 PROVISIONS CONCERNING THE FILING, PROSECUTION AND MAINTENANCE OF 21 PATENT RIGHTS - --------------------------------------------------------------------------------------------------- 9 LEGAL ACTION 22 - --------------------------------------------------------------------------------------------------- 10 TERMINATION AND DISENGAGEMENT 23 - --------------------------------------------------------------------------------------------------- 11 REPRESENTATIONS AND WARRANTIES 25 - --------------------------------------------------------------------------------------------------- 12 INDEMNIFICATION 26 - --------------------------------------------------------------------------------------------------- 13 DISPUTE RESOLUTION 27 - --------------------------------------------------------------------------------------------------- 14 MISCELLANEOUS 28 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- APPENDIX TITLE PAGE - --------------------------------------------------------------------------------------------------- A-1 RESEARCH [*****] A-1 - --------------------------------------------------------------------------------------------------- A-2 [*****] PLANS A-2 - --------------------------------------------------------------------------------------------------- A-3 RMC MEMBERSHIP A-3 - --------------------------------------------------------------------------------------------------- B-1 PATENT RIGHTS [*****] B-1 - --------------------------------------------------------------------------------------------------- B-2 DIVERSA PATENT RIGHTS [*****] B-2 - ---------------------------------------------------------------------------------------------------
* Confidential Treatment Requested
- --------------------------------------------------------------------------------------------------- APPENDIX TITLE PAGE - --------------------------------------------------------------------------------------------------- B-3 PATENT RIGHTS [*****] B-3 - --------------------------------------------------------------------------------------------------- B-4 [*****] DIVERSA PARENT RIGHTS [*****] B-4 - --------------------------------------------------------------------------------------------------- C MILESTONE PAYMENTS C-1 - --------------------------------------------------------------------------------------------------- D LICENSE AGREEMENT D-1 - --------------------------------------------------------------------------------------------------- E [*****] PROCEDURES E-1 - --------------------------------------------------------------------------------------------------- F MATERIAL TRANSFER AGREEMENT F-1 - --------------------------------------------------------------------------------------------------- G LICENSED [*****] G-1 - --------------------------------------------------------------------------------------------------- H RESEARCH [*****] H-1 - ---------------------------------------------------------------------------------------------------
iii * Confidential Treatment Requested COLLABORATIVE RESEARCH AGREEMENT BETWEEN THE DOW CHEMICAL COMPANY AND DIVERSA CORPORATION COLLABORATIVE RESEARCH AGREEMENT (including the Appendices hereto, the "Agreement") by and between THE DOW CHEMICAL COMPANY, a corporation duly formed and existing under the laws of Delaware, having a place of business at 2030 Dow Center, Midland, Michigan 48674, United States of America ("DOW" or a "Party"), and DIVERSA CORPORATION, a corporation duly formed and existing under the laws of Delaware, having a place of business at 10665 Sorrento Valley Road, San Diego, California 92121, United States of America ("DIVERSA" or a "Party"). R E C I T A L S A. DIVERSA has discovered and developed enzymes and has expertise in the rearrangement of DNA to produce and discover genes utilizing proprietary technologies for the rapid discovery, development and optimization of enzymes. B. DOW has expertise in the discovery, development and production of chemical compounds. C. DOW and DIVERSA wish to enter into this Agreement in order to perform research together to discover and optimize the function of new genes, processes and products resulting thereupon that can be used by DOW to produce certain, desired commercial chemical compounds. D. DIVERSA will perform research either independently or with DOW on projects funded and supported by DOW in order to discover and develop such genes processes and products resulting therefrom for the purpose of development, manufacture use and sale of products by DOW. E. DOW will perform research to develop products and technology [*****]. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the Parties hereby agree as follows: 1 * Confidential Treatment Requested Article 1. DEFINITIONS When used in this Agreement, the following terms shall have the meanings set out below, unless the context requires otherwise. The singular shall be interpreted as including the plural and vice versa, unless the context clearly indicates otherwise. 1.1 "Affiliate" means any corporation, firm, limited liability company, --------- partnership or other entity that directly or indirectly controls or is controlled by or is under common control with a Party to this Agreement. Control for purpose means ownership, directly or through one or more affiliated entities, of [*****] or more of the shares of stock entitled to vote for the election of directors in the case of a corporation, or [*****] or more of the equity interests in the case of any other type of legal entity, or any other arrangement whereby a Party controls or has the right to control the board of directors or equivalent governing body of a corporation or other entity. 1.2 "Agreement Term" means six months from the expiration or termination of --------------- the Research Term or until this Agreement is otherwise terminated as provided herein. 1.3 "Areas of Interest" means the development of [*****] Enzymes (as defined ----------------- below) for use in the following [*****]: [*****] 1.4 "Confidential Information" means all information, Know-How, scientific, ------------------------ technical, or non-technical data, samples and Materials, business plans, and marketing and sales information disclosed by one Party to the other hereunder or under the Option Agreement between DIVERSA and DOW dated June 30, 1997, whether disclosed or provided in oral, written (including but not limited to electronic, facsimile, paper or other means), graphic, photographic or any other form, except to the extent that such information: (i) as of the date of disclosure is known to the receiving Party as shown by written documentation, other than by virtue of a prior confidential disclosure from the disclosing Party to the receiving Party; (ii) as of the date of disclosure is in, or subsequently enters, the public domain through no fault or omission of the receiving Party; (iii) as of the date of disclosure or thereafter is obtained from a Third Party free from any obligation of confidentiality; or (iv) as of the date of disclosure or thereafter is developed by the receiving Party independent of the disclosure by the disclosing Party as evidenced by written 2 * Confidential Treatment Requested documentation. 1.5 "Consultants" means a non-Affiliate person who is under confidentiality to ----------- and paid by a Party to act or advise on that Party's behalf under this Agreement. 1.6 "Controls" or "Controlled" means, with respect to intellectual property, -------- ---------- possession (other than by virtue of this Agreement) of the ability to grant licenses or sublicenses to the other Party hereto without violating the terms of any agreement or other arrangement with any Third Party [*****]. 1.7 "DIVERSA Intellectual Property" means DIVERSA Patent Rights and DIVERSA ----------------------------- Know-How and Joint Intellectual Property. 1.8 "DIVERSA Know-How" means know-how Controlled solely by DIVERSA. The term ---------------- "know-how" means all Research Results and all know-how, nonpatented inventions, improvements, discoveries, data, instructions, [*****] information (including, without limitation, [*****] and information), processes, procedures, devices, methods and trade secrets which are conceived, discovered or invented during the Research Term in the course of performance of the R&D Program or which have been conceived, discovered or invented by DIVERSA prior to this Agreement, and which are necessary or appropriate to develop and commercialize Licensed Products; and does not include inventions within the Patent Rights. 1.9 "DIVERSA Patent Rights" means Patent Rights Controlled solely by DIVERSA [*****]. 1.10 "DIVERSA Research Results" means Research Results invented or discovered ------------------------ solely by DIVERSA. 1.11 "DOW Intellectual Property" means DOW Patent Rights and DOW Know-How and ------------------------- Joint Intellectual Property. 1.12 "DOW Know-How" means Know-How Controlled solely by DOW. ------------ 1.13 "DOW Patent Rights" means Patent Rights Controlled solely by DOW. ----------------- 1.14 "DOW Research Results" means Research Results invented or discovered -------------------- solely by DOW. 1.15 "Effective Date" means the date of last signature set forth at the end of -------------- this Agreement. 1.16 "Field" means [*****]; all Areas of Interest shall fall within this field. ----- 1.17 "FTE" means the equivalent of one full year of work on a full time basis --- by a scientist or other professional [*****] 3 * Confidential Treatment Requested [*****]. 1.18 "Intellectual Property" means Diversa Intellectual Property and Dow --------------------- Intellectual Property. 1.19 "[*****] Enzyme" means an enzyme or enzymes, either ex vivo or in vivo, -------------- provided to Dow by Diversa which is within the claims of DIVERSA Patent Rights or that incorporates, is derived from, or is identified, discovered, developed or made through the use of DIVERSA Know-How, which is developed from the [*****]. 1.20 "Jointly Developed" or "Jointly Invented" means any item developed or ----------------- ---------------- invented by both Parties in the course of the performance of the R & D Program during the Research Term. If the item developed or invented is a patentable invention, such invention is jointly developed if both Parties' employees or consultants are considered inventors under 35 U.S.C. et. seq., as interpreted by the U.S. Patent and Trademark Office and the United States courts. 1.21 "Joint Intellectual Property" means Joint Patent Rights and Joint Know- --------------------------- How. 1.22 "Joint Know-How" means Know-How which is Jointly Developed or Jointly -------------- Invented. 1.23 "Joint Patent Rights" means Patent Rights which are Jointly Developed. ------------------- 1.24 "Joint Research Results" means Research Results which are Jointly ---------------------- Developed or Jointly Invented. 1.25 "Know-How" means all Research Results and all know-how, nonpatented -------- inventions, improvements, discoveries, data, instructions, [*****] information (including, without limitation, [*****] and information), processes, procedures, devices, methods and trade secrets which are conceived, discovered or invented during the Research Term in the course of performance of the R&D Program, and which are necessary or appropriate to develop and [*****]. 1.26 "License Agreement" means the agreement described in Section 5.1 hereof. ----------------- 1.27 "Licensed Product" means (i) [*****] which is used to [*****], or (ii) ---------------- [*****] and which is [*****] and which both (i) and (ii) are designated by the RMC and listed on Appendix G attached hereto, encompassed within [*****], which is attached hereto and made a part hereof. It is expected that [*****] at the exercise of each License Agreement. 1.28 "Material" means the original, tangible materials provided by DOW or -------- DIVERSA to the 4 * Confidential Treatment Requested other Party in order that the recipient can perform its obligations under the R&D Program and any exchange of samples developed during the R&D Program. 1.29 "Patent Rights" means (i) all patents and patent applications which are ------------- conceived of by DIVERSA and/or DOW during the Research Term and in the course of performance of the R & D Program, and which are necessary for DOW to make, use or sell the Royalty Bearing Products (as defined in the License Agreement); if such patent rights arise they shall be listed on Appendix B-1, attached hereto and made a part hereof; (ii) the patents and patent applications listed on Appendix B-2, attached hereto and made a part hereof, are patent rights of DIVERSA that [*****]; (iii) the [*****]; and (iv) any divisions, continuations, continuations-in-part, reissues, reexaminations, extensions or other governmental actions which extend any of the subject matter of the patent applications or patents in (i) or (ii) above, and any substitutions, confirmations, patents-of-addition, registrations or revalidations of any of the foregoing, in each case, ------------ which are Controlled by DIVERSA or DOW during the Research Term and which are necessary for DOW to make, have made, use, sell, have sold, export or import the Royalty Bearing Products. All patents and patent applications subject to this definition are listed on Appendix B or will be included on Appendix B by the end of the Agreement Term. 1.30 "R&D Program" means the research and development program to be conducted ----------- during the Research Term by DIVERSA and DOW pursuant to Section 2, as more fully described [*****]. 1.31 "Research Data" means all data, [*****] and any other information ------------- obtained or developed in the course of performance of the R&D Program. 1.32 "Research Management Committee" or "RMC" means the committee created ----------------------------- --- pursuant to Section 2.2 hereof and which membership is defined in Appendix A-3, attached hereto and made a part hereof. 1.33 "Research Materials" mean all tangible property obtained or developed in ------------------ the course of performance of the R&D Program, including but not limited to [*****] Enzymes. 1.34 "Research Project Flow Chart" means a chart as Appendix H, attached hereto --------------------------- for reference, to aid in understanding the efforts made under this Agreement and the [*****]. 5 * Confidential Treatment Requested 1.35 "Research Results" means Research Data and Research Materials. ---------------- 1.36 "[*****]" means a specific target within [*****] as specifically ------- described in Appendix A-1 hereto and made a part hereof, as may be amended from time to time by the RMC in its written minutes. 1.37 "[*****]" means a [*****] within [*****] as specifically described in ------- Appendix A-1 hereto and made a part hereof, as may be amended from time to time by the RMC in its written minutes. 1.38 "Research Term" means the period commencing on the Effective Date and, ------------- unless extended by written agreement of the Parties or sooner terminated as provided herein, terminating on the third (3) anniversary of the Effective Date. 1.39 "Responsible Party" shall have the meaning set forth in Section 8.1.2. ----------------- 1.40 "Staffing Level" shall have the meaning set forth in Section 2.1.1(d). -------------- 1.41 "Third Party" means any party who is not a Party, or an Affiliate. ----------- 1.42 "[*****] Plans" mean the written plans drafted and approved by the RMC ------------- defining the activities to be carried out for, and the budget for, each [*****] during each twelve month period of the R&D Program, as more specifically detailed in [*****] attached hereto and made a part hereof, as modified from time to time by the RMC in its written minutes. The [*****] Plan Procedures are provided in [*****], attached hereto and made a part hereof. Article 2. R&D PROGRAM 2.1 Implementation of the R&D Program. ---------------------------------- 2.1.1 Basic Provisions of Program. (a) The primary objective of the R&D Program shall be the identification and development of [*****] Enzymes providing enhanced or new properties useful in the [*****]. The Research [*****] indicates the progress expected to occur under this Agreement; namely, from [*****] discovery to [*****] Enzyme to identification of a Licensed [*****]. Once a Licensed [*****] is identified then the License Agreement pertains for the remainder of the [*****]. (b) DIVERSA and DOW shall use their reasonable good faith efforts to conduct the research activities set forth in the [*****] Plans, and to provide Materials as set forth therein. Both Parties shall employ the best methods they know which are legally available to them to 6 * Confidential Treatment Requested perform the [*****] Plans. However, [*****] (which basis must be explained to DIVERSA) about the ability of DIVERSA to [*****], then DOW may request a modification to the [*****] Plan. DOW accepts that this could effect the ability to obtain the desired [*****] Enzyme(s) for the [*****]. (c) The Research [*****] and Research [*****], both in [*****], are defined in the [*****] Plans in [*****], as amended from time to time by the RMC in its written minutes. (d) In carrying out the R&D Program, DIVERSA shall devote [*****] FTEs per year for each of the [*****] years of the Research Term ("Staffing Level"), and DOW shall pay DIVERSA for the services of such FTEs as set forth herein. At the request of DOW, DIVERSA will in good faith consider and discuss proposed increases or decreases to the Staffing Level with adjustments in payments. Notwithstanding the foregoing or anything contained herein to the contrary, that the Staffing Level shall remain at [*****] FTEs, unless the Parties, in each Party's sole discretion, agree in writing to increase or decrease the Staffing Level. Any increase or decrease to the Staffing Level agreed to by the Parties shall be [*****] in the relevant [*****] Plan for each Research [*****] or Research [*****] and the budget associated with such [*****] Plan. Unless previously consented to in writing by DOW, the budget for the [*****] Plan for each Research [*****] and Research [*****] shall remain within the funding proposed in Section 4. No more than [*****] times per Research Term year, DOW shall have the right to audit, at its expense, during regular business hours at DIVERSA's place of business and, if conducted at different sites also where the work is performed, both for the technology development and FTEs assigned to the R&D Program. (e) DIVERSA and DOW shall use commercially reasonable efforts to perform the tasks set forth in the [*****] Plans, and to provide the facilities, materials and equipment necessary to perform the research activities set forth in the [*****] Plans. (f) DIVERSA shall not be obligated to utilize more than [*****] FTEs per year in the R&D Program. DOW shall be responsible for the expense of research activities in the R&D Program that are [*****], provided that DOW is notified of the reasons why DIVERSA [*****], is notified of the [*****], and gives its prior written consent. ------------- (g) At such time as each [*****] Plan is under consideration by the RMC, DOW may propose to the RMC to [*****] any selected 7 * Confidential Treatment Requested Research [*****] or Research [*****] and upon acceptance of the proposal by the RMC in its written minutes, DIVERSA will [*****] in respect of such Research [*****] or Research [*****], subject to DOW's obligations to maintain the Staffing Level. In such event, DOW may propose a substitute Research [*****] or Research [*****] within [*****] of the Areas of Interest to be included in the R&D Program, which shall be subject to the approval of the RMC. In the event no replacement Research [*****] in any Area of Interest can be identified by DOW and approved by the RMC, then (i) DOW may propose a new [*****] which when accepted by the RMC would be added by amendment to this Agreement or a new Research [*****] or Research [*****] within the Field and if this new replacement is acceptable to DIVERSA, this new replacement shall be instituted promptly; or (ii) the Staffing Level will be adjusted in accordance with Section 2.1.1(d). (h) Upon any such abandonment under Section 2.1.1(g), DOW shall have no further commercial rights with respect to any [*****] Enzymes or other DIVERSA Intellectual Property related to the abandoned Research [*****] or Research [*****]. DIVERSA shall, however, be free to continue the research efforts on its own behalf or with a Third Party at [*****] to DOW. All Joint Intellectual Property related to any abandoned Research [*****] or Research [*****] shall be listed on [*****] 3, attached hereto and made a part hereof. DOW shall retain the right to do research or non-commercial development using such Research [*****]. However, if DOW should later develop during the Agreement Term a suitable [*****] which DOW then desires to commercialize and which product used [*****] Enzyme or DIVERSA Patent Rights, then DOW would request [*****] DIVERSA. Unless the abandoned Area of Interest has been [*****], DIVERSA shall negotiate using good faith efforts with DOW for such [*****]. 2.1.2 Collaborative Efforts and Reports. --------------------------------- (a) The Parties agree that the successful execution of the R&D Program will require the collaborative use of both Parties' areas of expertise. The Parties shall keep the RMC fully informed about the status of the portions of the R&D Program they respectively perform. Without limiting the foregoing, each Party shall furnish to the RMC [*****] reports within [*****] days after the end of each [*****] period, describing the progress of its activities in connection with the R&D Program in reasonable 8 * Confidential Treatment Requested detail, including at least: (i) an estimation by DIVERSA of the FTEs used for each Research [*****] and Research [*****] and the budget used for each [*****] Plan, and (ii) a summary of the testing and development of [*****] Enzymes and Licensed [*****]. The reports described in this Section 2.1.2 (a) shall describe all [*****] Enzymes that have been put into [*****], and shall also contain sufficient other information to allow a Party to monitor the other Party's compliance with this Agreement, including without limitation, each Party's obligations with respect to the accomplishment of the [*****]. All reports and information provided under this Section 2.1.2 (a) shall be deemed Confidential Information of the Party which provided the information. (b) DIVERSA and DOW shall cooperate in the performance of the R&D Program and, subject to any confidentiality obligations to Third Parties or legal restrictions, shall exchange information [*****] as necessary to carry out the R&D Program pursuant to the provisions of this Agreement. Each Party will attempt to accommodate any reasonable request of the other Party to send or receive personnel for purposes of discussing the R&D Program. Such visits and access will be at mutually agreed times, have defined purposes, be of agreed limited duration, and be scheduled in advance. Each Party shall [*****] of their respective personnel related to these visits. It is understood that any such visiting personnel may be [*****] the R&D Program and the rights of Third Parties, which may include [*****] of the R&D Program. All personnel shall abide by the required rules for any Third Party visiting that Party's site, including, but not limited to, [*****] and other matters. (c) During the Research Term and for a period of [*****] years thereafter, DIVERSA and DOW shall maintain records of the R&D Program (or cause such records to be maintained) in sufficient detail and good scientific manner as will properly reflect all work done in the R&D Program and results achieved in the performance of the R&D Program. Each Party shall allow the other Party to have reasonable access to all pertinent Research [*****] generated by or on behalf of such Party with respect to each [*****] Enzyme. This retention of records may be extended if there is a legal proceeding pending (i.e., court action, or US 9 * Confidential Treatment Requested interference or opposition involving the Intellectual Property) where those records are reasonably required and a written request with the reason is provided to the Party. Nothing herein shall require, or be construed to require, that DIVERSA disclose to DOW any DIVERSA Know-How, except to the extent necessary for the filing of patent applications [*****]. DOW shall not be required to disclose to DIVERSA any DOW Know-How or any DOW [*****] on any Research [*****], Research [*****] or [*****] Enzyme, except for the reasonable information required by the RMC. 2.1.3 Work Plans. ---------- (a) In order to carry out the R&D Program, the RMC shall develop a [*****] Plan for each Research [*****] and Research [*****]. These [*****] Plans shall be in writing and attached hereto as [*****]. The [*****] Plans for each initial Research [*****] and Research [*****] will be agreed to not later than [*****] after the Effective Date and will be attached hereto as Appendix [*****] and made a part hereof. For each [*****] period during the Research Term after the period covered by the initial [*****] Plans attached hereto as Appendix [*****], [*****] Plans shall be prepared by the co-chairs of the RMC and approved by the RMC no later than [*****] days before the end of the then current [*****] period. Absent written agreement by the Parties, DIVERSA and DOW shall continue to conduct research activities within the scope of the projects set forth in the previous [*****] Plans, within the bounds of the then currently available FTEs. (b) Each [*****] Plan shall set forth specific, [*****] research, and development, objectives, including, without limitation, the applicable Research [*****] and Research [*****] within Areas of Interest, and resource allocations in accordance with the procedures set forth in Appendix [*****] attached hereto. Each [*****] Plan will reflect at least [*****], but no more than [*****] research milestones per year. These research milestones shall be designed to facilitate diligent development and identification of [*****] Enzymes for use in the Research [*****] or Research [*****]. The RMC will review research milestones on at least a [*****] basis. If the milestones are not met, then in the next written [*****] Plan, the RMC must (i) revise these milestones and/or [*****] Plan, (ii) replace the Research [*****] or Research [*****] with another Research [*****] or Research [*****] using their good faith efforts, (iii) if the replacement under (ii) is not deemed viable by the RMC, then DIVERSA and DOW agree to use their good faith efforts to permit some new [*****] in the Field to be substituted as a new [*****], or 10 * Confidential Treatment Requested (iv) abandon that Research [*****] or Research [*****] if so requested by DOW. (c) If the RMC is unable to agree as to the terms of a [*****] Plan for any given [*****] period following the initial [*****] period for a [*****] Plan, by the date provided in Section 2.1.3(a), above, then the matter shall be addressed as provided in Article 13 below . (d) The [*****] Plans may be modified by the RMC to satisfy the requirements of the Research [*****] and Research [*****], but a written copy of each revised [*****] Plan, signed by the co- chairs, shall be supplied to each Party as an amendment to Appendix [*****]. 2.1.4 Additional Research Activities. ------------------------------ (a) In the event that prior to the end of the Research Term, all research activities directed to [*****] Research [*****] and Research [*****] have been successfully completed or terminated by agreement of the Parties, then DOW shall have the right to propose to DIVERSA: (i) [*****] Research [*****] or Research [*****] to be pursued in the Areas of Interest under the R&D Program, or (ii) deploying the FTEs on Research [*****] and Research [*****] which are already underway, or (iii) if (i) and (ii) are not available, then considering deploying, using their good faith efforts, the FTE's on Research [*****] or Research [*****] within the Areas of Interest and for which DIVERSA has [*****] or serious obligations ([*****]) to a Third Party, or (iv) if (i) through (iii) are not available, then reducing the number of FTE's and [*****] for those FTEs no longer required computed in accordance with Section 4.4. If DIVERSA does not have [*****] with respect to the Research [*****] or Research [*****] proposed in Section 2.1.4(a)(i) or (iii) and does not have a [*****] on its own behalf or with a Third Party, the Parties shall negotiate in good faith the terms on which such additional research activities 11 * Confidential Treatment Requested may be conducted under the R&D Program. Such additional research activities will only be initiated if the Parties reach written agreement on the terms thereof, including, without limitation, milestone and other payments on resulting products. (b) During the R&D Program DOW may also propose that additional research activities directed to [*****] and Research [*****] and Research [*****] within those Areas of Interest, using their good faith efforts, be conducted in connection with the R&D Program. In such event, the Parties shall discuss an expansion of the R&D Program, provided DIVERSA shall have no obligation to conduct any such activities with DOW unless terms for such activities are agreed to in writing by the Parties. If DIVERSA does not have a [*****] with respect to a proposed additional Research [*****]or Research [*****]on its [*****] or with a Third Party, DIVERSA will notify DOW in writing of such within [*****] days of the proposal, and within [*****] days of such notice, the RMC will implement a [*****] for each additional Research [*****] or Research [*****]. In the event the RMC fails to initiate a [*****] Plan within such [*****] day period, or if DOW notifies DIVERSA in writing that it does not intend to pursue an additional Research [*****] or Research [*****], DIVERSA shall have [*****] to DOW under this Agreement with respect to such [*****] Research [*****] or Research [*****] and may collaborate with a Third Party on such [*****] Research [*****] or Research [*****]. (c) DOW shall further have the right during the [*****] period following the Effective Date to propose up to [*****] projects encompassed in new Areas of Interest [*****]. DIVERSA will consider such proposal, and, if the Parties agree to proceed, the Parties will negotiate a separate agreement for such a collaboration [*****]. The separate agreement will contain terms consistent with other DIVERSA agreements of this nature for [*****], including a separate [*****], and different milestone and [*****] payments. 2.1.5 Disclosures. ----------- If DIVERSA or DOW wishes to disclose any Research [*****] to a Third Party on a confidential basis, it shall first submit a description of the proposed disclosure directly to all members of the RMC for review at least [*****] prior to any such disclosure. Within [*****] of receipt of such description, the RMC shall notify DIVERSA or DOW, as the case may be, of its approval or denial of 12 * Confidential Treatment Requested such disclosure, provided such approval shall not be unreasonably withheld. Failure to provide such notice within the [*****] period shall be deemed to be consent to the proposed disclosure. Notwithstanding the foregoing, subject to Section 2.5, DIVERSA may provide any [*****] Enzyme under confidentiality terms at least as strict as this Agreement to a Third Party [*****] for use [*****] the Areas of Interest. DOW may provide any [*****] Enzyme under confidentiality terms at least as strict as this Agreement to any Third Party without the consent of the RMC or DIVERSA if used within the Areas of Interest if used with technology or intellectual property unavailable to DIVERSA. 2.2 Research Management Committee. ----------------------------- 2.2.1 Establishment and Functions of RMC. ---------------------------------- (a) DIVERSA and DOW hereby agree to establish the RMC. The RMC will act on behalf of the Parties and will be responsible for the planning and monitoring of the R&D Program and for setting forth specific research and development objectives, including, without limitation, (i) preparation and approval of each [*****] Plan in accordance with the procedures set forth in Appendix [*****] attached hereto and made a part hereof, (ii) determining whether research projects should be continued as active projects, and (iii) determining resource allocation for the R&D Program, so as to insure that meaningful research and development activity will be undertaken on all Research [*****] and Research [*****] in each [*****] period, taking into account that the overall research and development focus reflects both [*****] priorities. (b) In planning and monitoring the R&D Program, the RMC shall assign tasks and responsibilities taking into account each Party's respective specific capabilities and expertise in order to avoid duplication and enhance efficiency and synergies. For example, [*****]. 2.2.2 RMC Membership. -------------- DIVERSA and DOW each shall appoint, in its sole discretion, [*****] members to the RMC, including a co-chair designated by DOW and a co-chair designated by DIVERSA. Substitutes or alternates for the co-chairs 13 * Confidential Treatment Requested or other RMC members, if any, may be appointed at any time by written notice to the other Party prior to any meeting of the RMC. All RMC members shall be full time employees of DIVERSA and DOW. If either Party desires that an employee of an Affiliate or a consultant attend an RMC meeting, then such consultant to a Party must be under confidentiality obligations to that Party having terms at least a strict as those of this Agreement, must be approved in writing to attend by the other Party, and such person has no vote in the decisions of the RMC. The initial co-chairs and other RMC members are identified in Appendix [*****] attached hereto and made a part hereof, which Appendix shall be updated in writing from time to time to reflect any changes in RMC membership. 2.2.3 Meetings. -------- The RMC shall meet at least quarterly, with such meetings alternating between [*****], and [*****], unless the Parties agree otherwise. The first such meeting shall be held in [*****] within [*****] days after the Effective Date at which time the initial [*****] Plans shall be finalized. Any additional meetings, other than [*****], shall be held at places and on dates selected by the co-chairs of the RMC. RMC members may participate in any such meeting in person, by telephone or by videoconference. In addition, the RMC may act without a formal meeting by a written memorandum signed by the co-chairs of the RMC. Subject to the obligations set forth in Article 6, other full-time employees of each Party, in addition to the members of the RMC, may attend RMC meetings as nonvoting observers at the invitation of either Party with the prior written approval of the other Party. 2.2.4 Minutes. ------- The RMC shall keep minutes of its meetings that record all decisions and all actions recommended or taken. The Party hosting the meeting shall be responsible for the preparation of the meeting agenda and preparation and circulation of the draft minutes. Draft minutes shall be delivered by mail, electronic mail or facsimile to the co-chairs of the RMC within [*****] after each meeting. Any intellectual property issues that may need attention will be highlighted and forwarded to each Party's Patent Coordinator. Draft minutes shall be edited by the co-chairs and shall be issued in final form only with their approval and agreement as evidenced by their signatures on the minutes. A copy of the signed minutes shall be retained in each Party's files for at least [*****] after termination of this Agreement. 2.2.5 Quorum; Voting; Decisions. ------------------------- At each RMC meeting, at least [*****] members appointed by each Party shall constitute a quorum and decisions shall be made by [*****] vote. If the RMC is unable to reach agreement on any matter, such dispute shall be 14 * Confidential Treatment Requested settled pursuant to Article 13 below. 2.2.6 Expenses. -------- DIVERSA and DOW shall [*****] expenses of their respective RMC members related to their participation on the RMC and attendance at RMC meetings. 2.3 Third Party Licenses. -------------------- 2.3.1 DOW Responsibility. ------------------ In the event that DOW can reasonably demonstrate that [*****] of a Third Party's patent rights would [*****] under a [*****] Plan, then DOW shall so notify DIVERSA. DIVERSA shall state whether it has obtained or is planning to obtain [*****] of the [*****] Plan to go forward. If DOW elects to [*****], then the RMC may amend the [*****] Plan if only DOW can [*****]. If DOW and DIVERSA elect not to [*****], then the [*****] Plan shall be altered by the RMC to enable the performance of the modified [*****] Plan. 2.3.2 DIVERSA Responsibility. ---------------------- In the event that it is necessary to [*****] to perform the R&D Program with regard to [*****] provided by DIVERSA, including, without limitation, [*****], DIVERSA will be responsible for the payment of any amounts due to Third Parties for the [*****] for the performance of the R&D Program with regard to such [*****] and the costs of [*****]. The decision [*****] shall be solely DIVERSA's, and DOW shall be notified of that decision. Notwithstanding the foregoing, DIVERSA shall be responsible for [*****] for use of an [*****] Enzyme. DIVERSA and DOW shall promptly notify the other Party in writing of any allegation by a Third Party that the use of an [*****] Enzyme [*****]. If DOW believes that a [*****] to use an [*****] Enzyme, then DOW shall express its concerns to DIVERSA in writing. DIVERSA shall explain to DOW whether it agrees that a [*****] and shall provide sufficient explanation and reasons for its answer. Should DIVERSA be aware and concerned of such [*****] or be considering, instituting or have instituted a [*****], then all such [*****] by DIVERSA. The decision whether such a license is required shall be DIVERSA's. Notwithstanding the foregoing, DIVERSA shall 15 * Confidential Treatment Requested use good faith efforts to terminate [*****]. 2.3.3 Infringement Claims. ------------------- In the event that DOW or DIVERSA receives a written notice of an allegation of possible patent infringement from a Third Party or determines that there is such possible infringement based on (i) the use of a particular [*****], which has been or is planned to be used in the conduct of the R&D Program, or (ii) the use of an [*****] Enzyme or Confidential Information of DIVERSA [*****], such Party shall, within [*****] days, notify the other Party in writing and provide an explanation of the circumstances. If such possible infringement is of concern to DOW, DIVERSA may provide a [*****] to DOW from [*****], which may be based on a [*****], explaining DIVERSA's position and the bases therefore. In such event if no prior legal opinion has been done such that the [*****], then the Parties shall forward a copy of such claim to a [*****] and request that such [*****]. The cost of this review shall be borne by [*****]. If the [*****] that the activities of the R&D Program with respect to the [*****] would be found by a court of competent jurisdiction to infringe a claim of the Third Party patent which is likely to be found valid, then within [*****] days of such [*****], either (i) a [*****] will be substituted by DIVERSA for use in the [*****] Enzyme in the R&D Program, subject to the approval of the RMC, or (ii) DIVERSA will notify DOW that it will [*****] from such Third Party for any intellectual property rights necessary for use of the [*****] in the R&D Program pursuant to Section 2.3.2, or (iii) if the claim relates to alleged infringement of [*****] used to obtain a [*****] an [*****] Enzyme, DIVERSA will determine if an alternative technology could be used that does not infringe the claim of such Third Party patent, and propose to the RMC that such [*****], whereupon any [*****] Plan relating to the aforementioned [*****] Enzyme will be modified by the RMC; or (iv) the RMC may elect to cease to conduct any activity in the R&D Program requiring the use of [*****] and, if necessary, reallocate DIVERSA's FTEs to other activities within the R&D Program, 16 * Confidential Treatment Requested If either (i), (ii), (iii), or (iv) above is not satisfied within [*****], DOW may, upon written notice to DIVERSA, immediately terminate this Agreement and cease all payments, after such notice, except for work performed prior to receipt of such notice by DIVERSA and the payment due under Section 10.4. 2.4 Post Research Term Cooperation. ------------------------------ At least [*****] months prior to the expiration of the Research Term, the Parties shall meet to agree on mechanisms for coordinating and managing activities (including, but not limited to, patent prosecution and publication review) that will occur after the expiration of the Research Term which would otherwise be addressed by the RMC. Any patent applications included in Intellectual Property or Joint Intellectual Property which have not been filed shall be filed in the first instance during the Agreement Term, and both Parties shall cooperate with respect to all issues and formal papers. As part of such considerations, if any research project has not yet resulted in a Licensed [*****] and requires reasonable additional development to accomplish such result, and either the RMC notifies DOW and DIVERSA at its last meeting of this development request or DOW notifies DIVERSA not later than [*****] months after the expiration of the Research Term that DOW wishes to continue such research project with the help of DIVERSA, then DIVERSA agrees to consider in good faith the terms of such a continuation as proposed by DOW, which, in any event, will include the undertaking by DIVERSA to give to DOW access to experienced DIVERSA FTEs to be employed in the diligent continuation of the research project at the same cost as set forth in Section 4.4 hereof plus [*****]. Notwithstanding the foregoing, in no event will DIVERSA be obligated to continue any Research [*****] beyond the Research Term. Should DIVERSA elect not to continue with such incomplete [*****], then DOW is permitted to continue such [*****] in any manner, including with a Third Party, but without the use of DIVERSA Intellectual Property. 2.5 Research Exclusivity. -------------------- During the Research Term, DIVERSA will not collaborate with or license the rights to any Third Party to use any [*****] Enzyme in a Research [*****] to convert a Research [*****] to a [*****], as defined in Appendix [*****], so long as DOW satisfies the diligence obligations set forth in the [*****] Plan with respect to the development of the applicable [*****] Enzyme. During the Research Term, DOW will not collaborate with or license the rights to any Third Party to evolve any enzyme in a Research [*****] to convert a Research [*****] to a [*****], as defined in Appendix [*****]. Article 3. LICENSE RIGHTS 3.1 To DOW. ------ (a) Subject to the terms and conditions of this Agreement, DIVERSA hereby grants to DOW a non-exclusive, nonsublicensable, royalty-free, 17 * Confidential Treatment Requested worldwide license under the specific DIVERSA Intellectual Property listed on Appendix [*****] and Appendix [*****] (attached hereto and made a part hereof) to all Research [*****] using any Licensed [*****] to make, have made, import, have imported, use, have used, sell, have sold and otherwise exploit Royalty Bearing Products (as defined in the License Agreement), and a royalty-free license to all DIVERSA Know-How required for DOW to commercialize Royalty Bearing Products, and the [*****] provided to DOW by DIVERSA hereunder solely to conduct the R&D Program. DOW (i) shall promptly notify DIVERSA in writing of any improvements to the DIVERSA Intellectual Property conceived of or developed by DOW during the Research Term (the "Improvements"), and (ii) shall irrevocably assign to DIVERSA all right, title and interest in and to such Improvements. Such Improvements shall be included in the DIVERSA Intellectual Property licensed to DOW under this Section 3.1 and under the License Agreement. (b) Should DOW determine that modification of an [*****] Enzyme is required, after it has been provided to DOW by DIVERSA under the terms of this Agreement, to make the Licensed [*****] related to such [*****] Enzyme [*****], then DOW may request that DIVERSA perform such added modification under the R&D Program or, if this Agreement has terminated, then under terms to be negotiated in good faith by the Parties. DOW may use the [*****] or request that a Third Party perform the desired modifications of an [*****] Enzyme: (1) if DIVERSA is unwilling to perform such added modification, or (2) upon (i) the transfer or sale of all or substantially all of the business of DIVERSA to which this Agreement relates, whether by merger, sale of stock, sale of assets or otherwise, to a [*****], or (ii) the bankruptcy, insolvency, dissolution or winding up of DIVERSA (other than dissolution or winding up for the purposes of [*****]), then DOW or its Affiliates may modify the [*****] Enzyme to make the Licensed [*****] related to the [*****] Enzyme commercially viable and DOW continues to be able to use DIVERSA Intellectual Property listed in Appendix [*****] (attached hereto and made a part hereof) solely to modify the [*****] Enzyme and/or the Licensed [*****] related to the [*****] Enzyme, provided that DOW pays DIVERSA for the [*****]. (c) Notwithstanding the foregoing Sections 3.1 (a) and (b), DOW (or DOW with its consultants or though a separate agreement between DOW and a Third Party) may 18 * Confidential Treatment Requested conduct independent research activities outside the R&D Program, whether within the Areas of Interest or not, and [*****], but except as otherwise agreed to by DIVERSA in writing, DOW agrees that it will not itself or through any Third Party use any DIVERSA Intellectual Property, Joint Intellectual Property and/or Research [*****] to develop a [*****] Licensed [*****], except under the terms of this Agreement. 3.2 To DIVERSA. ---------- Subject to the terms and conditions of this Agreement, DOW hereby grants to DIVERSA (i) a nonexclusive, nontransferable, nonsublicensable, royalty- free, worldwide research license to DOW Intellectual Property, where legally possible, and the [*****] provided to DIVERSA by DOW, solely to conduct the R&D Program, and (ii) a nonexclusive, nontransferable, nonsublicensable, royalty-free, worldwide license under any patents, trade secrets and other intellectual property Controlled by DOW that relate to [*****] Enzymes in the R&D Program. 3.3 Assignment. ---------- 3.3.1 DOW. --- DOW shall have the right to assign its rights in the license granted herein (or any part thereof) to an Affiliate; provided, however, that DOW shall continue to be responsible for the obligations of any such Affiliate. DOW may assign its rights hereunder in connection with the transfer or sale of all or substantially all of the business of DOW to which this Agreement relates, whether by merger, sale of stock, sale of assets or otherwise. 3.3.2 DIVERSA. ------- DIVERSA shall have no right to assign its rights in the licenses granted to it by DOW pursuant to Section 3.2 hereof (or any part thereof) to any of its Affiliates or any Third Party, except in connection with the transfer or sale of all or substantially all of the business of DIVERSA to which this Agreement relates, whether by merger, sale of stock, sale of assets or otherwise. If DIVERSA is acquired by a Third Party [*****] for Research [*****] or if DIVERSA is controlled by merger, sale of stock, sale of assets or otherwise to a Third Party competitor, then prior to closure of such acquisition, DOW shall be informed of the identity of the Third Party competitor and at DOW's sole discretion can elect to terminate this Agreement under Section 10.4 and request in writing immediate return of all Confidential Information. 3.4 Retained Rights. ---------------- 3.4.1 DIVERSA. ------- DIVERSA shall retain all right, title and interest in and to the DIVERSA 19 * Confidential Treatment Requested Intellectual Property and Joint Intellectual Property, except as expressly granted to DOW in Section 3.1 or in the License Agreement. DIVERSA may grant to Third Parties licenses under the Diversa Intellectual Property for use of [*****] Enzymes; provided, however, that such licenses do not conflict with the license granted to DOW herein or under the License Agreement, and provided that in the event the [*****] Enzyme is a [*****] provided by DOW to DIVERSA under the terms of this Agreement, DIVERSA obtains DOW's prior written consent (which may be withheld for any reason) and pays a reasonable royalty to DOW in accordance with a separate license agreement to be negotiated in good faith between the Parties. DIVERSA shall inform DOW of the application(s) for an [*****] Enzyme that is intended transferred to a Third Party if the [*****] Enzyme is a [*****] provided by DOW to DIVERSA under the terms of this Agreement. Notwithstanding the license granted to DOW in Section 3.1, DIVERSA shall retain the right to use all [*****] Enzymes for its own research purposes (i.e., to develop, improve and validate its technology and intellectual property). 3.4.2 DOW. --- DOW shall retain all right, title and interest in and to the DOW Intellectual Property and Joint Intellectual Property, except as not expressly granted to DIVERSA in Section 3.2; provided, however, that during the Agreement Term, DOW shall not grant any license under the DOW Intellectual Property or Joint Intellectual Property which conflicts with the license granted to DIVERSA herein. Article 4. PAYMENTS 4.1 Technology Development. ---------------------- Within [*****] days after the Effective Date, DOW shall pay to DIVERSA a technology development fee of One Million Five Hundred Thousand (US$1,500,000) Dollars, and shall similarly provide DIVERSA with a technology development fee of One Million Five Hundred Thousand (US$1,500,000) Dollars, during the Agreement Term, within [*****] days of each of the successive two anniversary dates of the Effective Date. Thus within [*****] days after the Effective date, DOW shall pay to DIVERSA a technology development fee of One Million Five Hundred Thousand (US$1,500,000) Dollars and Nine Hundred Thousand (US$900,000) Dollars for the first quarter FTE payment under Section 4.4 for a total of Two Million Four Hundred Thousand (US$2,400,000) Dollars. 20 * Confidential Treatment Requested 4.2 Milestone Payments. ------------------ DOW shall make milestone payments to DIVERSA as set forth in Appendix [*****] attached hereto and made a part hereof. The RMC shall determine whether DIVERSA has achieved a milestone and shall note such decision in its signed minutes. If the RMC cannot reach a decision, then Article 13 shall control. The milestone goal achievements shall be determined [*****] by the RMC at its meeting [*****], shall be performance driven goals, and shall be paid by DOW to DIVERSA [*****] days after the determination has been made by the RMC that the milestone was met. The amount of milestone payments in a given year may be up to [*****] Dollars for all [*****] Plans. 4.3 Payments. -------- All payments due under this Agreement shall be made in accord with the respective sections of Article 4 by bank wire transfer in immediately available funds to a bank account designated in writing to DOW by DIVERSA. In the event that the due date of any payment subject to this Article 4 hereof is a Saturday, Sunday or national holiday, such payment may be paid on the following business day. Any late payments shall bear interest to the extent permitted by applicable law at the prime rate (as reported by the Bank of America, San Francisco, California, or its successor), on the date such payment is due plus an additional [*****], calculated on the number of days such payment is delinquent. The rights provided in this Section 4.3 shall in no way limit any other remedies available to DIVERSA hereunder. 4.4 FTE Payments. ------------ 4.4.1 In addition to the other payments due pursuant to this Article 4, DOW will pay to DIVERSA a nonrefundable amount of Three Million Six Hundred Thousand (US$3,600,000) Dollars per year for the 12 FTEs set forth in Section 2.1.1(d) for each of the three years of the Research Term, commencing as of the Effective Date. 4.4.2 Payments due pursuant to the above Section 4.4.1 shall be made in advance, on or before the first day of each calendar quarter, with the first and last payments prorated in the event that the Effective Date is not the first day of a calendar quarter. Should payment be due on a Saturday, Sunday or national holiday, such payment may be paid on the following business day. In the event that the Parties agree to a different Staffing Level for any given calendar quarter, the payment set forth in this Section 4.4 shall be prorated accordingly based on a level of funding of [*****] Dollars per year per FTE. Any change in the amount of the FTE payment due in a quarter shall be reported to DOW by DIVERSA in writing [*****] days in advance of such payment. Article 5. LICENSE AGREEMENT; DEVELOPMENT REPORTS 21 * Confidential Treatment Requested 5.1 License Agreement. ----------------- The Parties have entered into a License Agreement covering [*****] Enzymes and Licensed [*****] executed contemporaneously with this Agreement, a copy of which is attached hereto for reference as Appendix [*****]. DIVERSA hereby represents: (a) that it is willing and able to grant to DOW (i) an exclusive, royalty bearing, worldwide license under the DIVERSA Intellectual Property to use the [*****] Enzymes and the [*****] the [*****] Enzymes in a Research [*****] to make, have made, use, sell, offer for sale and import Royalty Bearing Products (as defined in the License Agreement), and (ii) a non-exclusive, royalty bearing, worldwide license under DIVERSA Intellectual Property to improve Licensed [*****]; and (b) that to the best of its knowledge, there are [*****] required for DOW to practice the DIVERSA Intellectual Property. 5.2 DOW may perform research within the Areas of Interest independent of this Agreement. If DOW desires that a Third Party assist DOW in such research, it shall be in accordance with Sections 3.1, 3.3 and 3.4. Article 6. TREATMENT OF CONFIDENTIAL INFORMATION 6.1 Confidentiality. --------------- 6.1.1 General. ------- (a) DIVERSA and DOW each recognize that the other Party's Confidential Information constitutes highly valuable and proprietary confidential information. Subject to the terms and conditions of Article 8, DIVERSA and DOW agree that, except as required by applicable law, rule or regulation (including the filing and prosecution of patent applications) or judicial or administrative order, during the Agreement Term and for [*****] years thereafter, unless these terms are modified by the License Agreement after the expiration of the Agreement Term that: (i) it will keep confidential and will cause its employees, consultants, and Affiliates, to keep confidential, all Confidential Information of the other Party that is disclosed to it, or to any of its employees or consultants, under or in connection with this Agreement; and (ii) neither it nor any of its respective employees, consultants or Affiliates shall use Confidential Information of the other Party for any purpose whatsoever, except as expressly permitted in this Agreement. 22 * Confidential Treatment Requested (b) Notwithstanding subsection (a) above: (i) either Party may disclose the other Party's Confidential Information to the extent reasonably necessary in prosecuting or defending litigation, complying with applicable governmental regulations or court orders or otherwise submitting information to tax or other governmental authorities; provided that, if a Party is required to make any such disclosure of the other Party's Confidential Information, it will give reasonable advance notice to the other Party of such disclosure and will use reasonable efforts to secure confidential treatment of such Confidential Information (whether through protective orders or otherwise); and (ii) the Parties will reasonably cooperate with each other in the making of reasonable disclosures of Confidential Information to actual and potential agents, investment bankers, investors and potential investors of each Party; provided, however, that such disclosures shall be critically required for an investment objective, notice shall be provided to the Party who owns the Confidential Information to protect its rights, and only be made under the terms of a confidentiality agreement providing protections no less stringent than those contained herein. 6.1.2 Restricted Access. ----------------- (a) Disclosure of a Party's Confidential Information to any of the officers, employees, consultants or agents of the other Party shall be made only if and to the extent necessary to carry out rights and responsibilities under this Agreement, shall be limited to the maximum extent possible, consistent with such rights and responsibilities, and shall only be made to persons who are bound to maintain the confidentiality thereof and not to use such Confidential Information except as expressly permitted by this Agreement. If DOW discloses any DIVERSA Confidential Information to [*****], it shall do so under these same terms and conditions of this Section 6.1.2. (b) Each Party shall use at least the same standard of care, but no less than a reasonable standard of care for this industry, as it uses to protect its own Confidential Information to ensure that its [*****], employees, agents, consultants and other representatives do not disclose or make any unauthorized use of Confidential Information of the other Party. Each Party shall promptly notify the other Party of any unauthorized use or disclosure of Confidential Information of the other Party. (c) Within [*****] days following termination or expiration of this Agreement, each Party will return to the other Party, or destroy, upon the written request of the other Party, all Confidential 23 * Confidential Treatment Requested Information disclosed to it by the other Party pursuant to this Agreement, including all copies and extracts of documents; provided that a Party may retain Confidential Information of the other Party relating to any license or right to use Intellectual Property that survives such termination and one copy of all other Confidential Information may be retained in confidential and inactive archives solely for the purpose of establishing the contents thereof and to determine the continuing obligations of each Party. 6.1.3 Employee Confidentiality Agreements. ----------------------------------- DIVERSA and DOW each represent that all of its employees and any consultants to such Party participating in the R&D Program or who shall otherwise have access to Confidential Information of the other Party are bound by written agreements to maintain such information in confidence and not to use such information except as expressly permitted herein. Each Party agrees to [*****] by which its employees and consultants are bound. 6.2 Publicity. --------- Except as expressly provided herein, neither Party may disclose the existence or terms of this Agreement without the prior written consent of the other Party; provided, however, that either Party may make such disclosure to the extent required by law and that either Party may make a disclosure of the existence of this Agreement to its attorneys, advisers, investors, prospective investors, lenders and other financing sources, under circumstances that reasonably ensure the confidentiality thereof. Notwithstanding the foregoing, the Parties shall mutually agree upon a press release to announce the execution of this Agreement, together with a corresponding Q&A outline for use in responding to inquiries about the Agreement; thereafter, DOW and DIVERSA may each disclose to Third Parties the information contained in such press release and Q&A outline without the need for further approval by the other Party. In no event shall the financial terms of this Agreement be publicly disclosed, except to the extent required by any Securities and Exchange Commission filings or regulations, but all financial terms must be redacted prior to submission. In addition, DIVERSA may (i) make public statements regarding Licensed [*****] by announcing in general terms the achievement of milestones, following consultation with DOW and with the prior written consent of DOW, and (ii) without the prior consent of DOW, make public statements, without identifying DOW, regarding the overall success rate(s) achieved by and/or for its customers with the use of its technology, including a general description of activities undertaken in connection with the R&D Program, and success of such activities. DOW is free to make public statements, press releases, and the like, with respect to Licensed [*****]. 6.3 Publication. ----------- A Party wishing to publish or otherwise publicly disclose its Research [*****] shall first submit a draft of the proposed manuscripts simultaneously to all members of the RMC 24 * Confidential Treatment Requested for review by the other Party at least [*****] days prior to any submission for publication or other public disclosure. To avoid loss of patent rights as a result of premature public disclosure of patentable information, the reviewing Party shall notify the submitting Party in writing within [*****] days after receipt of such proposed disclosure whether the reviewing Party desires that a patent application be filed on any invention disclosed in such proposed disclosure. In the event that the reviewing Party desires such filing, the submitting Party shall withhold publication or disclosure of such proposed disclosure until the earlier of (i) the date a patent application is filed thereon, or (ii) the date the Parties determine after consultation that no patentable invention exists, or (iii) [*****] days after receipt by the submitting Party of the reviewing Party's written notice of the reviewing Party's desire to file such patent application. If the proposed disclosure contains Confidential Information of the reviewing Party that is subject to nondisclosure obligations under this Article 6, the submitting Party agrees to remove such Confidential Information upon request of the reviewing Party. Article 7. INTELLECTUAL PROPERTY RIGHTS 7.1 Disclosure of Inventions. ------------------------ Each Party shall promptly inform the RMC of all Research [*****] relevant to the progress of each [*****] Plan towards its pre-agreed goals, in accordance with a procedure established by the RMC. 7.2 Ownership. --------- All intellectual property rights, which are in possession of either Party as of the Effective Date, shall remain in the possession of that Party. Ownership of inventions conceived of during the course of the collaboration in the Areas of Interest (the "Inventions") will be as follows: 7.2.1 DIVERSA Intellectual Property Rights. ------------------------------------ DIVERSA shall have sole and exclusive ownership of all right, title and interest on a worldwide basis in and to any DIVERSA Research Results. 7.2.2 DOW Intellectual Property Rights. -------------------------------- DOW shall have sole and exclusive ownership of all right, title and interest on a worldwide basis in and to any DOW Research Results. 7.2.3 Joint Intellectual Property Rights. ---------------------------------- DOW and DIVERSA shall jointly own all Joint Research Results. 7.2.4 Inventions Relating to [*****] Enzymes or Licensed Products. ----------------------------------------------------------- Notwithstanding the foregoing, (i) DIVERSA will own all Inventions relating to compositions of matter, uses or methods of, or otherwise involving, any [*****] Enzyme or [*****] except for Joint Intellectual Property 25 * Confidential Treatment Requested or [*****] supplied by DOW, and (ii) DOW will own all Inventions relating to compositions of matter, uses or methods of, or otherwise involving, products made by Licensed [*****] in the Areas of Interest. If the product made by the Licensed [*****] is within the Field but outside the Areas of Interest, then DOW shall have a right of first refusal for a reasonable time to obtain rights for that use under a separate license agreement. 7.3 Patent Coordinators. ------------------- DIVERSA and DOW shall each appoint a patent coordinator ("Patent Coordinator") who shall serve as such Party's primary liaison with the other Party on matters relating to ownership of Inventions, inventorship, patent filing, prosecution, maintenance and enforcement. Each Party may replace its Patent Coordinator at any time by notice in writing to the other Party. The initial Patent Coordinator from DIVERSA is [*****] and from DOW is [*****]. 7.4 Inventorship. ------------ Except as specifically provided above, ownership of Inventions and inventorship shall be determined by the Patent Coordinators in accordance with United States patent law. If the Patent Coordinators can not agree on inventorship or ownership of Inventions, then a neutral patent attorney acceptable to both Parties shall make the determination, with each Party [*****]. 7.5 Deposits. -------- Should deposits of the [*****] Enzyme or Licensed [*****] be desired by either Party to support the filing of a patent application, both Parties agree to cooperate to enable and obtain such deposit. Ownership of and costs for the deposit shall be borne by the Party responsible in accordance with Article 8. Article 8. PROVISIONS CONCERNING THE FILING, PROSECUTION AND MAINTENANCE OF PATENT RIGHTS The following provisions relate to the filing, prosecution and maintenance of Patent Rights claiming Inventions. 26 * Confidential Treatment Requested 8.1 Filing and Prosecution of Patents. --------------------------------- 8.1.1 Primary Responsibilities. ------------------------ In consultation with the Patent Coordinators, the RMC will coordinate the determination of what patents will be filed on Research [*****]. Unless the RMC agrees otherwise in writing, the Parties shall have the following responsibilities for patent filing, prosecution and maintenance (including the defense of interferences, oppositions and similar proceedings) (collectively, "Patent Activities"): (a) Royalty Bearing Products (as defined in the License Agreement). -------------------------------------------------------------- DOW will be responsible, at its sole expense, for Patent Activities with respect to Inventions made by DIVERSA or DOW or Jointly Developed relating primarily to Royalty Bearing Products and [*****] that use [*****] Enzymes and/or [*****] Enzymes that make Royalty Bearing Products (as defined in the License Agreement) in accordance with Section 7.2.4 (ii). (b) Improved Enzymes. DIVERSA will be responsible, at its sole ----------------- expense, for Patent Activities with respect to Inventions made by DIVERSA or DOW or Jointly Developed relating primarily to [*****] Enzymes in accordance with Section 7.2.4 (i). (c) All Other Inventions. DOW will be responsible, at its sole -------------------- expense, for Patent Activities with respect to Inventions made solely by DOW not otherwise covered in Section 8.1.1 (a) and (b). DIVERSA will be responsible, at its sole expense, for Patent Activities with respect to Inventions made solely by DIVERSA not otherwise covered in Section 8.1.1 (a) and (b). In the case of Inventions Jointly Developed not otherwise covered in Section 8.1.1, Patent Activities shall be conducted by outside counsel, reasonably acceptable to both Parties, with equal control and joint responsibility for costs incurred in connection with the applicable Patent Activities. 8.1.2 Cooperation. ----------- In each case in Section 8.1.1 above, the Party responsible for Patent Activities for the applicable patent applications (the "Responsible Party") shall use reasonable efforts to obtain patent coverage that is as broad as possible to [*****] thereof. Each Party shall be kept informed of all substantive matters relating to the preparation and prosecution of all patent applications under the Joint Patent Rights. 8.2 Elective Termination of Rights. ------------------------------ If at any time the Responsible Party does not wish to file any patent application or 27 * Confidential Treatment Requested wishes to discontinue the prosecution or maintenance of any Patent Rights claiming any [*****] Enzyme or Licensed [*****] filed in any country, it shall promptly give notice of such intention to the other Party. The latter shall have the right, [*****], to assume responsibility for the filing, prosecution or maintenance of any such Patent Rights on a country-by-country basis at its own expense, by giving notice to the Responsible Party of such intention within [*****] days. No assignment of Patent Rights shall occur to the other Party unless specifically agreed to under appropriate negotiated terms and conditions. In any such case, the Party declining such responsibilities shall not grant any Third Party a license under its interest in the applicable Patent Rights in the applicable country or countries and may not practice the applicable Patent Rights for any commercial use (but may practice, royalty free such Patent Rights for research use) without the prior written consent of the other Party. The other Party will bear the costs of Patent Activities with respect to all Patent Rights for which it has assumed responsibility pursuant to this Section 8.2. Article 9. LEGAL ACTION 9.1 Actual or Threatened Infringement. --------------------------------- 9.1.1 Notice. ------ In the event either Party becomes aware any where in the world of any actual or threatened commercially material infringement or unauthorized possession, knowledge or use of any Patent Rights (collectively, an "Infringement"), that Party shall, within 60 days, notify the other Party and provide it with all available details to the extent it is legally permitted to do so. The [*****]. 9.1.2 Primary Responsibility. ---------------------- (a) Notwithstanding the foregoing, if the Parties do not otherwise agree on a course of action, DOW shall have primary responsibility for the prosecution, prevention or termination of any Infringement of DOW's Patent Rights hereunder, at DOW's expense and with the sharing of recoveries as specified below. (b) DIVERSA shall have primary responsibility for the prosecution, prevention or termination of any Infringement of DIVERSA's Patent Rights, at DIVERSA's expense and with the sharing of recoveries as specified below. If either Party which has primary responsibility as described in (a) or (b) above determines that it is necessary or desirable for the other Party to join any such suit, action or proceeding, the other Party shall execute all papers and perform such other acts as may be reasonably required in the circumstances, at the 28 * Confidential Treatment Requested expense of the Party which has primary responsibility. 9.1.3 Jointly-Owned Patents. --------------------- In the event of an Infringement of Joint Patent Rights, the Parties shall agree which Party will have the rights and responsibilities of abating such Infringement, and how the expenses and any recovery thereof shall be shared. In this event, the responsible Party shall [*****], and shall keep the other Party fully informed as to the status of such matters. In the event only one Party wishes to pursue such proceeding, it shall have the right to proceed alone, at its expense, and may retain any recovery, and the other Party agrees, at the request and expense of the Party initiating such action, to cooperate and join in any proceedings in the event that a Third Party asserts that the co-owner of such Joint Invention is necessary or indispensable to such proceedings. 9.1.4 Costs. ----- DOW shall bear the cost of any proceeding or suit under this Section 9.1 brought by DOW; DIVERSA shall bear the cost of any such proceeding or suit brought by DIVERSA. In each such case, the Responsible Party shall have the right first to [*****] in such suit or in [*****] incurred by such Party, including [*****]. The remainder shall [*****] so incurred. Any remaining amounts or any non-monetary recovery shall be kept by the Responsible Party. If the suit results in damages being owed to a Third Party, then the Responsible Party [*****], except if the suit is based on Joint Patent Rights and both Parties are actively involved, then the costs and damages are to [*****]. 9.1.5 Separate Counsel. ---------------- Each Party shall always have the right to be represented by counsel of its own selection and at its own expense in any suit instituted under this Section 9.1 by the other Party for an Infringement. 9.1.6 Standing. -------- If either Party lacks standing and the other Party has standing to bring any such suit, action or proceeding as specified above, then the Responsible Party may request the other Party to do so at the Responsible Party's expense. The Party with standing is under no obligation to comply with such request, but rather is free to refuse such request. 9.1.7 Cooperation. ----------- 29 * Confidential Treatment Requested In any action under this Section 9.1, each Party shall fully cooperate with and assist the other Party as reasonably requested. No suit regarding DIVERSA Intellectual Property or Joint Intellectual Property may be settled by DOW without DIVERSA's prior written consent. No suit regarding DOW Intellectual Property or Joint Intellectual Property may be settled by DIVERSA without DOW's prior written consent. 9.2 Defense of Claims Asserted by Third Parties Against DOW. ------------------------------------------------------- DOW shall indemnify DIVERSA for the development, manufacture, use, handling, storage, sale or other disposition of Licensed [*****] or Research [*****] by DOW or its Affiliates during the Agreement Term. 9.3. Defense of Claims Asserted by Third Parties Against DIVERSA. ----------------------------------------------------------- DIVERSA shall indemnify DOW for the development, manufacture, use, handling, storage, sale or other disposition of [*****] Enzyme or Research [*****] by DIVERSA or its Affiliates during the Agreement Term. 9.4 Notice. ------ DOW or DIVERSA shall notify the other in accord with Section 14.1 of any suits or claims or proceedings brought against it under Section 9.2 or 9.3, respectively. Article 10. TERMINATION AND DISENGAGEMENT 10.1 Term. ---- This Agreement shall be effective as of the Effective Date and, unless otherwise terminated earlier pursuant to this Agreement, shall continue in full force and effect until the end of the Agreement Term. Nevertheless, this Agreement may be terminated at any time upon mutual written agreement of the Parties, provided that DOW pays any actual costs to DIVERSA done under the [*****] Plans until the date of termination. 10.2 Material Breach. In the event either Party has materially breached or --------------- defaulted in the performance of any of its obligations hereunder, the nonbreaching Party may terminate this Agreement. A material breach of this Agreement by a Party shall be deemed to have occurred: (a) upon the failure of a Party to pay, when due, any amount due hereunder to the other Party, if such Party has not paid the amount due within [*****] days after receiving notice from the non-breaching Party of such failure to pay; or (b) upon breach of any other material obligation or condition by a Party, if such Party has not cured such breach within [*****] days after receiving written notice from the nonbreaching Party of such breach. For this purpose a breach of a material obligation must result from a failure to meet that Party's representations, 30 * Confidential Treatment Requested warrantees, covenants or performance under the [*****] Plan. 10.3 Bankruptcy. ---------- 10.3.1 If either Party (the "Insolvent Party") files for protection under bankruptcy laws, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its property, files a voluntary petition under any bankruptcy or insolvency act or has any such petition filed against it which is not discharged within [*****] days of the filing thereof, then the other Party may, at its sole election upon notice to the Insolvent Party, terminate this Agreement by written notice to such Party. 10.3.2 All rights and licenses granted under or pursuant to this Agreement shall be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses or rights to "intellectual property" as defined under Section 101(52) of the U.S. Bankruptcy Code. The Parties agree that each Party, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the U.S. Bankruptcy Code, subject to performance by the licensee of its preexisting obligations under this Agreement. 10.4 Termination by DOW. ------------------ DOW may terminate this Agreement upon [*****] days prior written notice to DIVERSA; provided, however, that DOW shall pay to DIVERSA (i) [*****] upon termination of this Agreement during the [*****] following the Effective Date, and (ii) [*****] upon termination of this Agreement during the [*****] following the Effective Date. DOW may immediately terminate this Agreement in accord with Section 3.3.2 by providing [*****] days written notice to DIVERSA and providing payment of any remaining technology development fees of Section 4.1 (but no payment of any remaining FTE fees under Section 4.4). Notwithstanding the foregoing, DIVERSA will not refund DOW any portion of any payments made under Section 4.4. 10.5 Effect of Termination; Accrued Obligations. ------------------------------------------ 10.5.1 Accrued Obligations. ------------------- Termination of this Agreement for any reason shall not release any Party hereto from any liability which, at the time of such termination, has already accrued to the other Party or which is attributable to a period prior to such termination, nor preclude either Party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination. 10.5.2 Licenses. -------- (i) In the event that DOW terminates this Agreement to DIVERSA, pursuant to Section 10.2, then the R&D Program shall immediately terminate and all 31 * Confidential Treatment Requested payments due by DOW to DIVERSA shall immediately terminate. This Agreement relates to research rights only and all commercial rights are stated in the License Agreement and are not affected hereby. (ii) In the event DOW terminates the Agreement pursuant to Section 10. 3.1, the licenses granted to DIVERSA in Article 3 shall terminate. (iii) In the event DIVERSA terminates the Agreement pursuant to Section 10.3.1, the licenses granted to DOW in Article 3 shall terminate. 10.6 Surviving Provisions. -------------------- Articles 12, 13 and 14 and Sections 6.1, 6.2, 7.2, 7.5, 10.5, 11.1.4 and 11.1.5 of this Agreement shall survive the expiration or termination of this Agreement for any reason. Article 11. REPRESENTATIONS AND WARRANTIES 11.1 Mutual Representations. ---------------------- DIVERSA and DOW each represents and warrants as follows: 11.1.1 Organization. ------------ It is a corporation duly organized, validly existing and is in good standing under the laws of the jurisdiction of its incorporation, is qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the performance of its obligations hereunder requires such qualification and has all requisite power and authority, corporate or otherwise, to conduct its business as now being conducted, to own, lease and operate its properties and to execute, deliver and perform this Agreement. 11.1.2 Authorization. ------------- The execution, delivery and performance by it of this Agreement have been duly authorized by all necessary corporate action and do not and will not: (a) require any consent or approval of its stockholders or (b) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to it or any provision of its charter documents. 11.1.3 Binding Agreement. ----------------- This Agreement is a legal, valid and binding obligation of it, enforceable against it in accordance with its terms and conditions. 11.1.4 Warranty Disclaimer. ------------------- The Parties acknowledge that the research activities contemplated hereunder are experimental, and that the R&D Program may not be successful. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER 32 PARTY MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, WITH RESPECT TO ANY CONFIDENTIAL INFORMATION, PATENT RIGHTS, KNOW-HOW, [*****] ENZYMES, LICENSED [*****], OR OTHER TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, OR VALIDITY OF TECHNOLOGY OR PATENT CLAIMS, ISSUED OR PENDING, WITH RESPECT TO ANY AND ALL OF THE FOREGOING. 11.1.5 Limited Liability. ----------------- EXCEPT AS EXPRESSLY PROVIDED HEREIN, NEITHER DIVERSA NOR DOW WILL BE LIABLE TO THE OTHER PARTY WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR (i) ANY SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOST PROFITS OR (ii) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES. Article 12. INDEMNIFICATION 12.1 Indemnification. ---------------- Neither Party shall indemnify the other Party nor its Affiliates, or respective officers, directors, employees and agents and its respective successors, heirs and assigns ("Indemnitees") except for Sections 9.2 and 9.3, its respective gross negligence, or failure to perform using its reasonable best efforts under the [*****] Plans. This paragraph does not limit either Party's other remedies available to it under the laws. 12.2 Procedure. --------- A Party that intends to claim indemnification under this Article 12 (the "Indemnitee") shall promptly notify the other Party (the "Indemnitor") in writing of any loss, claim, damage, liability or action in respect of which the Indemnitee or any of its Affiliates or their directors, officers, employees, agents, consultants or counsel intend to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, to assume the defense thereof with counsel of its own choice. The indemnity agreement in this Article 12 shall not apply to amounts paid in settlement of any loss, claim, damage, liability or action if such settlement is made without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver written notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability 33 * Confidential Treatment Requested to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Article 12. At the Indemnitor's request, the Indemnitee under this Article 12, and its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation and defense of any action, claim or liability covered by this indemnification and provide full information with respect thereto. Article 13. DISPUTE RESOLUTION 13.1 Informal Dispute Resolution. --------------------------- 13.1.1 Senior Officials. ---------------- The Parties recognize that a bona fide dispute as to certain matters may from time to time arise during the Agreement Term, which relates to either Party's rights or obligations hereunder. In the event of the occurrence of such a dispute, either Party may, by written notice to the other Party, have such dispute referred to the [*****] of DIVERSA and the [*****] of DOW, or their successors or counterparts, for resolution by good faith negotiations within [*****] days after such notice is received at a [*****]. 13.1.2 Interim Conduct. --------------- If the Parties are unable to reach agreement with respect to a [*****] Plan pursuant to Section 13.1.1, then such dispute shall be resolved as described in Section 13.2 below. 13.2 Arbitration. ----------- Any dispute under this Agreement, except one that arises with respect to determination of Research [*****] or Research [*****], which is not settled by mutual consent pursuant to Section 13.1, shall be finally settled by binding arbitration, conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association (or such rules as are appropriate to the dispute) by three independent, neutral arbitrators having at least 15 years of experience in the areas of the contested issues and appointed in accordance with said rules. The procedures or rules for the arbitration may be modified by mutual consent of the Parties, including having mediation rather than an arbitration conducted. Any arbitration shall be in English held in [*****]. The arbitrators shall determine what discovery shall be permitted, consistent with the goal of limiting the cost and time that the Parties must expend for discovery; provided, however, that the arbitrators shall permit such discovery, as they deem necessary to permit an equitable resolution of the dispute. Any written evidence originally in a language other than English shall be submitted in English translation accompanied by the original or a true copy thereof. Except as otherwise expressly 34 * Confidential Treatment Requested provided in this Agreement, the costs of the arbitration, including administrative and arbitrator fees, shall be [*****] by the Parties and each Party shall bear its own costs and attorneys' and witness' fees incurred in connection with the arbitration. A disputed performance or suspended performance(s) pending the resolution of the arbitration must be completed within a reasonable time period following the final decision of the arbitrators. Any arbitration subject to this Article 13 shall be completed within [*****] from the filing of notice of a request for such arbitration and a written decision with reasons therefore provided to the Parties. Any decision shall be deemed confidential and not disclosed to any Third Party. Should a Party believe that reporting the decision is required by governmental regulation, then the Parties shall mutually agree as to the content of such report. Any decision which requires a monetary payment shall require such payment to be payable in United States dollars, free of any tax or other deduction. The Parties agree that the decision shall be the sole, exclusive and binding remedy between them regarding any and all disputes, controversies, claims and counterclaims presented to the arbitrators. If a decision is not complied with by a Party, then any award or decision may be entered in a court of competent jurisdiction for a judicial recognition of the decision and an order of enforcement. Article 14. MISCELLANEOUS 14.1 Notices. ------- All notices (including, but not limited to, legal matters and copies of the signed RMC minutes) shall be in writing mailed via certified mail, return receipt requested, or overnight express mail, courier providing evidence of delivery, addressed as follows, or to such other address as may be designated by notice so given from time to time: If to DOW: THE DOW CHEMICAL COMPANY [*****] If to DIVERSA: DIVERSA CORPORATION 10665 Sorrento Valley Road San Diego, California 92121 Attention: Chief Executive Officer Notices shall be deemed given as of the date received. If the notice relates to scientific matters, such as the RMC, a [*****] Plan, a Research [*****], or a Research [*****], the notice for the Parties is to be supplied and received in the manner described above but sent to: 35 * Confidential Treatment Requested If to DOW: THE DOW CHEMICAL COMPANY [*****] If to DIVERSA: DIVERSA CORPORATION. 10665 Sorrento Valley Road San Diego, California 92121 Attention: Jay M. Short, Ph.D. 36 * Confidential Treatment Requested 14.2 Governing Law and Jurisdiction. ------------------------------- This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the application of principles of conflicts of law. 14.3 Binding Effect. -------------- This Agreement shall be binding upon and inure to the benefit of the Parties and their respective legal representatives, successors and permitted assigns. 14.4 Headings. -------- Section and subsection headings are inserted for convenience of reference only and do not form a part of this Agreement. 14.5 Counterparts. ------------ This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original. 14.6 Amendment; Waiver. ----------------- This Agreement may be amended, modified, superseded or canceled, and any of the terms may be waived, only by a written instrument executed by each Party or, in the case of waiver, by the Party or Parties waiving compliance. Nevertheless, Appendices [*****] may be amended by the signatures of the co-chairs of the RMC to a revised Appendix, which must then be supplied to the persons for notice under Section 14.1, and Appendices [*****] may be amended by the signatures of both Patent Coordinators listed in Section 7.3. The delay or failure of any Party at any time or times to require performance of any provisions shall in no manner affect the rights at a later time to enforce the same. No waiver by any Party of any condition or of the breach of any term contained in this Agreement, whether by conduct, or otherwise, in any one or more instances, shall be deemed to be, or considered as, a further or continuing waiver of any such condition or of the breach of such term or any other term of this Agreement. 14.7 No Agency or Partnership. ------------------------ Nothing contained in this Agreement shall give either Party the right to bind the other Party, or be deemed to constitute either Party as an agent for the other Party or as a partner with the other Party or any Third Party. 14.8 Assignment and Successors. ------------------------- Except as expressly provided herein, this Agreement may not be assigned by either Party without the prior written consent of the other Party, except that each Party may, without such consent, assign this Agreement and the rights, obligations and interests of such Party, in whole or in part, to any 37 * Confidential Treatment Requested purchaser or other transferee of all or substantially all of its assets in the line of business to which this Agreement pertains, or to any successor corporation resulting from any merger or consolidation of such Party with or into another entity, subject, however, in the case of DIVERSA to the restriction set forth in Section 3.3.2. In the event of any merger or consolidation by a Party into another entity, such Party shall promptly notify the other Party in writing of such merger or consolidation and the obligations under this Agreement shall be maintained and performed by the successor entity unless modified in accord with Section 14.6. 14.9 Force Majeure. ------------- Neither DOW nor DIVERSA shall be liable to the other Party for failure of or delay in performing obligations set forth in this Agreement, and neither shall be deemed in breach of its obligations, if such failure or delay is due to natural disasters or any other cause beyond the reasonable control of a Party, and notice of such prevention of performance is promptly provided by the non-performing Party to the other Party. Such excuse shall be continued so long as the condition constituting force majeure continues and the non-performing Party takes reasonable efforts to remove the condition. In event of such force majeure, the Party affected thereby shall use reasonable efforts to cure or overcome the same and resume performance of its obligations hereunder. 14.10 Interpretation. -------------- The Parties hereto acknowledge and agree that: (i) each Party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting Party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all Parties hereto and not in a favor of or against any Party, regardless of which Party was generally responsible for the preparation of this Agreement. 14.11 Integration: Severability. ------------------------- This Agreement (including the Exhibits attached hereto) together with the License Agreement sets forth all of the agreements and understandings between the Parties with respect to the subject matter hereof and supersedes all other agreements and understandings between the Parties with respect to the same. If any provision of this Agreement is or becomes invalid or is ruled invalid by any court of competent jurisdiction or is deemed unenforceable, it is the intention of the Parties that the remainder of this Agreement shall not be affected. If possible, the invalid provision shall be replaced with a valid provision, which meets the intent of the Parties. 14.12 Approvals. --------- DOW shall be responsible, at its expense, for obtaining any approvals from governmental entities which may be required under applicable law for the development of Research [*****] or Licensed [*****], and shall use its best efforts to obtain all necessary 38 * COnfidential Treatment Requested approvals as soon as reasonable. DIVERSA shall be responsible, at its expense, for obtaining any approvals from governmental entities which may be required under applicable law for the shipment of [*****] Enzymes to DOW to perform its obligations under the R&D Program. 14.13 Export Controls. --------------- This Agreement is made subject to any restrictions concerning the export of Licensed [*****], Research [*****], Research [*****] or Intellectual Property (collectively, "Technology") from the United States that may be imposed upon either Party from time to time by laws or regulations of the United States. Neither Party will export, directly or indirectly, any Technology to any country for which the United States government or any agency thereof at the time of export requires an export license or other governmental approval, without first obtaining the written consent to do so from the Department of Commerce, Bureau of Export Administration, or other agency of the United States government when required by applicable statute or regulation. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in duplicate as of the last signature date below, by their duly authorized representatives. This Agreement is intended to be signed concurrently with the License Agreement and shall not be effective until the License Agreement has also been executed by both Parties. THE DOW CHEMICAL COMPANY Date:______________________________ By:_________________________________ Fernand Kaufmann Vice President New Businesses and Strategic Development DIVERSA CORPORATION Date:_______________________________ By:_________________________________ Jay M. Short, Ph.D. Chief Executive Officer 13 Appendix Enc.: Appendix A-1: [*****] Appendix A-2: [*****] Appendix A-3: [*****] Appendix B-1: [*****] Appendix B-2: [*****] Appendix B-3: [*****] [*****] 39 * Confidential Treatment Requested Appendix B-4: [*****] Appendix C: [*****] Appendix D: [*****] Appendix E: [*****] Appendix F: [*****] Appendix G: [*****] Appendix H: [*****] 40 * Confidential Treatment Requested APPENDIX [*****] RESEARCH [*****] AND/OR RESEARCH [*****] * Confidential Treatment Requested APPENDIX [*****] [*****] PLANS * Confidential Treatment Requested APPENDIX [*****] RMC MEMBERSHIP * Confidential Treatment Requested APPENDIX A-3 RMC MEMBERSHIP The following employees of DIVERSA will represent DIVERSA as the company's initial RMC members: [*****] [*****] [*****] The following employees of DOW will represent DOW as the company's initial RMC members: [*****] [*****] [*****] [*****] * Confidential Treatment Requested APPENDIX [*****] PATENT RIGHTS DURING THE AGREEMENT TERM UNDER THE [*****] PLANS * Confidential Treatment Requested APPENDIX [*****] DIVERSA PATENT RIGHTS WHICH [*****] * Confidential Treatment Requested APPENDIX [*****] PATENT RIGHTS DIRECTED TO [*****] RESEARCH [*****] AND/OR RESEARCH [*****] * Confidential Treatment Requested APPENDIX [*****] SPECIFIC [*****] DIVERSA PATENT RIGHTS USED TO [*****] ENZYMES * Confidential Treatment Requested APPENDIX [*****] [*****]
Title/Subject Filing Date Serial No. - ------------------------------------------------------------------------------------------ [*****]
* Confidential Treatment Requested APPENDIX [*****] [*****] * Confidential Treatment Requested APPENDIX [*****] [*****] [*****]. * Confidential Treatment Requested APPENDIX [*****] LICENSE AGREEMENT * Confidential Treatment Requested APPENDIX [*****] [*****] PLAN PROCEDURES * Confidential Treatment Requested APPENDIX E [*****] [*****] I. [*****] [*****] 1. [*****]; 2. [*****]; and 3. [*****]. II. [*****] [*****]: 1. [*****]; 2. [*****]; 3. [*****]; 4. [*****]; and 5. [*****]. III. [*****] [*****]: 1. [*****]; and 2. [*****]. IV. [*****] * Confidential Treatment Requested [*****]. * Confidential Treatment Requested APPENDIX [*****] MATERIAL TRANSFER AGREEMENT * Confidential Treatment Requested APPENDIX F MATERIAL TRANSFER AGREEMENT Effective as of , (the "Effective Date") this Agreement ("MTA") is made and entered into by and between Diversa Corporation, a Delaware corporation with headquarters at 10665 Sorrento Valley Road, San Diego, CA 92121 (hereinafter "DIVERSA") and The Dow Chemical Company, a Delaware corporation with headquarters at 2030 Dow Center, Midland, Michigan 48674 (hereinafter "DOW"), collectively known as "The Parties". WHEREAS, DIVERSA will provide DOW with certain proprietary genes as set forth below and hereinafter referred to as "Material" pursuant to the terms and conditions of this Agreement; and WHEREAS, DOW desires to use the Material for purposes of research to be conducted under the Collaborative Research Agreement between the Parties dated July 22, 1999 (the "Agreement") and is willing to receive the Material pursuant to the terms and conditions of this MTA. NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the Parties mutually agree to the following terms: 1. DIVERSA will provide to DOW the following Material: [TO BE DETERMINED] 2. DOW agrees that the Material shall be used solely for the purpose research under the Agreement and shall not be used for any other purpose whatsoever. 3. The Material delivered hereby is experimental in nature. DIVERSA MAKES NO WARRANTIES, EXPRESS OR IMPLIED INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 4. Information transferred under this MTA, including but not limited to the Material and all information related to the Material, shall be "Confidential Information". DOW shall not disclose to third parties any Confidential Information received from DIVERSA hereunder, provided, however, that DOW shall have no obligations to DIVERSA with respect to the use, or disclosure to others not party to this Agreement of such information which; a) prior to disclosure was known to or in the possession of DOW as evidenced by its written records; or b) is or becomes publicly known during the term of this MTA, other than through a breach of DOW's obligations hereunder; or c) is received from a third party having no obligations of confidentiality to DIVERSA hereunder; or * Confidential Treatment Requested d) is developed by DOW independently of any disclosures made under this MTA as evidenced by its written records; or e) is required by law or bona fide legal process to be disclosed provided that DOW takes all reasonable notice to DIVERSA or f) is authorized to be released in written release by DIVERSA. 5. DOW shall not modify the Materials in any way reverse engineer the Material use the Materials for reproduction, offer the Materials or any derivative thereof for resale, or use the Materials in any form of human or animal testing except as provided in the Agreement. 6. DOW agrees that the Material method of using the Material or any other material that could not have been made but for the Material, shall not be sold or otherwise transferred to any third party except as provided in the Agreement. 7. In the event that DOW provides DIVERSA with DOW's Material all the provisions above shall be construed to bind DIVERSA in the place of DOW in an identical manner. DIVERSA acknowledges that it has received Material from DOW under another research agreement for use as a dehalogenase enzyme, which Material may be used under this MTA for the present Agreement. 8. This MTA and rights thereunder shall not be assigned or transferred directly or indirectly in whole or in part by the Parties except as provided in the Agreement. 9. This MTA shall become effective beginning on the Effective Date and through the term of the Agreement. 10. This MTA may be terminated as set forth in the Agreement. 11. The Parties represent and warrant that each has the authority to undertake the obligations set forth in the MTA without breaching or violating any contractual or statutory obligation owed to another. 12. The provisions of this MTA are severable and in the event any provisions of this MTA are determined to be held invalid or unenforceable under any controlling body of law such invalidity or unenforceability shall not in any way affect the validity and enforceability of the remaining provisions hereof. 13. This MTA shall be construed in accordance with the laws of the State of Delaware without regard to its conflict of laws principles. After receipt of the executed Agreement, DIVERSA will arrange to provide DOW with the materials. IN WITNESS WHEREOF, the Parties have, through duly authorized representatives, executed this MTA, effective as of the date forth above. * Confidential Treatment Requested THE DOW CHEMICAL COMPANY DIVERSA CORPORATION _________________________________ _________________________________ Name:____________________________ Name:____________________________ Title:___________________________ Title:___________________________ Date:____________________________ Date:____________________________ APPENDIX [*****] LICENSED [*****] * Confidential Treatment Requested APPENDIX [*****] RESEARCH [*****] * Confidential Treatment Requested APPENDIX [*****] RESEARCH [*****] * Confidential Treatment Requested EX-10.17 5 LICENSE AGREEMENT EXHIBIT 10.17 Confidential Treatment Requested Under 17 C.F.R. (S)(S) 200.80(b)(4) 200.83 and 230.406 LICENSE AGREEMENT This License Agreement is made the 1st day of December, 1998, between Diversa Corporation, a Delaware corporation, having offices at 10665 Sorrento Valley Road, San Diego, California 92121 U.S.A.; and Finnfeeds International Limited, an English company, having an address at P.O. Box 777, Marlborough, Wiltshire, United Kingdom SN8 1XN. Witnesseth: Whereas, Diversa and FFI previously entered in a Collaboration Agreement dated January 2, 1997 (the "Collaboration Agreement") for the purpose of discovering, developing and commercializing enzyme technology for use in the [*****], which Collaboration Agreement superseded an earlier "Phytase Developed Agreement" between the parties dated May 17, 1996; Whereas, Diversa has identified a certain gene and the phytase enzyme it expresses, and owns and/or controls intellectual property rights relating thereto; Whereas, FFI desires to commercialize such technology, and Diversa desires FFI to commercialize this technology, under terms and conditions established by the Collaboration Agreement, as modified by a "Letter Agreement" between the parties (dated December 1, 1998) amending the Collaboration Agreement (the "Letter Agreement"), Whereas, in accordance with this desire to commercialize, FFI wishes to acquire from Diversa, and Diversa has agreed to grant to FFI, the within license and rights with respect to the use of the Diversa intellectual property rights for manufacture of phytase enzyme, and the use and/or sale of the so- manufactured phytase enzyme and animal health and nutrition products containing the same, as defined below, in accordance with the terms and conditions of this Agreement. Now, Therefore, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 The following terms whenever used in this Agreement shall have the meanings set forth below except when otherwise expressly stated: (a) "Effective Date" shall mean the date set forth at the top hereof. (b) "Affiliate" shall mean any individual, partnership, corporation, group or trust that directly or indirectly controls, is controlled by or is under common control with a party to this Agreement, with "control" being the power to direct or cause the direction of management and policies, whether through ownership or voting of securities, by contract or otherwise. [*****]. 1. *Confidential Treatment Requested (c) "Phytase" shall mean [*****] and which is manufactured under the licenses granted by this License Agreement. (d) "[*****] Field" shall mean a field of activities relating to products which [*****] and which [*****] in the United States. (e) "[*****] Field" shall mean a field of activities relating to products which [*****] and which [*****] in the United States. (f) "Products" shall mean products containing Phytase. (g) "DIVERSA Know-How" shall mean all information and data, whether patentable or not, owned or controlled by DIVERSA as of the Effective Date, relating to the manufacture of Phytase, the use and sale of Phytase for the manufacture of Products for the [*****] Field and [*****] Field, and the manufacture, use and sale of Products for the [*****] Field and [*****] Field. (h) "DIVERSA Patent Rights" shall mean all patents and applications for patents covering DIVERSA Know-How, including but not limited to those identified in Appendix A of this Agreement (attached hereto and made a part hereof), including any [*****] or the [*****] and any [*****] and [*****] of the foregoing, that are owned or controlled by Diversa and which DIVERSA has the right to grant licenses hereunder. (i) "DIVERSA Technology" shall mean DIVERSA Patent Rights and DIVERSA Know-how. (j) "Net Sales Price" of a Product shall mean the [*****] of such Product to the first person or entity purchasing such Product, [*****]; provided, however, that if such first person or entity is an Affiliate of FFI, the Net Sales Price shall be deemed to be [*****] or the [*****]. (k) "Profit" for a Product sold or distributed shall mean the [*****] less (1) [*****]; (2) [*****]; (3) [*****]; and (4) the [*****]. In the event that Profit cannot reasonably be calculated because a Product contains [*****] which add a significant contribution to the Net Sales Price of the Product apart from the [*****], the parties shall in good faith negotiate the applicable [*****] by [*****] 2. *Confidential Treatment Requested compared to the [*****]. (l) Terms used but not otherwise defined or referenced herein shall have the respective meanings set forth in the Collaboration Agreement. ARTICLE 2 GRANTS 2.1 DIVERSA hereby grants to FFI an exclusive, worldwide license to use the DIVERSA Technology for all activities relating to: (a) the manufacture of Phytase by GCI solely for sale to FFI (b) the use and sale of Phytase for the manufacture of Products for the Animal Health Field and Animal Nutrition Field; and (c) the manufacture, use and sale of Products for the Animal Health Field and Animal Nutrition Field. 2.2 [*****] 2.3 [*****] ARTICLE 3 MANUFACTURE OF PHYTASE, TRANSMISSION OF KNOW-HOW AND TECHNICAL ASSISTANCE 3.1 Notwithstanding paragraph 2.2 above, and in accordance with the Letter Agreement, DIVERSA and FFI agree that FFI shall only have the right to sublicense the DIVERSA Technology to GCI for activities in connection with the manufacture of Phytase, and then only in connection with a supply agreement which provides that GCI will exclusively supply Phytase to FFI at a cost [*****] of no more than [*****] per [*****] which drops to no more than [*****] at [*****] which further drops to [*****] at [*****] which still further drops to [*****] at [*****] which finally drops to [*****] for [*****]. Notwithstanding, [*****]. 3. *Confidential Treatment Requested 3.2 Within a reasonable time subsequent to entry of the parties into this License Agreement [*****], DIVERSA will (to the extent such has not already occurred) disclose to FFI the DIVERSA Technology reasonably required for FFI to exploit the license granted hereunder. To the extent feasible, the DIVERSA Technology shall be disclosed in written or other tangible form. 3.3 In addition to paragraph 3.2, DIVERSA shall promptly provide to FFI the DIVERSA Technology reasonably required for [*****], for the purpose of [*****] [*****] for the purpose of [*****]. 3.4 DIVERSA agrees to provide reasonable assistance to FFI (and FFI's sublicensees) to facilitate the understanding of the DIVERSA Technology. During the term of this License Agreement, the first [*****] of assistance shall be [*****] FFI agrees to compensate DIVERSA for any assistance [*****] above this amount at a reasonable manpower rate to be agreed upon by the parties, but in no event shall such rate be [*****]. 3.5 Notwithstanding other provisions herein to the contrary, nothing in this Agreement shall obligate DIVERSA to provide to FFI or its sublicensees information related to DIVERSA's [*****]. ARTICLE 4 ROYALTY AND PAYMENT 4.1 In consideration for this License Agreement and the licenses granted under Article 2 of this License Agreement, FFI shall pay to DIVERSA for each Product sold and/or distributed by FFI or any Affiliate or sublicensee of FFI during the term of this License Agreement, a [*****] royalty of [*****] for such Product. 4.2 FFI shall pay royalties to DIVERSA [*****] within [*****] after each [*****] for Profits accruing in respect of each such [*****] (each, a "Royalty Payment Date"). FFI shall furnish to DIVERSA, [*****], on each Royalty Payment Date, written reports showing in reasonably specific detail, the [*****] [*****] to DIVERSA in respect of each such [*****]. FFI shall keep complete and accurate records in sufficient detail to properly enable the royalties payable hereunder to be determined. 4. *Confidential Treatment Requested 4.3 (a) Upon the written request of DIVERSA and not more than [*****] FFI shall permit an independent certified public accounting firm of nationally recognized standing, selected by DIVERSA and reasonably acceptable to FFI, at DIVERSA's expense, to have access during normal business hours to such records of FFI as may reasonably be necessary to verify the accuracy of the royalty reports hereunder for [*****] prior to the date of such request. (b) If such accounting firm concludes that additional royalties were owed during such period, FFI shall pay the additional royalties within [*****] of the date DIVERSA delivers to FFI such accounting firm's written report so concluding, except in the case of manifest calculation error, in which event, the accounting firm shall recalculate the applicable royalty amount. The fees charged by such accounting firm shall be paid by DIVERSA provided however, if the audit (subject to recalculation, as aforesaid) discloses that the royalties payable to DIVERSA for such period have been underpaid by [*****] then FFI shall pay the reasonable fees and expenses charged by such accounting firm. 4.4 All amounts due to DIVERSA hereunder shall be paid in USA funds at a bank to be designated by DIVERSA. All accounting hereunder is to be done in accordance with United States Generally Accepted Accounting Principles. ARTICLE 5 DURATION 5.1 This term of this License Agreement shall commence as of the Effective Date, and shall continue for the life of the sale by FFI, an Affiliate of FFI and/or a sublicensee of FFI of Products using the Diversa Technology, except as otherwise provided in this Article V. 5.2 FFI may terminate the term of this License Agreement at any time upon six (6) months written notice to DIVERSA. 5.3 DIVERSA may terminate the term of this License Agreement upon occurrence of one or more of the following: (a) in the event that: (i) FFI becomes bankrupt or insolvent or goes into any form of liquidation (other than for the purposes of amalgamation or reconstruction) or suffers a receiver or trustee to be appointed of any of its assets; or (ii) any governmental authority seizes, expropriates, nationalizes or confiscates all or substantially all of the assets of FFI whether with or without compensation, or assumes control over all or substantially all of the business of FFI; or (b) if FFI shall materially breach any of the covenants, promises, obligations or undertakings herein contained, provided that FFI has not remedied any such material breach within [*****] after receipt of written notice from DIVERSA. 5.4 Upon the termination of this License Agreement under paragraphs 5.2 or 5.3, the license granted hereunder shall terminate and FFI shall cease to use the [*****] except that FFI shall be entitled to complete any outstanding orders for deliveries within a time limit of [*****] from the date of termination subject to payment of royalties thereon. 5. *Confidential Treatment Requested 5.5 [*****]. 5.6 Royalty obligations under this License Agreement shall commence with the [*****] and end on the [*****] and (b) [*****]. ARTICLE 6 WARRANTIES, INDEMNIFICATION AND INFRINGEMENT 6.1 Each party represents and warrants (a) that it has the corporate authorization to enter into and make the commitments on its behalf necessary to satisfy the obligations of this License Agreement; and (b) that there are no third party contractual restrictions on its ability to enter into and make the commitments on its behalf necessary to satisfy the obligations of this License Agreement except as may be disclosed in writing to the other party prior to the Effective Date. 6.2 DIVERSA further represents and warrants: (a) [*****]; 6. *Confidential Treatment Requested (b) [*****]; and (c) [*****]. 6.3 FFI represents that it shall, and shall cause its Affiliates and sublicensees, as applicable, to, comply with all laws and regulations applicable with its operation under the license granted hereunder. 6.4 THE FOREGOING REPRESENTATIONS AND WARRANTIES ARE IN LIEU OF, AND THE PARTIES HEREBY DISCLAIM AND NEGATE, ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR, PURPOSE. 6.5 Each party shall be solely responsible for damages to its own property and injury or death of the officers, employees or agents of such party sustained in the performance and as a result of this License Agreement, and shall indemnify and hold the other parties harmless from and against all claims, causes of action, loss and liability arising out of or in connection with such responsibility. 6.6 Each party agrees to indemnify and hold the other party harmless against any loss claim, liability and expense (including reasonable attorney's fees and expenses of litigation) that a court may order such other party to pay to a third party as a result of: (a) any misrepresentation or breach of warranty by the indemnifying party under this License Agreement; and (b) any failure by the indemnifying party to perform any of its obligations hereunder. 6.7 FFI agrees to indemnify DIVERSA, its directors, officers and employees and to hold such parties harmless from any action, claim, or liability, including without limitation liability for death, personal injury, and/or property damage (except as provided in paragraph 6.5), arising out of (i) the manufacture, use, sale, or other disposition of Products by FFI or Affiliates or sublicensees of FFI, or (ii) the use of the Diversa Technology pursuant to this License Agreement; provided, however, that such indemnification shall not apply to any claims resulting from the willful misconduct or negligence of DIVERSA, its directors, officers or employees. 6.8 It shall be a condition of any indemnification hereunder that the party seeking indemnification notify the indemnifying party promptly, and give the indemnifying party the opportunity of defending, any litigation at the indemnifying party's expense by counsel of the indemnifying party's choice who shall be under the indemnifying party's sole discretion and control. The indemnifying party shall have the right to settle or compromise any such litigation in its sole discretion and expense. 6.9 Notwithstanding any provision to the contrary, (i) each party shall be responsible and liable to the other party for any failure in the performance of its obligations hereunder; and (ii) nothing in this Agreement shall operate or be construed so as to limit or exclude a party from liability to the extent that such liability results from any negligent or willful act or omission of such party. 6.10 IN NO EVENT WILL EITHER PARTY, ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR AFFILIATES BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, WHETHER BASED UPON A CLAIM OR ACTION OF CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER TORT, OR OTHERWISE, ARISING OUT OF THIS AGREEMENT. 6.11 FFI shall forthwith inform DIVERSA upon its becoming aware of (a) any infringement by any third party of any DIVERSA Patent Rights, or any misappropriation by any third party of DIVERSA Know-How; and (b) [*****] in such way as [*****]. ARTICLE 7 CONFIDENTIALITY 7.1 Each party shall keep confidential any and all information (other than as set forth in paragraph 7.3 hereof) revealed to it (the "Recipient") by the other party hereto (the "Disclosing Party) during the term of this License Agreement, or otherwise which relates to the subject matter hereof and was previously disclosed during the term of the Collaboration Agreement or the Phytase Development Agreement. This provision shall apply regardless of the method of disclosure (whether written, oral or otherwise), and includes but is not limited to information 7. *Confidential Treatment Requested relating to the technology and intellectual property licensed under this Licensed Agreement, developed under this License Agreement or the previous Collaboration Agreement or Phytase Development Agreement, and information relating to the Disclosing Party's existing or proposed business or products; marketing and distribution data, methods, plans and efforts; and any other materials which have not been made available by the Disclosing Party to the general public ("Information"). Failure to mark any of Information as confidential or proprietary shall not affect its status as Information under the terms of this License Agreement. 7.2 Recipient shall maintain the confidential nature of Information and shall, at a minimum, take those precautions that it utilizes to protect its own confidential information. Recipient shall use Information only as necessary in the performance of Recipient's duties, or in the exercise of the rights granted to Recipient, hereunder. 7.3 The restrictions imposed by this Article VII shall not apply to Information that: (i) at the time of Disclosure by the Disclosing Party is in, or after disclosure by the Disclosing Party becomes part of, the public domain through no improper act on the part of Recipient or on the part of any of Recipient's employees or consultants; (ii) was in Recipient's possession at the time of disclosure by the Disclosing Party, as shown by written evidence, and was not acquired, directly or indirectly, from the Disclosing Party; (iii) Recipient receives from a third party, provided that such Information was not obtained by such third party, directly or indirectly, from the Disclosing Party; and (iv) Recipient independently develops without the benefit of any Information by the Disclosing Party. 7.4 Disclosure of Information by Recipient that is required in a judicial, administrative or governmental proceeding shall not constitute a breach of this License Agreement, provided that, if the Recipient is required by legal process to so disclose any such Information, Recipient shall timely notify the Disclosing Party of such requirement so that the Disclosing Party is afforded an opportunity to seek an appropriate protective order. ARTICLE 8 MISCELLANEOUS 8.1 This License Agreement embodies the entire understanding between the parties with respect to the subject matter hereof, and supersedes all prior agreements and understandings relating thereto, other than the Collaboration Agreement and the Letter Agreement to the extent they do not conflict with the terms of this License Agreement. 8.2 This License Agreement and the rights and obligations of the parties hereto shall be governed by the laws of the State of New York without regard to the principles of conflicts of laws of New York or any other jurisdiction. 8.3 This License Agreement may be executed simultaneously in counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 8.4 All amounts referred to in this License Agreement are stated in United States dollars. 8.5 This License Agreement and any term or provision thereof may at any time or from time to time be modified, amended or waived, or additional or substituted terms or provisions incorporated herein, upon the unanimous written consent of the parties. 8. 8.6 (a) The parties hereby expressly agree that any dispute, controversy or claim arising out of, or relating to this License Agreement or the relationship of the parties with respect to the subject matter hereof, including, but not limited to, any question regarding the existence, validity or termination of this License Agreement, shall be finally resolved by arbitration under rules of the American Arbitration Association ("AAA") then in effect. (b) Any such arbitration shall take place in New York, New York and the language of the arbitration shall be English. The number of arbitrators shall be three. FFI and DIVERSA shall each appoint one arbitrator, and the two so appointed shall appoint the third. The arbitrators shall all be fluent in the English language and be familiar with law of the State of New York. The arbitrators are not authorized to decide any dispute, controversy or claim ex aequo et bono, but shall strictly apply the governing law chosen by the parties. Arbitrators shall have the authority to determine whether the issue submitted to them is arbitrable. (c) The arbitral tribunal shall make a written record of the basis of its award. The arbitral tribunal shall be authorized to award costs and attorneys' fees to the prevailing party as part of its award. Any award of the tribunal shall be binding and enforceable against the parties in any court of competent jurisdiction, and the parties hereby waive any right to appeal such an award on the merits or to challenge the award except on the grounds expressly provided for in Article V of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. (d) Notwithstanding the provisions set forth above, nothing therein shall be deemed to prohibit either party from seeking immediate injunctive relief from any court or other forum to prevent or restrain a breach of any of the provisions of this Agreement. (e) Pending resolution of any dispute hereunder, each party shall use its best efforts to minimize adverse economic consequences to the other party which would result from non-operation, sub-capacity operation or failure to meet payment terms under loan agreements. 8.7 Any captions in this License Agreement are for the purposes of reference only and shall not limit or otherwise affect the meaning hereof. 8.8 Whenever the context may require, any pronoun used in this License Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 8.9 Any failure or delay on the part of any party in exercising any power or right hereunder shall not operate as a waiver thereof, nor shall any single or partial exercise of such right or power preclude any other or further exercise thereof or the exercise of any other right or power hereunder or otherwise available in law or equity. 8.10 The respective rights and obligations of the parties hereunder shall not, except as set forth herein, without prior written consent of the other party which shall not unreasonably be withheld, provided that no consent is required in connection with: (a) [*****]; or (b) [*****]. 9. *Confidential Treatment Requested This License Agreement shall bind and inure to the benefit of Diversa and IFI and their permitted successors and assigns. 8.11 In the event that performance of obligations hereunder by any party hereto is legally excusable because of force majeure, the following terms shall apply : (a) Any party which believes that its performance is excused by force majeure shall give written notice to the other as soon as possible with sufficient detail to permit the other to minimize inconvenience and expense. (b) The parties shall continue to operate to the maximum extent possible. (c) The party not affected shall have the right to terminate this License Agreement if the event of force majeure results in a material breach of this Agreement for more than [*****] (d) Force majeure shall include the following: any event outside of the control or influence of any party which results in the party's inability to perform or meet its obligations under this License Agreement. Such events shall include (but not be limited to) natural disasters, wars, acts of government (including refusal to grant authorizations required to effectuate performance), power failures or interruptions, unanticipated breakdown of equipment, extraordinary market or supply conditions beyond the party's control, legal restrictions on performance, and work stoppages. 8.12 Except as required to comply with law or regulation, [*****] 8.13 (a) The relationship between the parties shall be that of independent contractors and not partners, joint venturers or otherwise. No party has the right to bind the other party or incur obligations or liabilities on the other party's behalf. (b) It is the intention of the parties that no partnership be formed for United States federal income tax purposes. However, if a partnership between the parties is deemed to exist by the U.S. Internal Revenue Service, then [*****] shall be designated tax matters partner. In Witness Whereof, the parties have caused their duly authorized representatives to execute this Agreement on the day and year first above written. Finfeed International Limit By: /s/ Richard Cooper __________________ Name: Richard Cooper __________________ Title: Managing Director _____________________ Diversa Corporation By: /s/ Terrance J. Bruggeman _________________________ Name: Terrance J. Bruggeman _________________________ Title: Chief Executive Officer ___________________________ 10. *Confidential Treatment Requested Appendix A PATENTS Appln. Filing Patent Grant Expiration Country Number Date Number Date Date [*****] [*****] [*****] [*****] [*****] [*****] Appendix A-1. *Confidential Treatment Requested EX-10.18 6 COLLABORATIVE AGREEMENT EXHIBIT 10.18 Confidential Treatment Requested Under 17 C.F.R. (S)(S) 200.80(b)(4) 200.83 and 230.406 Addendum to the "COLLABORATION AGREEMENT" between Novartis Agribusiness Biotechnology Research, Inc. and Diversa Corporation. This addendum dated and effective as of the date last below written (the "Effective Date") is between Diversa Corporation ("Diversa"), a Delaware corporation, and Novartis Agribusiness Biotechnology Research, Inc. ("Novartis"), a corporation organized under the laws of Delaware, (collectively, the "Parties"). WHEREAS, Diversa has isolated and characterized a [*****]; WHEREAS, Novartis would like to receive such [*****] for [*****] against a [*****]; NOW, THEREFORE, in consideration of the mutual covenants set forth in this addendum, the Parties hereby agree as follows: (1) Diversa will [*****]. to Novartis, which are Diversa [*****]. Novartis will [*****] to [*****] The cost associated with the transfer of such [*****] is set at [*****]. (2) If and when [*****] are [*****] as [*****] (as defined in clause 1 of the Collaboration Agreement) by the Research Committee, [*****] will be conducted under the terms set forth in the Collaboration Agreement. (3) The scope of a [*****] license will be the use in [*****], applying to Crops the definition set forth in Collaboration Agreement. (4) This addendum, when fully executed, will be made an integral part of the Collaboration Agreement. Accepted and Agreed to: NOVARTIS AGRIBUSINESS DIVERSA CORPORATION BIOTECHNOLOGY RESEARCH, Inc. /s/ Stephen V. Evola /s/ Jay M. Short - ---------------------------- -------------------------- By: Dr. Stephen V. Evola By: Dr. Jay M. Short Co-President Chief Executive Officer *Confidential Treatment Requested COLLABORATION AGREEMENT between NOVARTIS AGRIBUSINESS BIOTECHNOLOGY RESEARCH, INC. and DIVERSA CORPORATION COLLABORATION AGREEMENT This Collaboration Agreement, dated and effective as of January 25, 1999 (the "Effective Date"), is between Diversa Corporation ("Diversa"), a Delaware corporation, and Novartis Agribusiness Biotechnology Research, Inc., ("Novartis"), a corporation organized under the laws of Delaware (collectively, the "Parties"). R E C I T A L S WHEREAS, Diversa has discovered and developed [*****] (as defined below), as well as proprietary technologies for the [*****] and is in the possession of Diversa Technology (as defined below) relating to said [*****] and technologies; WHEREAS, Novartis discovers, develops, and commercializes products useful in [*****] including [*****] as well as applied products which confer similar benefits; WHEREAS, Novartis and Diversa desire to collaborate to apply the [*****] and Diversa Technology to produce [*****] NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, the parties hereby agree as follows: 1. Definitions. "ADR" shall have the meaning set forth in Section 11.3. "Advanced Field Trials" shall mean advanced testing trials of a [*****] after successful testing in [*****] in a manner representative of [*****] including determining the [*****] of a [*****] in [*****] under [*****] "Affiliate" shall mean any entity that directly or indirectly Owns, is Owned by or is under common Ownership, with Novartis, NADI or Diversa, as the case may be, where "Owns" or "Ownership" means direct or indirect possession of [*****] of the outstanding voting securities of a corporation or a comparable equity interest in any other type of entity. "Agreement" shall mean this Collaboration Agreement. "Alternate" shall have the meaning set forth in Section 3.4. 1. *Confidential Treatment Requested "Audited Party" shall have the meaning set forth in Section 6.9. "Auditing Party" shall have the meaning set forth in Section 6.9. "[*****] Project" shall have the meaning set forth in Section 2.1.4. "Biomolecule(s)" shall mean [*****] regardless of whether they [*****] including [*****] "[*****] Project" shall have the meaning set forth in Section 2.1. "Change of Control" shall mean any of the following [*****] [*****] (a) a merger or consolidation of Diversa which results in the voting securities of Diversa outstanding immediately prior thereto ceasing to represent at least [*****] of the combined voting power of the surviving entity immediately after such merger or consolidation; (b) the sale of all or substantially all of the assets of Diversa; or (c) any one person (other than Diversa, any trustee or other fiduciary holding securities under an employee benefit plan of Diversa, or any corporation owned directly or indirectly by the stockholders of Diversa, in substantially the same proportion as their ownership of stock of Diversa), together with any of such person's "affiliates" or "associates", as such terms are used in the Securities Exchange Act of 1934, as amended, becoming the beneficial owner of [*****] of the combined voting power of the outstanding securities of Diversa or by contract or otherwise having the right to control the Board of Directors or equivalent governing body of Diversa or the ability to cause the direction of management of Diversa. "Committee Member" shall have the meaning set forth in Section 3. "Confidential Information" shall have the meaning set forth in Section 7.1. "Crop" shall mean any [*****] "[*****]" shall mean all [*****] that are derived from Licensed [*****] through [*****] and all [*****] through [*****] to any Licensed [*****] and any [*****] of such [*****] "[*****]" shall mean all [*****] that are [*****] through [*****] and all [*****] that are [*****] through [*****] to any Novartis [*****] and any [*****] of such [*****] 2. *Confidential Treatment Requested "[*****] Biomolecule" shall mean any [*****] or [*****] which exhibits [*****] in the [*****] Field and which the [*****] has elected to [*****]. "[*****] Net Sales" shall mean the [*****] and [*****] determined in accordance with the definition of Net Sales [*****] as established by competent written records, with the intent of determining the [*****]. "Disclosing Party" shall mean that Party disclosing Confidential Information to the other Party under Section 7. "Dispute" shall have the meaning set forth in Section 11.3. "Diversa Biomolecules" shall mean all [*****] which are provided by Diversa to Novartis under the Collaboration Agreement and [*****]. "Diversa Inventions" shall mean those Inventions over which Diversa has exclusive ownership and control as provided in Sections 5.1 and 5.2.3. "Diversa Know-How" shall mean all know-how, trade secrets, inventions, data, processes, procedures, devices, methods, formulas, media and/or all lines, reagents, protocols and marketing and other information, including improvements thereon, whether or not patentable, which are not covered by the Diversa Patent Rights, but which are necessary or useful for the commercial exploitation of the Diversa Patent Rights or the conduct of the Projects or otherwise relate to [*****] or Royalty-Bearing Products, and which are owned by or licensed to Diversa, with the right to license, as of the Effective Date or otherwise during the Research Period. "Diversa Patent Rights" shall mean all patent and provisional patent applications, issued and subsisting patents and substitutions, divisionals, continuations, continuations-in-part, reissues, reexaminations, extensions and supplementary protection certificates thereof, including foreign counterparts of the foregoing owned by or licensed to Diversa, with the right to license, [*****] [*****]. Without limiting the generality of the foregoing, [*****] under Sections 5.1.1, 5.1.3 and 5.1.4, or [*****] under Section 5.2.3. "[*****]" will document the research phase to be performed by [*****] including [*****]. 3. *Confidential Treatment Requested "Diversa Technology" shall mean the Diversa Know-How and the Diversa Patent Rights. "[*****]" shall mean [*****]. "[*****]" shall mean [*****]. "Indemnitees" shall have the meaning set forth in Section 9.1. "Indemnitor" shall have the meaning set forth in Section 9.1. "Initial Projects" shall mean the [*****] Project, the [*****] Project, the [*****] Project and the [*****] Project. "Inventions" shall have the meaning set forth in Section 5.1. "[*****] Project" shall have the meaning set forth in Section 2.3. "License" shall have the meaning set forth in Section 4.1. "License Agreement" shall have the meaning set forth in Section 4.4. "Licensed Biomolecule" shall mean each [*****] subject to a License granted [*****] of the [*****] (a) [*****] of which [*****] is within the [*****] or (b) which [*****] is [*****]. "License Fees" shall have the meaning set forth in Section 6.4. "[*****] Activity Level" shall mean, with respect to each Project, [*****]. "[*****] Project" shall have the meaning set forth in Section 2.1.2. "[*****]" shall mean [*****]. 4. "Net Sales" shall mean the [*****] less [*****]. For each Royalty-Bearing Product, the gross invoice price shall [*****] including, without limitation, [*****]. With respect to sales by Novartis [*****] Affiliates [*****] of any product which incorporates both (i) [*****] and (ii) [*****], Net Sales shall be calculated by [*****] by the [*****] as used herein, shall mean a [*****] and the [*****] The [*****] of such components shall be equal to the [*****] provided, however, that, in the event that the [*****]. "[*****] Project" shall mean a [*****], undertaken pursuant to the terms of this Agreement. "Novartis Biomolecules" shall mean all [*****] which are provided by Novartis to Diversa under the Collaboration Agreement. "[*****] Field" shall mean, with [*****] the [*****]. The [*****] Field for [*****] is set forth in this Agreement. The [*****] Field for each [*****] is as set forth in the [*****]. "Novartis Inventions" shall mean those Inventions over which Novartis has exclusive ownership and control as provided in Section 5.1 and 5.2.3. "Novartis Patent Rights" shall mean all patent and provisional patent applications, issued and subsisting patents and substitutions, divisionals, continuations, continuations-in-part, reissues, reexaminations, extensions and supplementary protection certificates thereof, including foreign counterparts of the foregoing owned by 5. *Confidential Treatment Requested or licensed to Novartis, with the right to license, as of the Effective Date or [*****] claiming inventions owned (or in-licensed) and controlled by Novartis which are necessary or useful for the [*****] or [*****] Royalty-Bearing Products. Without limiting the generality of the foregoing, Novartis Patent Rights include any patents and patent applications claiming Inventions owned by Novartis under Sections 5.1.2, 5.1.3 and 5.1.4, or transferred to Novartis under Section 5.2.3. "Novartis [*****]" shall mean a [*****]. Such documentation will include the [*****] Any Novartis [*****] submitted with respect to any [*****] will also include the [*****] Field and the [*****] for [*****] under such [*****] The [*****]. "Option" shall have the meaning set forth in Section 4.1. "Option Effective Date" shall have the meaning set forth in Section 4.1. "Option Exercise Date" shall have the meaning set forth in Section 4.3. "Option Period" shall have the meaning set forth in Section 4.2. "Party" means Diversa or Novartis. "[*****]" shall mean, with respect to each [*****] [*****] may include [*****]. "Projects" shall mean [*****] and [*****], collectively. "Project Plans" shall mean [*****] and [*****], collectively. "Receiving Party" shall mean that Party receiving Confidential Information under Section 7.1. "Research Committee" shall have the meaning set forth in Section 3. 6. *Confidential Treatment Requested "Research Period" shall mean the period beginning on the [*****] and ending [*****]. "Royalty-Bearing Product" shall mean a commercial product containing any Licensed [*****], provided that a Licensed [*****] alone shall not be a [*****] "Royalty Period" shall mean, with respect to each Royalty-Bearing Product in any country, [*****] of such Royalty-Bearing Product in such country and ending upon the later to occur of (a) [*****] or (b) [*****] or (c) [*****]. "Senior Executives" shall have the meaning set forth in Section 11.3. "[*****]" shall mean [*****]. "Sublicensee" shall mean any third party (other than an Affiliate of Novartis, NADI or an Affiliate of NADI or an Affiliate of Diversa) licensed by Novartis or NADI or their respective Affiliates to make, use (except where the implied right to use accompanies the sale to the third party of any Royalty- Bearing Product by Novartis, NADI or their respective Affiliates or Sublicensees), sell, import, export, advertise, promote and otherwise commercialize any Royalty-Bearing Product. "Use" shall mean each use or application for which any Licensed [*****] is [*****] or any Royalty-Bearing Product [*****]. In the event of [*****] each [*****] will represent a [*****]. "Valid Claim" shall mean a claim included in any pending patent application or any issued patent included within the [*****] which, if with respect to any pending claim, has not been irrevocably abandoned or held to be unpatentable by a court or other authority of competent jurisdiction in a proceeding which is not reversed, not appealable and not appealed, or, with respect to any issued claim, has not been held invalid by a decision of a court or other authority of competent jurisdiction which is not reversed, not appealable and not appealed. The above definitions are intended to encompass the defined terms in both the singular and plural tenses. 7. *Confidential Treatment Requested 2. Collaboration. 2.1 Projects. The scope of the collaboration between Novartis and Diversa during [*****] will be the areas of [*****] with the following [*****] Projects being defined in more detail in the [*****] Projects which are attached hereto as Exhibit A: 2.1.1 [*****] 2.1.2 [*****] 2.1.3 [*****] and 2.1.4 [*****] It is further understood that the Parties will, through the auspices of the Research Committee, also [*****] define additional projects (each a "[*****] Project"). The Parties contemplate that either Party may have certain of the work to be performed by such Party in support of a Project performed by an Affiliate of such Party (and, in the case of Novartis, by NADI or its Affiliates). Each Party shall remain primarily responsible for the work to be performed by such Party in support of Projects under this Agreement. 2.2 [*****] Use of [*****]. Novartis agrees that it will use [*****] pursuant to [*****] only for [*****] such [*****] in connection with [*****] Project against [*****] and will not [*****] for any [*****]. Novartis may not [*****] such [*****] to [*****]; provided that Novartis may [*****] such [*****] to [*****] subject to the [*****] set forth herein and only to the [*****] to effect the [*****]. Novartis will inform the Research Committee in writing of the [*****] such [*****] prior to commencing such [*****]. Novartis will provide Diversa with regular written reports (no less frequently than once per quarter) identifying the [*****] used in such [*****] and the [*****]. Novartis will employ a [*****] and to ensure that such [*****] are [*****] from any other [*****] used by [*****] if applicable) and will provide Diversa with a detailed description of such system prior to the delivery of any [*****] by Diversa to Novartis under the Project Plans. 8. *Confidential Treatment Requested 2.3 [*****] Provided by Diversa. Diversa shall be responsible for ensuring that all [*****] made available for the [*****] are done so in compliance with [*****] related thereto. 3. Research Committee. Novartis and Diversa shall establish a research committee (the "Research Committee") comprised of [*****] (each, a "Committee Member"), [*****] of whom shall be appointed by Novartis and [*****] of whom shall be appointed by Diversa. The Research Committee may invite other representatives of the Parties to participate in meetings of the Research Committee, as appropriate, provided that such representatives shall not have the right to vote as a Committee Member. 3.1 Responsibilities. The purpose of the Research Committee shall be to plan, coordinate, and direct the research efforts related to the Projects. Such responsibilities include, but are not limited to, the following: 3.1.1 Approval of [*****] Projects. The Research Committee must approve all [*****] Projects to be performed under the terms of this Agreement. Such approval will be based on, but not limited to, [*****] especially with respect to [*****]. 3.1.2 Approval of Project Plans. The Research Committee must approve all Project Plans for all Projects undertaken pursuant to this Agreement. At that time, the Research Committee will also designate reporting milestones for Diversa and Novartis to report progress on the Project to the Research Committee (see Section 3.1.3 below). All amendments to the Project Plans shall also be approved by the Research Committee and incorporated by reference into the Agreement. Resources, including but not limited to [*****] may be [*****] and the Research Committee may [*****]. Project Plans for the [*****] Projects are attached as Exhibit A. 3.1.3 Review of Reports. At certain reporting milestones defined by the Research Committee for each Project, Diversa and Novartis shall deliver to the Research Committee reports disclosing a [*****] including [*****], as appropriate. The Research Committee will review such data to determine progress made on the Projects. Reports to the Research Committee shall be subject to the confidentiality provisions contained herein. 9. *Confidential Treatment Requested 3.1.4 [*****] of [*****] Field and License Fee [*****] Based on the research and development efforts undertaken pursuant to this Agreement, Novartis [*****] to the [*****] for [*****] Such [*****] shall be [*****] a [*****] Plan with respect to such [*****] and an indication by Diversa [*****] Based on the information received, the [*****] shall [*****] as a [*****] In the event the [*****] designates a [*****] as the result of a [*****] Project, the [*****] will also [*****] the [*****] Field for that [*****] in relation to the [*****] Project (see Section 4.4.) and will [*****] the License Fee [*****] (see Section 6.4.3.). 3.1.5 Miscellaneous Matters. The Research Committee will discuss and propose solutions concerning any and all issues related to Inventions, intellectual property and contractual matters not clearly addressed in this Collaboration Agreement. 3.2 Meetings of the Research Committee. The Research Committee shall meet at least [*****] alternating the sites of the meetings between Diversa's facilities in San Diego, California and Novartis' facilities in Research Triangle Park, North Carolina, or at such other times and locations as the Research Committee determines. Within [*****] following each meeting of the Research Committee, the Research Committee shall prepare and deliver to both Parties a written report describing the decisions made, conclusions and actions agreed upon. Subsequent to written approval by both parties, such report shall be incorporated as part of this Agreement by reference. The members of the Research Committee shall have the right to invite any person to attend its meetings, as mutually agreed. 3.3 Requirements for Action. All actions and decisions of the Research Committee will require the [*****] of all of its voting members. The Committee Members or Alternates of Novartis shall collectively have [*****] on the Research Committee, and the Committee Members or Alternates of Diversa shall collectively have [*****] on the Research Committee. 3.4 Members. The initial Committee Members of the Research Committee shall be as follows: Diversa Representatives Novartis Representatives Jay Short, Ph.D. Michael Lanahan, Ph.D. Keith Kretz, Ph.D. Juan Estruch, Ph.D. A Party may change one or more of its Committee Members, provided, however, that such person is technically qualified as reasonably demonstrated by that Party. All appointments and withdrawals of appointment shall be made by written notice to the other Party. 10. *Confidential Treatment Requested Each Party may designate in writing an alternate Committee Member ("Alternate") if the designated Committee Member cannot attend a meeting, provided, however, that such Alternate is technically qualified as reasonably demonstrated by that Party. Any action taken with approval of an Alternate shall be as valid as if taken with the approval of the designated Committee Member. 3.5 Visits to Facilities. Committee Members shall have reasonable opportunity to visit the facilities of each Party (and such Party's Affiliates and, with respect to Novartis, NADI and its Affiliates, if applicable) where activities under this Agreement are in progress, but no more frequently than once per quarter and only during normal business hours and with reasonable prior notice. Each Party shall bear its own expenses in connection with such site visits, unless such visits are deemed by the Research Committee to be part of the Project, in which case the costs will be included as part of the applicable Project Plan. Committee Members shall have the right at any time during the visit to ask questions of and receive answers from any personnel regarding their activities and findings hereunder. 3.6 Information Sharing. Each Party shall provide to the Research Committee information that is relevant to make decisions regarding research and commercialization efforts related to the Projects. Without limiting the generality of the foregoing, Novartis will provide Diversa with the opportunity to review data from the [*****] and the [*****] to determine the status of the Projects. 3.7 Dispute Resolution. If the Research Committee fails to reach agreement upon any matter, the dispute will be resolved in accordance with the procedures set forth in Section 11.3. 4. Grant of Rights. 4.1 Option to License. Subject to the terms and conditions of this Agreement, with respect to each Development Biomolecule, Diversa grants to Novartis an exclusive option (the "Option") to receive an exclusive, worldwide, royalty-bearing license (the "License") under Section 4.4 so long as Diversa has not previously granted rights to such Development Biomolecule to a third party; provided that, at Novartis' sole election, such License shall be non-exclusive rather than exclusive, in which case the Parties agree that the License Fee and royalty rate shall be determined by mutual agreement of the Parties taking into account a non-exclusive License. Any such option shall be freely transferable or assignable to an Affiliate of Novartis or to NADI or any of its Affiliates. 4.2 Option Period. The Option will be effective ("Option Effective Date") upon (a) the designation by the Research Committee of a Biomolecule as a Development Biomolecule, and (b) payment by Novartis to Diversa of amounts due under Section 6.3.1 and 6.3.2, as applicable, and will continue in force for the period (the "Option Period") ending on the earliest to occur of: 11. * CONFIDENTIAL TREATMENT REQUESTED (a) the Option Exercise Date, or (b) the date Novartis notifies Diversa that Novartis does not intend to proceed with further development of the Development Biomolecule in accordance with the applicable Project Plan, or (c) thirty (30) days after the projected date for achievement of any technical milestone included in the applicable Novartis Project Plan, as approved by the Research Committee, in the event the results of such milestone have not been made known to Diversa or in the event that achievement of such milestone requires Novartis to make a milestone payment to Diversa and such payment has not been made to Diversa; provided that Novartis shall have sixty (60) days after written notice from Diversa to comply with this provision, or (d) the Research Committee determines that the results of any technical milestone included in the applicable Novartis Project Plan, as approved by the Research Committee, demonstrate that the applicable Minimum Activity Level was not achieved in accordance with such Novartis Project Plan; provided that the Research Committee will meet within thirty (30) days following the projected date for achievement of such technical milestone to make such determination, and, if the Research Committee does not meet within such thirty (30) day period, the applicable Minimum Activity Level will deemed not to have been achieved provided further that in the event such technical milestone has not been achieved, in accordance with such Novartis Project Plan, the Research Committee may extend the time in which to achieve such technical milestone if it determines that such technical milestone is achievable within a reasonable period of time consistent with the previously defined goals of such Novartis Project Plan; or (e) the date that Novartis notifies Diversa in writing that it waives its right to the Option, or (f) the date that this Agreement is terminated pursuant to Section 10.2. 4.3 Exercise of Option. Novartis, or its transferee or assignee with respect to the Option, may exercise the Option with respect to a given Development Biomolecule by providing Diversa written notice of the exercise of such Option at any time during the Option Period (the "Option Exercise Date"). If Novartis does not exercise the Option during the Option Period, the Option shall expire, and Novartis shall have no further rights thereunder and shall return or destroy all forms of Confidential Information provided to Novartis under this Agreement relating to the Development Biomolecule subject to such Option within thirty (30) days after such expiration; provided, however, that Novartis may retain one copy of such Confidential Information for the sole purposes of use in any litigation resulting from this Agreement or the activities undertaken pursuant to this Agreement. 12. 4.4 Licenses. In the event that Novartis exercises the Option prior to the end of the Option Period, Diversa will grant to Novartis a License under the Diversa Technology to use the applicable Licensed Biomolecule to the extent necessary to make, have made, use, sell, offer for sale and import Royalty- Bearing Products in the applicable Novartis Field. For clarification, (a) if the Novartis Field includes transgenic applications, the License will entitle Novartis to use the gene encoding the Licensed Biomolecule in Royalty-Bearing Products and, to the extent necessary, to use such gene in such Royalty-Bearing Products to make or have made such Licensed Biomolecule solely in order to make, have made, use, sell, offer for sale and import such Royalty-Bearing Products; and (b) if the Novartis Field includes non-transgenic applications, the License will entitle Novartis to use the Licensed Biomolecule in Royalty-Bearing Products and to make, have made, use, sell, offer for sale and import such Royalty-Bearing Products. The terms of each License, including the Novartis Field and the exclusive License Fee for each specific Licensed Biomolecule will be defined in a definitive license agreement ("License Agreement"), to be agreed upon by both Parties by the date the Option is exercised. The License for the specific Licensed Biomolecule will become effective upon payment of amounts due under Section 6.4. License(s) granted under the terms of this Agreement will continue until expiration of the Royalty-Bearing Period unless the License Agreement is terminated in accordance with its terms. 4.5 Scope of License. The Parties hereby agree that the Novartis Field related to the Initial Projects is as follows: 4.5.1 [*****] Project. Use in [*****]. 4.5.2 [*****] Project. Use in [*****]. 4.5.3 [*****] Project. Use in [*****]. 4.5.2 [*****] Project. Use in [*****]. For Development Biomolecules related to New Projects, the Novartis Field will be defined at the time of designation of such Development Biomolecule by the Research Committee. It is the intent of the Parties that the Novartis Field will include the definition of the specific Crop, or Crops, on or in which Royalty-Bearing Products will be used. 4.6 Rights to Sublicense. Under each License that is exclusive, Novartis shall have the right to grant sublicenses to Affiliates, NADI and its Affiliates and third parties, and under each License that is non-exclusive, Novartis shall have the right to grant sublicenses to Affiliates, and to NADI and its Affiliates; provided that any such 13. * CONFIDENTIAL TREATMENT REQUESTED sublicense shall expressly provide that the Sublicensee shall be subject in all respects to the royalty obligations, reports and other provisions in this Agreement with respect to Royalty-Bearing Products and shall otherwise have terms consistent with the terms of this Agreement. Novartis shall provide Diversa with prompt written notice of each sublicense agreement after it is granted. 4.7 Commercialization of Licensed Biomolecules. Novartis shall have the sole and absolute discretion to make all decisions relating to marketing and other commercialization activities in the Novartis Field with respect to any Licensed Biomolecule or any Royalty-Bearing Product containing such Licensed Biomolecule. However, each License Agreement shall include certain minimum performance requirements with respect to the development and commercialization of the applicable Licensed Biomolecule and Royalty-Bearing Product containing such Licensed Biomolecule, as agreed upon by the Parties, and reversion of rights with respect to such Licensed Biomolecule and Royalty-Bearing Product to Diversa if Novartis does not satisfy such performance requirements. 5. Intellectual Property Rights. 5.1 Intellectual Property Ownership. Ownership of all inventions, discoveries, developments and improvements conceived of in the course of work performed on any Project (the "Inventions") shall be determined in accordance with this Section 5.1. 5.1.1 Diversa shall have exclusive ownership and control over all Inventions relating to any Diversa Biomolecule and any derivative Biomolecule made pursuant to this Agreement (including but not limited to Derivative Novartis Biomolecules and Derivative Licensed Biomolecules, whether or not any such Biomolecules are Licensed Biomolecules, including, without limitation, any such Biomolecules, compositions containing any such Biomolecules (other than Royalty-Bearing Products), methods of using such Biomolecules and methods of making such Biomolecules. Diversa will not use any Derivative Novartis Biomolecule in the applicable Novartis Field except pursuant to the Project and will not provide or grant any rights to any third party to use any Derivative Novartis Biomolecule in the applicable Novartis Field; provided that Diversa may use any Derivative Novartis Biomolecule in any field outside of the Novartis Field and may provide or grant any rights to any third party to use any Derivative Novartis Biomolecule in any field outside of the Novartis Field if the utility of such Derivative Novartis Biomolecule in the applicable field was discovered without use of any information or materials provided to Diversa by Novartis (as documented by Diversa). In addition, Diversa will not use, or provide or grant any rights to any third party to use, any Derivative Licensed Biomolecule for the same or similar use as any Royalty-Bearing Product. Nothing herein is intended to limit Diversa's rights (including the right to grant licenses to third parties) to any Biomolecules, except Development Biomolecules subject to an Option under Section 4.1, Licensed Biomolecules subject to a License under a License Agreement, Derivative Novartis Biomolecules to the extent their use is limited by this Section 5.1.1 and Derivative Licensed Biomolecules to the extent their use is limited by this Section 5.1.1; except that no license, either express or implied, is granted by Novartis to 14. Diversa under any Novartis Patent Rights, nor under any other intellectual property rights held by Novartis or its Affiliates, or by NADI and its Affiliates, whether or not such rights arise from the performance of this agreement. 5.1.2 Novartis shall have exclusive ownership and control over all Inventions relating to any Royalty-Bearing Product, including, without limitation, such Royalty-Bearing Products, methods of using such Royalty-Bearing Products and methods of making such Royalty-Bearing Products subject to payment by Novartis to Diversa of compensation for Royalty-Bearing Products commercialized outside of the Novartis Field as agreed upon by the Parties prior to any such commercialization. 5.1.3 With respect to all Inventions relating to all assays designed and/or developed in the course of the Project, (a) Diversa shall have exclusive ownership and control over all such Inventions having solely Diversa inventors; (b) Diversa shall have exclusive ownership and control over all such Inventions having Diversa and Novartis inventors; provided that, except as contemplated by the Project, Diversa will not use, and will not provide or grant any rights to any third party to use any assay that incorporates or was designed and/or developed using any information or materials provided to Diversa by Novartis and (c) Novartis shall have exclusive ownership and control over all such Inventions having solely Novartis inventors. Diversa hereby grants a non- exclusive, non-transferable license to Novartis, its Affiliates, and to NADI and its Affiliates, to any such Inventions described in subsection (b) solely for Novartis' internal research purposes. 5.1.4 The provisions of Sections 5.1.1, 5.1.2, and 5.1.3 shall not apply to ownership of any patent applications and patents transferred from one Party to the other Party under the provisions of Section 5.2.3. 5.1.5 Inventorship of Inventions shall be determined in accordance with United States patent law. 5.1.6 Each Party will (and will cause any of its Affiliates and, in the case of Novartis, NADI and any of its Affiliates to) make such assignments and take such other actions as may be necessary or appropriate to effect the ownership of Rights in accordance with this Sections 5.1 and 5.2.3. 5.2 Filing, Prosecution and Maintenance of Patents. 5.2.1 Novartis Patent Rights. Novartis shall have the sole right, at its own expense, to control the filing, prosecution and maintenance of all Novartis Patent Rights. 5.2.2 Diversa Patent Rights. Diversa shall have the sole right, at its own expense, to control the filing, prosecution and maintenance of all Diversa Patent Rights. 5.2.3 Transfer of Patent Rights. If a Party with respect to Patent Rights claiming any Invention over which it has exclusive ownership and control that relates to any Biomolecule or Royalty-Bearing Product decides to abandon or not to pursue 15. prosecution of any such Patent Rights which claim such Invention, it shall inform and permit the other Party, at the other Party's option and expense, to undertake such efforts. The Party relinquishing such efforts shall fully cooperate with the other Party and shall provide to the other Party whatever assignments and any other documents that may be needed in connection with prosecution and/or maintenance of such Patent Rights. The Party assuming prosecution and/or maintenance of Patent Rights from the other Party under the provisions of this Section 5.2.3, shall have exclusive ownership and control of any and all Patent Rights transferred, notwithstanding the provisions of Section 5.1. 5.3 Cooperation of the Parties. Each Party agrees (and will cause any -------------------------- of its Affiliates and, in the case of Novartis, NADI and any of its Affiliates) to cooperate fully in the preparation, filing, prosecution and maintenance of any patent rights arising under this Agreement. Such cooperation includes, but is not limited to: (a) executing all papers and instruments, or using reasonable efforts to cause its employees or agents, to execute such papers and instruments, so as to effectuate the ownership of intellectual property rights set forth in Section 5.1 above and to enable the other Party to file and to prosecute patent applications and to maintain patents in any country; (b) promptly informing the other Party of any matters coming to such Party's attention that may affect the preparation, filing, or prosecution of any such patent applications or the maintenance of any such patents; and (c) undertaking no actions that are potentially deleterious to the preparation, filing, or prosecution of such patent applications or to the maintenance of such patents. 5.4 Infringement by Third Parties. 5.4.1 Notice. Diversa and Novartis shall promptly notify the other in writing of any alleged or threatened infringement of any patent or patent application included in the Diversa Patent Rights or Novartis Patent Rights of which they become aware. Both Parties shall use reasonable efforts in cooperating with each other to terminate such infringement without litigation. 5.4.2 Novartis Actions. Novartis shall have the first right to bring and control, by counsel of its own choice, any action or proceeding with respect to infringement of any Novartis Patent Rights, as well as any Diversa Patent rights, subject to an Option or a License at the time of commencement of such action or proceeding. Diversa shall have the right, at its own expense, to participate in any such action regarding the Diversa Patent Rights by counsel of its own choice. Upon written notice to Diversa, Novartis may require Diversa to participate in such action as a necessary party to such action, at Novartis' expense. If Novartis fails to bring an action or proceeding with respect to any such Diversa Patent Rights within (a) ninety (90) days following the notice of alleged infringement or (b) ten (10) days before the time limit, if 16. any, set forth in the appropriate laws and regulations for the filing of such actions, whichever comes first, Diversa shall have the right to bring and control any such action, at its own expense and by counsel of its own choice, and Novartis shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. 5.4.3 Diversa Actions. Diversa shall have the right to bring and control, by counsel of its own choice, any action or proceeding with respect to infringement of any Diversa Patent Rights which are not subject to an Option or a License at the time of commencement of such action or proceeding. 5.4.4 Cooperation; Awards. In the event a Party brings an infringement action, the other Party shall (and will cause any of its Affiliates and, in the case of Novartis, NADI and any of its Affiliates to) cooperate fully, including if required to bring such action, the furnishing of a power of attorney. Neither Party shall have the right to settle any patent infringement litigation under this Section 5.4 in a manner that diminishes the rights or interests of the other Party without the prior written consent of such other Party. Except as otherwise agreed to by the Parties as part of a cost sharing arrangement, any recovery realized as a result of such litigation, after reimbursement of any litigation costs of Diversa and Novartis, shall belong to the Party who brought the action. 5.5 Claimed Infringement by Third Parties. Diversa and Novartis shall promptly notify the other in writing of any allegation by a third party that the exercise of the rights granted to Novartis under this Agreement or the activities conducted by either Party under this Agreement infringes or may infringe the intellectual property rights of such third party. Each Party will use reasonable efforts (and will cause any of its Affiliates and, in the case of Novartis, NADI and any of its Affiliates) to cooperate with the other Party to resolve or defend against such claims. Neither Party shall have the right to settle any patent infringement litigation under this Section 5.5 in a manner that diminishes the rights or interests of the other Party without the prior written consent of such other Party. 6. Payments, Reports, and Records. 6.1 Equity. Simultaneous with the execution of this Agreement, Novartis shall purchase [*****] of Diversa preferred stock in exchange for a Transaction Amount of [*****] pursuant to a Stock Purchase Agreement which is attached as Exhibit B. 6.2 Research Funding. With respect to research performed [*****], Novartis will reimburse Diversa on a monthly basis at a rate of [*****] per full time equivalent based on actual work performed by Diversa under the applicable Project Plan. 6.3 Milestone Payments. For each Use of each [*****] developed pursuant to this Agreement, Novartis shall pay to Diversa the following amounts upon achievement of each of the milestones under each Project. 17. *Confidential Treatment Requested 6.3.1 [*****] upon the [*****] by the [*****] of a [*****]. 6.3.2 [*****] upon the [*****] of [*****] as provided for in the [*****] and approved by the [*****]. 6.3.3 [*****] upon the [*****] of [*****] as provided for in the [*****] and approved by the [*****]. Such milestone payments in Section 6.3 shall be [*****] and shall [*****] to Diversa under this Agreement. Novartis shall promptly notify Diversa of each occurrence of any of the foregoing milestone events. 6.4 License Fee Payments. In consideration of each License granted to Novartis by Diversa under Section 4.2 herein, Novartis shall pay Diversa the following license fees ("License Fees") for each [*****] payable [*****] as follows: 6.4.1 First, upon the [*****] of the [*****] with respect to a [*****], [*****] for [*****] associated with [*****] will be agreed to for such [*****] in accordance with Section [*****]; provided that, in no event shall the [*****] under this Section 6.4.1 be [*****]. 6.4.2 Second, upon the [*****] of [*****] containing [*****] in an amount to be agreed to at the time the [*****] for such [*****] in accordance with Section [*****]. The License Fees will be determined by [*****] of the [*****]. Such License Fees in Section 6.4 shall be [*****] and shall [*****] to Diversa under this Agreement. 6.5 Royalties. In consideration of the Licenses granted to Novartis by Diversa hereunder, for all sales by Novartis, its Affiliates and Sublicensees of Royalty-Bearing Products in the applicable Novartis Field, Novartis shall pay to Diversa a royalty of either (a) [*****] and [*****], or (b) [*****] and [*****], provided that such percentages in (b) [*****] The [*****] in either case will be determined by [*****] of the [*****] in the [*****] applicable to such [*****] based upon the factors described in Section 6.6. 18. *Confidential Treatment Requested 6.5.1 Sales to Affiliates and Sublicensees. [*****] royalty shall accrue on sales among Novartis, its Affiliates and Sublicensees, unless Novartis or such Affiliate or Sublicensee is the end user of a Royalty-Bearing Product. Royalties shall be payable [*****] for [*****] of Royalty-Bearing Product sold. 6.5.2 [*****] Royalties. [*****] may [*****] with [*****] over time under the [*****] to the extent such [*****] are [*****] of the [*****] of [*****] and would make it [*****] for [*****] to [*****] with the terms of the Agreement: 6.5.2.1 [*****] pays [*****] for a [*****] resulting in [*****] to [*****]; 6.5.2.2 A [*****] does not provide the [*****] to [*****] the [*****] of the [*****] of [*****] hereunder; a [*****] will be based upon the [*****] of the [*****]; or 6.5.2.3 The [*****] attributed to a [*****] in [*****] over [*****] or [*****] to be [*****], although not [*****] from a [*****]. In the event such a [*****] the Parties agree to [*****] in [*****] provided that any [*****] in the [*****] shall [*****] the [*****] of the [*****]. 6.6 [*****] License Fees and Royalties. The [*****] License Fees under Section 6.4 and the royalty rates under Section 6.5 will be [*****] by [*****] of the [*****] based on [*****] such as [*****] the [*****] is [*****]. 6.7 Reports and Payments. Within [*****] after the conclusion of each Royalty Period, Novartis shall pay to Diversa the estimated royalty payment due for such Royalty Period based on the royalty rates applicable to units of Royalty-Bearing Products shipped during such Royalty Period less estimated returns, and shall deliver to Diversa a report containing the following information: (a) Estimated gross sales and returns of Royalty-Bearing Products by Novartis, its Affiliates and Sublicensees during the applicable Royalty Period in each country of sale; 19. *Confidential Treatment Requested (b) Adjustments and calculation of Net Sales for the applicable Royalty Period in each country of sale; and (c) Calculation of royalty. Any corrections to the estimated [*****] royalty payment will be established at the [*****] and factored into the corresponding royalty payment for such [*****]. All amounts payable under this Section will first be calculated in the currency of sale and then converted into U.S. dollars. The buying rates involved for the currency of the United States into which the currencies involved are being exchanged shall be the one quoted by The Wall Street Journal at the close of business on the last business day of the applicable Royalty Period. Such amounts shall be paid without deduction, except as required by law, of any withholding taxes, value-added taxes, or other charges applicable to such payments. 6.8 Payments in U.S. Dollars. All payments due under this Agreement shall be payable in United States dollars. 6.9 Records. Novartis and its Affiliates shall maintain complete and accurate records of Royalty Bearing Products made, used or sold by them or their Sublicensees under this Agreement, and any amounts payable to Diversa in relation to Royalty Bearing Products, which records shall contain sufficient information to Diversa to confirm the accuracy of any reports delivered to them in accordance with Section 6.7. Novartis and its Affiliates shall retain such records relating to a given Royalty Period for at least three (3) years after the conclusion of that Royalty Period. Diversa (acting as the "Auditing Party") shall have the right, at its own expense, to cause an independent certified public accountant reasonably acceptable to Novartis, to inspect such records of Novartis or its Affiliates (the "Audited Party") during normal business hours for the sole purpose of verifying any reports and payments delivered under this Agreement. Such accountant shall not disclose to the Auditing Party any information other than information relating to accuracy of reports and payments delivered under this Agreement and shall provide the Audited Party with a copy of any report given to the Auditing Party. The Parties shall reconcile any underpayment or overpayment within [*****] after the accountant delivers the results of the audit. The Auditing Party shall bear the full cost of the audit unless, the audit performed under this Section reveals an underpayment in excess of [*****] in any Royalty Period, in which case the Audited Party shall bear the full cost of such audit. Diversa may exercise its rights under this Section only once every year and only with reasonable prior notice to Novartis. Novartis shall use commercially reasonable efforts to ensure that the other Party will have access to records of Royalty-Bearing Products sold by its Affiliates. 6.10 Late Payments. In the event that any payment, including royalty payments, due hereunder is not made when due, the payment shall accrue interest from that date due at the rate of [*****]; provided however, that in no event shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit Diversa from exercising any other rights it may have as a consequence of the lateness of any payment. 20. *Confidential Treatment Requested 7. Confidential Information. 7.1 Definition of Confidential Information. Confidential Information shall mean any technical or business information, whether orally or in writing, furnished by the Disclosing Party to the Receiving Party in connection with this Agreement. Such Confidential Information shall include, without limitation, the existence and terms of this Agreement, the identity of a [*****], the [*****], any [*****], if relevant, the use of a [*****], Diversa Technology, Novartis Technology, trade secrets, know-how, inventions, technical data or specifications, testing methods, business or financial information, research and development activities, product and marketing plans, and customer and supplier information, including, but not limited to, such items that become known to a Party during visits to the facilities of the other Party. 7.2 Obligations. The Receiving Party agrees that it shall: (a) Maintain all Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to its Affiliates, directors, officers, employees, consultants and advisors (or, in the case of Novartis, also to NADI and its Affiliates, directors, officers, employees, consultants and advisors) who are obligated to maintain the confidential nature of such Confidential Information and who need to know such Confidential Information for the purposes set forth in this Agreement; (b) Use all Confidential Information solely for the purposes set forth in, or as permitted by, this Agreement; and (c) Allow its Affiliates, directors, officers, employees, consultants and advisors (or, in the case of Novartis, also NADI and its Affiliates, directors, officers, employees, consultants and advisors) to reproduce the Confidential Information only to the extent necessary to effect the purposes set forth in this Agreement, with all such reproductions being considered Confidential Information. Each Party shall be responsible for any breaches of this Section 7.2. by any of its Affiliates, directors, officers, employees, consultants and advisors. 7.3 Exceptions. The obligations of the Receiving Party under Section 7.2. above shall not apply to any specific Confidential Information to the extent that the Receiving Party can demonstrate that such Confidential Information: (a) Was in the public domain prior to the time of its disclosure under this Agreement; (b) Entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act 21. *Confidential Treatment Requested or omission by the Receiving Party or its Affiliates, directors, officers, employees, consultants, advisors or agents; (c) Was or is independently developed or discovered by the Receiving Party without use of the Confidential Information, and which can be demonstrated by written record; (d) Is or was disclosed to the Receiving Party at any time, whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality to the Disclosing Party with respect to such Confidential Information; or (e) Is required to be disclosed to comply with applicable laws or regulations (such as disclosure to the SEC, the EPA, the FDA, or the United States Patent and Trademark Office or to their foreign equivalents), or to comply with a court or administrative order, provided that the Disclosing Party receives prior written notice of such disclosure and that the Receiving Party takes all reasonable and lawful actions to obtain confidential treatment for such disclosure and, if possible, to minimize the extent of such disclosure. 7.4 Survival of Obligations. The obligations set forth in Sections [*****] and [*****] shall remain in effect after termination or expiration of this Agreement for a period of [*****]. 7.5 Public Announcement. The Parties shall issue a joint press release regarding this Agreement, the text of which shall be subject to mutual agreement of the Parties. Except for the information disclosed in the joint press release, neither party shall use the name of the other party or reveal the existence of or terms of this Agreement in any publicity or advertising without the prior written approval of the other party, except that (i) either party may use the text of a written statement approved in advance by both parties without further approval, and (ii) either party shall have the right to identify the other party and to disclose the terms of this Agreement as required by applicable securities laws or other applicable law or regulation, provided that the receiving party takes reasonable and lawful actions to minimize the degree of such disclosure. 7.6 Publication. The Parties shall cooperate in appropriate publication of the results of research and development work performed pursuant to the Projects, but subject to the predominating interest to obtain patent protection for any patentable subject matter. To this end, prior to any public disclosure of such results, the Party proposing disclosure shall send the other Party a copy of the information to be disclosed, and shall allow the other party [*****] from the date of receipt in which to determine whether the information to be disclosed contains subject matter for which patent protection should be sought prior to disclosure, or otherwise contains Confidential Information of the reviewing Party. The Party proposing disclosure shall be free to proceed with the disclosure unless prior to the expiration of such [*****] period the reviewing Party notifies the Party proposing disclosure that the disclosure contains 22. *Confidential Treatment Requested subject matter for which patent protection should be sought or Confidential Information of the reviewing Party, and the Party proposing publication shall then delay public disclosure of the information for an additional period to be mutually agreed upon to permit the preparation and filing of a patent application on the subject matter to be disclosed or for the Parties to determine a mutually acceptable modification to such publication to protect the Confidential Information of the reviewing Party adequately. The Party proposing disclosure shall thereafter be free to publish or disclose the information. The determination of authorship for any paper shall be in accordance with accepted scientific practice. 8. Representations and Warranties. 8.1 Authorization. Each Party represents and warrants to the other that it has the legal right and power to enter into this Agreement, to extend the rights and licenses granted to the other in this Agreement, and to fully perform its obligations hereunder, and that the performance of such obligations will not conflict with its charter documents or any agreements, contracts, or other arrangements to which it is a party. 8.2 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION AND EXTENDS NO WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES AS TO MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. 8.3 Limitation of Liability. IN NO EVENT WILL EITHER PARTY, ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR AFFILIATES BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, WHETHER BASED UPON A CLAIM OR ACTION OF CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER TORT, OR OTHERWISE, ARISING OUT OF THIS AGREEMENT. 9. Indemnification. 9.1 Indemnification. Novartis (the "Indemnitor") shall indemnify, defend, and hold harmless Diversa and its Affiliates and their directors, officers, employees, and agents and their respective successors, heirs and assigns (the "Indemnitees"), against any liability, damage, loss, or expense incurred by or imposed upon the Indemnitees or any one of them in connection with any claims, settlements, suits, actions, demands, or judgments arising out of any theory of product liability (including, but not limited to, actions in the form of tort, warranty, or strict liability) concerning any product (or any process or service) that is made, used, or sold by the Indemnitor or its Affiliates or Sublicensees pursuant to any right or license granted under this Agreement; provided, however, that such indemnification right shall not apply to any liability, damage, loss, or expense to the extent directly attributable to the negligence, reckless misconduct, or intentional misconduct of the Indemnitees. An Indemnitee shall not be entitled to indemnification for the settlement of any claim pursuant to this Agreement unless it obtains the prior written consent of the Indemnitor to such settlement. 23. 9.2 Procedures. Any Indemnitee that intends to claim indemnification under Section 9.1 shall promptly notify the Indemnitor of any claim in respect of which the intends to claim such indemnification, and the Indemnitor shall assume the defense thereof with counsel mutually satisfactory to the Parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses of no more than the law firm representing all Indemnitees in the proceeding or related proceeding, to be paid by the Indemnitor, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceedings. The indemnity agreement in Section 9.1. shall not apply to amounts paid in settlement of any loss, claim, liability or action if such settlement is effected without the consent of the Indemnitor. The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, shall not relieve the Indemnitor of any liability to the Indemnitee under Section 9.1, except to the extent the Indemnitor has been prejudiced by such failure to give notice. Each Party and its Affiliates and their employees and agents shall cooperate fully with the other Party and its legal representatives in the investigation of any action, claim or liability covered by this indemnification. 10. Term; Termination. 10.1 Term. The term of this Agreement will commence as of the Effective Date of this Agreement and, unless sooner terminated as provided hereunder, will expire upon the later of (i) the last day of the Research Period, or (ii) the last day of the last Option Period. 10.2 Termination. 10.2.1 Change of Control. Novartis shall have the right to terminate this Agreement upon the occurrence of a Change of Control during the Research Period by providing written notice of termination to Diversa within sixty (60) days following receipt of written notice of the occurrence of such Change of Control. In the event that Novartis does not terminate this Agreement under this Section 10.2.1, this Agreement will be binding upon Novartis and Diversa, or any successor to Diversa in such Change of Control. 10.2.2 Mutual Consent. This Agreement may be terminated at any time by mutual written agreement of the Parties. 10.2.3 Material Breach. In the event that a Party commits a material breach of any of its obligations under this Agreement (other than as provided in Section 10.4) and such Party fails (i) to remedy that breach within ninety (90) days after receiving written notice thereof from the other Party or (ii) to commence dispute resolution pursuant to Section 10.3, within ninety (90) days after receiving written notice of that breach from the other Party, the other Party may immediately terminate this Agreement upon written notice to the breaching Party. 24. 10.2.4 Breach of Payment Obligations. In the event that Novartis fails to make timely payment of any amounts due under this Agreement within ten (10) business days after demand therefor, Diversa may terminate this Agreement upon thirty (30) days prior written notice, unless the Novartis cures such breach by paying all past-due amounts within such thirty (30) day notice period, provided that Novartis shall be entitled to use such cure provision no more than once in any twelve (12) month period. 10.3 Disposition of Confidential Information. In the event of termination or expiration of this Agreement, the Parties shall return or destroy all forms of Confidential Information provided to them under this Agreement, within thirty (30) days after such termination or expiration, provided, however, that each Party may retain one copy of such Confidential Information for the sole purpose of use in any litigation resulting from this Agreement or the activities undertaken pursuant to this Agreement and further provided, that if Diversa is the breaching Party, Novartis may retain Development Biomolecules, if any, pursuant to the Licenses granted pursuant to Section 4. 10.4 Effect of Termination or Expiration. Termination or expiration of this Agreement shall not relieve the parties of any obligation accruing prior to such termination or expiration and shall not terminate any License granted or License Agreement entered into prior to such termination or expiration. The provisions of Sections 5, 7.1, 7.2, 7.3, 7.4, 8.2, 8.3, 9, 10.3, 10.4 and 11 shall survive the expiration or termination of this Agreement, and the provisions of Sections 4.4, 4.5, 4.6, 4.7, 6.3, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9 and 6.10 shall survive the termination of this Agreement with respect to any License granted or Option exercised prior to such termination. Termination of this Agreement pursuant to Section 10.2 shall not limit any other rights and remedies of the terminating party. 11. Miscellaneous. 11.1 Relationship of Parties. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the parties. No party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein. 11.2 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of [*****] other than those provisions governing conflicts of law. 25. *Confidential Treatment Requested 11.3 Dispute Resolution Procedures. (a) The parties hereby agree that they will attempt in good faith to resolve any controversy, claim or dispute ("Dispute") arising out of or relating to this Agreement promptly by negotiations. Any such Dispute which is not settled by the parties within [*****] after notice of such Dispute is given by one party to the other in writing shall be referred to the Chief Executive Officer of Diversa and the appropriate Senior Executive of Novartis who are authorized to settle such Disputes on behalf of their respective companies ("Senior Executives"). The Senior Executives will meet for negotiations within [*****] of such notice of Dispute, at a time and place mutually acceptable to both Senior Executives. If the Dispute has not been resolved within [*****] after the end of the [*****] negotiation period referred to above (which period may be extended by mutual agreement), unless otherwise specifically provided for herein, any Dispute will be settled first by non-binding mediation and thereafter by arbitration as described in subsections (b) and (c) below. (b) Any Dispute which is not resolved by the parties within the time period described in subsection (a) shall be submitted to an alternative dispute resolution process ("ADR"). Within [*****] after the expiration of the [*****] period set forth in subsection (a), each party shall select for itself a representative with the authority to bind such party and shall notify the other party in writing of the name and title of such representative. Within [*****] after the date of delivery of such notice, the representatives shall schedule a date for engaging in non-binding ADR with a neutral mediator or dispute resolution firm mutually acceptable to both representatives. Any such mediation shall be held in [*****] if brought by [*****] and [*****],[*****] if brought by [*****]. Thereafter, the representatives of the parties shall engage in good faith in an ADR process under the auspices of such individual or firm. If the representatives of the parties have not been able to resolve the Dispute within [*****] after the conclusion of the ADR process, or if the representatives of the parties fail to schedule a date for engaging in non-binding ADR within the [*****] set forth above, the Dispute shall be settled by binding arbitration as set forth in subsection (c) below. If the representatives of the parties resolve the dispute within the [*****] set forth above, then such resolution shall be binding upon the parties. If either party fails to abide by such resolution, the other party can immediately refer the matter to arbitration under Section 11.3(c). (c) If the parties have not been able to resolve the Dispute as provided in subsections (a) and (b) above, the Dispute shall be finally settled by binding arbitration. Any arbitration hereunder shall be conducted under rules of conciliation and arbitration of the International Chamber of Commerce by three arbitrators chosen according to the following procedure: each of the parties shall appoint one arbitrator and the two so nominated shall choose the third; provided that in the case of a dispute as to decisions of the Research Committee each party shall designate one (1) neutral having the following minimum scientific qualifications: a Ph.D. degree in chemistry or life sciences and/or an M.D. degree plus at least [*****] of relevant business or scientific research experience. These [*****] shall select a third neutral having 26. *Confidential Treatment Requested the same minimum scientific qualifications within [*****] of the appointment of the first [*****]. None of the neutrals shall be an employee, director or shareholder of either Party or any of their Affiliates or NADI or its Affiliates or otherwise have a materially conflicting interest in the outcome of such proceeding. If the arbitrators chosen by the Parties cannot agree on the choice of the third arbitrator within a period of [*****] after their appointment, then the third arbitrator with such requisite qualifications shall be appointed by the Court of Arbitration of the International Chamber of Commerce. Any such arbitration shall be held in [*****] if brought by [*****] and [*****] if brought by [*****], or such other location as the arbitrators may agree, and shall be conducted in English. The arbitral award (i) shall be final and binding upon the parties; and (ii) may be entered in any court of competent jurisdiction. (d) Nothing contained in this Section or any other provisions of this Agreement shall be construed to limit or preclude a party from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief to compel the other party to comply with its obligations hereunder before or during the pendency of mediation or arbitration proceedings. The parties hereby irrevocably consent to submit to the jurisdiction of the federal courts located within the state of California and agree that venue is proper in any such court and will not seek to alter or contest such venue. 11.4 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 11.5 Headings. All headings in this Agreement are for convenience only and shall not affect the meaning of any provision hereof. 11.6 Binding Effect. This Agreement and all rights and obligations hereunder shall inure to the benefit of and be binding upon the Parties, their Affiliates, and their respective lawful successors and assigns (including, without limitation, any successor to Diversa upon a Change of Control). 11.7 Assignment. Except as otherwise provided herein, neither this Agreement nor any interest hereunder will be assignable in part or in whole by any Party without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement to any of its Affiliates (or in the case of Novartis, also to ([*****]) or to any successor by merger or sale of substantially all of its business to which this Agreement relates (provided that, in the event of such merger or sale, no intellectual property of any acquiring corporation that is not a Party shall be included in the technology licensed hereunder). This Agreement will be binding upon the successors and permitted assigns of the Parties. Any assignment which is not in accordance with this Section will be void. 11.8 Notices. All notices, requests, demands and other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given upon the date of receipt if delivered by hand, 27. *Confidential Treatment Requested recognized international overnight courier, confirmed facsimile transmission, or registered or certified mail, return receipt requested, postage prepaid to the following addresses or facsimile numbers: If to Novartis: If to Diversa: NOVARTIS AGRIBUSINESS [*****] Diversa Corporation [*****] 10665 Sorrento Valley Road [*****] San Diego, California 92121 [*****] Attention: Carolyn Erickson [*****] Tel: (619) 453-7020 [*****] Fax: (619) 453-7032 [*****] with a copy to: Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, CA 9221 Attention: M. Wainwright Fishburn, Esq. Tel: 619-550-6018 Fax: 619-453-3555 Either party may change its designated address and facsimile number by notice to the other party in the manner provided in this Section. 11.9 Amendment and Waiver. This Agreement may be amended, supplemented, or otherwise modified only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 11.10 Severability. In the event that any provision of this Agreement shall, for any reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and the parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent. 11.11 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements or understandings between the parties relating to the subject matter hereof. 11.12 Regulatory Filings. Novartis shall have sole responsibility for making all regulatory filings worldwide, including, without limitation, all filings required by the Biodiversity Convention and other legislation related to the ownership or use of 28. *Confidential Treatment Requested biological resources, and obtaining the necessary approvals to market Royalty- Bearing Products. Diversa will cooperate to provide information required to make and maintain such filings, as appropriate. 11.13 Force Majeure. Neither party shall be held liable or responsible to the other party, nor be deemed to be in breach of this Agreement, for failure or delay in fulfilling or performing any provisions of this Agreement (other than payment obligations) when such failure or delay is caused by or results from any cause whatsoever outside the reasonable control of the party concerned including, but not limited to, fire, explosion, breakdown of plant, damage to plant material by pests or otherwise, strike, lock-out, labor disputes, casualty or accident, lack or failure of transportation facilities, flood, lack or failure of sources of supply or of labor, raw materials or energy, civil commotion, embargo, any law, regulation, decision, demand or requirement of any national or local government or authority. The party claiming relief shall, without delay, notify the other party by registered airmail or by telefax of the interruption and cessation thereof and shall use its best efforts to remedy the effects of such hindrance with all reasonable dispatch. The onus of proving that any such Force Majeure event exists shall rest upon the party so asserting. During the period that one party is prevented from performing its obligations under this Agreement due to a Force Majeure event, the other party may, in its sole discretion, suspend any obligations that relate thereto. Upon cessation of such Force Majeure event the parties hereto shall use their best efforts to make up for any suspended obligations. If such Force Majeure event is anticipated to continue, or has existed for [*****], this Agreement may be forthwith terminated by either party by registered airmail or by telefax. In case of such termination the terminating party will not be required to pay to the other party any indemnity whatsoever. 29. *Confidential Treatment Requested IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement as a sealed instrument effective as of the date first above written. NOVARTIS AGRIBUSINESS BIOTECHNOLOGY RESEARCH, INC. DIVERSA CORPORATION /s/ Steven V. Evola /s/ Terrance J. Bruggeman - ----------------------------- ------------------------------ By: Steven V. Evola Terrance J. Bruggeman Co-President Chief Executive Officer 30. EXHIBIT A Project Plans 29. *Confidential Treatment Requested Flowchart: [*****] 6. *Confidential Treatment Requested PARTNERSHIP PROJECT R&D PLAN Title: [*****] Partner: [*****] Date: December 4, 1998 Project Description: [*****] Project Assumptions: 1. [*****] 2. [*****] 3. [*****] 4. [*****] 5. [*****] 7. *Confidential Treatment Requested 6. [*****] 7. [*****] 8. [*****] 9. [*****] Delivery: 1. [*****] 2. [*****] Effort: [*****] Flowchart: [*****] 8. *Confidential Treatment Requested Delivery: 1. [*****] 2. [*****] 3. [*****] 4. [*****] Effort: [*****] FLOWCHART: [*****] 10. *Confidential Treatment Requested Exhibit B Stock Purchase Agreement STOCK PURCHASE AGREEMENT Dated as of January 25, 1999 by and between DIVERSA CORPORATION and NOVARTIS AGRIBUSINESS BIOTECHNOLOGY RESEARCH, INC. Stock Purchase Agreement Stock Purchase Agreement dated as of January 25, 1999 (this "Agreement"), by and between Novartis Agribusiness Biotechnology Research, Inc., a Delaware corporation (the "Investor"), and Diversa Corporation, a Delaware corporation (the "Company"). R E C I T A L S Whereas, the Company and the Investor are parties to that certain Collaboration Agreement dated as of even date herewith (the "Collaboration Agreement") pursuant to which the Company and the Investor will collaborate on the projects described therein; and Whereas, in connection with such collaboration, the Company wishes to issue and sell to the Investor, and the Investor wishes to purchase from the Company, shares of the Company's capital stock, subject to and upon the terms and conditions hereinafter set forth. Now, Therefore, in consideration of the foregoing and of the respective covenants and undertakings hereunder and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto do hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms have the meanings specified or referred to in this Section 1. "Board of Directors" shall mean the Board of Directors of the Company. "Business" shall mean the business, operations and assets of the Company. "By-Laws" shall mean the by-laws of the Company. "Certificate of Incorporation" shall mean the Seventh Restated Certificate of Incorporation in substantially the form attached hereto as Exhibit A. "Closing" shall have the meaning set forth in Section 3.1. "Closing Date" shall mean the date and time of the Closing. "Collaboration Agreement" shall have the meaning set forth in the recitals to this Agreement. "Common Stock" shall mean the common stock, $.001 par value, of the Company. "Company" shall have the meaning set forth in the first paragraph of this Agreement. "Company Closing Documents" shall mean all the documents, instruments and writings required by this Agreement to be delivered by the Company at the Closing. 1. "Contemplated Transactions" shall mean the transactions contemplated by this Agreement. "Encumbrance" shall mean any security interest, mortgage, lien, charge, adverse claim or restriction of any kind, except for transfer restrictions imposed by the Securities Act or the Exchange Act and state securities laws. "Equity Stock" shall have the meaning set forth in Rule 3a11-1 under the Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "GAAP" shall mean generally accepted accounting principles of the United States. "Governmental Body" shall mean any United States or state government body, any agency, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory or taxing authority thereunder. "Investor" shall have the meaning set forth in the first paragraph of this Agreement. "IPO" and "IPO Shares" shall have the meanings set forth in Section 2.3. "IPO Closing" and "IPO Closing Date" shall have the meanings set forth in Section 3.4. "Non-Scientific Founders" shall mean Gary Friedman and Dr. Peter Korn. "Person" shall mean any individual, corporation, partnership, a limited liability company, joint venture, trust, association, unincorporated organization, other entity, or Governmental Body. "Proprietary Rights" shall mean all patents, patent applications, patent licenses, trademarks, tradenames, trade secrets, service marks, brand marks, brand names, copyrights, copyright applications, inventions, technologies, know- how, formulae, processes, names and likeness owned or licensed by the Company. "Purchase Price" shall have the meaning set forth in Section 2.2. "Restated Stockholders' Agreement" shall mean the Amended and Restated Stockholders' Agreement, amending and restating the Stockholders' Agreement in substantially the form attached hereto as Exhibit B, to be entered into by and among the Company and certain holders of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock of the Company as of the Closing Date. "Restated Voting Agreement" shall mean the Amended and Restated Voting Agreement, amending and restating the Voting Agreement in substantially the form attached hereto as Exhibit C, to be entered into by and among the Company, certain holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock 2. and Series E Preferred Stock and certain of the holders of Common Stock of the Company as of the Closing Date. "Restricted Stock Agreements" shall mean the Restricted Stock Agreements dated December 21, 1994 between the Company and each of the Scientific Founders and the Non-Scientific Founders and the Restricted Stock Agreement dated December 15, 1994 between the Company and Barry Marrs. "Restricted Stock Option Agreements" shall mean the Restricted Stock Option Agreements dated December 21, 1994 between the Company and each of the Scientific Founders and the Non-Scientific Founders and the Restricted Stock Option Agreement dated December 19, 1994 between the Company and Barry Marrs. "Scientific Founders" shall mean Dr. Melvin Simon, Dr. Jeffrey H. Miller, Dr. Karl Stetter and William A. Haseltine. "Securities Act" shall mean the Securities Act of 1933, as amended. "Series A Preferred Stock" shall mean the Series A Convertible Preferred Stock, $.001 par value per share, of the Company. "Series B Preferred Stock" shall mean the Series B Convertible Preferred Stock, $.001 par value per share, of the Company. "Series C Preferred Stock" shall mean the Series C Convertible Preferred Stock, $.001 par value per share, of the Company. "Series D Preferred Stock" shall mean the Series D Convertible Preferred Stock, $.001 par value per share, of the Company. "Series E Preferred Stock" shall mean the Series E Convertible Preferred Stock, $.001 par value per share, of the Company. "Series E Shares" shall have the meaning set forth in Section 2.2. "Stockholders' Agreement" shall mean the Stockholders' Agreement dated as of May 13, 1996, as amended on July 14, 1997 and October 22, 1997, by and among the Company and certain holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock of the Company. "Voting Agreement" shall mean the Voting Agreement dated as of May 13, 1996, as amended on July 14, 1997 and October 22, 1997, by and among the Company, the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock and certain of the holders of Common Stock of the Company. 3. 2. Purchase and Sale of Shares. 2.1 Authorization of the Series E Preferred Stock. On or before the Closing, the Company shall adopt and file with the Secretary of State of the State of Delaware the Certificate of Incorporation. The Series E Preferred Stock shall have the voting powers, dividend rights, liquidation rights, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof, set forth in the Certificate of Incorporation, the terms of which are incorporated herein by reference as though set forth herein in full. 2.2 Purchase and Sale of the Series E Shares. Subject to the terms and conditions of this Agreement, at the Closing to be held as provided in Section 3, the Company shall issue, sell and deliver to the Investor, and the Investor shall purchase from the Company, 5,555,556 shares of Series E Preferred Stock (the "Series E Shares"), free and clear of all Encumbrances, for the purchase price of $12,500,001 (the "Purchase Price"). The Purchase Price shall be paid by the Investor to the Company at the Closing in immediately available funds by wire transfer or by delivery of bank cashier's checks or certified checks or by such other form as approved by the Company. 2.3 Purchase and Sale of the IPO Shares. Subject to the terms and conditions hereof, at the time that the Company completes an initial underwritten public offering of its Common Stock (an "IPO") in which the Company realizes aggregate net proceeds of at least $10,000,000, the Investor shall have the right to purchase from the Company that number of shares of the Company's Common Stock having an aggregate value of up to 10% of the aggregate gross proceeds of the IPO (the "IPO Shares"), to be issued and sold in a private placement to close simultaneously with the completion of the IPO, at the price per share to the public in the IPO. The Company shall provide prompt written notice to the Investor of the proposed IPO and the Investor shall have 20 days following the date of such notice from the Company to exercise its right to purchase the IPO shares by providing written notice to the Company, which notice shall specify the anticipated number of IPO shares to be purchased (subject to adjustment based on the actual gross proceeds of the IPO and the actual price per share to the public in the IPO). If the Investor does not provide written notice to the Company within such 20-day period or provides written notice to the Company within such 20-day period that it does not wish to purchase the IPO shares, then the Investor shall have no further right to purchase shares from the Company, unless the Company does not complete the proposed IPO within nine months of the date of the Company's notice of such proposed IPO, in which case the Investor will again have the right set forth in this Section 2.3. If the Investor provides written notice to the Company of its election to purchase the IPO Shares within such 20-day period, then the Investor shall purchase from the Company, and the Company shall issue and sell to the Investor, the IPO Shares in a private placement to close simultaneously with the closing of the IPO. 3. Closing. 3.1 Place and Time. The closing of the sale and purchase of the Series E Shares pursuant to Section 2.2 (the "Closing") shall take place at the offices of Cooley Godward llp, 4365 Executive Drive, Suite 1100, San Diego, California, at 10:00 a.m. (San Diego time) on 4. January 4, 1999 following the satisfaction of the conditions set forth in Sections 8 and 9, or at such other place, date and time as the parties may agree in writing. 3.2 Deliveries by the Company. At the Closing, the Company shall deliver the following to the Investor: (a) A certificate representing the Series E Shares delivered pursuant to Section 2.2, duly registered in the name of the Investor. (b) The documents set forth in Section 8. (c) The Restated Stockholders' Agreement. (d) The Restated Voting Agreement. (e) All other documents, instruments and writings required by this Agreement to be delivered by the Company at the Closing. 3.3 Deliveries by the Investor. At the Closing, the Investor shall deliver the following to the Company: (a) A wire transfer of immediately available US dollar funds in the amount of the Purchase Price to an account designated by the Company not less than two (2) days prior to the Closing. (b) The documents set forth in Section 9. (c) An executed signature page to the Restated Stockholders' Agreement. (d) An executed signature page to the Restated Voting Agreement. (e) All other documents, instruments and writings required by this Agreement to be delivered by the Investor at the Closing. 3.4 IPO Closing. Subject to the terms of Sections 8 and 9, the closing of the sale and purchase of the IPO Shares under this Agreement (the "IPO Closing") shall be held at the time and date of the completion of the IPO (the "IPO Closing Date") at the offices of Cooley Godward, 4365 Executive Drive, Suite 1100, San Diego, California, or at such time and place as the Company and the Investor may agree. At the IPO Closing, subject to the terms and conditions hereof, the Company shall deliver to the Investor a stock certificate registered in the name of Investor representing the IPO Shares, dated as of the IPO Closing Date, against payment of the purchase price therefor by wire transfer of immediately available US dollar funds to an account designated by the Company not less than two (2) days prior to the IPO Closing. 5. 4. Representations and Warranties of the Company. The Company represents and warrants to the Investor as follows: 4.1 Organization of the Company; Authorization. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to enter into this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement and to perform all of its obligations hereunder and thereunder, and to own or lease its properties and to engage in its business as presently conducted. The Company is duly qualified and in good standing as a foreign corporation under the laws of each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. The Company has no subsidiaries, nor does it own any equity interest in, or control directly or indirectly, any other entity. (b) The execution, delivery and performance of this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement by the Company have been authorized by all necessary action and constitute valid and binding obligations of the Company, enforceable against it in accordance with their terms. 4.2 Capitalization. (a) As of the Closing, the authorized Equity Stock of the Company will consist of (i) 82,472,584 shares of Common Stock, of which 5,347,322 shares are issued and outstanding, (ii) 10,501,000 shares of Series A Preferred Stock, of which 10,000,000 shares are issued and outstanding, (iii) 24,566,184 shares of Series B Preferred Stock, all of which are issued and outstanding, (iv) 844,444 shares of Series C Preferred Stock, all of which are issued and outstanding, (v) 24,809,555 shares of Series D Preferred Stock, all of which are issued and outstanding, and (vi) 5,555,556 shares of Series E Preferred Stock, none of which are issued and outstanding (excluding the Series E Shares). All of such issued and outstanding shares have been duly authorized and validly issued and are fully paid and non-assessable. (b) A true and complete list of the holders of record of all issued and outstanding Equity Stock of the Company on the date hereof and reflecting the issuance of the Series E Shares on the Closing Date, including the number of shares of Equity Stock owned by each such holder, and the number of shares of Equity Stock reserved by the Company for each specified purpose is set forth on Schedule 4.2 hereto. (C) The issuance of the Series E Shares to be issued to the Investor hereunder simultaneously with the Closing and the shares of Common Stock issuable upon conversion of the Series E Shares have been or will be on or prior to the Closing duly authorized. The Company has or will on or prior to the Closing duly reserve for issuance the shares of Common Stock issuable upon conversion of the Series E Shares. No further approval or authorization of the stockholders or the directors of the Company, of any Governmental Body or foreign governmental body or of any other Person is required for the issuance and sale of the Series E Shares or the shares of Common Stock issuable on conversion thereof. When paid for by, and issued to, the Investor, the Series E Shares will be validly issued, fully paid and non-assessable, 6. and, except as set forth in this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement or the Certificate of Incorporation or under applicable law, will not be subject to any restriction on use, voting or transfer. The Series E Preferred Stock will have the designations, preferences and relative participating, optional and other special rights as set forth in the Certificate of Incorporation. The shares of Common Stock issuable to the Investor upon conversion of the Series E Shares will, upon conversion of the Series E Shares in accordance with the Certificate of Incorporation, be validly issued, fully paid and non-assessable, and, except as set forth in this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement or the Certificate of Incorporation or under applicable law, will not be subject to any restriction on use, voting or transfer. Assuming the truth of the Investor's representations and warranties contained in Section 5, the offer, sale and issuance of the Series E Shares (and any shares of Common Stock issuable on conversion thereof) are exempt from the registration requirements of the Securities Act and applicable state securities laws. (d) Except as set forth in Schedule 4.2 hereto, there are no outstanding options, rights, conversion rights, agreements or commitments of any kind relating to the issuance, sale, purchase, redemption, voting or transfer by the Company of any Equity Stock or other securities of the Company or any rights outstanding which permit or allow the holder thereof to cause the Company to file a registration statement or which permit or allow the holder thereof to include securities of the Company in a registration statement filed by the Company, other than the rights granted pursuant to the Restricted Stock Agreements, Restricted Stock Option Agreements, the Restated Stockholders' Agreement and the Restated Voting Agreement. There are no preemptive or other similar rights with respect to any Equity Stock of the Company except rights granted under the Stockholders' Agreement. None of the outstanding Equity Stock or other securities of the Company was issued in violation of the Securities Act, or the securities or blue sky laws of any state. The Company has delivered to the Investor copies of the certificate of incorporation and by-laws (or other governing instrument) of the Company, as currently in effect. (e) In the event of the IPO, the Company will update the capitalization information set forth in subsections (a) through (d) above to the IPO Closing Date. 4.3 No Conflict as to the Company. Neither the execution and delivery of this Agreement, the Restated Stockholders' Agreement or the Restated Voting Agreement, nor the issuance of the Series E Shares or the Common Stock issuable on conversion thereof will (a) violate any provision of the Certificate of Incorporation or By-Laws of the Company or (b) violate, or be in conflict with, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or excuse performance by any Person of any of its obligations under, or cause the acceleration of the maturity of any debt or obligation pursuant to, or result in the creation or imposition of any material Encumbrance upon any property or assets of the Company under, any material agreement to which the Company is a party or by which the Company or any of its property is bound, or (c) violate any statute or law or any judgment, decree, order, regulation or rule of any court or other Governmental Body applicable to the Company. 7. 4.4 Financial Statements; Financial Position; Absence of Undisclosed Liabilities. (a) The Company has delivered to the Investor a copy of the Company's audited financial statements as of December 31, 1997 and for the fiscal year then ended, together with the notes thereto (the "Annual Financial Statements"), and a balance sheet of the Company as of October 31, 1998 (such balance sheet shall hereafter be referred to as the "Current Balance Sheet") and the related income statement for the fiscal quarter then ended (the "Current Financial Statements"; the Current Financial Statements together with the Annual Financial Statements are collectively referred to herein as the "Financial Statements"). Except as set forth on Schedule 4.4 hereto, the Financial Statements (i) present fairly the financial condition of the Company as of their respective dates and the results of operations for their respective periods (subject to, in the case of the Current Financial Statements, year-end and audit adjustments), (ii) were prepared in accordance with the books and records of the Company, (iii) are true and correct and complete and (iv) present fairly the financial position and related results of operations of the Company as of the times and for the periods referred to therein, in accordance with GAAP consistently applied throughout the period involved and prior periods. Furthermore, except as set forth in Schedule 4.4 hereto, the Company hereby confirms that there have been no changes during the periods covered in the Financial Statements in the Company's accounting principles and practices. (b) As of the date hereof, except as set forth on Schedule 4.4 hereto, (i) the Company has no indebtedness or liabilities of any nature (matured or unmatured, fixed or contingent, direct or indirect, as guarantor or in any other capacity) which are not set forth on the Current Balance Sheet, and (ii) all reserves established by the Company and set forth on the Current Balance Sheet are adequate for the purposes for which they were established. (c) Except as described elsewhere in this Agreement or as set forth on Schedule 4.4 hereto, since the date of the Current Balance Sheet: (i) the Company has not entered into any transaction which was not in the ordinary course of its business; (ii) there has been no material adverse change in the Business of the Company; (iii) there has been no damage to, or destruction or loss of, physical property (whether or not covered by insurance) which may have a material adverse effect on the Business of the Company; (iv) the Company has not declared or paid any cash dividend or made any distribution on its securities, or redeemed, purchased, or otherwise acquired any of its securities; (v) the Company has not received any notice that there has been a loss of, or cancellation of a material order by, any customer of the Company; 8. (vii) there has been no borrowing or agreement to borrow by the Company or change in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty, or otherwise or grant of a mortgage or security interest in any properties of the Company; (viii) there has not been any payment of any obligation or liability other than current liabilities paid in the ordinary course of business; and (ix) there has been no sale, assignment, transfer or encumbrance of any tangible asset of the Company except in the ordinary course of business and no sale, assignment, transfer or encumbrance of any Proprietary Right or other intangible asset of the Company or, to the knowledge of the Company, any unauthorized disclosure of any proprietary confidential information of the Company. 4.5 Litigation. Except as set forth in Schedule 4.5 hereto, there is no litigation arbitration, claim, action, suit, governmental or other proceeding (formal or informal) or investigation pending with respect to the Company or any of its businesses, properties or assets, or, to the Company's knowledge, any of its directors, officers or employees to the extent such proceeding relates to the business of the Company. Except as set forth in Schedule 4.5 hereto, the Company is not subject to any judgment, order or decree. 4.6 Proprietary Rights. To the Company's current actual knowledge, (a) the Company has sufficient ownership or rights to all patents, patent applications, trademarks, copyrights, trade secrets and other proprietary rights necessary for its business as currently conducted and (b) the Company has received no claims or charges that the Company's business as currently conducted infringes any patents, patent applications, trademarks, copyrights, trade secrets or other propriety rights of third parties. 4.7 Compliance with Law. Except as set forth on Schedule 4.7 hereto, the operations of the Company have been conducted in all material respects in accordance with all applicable laws, regulations and other requirements of all Governmental Bodies having jurisdiction over the Company. The Company has not received any notification of any asserted present or past failure by the Company to comply with any such laws, rules or regulations. 4.8 No Brokers, Finders or Investment Bankers. Except as set forth in Schedule 4.8 hereto, neither the Company nor any of its officers or directors has employed any broker, or investment banker or incurred any liability which remains unsatisfied for any brokerage or finder's fees or commissions or similar payments in connection with this Agreement or the Contemplated Transactions. 4.9 Disclosure. No representations or warranties by the Company in this Agreement and no statement contained in any document (including, without limitation, the financial statements, certificates, or other writing furnished or to be furnished to the Investor or any of its representatives pursuant to the provisions hereof or in connection with the Contemplated Transactions) contains any untrue statement of material fact or omits to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. Documents delivered or to be delivered to the Investor 9. pursuant to this Agreement are true and complete copies of what they purport to be. Any projections or budgets with respect to the Company furnished to the Investor or any of its representatives pursuant to the provisions hereof or in connection with the Contemplated Transactions, have been prepared with reasonable care, are based on good faith estimates and assumptions, and represent good faith projections of results of operations to be achieved for the periods covered by such projections or budgets. The Company does not warrant that the projections can or will be achieved. 5. Representations and Warranties of the Investor. The Investor represents and warrants to the Company as follows: 5.1 Authorization. The Investor has the full power and authority to enter into this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement and to perform all of its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement by it have been duly authorized by all necessary action and constitute valid and binding obligations of the Investor, enforceable against it in accordance with their terms. The execution, delivery and performance of this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement by the Investor does not violate any provision of the governing instrument of the Investor, conflict with or constitute a default under any material agreement, indenture or instrument to which the Investor is a party or by which it or its property is bound or violate any statute or law or any judgment, decree, order, regulation or rule of any court or other Governmental Body applicable to the Investor. 5.2 Investment Representations. The Investor has knowledge and experience in financial and business matters sufficient to enable it to evaluate the merits and risks of an investment in the Series E Shares and the IPO Shares. The Investor has assets sufficient to enable it to bear the economic risk of its investment in the Series E Shares and the IPO Shares and has assets in excess of Five Million Dollars ($5,000,000). The Investor is acquiring the Series E Shares and the IPO Shares for its own account and not with a present view to, or for sale in connection with, any distribution thereof. The Investor understands that: the Series E Shares (and the Common Stock issuable upon conversion thereof) have not been, and the IPO Shares will not be, registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to the exemption provided in Section 4(2) thereof; the Series E Shares (and the Common Stock issuable upon conversion thereof) have not been, and the IPO Shares will not be, registered under applicable state securities laws by reason of their issuance in a transaction exempt from such registration requirements; and the Series E Shares (and the Common Stock issuable upon conversion thereof) and the IPO Shares may not be sold or otherwise disposed of unless registered under the Securities Act and applicable state securities laws (the Company being under no obligation so to register such Series E Shares, the Common Stock issuable on conversion thereof or the IPO Shares) or exempted from registration. The Investor further understands that the exemption from registration afforded by Rule 144 promulgated under the Securities Act is not presently available with respect to the Series E Shares, the Common Stock issuable upon conversion thereof and the IPO Shares. 10. 5.3 Investor's Acknowledgment as to Information. The Investor or its representatives have received from the Company such information as they requested with respect to the Company as the Investor has deemed necessary and relevant in connection with the Contemplated Transactions, and the Investor has had the opportunity, directly or through such representatives, to ask questions of and receive answers from persons acting on behalf of the Company necessary to verify the information so obtained. 5.4 No Brokers, Finders or Investment Bankers. Neither the Investor nor any of its officers or directors has employed any broker, finder or investment banker or incurred any liability which remains unsatisfied for any brokerage or finder's fees or commissions or similar payments in connection with this Agreement or the Contemplated Transactions. 6. Covenants of Investor. 6.1 Standstill Provision. From and after the date of this Agreement, the Investor shall not, and shall cause its affiliates not to, in any manner, singly or as part of a partnership, limited partnership, syndicate or other "Group" (within the meaning of Section 13(d)(3) of the Exchange Act), directly or indirectly, acquire, or offer or agree to acquire, record ownership or beneficial ownership in the aggregate greater than 9.9% of the shares of capital stock of the Company, including but not limited to any securities convertible into or exchangeable for capital stock or any other right to acquire capital stock from the Company or any other person (i.e., on a fully-diluted basis), without the prior written consent of the Company; provided, however, that this clause shall not apply to (a) any securities obtained or purchased by Investor pursuant to rights set forth in this Agreement, including but not limited to the Series E Shares, the Common Stock issuable upon conversion thereof and the IPO Shares, and (b) any securities issued with respect to the Series E Shares or the IPO Shares pursuant to a stock split, stock dividend, recapitalization or reclassification approved by the Company's Board of Directors; and provided, further, that this clause shall not apply to any securities of the Company held indirectly by the Investor through one or more investments in any of the Stockholders listed, as of the date hereof, on the Restated Stockholders' Agreement, so long as neither Investor, nor any of its affiliates, exercises "control" (within the meaning of Rule 12b-2 promulgated under the Exchange Act) with regard to such Stockholder. 6.2 Agreement Not to Sell. The Investor hereby covenants and agrees that it will not, nor will it permit any of its affiliates (including parents, subsidiaries or other related entities) to, directly or indirectly sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose or any of the Series E Shares, the Common Stock issuable upon conversion thereof or the IPO Shares without the prior written consent of the Company during the period from the Closing Date or the IPO Closing Date, as applicable, through the later of (a) completion of the work conducted under all Project Plans under the Collaboration Agreement; or (b) the earlier of (i) the fifth anniversary of the date of this Agreement or (ii) the second anniversary of the IPO Closing Date. In order to enforce the provisions of this Section 6.2, the Company may impose stop-transfer instructions with respect to the securities held by the Investor and its affiliates that are subject to the foregoing restriction until the end of such period. 11. 6.3 Market Stand-Off Provision. The Investor agrees that, during the period of duration specified by the Company and an underwriter of Common Stock or other securities of the Company following the effective date of a registration statement of the Company filed under the Securities Act (which period shall not exceed 180 days), the Investor shall not, to the extent requested by the Company, directly or indirectly sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of any securities of the Company held by the Investor at any time during such period. In order to enforce the provisions of this Section 6.3, the Company may impose stop-transfer instructions with respect to the securities held by the Investor and its affiliates that are subject to the foregoing restriction until the end of such period. 7. Confidentiality. All information heretofore or hereafter furnished to the Investor by the Company or on the Company's behalf under this Agreement or in connection with the Contemplated Transactions shall be deemed Confidential Information, as defined in Section 7.1 of the Collaboration Agreement, and the provisions of Section 7 of the Collaboration Agreement (which are hereby incorporated herein by reference) shall apply to all such Confidential Information. 8. Conditions to the Investor's Obligations. The obligations of the Investor to effect the Closing or the IPO Closing, as applicable, shall be subject to the satisfaction at or prior to the Closing or the IPO Closing, as applicable, of the following conditions, any one or more of which may be waived by the Investor: 8.1 No Injunction. There shall not be in effect any injunction, order or decree of a court of competent jurisdiction that prohibits or delays consummation of any or all of the Contemplated Transactions. 8.2 Representations, Warranties and Agreements. The representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date or the IPO Closing Date, as applicable, with the same force and effect as though made at such time; provided, however, that the representations and warrants shall be modified as required to reflect changes occurring between the date of this Agreement and the Closing Date or the IPO Closing Date, as applicable. The Company shall have performed and complied in all material respects with all agreements, covenants and conditions contained in this Agreement required to be performed and complied with by it at or prior to the Closing Date or the IPO Closing Date, as applicable. The Investor shall have received a certificate as to the foregoing signed by the Chief Executive Officer of the Company. 8.3 Regulatory Approvals. All licenses, authorizations, consents, orders and regulatory approvals of Governmental Bodies necessary in the good faith judgment of the Investor for the consummation of any or all of the Contemplated Transactions to be effected at the Closing and the IPO Closing, respectively, shall have been obtained and shall be in full force. 12. 8.4 Other Consents. Consents or waivers from parties other than Governmental Bodies that are required in connection with the consummation of any or all of the Contemplated Transactions shall have been obtained and shall be in full force. 8.5 Secretary of State Certificates. The Investor shall have received (i) a copy of the Certificate of Incorporation certified as of a recent date by the Secretary of State of Delaware, and (ii) Certificates of the Secretary of State of the State of Delaware with respect to the Company, and of each state in which the Company is qualified to do business as a foreign corporation, as of a recent date showing the Company to be validly existing or qualified as a foreign corporation in its states of existence and qualification, as the case may be, and in good standing. 8.6 Secretary's Certificate of the Company. The Investor shall have received a Certificate of the Secretary of the Company, certifying (i) that no document has been filed relating to or affecting the Certificate of Incorporation of the Company after the date of the Certificate of the Secretary of State of Delaware furnished pursuant to Section 8.5, (ii) that attached to the Certificate is a true and complete copy of By-Laws of the Company, as in full force and effect, and (iii) the names and true signatures of each officer of the Company who has been authorized to execute and deliver this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement and any other document required hereunder or thereunder to be executed and delivered by or on behalf of the Company. 8.7 Resolutions. The Investor shall have received certified copies of resolutions duly adopted by the Company's Board of Directors (and stockholders, if necessary) authorizing the execution and delivery of this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement and each of the other Company Closing Documents, the amendment and restatement of the certificate of incorporation of the Company to authorize the Series E Shares, the issuance and sale of the Series E Shares, the issuance and sale of the IPO Shares, the reservation of the shares of Common Stock issuable upon conversion of the Series E Shares and the performance of the Contemplated Transactions and certifying that such resolutions were duly adopted, are in full force and effect and have not been rescinded or amended. 8.8 Compliance Evidence. The Investor shall have received such certificates, documents and information as it may reasonably request in order to establish satisfaction of the conditions set forth in this Section 8. 9. Conditions to the Company's Obligations. The obligations of the Company to effect the Closing or the IPO Closing, as applicable, shall be subject to the satisfaction at or prior to the Closing or the IPO Closing, as applicable, of the following conditions, any one or more of which may be waived by the Company. 9.1 No Injunction. There shall not be in effect any injunction, order or decree of a court of competent jurisdiction that prohibits or delays consummation of any or all of the Contemplated Transactions. 9.2 Representations, Warranties and Agreements. The representations and warranties of the Investor set forth in this Agreement shall be true and correct in all material 13. respects as of the date of this Agreement and as of the Closing Date or the IPO Closing Date, as applicable, with the same force and effect as though made at such time. The Investor shall have performed and complied in all material respects with the agreements contained in this Agreement required to be performed and complied with by it prior to the Closing Date or the IPO Closing Date. The Company shall have received a certificate as to the foregoing signed by an officer of the Investor. 9.3 Regulatory Approvals. All licenses, authorizations, consents, orders and regulatory approvals of Governmental Bodies necessary in the good faith judgment of the Investor for the consummation of any or all of the Contemplated Transactions to be effected at the Closing and the IPO Closing, respectively, shall have been obtained and shall be in full force and effect. 9.4 Other Consents. Consents or waivers from parties other than Governmental Bodies that are required in connection with the consummation of any or all of the Contemplated Transactions shall have been obtained and shall be in full force. 9.5 Secretary's Certificate of the Investor. The Company shall have received a Certificate of the Secretary of the Investor, certifying the names and true signatures of each officer of the Investor who has been authorized to execute and deliver this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement and any other document required hereunder or thereunder to be executed and delivered by or on behalf of the Investor. 9.6 Resolutions. The Company shall have received certified copies of resolutions duly adopted by the Investor's Board of Directors (and stockholders, if necessary) authorizing the execution and delivery of this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement and each of the other documents to be delivered by the Investor hereunder and certifying that such resolutions were duly adopted, are in full force and effect and have not been rescinded or amended. 9.7 Compliance Evidence. The Company shall have received such certificates, documents and information as it may reasonably request in order to establish satisfaction of the conditions set forth in this Section 9. 9.8 Payment of Purchase Price. At the Closing, Investor shall have tendered delivery of the Purchase Price as specified in Section 2.2 herein. At the IPO Closing, the Investor shall have tendered delivery of the purchase price for the IPO Shares as specified in Section 2.3. 10. Miscellaneous. 10.1 Notices. All notices, consents and other communications under this Agreement shall be in writing and shall be deemed to have been duly given when (a) delivered by hand, (b) sent by telex or telecopier (with receipt confirmed), provided that a copy is mailed by certified mail, return receipt requested, or (c) when received by the addressee, if sent by Express Mail, Federal Express or other express delivery service (receipt requested), in each case to the appropriate addresses, telex numbers and telecopier numbers set forth below (or to such other 14. addresses, telex numbers and telecopier numbers as a party may designate as to itself by notice to the other parties complying as to delivery with this Section 10.1): If to the Company: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 Attention: Chief Executive Officer with a copy to: Cooley Godward llp 4365 Executive Drive Suite 1100 San Diego, CA 92121 Fax No.: (619) 453-3555 Attention: M. Wainwright Fishburn, Jr., Esq. If to the Investor: Novartis Agribusiness Biotechnology Research, Inc. 3054 Cornwallis Road Research Triangle Park, NC 27709 Fax No.: (919) 541-8585 Attention: Dr. Juanjo Estruch with a copy to: Novartis Seeds, Inc. 7240 Holsclaw Road Gilroy, CA 95020-8027 Fax No.: (408) 848-8129 Attention: Allen E. Norris, Esq. 10.2 Service of Process. Process in any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement against any of the parties, may be served on any party anywhere in the world, whether within or without the State of California and may also be served upon any party in the manner provided for giving of notices to it in Section 10.1. 10.3 Expenses. Each party shall bear its own expenses incident to the preparation, negotiation, execution and delivery of this Agreement and the performance of its obligations hereunder. 10.4 Payment. A wire transfer or delivery of a check shall not operate to discharge any obligation of payment under this Agreement and is accepted subject to collection. 15. 10.5 Captions. The captions in this Agreement are for convenience of reference only and shall not be given any effect in the interpretation of this Agreement. 10.6 Attorneys' Fees. In any action or proceeding brought by a party to enforce any provision of this Agreement, the prevailing party shall be entitled to recover the reasonable costs and expenses incurred by it in connection with that action or proceeding (including, but not limited to, attorneys' fees). 10.7 No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. 10.8 Exclusive Agreement; Amendment. This Agreement supersedes all prior agreements among the parties with respect to its subject matter, is intended (with the documents referred to herein) as a complete and exclusive statement of the terms of the agreement among the parties with respect thereto and cannot be changed or terminated except by a written instrument executed by the party or parties against whom enforcement thereof is sought. 10.9 Severability. If any term, covenant or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (a) the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (b) the parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the parties that the basic purposes of this Agreement are to be effectuated. 10.10 Assignment. This Agreement may not be assigned by either party without the prior written consent of the other party; provided that, after the Closing, the Investor may upon ten (10) days prior written notice to the Company, assign this Agreement to any of its affiliates (as defined by Rule 405 promulgated under the Securities Act) without the prior written consent of the Company. 10.11 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided for in this Agreement. 10.12 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be considered an original, but all of which together shall constitute the same instrument. 16. 10.13 Governing Law. This Agreement and (unless otherwise provided) all amendments hereof and waivers and consents hereunder shall be governed by the internal laws of the State of California, without regard to the conflicts of law principles thereof. 10.14 Memorandum Regarding Purchase Price. A memorandum setting forth certain agreements by Diversa and the Investor with regard to the Purchase Price is attached hereto as Exhibit D. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 17. In Witness Whereof, the parties hereto have executed this Agreement on the date first above written, in the case of corporations by their respective officers thereunto duly authorized. Diversa Corporation Dated:_________________________ By:______________________________ Name:____________________________ Title:___________________________ Novartis Agribusiness Biotechnology Research, Inc. Dated:_________________________ By:______________________________ Name:____________________________ Title:___________________________ 18.
Table Of Contents Page 1. Definitions................................................................. 1 2. Purchase and Sale of Shares................................................. 4 2.1 Authorization of the Series E Preferred Stock...................... 4 2.2 Purchase and Sale of the Series E Shares........................... 4 2.3 Purchase and Sale of the IPO Shares................................ 4 3. Closing..................................................................... 4 3.1 Place and Time..................................................... 4 3.2 Deliveries by the Company.......................................... 5 3.3 Deliveries by the Investor......................................... 5 3.4 IPO Closing........................................................ 5 4. Representations and Warranties of the Company............................... 6 4.1 Organization of the Company; Authorization......................... 6 4.2 Capitalization..................................................... 6 4.5 Litigation......................................................... 9 4.6 Proprietary Rights................................................. 9 4.7 Compliance with Law................................................ 9 4.8 No Brokers, Finders or Investment Bankers.......................... 9 4.9 Disclosure......................................................... 9 5. Representations and Warranties of the Investor.............................. 10 5.1 Authorization...................................................... 10 5.2 Investment Representations......................................... 10 5.3 Investor's Acknowledgment as to Information........................ 11 5.4 No Brokers, Finders or Investment Bankers.......................... 11 6. Covenants of Investor....................................................... 11 6.1 Standstill Provision............................................... 11 6.2 Agreement Not to Sell.............................................. 11 6.3 Market Stand-Off Provision......................................... 12 7. Confidentiality............................................................. 12 8. Conditions to the Investor's Obligations.................................... 12 8.1 No Injunction...................................................... 12
Table Of Contents (continued)
PAGE 8.2 Representations, Warranties and Agreements......................... 12 8.3 Regulatory Approvals............................................... 12 8.4 Other Consents..................................................... 13 8.5 Secretary of State Certificates.................................... 13 8.6 Secretary's Certificate of the Company............................. 13 8.7 Resolutions........................................................ 13 8.8 Compliance Evidence................................................ 13 9. Conditions to the Company's Obligations..................................... 13 9.1 No Injunction...................................................... 13 9.2 Representations, Warranties and Agreements......................... 13 9.3 Regulatory Approvals............................................... 14 9.4 Other Consents..................................................... 14 9.5 Secretary's Certificate of the Investor............................ 14 9.6 Resolutions........................................................ 14 9.7 Compliance Evidence................................................ 14 9.8 Payment of Purchase Price.......................................... 14 10. Miscellaneous............................................................... 14 10.1 Notices............................................................ 14 10.2 Service of Process................................................. 15 10.3 Expenses........................................................... 15 10.4 Payment............................................................ 15 10.5 Captions........................................................... 16 10.6 Attorneys' Fees.................................................... 16 10.7 No Waiver.......................................................... 16 10.8 Exclusive Agreement; Amendment..................................... 16 10.9 Severability....................................................... 16 10.10 Assignment......................................................... 16 10.11 Successors and Assigns............................................. 16 10.12 Counterparts....................................................... 16 10.13 Governing Law...................................................... 17
ii. Table Of Contents (continued)
Page 10.14 Memorandum Regarding Purchase Price................................ 17
iii. List of Schedules Schedule No. Title - ------------ ----- Schedule 4.2 Capitalization Schedule 4.4 Undisclosed Liabilities Schedule 4.5 Litigation Schedule 4.7 Compliance with Law Schedule 4.8 Brokers, Finders or Investment Bankers iv. List of Exhibits Exhibit Title - ------- ----- Exhibit A Seventh Restated Certificate of Incorporation Exhibit B Amended and Restated Stockholders' Agreement Exhibit C Amended and Restated Voting Agreement Exhibit D Memorandum Regarding Stock Purchase Agreement v. SCHEDULES TO STOCK PURCHASE AGREEMENT [SEE ATTACHED] Exhibit A SEVENTH RESTATED CERTIFICATE OF INCORPORATION Exhibit B AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT Exhibit C AMENDED AND RESTATED VOTING AGREEMENT Exhibit D MEMORANDUM REGARDING STOCK PURCHASE AGREEMENT EX-10.19 7 STOCK PURCHASE AGREEMENT EXHIBIT 10.19 STOCK PURCHASE AGREEMENT Dated as of January 25, 1999 by and between DIVERSA CORPORATION and NOVARTIS AGRIBUSINESS BIOTECHNOLOGY RESEARCH, INC. Table Of Contents
Page 1. Definitions.......................................................... 1 2. Purchase and Sale of Shares.......................................... 4 2.1 Authorization of the Series E Preferred Stock................... 4 2.2 Purchase and Sale of the Series E Shares........................ 4 2.3 Purchase and Sale of the IPO Shares............................. 4 3. Closing.............................................................. 4 3.1 Place and Time.................................................. 4 3.2 Deliveries by the Company....................................... 5 3.3 Deliveries by the Investor...................................... 5 3.4 IPO Closing..................................................... 5 4. Representations and Warranties of the Company........................ 6 4.1 Organization of the Company; Authorization...................... 6 4.2 Capitalization.................................................. 6 4.5 Litigation...................................................... 9 4.6 Proprietary Rights.............................................. 9 4.7 Compliance with Law............................................. 9 4.8 No Brokers, Finders or Investment Bankers....................... 9 4.9 Disclosure...................................................... 9 5. Representations and Warranties of the Investor....................... 10 5.1 Authorization................................................... 10 5.2 Investment Representations...................................... 10 5.3 Investor's Acknowledgment as to Information..................... 11 5.4 No Brokers, Finders or Investment Bankers....................... 11 6. Covenants of Investor................................................ 11 6.1 Standstill Provision............................................ 11 6.2 Agreement Not to Sell........................................... 11 6.3 Market Stand-Off Provision...................................... 12 7. Confidentiality...................................................... 12 8. Conditions to the Investor's Obligations............................. 12 8.1 No Injunction................................................... 12
Table Of Contents (Continued)
Page 8.2 Representations, Warranties and Agreements..................... 12 8.3 Regulatory Approvals........................................... 12 8.4 Other Consents................................................. 13 8.5 Secretary of State Certificates................................ 13 8.6 Secretary's Certificate of the Company......................... 13 8.7 Resolutions.................................................... 13 8.8 Compliance Evidence............................................ 13 9. Conditions to the Company's Obligations.............................. 13 9.1 No Injunction.................................................. 13 9.2 Representations, Warranties and Agreements..................... 13 9.3 Regulatory Approvals........................................... 14 9.4 Other Consents................................................. 14 9.5 Secretary's Certificate of the Investor........................ 14 9.6 Resolutions.................................................... 14 9.7 Compliance Evidence............................................ 14 9.8 Payment of Purchase Price...................................... 14 10. Miscellaneous........................................................ 14 10.1 Notices........................................................ 14 10.2 Service of Process............................................. 15 10.3 Expenses....................................................... 15 10.4 Payment........................................................ 15 10.5 Captions....................................................... 16 10.6 Attorneys' Fees................................................ 16 10.7 No Waiver...................................................... 16 10.8 Exclusive Agreement; Amendment................................. 16 10.9 Severability................................................... 16 10.10 Assignment..................................................... 16 10.11 Successors and Assigns......................................... 16 10.12 Counterparts................................................... 16 10.13 Governing Law.................................................. 17
ii. Table Of Contents (Continued)
Page 10.14 Memorandum Regarding Purchase Price............................ 17
iii. Stock Purchase Agreement Stock Purchase Agreement dated as of January 25, 1999 (this "Agreement"), by and between Novartis Agribusiness Biotechnology Research, Inc., a Delaware corporation (the "Investor"), and Diversa Corporation, a Delaware corporation (the "Company"). R E C I T A L S Whereas, the Company and the Investor are parties to that certain Collaboration Agreement dated as of even date herewith (the "Collaboration Agreement") pursuant to which the Company and the Investor will collaborate on the projects described therein; and Whereas, in connection with such collaboration, the Company wishes to issue and sell to the Investor, and the Investor wishes to purchase from the Company, shares of the Company's capital stock, subject to and upon the terms and conditions hereinafter set forth. Now, Therefore, in consideration of the foregoing and of the respective covenants and undertakings hereunder and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto do hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms have the meanings specified or referred to in this Section 1. "Board of Directors" shall mean the Board of Directors of the Company. "Business" shall mean the business, operations and assets of the Company. "By-Laws" shall mean the by-laws of the Company. "Certificate of Incorporation" shall mean the Seventh Restated Certificate of Incorporation in substantially the form attached hereto as Exhibit A. "Closing" shall have the meaning set forth in Section 3.1. "Closing Date" shall mean the date and time of the Closing. "Collaboration Agreement" shall have the meaning set forth in the recitals to this Agreement. "Common Stock" shall mean the common stock, $.001 par value, of the Company. "Company" shall have the meaning set forth in the first paragraph of this Agreement. "Company Closing Documents" shall mean all the documents, instruments and writings required by this Agreement to be delivered by the Company at the Closing. 1. "Contemplated Transactions" shall mean the transactions contemplated by this Agreement. "Encumbrance" shall mean any security interest, mortgage, lien, charge, adverse claim or restriction of any kind, except for transfer restrictions imposed by the Securities Act or the Exchange Act and state securities laws. "Equity Stock" shall have the meaning set forth in Rule 3a11-1 under the Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "GAAP" shall mean generally accepted accounting principles of the United States. "Governmental Body" shall mean any United States or state government body, any agency, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory or taxing authority thereunder. "Investor" shall have the meaning set forth in the first paragraph of this Agreement. "IPO" and "IPO Shares" shall have the meanings set forth in Section 2.3. "IPO Closing" and "IPO Closing Date" shall have the meanings set forth in Section 3.4. "Non-Scientific Founders" shall mean Gary Friedman and Dr. Peter Korn. "Person" shall mean any individual, corporation, partnership, a limited liability company, joint venture, trust, association, unincorporated organization, other entity, or Governmental Body. "Proprietary Rights" shall mean all patents, patent applications, patent licenses, trademarks, tradenames, trade secrets, service marks, brand marks, brand names, copyrights, copyright applications, inventions, technologies, know- how, formulae, processes, names and likeness owned or licensed by the Company. "Purchase Price" shall have the meaning set forth in Section 2.2. "Restated Stockholders' Agreement" shall mean the Amended and Restated Stockholders' Agreement, amending and restating the Stockholders' Agreement in substantially the form attached hereto as Exhibit B, to be entered into by and among the Company and certain holders of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock of the Company as of the Closing Date. "Restated Voting Agreement" shall mean the Amended and Restated Voting Agreement, amending and restating the Voting Agreement in substantially the form attached hereto as Exhibit C, to be entered into by and among the Company, certain holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock 2. and Series E Preferred Stock and certain of the holders of Common Stock of the Company as of the Closing Date. "Restricted Stock Agreements" shall mean the Restricted Stock Agreements dated December 21, 1994 between the Company and each of the Scientific Founders and the Non-Scientific Founders and the Restricted Stock Agreement dated December 15, 1994 between the Company and Barry Marrs. "Restricted Stock Option Agreements" shall mean the Restricted Stock Option Agreements dated December 21, 1994 between the Company and each of the Scientific Founders and the Non-Scientific Founders and the Restricted Stock Option Agreement dated December 19, 1994 between the Company and Barry Marrs. "Scientific Founders" shall mean Dr. Melvin Simon, Dr. Jeffrey H. Miller, Dr. Karl Stetter and William A. Haseltine. "Securities Act" shall mean the Securities Act of 1933, as amended. "Series A Preferred Stock" shall mean the Series A Convertible Preferred Stock, $.001 par value per share, of the Company. "Series B Preferred Stock" shall mean the Series B Convertible Preferred Stock, $.001 par value per share, of the Company. "Series C Preferred Stock" shall mean the Series C Convertible Preferred Stock, $.001 par value per share, of the Company. "Series D Preferred Stock" shall mean the Series D Convertible Preferred Stock, $.001 par value per share, of the Company. "Series E Preferred Stock" shall mean the Series E Convertible Preferred Stock, $.001 par value per share, of the Company. "Series E Shares" shall have the meaning set forth in Section 2.2. "Stockholders' Agreement" shall mean the Stockholders' Agreement dated as of May 13, 1996, as amended on July 14, 1997 and October 22, 1997, by and among the Company and certain holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock of the Company. "Voting Agreement" shall mean the Voting Agreement dated as of May 13, 1996, as amended on July 14, 1997 and October 22, 1997, by and among the Company, the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock and certain of the holders of Common Stock of the Company. 3. 2. Purchase and Sale of Shares. 2.1 Authorization of the Series E Preferred Stock. On or before the Closing, the Company shall adopt and file with the Secretary of State of the State of Delaware the Certificate of Incorporation. The Series E Preferred Stock shall have the voting powers, dividend rights, liquidation rights, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof, set forth in the Certificate of Incorporation, the terms of which are incorporated herein by reference as though set forth herein in full. 2.2 Purchase and Sale of the Series E Shares. Subject to the terms and conditions of this Agreement, at the Closing to be held as provided in Section 3, the Company shall issue, sell and deliver to the Investor, and the Investor shall purchase from the Company, 5,555,556 shares of Series E Preferred Stock (the "Series E Shares"), free and clear of all Encumbrances, for the purchase price of $12,500,001 (the "Purchase Price"). The Purchase Price shall be paid by the Investor to the Company at the Closing in immediately available funds by wire transfer or by delivery of bank cashier's checks or certified checks or by such other form as approved by the Company. 2.3 Purchase and Sale of the IPO Shares. Subject to the terms and conditions hereof, at the time that the Company completes an initial underwritten public offering of its Common Stock (an "IPO") in which the Company realizes aggregate net proceeds of at least $10,000,000, the Investor shall have the right to purchase from the Company that number of shares of the Company's Common Stock having an aggregate value of up to 10% of the aggregate gross proceeds of the IPO (the "IPO Shares"), to be issued and sold in a private placement to close simultaneously with the completion of the IPO, at the price per share to the public in the IPO. The Company shall provide prompt written notice to the Investor of the proposed IPO and the Investor shall have 20 days following the date of such notice from the Company to exercise its right to purchase the IPO shares by providing written notice to the Company, which notice shall specify the anticipated number of IPO shares to be purchased (subject to adjustment based on the actual gross proceeds of the IPO and the actual price per share to the public in the IPO). If the Investor does not provide written notice to the Company within such 20-day period or provides written notice to the Company within such 20-day period that it does not wish to purchase the IPO shares, then the Investor shall have no further right to purchase shares from the Company, unless the Company does not complete the proposed IPO within nine months of the date of the Company's notice of such proposed IPO, in which case the Investor will again have the right set forth in this Section 2.3. If the Investor provides written notice to the Company of its election to purchase the IPO Shares within such 20-day period, then the Investor shall purchase from the Company, and the Company shall issue and sell to the Investor, the IPO Shares in a private placement to close simultaneously with the closing of the IPO. 3. Closing. 3.1 Place and Time. The closing of the sale and purchase of the Series E Shares pursuant to Section 2.2 (the "Closing") shall take place at the offices of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California, at 10:00 a.m. (San Diego time) on 4. January 4, 1999 following the satisfaction of the conditions set forth in Sections 8 and 9, or at such other place, date and time as the parties may agree in writing. 3.2 Deliveries by the Company. At the Closing, the Company shall deliver the following to the Investor: (a) A certificate representing the Series E Shares delivered pursuant to Section 2.2, duly registered in the name of the Investor. (b) The documents set forth in Section 8. (c) The Restated Stockholders' Agreement. (d) The Restated Voting Agreement. (e) All other documents, instruments and writings required by this Agreement to be delivered by the Company at the Closing. 3.3 Deliveries by the Investor. At the Closing, the Investor shall deliver the following to the Company: (a) A wire transfer of immediately available US dollar funds in the amount of the Purchase Price to an account designated by the Company not less than two (2) days prior to the Closing. (b) The documents set forth in Section 9. (c) An executed signature page to the Restated Stockholders' Agreement. (d) An executed signature page to the Restated Voting Agreement. (e) All other documents, instruments and writings required by this Agreement to be delivered by the Investor at the Closing. 3.4 IPO Closing. Subject to the terms of Sections 8 and 9, the closing of the sale and purchase of the IPO Shares under this Agreement (the "IPO Closing") shall be held at the time and date of the completion of the IPO (the "IPO Closing Date") at the offices of Cooley Godward, 4365 Executive Drive, Suite 1100, San Diego, California, or at such time and place as the Company and the Investor may agree. At the IPO Closing, subject to the terms and conditions hereof, the Company shall deliver to the Investor a stock certificate registered in the name of Investor representing the IPO Shares, dated as of the IPO Closing Date, against payment of the purchase price therefor by wire transfer of immediately available US dollar funds to an account designated by the Company not less than two (2) days prior to the IPO Closing. 5. 4. Representations and Warranties of the Company. The Company represents and warrants to the Investor as follows: 4.1 Organization of the Company; Authorization. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to enter into this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement and to perform all of its obligations hereunder and thereunder, and to own or lease its properties and to engage in its business as presently conducted. The Company is duly qualified and in good standing as a foreign corporation under the laws of each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. The Company has no subsidiaries, nor does it own any equity interest in, or control directly or indirectly, any other entity. (b) The execution, delivery and performance of this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement by the Company have been authorized by all necessary action and constitute valid and binding obligations of the Company, enforceable against it in accordance with their terms. 4.2 Capitalization. (a) As of the Closing, the authorized Equity Stock of the Company will consist of (i) 82,472,584 shares of Common Stock, of which 5,347,322 shares are issued and outstanding, (ii) 10,501,000 shares of Series A Preferred Stock, of which 10,000,000 shares are issued and outstanding, (iii) 24,566,184 shares of Series B Preferred Stock, all of which are issued and outstanding, (iv) 844,444 shares of Series C Preferred Stock, all of which are issued and outstanding, (v) 24,809,555 shares of Series D Preferred Stock, all of which are issued and outstanding, and (vi) 5,555,556 shares of Series E Preferred Stock, none of which are issued and outstanding (excluding the Series E Shares). All of such issued and outstanding shares have been duly authorized and validly issued and are fully paid and non-assessable. (b) A true and complete list of the holders of record of all issued and outstanding Equity Stock of the Company on the date hereof and reflecting the issuance of the Series E Shares on the Closing Date, including the number of shares of Equity Stock owned by each such holder, and the number of shares of Equity Stock reserved by the Company for each specified purpose is set forth on Schedule 4.2 hereto. (c) The issuance of the Series E Shares to be issued to the Investor hereunder simultaneously with the Closing and the shares of Common Stock issuable upon conversion of the Series E Shares have been or will be on or prior to the Closing duly authorized. The Company has or will on or prior to the Closing duly reserve for issuance the shares of Common Stock issuable upon conversion of the Series E Shares. No further approval or authorization of the stockholders or the directors of the Company, of any Governmental Body or foreign governmental body or of any other Person is required for the issuance and sale of the Series E Shares or the shares of Common Stock issuable on conversion thereof. When paid for by, and issued to, the Investor, the Series E Shares will be validly issued, fully paid and non-assessable, 6. and, except as set forth in this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement or the Certificate of Incorporation or under applicable law, will not be subject to any restriction on use, voting or transfer. The Series E Preferred Stock will have the designations, preferences and relative participating, optional and other special rights as set forth in the Certificate of Incorporation. The shares of Common Stock issuable to the Investor upon conversion of the Series E Shares will, upon conversion of the Series E Shares in accordance with the Certificate of Incorporation, be validly issued, fully paid and non-assessable, and, except as set forth in this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement or the Certificate of Incorporation or under applicable law, will not be subject to any restriction on use, voting or transfer. Assuming the truth of the Investor's representations and warranties contained in Section 5, the offer, sale and issuance of the Series E Shares (and any shares of Common Stock issuable on conversion thereof) are exempt from the registration requirements of the Securities Act and applicable state securities laws. (d) Except as set forth in Schedule 4.2 hereto, there are no outstanding options, rights, conversion rights, agreements or commitments of any kind relating to the issuance, sale, purchase, redemption, voting or transfer by the Company of any Equity Stock or other securities of the Company or any rights outstanding which permit or allow the holder thereof to cause the Company to file a registration statement or which permit or allow the holder thereof to include securities of the Company in a registration statement filed by the Company, other than the rights granted pursuant to the Restricted Stock Agreements, Restricted Stock Option Agreements, the Restated Stockholders' Agreement and the Restated Voting Agreement. There are no preemptive or other similar rights with respect to any Equity Stock of the Company except rights granted under the Stockholders' Agreement. None of the outstanding Equity Stock or other securities of the Company was issued in violation of the Securities Act, or the securities or blue sky laws of any state. The Company has delivered to the Investor copies of the certificate of incorporation and by-laws (or other governing instrument) of the Company, as currently in effect. (e) In the event of the IPO, the Company will update the capitalization information set forth in subsections (a) through (d) above to the IPO Closing Date. 4.3 No Conflict as to the Company. Neither the execution and delivery of this Agreement, the Restated Stockholders' Agreement or the Restated Voting Agreement, nor the issuance of the Series E Shares or the Common Stock issuable on conversion thereof will (a) violate any provision of the Certificate of Incorporation or By-Laws of the Company or (b) violate, or be in conflict with, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or excuse performance by any Person of any of its obligations under, or cause the acceleration of the maturity of any debt or obligation pursuant to, or result in the creation or imposition of any material Encumbrance upon any property or assets of the Company under, any material agreement to which the Company is a party or by which the Company or any of its property is bound, or (c) violate any statute or law or any judgment, decree, order, regulation or rule of any court or other Governmental Body applicable to the Company. 7. 4.4 Financial Statements; Financial Position; Absence of Undisclosed Liabilities. (a) The Company has delivered to the Investor a copy of the Company's audited financial statements as of December 31, 1997 and for the fiscal year then ended, together with the notes thereto (the "Annual Financial Statements"), and a balance sheet of the Company as of October 31, 1998 (such balance sheet shall hereafter be referred to as the "Current Balance Sheet") and the related income statement for the fiscal quarter then ended (the "Current Financial Statements"; the Current Financial Statements together with the Annual Financial Statements are collectively referred to herein as the "Financial Statements"). Except as set forth on Schedule 4.4 hereto, the Financial Statements (i) present fairly the financial condition of the Company as of their respective dates and the results of operations for their respective periods (subject to, in the case of the Current Financial Statements, year-end and audit adjustments), (ii) were prepared in accordance with the books and records of the Company, (iii) are true and correct and complete and (iv) present fairly the financial position and related results of operations of the Company as of the times and for the periods referred to therein, in accordance with GAAP consistently applied throughout the period involved and prior periods. Furthermore, except as set forth in Schedule 4.4 hereto, the Company hereby confirms that there have been no changes during the periods covered in the Financial Statements in the Company's accounting principles and practices. (b) As of the date hereof, except as set forth on Schedule 4.4 hereto, (i) the Company has no indebtedness or liabilities of any nature (matured or unmatured, fixed or contingent, direct or indirect, as guarantor or in any other capacity) which are not set forth on the Current Balance Sheet, and (ii) all reserves established by the Company and set forth on the Current Balance Sheet are adequate for the purposes for which they were established. (c) Except as described elsewhere in this Agreement or as set forth on Schedule 4.4 hereto, since the date of the Current Balance Sheet: (i) the Company has not entered into any transaction which was not in the ordinary course of its business; (ii) there has been no material adverse change in the Business of the Company; (iii) there has been no damage to, or destruction or loss of, physical property (whether or not covered by insurance) which may have a material adverse effect on the Business of the Company; (iv) the Company has not declared or paid any cash dividend or made any distribution on its securities, or redeemed, purchased, or otherwise acquired any of its securities; (v) the Company has not received any notice that there has been a loss of, or cancellation of a material order by, any customer of the Company; (vi) there has been no resignation or termination of employment of any key employee of the Company; 8. (vii) there has been no borrowing or agreement to borrow by the Company or change in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty, or otherwise or grant of a mortgage or security interest in any properties of the Company; (viii) there has not been any payment of any obligation or liability other than current liabilities paid in the ordinary course of business; and (ix) there has been no sale, assignment, transfer or encumbrance of any tangible asset of the Company except in the ordinary course of business and no sale, assignment, transfer or encumbrance of any Proprietary Right or other intangible asset of the Company or, to the knowledge of the Company, any unauthorized disclosure of any proprietary confidential information of the Company. 4.5 Litigation. Except as set forth in Schedule 4.5 hereto, there is no litigation arbitration, claim, action, suit, governmental or other proceeding (formal or informal) or investigation pending with respect to the Company or any of its businesses, properties or assets, or, to the Company's knowledge, any of its directors, officers or employees to the extent such proceeding relates to the business of the Company. Except as set forth in Schedule 4.5 hereto, the Company is not subject to any judgment, order or decree. 4.6 Proprietary Rights. To the Company's current actual knowledge, (a) the Company has sufficient ownership or rights to all patents, patent applications, trademarks, copyrights, trade secrets and other proprietary rights necessary for its business as currently conducted and (b) the Company has received no claims or charges that the Company's business as currently conducted infringes any patents, patent applications, trademarks, copyrights, trade secrets or other propriety rights of third parties. 4.7 Compliance with Law. Except as set forth on Schedule 4.7 hereto, the operations of the Company have been conducted in all material respects in accordance with all applicable laws, regulations and other requirements of all Governmental Bodies having jurisdiction over the Company. The Company has not received any notification of any asserted present or past failure by the Company to comply with any such laws, rules or regulations. 4.8 No Brokers, Finders or Investment Bankers. Except as set forth in Schedule 4.8 hereto, neither the Company nor any of its officers or directors has employed any broker, or investment banker or incurred any liability which remains unsatisfied for any brokerage or finder's fees or commissions or similar payments in connection with this Agreement or the Contemplated Transactions. 4.9 Disclosure. No representations or warranties by the Company in this Agreement and no statement contained in any document (including, without limitation, the financial statements, certificates, or other writing furnished or to be furnished to the Investor or any of its representatives pursuant to the provisions hereof or in connection with the Contemplated Transactions) contains any untrue statement of material fact or omits to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. Documents delivered or to be delivered to the Investor 9. pursuant to this Agreement are true and complete copies of what they purport to be. Any projections or budgets with respect to the Company furnished to the Investor or any of its representatives pursuant to the provisions hereof or in connection with the Contemplated Transactions, have been prepared with reasonable care, are based on good faith estimates and assumptions, and represent good faith projections of results of operations to be achieved for the periods covered by such projections or budgets. The Company does not warrant that the projections can or will be achieved. 5. Representations and Warranties of the Investor. The Investor represents and warrants to the Company as follows: 5.1 Authorization. The Investor has the full power and authority to enter into this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement and to perform all of its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement by it have been duly authorized by all necessary action and constitute valid and binding obligations of the Investor, enforceable against it in accordance with their terms. The execution, delivery and performance of this Agreement, the Restated Stockholders' Agreement and the Restated Voting Agreement by the Investor does not violate any provision of the governing instrument of the Investor, conflict with or constitute a default under any material agreement, indenture or instrument to which the Investor is a party or by which it or its property is bound or violate any statute or law or any judgment, decree, order, regulation or rule of any court or other Governmental Body applicable to the Investor. 5.2 Investment Representations. The Investor has knowledge and experience in financial and business matters sufficient to enable it to evaluate the merits and risks of an investment in the Series E Shares and the IPO Shares. The Investor has assets sufficient to enable it to bear the economic risk of its investment in the Series E Shares and the IPO Shares and has assets in excess of Five Million Dollars ($5,000,000). The Investor is acquiring the Series E Shares and the IPO Shares for its own account and not with a present view to, or for sale in connection with, any distribution thereof. The Investor understands that: the Series E Shares (and the Common Stock issuable upon conversion thereof) have not been, and the IPO Shares will not be, registered under the Securities Act by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to the exemption provided in Section 4(2) thereof; the Series E Shares (and the Common Stock issuable upon conversion thereof) have not been, and the IPO Shares will not be, registered under applicable state securities laws by reason of their issuance in a transaction exempt from such registration requirements; and the Series E Shares (and the Common Stock issuable upon conversion thereof) and the IPO Shares may not be sold or otherwise disposed of unless registered under the Securities Act and applicable state securities laws (the Company being under no obligation so to register such Series E Shares, the Common Stock issuable on conversion thereof or the IPO Shares) or exempted from registration. The Investor further understands that the exemption from registration afforded by Rule 144 promulgated under the Securities Act is not presently available with respect to the Series E Shares, the Common Stock issuable upon conversion thereof and the IPO Shares. 10. 5.3 Investor's Acknowledgment as to Information. The Investor or its representatives have received from the Company such information as they requested with respect to the Company as the Investor has deemed necessary and relevant in connection with the Contemplated Transactions, and the Investor has had the opportunity, directly or through such representatives, to ask questions of and receive answers from persons acting on behalf of the Company necessary to verify the information so obtained. 5.4 No Brokers, Finders or Investment Bankers. Neither the Investor nor any of its officers or directors has employed any broker, finder or investment banker or incurred any liability which remains unsatisfied for any brokerage or finder's fees or commissions or similar payments in connection with this Agreement or the Contemplated Transactions. 6. Covenants of Investor. 6.1 Standstill Provision. From and after the date of this Agreement, the Investor shall not, and shall cause its affiliates not to, in any manner, singly or as part of a partnership, limited partnership, syndicate or other "Group" (within the meaning of Section 13(d)(3) of the Exchange Act), directly or indirectly, acquire, or offer or agree to acquire, record ownership or beneficial ownership in the aggregate greater than 9.9% of the shares of capital stock of the Company, including but not limited to any securities convertible into or exchangeable for capital stock or any other right to acquire capital stock from the Company or any other person (i.e., on a fully-diluted basis), without the prior written consent of the Company; provided, however, that this clause shall not apply to (a) any securities obtained or purchased by Investor pursuant to rights set forth in this Agreement, including but not limited to the Series E Shares, the Common Stock issuable upon conversion thereof and the IPO Shares, and (b) any securities issued with respect to the Series E Shares or the IPO Shares pursuant to a stock split, stock dividend, recapitalization or reclassification approved by the Company's Board of Directors; and provided, further, that this clause shall not apply to any securities of the Company held indirectly by the Investor through one or more investments in any of the Stockholders listed, as of the date hereof, on the Restated Stockholders' Agreement, so long as neither Investor, nor any of its affiliates, exercises "control" (within the meaning of Rule 12b-2 promulgated under the Exchange Act) with regard to such Stockholder. 6.2 Agreement Not to Sell. The Investor hereby covenants and agrees that it will not, nor will it permit any of its affiliates (including parents, subsidiaries or other related entities) to, directly or indirectly sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose or any of the Series E Shares, the Common Stock issuable upon conversion thereof or the IPO Shares without the prior written consent of the Company during the period from the Closing Date or the IPO Closing Date, as applicable, through the later of (a) completion of the work conducted under all Project Plans under the Collaboration Agreement; or (b) the earlier of (i) the fifth anniversary of the date of this Agreement or (ii) the second anniversary of the IPO Closing Date. In order to enforce the provisions of this Section 6.2, the Company may impose stop-transfer instructions with respect to the securities held by the Investor and its affiliates that are subject to the foregoing restriction until the end of such period. 11. 6.3 Market Stand-Off Provision. The Investor agrees that, during the period of duration specified by the Company and an underwriter of Common Stock or other securities of the Company following the effective date of a registration statement of the Company filed under the Securities Act (which period shall not exceed 180 days), the Investor shall not, to the extent requested by the Company, directly or indirectly sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of any securities of the Company held by the Investor at any time during such period. In order to enforce the provisions of this Section 6.3, the Company may impose stop-transfer instructions with respect to the securities held by the Investor and its affiliates that are subject to the foregoing restriction until the end of such period. 7. Confidentiality. All information heretofore or hereafter furnished to the Investor by the Company or on the Company's behalf under this Agreement or in connection with the Contemplated Transactions shall be deemed Confidential Information, as defined in Section 7.1 of the Collaboration Agreement, and the provisions of Section 7 of the Collaboration Agreement (which are hereby incorporated herein by reference) shall apply to all such Confidential Information. 8. Conditions to the Investor's Obligations. The obligations of the Investor to effect the Closing or the IPO Closing, as applicable, shall be subject to the satisfaction at or prior to the Closing or the IPO Closing, as applicable, of the following conditions, any one or more of which may be waived by the Investor: 8.1 No Injunction. There shall not be in effect any injunction, order or decree of a court of competent jurisdiction that prohibits or delays consummation of any or all of the Contemplated Transactions. 8.2 Representations, Warranties and Agreements. The representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date or the IPO Closing Date, as applicable, with the same force and effect as though made at such time; provided, however, that the representations and warrants shall be modified as required to reflect changes occurring between the date of this Agreement and the Closing Date or the IPO Closing Date, as applicable. The Company shall have performed and complied in all material respects with all agreements, covenants and conditions contained in this Agreement required to be performed and complied with by it at or prior to the Closing Date or the IPO Closing Date, as applicable. The Investor shall have received a certificate as to the foregoing signed by the Chief Executive Officer of the Company. 8.3 Regulatory Approvals. All licenses, authorizations, consents, orders and regulatory approvals of Governmental Bodies necessary in the good faith judgment of the Investor for the consummation of any or all of the Contemplated Transactions to be effected at the Closing and the IPO Closing, respectively, shall have been obtained and shall be in full force. 12. 8.4 Other Consents. Consents or waivers from parties other than Governmental Bodies that are required in connection with the consummation of any or all of the Contemplated Transactions shall have been obtained and shall be in full force. 8.5 Secretary of State Certificates. The Investor shall have received (i) a copy of the Certificate of Incorporation certified as of a recent date by the Secretary of State of Delaware, and (ii) Certificates of the Secretary of State of the State of Delaware with respect to the Company, and of each state in which the Company is qualified to do business as a foreign corporation, as of a recent date showing the Company to be validly existing or qualified as a foreign corporation in its states of existence and qualification, as the case may be, and in good standing. 8.6 Secretary's Certificate of the Company. The Investor shall have received a Certificate of the Secretary of the Company, certifying (i) that no document has been filed relating to or affecting the Certificate of Incorporation of the Company after the date of the Certificate of the Secretary of State of Delaware furnished pursuant to Section 8.5, (ii) that attached to the Certificate is a true and complete copy of By-Laws of the Company, as in full force and effect, and (iii) the names and true signatures of each officer of the Company who has been authorized to execute and deliver this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement and any other document required hereunder or thereunder to be executed and delivered by or on behalf of the Company. 8.7 Resolutions. The Investor shall have received certified copies of resolutions duly adopted by the Company's Board of Directors (and stockholders, if necessary) authorizing the execution and delivery of this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement and each of the other Company Closing Documents, the amendment and restatement of the certificate of incorporation of the Company to authorize the Series E Shares, the issuance and sale of the Series E Shares, the issuance and sale of the IPO Shares, the reservation of the shares of Common Stock issuable upon conversion of the Series E Shares and the performance of the Contemplated Transactions and certifying that such resolutions were duly adopted, are in full force and effect and have not been rescinded or amended. 8.8 Compliance Evidence. The Investor shall have received such certificates, documents and information as it may reasonably request in order to establish satisfaction of the conditions set forth in this Section 8. 9. Conditions to the Company's Obligations. The obligations of the Company to effect the Closing or the IPO Closing, as applicable, shall be subject to the satisfaction at or prior to the Closing or the IPO Closing, as applicable, of the following conditions, any one or more of which may be waived by the Company. 9.1 No Injunction. There shall not be in effect any injunction, order or decree of a court of competent jurisdiction that prohibits or delays consummation of any or all of the Contemplated Transactions. 9.2 Representations, Warranties and Agreements. The representations and warranties of the Investor set forth in this Agreement shall be true and correct in all material 13. respects as of the date of this Agreement and as of the Closing Date or the IPO Closing Date, as applicable, with the same force and effect as though made at such time. The Investor shall have performed and complied in all material respects with the agreements contained in this Agreement required to be performed and complied with by it prior to the Closing Date or the IPO Closing Date. The Company shall have received a certificate as to the foregoing signed by an officer of the Investor. 9.3 Regulatory Approvals. All licenses, authorizations, consents, orders and regulatory approvals of Governmental Bodies necessary in the good faith judgment of the Investor for the consummation of any or all of the Contemplated Transactions to be effected at the Closing and the IPO Closing, respectively, shall have been obtained and shall be in full force and effect. 9.4 Other Consents. Consents or waivers from parties other than Governmental Bodies that are required in connection with the consummation of any or all of the Contemplated Transactions shall have been obtained and shall be in full force. 9.5 Secretary's Certificate of the Investor. The Company shall have received a Certificate of the Secretary of the Investor, certifying the names and true signatures of each officer of the Investor who has been authorized to execute and deliver this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement and any other document required hereunder or thereunder to be executed and delivered by or on behalf of the Investor. 9.6 Resolutions. The Company shall have received certified copies of resolutions duly adopted by the Investor's Board of Directors (and stockholders, if necessary) authorizing the execution and delivery of this Agreement, the Restated Stockholders' Agreement, the Restated Voting Agreement and each of the other documents to be delivered by the Investor hereunder and certifying that such resolutions were duly adopted, are in full force and effect and have not been rescinded or amended. 9.7 Compliance Evidence. The Company shall have received such certificates, documents and information as it may reasonably request in order to establish satisfaction of the conditions set forth in this Section 9. 9.8 Payment of Purchase Price. At the Closing, Investor shall have tendered delivery of the Purchase Price as specified in Section 2.2 herein. At the IPO Closing, the Investor shall have tendered delivery of the purchase price for the IPO Shares as specified in Section 2.3. 10. Miscellaneous. 10.1 Notices. All notices, consents and other communications under this Agreement shall be in writing and shall be deemed to have been duly given when (a) delivered by hand, (b) sent by telex or telecopier (with receipt confirmed), provided that a copy is mailed by certified mail, return receipt requested, or (c) when received by the addressee, if sent by Express Mail, Federal Express or other express delivery service (receipt requested), in each case to the appropriate addresses, telex numbers and telecopier numbers set forth below (or to such other 14. addresses, telex numbers and telecopier numbers as a party may designate as to itself by notice to the other parties complying as to delivery with this Section 10.1): If to the Company: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 Attention: Chief Executive Officer with a copy to: Cooley Godward LLP 4365 Executive Drive Suite 1100 San Diego, CA 92121 Fax No.: (619) 453-3555 Attention: M. Wainwright Fishburn, Jr., Esq. If to the Investor: Novartis Agribusiness Biotechnology Research, Inc. 3054 Cornwallis Road Research Triangle Park, NC 27709 Fax No.: (919) 541-8585 Attention: Dr. Juanjo Estruch with a copy to: Novartis Seeds, Inc. 7240 Holsclaw Road Gilroy, CA 95020-8027 Fax No.: (408) 848-8129 Attention: Allen E. Norris, Esq. 10.2 Service of Process. Process in any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement against any of the parties, may be served on any party anywhere in the world, whether within or without the State of California and may also be served upon any party in the manner provided for giving of notices to it in Section 10.1. 10.3 Expenses. Each party shall bear its own expenses incident to the preparation, negotiation, execution and delivery of this Agreement and the performance of its obligations hereunder. 10.4 Payment. A wire transfer or delivery of a check shall not operate to discharge any obligation of payment under this Agreement and is accepted subject to collection. 15. 10.5 Captions. The captions in this Agreement are for convenience of reference only and shall not be given any effect in the interpretation of this Agreement. 10.6 Attorneys' Fees. In any action or proceeding brought by a party to enforce any provision of this Agreement, the prevailing party shall be entitled to recover the reasonable costs and expenses incurred by it in connection with that action or proceeding (including, but not limited to, attorneys' fees). 10.7 No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. 10.8 Exclusive Agreement; Amendment. This Agreement supersedes all prior agreements among the parties with respect to its subject matter, is intended (with the documents referred to herein) as a complete and exclusive statement of the terms of the agreement among the parties with respect thereto and cannot be changed or terminated except by a written instrument executed by the party or parties against whom enforcement thereof is sought. 10.9 Severability. If any term, covenant or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (a) the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (b) the parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the parties that the basic purposes of this Agreement are to be effectuated. 10.10 Assignment. This Agreement may not be assigned by either party without the prior written consent of the other party; provided that, after the Closing, the Investor may upon ten (10) days prior written notice to the Company, assign this Agreement to any of its affiliates (as defined by Rule 405 promulgated under the Securities Act) without the prior written consent of the Company. 10.11 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided for in this Agreement. 10.12 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be considered an original, but all of which together shall constitute the same instrument. 16. 10.13 Governing Law. This Agreement and (unless otherwise provided) all amendments hereof and waivers and consents hereunder shall be governed by the internal laws of the State of California, without regard to the conflicts of law principles thereof. 10.14 Memorandum Regarding Purchase Price. A memorandum setting forth certain agreements by Diversa and the Investor with regard to the Purchase Price is attached hereto as Exhibit D. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 17. In Witness Whereof, the parties hereto have executed this Agreement on the date first above written, in the case of corporations by their respective officers thereunto duly authorized. Diversa Corporation Dated:____________________________ By:____________________________ Name:__________________________ Title:_________________________ Novartis Agribusiness Biotechnology Research, Inc. Dated:____________________________ By:____________________________ Name:__________________________ Title:_________________________ 18. List of Schedules Schedule No. Title - ------------ -------------------------------------------------- Schedule 4.2 Capitalization Schedule 4.4 Undisclosed Liabilities Schedule 4.5 Litigation Schedule 4.7 Compliance with Law Schedule 4.8 Brokers, Finders or Investment Bankers iv. List of Exhibits Exhibit Title - ------------ -------------------------------------------------- Exhibit A Seventh Restated Certificate of Incorporation Exhibit B Amended and Restated Stockholders' Agreement Exhibit C Amended and Restated Voting Agreement Exhibit D Memorandum Regarding Stock Purchase Agreement v. SCHEDULES TO STOCK PURCHASE AGREEMENT [SEE ATTACHED] SCHEDULE OF EXCEPTIONS This Schedule of Exceptions, dated as of the Closing Date, is made and given pursuant to Section 4 of the Stock Purchase Agreement by and between Diversa Corporation (the "Company") and Novartis Agribusiness Biotechnology Research, Inc. (the "Investor"), dated as of January 25, 1999 (the "Agreement"). The section numbers in this Schedule of Exceptions correspond to the section numbers in the Agreement; however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other section number under the Agreement where such disclosure would be appropriate. Any terms defined in the Agreement shall have the same meaning when used in this Schedule of Exceptions as when used in the Agreement unless the context otherwise requires. In addition, any summaries or descriptions of agreements that may be contained herein are intended to serve as identifying aids to such agreements and are not meant to be complete descriptions of all of the material terms to such agreements. All information set forth in the Schedules and Exhibits to the Agreement are deemed incorporated by reference into this Schedule of Exceptions. SCHEDULE 4.4(a) FINANCIAL STATEMENTS; FINANCIAL POSITION; ABSENCE OF UNDISCLOSED LIABILITIES. Effective with the 1995 fiscal year end, the Company changed its fiscal year end from a calendar year end method to a fiscal year ending on the closest Saturday to December 31 (also commonly called a 52/53 week fiscal year end method). Effective with the 1997 fiscal year end, the Company changed its fiscal year end from the 52/53 week fiscal year end method to the calendar year end method. These changes in accounting method caused no material change in the financial results that would have been reported for such periods. SCHEDULE 4.2 - CAPITALIZATION DIVERSA CORPORATION CAPITALIZATION TABLE Actual Prior To Series E Closing
Total Total Shares Fully-Diluted Shares -------------------------------------------------------------------------------------------------------- Series A Series B Series C Series D Common Warrants(a) Options(b) # % -------------------------------------------------------------------------------------------------------- PATRICOF FUNDS: APA Excelsior IV, L.P. The P/A Fund, L.P. APA Excelsior IV/Offshore, L.P. Patricof Private Investment Club, L.P. - ----------------------------------------------------------------------------------------------------------------------------------- Total Patricof Funds - ----------------------------------------------------------------------------------------------------------------------------------- HEALTHCARE FUNDS: HealthCare Ventures III, L.P. HealthCare Ventures IV, L.P. HealthCare Ventures V, L.P. - ----------------------------------------------------------------------------------------------------------------------------------- Total HealthCare Funds - ----------------------------------------------------------------------------------------------------------------------------------- OTHER INVESTORS: Benefit Capital Management Corporation New York Life Insurance Company CSK Venture Capital Co., Ltd. State of Michigan GC&H Investments Mentus Money Purchase Plan Logue, Kenneth F. Rice, Raymond D. Finnfeeds International Limited Abrams, Larry Axiom Venture Partners, L.P. Comdisco Warrant Johnston, Donald Rho Management Trust II Aetna Life Insurance Company Landsberger, Frank Casty, Lee Hudson Trust The CIT Group/Venture Capital, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Total Other Investors - ----------------------------------------------------------------------------------------------------------------------------------- FOUNDERS: The Institute for Genomic Research, et al. Haseltine, Wm. Miller, Jeffrey H. Simon, Melvin I. Stetter, Karl O. Kom, Peter, et al. Friedman, Gary, et al. - ----------------------------------------------------------------------------------------------------------------------------------- Total Founders - ----------------------------------------------------------------------------------------------------------------------------------- EMPLOYEES & CONSULTANTS: CURRENT EMPLOYEES Bruggeman, Terrance Short, Jay Van Sleen, Kathleen Simms, Patrick Baum, Bill - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal Management - ----------------------------------------------------------------------------------------------------------------------------------- Other Employees Pool Available (c) - ----------------------------------------------------------------------------------------------------------------------------------- Total Current Employees - ----------------------------------------------------------------------------------------------------------------------------------- TERMINATED EMPLOYEES Marrs, Barry Garaventi, Don Other Terminated Employees - ----------------------------------------------------------------------------------------------------------------------------------- Total Terminated Employees - ----------------------------------------------------------------------------------------------------------------------------------- Glickman, Bary Carroll, Daniel (Director) Other Consultants - ----------------------------------------------------------------------------------------------------------------------------------- Total Employees and Consultants - ----------------------------------------------------------------------------------------------------------------------------------- Grand Total ===================================================================================================================================
FOOTNOTES: (a) [****] (b) [****] (c) [****] * CONFIDENTIAL TREATMENT REQUESTED SCHEDULE 4.2 - CAPITALIZATION DIVERSA CORPORATION CAPITALIZATION TABLE Projected After Series E Closing
Total Total Shares Fully-Diluted Shares -------------------------------------------------------------------------------------------------------- Series A Series B Series C Series D Common Warrants(a) Options(b) # % -------------------------------------------------------------------------------------------------------- PATRICOF FUNDS: APA Excelsior IV, L.P. The P/A Fund, L.P. APA Excelsior IV/Offshore, L.P. Patricof Private Investment Club, L.P. - ----------------------------------------------------------------------------------------------------------------------------------- Total Patricof Funds - ----------------------------------------------------------------------------------------------------------------------------------- HEALTHCARE FUNDS: HealthCare Ventures III, L.P. HealthCare Ventures IV, L.P. HealthCare Ventures V, L.P. - ----------------------------------------------------------------------------------------------------------------------------------- Total HealthCare Funds - ----------------------------------------------------------------------------------------------------------------------------------- OTHER INVESTORS: Benefit Capital Management Corporation New York Life Insurance Company CSK Venture Capital Co., Ltd. State of Michigan GC&H Investments Mentus Money Purchase Plan Logue, Kenneth F. Rice, Raymond D. Finnfeeds International Limited Abrams, Larry Axiom Venture Partners, L.P. Comdisco Warrant Johnston, Donald Rho Management Trust II Aetna Life Insurance Company Landsberger, Frank Casty, Lee Hudson Trust The CIT Group/Venture Capital, Inc. - ----------------------------------------------------------------------------------------------------------------------------------- Total Other Investors - ----------------------------------------------------------------------------------------------------------------------------------- FOUNDERS: The Institute for Genomic Research, et al. Haseltine, Wm. Miller, Jeffrey H. Simon, Melvin I. Stetter, Karl O. Kom, Peter, et al. Friedman, Gary, et al. - ----------------------------------------------------------------------------------------------------------------------------------- Total Founders - ----------------------------------------------------------------------------------------------------------------------------------- EMPLOYEES & CONSULTANTS: CURRENT EMPLOYEES Bruggeman, Terrance Short, Jay Van Sleen, Kathleen Simms, Patrick Baum, Bill - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal Management - ----------------------------------------------------------------------------------------------------------------------------------- Other Employees Pool Available (c) - ----------------------------------------------------------------------------------------------------------------------------------- Total Current Employees - ----------------------------------------------------------------------------------------------------------------------------------- TERMINATED EMPLOYEES Marrs, Barry Garaventi, Don Other Terminated Employees - ----------------------------------------------------------------------------------------------------------------------------------- Total Terminated Employees - ----------------------------------------------------------------------------------------------------------------------------------- Glickman, Bary Carroll, Daniel (Director) Other Consultants - ----------------------------------------------------------------------------------------------------------------------------------- Total Employees and Consultants - ----------------------------------------------------------------------------------------------------------------------------------- Grand Total ===================================================================================================================================
FOOTNOTES: (a) [****] (b) [****] (c) [****] * CONFIDENTIAL TREATMENT REQUESTED SCHEDULE 4.4(b) FINANCIAL STATEMENTS; FINANCIAL POSITION; ABSENCE OF UNDISCLOSED LIABILITIES. None SCHEDULE 4.4(c) FINANCIAL STATEMENTS; FINANCIAL POSITION; ABSENCE OF UNDISCLOSED LIABILITIES. None SCHEDULE 4.5 LITIGATION. On August 4, 1997, the Company announced it had changed its name to Diversa Corporation. On August 7, 1997 the Company received a letter from Diversa Chemical Technologies, Inc. ("DCT") threatening legal action if the Company continued to use the name Diversa. The Company, through its legal counsel, has responded in writing to such correspondence, but has not received any further communications from DCT or its counsel. The date of the Company's trademark applications with the U.S. Patent and Trademark Office for the Diversa mark predate those of DCT, and the Company believes it has the right to use the name Diversa and has continued to do so. On November 13, 1996, the Company received a letter from counsel to Dr. Peter Lucchesi regarding a disputed amount of $18,750 allegedly owed under a consulting agreement between the Company and Dr. Lucchesi. To date, the Company has not received any further communications from Dr. Lucchesi or his counsel, and the Company has taken no further actions with regard to this matter. SCHEDULE 4.7 COMPLIANCE WITH LAW. In connection with U.S. Department of Labor Inspection Number 102944774 of the Sharon Hill, Pennsylvania facility, the Company received a Citation and Notice of Penalty (the "Citation") for apparent violations of OSHA Regulations. The Company was fined $700 and has taken remedial action to correct the conditions identified in the Citation. The Company no longer occupies this facility. In connection with a County of San Diego Department of Environmental Health (the "DEH") inspection of the La Jolla, California facility, conducted on January 31, 1996, the Company received a Notice of Violation for apparent violations of the California Code of Regulations. The Company took remedial action and was notified by the DEH in a letter dated March 4, 1996 that the Notice of Violation had been closed out. The Company no longer occupies this facility. In connection with a DEH inspection of the La Jolla, California facility, conducted on May 6, 1996, the Company was notified of two violations. The Company has taken remedial action to correct the violations. The Company no longer occupies this facility. In connection with a DEH inspection of the San Diego, California facility conducted on May 1, 1997, the Company was notified of three minor violations. The Company has taken remedial action to correct these violations. No penalty was assessed for these minor violations. In connection with a DEH inspection of the San Diego, California facility conducted on July 13, 1998, the Company was notified of five minor violations. The Company has taken remedial action to correct these violations. No penalty was assessed for these minor violations. SCHEDULE 4.8 NO BROKERS, FINDERS OR INVESTMENT BANKERS. None. Exhibit A SEVENTH RESTATED CERTIFICATE OF INCORPORATION Seventh Restated Certificate of Incorporation of Diversa Corporation Diversa Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "General Corporation Law"), hereby certifies as follows: First: The name of the Corporation is Diversa Corporation. A Certificate of Incorporation of the Corporation originally was filed by the Corporation with the Secretary of State of Delaware on December 21, 1992. The Corporation was originally incorporated under the name Industrial Genome Sciences, Inc. A Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on April 20, 1994. A Second Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on December 20, 1994. A Certificate of Amendment of the Second Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on March 7, 1995. A Certification of Designation of the Corporation was filed with the Secretary of State of Delaware on March 7, 1995. A Certificate of Amendment of the Second Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on July 24, 1995. A Certificate of Amendment of the Second Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on January 11, 1996. A Third Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on May 7, 1996. A Certificate of Amendment of the Third Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on August 22, 1996. A Second Certificate of Amendment of the Third Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on August 22, 1996. A Third Certificate of Amendment was filed with the Secretary of State of Delaware on December 3, 1996. A Fourth Certificate of Amendment was filed with the Secretary of State of Delaware on June 9, 1997. A Fourth Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on July 10, 1997. A Certificate of Amendment of the Fourth Restated Certificate of Incorporation was filed on August 14, 1997, changing the name of the Corporation from Recombinant BioCatalysis, Inc. to Diversa Corporation. A Fifth Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on October 17, 1997. A Sixth Restated Certificate of Incorporation was filed with the Secretary of State of Delaware on August 24, 1998. Second: This Seventh Restated Certificate of Incorporation which restates, amends and supersedes the Certificate of Incorporation of the Corporation as originally filed and thereafter amended and restated as described in First above, was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law, and was approved by written consent of the stockholders of the Corporation given in accordance with the provisions of Section 228 of the General Corporation Law (prompt notice of such action having been given to those stockholders who did not consent in writing). 1. Third: The text of the Certificate of Incorporation of the Corporation is hereby restated, amended and superseded to read in its entirety as follows: ARTICLE I. Name The name of the corporation is Diversa Corporation ARTICLE II. Purpose The Corporation is organized to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law. ARTICLE III. Capital Stock 1. Authorization, Designation and Amount. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 148,749,323 consisting of 66,276,739 shares of Preferred Stock, par value $.001 per share (the "Preferred Stock"), of which 10,501,000 shares shall be designated "Series A Convertible Preferred Stock" (the "Series A Preferred Stock"), 24,566,184 shall be designated "Series B Convertible Preferred Stock" (the "Series B Preferred Stock"), 844,444 shall be designated "Series C Convertible Preferred Stock" (the "Series C Preferred Stock"), 24,809,555 shall be designated "Series D Convertible Preferred Stock" (the "Series D Preferred Stock") and 5,555,556 shall be designated "Series E Convertible Preferred Stock" (the "Series E Preferred Stock"), and 82,472,584 shares of Common Stock, par value $.001 per share (the "Common Stock"). The number of shares, powers, terms, conditions, designations, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions, of the Preferred Stock, and the Common Stock shall be as set forth in this Article III, or with respect to any shares as to which the powers, terms, conditions, designations, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions have not been set forth in this Article III, the Board of Directors of the Corporation is expressly authorized to the fullest extent permitted by law, at any time and from time to time; to divide the authorized and unissued shares into classes or series, or both, and to provide for the powers, terms, conditions, designations, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions of the shares of the class or series. The number of authorized shares of Common Stock may be increased or decreased (but not below the combined number of shares thereof then outstanding, plus that number of shares reserved for purposes of effecting the conversion of the Series Preferred Stock into Common Stock) by the affirmative vote of the holders of 75% of (i) the issued and outstanding Common Stock (voting together with the holders of Series Preferred Stock in accordance with Sections A.6(a), B.6(a), C.6(a), D.6(a) and E.6(a) hereof), (ii) the issued and outstanding Series Preferred Stock and (iii) any other class 2. or series of capital stock entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law. PART A. Series A Convertible Preferred Stock. 1. Terms. The number of shares, powers, terms, conditions, designations, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions, if any, of the Series A Preferred Stock shall be as set forth herein. 2. Ranking. The Corporation's Series A Preferred Stock shall rank, as to dividends and upon redemption and Liquidation, (x) pari passu with the Series B and Series D Preferred Stock, (y) senior and prior to the Series C Preferred Stock and Series E Preferred Stock (but, with respect to Liquidation, only to the extent provided in Section A.4 hereof and with respect to redemption, only to the extent provided in Section A.8 hereof), and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation, except in the case of a change in the relative ranking of the Series A, Series B and Series D Preferred Stock, as otherwise approved by the affirmative vote or consent of the holders of 75% of the issued and outstanding shares of Series A, Series B and Series D Preferred Stock voting together. The Series A Preferred Stock shall have the following designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions: 3. Dividends. a. Dividends are payable on the Series A Preferred Stock, when, as and if declared by the Board of Directors. Whenever any dividend or other distribution is declared on any shares of Series A Preferred Stock, the Board of Directors shall simultaneously declare a dividend or distribution at the same percentage rate and in the same form on each other outstanding share of Series A Preferred Stock and each outstanding share of Series B and Series D Preferred Stock, so that all outstanding shares of Series A, Series B and Series D Preferred Stock will participate equally with each other ratably per share. b. So long as any Series A Preferred Stock is outstanding the Corporation shall not declare or pay any dividend or make any distribution (whether in cash, shares of capital stock of the Corporation or other property) on shares of its Common Stock or any other class or series of stock ranking pari passu with or junior to the Series A Preferred Stock, unless prior thereto or simultaneously therewith (A) all dividends and distributions previously declared on the Series A Preferred Stock and (B) any cumulative dividends in accordance with Section A.3(d) hereof shall have been paid or the Corporation shall have irrevocably deposited or set aside cash or United States Obligations sufficient for the payment thereof. c. If the Board of Directors declares dividends or other distributions (other than on Liquidation) on the Common Stock or any other class or series of stock ranking pari passu with or junior to the Series A Preferred Stock in cash, property or securities (excluding Common Stock) of the Corporation (or subscription or other rights to purchase or acquire securities (excluding Common Stock) of the Corporation), the Board of Directors shall 3. simultaneously declare a dividend or distribution on the same terms, at the same or equivalent rate, and in the same form on each share of Series A Preferred Stock, so that all outstanding shares of Series A Preferred Stock will participate ratably with the shares of Common Stock and the shares of each other class or series of stock ranking pari passu with or junior to the Series A Preferred Stock in such dividend or distribution. For purposes of determining its proportional share of the dividend or distribution, each share of the Series A Preferred Stock and any other applicable class or series of convertible securities shall be deemed to be that number of shares of Common Stock into which such share is then convertible, rounded to the nearest one-tenth of a share. d. From and after the Series A Preferred Fifth Anniversary Date and until the date of the consummation of the Corporation's first Public Offering, the Series A Preferred Stock will be entitled, pari passu with the Series B and Series D Preferred Stock, to dividends, to be paid quarterly, in cash or in kind at the discretion of the Board of Directors, at an annual rate of five percent (5%) of the Series A Preferred Original Purchase Price (or such greater amount of dividends as such Series A Preferred Stock would be entitled to if such Series A Preferred Stock were converted into Common Stock), as adjusted for any combinations or divisions or similar recapitalizations affecting the Series A Preferred Stock after the Series A Preferred Original Issuance Date, payable on the first day of January, April, July and October (and any dividends payable to holders of Series A Preferred Stock which are not paid shall be cumulative). Upon conversion of any Series A Preferred Stock, all accrued but unpaid cumulative dividends and any declared but unpaid dividends shall be paid in cash, or in additional shares of Common Stock at the Series A Preferred Conversion Price then in effect in the discretion of the Board of Directors. Nothing in this Section A.3(d) shall be deemed to limit the rights of the Series A Preferred Stock under Sections A.3(b) and A.3(c) hereof. 4. Rights on Liquidation, Dissolution, Winding-Up. a. With respect to rights on Liquidation, the Series A Preferred Stock shall rank (x) pari passu with the Series B and Series D Preferred Stock, (y) senior and prior to the Series C Preferred Stock and Series E Preferred Stock (but only to the extent provided in this Section A.4) and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation, except in the case of a change in the relative ranking upon Liquidation of the Series A, Series B and Series D Preferred Stock, as otherwise approved by the affirmative vote or consent of the holders of 75% of the issued and outstanding shares of Series A, Series B and Series D Preferred Stock voting together. b. In the event of any Liquidation, whether voluntary or involuntary, before any payment of cash or distribution of other property shall be made to the Series C Preferred Stockholders, Series E Preferred Stockholders or the Common Stockholders or any other class or series of stock ranking on Liquidation junior to the Series A Preferred Stock, the holders of Series A Preferred Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution to its stockholders, pari passu with the rights of the Series B and Series D Preferred Stockholders, an amount per share equal to the Series A Preferred Original Purchase Price whether from capital, surplus or earnings, plus an amount equal to any accrued but unpaid cumulative dividends thereon and any declared but unpaid dividends thereon. 4. c. If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series A Preferred Stockholders the full amounts to which each of them shall be entitled pursuant to Section A.4(b) hereof and to pay to the Series B and Series D Preferred Stockholders the full amount to which each of them shall be entitled pursuant to Sections B.4(b) and D.4(b) hereof, then the Series A, Series B and Series D Preferred Stockholders shall share ratably in any distribution of assets according to the respective amounts which would be payable to them in respect of the shares of Series A, Series B or Series D Preferred Stock, as the case may be, held upon such distribution if all amounts payable on or with respect to such shares were paid in full pursuant to Sections A.4(b), B.4(b) and D.4(b) hereof. d. In the event of any Liquidation, after payment shall have been made to (i) the Series A, Series B and Series D Preferred Stockholders of the full amount to which they shall be entitled pursuant to Sections A.4(b), B.4(b) and D.4(b) hereof, respectively, and (ii) the Series C and Series E Preferred Stockholders of the full amount to which they shall be entitled pursuant to Section C.4(b) and E.4(b) hereof, respectively, with respect to each other class or series of capital stock (other than the Series C Preferred Stock, Series E Preferred Stock and the Common Stock) ranking on Liquidation junior to such Series A Preferred Stock (in descending order of seniority), the Series A, Series B and Series D Preferred Stockholders, as a class, shall be entitled to receive an amount equal (and in like kind) to the aggregate preferential amount fixed for each such junior class or series of capital stock, which amount shall be distributed ratably among the Series A Preferred Stockholders in an equal amount per share of the Series A Preferred Stock then outstanding and among the Series B Preferred Stockholders in an equal amount per share of the Series B Preferred Stock then outstanding and among the Series D Preferred Stockholders in an equal amount per share of the Series D Preferred Stock then outstanding. If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series A Preferred Stockholders, the Series B Preferred Stockholders, the Series D Preferred Stockholders and each class or series of capital stock (other than the Series C Preferred Stock, Series E Preferred Stock and the Common Stock) junior to the Series A Preferred Stock the full amounts to which they shall be entitled pursuant to the immediately preceding sentence, the Series A, Series B and Series D Preferred Stockholders shall be entitled to share ratably with each such other class or series of capital stock in any distribution of assets according to the respective preferential amounts fixed for the Series A Preferred Stock (pursuant to Section A.4(b) hereof), the Series B Preferred Stock (pursuant to Section B.4(b) hereof) and the Series D Preferred Stock (pursuant to Section D.4(b) hereof), and each such junior class or series of capital stock (pursuant to the applicable terms thereof), which would be payable in respect of the shares held by them upon such distribution if all such preferential amounts payable on or with respect to such shares were paid in full. e. In the event of any Liquidation, after payment shall have been made to the Series A Preferred Stockholders, the Series B Preferred Stockholders, the Series C Preferred Stockholders, Series D Preferred Stockholders and the Series E Preferred Stockholders of the full amount to which they shall be entitled as aforesaid, and after payment shall have made of the respective preferential amounts of all other classes and series of capital stock ranking senior to the Common Stock, the Series A, Series B and Series D Preferred Stockholders shall be entitled to share ratably (calculated with respect to such Series A, Series B and Series D Preferred Stock as provided in the next sentence) with the holders of Common Stock in all 5. remaining assets of the Corporation available for distribution to its stockholders. For purposes of calculating the amount of any payment to be paid pursuant to this Section A.4(e) upon any such Liquidation, each share of Series A, Series B and Series D Preferred Stock shall be deemed to be that number of shares of Common Stock into which such share is then convertible, rounded to the nearest one-tenth of a share. 5. Merger, Consolidation, etc. a. In the event the Corporation intends to sell, lease or otherwise dispose of all or substantially all of the assets of the Corporation, effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering), or merge or consolidate with or into any other corporation, corporations or other entity or entities (other than a merger or consolidation in which the Series Preferred Stockholders receive securities of the surviving corporation having substantially similar rights to the Series Preferred Stock and in which the stockholders of the Corporation immediately prior to such a transaction are holders of at least a majority of the voting securities of the surviving corporation immediately thereafter), then the Corporation shall give written notice to each Series Preferred Stockholder no less than 20 days prior to the closing of any such transaction notifying the Series Preferred Stockholders of the terms and timing of the closing of such transaction and of the rights of the Series Preferred Stockholders under Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof. b. Upon the affirmative vote of the holders of not less than 75% in voting power of all of the shares of Series Preferred Stock then outstanding, voting together as a separate class, made prior to the consummation of such transaction, the proceeds of or any property deliverable from such transaction shall be distributed among the holders of the Series Preferred Stock and the Common Stock according to the provisions of Sections A.4, B.4, C.4, D.4 and E.4 hereof as if such transaction were a Liquidation. c. The voting rights of the holders of Series Preferred Stock contained in Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof may be exercised at a special meeting of the holders of Series Preferred Stockholders called as provided in accordance with the By-laws of the Corporation or by written consent of the holders of Series Preferred Stock in lieu of a meeting. 6. Voting. a. General. In addition to the rights otherwise provided for herein or by law, the Series A Preferred Stockholders shall be entitled to vote, together with the Series B Preferred Stockholders, the Series C Preferred Stockholders, the Series D Preferred Stockholders, the Series E Preferred Stockholders and the Common Stockholders and any other class or series of stock then entitled to vote, as one class on all matters as to which Common Stockholders shall be entitled to vote, in the same manner and with the same effect as the Common Stockholders, except as otherwise required by the General Corporation Law. In any such vote, and in any vote or action of the Series A Preferred Stockholders voting together as a separate class or with the other holders of Series Preferred Stock as a separate class, each share of issued and outstanding Series A Preferred Stock shall entitle the holder thereof to one vote per 6. share for each share of Common Stock (including fractional shares) into which each share of Series A Preferred Stock is then convertible, rounded to the nearest one-tenth of a share. b. Election of Board of Directors. (i) In addition to the rights specified in Sections A.6(a), B.6(a), C.6(a) and D.6(a) hereof, the holders of a majority in voting power of the Series A, Series B, Series C and Series D Preferred Stock, voting together as a separate class or in such other manner as the holders of the Series A, Series B, Series C and Series D Preferred Stock shall agree among themselves in the Stockholders' Agreement, shall have the exclusive right to elect to the Board of Directors of the Corporation that number of directors which shall be equal to a majority of the total number of directors on the Board of Directors at any given time. In any election of Preferred Directors pursuant to this Section A.6(b) and Sections B.6(b), C.6(b) and D.6(b), each share of issued and outstanding Series A, Series B, Series C and Series D Preferred Stock shall entitle the holder thereof to the number of votes per share that equals the number of shares of Common Stock (including fractional shares) into which each such share is then convertible, rounded up to the nearest one-tenth of a share. The voting rights of the Series A, Series B, Series C and Series D Preferred Stockholders contained in this Section A.6(b) and Sections B.6(b), C.6(b) and D.6(b) may be exercised at a special meeting of the Series Preferred Stockholders called as provided in accordance with the By-laws of the Corporation, at any annual or special meeting of the Stockholders of the Corporation, or by written consent of the holders of Series Preferred Stock in lieu of a meeting. The Preferred Directors elected pursuant to this Section A.6(b) and Sections B.6(b), C.6(b) and D.6(b) shall serve from the date of their election and qualification until their successors have been duly elected and qualified. (ii) Notwithstanding anything to the contrary contained in Sections A.6(b)(i), B.6(b)(i), C.6(b)(i) and D.6(b)(i) hereof, if an Event of Noncompliance is declared in accordance with the Stockholders' Agreement, the Series A, Series B, Series C and Series D Preferred Stockholders, voting together as a separate class, shall have the right to elect all of the members of the Board of Directors of the Corporation. (iii) A vacancy in the directorships to be elected pursuant to Sections A.6(b)(i)-(ii), B.6(b)(i)-(ii), C.6(b)(i)-(ii) and D.6(b)(i)-(ii) hereof (including any vacancy created on account of an increase in the number of directors on the Board of Directors) may be filled only by vote at a meeting called in accordance with the By-laws of the Corporation or written consent in lieu of a meeting in accordance with Sections A.6(b)(i), B.6(b)(i), C.6(b)(i) and D.6(b)(i) hereof or, with respect to a Preferred Director, as provided for in the Stockholders' Agreement. c. Protective Provisions. So long as any Series Preferred Stock is outstanding, the Corporation shall not, without the written consent in lieu of a meeting, or the affirmative vote at a meeting called for such purpose, of the holders of shares representing at least 75% of the combined voting power of the issued and outstanding Series A, Series B, Series C, Series D and Series E Preferred Stock, voting together as a single class: (i) except for "Excluded Stock", authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation, any right, warrant, or option to 7. receive any capital stock, or any security convertible into or exchangeable for capital stock or any capitalized lease with any equity feature with respect to the capital stock of the Corporation; (ii) change as a whole, by subdivision or combination in any manner, the number of shares of the Common Stock then outstanding into a different number of shares, with or without par value, without making the identical change as a whole in the number of shares of Series Preferred Stock then outstanding; (iii) amend, alter or repeal, in any manner whatsoever, the designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions of the Series Preferred Stock; (iv) sell, abandon, transfer, lease or otherwise dispose of all or substantially all of the properties or assets of the Corporation or any of its subsidiaries; (v) declare or pay any dividend (other than as required by Section A.3(d) hereof in respect of the Series A Preferred Stock, by Section B.3(d) hereof in respect of the Series B Preferred Stock and by Section D.3(d) hereof in respect of the Series D Preferred Stock) or make any distribution (whether in cash, shares of capital stock of the Corporation, or other property) on shares of its capital stock other than the Series Preferred Stock; (vi) merge or consolidate with or into, or permit any subsidiary of the Corporation to merge or consolidate with or into, any other corporation, corporations or other entity or entities, or effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering); (vii) voluntarily dissolve, liquidate or wind-up or carry out any partial Liquidation or distribution or transaction in the nature of a partial Liquidation or distribution; (viii) increase the number of shares of any series of Preferred Stock of the Corporation authorized to be issued; (ix) reclassify any shares of the Corporation's capital stock as shares ranking senior to or on parity with the Series Preferred Stock with respect to rights on Liquidation, redemption or for the payment of any dividend or distribution other than in Liquidation; (x) amend, alter or repeal any provision of the Certificate of Incorporation of the Corporation; (xi) amend, alter or repeal any provisions of the By-laws of the Corporation so as to adversely affect the rights of the holders of the Series Preferred Stock; or (xii) directly or indirectly, redeem, purchase or otherwise acquire for value (including through an exchange), or set apart money or other property for any 8. mandatory purchase or other analogous fund for the redemption, purchase or acquisition of, any shares of Common Stock, except (a) pursuant to Sections A.8, B.8, C.8 and D.8 hereof, and (b) pursuant to any agreement approved by the Board of Directors with an officer, director, employee or consultant providing for the repurchase of any capital stock of the Corporation owned by such officer, director, employee or consultant at the option of the Corporation, which is either (A) set forth on Schedule 4.10 of the Series B Stock Purchase Agreement, or (B) issued pursuant to the Option Plan, as amended, the 1997 Equity Incentive Plan, or any other stock option plan of the Corporation or one or more amendments to the Option Plan, from and after May 13, 1996, approved by the Board of Directors and by the holders of 75% of the then issued and outstanding Series Preferred Stock, voting together as a separate class. In any vote or written consent in lieu of a meeting pursuant to this Section A.6(c) and Sections B.6(c), C.6(c), D.6(c) and E.6(c) hereof, each share of issued and outstanding Series Preferred Stock shall entitle the holder thereof to the number of votes per share that equals the number of shares of Common Stock (including fractional shares) into which each such share is then convertible, rounded to the nearest one-tenth of a share. 7. Conversion. a. Right to Convert. (i) Any Series A Preferred Stockholder shall have the right, at any time or from time to time, prior to the Closing Date to convert any or all of its shares of Series A Preferred Stock into that number of fully paid and nonassessable shares of Common Stock for each share of Series A Preferred Stock so converted equal to the quotient of the Series A Preferred Original Purchase Price divided by the Series A Preferred Conversion Price (as last adjusted and then in effect) rounded to the nearest one-tenth of a share. (ii) (a) Any Series A Preferred Stock that remains unconverted on the Closing Date shall be automatically converted without notice and without any action on the part of the holder thereof into shares of Common Stock on the Closing Date in accordance with the preceding sentence. After the Closing Date all rights of holders of shares of Series A Preferred Stock with respect to Series A Preferred Stock, except the right to receive shares of Common Stock in accordance with this Section A.7(a)(ii)(a) and any accrued but unpaid dividends and any declared but unpaid dividends as in accordance with Section A.7(a)(ii)(c) hereof, shall cease and the shares of Series A Preferred Stock shall no longer be deemed to be outstanding, whether or not the Corporation has received the certificates representing such shares. (b) The Corporation shall promptly send by first-class mail, postage prepaid, to each Series A Preferred Stockholder at such holder's address appearing on the Corporation's records a copy of (i) each registration statement filed by the Corporation under the Securities Act and each amendment thereof and each exhibit and schedule thereto and (ii) each order of the Securities and Exchange Commission declaring any such registration statement to be effective. 9. (c) Holders of Series A Preferred Stock converted into shares of Common Stock pursuant to this Section A.7 shall be entitled to payment of any accrued but unpaid cumulative dividend and any declared but unpaid dividends payable with respect to such shares of Series A Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. b. Mechanics of Conversion. (i) Any Series A Preferred Stockholder that exercises its right to convert its shares of Series A Preferred Stock into Common Stock shall deliver the Preferred Certificate, duly endorsed or assigned in blank to the Corporation, during regular business hours, at the office of the transfer agent of the Corporation, if any, at the principal place of business of the Corporation or at such other place as may be designated by the Corporation. (ii) Each Preferred Certificate shall be accompanied by written notice stating that such holder elects to convert such shares and stating the name or names (with address) in which the Common Certificate(s) are to be issued. Such conversion shall be deemed to have been effected on the date when the aforesaid delivery is made. (iii) As promptly as practicable thereafter, the Corporation shall issue and deliver to or upon the written order of such holder, at the place designated by such holder, the Common Certificate(s) for the number of full shares of Common Stock to which such holder is entitled and a cash payment for any fractional interest in a share of Common Stock, as provided in Section A.7(c) hereof, and for any accrued but unpaid cumulative dividends and any declared but unpaid dividends, payable with respect to the converted shares of Series A Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. (iv) The person in whose name each Common Certificate is to be issued shall be deemed to have become a stockholder of record of Common Stock on the Conversion Date or the Closing Date, as the case may be, unless the transfer books of the Corporation are closed on that date, in which event such holder shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open; provided, that the Series A Preferred Conversion Price shall be that in effect on the Conversion Date or the Closing Date, as the case may be. (v) Upon conversion of only a portion of the shares of Series A Preferred Stock covered by a Preferred Certificate, the Corporation, at its own expense, shall issue and deliver to or upon the written order of the holder of such Preferred Certificate, a new certificate representing the number of unconverted shares of Series A Preferred Stock from the Preferred Certificate so surrendered. c. Issuance of Common Stock on Conversion. (i) If a Series A Preferred Stockholder shall surrender more than one Preferred Certificate for conversion at any one time, the number of such shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Preferred Stock so surrendered. 10. (ii) No fractional shares of Common Stock shall be issued upon conversion of shares of Series A Preferred Stock. The Corporation shall pay a cash adjustment for such fractional interest in an amount equal to the then Current Market Price of a share of Common Stock multiplied by such fractional interest. d. Conversion Price; Adjustment. The "Series A Preferred Conversion Price" with respect to the Series A Preferred Stock shall initially be equal to the Series A Preferred Original Purchase Price and shall be subject to adjustment from time to time as follows: (i) If the Corporation shall, at any time or from time to time after the Series A Preferred Original Issuance Date, make a Dilutive Issuance, the Series A Preferred Conversion Price in effect immediately prior to each such Dilutive Issuance shall automatically be lowered to a price (calculated to the nearest cent) determined by multiplying the Series A Preferred Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issuance plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation in such Dilutive Issuance so issued would purchase at the Series A Preferred Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of such additional shares of Common Stock so issued in such Dilutive Issuance; provided that, for the purpose of this Section A.7(d)(i), all shares of Common Stock issuable upon exercise or conversion of options or convertible securities outstanding immediately prior to such issuance (other than any additional shares of Common Stock issuable with respect to shares of Series Preferred Stock, convertible securities, or outstanding options, warrants or other rights for the purchase of shares of Common Stock or convertible securities, solely as a result of either (x) the Dilutive Issuance or (y) the adjustment of the Series A Preferred Conversion Price (or other conversion ratios applicable to other Series Preferred Stock and otherwise) resulting from the Dilutive Issuance) shall be deemed to be outstanding. For the purposes of any adjustment of the Series A Preferred Conversion Price pursuant to this Section A.7(d)(i), the following provisions shall be applicable: (a) In the case of the issuance of Common Stock in whole or in part for cash, the consideration shall be deemed to be the amount of cash paid therefor, plus the value of any property other than cash received by the Corporation as provided in Section A.7(d)(i)(b) hereof, less any discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (b) In the case of the issuance of Common Stock for consideration in whole or in part in property or consideration other than cash, the value of such property or consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Corporation, irrespective of any accounting treatment; provided, however, that such fair market value shall not exceed the aggregate Current Market Price of the shares of Common Stock being issued, less any cash consideration paid for such shares. 11. (c) In the case of the issuance of (I) options to purchase or rights to subscribe for Common Stock, (II) securities convertible into or exchangeable for Common Stock or (III) options to purchase or rights to subscribe for such convertible or exchangeable securities: (1) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase, or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections A.7(d)(i)(a) and (b) hereof, if any, received by the Corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (2) the aggregate maximum number of shares of Common Stock deliverable upon conversion of, or in exchange for, any such convertible or exchangeable securities or upon the exercise of options to purchase, or rights to subscribe for, such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (determined in the manner provided in Sections A.7(d)(i)(a) and (b) hereof); (3) if there is any decrease in the conversion or exercise price of, or any increase in the number of shares to be received upon exercise, conversion or exchange of any such options, rights or convertible or exchangeable securities (other than a change resulting from the antidilution provisions thereof), the Series A Preferred Conversion Price shall be automatically lowered to reflect such change; and (4) on the expiration of any right or option referred to in Sections A.7(d)(i)(c)(1) or (2) hereof or on the termination of any right to convert or exchange any convertible or exchangeable securities referred to in Section A.7(d)(i)(c)(2) hereof, the Series A Preferred Conversion Price then in effect shall thereupon be readjusted to the Series A Preferred Conversion Price as would have been in effect had the adjustment made upon the granting or issuance of such rights or options or convertible or exchangeable securities been made upon the basis of the issuance or sale of only the number of shares of Common Stock actually issued upon the exercise of such options or rights or upon the conversion or exchange of such convertible or exchangeable securities. (ii) If the Corporation shall at any time after the Series A Preferred Original Issuance Date fix a record date for the subdivision, split-up or stock dividend of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such subdivision, split-up or dividend (or the date of such subdivision, split-up or dividend, if no record date is fixed), the Series A Preferred Conversion Price shall be appropriately decreased so that the number of shares of Common 12. Stock issuable on conversion of each share of the Series A Preferred Stock shall be increased in proportion to such increase in outstanding shares. (iii) If, at any time after the Series A Preferred Original Issuance Date, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date fixed for such combination (or the date of such combination, if no record date is fixed), the Series A Preferred Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (iv) If, at any time after the Series A Preferred Original Issuance Date, an Extraordinary Transaction is consummated, the Series A Preferred Conversion Price with respect to the Series A Preferred Stock outstanding after the Extraordinary Transaction shall be adjusted to provide that the shares of Series A Preferred Stock outstanding immediately prior to the effectiveness of the Extraordinary Transaction shall be convertible into the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from or surviving such Extraordinary Transaction which the holder of the number of shares of Common Stock deliverable (immediately prior to the effectiveness of the Extraordinary Transaction) upon conversion of such Series A Preferred Stock would have been entitled to receive upon such Extraordinary Transaction. The provisions of this Section A.7(d)(iv) shall similarly apply to successive Extraordinary Transactions. (v) All calculations under this Section A.7(d) shall be made to the nearest one-tenth of a cent ($.001) or to the nearest one-tenth of a share, as the case may be. (vi) In any case in which the provisions of this Section A.7(d) shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of that event (A) issuing to the holder of any share of Series A Preferred Stock converted after such record date and before the occurrence of such event the additional shares of capital stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares of capital stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount in cash in lieu of a fractional share of capital stock pursuant to Section A.7(c) hereof; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares, in such case, upon the occurrence of the event requiring such adjustment. e. Notice of Adjustments. (i) Whenever the Series A Preferred Conversion Price shall be adjusted as provided in Section A.7(d) hereof, the Corporation shall file, at its principal office, at the office of the transfer agent for the Series A Preferred Stock, if any, or at such other place as may be designated by the Corporation, a statement, signed by its President and by its Chief Financial Officer, showing in detail the facts requiring such adjustment and the Series A Preferred Conversion Price that shall be in effect after such adjustment. The Corporation shall also cause a copy of such statement to be sent by first-class, certified mail, return receipt 13. requested, postage prepaid, to each Series A Preferred Stockholder at such holder's address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section A.7(e)(ii) hereof. (ii) In the event the Corporation shall propose to file a registration statement under the Securities Act for a Public Offering or to take any action of the types described in clauses (i), (ii), (iii) or (iv) of Section A.7(d) hereof, the Corporation shall give notice to each Series A Preferred Stockholder, in the manner set forth in Section A.7(e)(i) hereof, which shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. The notice shall also set forth such facts as are reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Series A Preferred Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Series A Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten (10) days prior to the date so fixed, and in case of all other action, such notice shall be given at least fifteen (15) days prior to the taking of such proposed action. Failure to give notice under this Section A.7(e)(ii), or any defect therein, shall not affect the legality or validity of any such action. f. Transfer Taxes. The Corporation shall pay all documentary, stamp or other transactional taxes (excluding income taxes) attributable to the issuance or delivery of shares of capital stock of the Corporation upon conversion of any shares of Series A Preferred Stock; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Series A Preferred Stock in respect of which such shares are being issued. g. Reservation of Common Stock. The Corporation shall at all times reserve, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series A Preferred Stock, sufficient shares of Common Stock to provide for the conversion of all outstanding shares of Series A Preferred Stock. h. Status of Common Stock. All shares of Common Stock which may be issued in connection with the conversion provisions set forth herein will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable, free from preemptive rights and free from all taxes, liens or charges with respect thereto created or imposed by the Corporation. 8. Redemption. a. On and after the Series B Preferred Fifth Anniversary Date or at any time if an Event of Noncompliance is declared in accordance with the Stockholders' Agreement, at the written request of the holders of shares representing not less than 75% of the combined voting power of the Series A, Series B, Series C and Series D Preferred Stock then 14. outstanding, voting together as a single class, made, from time to time, at any date on or after the Series B Preferred Fifth Anniversary Date or upon the declaration of an Event of Noncompliance, the Corporation shall redeem (unless otherwise prevented by law) all of the shares of Series A, Series B and Series D Preferred Stock, at a redemption price per share for each such series of Series Preferred Stock equal to (i) the Series A Preferred Original Purchase Price, the Series B Preferred Original Purchase Price or the Series D Preferred Original Purchase Price, as applicable, plus (ii) an amount equal to any accrued but unpaid cumulative dividends thereon and any declared but unpaid dividends thereof, and, then, all of the shares of Series C Preferred Stock, at a redemption price per share for such Series C Preferred Stock equal to (i) the Series C Preferred Original Purchase Price plus (ii) an amount equal to any accrued but unpaid dividends thereon and any declared but unpaid dividends thereon. For purposes of determining whether the requisite 75% of the holders of Series A, Series B, Series C and Series D Preferred Stock are participating in the Redemption Notice, each share of issued and outstanding Series A, Series B, Series C and Series D Preferred Stock shall entitle the holder thereof to one vote per share for each share of Common Stock (including fractional shares) into which each share of Series A, Series B, Series C and Series D Preferred Stock is then convertible, rounded to the nearest one-tenth of a share. b. On and after the Redemption Date, all rights of any Series A Preferred Stockholder with respect to the shares of Series A Preferred Stock redeemed on that Redemption Date, except the right to receive the Redemption Payment as provided herein, shall cease, and such shares shall no longer be deemed to be outstanding, whether or not the Corporation has received the certificates representing such shares, on the condition that the Corporation pays the Redemption Payment, or irrevocably deposits or sets aside cash in an amount equal to the Redemption Payment; provided, however, that if the Corporation defaults in the payment of the Redemption Payment, the rights of the holder with respect to such shares of Series A Preferred Stock shall continue until the Corporation cures such default. c. The Requesting Holders shall send their Redemption Notice pursuant to this Section A.8 by first-class, certified mail, return receipt requested, postage prepaid, to the Corporation at its principal place of business or to any transfer agent of the Corporation. The Corporation shall fix a date for redemption which shall not be more than 60 days after the receipt of Redemption Notices from the Requesting Holders. Not less than 45 days prior to the Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A, Series B, Series C and Series D Preferred Stock, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice, notifying such holder of the redemption to be effected, the Redemption Date fixed, the Redemption Payment, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, such holder's certificate or certificates representing the shares to be redeemed. In the event of only a partial redemption of the outstanding shares of the Series A, Series B and Series D Preferred Stock entitled to redemption for any reason, the redemption of the Series A, Series B and Series D Preferred Stock shall be pro rata based upon the total amount that would be paid by the Corporation to each Series A, Series B and Series D Preferred Stockholder if all of the shares of Series A, Series B and Series D Preferred Stock were fully redeemed pursuant to Sections 15. A.8(a), B.8(a) and D.8(a) hereof. At any time on or after the Redemption Date, the holders of the Series A Preferred Stock shall be entitled to receive the Redemption Payment for each of the shares of Series A Preferred Stock held by such holder which are to be redeemed by the Corporation upon actual delivery to the Corporation or its transfer agent of the certificate(s) representing the shares to be redeemed. Upon redemption of only a portion of the number of shares covered by a Series A Preferred Stock certificate, the Corporation shall issue and deliver to or upon the written order of the holder of such Series A Preferred Stock certificate, at the expense of the Corporation, a new certificate covering the number of shares of Series A Preferred Stock being redeemed representing the unredeemed portion of the Series A Preferred Stock certificate, which new certificate shall entitle the holder thereof to all the rights, powers and privileges of a holder of such shares. d. Notwithstanding anything to the contrary contained in this Section A.8, the Corporation shall not be obligated to acquire any shares on any Redemption Date to the extent that the acquisition thereof would violate any law, statute, rule, regulation, policy or guideline promulgated by any federal, state, local or foreign governmental authority applicable to the Corporation, provided that the Corporation shall use all legally permissible methods in the reduction of capital and revaluation of assets, including appraisal, in order to obtain a legal source of funds with which to pay the Redemption Payment and shall acquire such shares as soon as permitted by applicable laws, statutes, rules, regulations, policies and guidelines. 9. Miscellaneous. a. Shares of Series A Preferred Stock are not subject to or entitled to the benefit of a sinking fund. b. Redeemed shares of Series A Preferred Stock shall not be reissued but shall be retired. Upon the retirement of redeemed shares the capital of the Corporation shall be reduced. c. The shares of the Series A Preferred Stock shall not have any preferences, voting powers or relative, participating, optional, preemptive or other special rights except as set forth above in this Seventh Restated Certificate of Incorporation of the Corporation. PART B. Series B Convertible Preferred Stock. 1. Terms. The number of shares, powers, terms, conditions, designations, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions, if any, of the Series B Preferred Stock shall be as set forth herein. 2. Ranking. The Corporation's Series B Preferred Stock shall rank, as to dividends and upon redemption and Liquidation, (x) pari passu with the Series A and Series D Preferred Stock, (y) senior and prior to the Series C Preferred Stock and Series E Preferred Stock (but, with respect to Liquidation, only to the extent provided in Section B.4 hereof and with respect to redemption, only to the extent provided in Section B.8 hereof), and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation, except in the case of a change in the relative ranking of the Series A, Series B and Series D Preferred 16. Stock, as otherwise approved by the affirmative vote or consent of the holders of 75% of the issued and outstanding shares of Series A, Series B and Series D Preferred Stock voting together. The Series B Preferred Stock shall have the following designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions: 3. Dividends. a. Dividends are payable on the Series B Preferred Stock, when, as and if declared by the Board of Directors. Whenever any dividend or other distribution is declared on any shares of Series B Preferred Stock, the Board of Directors shall simultaneously declare a dividend or distribution at the same percentage rate and in the same form on each other outstanding share of Series B Preferred Stock and each outstanding share of the Series A and Series D Preferred Stock, so that all outstanding shares of Series A, Series B and Series D Preferred Stock will participate equally with each other ratably per share. b. So long as any Series B Preferred Stock is outstanding the Corporation shall not declare or pay any dividend or make any distribution (whether in cash, shares of capital stock of the Corporation or other property) on shares of its Common Stock or any other class or series of stock ranking pari passu with or junior to the Series B Preferred Stock, unless prior thereto or simultaneously therewith (A) all dividends and distributions previously declared on the Series B Preferred Stock and (B) any cumulative dividends in accordance with Section B.3(d) hereof shall have been paid or the Corporation shall have irrevocably deposited or set aside cash or United States Obligations sufficient for the payment thereof. c. If the Board of Directors declares dividends or other distributions (other than on Liquidation) on the Common Stock or any other class or series of stock ranking pari passu with or junior to the Series B Preferred Stock in cash, property or securities (excluding Common Stock) of the Corporation (or subscription or other rights to purchase or acquire securities (excluding Common Stock) of the Corporation), the Board of Directors shall simultaneously declare a dividend or distribution on the same terms, at the same or equivalent rate, and in the same form on each share of Series B Preferred Stock, so that all outstanding shares of Series B Preferred Stock will participate ratably with the shares of Common Stock and the shares of each other class or series of stock ranking pari passu with or junior to the Series B Preferred Stock in such dividend or distribution. For purposes of determining its proportional share of the dividend or distribution, each share of the Series B Preferred Stock and any other applicable class or series of convertible securities shall be deemed to be that number of shares of Common Stock into which such share is then convertible, rounded to the nearest one-tenth of a share. d. From and after the Series A Preferred Fifth Anniversary Date and until the date of the consummation of the Corporation's first Public Offering, the Series B Preferred Stock will be entitled, pari passu with the Series A and Series D Preferred Stock, to dividends, to be paid quarterly, in cash or in kind at the discretion of the Board of Directors, at an annual rate of five percent (5%) of the Series B Preferred Original Purchase Price (or such greater amount of dividends as such Series B Preferred Stock would be entitled to if such Series B Preferred Stock were converted into Common Stock), as adjusted for any combinations or 17. divisions or similar recapitalizations affecting the Series B Preferred Stock after the Series B Preferred Original Issuance Date, payable on the first day of January, April, July and October (and any dividends payable to holders of Series B Preferred Stock which are not paid shall be cumulative). Upon conversion of any Series B Preferred Stock, all accrued but unpaid cumulative dividends and any declared but unpaid dividends shall be paid in cash, or in additional shares of Common Stock at the Series B Preferred Conversion Price then in effect in the discretion of the Board of Directors. Nothing in this Section B.3(d) shall be deemed to limit the rights of the Series B Preferred Stock under Sections B.3(b) and B.3(c) hereof. 4. Rights on Liquidation, Dissolution, Winding-Up. a. With respect to rights on Liquidation, the Series B Preferred Stock shall rank (x) pari passu with the Series A and Series D Preferred Stock, (y) senior and prior to the Series C Preferred Stock and Series E Preferred Stock (but only to the extent provided in this Section B.4) and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation, except in the case of a change in the relative ranking upon Liquidation of the Series A, Series B and Series D Preferred Stock, as otherwise approved by the affirmative vote or consent of the holders of 75% of the issued and outstanding shares of Series A, Series B and Series D Preferred Stock voting together. b. In the event of any Liquidation, whether voluntary or involuntary, before any payment of cash or distribution of other property shall be made to the Series C Preferred Stockholders, Series E Preferred Stockholders or the Common Stockholders or any other class or series of stock ranking on Liquidation junior to the Series B Preferred Stock, the holders of Series B Preferred Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution to its stockholders, pari passu with the rights of the Series A and Series D Preferred Stockholders, an amount per share equal to the Series B Preferred Original Purchase Price whether from capital, surplus or earnings, plus an amount equal to any accrued but unpaid cumulative dividends thereon and any declared but unpaid dividends thereon. c. If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series B Preferred Stockholders the full amounts to which each of them shall be entitled pursuant to Section B.4(b) hereof and to pay to the Series A and Series D Preferred Stockholders the full amount to which each of them shall be entitled pursuant to Sections A.4(b) and D.4(b) hereof, then the Series A, Series B and Series D Preferred Stockholders shall share ratably in any distribution of assets according to the respective amounts which would be payable to them in respect of the shares of Series A, Series B or Series D Preferred Stock, as the case may be, held upon such distribution if all amounts payable on or with respect to such shares were paid in full pursuant to Sections A.4(b), B.4(b) and D.4(b) hereof. d. In the event of any Liquidation, after payment shall have been made to (i) the Series A, Series B and Series D Preferred Stockholders of the full amount to which they shall be entitled pursuant to Sections A.4(b), B.4(b) and D.4(b) hereof, respectively, and (ii) the Series C and Series E Preferred Stockholders of the full amount to which they shall be entitled pursuant to Section C.4(b) and E.4(b) hereof, respectively, with respect to each other 18. class or series of capital stock (other than the Series C Preferred Stock, Series E Preferred Stock and the Common Stock) ranking on Liquidation junior to such Series B Preferred Stock (in descending order of seniority), the Series A, Series B and Series D Preferred Stockholders, as a class shall be entitled to receive an amount equal (and in like kind) to the aggregate preferential amount fixed for each such junior class or series of capital stock, which amount shall be distributed ratably among the Series A Preferred Stockholders in an equal amount per share of the Series A Preferred Stock then outstanding, among the Series B Preferred Stockholders in an equal amount per share of the Series B Preferred Stock then outstanding and among the Series D Preferred Stockholders in an equal amount per share of the Series D Preferred Stock then outstanding. If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series A Preferred Stockholders, Series B Preferred Stockholders, the Series D Preferred Stockholders, and each class or series of capital stock (other than the Series C Preferred Stock, Series E Preferred Stock and the Common Stock) junior to the Series B Preferred Stock the full amounts to which they shall be entitled pursuant to the immediately preceding sentence, the Series A, Series B and Series D Preferred Stockholders shall be entitled to share ratably with each such other class or series of capital stock in any distribution of assets according to the respective preferential amounts fixed for the Series A Preferred Stock (pursuant to Section A.4(b) hereof), the Series B Preferred Stock (pursuant to Section B.4(b) hereof) and the Series D Preferred Stock (pursuant to Section D.4(b) hereof) and each such junior class or series of capital stock (pursuant to the applicable terms thereof), which would be payable in respect of the shares held by them upon such distribution if all such preferential amounts payable on or with respect to such shares were paid in full. e. In the event of any Liquidation, after payment shall have been made to the Series A Preferred Stockholders, the Series B Preferred Stockholders, the Series C Preferred Stockholders, Series D Preferred Stockholders and the Series E Preferred Stockholders of the full amount to which they shall be entitled as aforesaid, and after payment shall have made of the respective preferential amounts of all other classes and series of capital stock ranking senior to the Common Stock, the Series A, Series B and Series D Preferred Stockholders shall be entitled to share ratably (calculated with respect to such Series A, Series B and Series D Preferred Stock as provided in the next sentence) with the holders of Common Stock in all remaining assets of the Corporation available for distribution to its stockholders. For purposes of calculating the amount of any payment to be paid pursuant to this Section B.4(e) upon any such Liquidation, each share of Series A, Series B and Series D Preferred Stock shall be deemed to be that number of shares of Common Stock into which such share is then convertible, rounded to the nearest one-tenth of a share. 5. Merger, Consolidation, etc. a. In the event the Corporation intends to sell, lease or otherwise dispose of all or substantially all of the assets of the Corporation, effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering), or merge or consolidate with or into any other corporation, corporations or other entity or entities (other than a merger or consolidation in which the Series Preferred Stockholders receive securities of the surviving corporation having substantially similar rights to the Series Preferred Stock and in which the stockholders of the Corporation immediately prior to such a transaction are holders of at least a 19. majority of the voting securities of the surviving corporation immediately thereafter), then the Corporation shall give written notice to each Series Preferred Stockholder no less than 20 days prior to the closing of any such transaction notifying the Series Preferred Stockholders of the terms and timing of the closing of such transaction and of the rights of the Series Preferred Stockholders under Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof. b. Upon the affirmative vote of the holders of not less than 75% in voting power of all of the shares of Series Preferred Stock then outstanding, voting together as a separate class, made prior to the consummation of such transaction, the proceeds of or any property deliverable from such transaction shall be distributed among the holders of the Series Preferred Stock and the Common Stock according to the provisions of Sections A.4, B.4, C.4, D.4 and E.4 hereof as if such transaction were a Liquidation. c. The voting rights of the holders of Series Preferred Stock contained in Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof may be exercised at a special meeting of the holders of Series Preferred Stockholders called as provided in accordance with the By-laws of the Corporation or by written consent of the holders of Series Preferred Stock in lieu of a meeting. 6. Voting. a. General. In addition to the rights otherwise provided for herein or by law, the Series B Preferred Stockholders shall be entitled to vote, together with the Series A Preferred Stockholders, the Series C Preferred Stockholders, the Series D Preferred Stockholders, the Series E Preferred Stockholders and the Common Stockholders and any other class or series of stock then entitled to vote, as one class on all matters as to which Common Stockholders shall be entitled to vote, in the same manner and with the same effect as the Common Stockholders, except as otherwise required by the General Corporation Law. In any such vote, and in any vote or action of the Series B Preferred Stockholders voting together as a separate class or with the other holders of Series Preferred Stock as a separate class, each share of issued and outstanding Series B Preferred Stock shall entitle the holder thereof to one vote per share for each share of Common Stock (including fractional shares) into which each share of Series B Preferred Stock is then convertible, rounded to the nearest one-tenth of a share. b. Election of Board of Directors. (i) In addition to the rights specified in Sections A.6(a), B.6(a), C.6(a) and D.6(a) hereof, the holders of a majority in voting power of the Series A, Series B, Series C and Series D Preferred Stock, voting together as a separate class or in such other manner as the holders of the Series A, Series B, Series C and Series D Preferred Stock shall agree among themselves in the Stockholders' Agreement, shall have the exclusive right to elect to the Board of Directors of the Corporation that number of directors which shall be equal to a majority of the total number of directors on the Board of Directors at any given time. In any election of Preferred Directors pursuant to this Section B.6(b) and Sections A.6(b), C.6(b) and D.6(b), each share of issued and outstanding Series A, Series B, Series C and Series D Preferred Stock shall entitle the holder thereof to the number of votes per share that equals the number of shares of Common Stock (including fractional shares) into which each such share is then 20. convertible, rounded up to the nearest one-tenth of a share. The voting rights of the Series A, Series B, Series C and Series D Preferred Stockholders contained in this Section B.6(b) and Sections A.6(b), C.6(b) and D.6(b) may be exercised at a special meeting of the Series Preferred Stockholders called as provided in accordance with the By-laws of the Corporation, at any annual or special meeting of the Stockholders of the Corporation, or by written consent of the holders of Series Preferred Stock in lieu of a meeting. The Preferred Directors elected pursuant to this Section B.6(b) and Sections A.6(b), C.6(b) and D.6(b) shall serve from the date of their election and qualification until their successors have been duly elected and qualified. (ii) Notwithstanding anything to the contrary contained in Sections A.6(b)(i), B.6(b)(i), C.6(b)(i) and D.6(b)(i) hereof, if an Event of Noncompliance is declared in accordance with the Stockholders' Agreement, the Series A, Series B, Series C and Series D Preferred Stockholders, voting together as a separate class, shall have the right to elect all of the members of the Board of Directors of the Corporation. (iii) A vacancy in the directorships to be elected pursuant to Sections A.6(b)(i)-(ii), B.6(b)(i)-(ii), C.6(b)(i)-(ii) and D.6(b)(i)-(ii) hereof (including any vacancy created on account of an increase in the number of directors on the Board of Directors) may be filled only by vote at a meeting called in accordance with the By-laws of the Corporation or written consent in lieu of a meeting in accordance with Sections A.6(b)(i), B.6(b)(i), C.6(b)(i) and D.6(b)(i) hereof or, with respect to a Preferred Director, as provided for in the Stockholders' Agreement. c. Protective Provisions. So long as any Series Preferred Stock is outstanding, the Corporation shall not, without the written consent in lieu of a meeting, or the affirmative vote at a meeting called for such purpose, of the holders of shares representing at least 75% of the combined voting power of the issued and outstanding Series A, Series B, Series C, Series D and Series E Preferred Stock, voting together as a single class: (i) except for "Excluded Stock", authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation, any right, warrant, or option to receive any capital stock, or any security convertible into or exchangeable for capital stock or any capitalized lease with any equity feature with respect to the capital stock of the Corporation; (ii) change as a whole, by subdivision or combination in any manner, the number of shares of the Common Stock then outstanding into a different number of shares, with or without par value, without making the identical change as a whole in the number of shares of Series Preferred Stock then outstanding; (iii) amend, alter or repeal, in any manner whatsoever, the designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions of the Series Preferred Stock; (iv) sell, abandon, transfer, lease or otherwise dispose of all or substantially all of the properties or assets of the Corporation or any of its subsidiaries; (v) declare or pay any dividend (other than as required by Section A.3(d) hereof in respect of the Series A Preferred Stock, by Section B.3(d) hereof in 21. respect of the Series B Preferred Stock and by Section D.3(d) hereof in respect of the Series D Preferred Stock) or make any distribution (whether in cash, shares of capital stock of the Corporation, or other property) on shares of its capital stock other than the Series Preferred Stock; (vi) merge or consolidate with or into, or permit any subsidiary of the Corporation to merge or consolidate with or into, any other corporation, corporations or other entity or entities, or effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering); (vii) voluntarily dissolve, liquidate or wind-up or carry out any partial Liquidation or distribution or transaction in the nature of a partial Liquidation or distribution; (viii) increase the number of shares of any series of Preferred Stock of the Corporation authorized to be issued; (ix) reclassify any shares of the Corporation's capital stock as shares ranking senior to or on parity with the Series Preferred Stock with respect to rights on Liquidation, redemption or for the payment of any dividend or distribution other than in Liquidation; (x) amend, alter or repeal any provision of the Certificate of Incorporation of the Corporation; (xi) amend, alter or repeal any provisions of the By-laws of the Corporation so as to adversely affect the rights of the holders of the Series Preferred Stock; or (xii) directly or indirectly, redeem, purchase or otherwise acquire for value (including through an exchange), or set apart money or other property for any mandatory purchase or other analogous fund for the redemption, purchase or acquisition of, any shares of Common Stock, except (a) pursuant to Sections A.8, B.8, C.8 and D.8 hereof, and (b) pursuant to any agreement approved by the Board of Directors with an officer, director, employee or consultant providing for the repurchase of any capital stock of the Corporation owned by such officer, director, employee or consultant at the option of the Corporation, which is either (A) set forth on Schedule 4.10 of the Series B Stock Purchase Agreement, or (B) issued pursuant to the Option Plan, as amended, the 1997 Equity Incentive Plan, or any other stock option plan of the Corporation or one or more amendments to the Option Plan, from and after May 13, 1996, approved by the Board of Directors and by the holders of 75% of the then issued and outstanding Series Preferred Stock, voting together as a separate class. In any vote or written consent in lieu of a meeting pursuant to this Section B.6(c) and Sections A.6(c), C.6(c), D.6(c) and E.6(c) hereof, each share of issued and outstanding Series Preferred Stock shall entitle the holder thereof to the number of votes per share that equals the number of shares of Common Stock (including fractional shares) into which each such share is then convertible, rounded to the nearest one-tenth of a share. 22. 7. Conversion. a. Right to Convert. (i) Any Series B Preferred Stockholder shall have the right, at any time or from time to time, prior to the Closing Date to convert any or all of its shares of Series B Preferred Stock into that number of fully paid and nonassessable shares of Common Stock for each share of Series B Preferred Stock so converted equal to the quotient of the Series B Preferred Original Purchase Price divided by the Series B Preferred Conversion Price (as last adjusted and then in effect) rounded to the nearest one-tenth of a share. (ii) (a) Any Series B Preferred Stock that remains unconverted on the Closing Date shall be automatically converted without notice and without any action on the part of the holder thereof into shares of Common Stock on the Closing Date in accordance with the preceding sentence. After the Closing Date all rights of holders of shares of Series B Preferred Stock with respect to Series B Preferred Stock, except the right to receive shares of Common Stock in accordance with this Section B.7(a)(ii)(a) and any accrued but unpaid dividends and any declared but unpaid dividends as in accordance with Section B.7(a)(ii)(c) hereof, shall cease and the shares of Series B Preferred Stock shall no longer be deemed to be outstanding, whether or not the Corporation has received the certificates representing such shares. (b) The Corporation shall promptly send by first-class mail, postage prepaid, to each Series B Preferred Stockholder at such holder's address appearing on the Corporation's records a copy of (i) each registration statement filed by the Corporation under the Securities Act and each amendment thereof and each exhibit and schedule thereto and (ii) each order of the Securities and Exchange Commission declaring any such registration statement to be effective. (c) Holders of Series B Preferred Stock converted into shares of Common Stock pursuant to this Section B.7 shall be entitled to payment of any accrued but unpaid cumulative dividend and any declared but unpaid dividends payable with respect to such shares of Series B Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. b. Mechanics of Conversion. (i) Any Series B Preferred Stockholder that exercises its right to convert its shares of Series B Preferred Stock into Common Stock shall deliver the Preferred Certificate, duly endorsed or assigned in blank to the Corporation, during regular business hours, at the office of the transfer agent of the Corporation, if any, at the principal place of business of the Corporation or at such other place as may be designated by the Corporation. (ii) Each Preferred Certificate shall be accompanied by written notice stating that such holder elects to convert such shares and stating the name or names (with address) in which the Common Certificate(s) are to be issued. Such conversion shall be deemed to have been effected on the date when the aforesaid delivery is made. 23. (iii) As promptly as practicable thereafter, the Corporation shall issue and deliver to or upon the written order of such holder, at the place designated by such holder, the Common Certificate(s) for the number of full shares of Common Stock to which such holder is entitled and a cash payment for any fractional interest in a share of Common Stock, as provided in Section B.7(c) hereof, and for any accrued but unpaid cumulative dividends and any declared but unpaid dividends, payable with respect to the converted shares of Series B Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. (iv) The person in whose name each Common Certificate is to be issued shall be deemed to have become a stockholder of record of Common Stock on the Conversion Date or the Closing Date, as the case may be, unless the transfer books of the Corporation are closed on that date, in which event such holder shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open; provided, that the Series B Preferred Conversion Price shall be that in effect on the Conversion Date or the Closing Date, as the case may be. (v) Upon conversion of only a portion of the shares of Series B Preferred Stock covered by a Preferred Certificate, the Corporation, at its own expense, shall issue and deliver to or upon the written order of the holder of such Preferred Certificate, a new certificate representing the number of unconverted shares of Series B Preferred Stock from the Preferred Certificate so surrendered. c. Issuance of Common Stock on Conversion. (i) If a Series B Preferred Stockholder shall surrender more than one Preferred Certificate for conversion at any one time, the number of such shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series B Preferred Stock so surrendered. (ii) No fractional shares of Common Stock shall be issued upon conversion of shares of Series B Preferred Stock. The Corporation shall pay a cash adjustment for such fractional interest in an amount equal to the then Current Market Price of a share of Common Stock multiplied by such fractional interest. d. Conversion Price; Adjustment. The "Series B Preferred Conversion Price" with respect to the Series B Preferred Stock shall initially be equal to the Series B Preferred Original Purchase Price and shall be subject to adjustment from time to time as follows: (i) If the Corporation shall, at any time or from time to time after the Series B Preferred Original Issuance Date, make a Dilutive Issuance, the Series B Preferred Conversion Price in effect immediately prior to each such Dilutive Issuance shall automatically be lowered to a price (calculated to the nearest cent) determined by multiplying the Series B Preferred Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issuance plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation in such Dilutive Issuance so issued would purchase at the Series B Preferred 24. Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of such additional shares of Common Stock so issued in such Dilutive Issuance; provided that, for the purpose of this Section B.7(d)(i), all shares of Common Stock issuable upon exercise or conversion of options or convertible securities outstanding immediately prior to such issuance (other than any additional shares of Common Stock issuable with respect to shares of Series Preferred Stock, convertible securities, or outstanding options, warrants or other rights for the purchase of shares of Common Stock or convertible securities, solely as a result of either (x) the Dilutive Issuance or (y) the adjustment of the Series B Preferred Conversion Price (or other conversion ratios applicable to other Series Preferred Stock and otherwise) resulting from the Dilutive Issuance) shall be deemed to be outstanding. For the purposes of any adjustment of the Series B Preferred Conversion Price pursuant to this Section B.7(d)(i), the following provisions shall be applicable: (a) In the case of the issuance of Common Stock in whole or in part for cash, the consideration shall be deemed to be the amount of cash paid therefor, plus the value of any property other than cash received by the Corporation as provided in Section B.7(d)(i)(b) hereof, less any discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (b) In the case of the issuance of Common Stock for consideration in whole or in part in property or consideration other than cash, the value of such property or consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Corporation, irrespective of any accounting treatment; provided, however, that such fair market value shall not exceed the aggregate Current Market Price of the shares of Common Stock being issued, less any cash consideration paid for such shares. (c) In the case of the issuance of (I) options to purchase or rights to subscribe for Common Stock, (II) securities convertible into or exchangeable for Common Stock or (III) options to purchase or rights to subscribe for such convertible or exchangeable securities: (1) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase, or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections B.7(d)(i)(a) and (b) hereof, if any, received by the Corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (2) the aggregate maximum number of shares of Common Stock deliverable upon conversion of, or in exchange for, any such convertible or exchangeable securities or upon the exercise of options to purchase, or rights to subscribe for, such convertible or exchangeable securities and subsequent conversion or exchange thereof shall 25. be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (determined in the manner provided in Sections B.7(d)(i)(a) and (b) hereof); 3. if there is any decrease in the conversion or exercise price of, or any increase in the number of shares to be received upon exercise, conversion or exchange of any such options, rights or convertible or exchangeable securities (other than a change resulting from the antidilution provisions thereof), the Series B Preferred Conversion Price shall be automatically lowered to reflect such change; and 4. on the expiration of any right or option referred to in Sections B.7(d)(i)(c)(1) or (2) hereof or on the termination of any right to convert or exchange any convertible or exchangeable securities referred to in Section B.7(d)(i)(c)(2) hereof, the Series B Preferred Conversion Price then in effect shall thereupon be readjusted to the Series B Preferred Conversion Price as would have been in effect had the adjustment made upon the granting or issuance of such rights or options or convertible or exchangeable securities been made upon the basis of the issuance or sale of only the number of shares of Common Stock actually issued upon the exercise of such options or rights or upon the conversion or exchange of such convertible or exchangeable securities. (ii) If the Corporation shall at any time after the Series B Preferred Original Issuance Date fix a record date for the subdivision, split-up or stock dividend of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such subdivision, split-up or dividend (or the date of such subdivision, split-up or dividend, if no record date is fixed), the Series B Preferred Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of the Series B Preferred Stock shall be increased in proportion to such increase in outstanding shares. (iii) If, at any time after the Series B Preferred Original Issuance Date, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date fixed for such combination (or the date of such combination, if no record date is fixed), the Series B Preferred Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series B Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (iv) If, at any time after the Series B Preferred Original Issuance Date, an Extraordinary Transaction is consummated, the Series B Preferred Conversion Price with respect to the Series B Preferred Stock outstanding after the Extraordinary Transaction shall be adjusted to provide that the shares of Series B Preferred Stock outstanding immediately prior to the effectiveness of the Extraordinary Transaction shall be convertible into the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from or surviving such Extraordinary Transaction which the holder of the 26. number of shares of Common Stock deliverable (immediately prior to the effectiveness of the Extraordinary Transaction) upon conversion of such Series B Preferred Stock would have been entitled to receive upon such Extraordinary Transaction. The provisions of this Section B.7(d)(iv) shall similarly apply to successive Extraordinary Transactions. (v) All calculations under this Section B.7(d) shall be made to the nearest one-tenth of a cent ($.001) or to the nearest one-tenth of a share, as the case may be. (vi) In any case in which the provisions of this Section B.7(d) shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of that event (A) issuing to the holder of any share of Series B Preferred Stock converted after such record date and before the occurrence of such event the additional shares of capital stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares of capital stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount in cash in lieu of a fractional share of capital stock pursuant to Section B.7(c) hereof; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares, in such case, upon the occurrence of the event requiring such adjustment. e. Notice of Adjustments. (i) Whenever the Series B Preferred Conversion Price shall be adjusted as provided in Section B.7(d) hereof, the Corporation shall file, at its principal office, at the office of the transfer agent for the Series B Preferred Stock, if any, or at such other place as may be designated by the Corporation, a statement, signed by its President and by its Chief Financial Officer, showing in detail the facts requiring such adjustment and the Series B Preferred Conversion Price that shall be in effect after such adjustment. The Corporation shall also cause a copy of such statement to be sent by first-class, certified mail, return receipt requested, postage prepaid, to each Series B Preferred Stockholder at such holder's address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section B.7(e)(ii) hereof. (ii) In the event the Corporation shall propose to file a registration statement under the Securities Act for a Public Offering or to take any action of the types described in clauses (i), (ii), (iii) or (iv) of Section B.7(d) hereof, the Corporation shall give notice to each Series B Preferred Stockholder, in the manner set forth in Section B.7(e)(i) hereof, which shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. The notice shall also set forth such facts as are reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Series B Preferred Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Series B Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten (10) days prior to the date so fixed, and in case of all other action, such notice shall be given at least fifteen (15) days prior to the taking of such proposed action. Failure to give notice under 27. this Section B.7(e)(ii), or any defect therein, shall not affect the legality or validity of any such action. f. Transfer Taxes. The Corporation shall pay all documentary, stamp or other transactional taxes (excluding income taxes) attributable to the issuance or delivery of shares of capital stock of the Corporation upon conversion of any shares of Series B Preferred Stock; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Series B Preferred Stock in respect of which such shares are being issued. g. Reservation of Common Stock. The Corporation shall at all times reserve, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series B Preferred Stock, sufficient shares of Common Stock to provide for the conversion of all outstanding shares of Series B Preferred Stock. h. Status of Common Stock. All shares of Common Stock which may be issued in connection with the conversion provisions set forth herein will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable, free from preemptive rights and free from all taxes, liens or charges with respect thereto created or imposed by the Corporation. 8. Redemption. a. On and after the Series B Preferred Fifth Anniversary Date or at any time if an Event of Noncompliance is declared in accordance with the Stockholders' Agreement, at the written request of the holders of shares representing not less than 75% of the combined voting power of the Series A, Series B, Series C and Series D Preferred Stock then outstanding, voting together as a single class, made, from time to time, at any date on or after the Series B Preferred Fifth Anniversary Date or upon the declaration of an Event of Noncompliance, the Corporation shall redeem (unless otherwise prevented by law) all of the shares of Series A, Series B and Series D Preferred Stock, at a redemption price per share for each such series of Series Preferred Stock equal to (i) the Series A Preferred Original Purchase Price, Series B Preferred Original Purchase Price or Series D Preferred Original Purchase Price, as applicable, plus (ii) an amount equal to any accrued but unpaid cumulative dividends thereon and any declared but unpaid dividends thereof, and, then, all of the shares of Series C Preferred Stock, at a redemption price per share for such Series C Preferred Stock equal to (i) the Series C Preferred Original Purchase Price plus (ii) an amount equal to any accrued but unpaid dividends thereon and any declared but unpaid dividends thereon. For purposes of determining whether the requisite 75% of the holders of Series A, Series B, Series C and Series D Preferred Stock are participating in the Redemption Notice, each share of issued and outstanding Series A, Series B, Series C and Series D Preferred Stock shall entitle the holder thereof to one vote per share for each share of Common Stock (including fractional shares) into which each share of Series A, Series B, Series C and Series D Preferred Stock is then convertible, rounded to the nearest one-tenth of a share. 28. b. On and after the Redemption Date, all rights of any Series B Preferred Stockholder with respect to the shares of Series B Preferred Stock redeemed on that Redemption Date, except the right to receive the Redemption Payment as provided herein, shall cease, and such shares shall no longer be deemed to be outstanding, whether or not the Corporation has received the certificates representing such shares, on the condition that the Corporation pays the Redemption Payment, or irrevocably deposits or sets aside cash in an amount equal to the Redemption Payment; provided, however, that if the Corporation defaults in the payment of the Redemption Payment, the rights of the holder with respect to such shares of Series B Preferred Stock shall continue until the Corporation cures such default. c. The Requesting Holders shall send their Redemption Notice pursuant to this Section B.8 by first-class, certified mail, return receipt requested, postage prepaid, to the Corporation at its principal place of business or to any transfer agent of the Corporation. The Corporation shall fix a date for redemption which shall not be more than 60 days after the receipt of Redemption Notices from the Requesting Holders. Not less than 45 days prior to the Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A, Series B, Series C and Series D Preferred Stock, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice, notifying such holder of the redemption to be effected, the Redemption Date fixed, the Redemption Payment, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, such holder's certificate or certificates representing the shares to be redeemed. In the event of only a partial redemption of the outstanding shares of the Series A, Series B and Series D Preferred Stock entitled to redemption for any reason, the redemption of the Series A, Series B and Series D Preferred Stock shall be pro rata based upon the total amount that would be paid by the Corporation to each Series A, Series B and Series C Preferred Stockholder if all of the Series A, Series B and Series C Preferred Stock were fully redeemed pursuant to Sections A.8(a), B.8(a) and D.8(a) hereof. At any time on or after the Redemption Date, the holders of the Series B Preferred Stock shall be entitled to receive the Redemption Payment for each of the shares of Series B Preferred Stock held by such holder which are to be redeemed by the Corporation upon actual delivery to the Corporation or its transfer agent of the certificate(s) representing the shares to be redeemed. Upon redemption of only a portion of the number of shares covered by a Series B Preferred Stock certificate, the Corporation shall issue and deliver to or upon the written order of the holder of such Series B Preferred Stock certificate, at the expense of the Corporation, a new certificate covering the number of shares of Series B Preferred Stock being redeemed representing the unredeemed portion of the Series B Preferred Stock certificate, which new certificate shall entitle the holder thereof to all the rights, powers and privileges of a holder of such shares. d. Notwithstanding anything to the contrary contained in this Section B.8, the Corporation shall not be obligated to acquire any shares on any Redemption Date to the extent that the acquisition thereof would violate any law, statute, rule, regulation, policy or guideline promulgated by any federal, state, local or foreign governmental authority applicable to the Corporation, provided that the Corporation shall use all legally permissible methods in the reduction of capital and revaluation of assets, including appraisal, in order to obtain a legal 29. source of funds with which to pay the Redemption Payment and shall acquire such shares as soon as permitted by applicable laws, statutes, rules, regulations, policies and guidelines. 9. Miscellaneous. a. Shares of Series B Preferred Stock are not subject to or entitled to the benefit of a sinking fund. b. Redeemed shares of Series B Preferred Stock shall not be reissued but shall be retired. Upon the retirement of redeemed shares the capital of the Corporation shall be reduced. c. The shares of the Series B Preferred Stock shall not have any preferences, voting powers or relative, participating, optional, preemptive or other special rights except as set forth above in this Seventh Restated Certificate of Incorporation of the Corporation. PART C. Series C Convertible Preferred Stock. 1. Terms. The number of shares, powers, terms, conditions, designations, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions, if any, of the Series C Preferred Stock shall be as set forth herein. 2. Ranking. The Corporation's Series C Preferred Stock shall rank, as to dividends and upon redemption and Liquidation, (x) junior to the Series A, Series B and Series D Preferred Stock (but, with respect to Liquidation, only to the extent provided in Sections A.4, B.4, C.4, D.4 and E.4 hereof and with respect to redemption, only to the extent provided in Sections A.8, B.8, C.8 and D.8 hereof), (y) pari passu with the Series E Preferred Stock and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation. The Series C Preferred Stock shall have the following designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions: 3. Dividends. a. Dividends are payable on the Series C Preferred Stock, when, as and if declared by the Board of Directors. Whenever any dividend or other distribution is declared on any shares of Series C Preferred Stock, the Board of Directors shall simultaneously declare a dividend or distribution at the same percentage rate and in the same form on each other outstanding share of Series C and each outstanding share of Series E Preferred Stock, so that all outstanding shares of Series C and Series E Preferred Stock will participate equally with each other ratably per share. b. So long as any Series C Preferred Stock is outstanding the Corporation shall not declare or pay any dividend or make any distribution (whether in cash, shares of capital stock of the Corporation or other property) on shares of its Common Stock or any other class or series of stock ranking pari passu with or junior to the Series C Preferred Stock, unless prior thereto or simultaneously therewith all dividends and distributions previously 30. declared on the Series C Preferred Stock shall have been paid or the Corporation shall have irrevocably deposited or set aside cash or United States Obligations sufficient for the payment thereof. c. If the Board of Directors declares dividends or other distributions (other than (i) on Liquidation, (ii) on the Series A Preferred Stock pursuant to Section A.3(d) hereof, (iii) on the Series B Preferred Stock pursuant to Section B.3(d) hereof, or (iv) on the Series D Preferred Stock pursuant to Section D.3(d) hereof) on the Common Stock or any other class or series of stock ranking pari passu with or junior to the Series C Preferred Stock in cash, property or securities (excluding Common Stock) of the Corporation (or subscription or other rights to purchase or acquire securities (excluding Common Stock) of the Corporation), the Board of Directors shall simultaneously declare a dividend or distribution on the same terms, at the same or equivalent rate, and in the same form on each share of Series C Preferred Stock, so that all outstanding shares of Series C Preferred Stock will participate ratably with the Common Stock and each other class or series of stock ranking pari passu with or junior to the Series C Preferred Stock in such dividend or distribution. For purposes of determining its proportional share of the dividend or distribution, each share of the Series C Preferred Stock and any other applicable class or series of convertible securities shall be deemed to be that number of shares of Common Stock into which such share is then convertible, rounded to the nearest one-tenth of a share. 4. Rights on Liquidation, Dissolution, Winding-Up. a. With respect to rights on Liquidation, the Series C Preferred Stock shall rank (x) junior to the Series A, Series B and Series D Preferred Stock (but only to the extent provided in this Section C.4), (y) pari passu with the Series E Preferred Stock and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation. b. Subject to the holders of Series A Preferred Stock set forth in Section A.4 hereof, the holders of Series B Preferred Stock set forth in Section B.4 hereof and the holders of Series D Preferred Stock set forth in Section D.4 hereof, in the event of any Liquidation, whether voluntary or involuntary, before any payment of cash or distribution of other property shall be made to the Common Stockholders or any other class or series of stock ranking on Liquidation junior to the Series C Preferred Stock, the holders of Series C Preferred Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution to its stockholders, pari passu with the rights of the Series E Stockholders, an amount per share equal to the Series C Preferred Liquidation Preference divided by the number of outstanding shares of Series C Preferred Stock whether from capital, surplus or earnings, plus an amount equal to any accrued but unpaid cumulative dividends thereon and any declared but unpaid dividends thereon. c. If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series C Preferred Stockholders the full amounts to which each of them shall be entitled pursuant to Section C.4(b) hereof and to pay the Series E Preferred Stockholders the full amount to which each of them shall be entitled pursuant to Section E.4(b) hereof, then the Series C and Series E Preferred Stockholders shall share ratably in any distribution of assets according to the respective amounts which would be 31. payable to them in respect of the shares of Series C or Series E Preferred Stock, as the case may be, held upon such distribution if all amounts payable on or with respect to such shares were paid in full pursuant to Sections C.4(b) and E.4(b) hereof. d. In the event of any Liquidation, the Series C Preferred Stock shall not be entitled to receive any payment of cash or distribution of property other than as expressly provided in this Section C.4. 5. Merger, Consolidation, etc. a. In the event the Corporation intends to sell, lease or otherwise dispose of all or substantially all of the assets of the Corporation, effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering), or merge or consolidate with or into any other corporation, corporations or other entity or entities (other than a merger or consolidation in which the Series Preferred Stockholders receive securities of the surviving corporation having substantially similar rights to the Series Preferred Stock and in which the stockholders of the Corporation immediately prior to such a transaction are holders of at least a majority of the voting securities of the surviving corporation immediately thereafter), then the Corporation shall give written notice to each Series Preferred Stockholder no less than 20 days prior to the closing of any such transaction notifying the Series Preferred Stockholders of the terms and timing of the closing of such transaction and of the rights of the Series Preferred Stockholders under Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof. b. Upon the affirmative vote of the holders of not less than 75% in voting power of all of the shares of Series Preferred Stock then outstanding, voting together as a separate class, made prior to the consummation of such transaction, the proceeds of or any property deliverable from such transaction shall be distributed among the holders of the Series Preferred Stock and the Common Stock according to the provisions of Sections A.4, B.4, C.4, D.4 and E.4 hereof as if such transaction were a Liquidation. c. The voting rights of the holders of Series Preferred Stock contained in Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof may be exercised at a special meeting of the holders of Series Preferred Stockholders called as provided in accordance with the By-laws of the Corporation or by written consent of the holders of Series Preferred Stock in lieu of a meeting. 6. Voting. a. General. In addition to the rights otherwise provided for herein or by law, the Series C Preferred Stockholders shall be entitled to vote, together with the Series A Preferred Stockholders, the Series B Preferred Stockholders, the Series D Preferred Stockholders, the Series E Preferred Stockholders and the Common Stockholders and any other class or series of stock then entitled to vote, as one class on all matters as to which Common Stockholders shall be entitled to vote, in the same manner and with the same effect as the Common Stockholders, except as otherwise required by the General Corporation Law. In any such vote, and in any vote or action of the Series C Preferred Stockholders voting together as a 32. separate class or with the other holders of Series Preferred Stock as a separate class, each share of issued and outstanding Series C Preferred Stock shall entitle the holder thereof to one vote per share for each share of Common Stock (including fractional shares) into which each share of Series C Preferred Stock is then convertible, rounded to the nearest one-tenth of a share. b. Election of Board of Directors. (i) In addition to the rights specified in Sections A.6(a), B.6(a), C.6(a) and D.6(a) hereof, the holders of a majority in voting power of the Series A, Series B, Series C and Series D Preferred Stock, voting together as a separate class or in such other manner as the holders of the Series A, Series B, Series C and Series D Preferred Stock shall agree among themselves in the Stockholders' Agreement, shall have the exclusive right to elect to the Board of Directors of the Corporation that number of directors which shall be equal to a majority of the total number of directors on the Board of Directors at any given time. In any election of Preferred Directors pursuant to this Section C.6(b) and Sections A.6(b), B.6(b) and D.6(b), each share of issued and outstanding Series A, Series B, Series C and Series D Preferred Stock shall entitle the holder thereof to the number of votes per share that equals the number of shares of Common Stock (including fractional shares) into which each such share is then convertible, rounded up to the nearest one-tenth of a share. The voting rights of the Series A, Series B, Series C and Series D Preferred Stockholders contained in this Section C.6(b) and Sections A.6(b), B.6(b) and D.6(b) may be exercised at a special meeting of the Series Preferred Stockholders called as provided in accordance with the By-laws of the Corporation, at any annual or special meeting of the Stockholders of the Corporation, or by written consent of the holders of Series Preferred Stock in lieu of a meeting. The Preferred Directors elected pursuant to this Section C.6(b) and Sections A.6(b), B.6(b) and D.6(b) shall serve from the date of their election and qualification until their successors have been duly elected and qualified. (ii) Notwithstanding anything to the contrary contained in Sections A.6(b)(i), B.6(b)(i), C.6(b)(i) and D.6(b)(i) hereof, if an Event of Noncompliance is declared in accordance with the Stockholders' Agreement, the Series A, Series B, Series C and Series D Preferred Stockholders, voting together as a separate class, shall have the right to elect all of the members of the Board of Directors of the Corporation. (iii) A vacancy in the directorships to be elected pursuant to Sections A.6(b)(i)-(ii), B.6(b)(i)-(ii), C.6(b)(i)-(ii) and D.6(b)(i)-(ii) hereof (including any vacancy created on account of an increase in the number of directors on the Board of Directors) may be filled only by vote at a meeting called in accordance with the By-laws of the Corporation or written consent in lieu of a meeting in accordance with Sections A.6(b)(i), B.6(b)(i), C.6(b)(i) and D.6(b)(i) hereof or, with respect to a Preferred Director, as provided for in the Stockholders' Agreement. c. Protective Provisions. So long as any Series Preferred Stock is outstanding, the Corporation shall not, without the written consent in lieu of a meeting, or the affirmative vote at a meeting called for such purpose, of the holders of shares representing at least 75% of the combined voting power of the issued and outstanding Series A, Series B, Series C, Series D and Series E Preferred Stock, voting together as a single class: 33. (i) except for "Excluded Stock", authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation, any right, warrant, or option to receive any capital stock, or any security convertible into or exchangeable for capital stock or any capitalized lease with any equity feature with respect to the capital stock of the Corporation; (ii) change as a whole, by subdivision or combination in any manner, the number of shares of the Common Stock then outstanding into a different number of shares, with or without par value, without making the identical change as a whole in the number of shares of Series Preferred Stock then outstanding; (iii) amend, alter or repeal, in any manner whatsoever, the designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions of the Series Preferred Stock; (iv) sell, abandon, transfer, lease or otherwise dispose of all or substantially all of the properties or assets of the Corporation or any of its subsidiaries; (v) declare or pay any dividend (other than as required by Section A.3(d) hereof in respect of the Series A Preferred Stock, by Section B.3(d) hereof in respect of the Series B Preferred Stock and by Section D.3(d) hereof in respect of the Series D Preferred Stock) or make any distribution (whether in cash, shares of capital stock of the Corporation, or other property) on shares of its capital stock other than the Series Preferred Stock; (vi) merge or consolidate with or into, or permit any subsidiary of the Corporation to merge or consolidate with or into, any other corporation, corporations or other entity or entities, or effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering); (vii) voluntarily dissolve, liquidate or wind-up or carry out any partial Liquidation or distribution or transaction in the nature of a partial Liquidation or distribution; (viii) increase the number of shares of any series of Preferred Stock of the Corporation authorized to be issued; (ix) reclassify any shares of the Corporation's capital stock as shares ranking senior to or on parity with the Series Preferred Stock with respect to rights on Liquidation, redemption or for the payment of any dividend or distribution other than in Liquidation; (x) amend, alter or repeal any provision of the Certificate of Incorporation of the Corporation; (xi) amend, alter or repeal any provisions of the By-laws of the Corporation so as to adversely affect the rights of the holders of the Series Preferred Stock; or 34. (xii) directly or indirectly, redeem, purchase or otherwise acquire for value (including through an exchange), or set apart money or other property for any mandatory purchase or other analogous fund for the redemption, purchase or acquisition of, any shares of Common Stock, except (a) pursuant to Sections A.8, B.8, C.8 and D.8 hereof, and (b) pursuant to any agreement approved by the Board of Directors with an officer, director, employee or consultant providing for the repurchase of any capital stock of the Corporation owned by such officer, director, employee or consultant at the option of the Corporation, which is either (A) set forth on Schedule 4.10 of the Series B Stock Purchase Agreement, or (B) issued pursuant to the Option Plan, as amended prior to May 13, 1996, the 1997 Equity Incentive Plan, or any other stock option plan of the Corporation or one or more amendments to the Option Plan, from and after May 13, 1996, approved by the Board of Directors and by the holders of 75% of the then issued and outstanding Series Preferred Stock, voting together as a separate class. In any vote or written consent in lieu of a meeting pursuant to this Section C.6(c) and Sections A.6(c), B.6(c), D.6(c) and E.6(c) hereof, each share of issued and outstanding Series Preferred Stock shall entitle the holder thereof to the number of votes per share that equals the number of shares of Common Stock (including fractional shares) into which each such share is then convertible, rounded to the nearest one-tenth of a share. 7. Conversion. a. Right to Convert. (i) Any Series C Preferred Stockholder shall have the right, at any time or from time to time, prior to the Closing Date to convert any or all of its shares of Series C Preferred Stock into that number of fully paid and nonassessable shares of Common Stock for each share of Series C Preferred Stock so converted equal to the quotient of the Series C Preferred Original Purchase Price divided by the Series C Preferred Conversion Price (as last adjusted and then in effect) rounded to the nearest one-tenth of a share. (ii) (a) Any Series C Preferred Stock that remains unconverted on the Closing Date shall be automatically converted without notice and without any action on the part of the holder thereof into shares of Common Stock on the Closing Date in accordance with the preceding sentence. After the Closing Date all rights of holders of shares of Series C Preferred Stock with respect to Series C Preferred Stock, except the right to receive shares of Common Stock in accordance with this Section C.7(a)(ii)(a) and any accrued but unpaid dividends and any declared but unpaid dividends as in accordance with Section C.7(a)(ii)(c) hereof, shall cease and the shares of Series C Preferred Stock shall no longer be deemed to be outstanding, whether or not the Corporation has received the certificates representing such shares. (b) The Corporation shall promptly send by first-class mail, postage prepaid, to each Series C Preferred Stockholder at such holder's address appearing on the Corporation's records a copy of (i) each registration statement filed by the Corporation under the Securities Act and each amendment thereof and each exhibit and schedule thereto and (ii) each order of the Securities and Exchange Commission declaring any such registration statement to be effective. 35. (c) Holders of Series C Preferred Stock converted into shares of Common Stock pursuant to this Section C.7 shall be entitled to payment of any accrued but unpaid cumulative dividend and any declared but unpaid dividends payable with respect to such shares of Series C Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. b. Mechanics of Conversion. (i) Any Series C Preferred Stockholder that exercises its right to convert its shares of Series C Preferred Stock into Common Stock shall deliver the Preferred Certificate, duly endorsed or assigned in blank to the Corporation, during regular business hours, at the office of the transfer agent of the Corporation, if any, at the principal place of business of the Corporation or at such other place as may be designated by the Corporation. (ii) Each Preferred Certificate shall be accompanied by written notice stating that such holder elects to convert such shares and stating the name or names (with address) in which the Common Certificate(s) are to be issued. Such conversion shall be deemed to have been effected on the date when the aforesaid delivery is made. (iii) As promptly as practicable thereafter, the Corporation shall issue and deliver to or upon the written order of such holder, at the place designated by such holder, the Common Certificate(s) for the number of full shares of Common Stock to which such holder is entitled and a cash payment for any fractional interest in a share of Common Stock, as provided in Section C.7(c) hereof, and for any accrued but unpaid cumulative dividends and any declared but unpaid dividends, payable with respect to the converted shares of Series C Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. (iv) The person in whose name each Common Certificate is to be issued shall be deemed to have become a stockholder of record of Common Stock on the Conversion Date or the Closing Date, as the case may be, unless the transfer books of the Corporation are closed on that date, in which event such holder shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open; provided, that the Series C Preferred Conversion Price shall be that in effect on the Conversion Date or the Closing Date, as the case may be. (v) Upon conversion of only a portion of the shares of Series C Preferred Stock covered by a Preferred Certificate, the Corporation, at its own expense, shall issue and deliver to or upon the written order of the holder of such Preferred Certificate, a new certificate representing the number of unconverted shares of Series C Preferred Stock from the Preferred Certificate so surrendered. c. Issuance of Common Stock on Conversion. (i) If a Series C Preferred Stockholder shall surrender more than one Preferred Certificate for conversion at any one time, the number of such shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series C Preferred Stock so surrendered. 36. (ii) No fractional shares of Common Stock shall be issued upon conversion of shares of Series C Preferred Stock. The Corporation shall pay a cash adjustment for such fractional interest in an amount equal to the then Current Market Price of a share of Common Stock multiplied by such fractional interest. (d) Conversion Price; Adjustment. The "Series C Preferred Conversion Price" with respect to the Series C Preferred Stock shall initially be equal to the Series C Preferred Original Purchase Price and shall be subject to adjustment from time to time as follows: (i) If the Corporation shall at any time after the Series C Preferred Original Issuance Date fix a record date for the subdivision, split- up or stock dividend of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such subdivision, split-up or dividend (or the date of such subdivision, split-up or dividend, if no record date is fixed), the Series C Preferred Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of the Series C Preferred Stock shall be increased in proportion to such increase in outstanding shares. (ii) If, at any time after the Series C Preferred Original Issuance Date, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date fixed for such combination (or the date of such combination, if no record date is fixed), the Series C Preferred Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series C Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (iii) If, at any time after the Series C Preferred Original Issuance Date, an Extraordinary Transaction is consummated, the Series C Preferred Conversion Price with respect to the Series C Preferred Stock outstanding after the Extraordinary Transaction shall be adjusted to provide that the shares of Series C Preferred Stock outstanding immediately prior to the effectiveness of the Extraordinary Transaction shall be convertible into the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from or surviving such Extraordinary Transaction which the holder of the number of shares of Common Stock deliverable (immediately prior to the effectiveness of the Extraordinary Transaction) upon conversion of such Series C Preferred Stock would have been entitled to receive upon such Extraordinary Transaction. The provisions of this Section C.7(d)(iii) shall similarly apply to successive Extraordinary Transactions. (iv) All calculations under this Section C.7(d) shall be made to the nearest one-tenth of a cent ($.001) or to the nearest one-tenth of a share, as the case may be. (v) In any case in which the provisions of this Section C.7(d) shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of that event (A) issuing to the holder of any share of Series C Preferred Stock converted after such record date and before the occurrence of such event the additional shares of capital stock issuable upon such conversion by reason of 37. the adjustment required by such event over and above the shares of capital stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount in cash in lieu of a fractional share of capital stock pursuant to Section C.7(c) hereof; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares, in such case, upon the occurrence of the event requiring such adjustment. e. Notice of Adjustments. (i) Whenever the Series C Preferred Conversion Price shall be adjusted as provided in Section C.7(d) hereof, the Corporation shall file, at its principal office, at the office of the transfer agent for the Series C Preferred Stock, if any, or at such other place as may be designated by the Corporation, a statement, signed by its President and by its Chief Financial Officer, showing in detail the facts requiring such adjustment and the Series C Preferred Conversion Price that shall be in effect after such adjustment. The Corporation shall also cause a copy of such statement to be sent by first-class, certified mail, return receipt requested, postage prepaid, to each Series C Preferred Stockholder at such holder's address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section C.7(e)(ii) hereof. (ii) In the event the Corporation shall propose to file a registration statement under the Securities Act for a Public Offering or to take any action of the types described in clauses (i), (ii) or (iii) of Section C.7(d) hereof, the Corporation shall give notice to each Series C Preferred Stockholder, in the manner set forth in Section C.7(e)(i) hereof, which shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. The notice shall also set forth such facts as are reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Series C Preferred Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Series C Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten (10) days prior to the date so fixed, and in case of all other action, such notice shall be given at least fifteen (15) days prior to the taking of such proposed action. Failure to give notice under this Section C.7(e)(ii), or any defect therein, shall not affect the legality or validity of any such action. f. Transfer Taxes. The Corporation shall pay all documentary, stamp or other transactional taxes (excluding income taxes) attributable to the issuance or delivery of shares of capital stock of the Corporation upon conversion of any shares of Series C Preferred Stock; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Series C Preferred Stock in respect of which such shares are being issued. g. Reservation of Common Stock. The Corporation shall at all times reserve, free from preemptive rights, out of its authorized but unissued shares of Common 38. Stock, solely for the purpose of effecting the conversion of the shares of Series C Preferred Stock, sufficient shares of Common Stock to provide for the conversion of all outstanding shares of Series C Preferred Stock. h. Status of Common Stock. All shares of Common Stock which may be issued in connection with the conversion provisions set forth herein will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable, free from preemptive rights and free from all taxes, liens or charges with respect thereto created or imposed by the Corporation. 8. Redemption. a. On and after the Series B Preferred Fifth Anniversary Date or at any time if an Event of Noncompliance is declared in accordance with the Stockholders' Agreement, at the written request of the holders of shares representing not less than 75% of the combined voting power of the Series A, Series B, Series C and Series D Preferred Stock then outstanding, voting together as a single class, made, from time to time, at any date on or after the Series B Preferred Fifth Anniversary Date or upon the declaration of an Event of Noncompliance, the Corporation shall redeem (unless otherwise prevented by law) all of the shares of Series A, Series B and Series D Preferred Stock, at a redemption price per share for each such series of Series Preferred Stock equal to (i) the Series A Preferred Original Purchase Price, Series B Preferred Original Purchase Price or the Series D Preferred Original Purchase Price, as applicable, plus (ii) an amount equal to any accrued but unpaid cumulative dividends thereon and any declared but unpaid dividends thereof, and, then, all of the shares of Series C Preferred Stock, at a redemption price per share for such Series C Preferred Stock equal to (i) the Series C Preferred Original Purchase Price plus (ii) an amount equal to any accrued but unpaid dividends thereon and any declared but unpaid dividends thereon. For purposes of determining whether the requisite 75% of the holders of Series A, Series B, Series C and Series D Preferred Stock are participating in the Redemption Notice, each share of issued and outstanding Series A, Series B, Series C and Series D Preferred Stock shall entitle the holder thereof to one vote per share for each share of Common Stock (including fractional shares) into which each share of Series A, Series B, Series C and Series D Preferred Stock is then convertible, rounded to the nearest one-tenth of a share. b. On and after the Redemption Date, all rights of any Series C Preferred Stockholder with respect to the shares of Series C Preferred Stock redeemed on that Redemption Date, except the right to receive the Redemption Payment as provided herein, shall cease, and such shares shall no longer be deemed to be outstanding, whether or not the Corporation has received the certificates representing such shares, on the condition that the Corporation pays the Redemption Payment, or irrevocably deposits or sets aside cash in an amount equal to the Redemption Payment; provided, however, that if the Corporation defaults in the payment of the Redemption Payment, the rights of the holder with respect to such shares of Series C Preferred Stock shall continue until the Corporation cures such default. c. The Requesting Holders shall send their Redemption Notice pursuant to this Section C.8 by first-class, certified mail, return receipt requested, postage prepaid, to the Corporation at its principal place of business or to any transfer agent of the 39. Corporation. The Corporation shall fix a date for redemption which shall not be more than 60 days after the receipt of Redemption Notices from the Requesting Holders. Not less than 45 days prior to the Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A, Series B, Series C and Series D Preferred Stock, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice, notifying such holder of the redemption to be effected, the Redemption Date fixed, the Redemption Payment, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, such holder's certificate or certificates representing the shares to be redeemed. In the event of only a partial redemption of the outstanding shares of the Series C Preferred Stock entitled to redemption for any reason, the redemption of the Series C Preferred Stock shall be pro rata based upon the total amount that would be paid by the Corporation to each Series C Preferred Stockholder if all of the shares of the Series C Preferred Stock were fully redeemed pursuant to Section C.8(a) hereof. At any time on or after the Redemption Date, the holders of the Series C Preferred Stock shall be entitled to receive the Redemption Payment for each of the shares of Series C Preferred Stock held by such holder which are to be redeemed by the Corporation upon actual delivery to the Corporation or its transfer agent of the certificate(s) representing the shares to be redeemed. Upon redemption of only a portion of the number of shares covered by a Series C Preferred Stock certificate, the Corporation shall issue and deliver to or upon the written order of the holder of such Series C Preferred Stock certificate, at the expense of the Corporation, a new certificate covering the number of shares of Series C Preferred Stock being redeemed representing the unredeemed portion of the Series C Preferred Stock certificate, which new certificate shall entitle the holder thereof to all the rights, powers and privileges of a holder of such shares. d. Notwithstanding anything to the contrary contained in this Section C.8, the Corporation shall not be obligated to acquire any shares on any Redemption Date to the extent that the acquisition thereof would violate any law, statute, rule, regulation, policy or guideline promulgated by any federal, state, local or foreign governmental authority applicable to the Corporation, provided that the Corporation shall use all legally permissible methods in the reduction of capital and revaluation of assets, including appraisal, in order to obtain a legal source of funds with which to pay the Redemption Payment and shall acquire such shares as soon as permitted by applicable laws, statutes, rules, regulations, policies and guidelines. 9. Miscellaneous. a. Shares of Series C Preferred Stock are not subject to or entitled to the benefit of a sinking fund. b. Redeemed shares of Series C Preferred Stock shall not be reissued but shall be retired. Upon the retirement of redeemed shares the capital of the Corporation shall be reduced. 40. c. The shares of the Series C Preferred Stock shall not have any preferences, voting powers or relative, participating, optional, preemptive or other special rights except as set forth above in this Seventh Restated Certificate of Incorporation of the Corporation. D. Series D Convertible Preferred Stock. 1. Terms. The number of shares, powers, terms, conditions, designations, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions, if any, of the Series D Preferred Stock shall be as set forth herein. 2. Ranking. The Corporation's Series D Preferred Stock shall rank, as to dividends and upon redemption and Liquidation, (x) pari passu with the Series A and Series B Preferred Stock, (y) senior and prior to the Series C Preferred Stock and Series E Preferred Stock (but, with respect to Liquidation, only to the extent provided in Section D.4 hereof and with respect to redemption, only to the extent provided in Section D.8 hereof), and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation, except in the case of a change in the relative ranking of the Series A Preferred Stock, the Series B Preferred Stock and the Series D Preferred Stock, as otherwise approved by the affirmative vote or consent of the holders of 75% of the issued and outstanding shares of Series A, Series B and Series D Preferred Stock voting together. The Series D Preferred Stock shall have the following designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions: 3. Dividends. a. Dividends are payable on the Series D Preferred Stock, when, as and if declared by the Board of Directors. Whenever any dividend or other distribution is declared on any shares of Series D Preferred Stock, the Board of Directors shall simultaneously declare a dividend or distribution at the same percentage rate and in the same form on each other outstanding share of Series D Preferred Stock and each outstanding share of Series A and Series B Preferred Stock, so that all outstanding shares of Series A, Series B and Series D Preferred Stock will participate equally with each other ratably per share. b. So long as any Series D Preferred Stock is outstanding the Corporation shall not declare or pay any dividend or make any distribution (whether in cash, shares of capital stock of the Corporation or other property) on shares of its Common Stock or any other class or series of stock ranking pari passu with or junior to the Series D Preferred Stock, unless prior thereto or simultaneously therewith (A) all dividends and distributions previously declared on the Series D Preferred Stock and (B) any cumulative dividends in accordance with Section D.3(d) hereof shall have been paid or the Corporation shall have irrevocably deposited or set aside cash or United States Obligations sufficient for the payment thereof. c. If the Board of Directors declares dividends or other distributions (other than on Liquidation) on the Common Stock or any other class or series of stock ranking pari passu with or junior to the Series D Preferred Stock in cash, property or securities 41. excluding Common Stock) of the Corporation (or subscription or other rights to purchase or acquire securities (excluding Common Stock) of the Corporation), the Board of Directors shall simultaneously declare a dividend or distribution on the same terms, at the same or equivalent rate, and in the same form on each share of Series D Preferred Stock, so that all outstanding shares of Series D Preferred Stock will participate ratably with the shares of Common Stock and the shares of each other class or series of stock ranking pari passu with or junior to the Series D Preferred Stock in such dividend or distribution. For purposes of determining its proportional share of the dividend or distribution, each share of the Series D Preferred Stock and any other applicable class or series of convertible securities shall be deemed to be that number of shares of Common Stock into which such share is then convertible, rounded to the nearest one- tenth of a share. d. From and after the Series A Preferred Fifth Anniversary Date and until the date of the consummation of the Corporation's first Public Offering, the Series D Preferred Stock will be entitled, pari passu with the Series A and Series B Preferred Stock, to dividends, to be paid quarterly, in cash or in kind at the discretion of the Board of Directors, at an annual rate of five percent (5%) of the Series D Preferred Original Purchase Price (or such greater amount of dividends as such Series D Preferred Stock would be entitled to if such Series D Preferred Stock were converted into Common Stock), as adjusted for any combinations or divisions or similar recapitalizations affecting the Series D Preferred Stock after the Series D Preferred Original Issuance Date, payable on the first day of January, April, July and October (and any dividends payable to holders of Series D Preferred Stock which are not paid shall be cumulative). Upon conversion of any Series D Preferred Stock, all accrued but unpaid cumulative dividends and any declared but unpaid dividends shall be paid in cash, or in additional shares of Common Stock at the Series D Preferred Conversion Price then in effect in the discretion of the Board of Directors. Nothing in this Section D.3(d) shall be deemed to limit the rights of the Series D Preferred Stock under Sections D.3(b) and D.3(c) hereof. 4. Rights on Liquidation, Dissolution, Winding-Up. a. With respect to rights on Liquidation, the Series D Preferred Stock shall rank (x) pari passu with the Series A and Series B Preferred Stock, (y) senior and prior to the Series C Preferred Stock and Series E Preferred Stock (but only to the extent provided in this Section D.4) and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation, except in the case of a change in the relative ranking upon Liquidation of the Series A, Series B and Series D Preferred Stock, as otherwise approved by the affirmative vote or consent of the holders of 75% of the issued and outstanding shares of Series A, Series B and Series D Preferred Stock voting together. b. In the event of any Liquidation, whether voluntary or involuntary, before any payment of cash or distribution of other property shall be made to the Series C Preferred Stockholders, Series E Preferred Stockholders or the Common Stockholders or any other class or series of stock ranking on Liquidation junior to the Series D Preferred Stock, the holders of Series D Preferred Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution to its stockholders, pari passu with the rights of the Series A and Series B Preferred Stockholders, an amount per share equal to the Series D Preferred Original Purchase Price whether from capital, surplus or earnings, plus an amount 42. equal to any accrued but unpaid cumulative dividends thereon and any declared but unpaid dividends thereon. c. If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series D Preferred Stockholders the full amounts to which each of them shall be entitled pursuant to Section D.4(b) hereof and to pay to the Series A and Series B Preferred Stockholders the full amount to which each of them shall be entitled pursuant to Sections A.4(b) and B.4(b) hereof, then the Series A, Series B and Series D Preferred Stockholders shall share ratably in any distribution of assets according to the respective amounts which would be payable to them in respect of the shares of Series A, Series B or Series D Preferred Stock, as the case may be, held upon such distribution if all amounts payable on or with respect to such shares were paid in full pursuant to Sections A.4(b), B.4(b) and D.4(b) hereof. d. In the event of any Liquidation, after payment shall have been made to (i) the Series A, Series B and Series D Preferred Stockholders of the full amount to which they shall be entitled pursuant to Sections A.4(b), B.4(b) and D.4(b) hereof, respectively, and (ii) the Series C and Series E Preferred Stockholders of the full amount to which they shall be entitled pursuant to Section C.4(b) and E.4(b) hereof, respectively, with respect to each other class or series of capital stock (other than the Series C Preferred Stock, Series E Preferred Stock and the Common Stock) ranking on Liquidation junior to such Series D Preferred Stock (in descending order of seniority), the Series A, Series B and Series D Preferred Stockholders, as a class, shall be entitled to receive an amount equal (and in like kind) to the aggregate preferential amount fixed for each such junior class or series of capital stock, which amount shall be distributed ratably among the Series A Preferred Stockholders in an equal amount per share of the Series A Preferred Stock then outstanding and among the Series B Preferred Stockholders in an equal amount per share of the Series B Preferred Stock then outstanding and among the Series D Preferred Stockholders in an equal amount per share of the Series D Preferred Stock then outstanding. If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series A Preferred Stockholders, the Series B Preferred Stockholders, the Series D Preferred Stockholders and each class or series of capital stock (other than the Series C Preferred Stock, and Series E Preferred Stock and the Common Stock) junior to the Series D Preferred Stock the full amounts to which they shall be entitled pursuant to the immediately preceding sentence, the Series A, Series B and Series D Preferred Stockholders shall be entitled to share ratably with each such other class or series of capital stock in any distribution of assets according to the respective preferential amounts fixed for the Series A Preferred Stock (pursuant to Section A.4(b) hereof), the Series B Preferred Stock (pursuant to Section B.4(b) hereof) and the Series D Preferred Stock (pursuant to Section D.4(b) hereof), and each such junior class or series of capital stock (pursuant to the applicable terms thereof), which would be payable in respect of the shares held by them upon such distribution if all such preferential amounts payable on or with respect to such shares were paid in full. e. In the event of any Liquidation, after payment shall have been made to the Series A Preferred Stockholders, the Series B Preferred Stockholders, the Series C Preferred Stockholders, Series D Preferred Stockholders and the Series E Preferred Stockholders of the full amount to which they shall be entitled as aforesaid, and after payment shall have made of the respective preferential amounts of all other classes and series of capital stock ranking 43. senior to the Common Stock, the Series A, Series B and Series D Preferred Stockholders shall be entitled to share ratably (calculated with respect to such Series A, Series B and Series D Preferred Stock as provided in the next sentence) with the holders of Common Stock in all remaining assets of the Corporation available for distribution to its stockholders. For purposes of calculating the amount of any payment to be paid pursuant to this Section D.4(e) upon any such Liquidation, each share of Series A, Series B and Series D Preferred Stock shall be deemed to be that number of shares of Common Stock into which such share is then convertible, rounded to the nearest one-tenth of a share. 5. Merger, Consolidation, etc. a. In the event the Corporation intends to sell, lease or otherwise dispose of all or substantially all of the assets of the Corporation, effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering), or merge or consolidate with or into any other corporation, corporations or other entity or entities (other than a merger or consolidation in which the Series Preferred Stockholders receive securities of the surviving corporation having substantially similar rights to the Series Preferred Stock and in which the stockholders of the Corporation immediately prior to such a transaction are holders of at least a majority of the voting securities of the surviving corporation immediately thereafter), then the Corporation shall give written notice to each Series Preferred Stockholder no less than 20 days prior to the closing of any such transaction notifying the Series Preferred Stockholders of the terms and timing of the closing of such transaction and of the rights of the Series Preferred Stockholders under Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof. b. Upon the affirmative vote of the holders of not less than 75% in voting power of all of the shares of Series Preferred Stock then outstanding, voting together as a separate class, made prior to the consummation of such transaction, the proceeds of or any property deliverable from such transaction shall be distributed among the holders of the Series Preferred Stock and the Common Stock according to the provisions of Sections A.4, B.4, C.4, D.4 and E.4 hereof as if such transaction were a Liquidation. c. The voting rights of the holders of Series Preferred Stock contained in Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof may be exercised at a special meeting of the holders of Series Preferred Stockholders called as provided in accordance with the By-laws of the Corporation or by written consent of the holders of Series Preferred Stock in lieu of a meeting. 6. Voting. a. General. In addition to the rights otherwise provided for herein or by law, the Series D Preferred Stockholders shall be entitled to vote, together with the Series A Preferred Stockholders, the Series B Preferred Stockholders, the Series C Preferred Stockholders, the Series E Preferred Stockholders and the Common Stockholders and any other class or series of stock then entitled to vote, as one class on all matters as to which Common Stockholders shall be entitled to vote, in the same manner and with the same effect as the Common Stockholders, except as otherwise required by the General Corporation Law. In any such vote, and in any vote 44. or action of the Series D Preferred Stockholders voting together as a separate class or with the other holders of Series Preferred Stock as a separate class, each share of issued and outstanding Series D Preferred Stock shall entitle the holder thereof to one vote per share for each share of Common Stock (including fractional shares) into which each share of Series D Preferred Stock is then convertible, rounded to the nearest one-tenth of a share. b. Election of Board of Directors. (i) In addition to the rights specified in Sections A.6(a), B.6(a), C.6(a) and D.6(a) hereof, the holders of a majority in voting power of the Series A, Series B, Series C and Series D Preferred Stock, voting together as a separate class or in such other manner as the holders of the Series A, Series B, Series C and Series D Preferred Stock shall agree among themselves in the Stockholders' Agreement, shall have the exclusive right to elect to the Board of Directors of the Corporation that number of directors which shall be equal to a majority of the total number of directors on the Board of Directors at any given time. In any election of Preferred Directors pursuant to this Section D.6(b) and Sections A.6(b), B.6(b) and C.6(b), each share of issued and outstanding Series A, Series B, Series C and Series D Preferred Stock shall entitle the holder thereof to the number of votes per share that equals the number of shares of Common Stock (including fractional shares) into which each such share is then convertible, rounded up to the nearest one-tenth of a share. The voting rights of the Series A, Series B, Series C and Series D Preferred Stockholders contained in this Section D.6(b) and Sections A.6(b), B.6(b) and C.6(b) may be exercised at a special meeting of the Series Preferred Stockholders called as provided in accordance with the By-laws of the Corporation, at any annual or special meeting of the Stockholders of the Corporation, or by written consent of the holders of Series Preferred Stock in lieu of a meeting. The Preferred Directors elected pursuant to this Section D.6(b) and Sections A.6(b), B.6(b) and C.6(b) shall serve from the date of their election and qualification until their successors have been duly elected and qualified. (ii) Notwithstanding anything to the contrary contained in Sections A.6(b)(i), B.6(b)(i), C.6(b)(i) and D.6(b)(i) hereof, if an Event of Noncompliance is declared in accordance with the Stockholders' Agreement, the Series A, Series B, Series C and Series D Preferred Stockholders, voting together as a separate class, shall have the right to elect all of the members of the Board of Directors of the Corporation. (iii) A vacancy in the directorships to be elected pursuant to Sections A.6(b)(i)-(ii), B.6(b)(i)-(ii), C.6(b)(i)-(ii) and D.6(b)(i)-(ii) hereof (including any vacancy created on account of an increase in the number of directors on the Board of Directors) may be filled only by vote at a meeting called in accordance with the By-laws of the Corporation or written consent in lieu of a meeting in accordance with Sections A.6(b)(i), B.6(b)(i), C.6(b)(i) and D.6(b)(i) hereof or, with respect to a Preferred Director, as provided for in the Stockholders' Agreement. c. Protective Provisions. So long as any Series Preferred Stock is outstanding, the Corporation shall not, without the written consent in lieu of a meeting, or the affirmative vote at a meeting called for such purpose, of the holders of shares representing at least 75% of the combined voting power of the issued and outstanding Series A, Series B, Series C, Series D and Series E Preferred Stock, voting together as a single class: 45. (i) except for "Excluded Stock", authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation, any right, warrant, or option to receive any capital stock, or any security convertible into or exchangeable for capital stock or any capitalized lease with any equity feature with respect to the capital stock of the Corporation; (ii) change as a whole, by subdivision or combination in any manner, the number of shares of the Common Stock then outstanding into a different number of shares, with or without par value, without making the identical change as a whole in the number of shares of Series Preferred Stock then outstanding; (iii) amend, alter or repeal, in any manner whatsoever, the designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions of the Series Preferred Stock; (iv) sell, abandon, transfer, lease or otherwise dispose of all or substantially all of the properties or assets of the Corporation or any of its subsidiaries; (v) declare or pay any dividend (other than as required by Section A.3(d) hereof in respect of the Series A Preferred Stock, by Section B.3(d) hereof in respect of the Series B Preferred Stock and by Section D.3(d) hereof in respect of the Series D Preferred Stock) or make any distribution (whether in cash, shares of capital stock of the Corporation, or other property) on shares of its capital stock other than the Series Preferred Stock; (vi) merge or consolidate with or into, or permit any subsidiary of the Corporation to merge or consolidate with or into, any other corporation, corporations or other entity or entities, or effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering); (vii) voluntarily dissolve, liquidate or wind-up or carry out any partial Liquidation or distribution or transaction in the nature of a partial Liquidation or distribution; (viii) increase the number of shares of any series of Preferred Stock of the Corporation authorized to be issued; (ix) reclassify any shares of the Corporation's capital stock as shares ranking senior to or on parity with the Series Preferred Stock with respect to rights on Liquidation, redemption or for the payment of any dividend or distribution other than in Liquidation; (x) amend, alter or repeal any provision of the Certificate of Incorporation of the Corporation; (xi) amend, alter or repeal any provisions of the By-laws of the Corporation so as to adversely affect the rights of the holders of the Series Preferred Stock; or 46. (xii) directly or indirectly, redeem, purchase or otherwise acquire for value (including through an exchange), or set apart money or other property for any mandatory purchase or other analogous fund for the redemption, purchase or acquisition of, any shares of Common Stock, except (a) pursuant to Sections A.8, B.8, C.8 and D.8 hereof, and (b) pursuant to any agreement approved by the Board of Directors with an officer, director, employee or consultant providing for the repurchase of any capital stock of the Corporation owned by such officer, director, employee or consultant at the option of the Corporation, which is either (A) set forth on Schedule 4.10 of the Series B Stock Purchase Agreement, or (B) issued pursuant to the Option Plan, as amended prior to May 13, 1996, the 1997 Equity Incentive Plan, or any other stock option plan of the Corporation or one or more amendments to the Option Plan, from and after May 13, 1996, approved by the Board of Directors and by the holders of 75% of the then issued and outstanding Series Preferred Stock, voting together as a separate class. In any vote or written consent in lieu of a meeting pursuant to this Section D.6(c) and Sections A.6(c), B.6(c), C.6(c) and E.6(c) hereof, each share of issued and outstanding Series Preferred Stock shall entitle the holder thereof to the number of votes per share that equals the number of shares of Common Stock (including fractional shares) into which each such share is then convertible, rounded to the nearest one-tenth of a share. 7. Conversion. a. Right to Convert. (i) Any Series D Preferred Stockholder shall have the right, at any time or from time to time, prior to the Closing Date to convert any or all of its shares of Series D Preferred Stock into that number of fully paid and nonassessable shares of Common Stock for each share of Series D Preferred Stock so converted equal to the quotient of the Series D Preferred Original Purchase Price divided by the Series D Preferred Conversion Price (as last adjusted and then in effect) rounded to the nearest one-tenth of a share. (ii) (a) Any Series D Preferred Stock that remains unconverted on the Closing Date shall be automatically converted without notice and without any action on the part of the holder thereof into shares of Common Stock on the Closing Date in accordance with the preceding sentence. After the Closing Date all rights of holders of shares of Series D Preferred Stock with respect to Series D Preferred Stock, except the right to receive shares of Common Stock in accordance with this Section D.7(a)(ii)(a) and any accrued but unpaid dividends and any declared but unpaid dividends as in accordance with Section D.7(a)(ii)(c) hereof, shall cease and the shares of Series D Preferred Stock shall no longer be deemed to be outstanding, whether or not the Corporation has received the certificates representing such shares. (b) The Corporation shall promptly send by first- class mail, postage prepaid, to each Series D Preferred Stockholder at such holder's address appearing on the Corporation's records a copy of (i) each registration statement filed by the Corporation under the Securities Act and each amendment thereof and each exhibit and schedule thereto and (ii) each order of the Securities and Exchange Commission declaring any such registration statement to be effective. 47. (c) Holders of Series D Preferred Stock converted into shares of Common Stock pursuant to this Section D.7 shall be entitled to payment of any accrued but unpaid cumulative dividend and any declared but unpaid dividends payable with respect to such shares of Series D Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. b. Mechanics of Conversion. (i) Any Series D Preferred Stockholder that exercises its right to convert its shares of Series D Preferred Stock into Common Stock shall deliver the Preferred Certificate, duly endorsed or assigned in blank to the Corporation, during regular business hours, at the office of the transfer agent of the Corporation, if any, at the principal place of business of the Corporation or at such other place as may be designated by the Corporation. (ii) Each Preferred Certificate shall be accompanied by written notice stating that such holder elects to convert such shares and stating the name or names (with address) in which the Common Certificate(s) are to be issued. Such conversion shall be deemed to have been effected on the date when the aforesaid delivery is made. (iii) As promptly as practicable thereafter, the Corporation shall issue and deliver to or upon the written order of such holder, at the place designated by such holder, the Common Certificate(s) for the number of full shares of Common Stock to which such holder is entitled and a cash payment for any fractional interest in a share of Common Stock, as provided in Section D.7(c) hereof, and for any accrued but unpaid cumulative dividends and any declared but unpaid dividends, payable with respect to the converted shares of Series D Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. (iv) The person in whose name each Common Certificate is to be issued shall be deemed to have become a stockholder of record of Common Stock on the Conversion Date or the Closing Date, as the case may be, unless the transfer books of the Corporation are closed on that date, in which event such holder shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open; provided, that the Series D Preferred Conversion Price shall be that in effect on the Conversion Date or the Closing Date, as the case may be. (v) Upon conversion of only a portion of the shares of Series D Preferred Stock covered by a Preferred Certificate, the Corporation, at its own expense, shall issue and deliver to or upon the written order of the holder of such Preferred Certificate, a new certificate representing the number of unconverted shares of Series D Preferred Stock from the Preferred Certificate so surrendered. c. Issuance of Common Stock on Conversion. (i) If a Series D Preferred Stockholder shall surrender more than one Preferred Certificate for conversion at any one time, the number of such shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series D Preferred Stock so surrendered. 48. (ii) No fractional shares of Common Stock shall be issued upon conversion of shares of Series D Preferred Stock. The Corporation shall pay a cash adjustment for such fractional interest in an amount equal to the then Current Market Price of a share of Common Stock multiplied by such fractional interest. d. Conversion Price; Adjustment. The "Series D Preferred Conversion Price" with respect to the Series D Preferred Stock shall initially be equal to the Series D Preferred Original Purchase Price and shall be subject to adjustment from time to time as follows: (i) If the Corporation shall, at any time or from time to time after the Series D Preferred Original Issuance Date, make a Dilutive Issuance, the Series D Preferred Conversion Price in effect immediately prior to each such Dilutive Issuance shall automatically be lowered to a price (calculated to the nearest cent) determined by multiplying the Series D Preferred Conversion Price by a fraction, (A) the numerator of which shall be (1) the number of shares of Common Stock outstanding immediately prior to such issuance plus (2) the number of shares of Common Stock which the aggregate consideration received or to be received by the Corporation in such Dilutive Issuance so issued would purchase at the Series D Preferred Conversion Price; and (B) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of such additional shares of Common Stock so issued in such Dilutive Issuance; provided that, for the purpose of this Section D.7(d)(i), all shares of Common Stock issuable upon exercise or conversion of options or convertible securities outstanding immediately prior to such issuance (other than any additional shares of Common Stock issuable with respect to shares of Series Preferred Stock, convertible securities, or outstanding options, warrants or other rights for the purchase of shares of Common Stock or convertible securities, solely as a result of either (x) the Dilutive Issuance or (y) the adjustment of the Series D Preferred Conversion Price (or other conversion ratios applicable to other Series Preferred Stock and otherwise) resulting from the Dilutive Issuance) shall be deemed to be outstanding. For the purposes of any adjustment of the Series D Preferred Conversion Price pursuant to this Section D.7(d)(i), the following provisions shall be applicable: (a) In the case of the issuance of Common Stock in whole or in part for cash, the consideration shall be deemed to be the amount of cash paid therefor, plus the value of any property other than cash received by the Corporation as provided in Section D.7(d)(i)(b) hereof, less any discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (b) In the case of the issuance of Common Stock for consideration in whole or in part in property or consideration other than cash, the value of such property or consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Corporation, irrespective of any accounting treatment; provided, however, that such fair market value shall not exceed the aggregate Current Market Price of the shares of Common Stock being issued, less any cash consideration paid for such shares. 49. (c) In the case of the issuance of (I) options to purchase or rights to subscribe for Common Stock, (II) securities convertible into or exchangeable for Common Stock or (III) options to purchase or rights to subscribe for such convertible or exchangeable securities: (1) the aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase, or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections D.7(d)(i)(a) and (b) hereof, if any, received by the Corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby; (2) the aggregate maximum number of shares of Common Stock deliverable upon conversion of, or in exchange for, any such convertible or exchangeable securities or upon the exercise of options to purchase, or rights to subscribe for, such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (determined in the manner provided in Sections D.7(d)(i)(a) and (b) hereof); (3) if there is any decrease in the conversion or exercise price of, or any increase in the number of shares to be received upon exercise, conversion or exchange of any such options, rights or convertible or exchangeable securities (other than a change resulting from the antidilution provisions thereof), the Series D Preferred Conversion Price shall be automatically lowered to reflect such change; and (4) on the expiration of any right or option referred to in Sections D.7(d)(i)(c)(1) or (2) hereof or on the termination of any right to convert or exchange any convertible or exchangeable securities referred to in Section D.7(d)(i)(c)(2) hereof, the Series D Preferred Conversion Price then in effect shall thereupon be readjusted to the Series D Preferred Conversion Price as would have been in effect had the adjustment made upon the granting or issuance of such rights or options or convertible or exchangeable securities been made upon the basis of the issuance or sale of only the number of shares of Common Stock actually issued upon the exercise of such options or rights or upon the conversion or exchange of such convertible or exchangeable securities. (ii) If the Corporation shall at any time after the Series D Preferred Original Issuance Date fix a record date for the subdivision, split-up or stock dividend of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such subdivision, split-up or dividend (or the date of such subdivision, split-up or dividend, if no record date is fixed), the Series D Preferred Conversion Price shall be appropriately decreased so that the number of shares of Common 50. Stock issuable on conversion of each share of the Series A Preferred Stock shall be increased in proportion to such increase in outstanding shares. (iii) If, at any time after the Series D Preferred Original Issuance Date, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date fixed for such combination (or the date of such combination, if no record date is fixed), the Series D Preferred Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series D Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (iv) If, at any time after the Series D Preferred Original Issuance Date, an Extraordinary Transaction is consummated, the Series D Preferred Conversion Price with respect to the Series D Preferred Stock outstanding after the Extraordinary Transaction shall be adjusted to provide that the shares of Series D Preferred Stock outstanding immediately prior to the effectiveness of the Extraordinary Transaction shall be convertible into the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from or surviving such Extraordinary Transaction which the holder of the number of shares of Common Stock deliverable (immediately prior to the effectiveness of the Extraordinary Transaction) upon conversion of such Series D Preferred Stock would have been entitled to receive upon such Extraordinary Transaction. The provisions of this Section D.7(d)(iv) shall similarly apply to successive Extraordinary Transactions. (v) All calculations under this Section D.7(d) shall be made to the nearest one-tenth of a cent ($.001) or to the nearest one-tenth of a share, as the case may be. (vi) In any case in which the provisions of this Section D.7(d) shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of that event (A) issuing to the holder of any share of Series D Preferred Stock converted after such record date and before the occurrence of such event the additional shares of capital stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares of capital stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount in cash in lieu of a fractional share of capital stock pursuant to Section D.7(c) hereof; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares, in such case, upon the occurrence of the event requiring such adjustment. e. Notice of Adjustments. (i) Whenever the Series D Preferred Conversion Price shall be adjusted as provided in Section D.7(d) hereof, the Corporation shall file, at its principal office, at the office of the transfer agent for the Series D Preferred Stock, if any, or at such other place as may be designated by the Corporation, a statement, signed by its President and by its Chief Financial Officer, showing in detail the facts requiring such adjustment and the Series D Preferred Conversion Price that shall be in effect after such adjustment. The Corporation shall also cause a copy of such statement to be sent by first-class, certified mail, return receipt 51. requested, postage prepaid, to each Series D Preferred Stockholder at such holder's address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section D.7(e)(ii) hereof. (ii) In the event the Corporation shall propose to file a registration statement under the Securities Act for a Public Offering or to take any action of the types described in clauses (i), (ii), (iii) or (iv) of Section D.7(d) hereof, the Corporation shall give notice to each Series D Preferred Stockholder, in the manner set forth in Section D.7(e)(i) hereof, which shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. The notice shall also set forth such facts as are reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Series D Preferred Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Series D Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten (10) days prior to the date so fixed, and in case of all other action, such notice shall be given at least fifteen (15) days prior to the taking of such proposed action. Failure to give notice under this Section D.7(e)(ii), or any defect therein, shall not affect the legality or validity of any such action. f. Transfer Taxes. The Corporation shall pay all documentary, stamp or other transactional taxes (excluding income taxes) attributable to the issuance or delivery of shares of capital stock of the Corporation upon conversion of any shares of Series D Preferred Stock; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Series D Preferred Stock in respect of which such shares are being issued. g. Reservation of Common Stock. The Corporation shall at all times reserve, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series D Preferred Stock, sufficient shares of Common Stock to provide for the conversion of all outstanding shares of Series D Preferred Stock. h. Status of Common Stock. All shares of Common Stock which may be issued in connection with the conversion provisions set forth herein will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable, free from preemptive rights and free from all taxes, liens or charges with respect thereto created or imposed by the Corporation. 8. Redemption. a. On and after the Series B Preferred Fifth Anniversary Date or at any time if an Event of Noncompliance is declared in accordance with the Stockholders' Agreement, at the written request of the holders of shares representing not less than 75% of the combined voting power of the Series A, Series B, Series C and Series D Preferred Stock then 52. outstanding, voting together as a single class, made, from time to time, at any date on or after the Series B Preferred Fifth Anniversary Date or upon the declaration of an Event of Noncompliance, the Corporation shall redeem (unless otherwise prevented by law) all of the shares of Series A, Series B and Series D Preferred Stock, at a redemption price per share for each such series of Series Preferred Stock equal to (i) the Series A Preferred Original Purchase Price, the Series B Preferred Original Purchase Price or the Series D Preferred Original Purchase Price, as applicable, plus (ii) an amount equal to any accrued but unpaid cumulative dividends thereon and any declared but unpaid dividends thereof, and, then, all of the shares of Series C Preferred Stock, at a redemption price per share for such Series C Preferred Stock equal to (i) the Series C Preferred Original Purchase Price plus (ii) an amount equal to any accrued but unpaid dividends thereon and any declared but unpaid dividends thereon. For purposes of determining whether the requisite 75% of the holders of Series A, Series B, Series C and Series D Preferred Stock are participating in the Redemption Notice, each share of issued and outstanding Series A, Series B, Series C and Series D Preferred Stock shall entitle the holder thereof to one vote per share for each share of Common Stock (including fractional shares) into which each share of Series A, Series B, Series C and Series D Preferred Stock is then convertible, rounded to the nearest one-tenth of a share. b. On and after the Redemption Date, all rights of any Series D Preferred Stockholder with respect to the shares of Series D Preferred Stock redeemed on that Redemption Date, except the right to receive the Redemption Payment as provided herein, shall cease, and such shares shall no longer be deemed to be outstanding, whether or not the Corporation has received the certificates representing such shares, on the condition that the Corporation pays the Redemption Payment, or irrevocably deposits or sets aside cash in an amount equal to the Redemption Payment; provided, however, that if the Corporation defaults in the payment of the Redemption Payment, the rights of the holder with respect to such shares of Series D Preferred Stock shall continue until the Corporation cures such default. c. The Requesting Holders shall send their Redemption Notice pursuant to this Section D.8 by first-class, certified mail, return receipt requested, postage prepaid, to the Corporation at its principal place of business or to any transfer agent of the Corporation. The Corporation shall fix a date for redemption which shall not be more than 60 days after the receipt of Redemption Notices from the Requesting Holders. Not less than 45 days prior to the Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A, Series B, Series C and Series D Preferred Stock, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice, notifying such holder of the redemption to be effected, the Redemption Date fixed, the Redemption Payment, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, such holder's certificate or certificates representing the shares to be redeemed. In the event of only a partial redemption of the outstanding shares of the Series A, Series B and Series D Preferred Stock entitled to redemption for any reason, the redemption of the Series A, Series B and Series D Preferred Stock shall be pro rata based upon the total amount that would be paid by the Corporation to each Series A, Series B and Series D Preferred Stockholder if all of the shares of Series A, Series B and Series D Preferred Stock were fully redeemed pursuant to Sections 53. A.8(a), B.8(a) and D.8(a) hereof. At any time on or after the Redemption Date, the holders of the Series D Preferred Stock shall be entitled to receive the Redemption Payment for each of the shares of Series D Preferred Stock held by such holder which are to be redeemed by the Corporation upon actual delivery to the Corporation or its transfer agent of the certificate(s) representing the shares to be redeemed. Upon redemption of only a portion of the number of shares covered by a Series D Preferred Stock certificate, the Corporation shall issue and deliver to or upon the written order of the holder of such Series D Preferred Stock certificate, at the expense of the Corporation, a new certificate covering the number of shares of Series D Preferred Stock being redeemed representing the unredeemed portion of the Series D Preferred Stock certificate, which new certificate shall entitle the holder thereof to all the rights, powers and privileges of a holder of such shares. d. Notwithstanding anything to the contrary contained in this Section D.8, the Corporation shall not be obligated to acquire any shares on any Redemption Date to the extent that the acquisition thereof would violate any law, statute, rule, regulation, policy or guideline promulgated by any federal, state, local or foreign governmental authority applicable to the Corporation, provided that the Corporation shall use all legally permissible methods in the reduction of capital and revaluation of assets, including appraisal, in order to obtain a legal source of funds with which to pay the Redemption Payment and shall acquire such shares as soon as permitted by applicable laws, statutes, rules, regulations, policies and guidelines. 9. Miscellaneous. a. Shares of Series D Preferred Stock are not subject to or entitled to the benefit of a sinking fund. b. Redeemed shares of Series D Preferred Stock shall not be reissued but shall be retired. Upon the retirement of redeemed shares the capital of the Corporation shall be reduced. c. The shares of the Series D Preferred Stock shall not have any preferences, voting powers or relative, participating, optional, preemptive or other special rights except as set forth above in this Seventh Restated Certificate of Incorporation of the Corporation. PART E. Series E Convertible Preferred Stock. 1. Terms. The number of shares, powers, terms, conditions, designations, preferences and privileges, relative, participating, optional and other special rights, and qualifications, limitations and restrictions, if any, of the Series E Preferred Stock shall be as set forth herein. 2. Ranking. The Corporation's Series E Preferred Stock shall rank, as to dividends and upon Liquidation, (x) junior to the Series A, Series B and Series D Preferred Stock (but, with respect to Liquidation, only to the extent provided in Sections A.4, B.4, C.4, D.4 and E.4 hereof), (y) pari passu with the Series C Preferred Stock and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation. The Series E Preferred Stock shall have the following designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions: 54. 3. Dividends. a. Dividends are payable on the Series E Preferred Stock, when, as and if declared by the Board of Directors. Whenever any dividend or other distribution is declared on any shares of Series E Preferred Stock, the Board of Directors shall simultaneously declare a dividend or distribution at the same percentage rate and in the same form on each other outstanding share of Series E and each outstanding share of Series C Preferred Stock, so that all outstanding shares of Series E and Series C Preferred Stock will participate equally with each other ratably per share. b. So long as any Series E Preferred Stock is outstanding the Corporation shall not declare or pay any dividend or make any distribution (whether in cash, shares of capital stock of the Corporation or other property) on shares of its Common Stock or any other class or series of stock ranking pari passu with or junior to the Series E Preferred Stock, unless prior thereto or simultaneously therewith all dividends and distributions previously declared on the Series E Preferred Stock shall have been paid or the Corporation shall have irrevocably deposited or set aside cash or United States Obligations sufficient for the payment thereof. c. If the Board of Directors declares dividends or other distributions (other than (i) on Liquidation, (ii) on the Series A Preferred Stock pursuant to Section A.3(d) hereof, (iii) on the Series B Preferred Stock pursuant to Section B.3(d) hereof, or (iv) on the Series D Preferred Stock pursuant to Section D.3(d) hereof) on the Common Stock or any other class or series of stock ranking pari passu with or junior to the Series E Preferred Stock in cash, property or securities (excluding Common Stock) of the Corporation (or subscription or other rights to purchase or acquire securities (excluding Common Stock) of the Corporation), the Board of Directors shall simultaneously declare a dividend or distribution on the same terms, at the same or equivalent rate, and in the same form on each share of Series E Preferred Stock, so that all outstanding shares of Series E Preferred Stock will participate ratably with the Common Stock and each other class or series of stock ranking pari passu with or junior to the Series E Preferred Stock in such dividend or distribution. For purposes of determining its proportional share of the dividend or distribution, each share of the Series E Preferred Stock and any other applicable class or series of convertible securities shall be deemed to be that number of shares of Common Stock into which such share is then convertible, rounded to the nearest one-tenth of a share. 4. Rights on Liquidation, Dissolution, Winding-Up. a. With respect to rights on Liquidation, the Series E Preferred Stock shall rank (x) junior to the Series A, Series B and Series D Preferred Stock (but only to the extent provided in this Section E.4), (y) pari passu with the Series C Preferred Stock and (z) senior and prior to the Common Stock and to all other classes or series of stock issued by the Corporation. b. Subject to the rights of the holders of Series A Preferred Stock set forth in Section A.4 hereof, the holders of Series B Preferred Stock set forth in Section B.4 hereof, the holders of Series C Preferred Stock set forth in Section C.4 hereof and the holders of Series D Preferred Stock set forth in Section D.4 hereof, in the event of any Liquidation, whether 55. voluntary or involuntary, before any payment of cash or distribution of other property shall be made to the Common Stockholders or any other class or series of stock ranking on Liquidation junior to the Series E Preferred Stock, the holders of Series E Preferred Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution to its stockholders, pari passu with the rights of the Series C Stockholders, an amount per share equal to the Series E Preferred Liquidation Preference whether from capital, surplus or earnings, plus an amount equal to any accrued but unpaid cumulative dividends thereon and any declared but unpaid dividends thereon. c. If, upon any Liquidation, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the Series E Preferred Stockholders the full amounts to which each of them shall be entitled pursuant to Section E.4(b) hereof and to pay the Series C Preferred Stockholders the full amount to which each of them shall be entitled pursuant to Section C.4(b) hereof, then the Series E and Series C Preferred Stockholders shall share ratably in any distribution of assets according to the respective amounts which would be payable to them in respect of the shares of Series E or Series C Preferred Stock, as the case may be, held upon such distribution if all amounts payable on or with respect to such shares were paid in full pursuant to Sections E.4(b) and C.4(b) hereof. d. In the event of any Liquidation, the Series E Preferred Stock shall not be entitled to receive any payment of cash or distribution of property other than as expressly provided in this Section E.4. 5. Merger, Consolidation, etc. a. In the event the Corporation intends to sell, lease or otherwise dispose of all or substantially all of the assets of the Corporation, effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering), or merge or consolidate with or into any other corporation, corporations or other entity or entities (other than a merger or consolidation in which the Series Preferred Stockholders receive securities of the surviving corporation having substantially similar rights to the Series Preferred Stock and in which the stockholders of the Corporation immediately prior to such a transaction are holders of at least a majority of the voting securities of the surviving corporation immediately thereafter), then the Corporation shall give written notice to each Series Preferred Stockholder no less than 20 days prior to the closing of any such transaction notifying the Series Preferred Stockholders of the terms and timing of the closing of such transaction and of the rights of the Series Preferred Stockholders under Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof. b. Upon the affirmative vote of the holders of not less than 75% in voting power of all of the shares of Series Preferred Stock then outstanding, voting together as a separate class, made prior to the consummation of such transaction, the proceeds of or any property deliverable from such transaction shall be distributed among the holders of the Series Preferred Stock and the Common Stock according to the provisions of Sections A.4, B.4, C.4, D.4 and E.4 hereof as if such transaction were a Liquidation. 56. c. The voting rights of the holders of Series Preferred Stock contained in Sections A.5(b), B.5(b), C.5(b), D.5(b) and E.5(b) hereof may be exercised at a special meeting of the holders of Series Preferred Stockholders called as provided in accordance with the By-laws of the Corporation or by written consent of the holders of Series Preferred Stock in lieu of a meeting. 6. Voting. a. General. In addition to the rights otherwise provided for herein or by law, except as provided in Section E.6(b) hereof, the Series E Preferred Stockholders shall be entitled to vote, together with the Series A Preferred Stockholders, the Series B Preferred Stockholders, the Series C Preferred Stockholders, the Series D Preferred Stockholders, the Series E Preferred Stockholders and the Common Stockholders and any other class or series of stock then entitled to vote, as one class on all matters as to which Common Stockholders shall be entitled to vote, in the same manner and with the same effect as the Common Stockholders, except as otherwise required by the General Corporation Law. In any such vote, and in any vote or action of the Series E Preferred Stockholders voting together as a separate class or with the other holders of Series Preferred Stock as a separate class, each share of issued and outstanding Series E Preferred Stock shall entitle the holder thereof to one vote per share for each share of Common Stock (including fractional shares) into which each share of Series E Preferred Stock is then convertible, rounded to the nearest one-tenth of a share. b. Election of Board of Directors. The Series E Preferred Stockholders shall not have any right to vote for the election of members to the Board of Directors of the Corporation. c. Protective Provisions. So long as any Series Preferred Stock is outstanding, the Corporation shall not, without the written consent in lieu of a meeting, or the affirmative vote at a meeting called for such purpose, of the holders of shares representing at least 75% of the combined voting power of the issued and outstanding Series A, Series B, Series C, Series D and Series E Preferred Stock, voting together as a single class: (i) except for "Excluded Stock", authorize, issue or agree to authorize or issue any shares of capital stock of the Corporation, any right, warrant, or option to receive any capital stock, or any security convertible into or exchangeable for capital stock or any capitalized lease with any equity feature with respect to the capital stock of the Corporation; (ii) change as a whole, by subdivision or combination in any manner, the number of shares of the Common Stock then outstanding into a different number of shares, with or without par value, without making the identical change as a whole in the number of shares of Series Preferred Stock then outstanding; (iii) amend, alter or repeal, in any manner whatsoever, the designations, powers, preferences, relative, participating, optional or other special rights, qualifications, limitations and restrictions of the Series Preferred Stock; (iv) sell, abandon, transfer, lease or otherwise dispose of all or substantially all of the properties or assets of the Corporation or any of its subsidiaries; 57. (v) declare or pay any dividend (other than as required by Section A.3(d) hereof in respect of the Series A Preferred Stock, by Section B.3(d) hereof in respect of the Series B Preferred Stock and by Section D.3(d) hereof in respect of the Series D Preferred Stock) or make any distribution (whether in cash, shares of capital stock of the Corporation, or other property) on shares of its capital stock other than the Series Preferred Stock; (vi) merge or consolidate with or into, or permit any subsidiary of the Corporation to merge or consolidate with or into, any other corporation, corporations or other entity or entities, or effect any transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred (other than in connection with a Public Offering); (vii) voluntarily dissolve, liquidate or wind-up or carry out any partial Liquidation or distribution or transaction in the nature of a partial Liquidation or distribution; (viii) increase the number of shares of any series of Preferred Stock of the Corporation authorized to be issued; (ix) reclassify any shares of the Corporation's capital stock as shares ranking senior to or on parity with the Series Preferred Stock with respect to rights on Liquidation, redemption or for the payment of any dividend or distribution other than in Liquidation; (x) amend, alter or repeal any provision of the Certificate of Incorporation of the Corporation; (xi) amend, alter or repeal any provisions of the By-laws of the Corporation so as to adversely affect the rights of the holders of the Series Preferred Stock; or (xii) directly or indirectly, redeem, purchase or otherwise acquire for value (including through an exchange), or set apart money or other property for any mandatory purchase or other analogous fund for the redemption, purchase or acquisition of, any shares of Common Stock, except (a) pursuant to Sections A.8, B.8, C.8 and D.8 hereof, and (b) pursuant to any agreement approved by the Board of Directors with an officer, director, employee or consultant providing for the repurchase of any capital stock of the Corporation owned by such officer, director, employee or consultant at the option of the Corporation, which is either (A) set forth on Schedule 4.10 of the Series B Stock Purchase Agreement, or (B) issued pursuant to the Option Plan, as amended prior to May 13, 1996, the 1997 Equity Incentive Plan, or any other stock option plan of the Corporation or one or more amendments to the Option Plan, from and after May 13, 1996, approved by the Board of Directors and by the holders of 75% of the then issued and outstanding Series Preferred Stock, voting together as a separate class. In any vote or written consent in lieu of a meeting pursuant to this Section E.6(c) and Sections A.6(c), B.6(c), C.6(c) and D.6(c) hereof, each share of issued and outstanding Series Preferred Stock shall entitle the holder thereof to the number of votes per share that equals the number of 58. shares of Common Stock (including fractional shares) into which each such share is then convertible, rounded to the nearest one-tenth of a share. 7. Conversion. a. Right to Convert. (i) Any Series E Preferred Stockholder shall have the right, at any time or from time to time, prior to the Closing Date to convert any or all of its shares of Series E Preferred Stock into that number of fully paid and nonassessable shares of Common Stock for each share of Series E Preferred Stock so converted equal to the quotient of the Series E Preferred Original Purchase Price divided by the Series E Preferred Conversion Price (as last adjusted and then in effect) rounded to the nearest one-tenth of a share. (ii) (a) Any Series E Preferred Stock that remains unconverted on the Closing Date shall be automatically converted without notice and without any action on the part of the holder thereof into shares of Common Stock on the Closing Date in accordance with the preceding sentence. After the Closing Date all rights of holders of shares of Series E Preferred Stock with respect to Series E Preferred Stock, except the right to receive shares of Common Stock in accordance with this Section E.7(a)(ii)(a) and any accrued but unpaid dividends and any declared but unpaid dividends as in accordance with Section E.7(a)(ii)(c) hereof, shall cease and the shares of Series E Preferred Stock shall no longer be deemed to be outstanding, whether or not the Corporation has received the certificates representing such shares. (b) The Corporation shall promptly send by first- class mail, postage prepaid, to each Series E Preferred Stockholder at such holder's address appearing on the Corporation's records a copy of (i) each registration statement filed by the Corporation under the Securities Act and each amendment thereof and each exhibit and schedule thereto and (ii) each order of the Securities and Exchange Commission declaring any such registration statement to be effective. (c) Holders of Series E Preferred Stock converted into shares of Common Stock pursuant to this Section E.7 shall be entitled to payment of any accrued but unpaid cumulative dividend and any declared but unpaid dividends payable with respect to such shares of Series E Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. b. Mechanics of Conversion. (i) Any Series E Preferred Stockholder that exercises its right to convert its shares of Series E Preferred Stock into Common Stock shall deliver the Preferred Certificate, duly endorsed or assigned in blank to the Corporation, during regular business hours, at the office of the transfer agent of the Corporation, if any, at the principal place of business of the Corporation or at such other place as may be designated by the Corporation. (ii) Each Preferred Certificate shall be accompanied by written notice stating that such holder elects to convert such shares and stating the name or names (with 59. address) in which the Common Certificate(s) are to be issued. Such conversion shall be deemed to have been effected on the date when the aforesaid delivery is made. (iii) As promptly as practicable thereafter, the Corporation shall issue and deliver to or upon the written order of such holder, at the place designated by such holder, the Common Certificate(s) for the number of full shares of Common Stock to which such holder is entitled and a cash payment for any fractional interest in a share of Common Stock, as provided in Section E.7(c) hereof, and for any accrued but unpaid cumulative dividends and any declared but unpaid dividends, payable with respect to the converted shares of Series E Preferred Stock, up to and including the Conversion Date or the Closing Date, as the case may be. (iv) The person in whose name each Common Certificate is to be issued shall be deemed to have become a stockholder of record of Common Stock on the Conversion Date or the Closing Date, as the case may be, unless the transfer books of the Corporation are closed on that date, in which event such holder shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open; provided, that the Series E Preferred Conversion Price shall be that in effect on the Conversion Date or the Closing Date, as the case may be. (v) Upon conversion of only a portion of the shares of Series E Preferred Stock covered by a Preferred Certificate, the Corporation, at its own expense, shall issue and deliver to or upon the written order of the holder of such Preferred Certificate, a new certificate representing the number of unconverted shares of Series E Preferred Stock from the Preferred Certificate so surrendered. c. Issuance of Common Stock on Conversion. (i) If a Series E Preferred Stockholder shall surrender more than one Preferred Certificate for conversion at any one time, the number of such shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series E Preferred Stock so surrendered. (ii) No fractional shares of Common Stock shall be issued upon conversion of shares of Series E Preferred Stock. The Corporation shall pay a cash adjustment for such fractional interest in an amount equal to the then Current Market Price of a share of Common Stock multiplied by such fractional interest. d. Conversion Price; Adjustment. The "Series E Preferred Conversion Price" with respect to the Series E Preferred Stock shall initially be equal to the Series E Preferred Original Purchase Price and shall be subject to adjustment from time to time as follows: (i) If the Corporation shall at any time after the Series E Preferred Original Issuance Date fix a record date for the subdivision, split- up or stock dividend of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such subdivision, split-up or dividend (or the date of such subdivision, split-up or dividend, if no record date is fixed), the Series E Preferred Conversion Price shall be appropriately decreased so that the number of shares of Common 60. Stock issuable on conversion of each share of the Series E Preferred Stock shall be increased in proportion to such increase in outstanding shares. (ii) If, at any time after the Series E Preferred Original Issuance Date, the number of shares of Common Stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then, following the record date fixed for such combination (or the date of such combination, if no record date is fixed), the Series E Preferred Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series E Preferred Stock shall be decreased in proportion to such decrease in outstanding shares. (iii) If, at any time after the Series E Preferred Original Issuance Date, an Extraordinary Transaction is consummated, the Series E Preferred Conversion Price with respect to the Series E Preferred Stock outstanding after the Extraordinary Transaction shall be adjusted to provide that the shares of Series E Preferred Stock outstanding immediately prior to the effectiveness of the Extraordinary Transaction shall be convertible into the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from or surviving such Extraordinary Transaction which the holder of the number of shares of Common Stock deliverable (immediately prior to the effectiveness of the Extraordinary Transaction) upon conversion of such Series E Preferred Stock would have been entitled to receive upon such Extraordinary Transaction. The provisions of this Section E.7(d)(iii) shall similarly apply to successive Extraordinary Transactions. (iv) All calculations under this Section E.7(d) shall be made to the nearest one-tenth of a cent ($.001) or to the nearest one-tenth of a share, as the case may be. (v) In any case in which the provisions of this Section E.7(d) shall require that an adjustment shall become effective immediately after a record date for an event, the Corporation may defer until the occurrence of that event (A) issuing to the holder of any share of Series E Preferred Stock converted after such record date and before the occurrence of such event the additional shares of capital stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares of capital stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount in cash in lieu of a fractional share of capital stock pursuant to Section E.7(c) hereof; provided, however, that the Corporation shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares, in such case, upon the occurrence of the event requiring such adjustment. e. Notice of Adjustments. (i) Whenever the Series E Preferred Conversion Price shall be adjusted as provided in Section E.7(d) hereof, the Corporation shall file, at its principal office, at the office of the transfer agent for the Series E Preferred Stock, if any, or at such other place as may be designated by the Corporation, a statement, signed by its President and by its Chief Financial Officer, showing in detail the facts requiring such adjustment and the Series E Preferred Conversion Price that shall be in effect after such adjustment. The Corporation shall also cause a copy of such statement to be sent by first-class, certified mail, return receipt 61. requested, postage prepaid, to each Series E Preferred Stockholder at such holder's address appearing on the Corporation's records. Where appropriate, such copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section E.7(e)(ii) hereof. (ii) In the event the Corporation shall propose to file a registration statement under the Securities Act for a Public Offering or to take any action of the types described in clauses (i), (ii) or (iii) of Section E.7(d) hereof, the Corporation shall give notice to each Series E Preferred Stockholder, in the manner set forth in Section E.7(e)(i) hereof, which shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. The notice shall also set forth such facts as are reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Series E Preferred Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable or purchasable upon the occurrence of such action or deliverable upon conversion of shares of Series E Preferred Stock. In the case of any action which would require the fixing of a record date, such notice shall be given at least ten (10) days prior to the date so fixed, and in case of all other action, such notice shall be given at least fifteen (15) days prior to the taking of such proposed action. Failure to give notice under this Section E.7(e)(ii), or any defect therein, shall not affect the legality or validity of any such action. f. Transfer Taxes. The Corporation shall pay all documentary, stamp or other transactional taxes (excluding income taxes) attributable to the issuance or delivery of shares of capital stock of the Corporation upon conversion of any shares of Series E Preferred Stock; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Series E Preferred Stock in respect of which such shares are being issued. g. Reservation of Common Stock. The Corporation shall at all times reserve, free from preemptive rights, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series E Preferred Stock, sufficient shares of Common Stock to provide for the conversion of all outstanding shares of Series E Preferred Stock. h. Status of Common Stock. All shares of Common Stock which may be issued in connection with the conversion provisions set forth herein will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable, free from preemptive rights and free from all taxes, liens or charges with respect thereto created or imposed by the Corporation. 8. Miscellaneous. a. Shares of Series E Preferred Stock are not entitled to a right of redemption by the Company. 62. b. Shares of Series E Preferred Stock are not subject to or entitled to the benefit of a sinking fund. c. The shares of the Series E Preferred Stock shall not have any preferences, voting powers or relative, participating, optional, preemptive or other special rights except as set forth above in this Seventh Restated Certificate of Incorporation of the Corporation. PART F. Common Stock. 1. Common Stock. a. Voting. Each holder of Common Stock shall be entitled to one vote for each share of Common Stock held of record on all matters as to which holders of Common Stock shall be entitled to vote, which voting rights shall not be cumulative. In any election of directors, no holder of Common Stock shall be entitled to more than one (1) vote per share. b. Other Rights. Each share of Common Stock issued and outstanding shall be identical in all respects with each other such share, and no dividends shall be paid on any shares of Common Stock unless the same dividend is paid on all shares of Common Stock outstanding at the time of such payment. Except for and subject to those rights expressly granted to the holders of any class or series of capital stock having a preference over the Common Stock and except as may be provided by the laws of the State of Delaware, the holders of Common Stock shall have all other rights of stockholders, including, without limitation, (a) the right to receive dividends, when and as declared by the Board of Directors, out of assets lawfully available therefor, and (b) in the event of any distribution of assets upon a Liquidation, the right to receive ratably and equally along with the holders of the Series A Preferred Stock in accordance with Section A.4 hereof, the holders of the Series B Preferred Stock in accordance with Section B.4 hereof, the holders of the Series D Preferred Stock in accordance with Section D.4 hereof, and the holders of any other capital stock then entitled to participate, all the assets and funds of the Corporation remaining after the payment of all claims and obligations of the Corporation, as provided by the General Corporation Law. PART G. Definitions. 1. As used in Article III of this Seventh Restated Certificate of Incorporation, the following terms shall have the meanings provided therefor below or elsewhere in this Seventh Restated Certificate of Incorporation as referred to below: "Closing Date" shall mean the date of the closing of the Corporation's first Public Offering. "Common Certificate" shall mean the certificate(s) for the shares of Common Stock issued upon the conversion of Series Preferred Stock. "Common Stock" shall have the meaning set forth Section 1 of this Article III. "Common Stockholders" shall mean the holders of Common Stock. 63. "Conversion Date" shall mean the date on which any Series Preferred Stockholder delivers a Preferred Certificate for conversion into Common Stock in accordance with Sections A.7(b)(ii), B.7(b)(ii), C.7(b)(ii), D.7(b)(ii) or E.7(b)(ii) hereof. "Current Market Price" of one share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the thirty (30) consecutive business days ending on the fifth (5th) business day before the day in question (as adjusted for any stock dividend, split-up, combination or reclassification that took effect during such thirty (30) business day period) as follows: a. If the Common Stock is listed or admitted for trading on a national securities exchange, the closing price for each day shall be the last reported sales price regular way or, in case no such reported sales took place on such day, the average of the last reported bid and asked prices regular way, in either case, on the principal national securities exchange on which the Common Stock is listed or admitted to trading. b. If the Common Stock is not at the time listed or admitted for trading on any such exchange, then such price as shall be equal to the last reported sale price, or, if there is no such sale price, the average of the last reported bid and asked prices, as reported by the Nasdaq on such day. c. If, on any day in question, the security shall not be listed or admitted to trading on a national securities exchange or quoted on the Nasdaq, then such price shall be equal to the last reported bid and asked prices on such day as reported by the National Quotation Bureau, Inc. or any similar reputable quotation and reporting service, if such quotation is not reported by the National Quotation Bureau, Inc. d. If the Common Stock is not traded in such manner that the quotations referred to in this definition are available for the period required hereunder, the Current Market Price shall be determined by the Board of Directors of the Corporation. "Dilutive Issuance" shall mean an issuance of any shares of Common Stock (which term, for purposes of this definition, shall be deemed to include all other securities convertible into, or exchangeable or exercisable for, shares of Common Stock (including, but not limited to, Series Preferred Stock) or options to purchase or other rights to subscribe for such convertible or exchangeable securities), other than Excluded Stock, for a consideration per share less than the applicable Series A Preferred Conversion Price, Series B Preferred Conversion Price or Series D Preferred Conversion Price in effect immediately prior to the issuance of such Common Stock or other securities. "Event of Noncompliance" shall be as defined in the Stockholders' Agreement. "Excluded Stock" shall mean: a. Common Stock issued upon conversion of any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock; 64. b. Securities issued pursuant to the acquisition of another corporation, partnership, joint venture, trust or other entity by the Corporation by merger, consolidation, stock acquisition, reorganization, or otherwise whereby the Corporation, or its shareholders of record immediately prior to the effectiveness of such transaction, directly or indirectly own at least the majority of the voting power of such other entity or the resulting or surviving corporation immediately after such transaction; c. Common Stock issued to employees, consultants or others who provide services to the Corporation, pursuant to any options to purchase or rights to subscribe for such Common Stock granted pursuant to an option or rights plan, agreement or arrangement approved by the Corporation's Board of Directors, but not to exceed 11,275,624 shares of Common Stock, giving effect to appropriate adjustment to prevent dilution thereof; d. Common Stock issued upon exercise of options granted pursuant to the Restricted Stock Option Agreements (as defined in the Stockholders' Agreement); e. Common Stock issued in transactions described in Sections A.7(d)(ii)-(iii), B.7(d)(ii)-(iii), C.7(d)(i)-(ii), D.7(d)(ii)-(iii) or E.7(d)(ii)-(iii) hereof; f. (i) The warrant issued to Comdisco, Inc. to initially acquire up to 501,000 shares of Series A Preferred Stock, (ii) up to 501,000 shares of Series A Preferred Stock issuable in connection with the exercise of the warrant, and (iii) the Common Stock into which such Series A Preferred Stock is convertible; g. The warrants issued to the holders of Series I Preferred Stock previously issued by the Corporation, in connection with the issuance of Series I Preferred Stock, to acquire 100,000 shares of Common Stock and the issuance of the shares of Common Stock in connection with the exercise of the warrants; h. The warrants issued to the parties to the Loan Agreement with the Corporation dated January 12, 1996 to acquire up to 450,000 shares of Common Stock and the issuance of Common Stock in connection with the exercise of the warrants; i. (a) Up to 18,939,394 shares of Series B Preferred Stock issued pursuant to the Series B Stock Purchase Agreement, (b) up to 5,818,184 shares of Series B Preferred Stock issued pursuant to options therein, and (c) the Common Stock into which such Series B Preferred Stock is convertible; and j. (a) Up to 24,809,555 shares of Series D Preferred Stock issued pursuant to the Series D Stock Purchase Agreement and (b) the Common Stock into which such Series D Preferred Stock is convertible. k (a) Up to 5,555,556 shares of Series E Preferred Stock issued pursuant to the Series E Stock Purchase Agreement and (b) the Common Stock into which such Series E Preferred Stock is convertible. l. Common Stock issued to Novartis Agribusiness Biotechnology Research, Inc. or its assigns upon the occurrence of an underwritten initial public offering of the 65. Corporation pursuant to that certain Stock Purchase Agreement between the Corporation and Novartis Agribusiness Biotechnology Research, Inc. dated as of the Series E Preferred Original Issuance Date. "Extraordinary Transaction" shall mean any capital reorganization, or any reclassification of the capital stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of the Corporation with or into another corporation (other than a consolidation or merger which has been treated as a Liquidation under Sections A.5, B.5, C.5, D.5 and E.5 hereof or in which the Corporation is the continuing corporation and which does not result in any change in the powers, designations, preferences and rights (or the qualifications, limitations or restrictions, if any) of the Series Preferred Stock). "Liquidation" shall mean any liquidation, dissolution or winding-up of the affairs of the Corporation. "Nasdaq" shall mean the National Association of Securities Dealers Automated Quotations System. "1997 Equity Incentive Plan" shall mean the Corporation's 1997 Equity Incentive Plan, as the same may be amended from time to time. "Option Plan" shall mean the Corporation's Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan, as amended. "Preferred Stock" shall have the meaning set forth Section 1 of this Article III. "Preferred Certificate" shall mean the certificate(s) of Series Preferred Stock delivered for conversion into Common Stock pursuant to Sections A.7(b)(i), B.7(b)(i), C.7(b)(i), D.7(b)(i) or E.7(b)(i) hereof. "Preferred Directors" shall mean the directors of the Corporation which the Series A, Series B, Series C and Series D Preferred Stockholders have the right to elect pursuant to Sections A.6(b)(i), B.6(b)(i), C.6(b)(i) and D.6(b)(i) hereof. "Proportional Adjustment" shall mean an adjustment made to the price of the Series Preferred Stock upon the occurrence of a stock split, reverse stock split, stock dividend, stock combination, reclassification or other similar change with respect to such security, such that the price of one share of the Series Preferred Stock before the occurrence of any such change shall equal the aggregate price of the share (or shares or fractional share) of such security (or any other security) received by the holder of the Series Preferred Stock with respect thereto upon the effectiveness of such change. "Public Offering" shall mean an Underwritten Offering by the Corporation of authorized but unissued shares of Common Stock at a price per share of not less than $3.00 (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) resulting in 66. gross proceeds to the Corporation (before deducting underwriting commissions and expenses of the offering) of not less than $25,000,000. "Redemption Date" shall mean the date fixed for any redemption pursuant to Sections A.8(c), B.8(c), C.8(c) or D.8(c) hereof. "Redemption Notice" shall mean a request for redemption of the Series Preferred Stockholders pursuant to Sections A.8(a), B.8(a), C.8(a) or D.8(a) hereof. "Redemption Payment" shall mean the redemption payment to which a Series A Preferred Stockholder is entitled pursuant to Section A.8 hereof, a Series B Preferred Stockholder is entitled pursuant to Section B.8 hereof, a Series C Preferred Stockholder is entitled pursuant to Section C.8 hereof or a Series D Preferred Stockholder is entitled pursuant to Section D.8 hereof. "Requesting Holders" shall mean the Series Preferred Stockholders making a request for redemption pursuant to Sections A.8(a), B.8(a), C.8(a) or D.8(a) hereof. "Securities Act" shall mean the Securities Act of 1993, as amended, and the rules and regulations promulgated thereunder. "Series A Preferred Conversion Price" shall have the meaning set forth in Section A.7(d) hereof. "Series A Preferred Fifth Anniversary Date" shall mean the fifth (5th) anniversary of the Series A Preferred Original Issuance Date. "Series A Preferred Original Issuance Date" shall mean the date of first issuance by the Corporation of a share of Series A Preferred Stock. "Series A Preferred Original Purchase Price" shall mean $1.00 per share, subject to Proportional Adjustment. "Series A Preferred Stock" shall have the meaning set forth in Section 1 of this Article III. "Series A Preferred Stockholders" shall mean the holders of the outstanding shares of Series A Preferred Stock. "Series B Preferred Conversion Price" shall have the meaning set forth in Section B.7(d) hereof. "Series B Preferred Fifth Anniversary Date" shall mean the fifth (5th) anniversary of the Series B Preferred Original Issuance Date. "Series B Preferred Original Issuance Date" shall mean the date of first issuance by the Corporation of a share of Series B Preferred Stock. 67. "Series B Preferred Original Purchase Price" shall mean $0.66 per share, subject to Proportional Adjustment. "Series B Preferred Stock" shall have the meaning set forth in Section 1 of this Article III. "Series B Preferred Stockholders" shall mean the holders of the outstanding shares of Series B Preferred Stock. "Series B Stock Purchase Agreement" shall mean the Stock Purchase Agreement for the sale of Series B Preferred Stock dated as of May 13, 1996, as amended by the Amendment to Stock Purchase Agreement dated as of May 13, 1996. "Series C Preferred Liquidation Preference" shall mean the fair value, as determined by the Board of Directors of the Corporation in its reasonable discretion, of the Corporation's intellectual property rights in the genes and gene sequences developed by the Corporation pursuant to the Collaboration Agreement dated as of January 2, 1997, as amended between the Corporation and Finnfeeds International Limited. "Series C Preferred Original Issuance Date" shall mean the date of first issuance by the Corporation of a share of Series C Preferred Stock. "Series C Preferred Original Purchase Price" shall mean $2.25 per share, subject to Proportional Adjustment. "Series C Preferred Stock" shall have the meaning set forth in Section 1 of this Article III. "Series C Preferred Stockholders" shall mean the holders of the outstanding shares of Series C Preferred Stock. "Series D Preferred Conversion Price" shall have the meaning set forth in Section D.7(d) hereof. "Series D Preferred Original Issuance Date" shall mean the date of first issuance by the Corporation of a share of Series D Preferred Stock. "Series D Preferred Original Purchase Price" shall mean $0.85 per share, subject to Proportional Adjustment. "Series D Preferred Stock" shall have the meaning set forth Section 1 of this Article III. "Series D Preferred Stockholders" shall mean the holders of the outstanding shares of Series D Preferred Stock. 68. "Series D Stock Purchase Agreement" shall mean the Stock Purchase Agreement and Agreement and Plan of Reorganization for the sale of Series D Preferred Stock dated as of October 22, 1997. "Series E Preferred Liquidation Preference" shall mean an amount equal to the Series D Preferred Original Purchase Price. "Series E Preferred Original Issuance Date" shall mean the date of first issuance by the Corporation of a share of Series E Preferred Stock. "Series E Preferred Original Purchase Price" shall mean $2.25 per share, subject to Proportional Adjustment. "Series E Preferred Stock" shall have the meaning set forth in Section 1 of this Article III. "Series E Preferred Stockholders" shall mean the holders of the outstanding shares of Series E Preferred Stock. "Series Preferred Stock" shall mean the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series E Preferred Stock, collectively. "Series Preferred Stockholders" shall mean the Series A Preferred Stockholders, the Series B Preferred Stockholders, the Series C Preferred Stockholders, the Series D Preferred Stockholders and the Series E Preferred Stockholders, collectively. "Stockholders' Agreement" shall mean the Amended and Restated Stockholders' Agreement among the Corporation and certain Series Preferred Stockholders of the Corporation dated as of the Series E Preferred Original Issuance Date, as may be amended from time to time. "Underwritten Offering" shall mean a firm commitment offering by one or more underwriters in an offering registered on Form S-1 under the Securities Act. "United States Obligations" shall mean any obligations, the payment of which is backed by the full faith and credit of the United States. ARTICLE IV. Registered Agent The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The name of the registered agent of the Corporation at such address is The Corporation Trust Company. 69. ARTICLE V. Board of Directors The number of directors of the Corporation shall be such number as from time to time shall be fixed by, or in the manner provided in, the By-laws of the Corporation. Unless and except to the extent that the By-laws of the Corporation otherwise require, the election of directors of the Corporation need not be by written ballot. ARTICLE VI. By-laws In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to adopt, amend or repeal the By-laws of the Corporation. ARTICLE VII. Perpetual Existence The Corporation is to have perpetual existence. ARTICLE VIII. Amendments and Repeal Except as otherwise specifically provided in this Seventh Restated Certificate of Incorporation, the Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Seventh Restated Certificate of Incorporation, and to add or insert other provisions authorized at such time by the laws of the State of Delaware, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Seventh Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article VIII. ARTICLE IX. Compromises and Arrangements Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under Section 291 of the General Corporation Law or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under Section 279 of the General Corporation Law, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders 70. of the Corporation, as the case may be, to be summoned in such manner as such court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, then such compromise or arrangement and such reorganization shall, if sanctioned by the court to which such application has been made, be binding on all the creditors or class of creditors, and/or on all of the stockholders or class of stockholders of the Corporation, as the case may be, and also on the Corporation. ARTICLE X. Limitation of Liability No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of his or her fiduciary duty as director; provided, however, that nothing contained in this Article X shall eliminate or limit the liability of a director: a. for any breach of the director's duty of loyalty to the Corporation or its stockholders; b. for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; c. under Section 174 of the General Corporation Law; or d. for any transaction from which the director derived improper personal benefit. No amendment to or repeal of this Article X shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK 71. In Witness Whereof, the undersigned has caused this Seventh Restated Certificate of Incorporation to be duly executed on behalf of the Corporation on December __, 1998. Diversa Corporation By: ______________________________ Terrance J. Bruggeman Chief Executive Officer Attest: ____________________________ Kathleen H. Van Sleen Secretary 72. Exhibit B AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT Amended and Restated Stockholders' Agreement Dated as of January 25, 1999 by and among DIVERSA CORPORATION and the Stockholders named herein Table Of Contents
Page 1. Definitions...................................................... 1 2. Representations and Certain Covenants............................ 10 2.1 By the Company............................................. 10 2.2 By the Stockholders........................................ 10 2.3 By the Series A Preferred Stockholders..................... 10 2.4 Covenants of the Stockholders.............................. 11 3. Legend on Shares and Notice of Transfer.......................... 11 3.1 Restrictive Legends........................................ 11 3.2 Notice of Transfer......................................... 12 3.3 Prohibited Transfers....................................... 13 3.4 Right of First Refusal; Tag-Along Rights................... 13 4. Rights to Purchase Additional Stock.............................. 16 5. Board of Directors............................................... 17 5.1 Number of Directors........................................ 17 5.2 Agreement to Vote for Directors............................ 17 5.3 Default of Agreement to Vote............................... 18 5.4 Board Observation Rights................................... 18 6. Affirmative Covenants of the Company............................. 18 6.1 Use of Proceeds............................................. 19 6.2 Consent as to Issuance of Common Stock...................... 19 6.3 Financial Information....................................... 19 6.4 Other Reports and Inspection................................ 20 6.5 Corporate Existence......................................... 21 6.6 Insurance................................................... 21 6.7 Maintenance of Properties................................... 21 6.8 Compliance with Obligations................................. 21 6.9 Taxes....................................................... 21 6.10 Compliance with Law......................................... 21 6.11 Environmental Matters....................................... 22 6.12 Accounting System........................................... 22
i. Table Of Contents (Continued)
Page 6.13 Reservation of Common Stock................................. 22 6.14 Confidentiality Agreements with Employees and Consultants... 22 6.15 Board of Directors Meetings................................. 22 6.16 Publicity................................................... 22 6.17 Registration Rights......................................... 22 6.18 Key Man Life Insurance...................................... 23 6.19 Voting Agreement with Common Stockholders................... 23 6.20 Option Exercises............................................ 23 6.21 Proprietary Rights.......................................... 23 6.22 Approval of Budget.......................................... 23 6.23 Repayment of Loan Agreement and Release of Encumbrances..... 23 7. Negative Covenants of the Company................................. 23 7.1 Indebtedness; Commitments................................... 24 7.2 Restriction on Dividends.................................... 24 7.3 Restriction on Issuances of Shares.......................... 24 7.4 Protective Provisions....................................... 24 7.5 Business.................................................... 24 7.6 Guarantees.................................................. 24 7.7 Conflicting Agreements...................................... 24 7.8 No Acquisitions............................................. 24 7.9 No Dispositions............................................. 24 7.10 Employee Stock and Stock Options............................ 25 8. Confidentiality................................................... 25 9. Events of Noncompliance........................................... 26 9.1 Occurrence of Event of Noncompliance........................ 26 9.2 Remedies.................................................... 27 10. Filing of Reports Under the Exchange Act.......................... 27 11. Registration Rights............................................... 28 11.1 Demand Registration Rights.................................. 28
ii. Table of Contents (Continued)
Page 11.2 Registration Requested by Holders......................... 30 11.3 "Piggyback" Registrations................................. 31 11.4 Registrations on S-3...................................... 33 11.5 Company's Obligations in Registration..................... 33 11.6 Payment of Registration Expenses.......................... 35 11.7 Information from Holders of Registrable Securities........ 36 11.8 Indemnification........................................... 36 12. Small Business Matters.......................................... 38 12.1 Generally: Certain SBIC Covenants......................... 38 12.2 Regulatory Compliance Cooperation......................... 39 12.3 Information Rights and Related Covenants.................. 40 12.4 Remedies.................................................. 40 13. Duration of Agreement........................................... 41 14. Additional Remedies............................................. 41 15. Successors and Assigns; Limitation on Assignment................ 41 16. Entire Agreement................................................ 42 17. Notices......................................................... 42 18. Changes......................................................... 43 19. Counterparts.................................................... 43 20. Headings........................................................ 43 21. Nouns and Pronouns.............................................. 43 22. Severability.................................................... 43 23. Governing Law; Jurisdiction..................................... 43 24. New York Life Insurance Company Compliance Obligations.......... 43
iii. AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT This Amended and Restated Stockholders' Agreement dated as of January 25, 1999 by and among Diversa Corporation, a Delaware corporation (the "Company"), and those stockholders of the Company whose names appear on the signature pages hereof. R E C I T A L S Whereas, the Company and the holders of the Series A Preferred Stock have previously entered into a Stockholders' Agreement dated as of December 21, 1994 by and among the Company (formerly known as Industrial Genome Sciences, Inc.) and those stockholders whose names appear on the signature pages thereof, as amended by Amendment No. 1 thereto (the "Original Stockholders' Agreement"); Whereas, the Company and the holders of the Series A, Series B, Series C and Series D Preferred Stock have previously entered into a Stockholders' Agreement dated as of May 13, 1996, as amended on July 14, 1997 and October 22, 1997, by and among the Company and those stockholders whose names appear on the signature pages thereof (the "Prior Stockholders' Agreement"), which superceded and replaced in its entirety the Original Stockholders' Agreement; Whereas, the Company is entering, or will enter into, a Stock Purchase Agreement with the Series E Investors pursuant to which the Company will sell shares of its Series E Preferred Stock to the Series E Investors; Whereas, in connection with the sale of the Series E Preferred Stock to the Series E Investors, the Company and the Stockholders desire to (i) amend and restate the Prior Stockholders' Agreement to make certain covenants with the Series E Investors and to grant the Series E Investors certain rights and (ii) terminate the Prior Stockholders' Agreement in its entirety with such Prior Stockholders' Agreement being superseded and replaced in its entirety with this Agreement; Now, Therefore, in consideration of the foregoing and of the respective covenants and undertakings hereunder, the parties hereto do hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "1997 Plan" shall mean the Company's 1997 Equity Incentive Plan. "Affiliate" shall mean, with respect to any Person, (i) a director, officer or stockholder of such Person, (ii) a spouse, parent, sibling or descendant of such Person (or spouse, parent, sibling or descendant of any director or executive officer of such Person), and (iii) any other Person that, 1. directly or indirectly through one or more intermediaries, Controls, or is Controlled by, or is under common Control with, such Person. "Applicable Environmental Law" shall mean CERCLA, RCRA, the Federal Waste Pollution Control Act, 33 U.S.C. (S)(S) 1261 et seq., the Clean Air Act, 42 U.S.C. (S)(S) 7401 et seq., any similar provisions of state or local law in the countries and jurisdictions where the properties of the Company are located and where the Company conducts its business and the regulations thereunder and any other local, state and/or federal laws or regulations, whether currently in existence or hereafter enacted, that govern: (a) the existence, cleanup and/or remediation of contamination on property; (b) the protection of the environment from spilled, deposited or otherwise emplaced contamination; (c) the control of hazardous wastes; or (d) the use, generation, transport, handling, treatment, storage, disposal, removal or recovery of Hazardous Materials, including building materials. "Board of Directors" shall mean the Board of Directors of the Company. "Budget" shall have the meaning set forth in Section 6.3(d). "Business" shall have the meaning set forth in Section 12.1. "Business and Condition" shall mean the business, operations, properties, assets, prospects or condition (financial or otherwise) of the Company. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks located in the City of New York are authorized or required to be closed. "By-laws" shall mean the By-laws of the Company, as amended. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)(S) 6901 et seq. "Capital Stock" shall mean any (i) shares of Common Stock, Preferred Stock or any other equity security of the Company, (ii) debt securities convertible into or exchangeable for any equity security of the Company, (iii) any debt security or capitalized lease with any equity feature with respect to the Company, or (iv) options, warrants or other rights to subscribe for, purchase or otherwise acquire any such equity security or debt security of the Company. "Charter" shall mean the Seventh Restated Certificate of Incorporation of the Company, as filed on December 30, 1998 with the Secretary of State of Delaware, as the same may be restated and amended from time to time. "CIT/VC" shall mean The CIT Group/Venture Capital, Inc. and any successor thereto. 2. "CIT/VC Group" shall mean any entity or Person now existing or hereafter formed which is affiliated with The CIT Group/Venture Capital, Inc. and any successors or assigns of any of the foregoing Persons. "Commission" shall mean the Securities and Exchange Commission or any other Federal agency administering the Securities Act at the applicable time. "Commitment" shall mean all obligations of the Company and its Subsidiaries pursuant to long-term leases or similar agreements relating to the use of personal property. "Common Shares" shall mean the issued and outstanding shares of the Company's Common Stock, $.001 par value per share, at the applicable time. "Common Stock" shall mean the Company's authorized Common Stock, $.001 par value per share. "Common Stockholder" shall mean each Person who has purchased Common Stock from the Company or who acquires Common Stock upon the conversion of preferred stock, by Transfer or otherwise and who becomes a party to this Agreement. "Control" shall mean, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Covenant Preferred Shares" shall mean the issued and outstanding shares of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, and, for purposes of Section 6 only with respect to Sections 6.1, 6.2, 6.3(a) and (b), 6.4 and 6.13, the Series E Preferred Stock. "Covenant Preferred Stockholders" shall mean any holder of Covenant Preferred Shares and any person to whom Covenant Preferred Shares (or the Common Stock issued upon conversion thereof) are Transferred. "Equity Stock" shall have the meaning set forth in Rule 3a11-l under the Exchange Act. "Event of Noncompliance" shall have the meaning set forth in Section 9.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor statute and the rules and regulations thereunder, as shall be in effect from time to time. "Excluded Stock" shall mean (a) the Preferred Shares, (b) the Option Shares, (c) Common Stock issuable upon conversion of the Preferred Shares, (d) securities issued pursuant to the acquisition of another corporation, partnership, joint venture, trust or other entity by the Company by merger, consolidation, stock acquisition, reorganization, or otherwise, (e) Common Stock issuable upon exercise of options granted pursuant to the Restricted Stock Option Agreements, (f) Common Stock issuable as a result of stock dividends, stock splits, stock combinations or other similar transactions by the Company and (g) securities issued in connection with bank credit facilities, equipment financing transactions, other leasing lines of 3. credit or collaborative arrangements not primarily intended to provide equity financing to the Company. "GAAP" shall mean generally accepted accounting principles of the United States. "Governmental Body" shall mean any United States or state government body, any agency, commission or authority thereof, or any quasi-governmental or private body exercising any regulatory or taxing authority thereunder. "Group" shall mean as to (a) a Preferred Stockholder that is a limited partnership, any and all of the venture capital limited partnerships now existing or hereafter arising that are "affiliates" (as defined by Rule 405 promulgated under the Securities Act), in whole or in part, of one or more general partners or of one or more general partners of a general partner of such Stockholder and any predecessor or successor partnership and any limited and general partners of any such partnership; (b) a Preferred Stockholder that is a trust, any of the beneficiaries, settlors or grantors now existing or hereafter arising of, or any Person under common control with, such trust; (c) in the case of HCV I, HCV II, HCV III and HCV IV, the HCV Group; (d) in the case of Everest Trust, any grantor or beneficiary thereof, or any other trust, corporate entity or partnership under common control with Everest Trust for which Rho Management Company, Inc. acts as investment adviser; (e) in the case of APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P., and the Patricof Private Investment Club, L.P., the Patricof Group; (f) in the case of the Series E Investors, any affiliates, in whole or in part, of such Series E Investor; and (g) any Preferred Stockholder, any other Preferred Stockholder. "Hazardous Materials" shall mean any substance which as of the date of this Agreement shall be identified as "hazardous" or "toxic" or otherwise regulated under CERCLA or RCRA or which has been or shall be determined at any time by any agency or court to be a hazardous or toxic substance under Applicable Environmental Law. The term "Hazardous Material" shall also include, without limitation, raw materials, building components (including asbestos), the products of any manufacturing or other activities on the properties, wastes, petroleum, and source, special nuclear or by-product material as defined by the Atomic Energy Act of 1954, as amended (42 U.S.C. (S)(S) 3011 et seq., as amended.) "HCV Group" shall mean, collectively, (i) HCV I, (ii) HCV II, (iii) HCV III, (iv) HCV IV, (v) any venture capital limited partnership now existing or hereafter formed which is affiliated with or under common control with one or more general partners of any general partner of HCV I, HCV II, HCV III and HCV IV (an "HCV Fund") (including, without limitation, the other HCV Funds); (vi) any limited partners or affiliates of HCV I, HCV II, HCV III, HCV IV or any other HCV Fund; and (vii) any successors or assigns of any of the foregoing persons. "HCV I" shall mean HealthCare Ventures I, L.P., a Delaware limited partnership, including any successor thereto. "HCV II" shall mean HealthCare Ventures II, L.P., a Delaware limited partnership, including any successor thereto. "HCV III" shall mean HealthCare Ventures III, L.P., a Delaware limited partnership, including any successor thereto. 4. "HCV IV" shall mean HealthCare Ventures IV, L.P., a Delaware limited partnership, including any successor thereto. "Initial Public Offering" shall mean the Company's initial distribution of Common Stock in an underwritten Public Offering to the general public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act at a price per share which is not less than 300% of the Conversion Price (as defined in the Charter) of the Series B Preferred Stock in effect at the time of such public offering and resulting in gross proceeds (before underwriting commissions and offering expenses) to the Company of not less than $15 million. "Indebtedness" shall mean all liabilities for money borrowed, or for the deferred portion of the purchase price, payable by the Company or its Subsidiaries. "Key Man Life Insurance" shall have the meaning set forth in Section 6.19. "Non-Scientific Founders" shall mean Dr. Peter Korn and Gary Friedman. "Offer" shall have the meaning set forth in Section 4(b) hereof. "Offered Shares" shall have the meaning set forth in Section 4(a) hereof. "Option Shares" shall mean up to 11,275,624 shares of Common Stock issued, available for issuance or subject to options, warrants, awards or rights granted or authorized to be granted to employees, consultants and others who provide services to the Company pursuant to any Stock Plan. "Patricof Group" shall mean, collectively, (i) APA Excelsior IV, L.P., (ii) APA Excelsior IV/Offshore, L.P., (iii) The P/A Fund, L.P., (iv) the Patricof Private Investment Club, L.P., (v) any venture capital limited partnership or entity (a "Patricof Fund") now existing or hereafter formed which is affiliated with or under common control with (x) one or more general partners of any general partner of APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P., or the Patricof Private Investment Club, L.P., or (y) managed or advised by Patricof & Co. Ventures, Inc. or any affiliate thereof (including, without limitation, the other Patricof Funds); (vi) any limited partners or affiliates of APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P., or the Patricof Private Investment Club, L.P., or any other Patricof Fund; and (vii) any successors or assigns of any of the foregoing persons. Any reference to APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A Fund, L.P., and the Patricof Private Investment Club, L.P., shall mean such entity and any successor to such entity. "Person" shall mean any individual, corporation, partnership, a limited liability company, joint venture, trust, association, unincorporated organization, other entity, or Governmental Body. "Preferred Shares" shall mean the issued and outstanding shares of the Company's Series A Preferred Stock, $.001 par value per share, Series B Preferred Stock, $.001 par value 5. per share, Series C Preferred Stock, $.001 par value per share, Series D Preferred Stock, $.001 par value per share, and Series E Preferred Stock, $.001 par value per share. "Preferred Stockholder" shall mean any holder of Preferred Shares and any Person to whom Preferred Shares (or the Common Stock issued upon conversion thereof) are Transferred. "Pro Rata Fraction" shall have the meaning set forth in Section 3.4(b). "Public Offering" shall mean a distribution of Common Stock in an underwritten public offering to the general public pursuant to a registration statement filed with and declared effective by the Commission pursuant to the Securities Act. "RCRA" shall mean Resource Conservation and Recovery Act, 42 U.S.C. (S)(S) 6901 et seq. "Registrable Securities" shall mean the aggregate of Series A Registrable Securities, the Series B Registrable Securities, the Series C Registrable Securities, the Series D Registrable Securities and the Series E Registrable Securities. "Regulated Holder" shall mean any holder of the Company's Securities that is (or that is a subsidiary of a bank holding company that is) subject to the various provisions of Regulation Y of the Board of Governors of the Federal Reserve Systems, 12 C.F.R., Part 225 (or any successor to Regulation Y). "Regulatory Problem" shall mean (i) any set of facts or circumstances wherein it has been asserted by any governmental regulatory agency (or CIT/VC reasonably believes that there is a significant risk of such assertion) that such Person (or any bank holding company that controls such Person) is not entitled to hold, or exercise any material right with respect to, all or any portion of the Securities of the Company which such Person holds or (ii) when such Person and its Affiliates would own, control or have power (including voting rights) over a greater quantity of Securities of the Company than is permitted under any law or regulation or any requirement of any governmental authority applicable to a Person or to which such Person is subject. "Restricted Securities" shall mean the aggregate of Series A Restricted Securities, the Series B Restricted Securities, the Series C Restricted Securities, the Series D Restricted Securities and the Series E Restricted Securities. "Restricted Stock Option Agreements" shall mean the Restricted Stock Option Agreements dated December 21, 1994 between the Company and each of the Scientific Founders and the Non-Scientific Founders (except Barry Marrs) and the Restricted Stock Option Agreement dated December 19, 1994 between the Company and Barry Marrs. "SBA" shall have the meaning set forth in Section 12.1. "SBIA" shall have the meaning set forth in Section 12.1. "SBIC" shall have the meaning set forth in Section 12.1. 6. "Scientific Founders" shall mean Dr. Melvin Simon, Dr. Jeffrey H. Miller, Dr. Barry Marrs and Dr. Karl Stetter. "Securities" shall mean, with respect to any Person, such Person's capital stock or any options, warrants or other Securities which are directly or indirectly convertible into, or exercisable or exchangeable for, such Person's capital stock (whether or not such derivative Securities are issued by the Company). Whenever a reference herein to Securities refers to any derivative Securities, such reference shall apply to such derivative Securities and all underlying Securities directly or indirectly issuable upon conversion, exchange or exercise of such derivative Securities. "Securities Act" shall mean the Securities Act of 1933, as amended, and any successor statute and the rules and regulations of the Commission thereunder, as shall be in effect at the applicable time. "Series A Preferred Stock" shall mean the Series A Preferred Stock, $.001 par value per share, of the Company. "Series A Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series A Restricted Securities, or constituting a portion of the Series A Restricted Securities. "Series A Restricted Securities" shall mean the Series A Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series A Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the holders of the Series A Preferred Stock (other than Series B Preferred Stock) which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series A Preferred Stock or any Common Stock which has been issued on conversion of Series A Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series A Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of December 21, 1994 by and among the Company and the parties thereto, as amended by the Stock Purchase Agreement and Amendment to Stock Purchase Agreement, dated March 15, 1995 by and among the Company and the parties thereto, as amended by the Stock Purchase Agreement and Amendment to Stock Purchase Agreement dated July 28, 1995 by and among the Company and the parties thereto, as amended by Amendment No. 3 to the Stock Purchase Agreement dated May 13, 1996 by and among the Company and the parties thereto. "Series B Preferred Stock" shall mean the Series B Preferred Stock, $.001 par value per share, of the Company. "Series B Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series B Restricted Securities, or constituting a portion of the Series B Restricted Securities. 7. "Series B Restricted Securities" shall mean the Series B Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series B Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the holders of the Series B Preferred Stock (other than Series A Preferred Stock) which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series B Preferred Stock or any Common Stock which has been issued on conversion of Series B Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series B Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of May 13, 1996, by and among the Company and the purchasers of the Series B Preferred Stock named as Investors therein. "Series C Preferred Stock" shall mean the Series C Preferred Stock, $.001 par value per share, of the Company. "Series C Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series C Restricted Securities, or constituting a portion of the Series C Restricted Securities. "Series C Restricted Securities" shall mean the Series C Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series C Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the holders of the Series C Preferred Stock which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series C Preferred Stock or any Common Stock which has been issued on conversion of Series C Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series C Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of July 14, 1997 by and among the Company and the parties thereto. "Series D Preferred Stock" shall mean the Series D Preferred Stock, $.001 par value per share, of the Company. "Series D Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series D Restricted Securities, or constituting a portion of the Series D Restricted Securities. "Series D Restricted Securities" shall mean the Series D Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series D Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the 8. holders of the Series D Preferred Stock which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series D Preferred Stock or any Common Stock which has been issued on conversion of Series D Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series D Stock Purchase Agreement" shall mean the Stock Purchase Agreement and Agreement and Plan or Reorganization, dated as of October 22, 1997 by and among the Company and the parties thereto. "Series E Investors" shall mean the investor(s) listed on the Schedule of Series E Investors attached hereto. "Series E Preferred Stock" shall mean the Series E Preferred Stock, $.001 par value per share, of the Company. "Series E Registrable Securities" shall mean the shares of Common Stock issued or issuable on conversion or exercise of Series E Restricted Securities, or constituting a portion of the Series E Restricted Securities. "Series E Restricted Securities" shall mean the Series E Preferred Stock and the Common Stock issued or issuable upon the conversion of the Series E Preferred Stock, and any other securities of the Company which may be heretofore or hereafter issued to any of the holders of the Series E Preferred Stock which are convertible into or exercisable or exchangeable for shares of Common Stock (including, without limitation, other classes or series of preferred stock, warrants, options or other rights to purchase Common Stock or convertible debentures or other convertible debt securities) and any Common Stock (howsoever acquired) by any holder of Series E Preferred Stock or any Common Stock which has been issued on conversion of Series E Preferred Stock, which have not been sold (a) in connection with an effective registration statement filed pursuant to the Securities Act, or (b) pursuant to Rule 144 or Rule 144A promulgated by the Commission under the Securities Act. "Series E Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of January 25, 1999, or any additional stock purchase agreement for the purchase and sale of Series E Preferred Stock, by and among the Company and the parties thereto. "Shares" shall mean and include all shares of voting capital stock of the Company now owned or hereafter acquired by any Stockholder or transferee of such Stockholder. "Stockholder" shall mean each Person who has purchased Shares from the Company or who acquires Shares upon conversion of the Preferred Shares, the exercise of options, Transfer or otherwise and who is a party to this Agreement. "Stock Plan" shall mean any stock award or option plan, agreement or arrangement for officers, directors, consultants, employees and others who render services to the Company. 9. "Subsidiary" shall mean, with respect to any Person, any corporation of which securities having the power to elect a majority of that corporation's Board of Directors (other than securities having that power only upon the happening of a contingency that has not occurred) are held by such Person or one or more of its Subsidiaries. "Taxes" shall mean all taxes, duties, charges, fees, levies, interest, penalties, additions to tax or other assessments, including, but not limited to, foreign, federal, state and local income, excise, employment, property, sales, use, occupation, value added and franchise taxes and customs duties, imposed by any Governmental Body and any payments with respect thereto required under any tax-sharing agreement. "Transfer" shall include any sale, assignment, transfer, pledge, encumbrance, or other disposition of, or the subjecting to a security interest of, any Restricted Securities, or any disposition of any Restricted Securities or of any interest therein which would constitute a sale thereof within the meaning of the Securities Act. "Voting Agreement" shall mean the Amended and Restated Voting Agreement dated as of even date herewith, by and among the Company, the Preferred Stockholders and certain Common Stockholders, as the same may be amended from time to time. 2. Representations and Certain Covenants. 2.1 By the Company. The Company represents to each Stockholder that: (a) The execution, delivery and performance by the Company of this Agreement and each other agreement to be entered into by the Company in connection with this Agreement have been duly authorized by all action required by law, its Charter, its By-laws or otherwise. (b) This Agreement and such other agreements have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against it in accordance with their terms. 2.2 By the Stockholders. Each Stockholder, as to itself or himself, represents to the Company and the other Stockholders that: (a) The execution, delivery and performance by such Stockholder of this Agreement and each other agreement to be entered into by such Stockholder in connection with this Agreement have been duly authorized by all action required by law, and by the certificate of incorporation and by-laws, partnership agreement or other governing instrument of such Stockholder. (b) This Agreement and such other agreements have been duly executed and delivered by such Stockholder and constitutes the legal, valid and binding obligations of such Stockholder enforceable against it or him in accordance with their terms. 2.3 By the Series A Preferred Stockholders. Each holder of the Series A Preferred Stock agrees to waive any prior breach of the Series A Preferred Stock Purchase Agreement and 10. each other agreement between the Company and the holders of Series A Preferred Stock. The right of the holders of Series A Preferred Stock are as set forth in this Agreement, the Series A Stock Purchase Agreement and the Charter; for the avoidance of doubt, the Series A Stockholders shall not be deemed to have waived any rights available to them in the future under either of said agreements or the Charter. 2.4 Covenants of the Stockholders. Each of the Stockholders hereby waives any default or Event of Noncompliance that may have occurred prior to the date hereof with respect to the late reporting or presentation of financial materials and/or budgets pursuant to Sections 6.3 and 6.22 herein. 3. Legend on Shares and Notice of Transfer. 3.1 Restrictive Legends. (a) Each certificate evidencing Shares, and each certificate evidencing Shares held by subsequent transferees of any such certificate, shall (unless otherwise permitted by the provisions of Section 3.2 hereof) be stamped or otherwise imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. THESE SECURITIES MAY NOT BE PLEDGED, HYPOTHECATED, SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW. (b) Each certificate evidencing Shares, and each certificate evidencing Shares held by subsequent transferees of any such certificate, shall also be stamped or otherwise imprinted with a legend in substantially the following form: ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE TERMS AND CONDITIONS OF AN AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT, BY AND AMONG DIVERSA CORPORATION, THE HOLDER OF RECORD OF THIS CERTIFICATE AND CERTAIN OTHER SIGNATORIES THERETO, AND NO TRANSFER OF SUCH SECURITIES SHALL BE VALID OR EFFECTIVE EXCEPT IN ACCORDANCE WITH SUCH AGREEMENT AND UNTIL SUCH TERMS AND CONDITIONS HAVE BEEN FULFILLED. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD 11. OF THIS CERTIFICATE TO THE SECRETARY OF DIVERSA CORPORATION. 3.2 Notice of Transfer. (a) Each of the Stockholders, and any other holder of any Shares by acceptance thereof, agrees that, prior to any Transfer of any Shares, such holder will give written notice to the Company of such holder's intention to effect such Transfer and to comply in all other respects with the provisions of this Section 3.2 and all of the provisions of Section 3.4 hereof. Each such notice shall contain (i) a statement setting forth the intention of said holder's prospective transferee with respect to its retention or disposition of said Shares, and (ii) unless waived by the Company, an opinion of counsel (reasonably satisfactory to the Company and its counsel) for said holder (who may be the inside or staff counsel employed by said holder), as to the necessity or non-necessity for registration under the Securities Act and applicable state securities laws in connection with such Transfer and stating the factual and statutory bases relied upon by counsel. The following provisions shall then apply: (i) If the proposed Transfer of Shares may be effected without registration or qualification under the Securities Act and any applicable state securities laws, then the registered holder of such Shares shall be entitled to Transfer such Shares in accordance with Section 3.3 and the intended method of disposition specified in the statement delivered by said holder to the Company. (ii) If the proposed Transfer of such Shares may not be effected without registration under the Securities Act or registration or qualification under any applicable state securities laws, the registered holder of such Shares shall not be entitled to Transfer such Shares until the requisite registration or qualification is effective. (b) Notwithstanding the provisions of Section 3.2, (i) in the case of a Transfer by a holder to a member of such holder's Group, no such opinion of counsel shall be necessary, provided that the transferee agrees in writing to be subject to Section 3 hereof to the same extent as if such transferee were originally a signatory to this Agreement, and (ii) in the case of any holder of Restricted Securities that is a partnership, no such opinion of counsel shall be necessary for a Transfer by such holder to a partner of such holder, or a retired partner of such holder who retires after the date hereof, or the estate of any holder who retires after the date hereof, or the estate of any such partner or retired partner if, with respect to such Transfer by a partnership, such Transfer is made in accordance with the partnership agreement of such partnership, and the transferee agrees in writing to be subject to the terms of Section 3 hereof to the same extent as if such transferee were originally a signatory to this Agreement. Transfers pursuant to this Section 3.3(b) are not subject to the provisions of Section 3.4. (c) Each certificate evidencing the Shares issued upon such Transfer (and each certificate evidencing any untransferred balance of such Shares) shall bear the legends set forth in Section 3.1 hereof unless the Shares are no longer subject to this Stockholders' Agreement and (i) in the opinion of counsel (reasonably acceptable to the Company) addressed to the Company the registration of future Transfers is not required by the applicable provisions of the Securities Act or applicable state securities laws; (ii) the Company shall have waived the 12. requirement of such legend; or (iii) in the reasonable opinion of counsel to the Company, such Transfer shall have been made in connection with an effective registration statement filed pursuant to the Securities Act or in compliance with the requirements of Rule 144 or Rule 144A (or any similar or successor rule) promulgated under the Securities Act, and in compliance with applicable state securities laws, to a person who is not an affiliate (as such term is defined in the Securities Act) of the Company. 3.3 Prohibited Transfers. (a) Each Stockholder agrees that it or he shall not Transfer any of its or his Shares without the prior written consent of the holders of at least 75% in interest of the Preferred Shares, voting together as a class (without counting the Shares held by such transferring Stockholder) except as provided for in Section 3. (b) Notwithstanding anything to the contrary contained herein, a Stockholder may Transfer all or any of its Shares to a member of its Group and, in the case of any stockholder which is a partnership, to a partner of such holder, or a retired partner of such holder who retires after the date hereof, or the estate of any holder who retires after the date hereof, or the estate of any such partner or retired partner if, with respect to such Transfer by a partnership, such Transfer is made in accordance with the partnership agreement of such partnership provided that any such transferee shall agree in writing with the Company, prior to and as a condition precedent to such transfer, to be bound by all of the provisions of this Agreement. (c) If requested in writing by the managing underwriters, if any, of any Public Offering, each Stockholder agrees not to offer, sell, contract to sell or otherwise dispose of any Shares except as part of such Public Offering within thirty (30) days before or one hundred and eighty (180) days after the effective date of the registration statement filed with respect to said offering, and the Company hereby also so agrees; provided, however, that this restriction will not apply to transfers permitted under Section 3.3(b). (d) Each Transfer of Shares which is permitted by Section 3 of this Stockholders' Agreement shall be by written agreement (the "Transfer Agreement"), in a form reasonably satisfactory to the Company and its counsel, pursuant to which the transferee (other than a Stockholder who is already a party to this Stockholders' Agreement) agrees to execute a counterpart copy of this Stockholders' Agreement, and to abide by, and hold the transferred Shares subject to, the terms of this Agreement that are applicable to the transferring Stockholder as of the time of the Transfer and that would have been applicable to such transferring Stockholder had the transferring Stockholder retained such transferred Shares. 3.4 Right of First Refusal; Tag-Along Rights. (a) If a Stockholder (for purposes of this Section, the "Selling Stockholder") desires to sell all or any part of his Shares pursuant to a bona fide, arm's-length offer from a creditworthy third party (the "Proposed Transferee"), the Selling Stockholder shall submit a written offer (the "Offer") to sell such Shares (the "Offered Shares") to the other Stockholders and the Company, on terms and conditions, including price, not less favorable to the other Stockholders and the Company than those on which the Selling Stockholder proposes to sell the 13. Offered Shares to the Proposed Transferee. The Offer shall disclose the identity of the Proposed Transferee, the number of Offered Shares proposed to be sold, the total number of Shares owned by the Selling Stockholder, the terms and conditions, including price, of the proposed sale, the address of the Selling Stockholder and any other material facts relating to the proposed sale. (b) Subject to and in accordance with the priorities of rights established in subsection (c) below, each Stockholder shall have the right (the "Right of First Refusal") to purchase that number of Offered Shares as shall be equal to the number of Offered Shares multiplied by a fraction, the numerator of which shall be the number of Shares then owned by such Stockholder and the denominator of which shall be the aggregate number of Shares then owned by all of the Stockholders less those owned by the Selling Stockholder (the "Pro Rata Fraction"). For the purpose of calculating the Pro Rata Fraction, each Preferred Share shall be deemed to represent the number of Common Shares into which the Preferred Share is then convertible. (c) Stockholders shall have a right of oversubscription such that if any Stockholder fails to accept the Offer as to its or his full Pro Rata Fraction, the other Stockholders, among them, shall have the right to purchase up to the balance of the Offered Shares not so purchased. Such right of oversubscription may be exercised by a Stockholder by accepting the Offer as to more than its or his Pro Rata Fraction. If, as a result thereof, such oversubscriptions exceed the total number of Offered Shares available in respect of such oversubscription privilege, the oversubscribing Stockholders shall be cut back with respect to their oversubscriptions so as to sell the Offered Shares as nearly as possible in accordance with their respective Pro Rata Fractions or as they may otherwise agree among themselves. (d) If a Stockholder desires to purchase all or any part of the Offered Shares, such Stockholder (a "Purchasing Stockholder") shall communicate in writing its or his election to purchase (an "Acceptance") to the Selling Stockholder, which Acceptance shall state the number of Offered Shares the Purchasing Stockholder desires to purchase and shall be delivered in person or mailed to the Selling Stockholder at the address set forth in the Offer, with a copy to the Company and the other Stockholders, within twenty (20) days of the date the Offer was made. (e) If the other Stockholders do not accept the Offer for all of the Offered Shares, the Company shall have the right to purchase all of the remaining Offered Shares (including any Tag-Along Shares being offered pursuant to paragraph (j) below). If the Company desires to purchase all of the remaining Offered Shares it shall seek the approval of the holders of at least 75% in interest of the Preferred Shares (excluding those Preferred Shares owned or held by the Selling Stockholder and any Tag-Along Stockholder pursuant to paragraph (j) below), voting together as a class. Upon obtaining the requisite approval from the Preferred Stockholders, the Company shall communicate in writing its acceptance to the Selling Stockholder and the other Stockholders, which Acceptance shall be delivered in person or mailed to the Selling Stockholder and the other Stockholders within thirty (30) days of the date the Offer was made. (f) Sale of the Offered Shares pursuant to this Section 3.4 shall be made at the offices of the Company no later than the thirtieth (30) day following the expiration of the 30-day 14. period after the Offer is made (or if such thirtieth (30) day is not a Business Day, then on the next succeeding Business Day). Such sales shall be effected by the Selling Stockholder's delivery to each Purchasing Stockholder or the Company, as the case may be, of a certificate or certificates evidencing the Offered Shares to be purchased by it or him, duly endorsed for transfer to the Purchasing Stockholder or the Company, as the case may be, which Offered Shares shall be delivered free and clear of all liens, charges, claims and encumbrances of any nature whatsoever, against payment to the Selling Stockholder of the purchase price therefor by the Purchasing Stockholder or Company, as the case may be. Payment for the Offered Shares shall be made as provided in the Offer or by wire transfer or certified check. (g) If the Purchasing Stockholders and the Company do not agree to purchase all of the Offered Shares, then the Offered Shares may be sold by the Selling Stockholder at any time within 120 days after the date the Offer was made. Any such sale shall be to the Proposed Transferee, at not less than the price and upon other terms and conditions, if any, not more favorable to the Proposed Transferee than those specified in the Offer. Any Offered Shares not sold within such 120-day period shall continue to be subject to the requirements of a prior offer pursuant to this Section 3.4. (h) If any Selling Stockholder becomes obligated to sell any Shares (a "Defaulting Stockholder") to the Company or any Purchasing Stockholder under this Agreement and fails to deliver such Shares in accordance with the terms of this Agreement, the Company or the Purchasing Stockholder, as the case may be, may, at its or his option, in addition to all other remedies it or he may have, send to the Defaulting Stockholder the purchase price for such Shares as is herein specified. Thereupon, the Company, upon written notice to the Defaulting Stockholder, if applicable, shall (x) cancel on its books the certificate or certificates representing the Shares to be sold and (y) issue, in lieu thereof, in the name of the Purchasing Stockholder, a new certificate or certificates representing such Shares, and thereupon all of the Defaulting Stockholder's rights in and to such Shares shall terminate, except for the right to receive payment of the purchase price therefor. (i) Notwithstanding anything herein to the contrary, the Selling Stockholder shall not be obligated to sell any Shares to the Company or the other Stockholders, and will be free to sell all of the Shares to the Proposed Transferee, if the Company and the Stockholders do not elect to buy all of the Shares specified in the Offer. (j) In lieu of exercising the Right of First Refusal, each of the other Stockholders (for the purposes of this paragraph, the "Tag-Along Stockholder") shall have the irrevocable right (the "Tag-Along Right") to require the Selling Stockholder to cause the Proposed Transferee to purchase from such Tag-Along Stockholder that number of Shares held by such Tag-Along Stockholder as is equal to the product of the Offered Shares, multiplied by a fraction, the numerator of which is the number of Shares held by such Tag-Along Stockholder and the denominator of which is the number of Shares owned by such Tag-Along Stockholder plus the sum of the number of Shares owned by the Selling Stockholder and all other Tag-Along Stockholders who are exercising their Tag- Along Rights (the "Tag-Along Shares"). The sale of the Offered Shares (as reduced by the Tag-Along Shares, the "Remaining Offered Shares") and the Tag- Along Shares shall be for the same consideration and otherwise on the same terms and conditions for all holders. The Tag-Along Right shall be exercised by a Tag- Along Stockholder 15. by notifying the Selling Stockholder and the Company in writing (the "Tag-Along Notice") within twenty (20) calendar days of receiving the Offer of his intention to sell his Tag-Along Shares. Failure by any Stockholder to deliver a Tag-Along Notice during such twenty (20) calendar day period shall be deemed to constitute the election of such Stockholder not to exercise his Tag-Along Rights. If the Proposed Transferee does not consummate the purchase of all of the Remaining Offered Shares and the Tag-Along Shares within 120 calendar days from the receipt by the Selling Stockholder of a Tag-Along Notice from each of the other Stockholders, the Offered Shares and Tag-Along Shares shall again become subject to the terms of this Section 3. 4. Rights to Purchase Additional Stock. (a) Except for Excluded Stock, the Covenant Preferred Stockholders shall have the right to subscribe to any and all issuances of Capital Stock of the Company ("Company Offered Shares"). Each Covenant Preferred Stockholder shall have the right to purchase that number of Company Offered Shares as shall be equal to the number of Company Offered Shares multiplied by a fraction, the numerator of which shall be the number of Shares then owned by such Covenant Preferred Stockholder and the denominator of which shall be the aggregate number of Shares then owned by all of the Covenant Preferred Stockholders (the "Fraction"). For purposes of calculating the Fraction, all issued and outstanding securities held by the Covenant Preferred Stockholders that are convertible into or exercisable or exchangeable for shares of Common Stock (including any issued and issuable Covenant Preferred Shares) or for any such convertible, exercisable or exchangeable securities, shall be treated as having been so converted, exercised or exchanged. (b) In the event the Company shall propose to issue Capital Stock except for Excluded Stock, the Company shall give written notice (the "Offer of Shares") to each Covenant Preferred Stockholder, which shall set forth the number and kind or class of shares of Capital Stock proposed to be issued, the terms and conditions thereof and the price therefor. Such notice shall be given at least twenty (20) days prior to the issuance of such Capital Stock. (c) The Offer of Shares by its terms shall remain open and irrevocable for a period of twenty (20) days from the date of its delivery to such Covenant Preferred Stockholder ("20-Day Period"). (d) Each Covenant Preferred Stockholder shall evidence its acceptance of the Offer of Shares by delivering a written notice ("Notice of Acceptance"), signed by the Covenant Preferred Stockholder, setting forth the number of Company Offered Shares which the Covenant Preferred Stockholder elects to purchase. The Notice of Acceptance must be delivered to the Company prior to the end of the 20-Day Period. (e) If the Covenant Preferred Stockholders do not tender Notices of Acceptance for all of the Company Offered Shares, the Company shall have ninety (90) days from the expiration of the 20-Day Period to sell all or any part of the Company Offered Shares refused by the Covenant Preferred Stockholders to any Person(s), but only upon terms and conditions which are in all material respects no more favorable to such other Person(s) than those set forth in the Offer of Shares. 16. (f) Upon the closing of the sale of Company Offered Shares to any third party (which shall include full payment of the purchase price to the Company), each Covenant Preferred Stockholder shall (i) purchase from the Company, and the Company shall issue and sell to such Covenant Preferred Stockholder, any Company Offered Shares for which such Covenant Preferred Stockholder tendered a Notice of Acceptance upon the terms specified in the Offer of Shares and (ii) execute and deliver an agreement restricting transfer of such Company Offered Shares substantially as set forth in Section 3 of this Agreement. (g) In each case, any Company Offered Shares not purchased either by the Covenant Preferred Stockholders or by any other Person in accordance with this Section 4 may not be sold or otherwise disposed of until they are again offered to the Covenant Preferred Stockholder under the procedures specified in this Section 4. (h) If the Capital Stock to be issued by the Company is to be issued pursuant to a Public Offering (i) notwithstanding the time periods set forth above, the Company may require that the Covenant Preferred Stockholders make an election to either (A) commit to purchase shares of Capital Stock from the Company at a price no higher than the public offering price at the closing of the Public Offering or (B) waive their rights to subscribe for additional shares of Common Stock to be issued in the Public Offering, (ii) the subscription right shall not be applicable to shares issuable if the underwriters exercise their over-allotment option; and (iii) the amount to be purchased pursuant to this Section 4(h) may be reduced if in the written opinion of the managing underwriters of the Public Offering, the purchase of such number of shares by the Covenant Preferred Stockholders would adversely impact the Public Offering. Such election shall be made sufficiently in advance of the filing of the registration statement relating to the Public Offering as shall be reasonably requested by the Company. (i) The rights provided by this Section 4 may be assigned by any Covenant Preferred Stockholder which is a limited partnership or a trust to any and all members of its Group, provided, that all such rights of any assignee to purchase Company Offered Shares will be subject to receipt of appropriate representations from such assignee as reasonably requested by the Company to ensure compliance with all applicable securities laws. 5. Board of Directors. 5.1 Number of Directors. In accordance with Section A.6(b)(i) of the Charter of the Company, the holders of a majority in voting power of the Covenant Preferred Shares, voting together as a separate class, have been granted the exclusive right to elect to the Board of Directors that number of the directors which shall equal a majority of the total number of directors on the Board of Directors. The Company and each of the other parties hereto hereby agree to take such actions as are necessary, so that the whole Board of Directors consists of nine members. 5.2 Agreement to Vote for Directors. The Company hereby agrees to take such actions as are necessary, and each of the other parties hereto agrees to vote his, her or its Covenant Preferred Shares (and any other shares of the Capital Stock of the Company over which he, she or it exercises voting control), and take such other actions as are necessary, so as to elect and thereafter continue in office as Directors of the Company (i) two nominees of the 17. holders of the Series A Preferred Stock, (ii) one nominee of the holders of the Series B Preferred Stock, (iii) one nominee of APA Excelsior IV, L.P., and (iv) one nominee mutually agreed upon by the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class. Each nominating Stockholder may replace any nominee designated by such nominating Stockholder who has been elected to the Board of Directors with a new nominee upon notice to the Board of Directors and to the other stockholders of the Company. If there is any increase in size of the Board of Directors, such that there shall be more than five Preferred Directors (as such term is defined in the Charter of the Company), then, with respect to such additional directors ("Additional Preferred Directors"), the Company hereby agrees to take such actions as are necessary, and each of the other parties hereto agrees to vote his, her or its Covenant Preferred Shares (and any other shares of the Capital Stock of the Company over which he, she or it exercises voting control), and take such other actions as are necessary, so as to elect and thereafter continue in office as Directors of the Company (i) the nominee(s) of the holders of the Series A Preferred Stock with respect to one-half of the Additional Preferred Directors, (ii) the nominee(s) of the holders of the Series B Preferred Stock with respect to one- half of the Additional Preferred Directors, and (iii) if there is an odd number of Additional Preferred Directors, a nominee mutually agreed upon by the holders at least 75% in interest of the Covenant Preferred Shares, voting together as a class. 5.3 Default of Agreement to Vote. In case any of the covenants set forth in this Section 5 shall have been breached by any party hereto, the party or parties entitled to the benefit of such covenants or agreements may proceed to protect and enforce their rights either by proceeding in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Section 5 and/or a temporary or permanent injunction, in any case without showing any actual damage and without establishing, in the case of an equitable proceeding, that the remedy at law is inadequate. 5.4 Board Observation Rights. For so long as CIT/VC or any member of the CIT/VC Group is a holder of Shares, CIT/VC shall have the right to appoint a designee as an observer to the Board of Directors. For so long as Benefit Capital Management Corporation is a holder of Shares, Benefit Capital Management Corporation shall have the right to appoint a designee as an observer to the Board of Directors. For so long as New York Life Insurance Company is a holder of Shares, New York Life Insurance Company shall have the right to appoint a designee as an observer to the Board of Directors. For so long as they hold observation rights under this Section 5.4, each of CIT/VC, Benefit Capital Management and New York Life Insurance Company shall be given notice of all such meetings at the same time and in the same manner as Directors of the Company are informed. 6. Affirmative Covenants of the Company. Subject to Sections 13 and 15, the Company covenants and agrees that, so long as any Covenant Preferred Shares are outstanding, except to the extent the Company receives the approval of the holders at least 75% in interest of the Covenant Preferred Shares, voting together as a class: 18. 6.1 Use of Proceeds. The proceeds of the sale of the Preferred Stock sold in connection with this Agreement and the Original Stockholders' Agreement shall be used by the Company to continue the identification and commercialization of products and processes by genomic analysis of diverse microbes and for working capital purposes related thereto. 6.2 Consent as to Issuance of Common Stock. The Company will use its best efforts to obtain any authorization, consent, approval or other action by and make any filing with any court or Governmental Body that may be required under applicable state securities laws in connection with the issuance of any shares of Common Stock upon conversion of the holder of Covenant Preferred Shares. 6.3 Financial Information. The Company, except as otherwise indicated, will deliver to each Covenant Preferred Stockholder: (a) As soon as practicable and in any event within 90 calendar days after the close of each fiscal year of the Company, copies of (i) the balance sheet of the Company as of the end of such fiscal year, (ii) statements of operations of the Company for such fiscal year, and (iii) statements of changes in cash flows of the Company for such fiscal year, setting forth in each case in comparative form the corresponding figures of the previous annual period and the most recent Budget (as defined in clause (d) below), all in reasonable detail, prepared in accordance with GAAP consistently applied throughout the periods involved and certified (except for the comparison to the most recent Budget), without qualification, by Coopers & Lybrand, LLP or another firm of independent certified public accountants of recognized national standing. (b) As soon as practicable, and in any event within 45 calendar days after the end of each of the first three fiscal quarters of the Company, an unaudited balance sheet of the Company as at the end of each such fiscal quarter and unaudited statements of operations, and changes in cash flows for such fiscal quarter, setting forth in each case in comparative form corresponding figures for the preceding year's respective fiscal quarter and for the Budget, all in reasonable detail, prepared in accordance with GAAP consistently applied throughout the period involved and certified as being correct and complete and fairly presenting the results of operations of the Company for the quarter indicated, subject to year-end audit adjustment, by the principal financial officer of the Company. In addition, as soon as practicable, and in any event within 20 calendar days after the end of each fiscal quarter of the Company, the principal financial officer of the Company will complete and sign a quarterly financial summary in the form attached hereto as Exhibit A. (c) For each calendar month, as soon as practicable and in any event within 20 calendar days after the close of each month, copies of (i) the balance sheet of the Company as of the end of such month, (ii) statements of operations of the Company for such month, and (iii) statements of changes in cash flows of the Company for such month setting forth in each case in comparative form the corresponding figures for the preceding month and for the Budget, for the year to date and for the comparable periods in the preceding year, all in reasonable detail, prepared in accordance with GAAP consistently applied throughout the periods involved and certified as being correct and complete and fairly presenting the results of operations of the 19. Company for the month indicated, subject to year-end audit adjustment, by the principal financial officer of the Company. (d) As soon as practicable and in any event no later than the end of each fiscal year of the Company (or by January 30, 1999 for fiscal year 1999), a proposed annual operating budget for the Company for the succeeding fiscal year, containing forecasts of profit and loss and cash flow with monthly and quarterly breakdowns and management's reasonably estimated projections of Indebtedness and Commitments for the succeeding fiscal year (the "Budget"). The portions of the Budget relating to Indebtedness, Commitments, acquisitions and dispositions shall be approved by at least 75% of the Board of Directors. If less than 75% of the Board of Directors vote to approve the portions of the Budget relating to Indebtedness, Commitments, acquisitions and dispositions, then those portions of the Budget shall be adopted if approved by the vote of (i) more than 50% of the Board of Directors, and (ii) the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class. Furthermore, any acquisition described in Section 7.8 and any disposition described in Section 7.9 shall require approval in accordance with those Sections. (e) Simultaneously with the delivery of the monthly statements required by clause (c), copies of a certificate of the principal financial officer of the Company giving a narrative analysis of operations and trends in the business of the Company during such month. (f) Promptly upon, and in any event within 10 calendar days after, their becoming available, a copy of (i) all reports, proxy statements, financial statements and other materials delivered or sent by the Company to its stockholders, (ii) all minutes of the proceedings of the Board of Directors of the Company and all committees thereof and all written consents signed by directors in lieu of meetings of the Board of Directors and committees thereof, and (iii) all management letters reviewing the Company's accounting and control procedures that the Company receives from its independent certified public accountants. (g) Concurrently with the furnishing of the reports pursuant to Section 6.3(a) and (b) hereof, an Officer's Certificate stating that the Company is not in default under, and has not breached, any material agreements or obligations, including, without limitation, this Agreement, or if any such default or breach exists, specifying the nature thereof and what actions the Company has taken and proposes to take with respect thereto. If for any period the Company shall have any Subsidiary or Subsidiaries whose accounts are consolidated with those of the Company, then the financial statements delivered for such period pursuant to the foregoing clauses (a), (b) and (c) of this Section 6.3 shall be the consolidated and consolidating financial statements of the Company and all such consolidated Subsidiaries and if the financial statements of such Subsidiary or Subsidiaries are not consolidated with those of the Company, separate financial statements for such Subsidiary or Subsidiaries shall be provided. 6.4 Other Reports and Inspection. The Company, upon reasonable prior notice, will make available to each Covenant Preferred Stockholder or its representatives or designees during normal business hours (a) all assets, properties and business records of the Company for inspection and copying and (b) the directors, officers, employees and public accountant (and by 20 this provision the Company hereby authorizes and instructs said accountants to discuss with such holder and such designees its affairs, finances and accounts and the responses of attorneys representing the Company to inquiries made by the Company on behalf of said accountants in connection with their audit of the financial affairs of the Company) of the Company for interviews concerning the business, affairs and finances of the Company. 6.5 Corporate Existence. The Company will, and will cause each of its Subsidiaries to, maintain preserve and renew its corporate existence and all material licenses, authorizations and permits necessary to the conduct of its business. 6.6 Insurance. The Company will maintain policies of insurance, including but not limited to, fire, liability, worker's compensation, directors' & officers' and company reimbursement, business interruption, and product liability, in such amounts and covering such risks as are customarily carried by businesses comparable to the business conducted by the Company. The Company has developed and implemented a risk assessment and insurance program appropriate for its business; and in connection therewith, to the extent that the insurance referred to in the forgoing sentence is either not currently maintained or not maintained in appropriate amounts, the Company will obtain such insurance. 6.7 Maintenance of Properties. The Company will, and will cause each of its Subsidiaries to, maintain and keep its properties in good repair, working order and condition, and from time to time make all necessary or desirable repairs, renewals and replacements, so that its businesses may be properly and advantageously conducted at all times. 6.8 Compliance with Obligations. The Company will, and will cause each of its Subsidiaries to, comply with all other material obligations which it incurs pursuant to any contract or agreement, whether oral or written, express or implied, as such obligations become due to the extent to which the failure to so comply would reasonably be expected to have a material adverse effect upon the Business and Condition of the Company and its Subsidiaries taken as a whole, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and adequate reserves (as determined in accordance with GAAP consistently applied) have been established on its books with respect thereto. 6.9 Taxes. The Company will, and will cause each of its Subsidiaries to, pay when due (i) all Taxes imposed upon it or any of its properties or income, other than Taxes which are being contested in good faith and which Taxes in the aggregate do not involve material amounts, and (ii) all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons which, if unpaid, might result in the creation of a lien upon any of its properties other than claims or demands which are being contested in good faith. 6.10 Compliance with Law. The Company will, and will cause each of its Subsidiaries to, comply, in all material respects, with all applicable statutes, rules, regulations and orders of all Governmental Bodies, with respect to the conduct of its business and the ownership of its properties, provided that the Company shall not be deemed to be in violation of this Section 6.10 as a result of any failure to comply with any provisions of such statutes, rules, regulations and orders, the noncompliance with which would not result in fines, penalties, injunctive relief or other civil or criminal liabilities which, in the aggregate, would materially and 21. adversely affect the Business and Condition of the Company and its Subsidiaries taken as a whole. 6.11 Environmental Matters. The Company shall promptly advise each Covenant Preferred Stockholder in writing of any pending or threatened claim, demand or action by any governmental authority or third party relating to any Hazardous Materials affecting any properties owned or leased by the Company of which it has knowledge. The Company shall not discharge, place, release, spill or dispose of any Hazardous Materials or any other pollutants or effluents upon any properties owned or leased by the Company or elsewhere (including, but not limited to, underground injection of such substances) other than in compliance with the Applicable Environmental Laws and the Company shall not discharge into the air any emission which would require a permit under the Clean Air Act or its state counterparts or any other Environmental Laws unless any and all such permit(s) are obtained prior to any discharge. The stockholders of the Company shall have no control over, or authority with respect to, the waste disposal operations of the Company. 6.12 Accounting System. The Company will maintain a system of accounting and proper books of record and account, in accordance with GAAP, and will set aside on its books reserves for depreciation, depletion, obsolescence, amortization, pending and threatened litigation and otherwise as may be appropriate in conformance with procedures and recommendations of the Company's independent public accountants. 6.13 Reservation of Common Stock. The Company shall reserve and keep available out of its authorized but unissued Common Stock the number of shares of Common Stock required for issuance upon the conversion of all of the Preferred Stock (including any additional shares of Common Stock which may become so issuable by reason of the operation of anti-dilution provisions of the Preferred Stock). 6.14 Confidentiality Agreements with Employees and Consultants. The Company will enter into confidentiality agreements approved by a majority of the Board of Directors with employees and consultants of the Company retained after the date hereof who should have or are proposed to have access to confidential or proprietary information. 6.15 Board of Directors Meetings. The Company shall call, and use its best efforts to have, regular meetings of the Board of Directors on a quarterly basis. The Company shall pay all reasonable travel expenses and other out-of- pocket expenses incurred by Directors who are not employed by the Company in connection with attending meetings of the Board or any committee thereof or in connection with attendance at meetings related to the business of the Company. 6.16 Publicity. The Company shall not identify any of the Covenant Preferred Stockholders as a stockholder or affiliate of the Company in any advertising or promotional material without the prior written consent of such Covenant Preferred Stockholder. 6.17 Registration Rights. The Company shall not hereafter grant to any persons any rights to register or qualify stock of the Company under Federal or state securities laws, unless it shall have first obtained the written consent of the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class. 22. 6.18 Key Man Life Insurance. The Company has obtained and will maintain "key man" life insurance policies (the "Key-Man Life Insurance") covering the lives of such officers of the Company as are designated by the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, in the amount of $1,000,000, the sole beneficiary of which shall be the Company. 6.19 Voting Agreement with Common Stockholders. (a) Upon the exercise of any outstanding option or warrant of the Company (including, without limitation, any options currently outstanding under the Company's Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan (the "1994 Plan")), the Company will request that such exercising optionee or warrant holder become a signatory to the Voting Agreement with respect to the Common Stock exercisable thereof. (b) The Company shall not hereafter issue any Common Stock or other voting security (excluding Common Stock issuable upon the exercise of currently outstanding options granted pursuant to the 1994 Plan) or any security (including any options under any Stock Plan of the Company) which is convertible into or exercisable for Common Stock or any other voting security unless, as a condition precedent to such issuance, the holder of such security agrees to become a signatory to the Voting Agreement. 6.20 Option Exercises. Upon the exercise of any option issued under the 1994 Plan, the optionee shall execute a Stock Purchase and Restriction Agreement in substantially the form of Exhibit B, as amended, to the 1994 Plan. 6.21 Proprietary Rights. The Company has developed and implemented a policy, satisfactory to the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class, with regard to noncompetition, nonsolicitation of employees, suppliers and customers of the Company by current and future employees of, or consultants to, the Company. It is contemplated that current and future employees of, or consultants to, the Company will be required to execute appropriate forms of agreement implementing the foregoing policy. 6.22 Approval of Budget. The Company shall obtain the approval required by Section 6.3(d) of the portions of the Budget relating to Indebtedness, Commitments, acquisitions and dispositions prior to the beginning of each fiscal year beginning with fiscal year 1998. 6.23 Repayment of Loan Agreement and Release of Encumbrances. The Company shall repay all amounts outstanding under the Loan Agreement prior to May 15, 1996 and in connection therewith shall obtain and promptly file such forms including, without limitation, UCC-3 termination statements as would be required to release any liens or encumbrances granted by the Company pursuant to the Loan Agreement. 7. Negative Covenants of the Company. Subject to Section 13 hereof, the Company covenants and agrees with the Covenant Preferred Stockholders and their transferees that, without the approval of the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class: 23. 7.1 Indebtedness; Commitments. The Company shall not incur any Indebtedness or Commitments at any time which exceeds by 10% or more of the amount of Indebtedness or Commitments included in a Budget approved by the Board of Directors (and the Covenant Preferred Stockholders, if required) in accordance with Section 6.3(d) hereof. If the Company determines to incur Indebtedness or Commitments in an amount which exceeds by 10% or more the amount of Indebtedness or Commitments included in an approved Budget, then the Company must seek an additional approval in accordance with Section 6.3(d) hereof. 7.2 Restriction on Dividends. The Company shall not declare or make any dividend payment or other distribution of assets, properties, cash rights, obligations or securities on account or in respect of any of its shares of Common Stock or any shares of preferred stock other than those which are both (x) required by the Charter, and (y) relate to the Preferred Shares of the Company. 7.3 Restriction on Issuances of Shares. The Company shall not issue any shares of Capital Stock; provided, however, that the Company may issue shares of Capital Stock pursuant to the options, warrants and rights listed on Schedule 7.3 hereof. 7.4 Protective Provisions. The Company shall not engage in any of the actions specified in Sections A.6(c), B.6(c), C.6(c) or D.6(c) of Article III of its Charter without the written consent in lieu of a meeting, or the affirmative vote at a meeting called for such purpose, of the holders of Preferred Stock, as provided in such Sections. 7.5 Business. The Company will only engage in the businesses of the identification and commercialization of products and processes by genomic analysis of diverse microbes and other living materials. 7.6 Guarantees. The Company will not incur any guarantee or similar contingent obligation in respect of the indebtedness of others, whether or not classified on the Company's balance sheet as a liability (a "Guarantee"). 7.7 Conflicting Agreements. The Company will not enter into any agreement which by its terms might restrict the performance of the Company's obligations pursuant to the terms of this Agreement or the provisions relating to the Preferred Stock included in the Charter, including but not limited to registration rights, and the payment of dividends on, the redemption, voting or conversion of, the Preferred Stock. 7.8 No Acquisitions. The Company shall not, nor shall it permit any of its Subsidiaries to, acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof without the approval of the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class. 7.9 No Dispositions. Other than in the ordinary course of business and other than dispositions of obsolete assets, the Company will not, nor shall it permit any of its Subsidiaries to, sell, lease, encumber or otherwise dispose of or agree to sell, lease, encumber or otherwise dispose of, in any transaction or series of related transactions, any substantial assets of the 24. Company without the approval of the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class. 7.10 Employee Stock and Stock Options. Other than options to purchase up to 11,275,624 shares of Common Stock which may be issued under the 1994 Plan or the 1997 Plan, the Company will not issue Common Stock or stock options to its officers, directors, employees or others who render services to the Company (the "Employees") unless such Common Stock or options, as the case may be, are issued pursuant to a stock option plan approved by holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, and an agreement in form and substance satisfactory to holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, except for immaterial changes thereto as shall be approved from time to time by officers of the Company. 8. Confidentiality. The Preferred Stockholders agree to keep the information heretofore or hereafter furnished to the Preferred Stockholders by the Company or on the Company's behalf (the "Confidential Material") confidential. Notwithstanding the foregoing, the term Confidential Material does not include information that (i) is or becomes publicly available other than through breach of this Agreement by the Preferred Stockholders; (ii) is already known to the Preferred Stockholders at the time of disclosure; (iii) is received by the Preferred Stockholders from a third party not under an obligation of confidentiality to the Company or (iv) is independently developed by the Preferred Stockholders without reference to the Confidential Material. The Preferred Stockholders agree to take reasonable precautions to safeguard the Confidential Material from disclosure to anyone other than appropriate employees, officers, directors, partners and representatives, including auditors and attorneys, of the Preferred Stockholders, which persons shall be advised of the confidential nature of such information. In the event that any Preferred Stockholder or any of such Preferred Stockholder's representatives receive a request or demand to disclose all or any part of the Confidential Material under the terms of a subpoena or order issued by a court of competent jurisdiction or otherwise, the Preferred Stockholders shall (i) promptly notify the Company of the existence, terms and circumstances surrounding such request or demand so that the Company may seek a protective order or other appropriate relief or remedy or waive compliance with the terms hereof, (ii) consult with the Company on the advisability of taking legally advisable steps to resist or narrow such request or demand, and (iii) if disclosure of such Confidential Material is required, disclose such Confidential Material and, subject to reimbursement by the Company of Preferred Stockholder's reasonable expenses, including legal fees, cooperate with the Company in its efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such portion of the disclosed Confidential Material which the Company may so designate. If, in the opinion of Preferred Stockholder's counsel, disclosure by the Preferred Stockholders of all or any part of the Confidential Material is required by law, the Preferred Stockholders shall (i) promptly notify the Company of the proposed disclosure, (ii) disclose only such Confidential Material which is required by law, in the reasonable opinion of the Preferred Stockholders' counsel, to be disclosed and (iii) subject to reimbursement by the Company of the Preferred Stockholders' reasonable expenses, including legal fees, take all legally advisable steps to obtain an order or other reliable assurance that confidential treatment will be accorded to the disclosed Confidential Material to the maximum extent possible or to obtain such other protection under law of the confidential 25. nature of such Confidential Material to the maximum extent possible. Any Preferred Stockholder who is entitled to receive information concerning the Company pursuant to Sections 6.3 and 6.4, shall as a condition to receipt of such confidential information, agree to be bound by this Section 8. 9. Events of Noncompliance. 9.1 Occurrence of Event of Noncompliance. An event of noncompliance (an "Event of Noncompliance") hereunder shall occur if: (a) the Company fails in any material respect to perform or observe any of the covenants contained in the Company fails in any material respect to perform or observe any of the covenants contained in this Stockholders' Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement or the Series D Stock Purchase Agreement, or fails in any material respect to comply with any of the provisions of this Stockholders' Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, the Series D Stock Purchase Agreement or of its Charter applicable to the Covenant Preferred Shares or the Registrable Securities (other than the Series E Registrable Securities); (b) the Company's representations and warranties contained in this Stockholders' Agreement, the Series A Stock Purchase Agreement (including the Schedules and Exhibits attached thereto), the Series B Stock Purchase Agreement (including the Schedules and Exhibits attached thereto), the Series C Stock Purchase Agreement (including the Schedules and Exhibits attached thereto) or the Series D Stock Purchase Agreement (including the Schedules and Exhibits attached thereto) shall be untrue or misleading in any material respect as of the time when made or as of the closings of such agreements; (c) the Company shall become insolvent, make an assignment for the benefit of its creditors, call a meeting of its creditors to obtain any general financial accommodation or suspend business; any material obligation of the Company shall be accelerated or shall not be paid when due; any judicial judgment or settlement shall be outstanding, or a case under any provision of Title 11 of the United States Code, 11 U.S.C. (S) 101 et seq. (the "Bankruptcy Code"), or any comparable law of any jurisdiction, including provisions for receivership or reorganization, shall be commenced by or against the Company which, in the case of an action being commenced against the Company under the Bankruptcy Code, shall remain unstayed or undismissed for a period of sixty (60) days; (d) the Company fails to complete, within five years from the date of the Series B Stock Purchase Agreement either: (i) an Initial Public Offering, (ii) a sale, liquidation or dissolution of the Company, or (iii) a sale, transfer or disposition of substantially all of the assets of the Company; (e) the Company (x) incurs Indebtedness or Commitments in violation of Section 7.1 hereto, (y) pays dividends in violation of Section 7.2 hereto, and/or (z) issues shares of Capital Stock in violation of Section 7.3 hereto; 26. (f) a default or an event of default shall occur or exist with respect to any debt or indebtedness of the Company; or (g) a default or an event of default shall occur or exist with respect to any material contract of the Company, which default could give rise to a material claim by a third party against the Company or the Company's assets. 9.2 Remedies. In the event of the occurrence and continuation of an Event of Noncompliance, the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, may: (a) demand, and be entitled to, in accordance with the provision of Sections A.8, B.8, C.8 and D.8 of Article III of the Charter of the Company, an immediate (i) redemption of all of the Covenant Preferred Shares held by them (or a portion of such shares pro rata), and (ii) immediate payment of all accrued but unpaid dividends and all declared but unpaid dividends; (b) declare an Event of Noncompliance and elect all members of the Board of Directors, which Board may sell, dispose of, or liquidate the assets and/or business of the Company in whatever manner it believes will maximize the return to the Preferred Stockholders, or cause the Company to issue additional securities in a private placement or Public Offering. If the holders of at least 75% in interest of the Covenant Preferred Shares, voting as a class, declare that an Event of Noncompliance exists, the Company may, for a period of 30 days after receipt of such declaration of an Event of Noncompliance, pay the entire redemption amount (including immediate payment of all accrued but unpaid dividends and all declared but unpaid dividends), in cash, of the Preferred Stock. The holders of the Preferred Stock shall, upon receipt of the full payment of the redemption amount (including immediate payment of all accrued but unpaid dividends and all declared but unpaid dividends), transfer and surrender all of their Preferred Stock to the Company, as instructed, and they shall thereafter no longer have any rights as stockholders of the Company. If the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class, shall send written notice of their redemption request to the Company, the Company shall promptly give each of the other holders of Covenant Preferred Shares written notice of the redemption (the "Redemption Notice"). The exercise of the foregoing contractual remedies shall be in addition to all other legal and equitable remedies available to the Preferred Stockholders. 10. Filing of Reports Under the Exchange Act. (a) The Company shall give prompt notice to the Preferred Stockholders of (i) the filing of any registration statement (an "Exchange Act Registration Statement") pursuant to the Exchange Act, relating to any class of equity securities of the Company, (ii) the effectiveness of such Exchange Act Registration Statement, and (iii) the number of shares of such class of equity securities outstanding as reported in such Exchange Act Registration Statement, in order to enable the Preferred Stockholders to comply with any reporting requirements under the 27. Exchange Act or the Securities Act. Upon the written request of a majority in interest of the holders of Preferred Shares, the Company shall, at any time after the Company has registered any shares of Common Stock under the Securities Act, file an Exchange Act Registration Statement relating to any class of equity securities of the Company then held by the holders of Preferred Shares or issuable upon conversion or exercise of any class of debt or equity securities or warrants or options of the Company then held by the holders of Preferred Shares, whether or not the class of equity securities with respect to which such request is made shall be held by the number of persons which would require the filing of a registration statement under Section 12(g)(1) of the Exchange Act. (b) If the Company shall have filed an Exchange Act Registration Statement or a registration statement (including an offering circular under Regulation A promulgated under the Securities Act) pursuant to the requirements of the Securities Act, which shall have become effective (and in any event, at all times following the initial public offering of any of the securities of the Company), then the Company shall comply with all the reporting requirements of the Exchange Act (whether or not it shall be required to do so) and shall comply with all other public information reporting requirements of the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any of the Restricted Securities by any holder of Restricted Securities (including any such exemption pursuant to Rule 144 or Rule 144A thereof, as amended from time to time, or any successor rule thereto or otherwise). The Company shall cooperate with each holder of Restricted Securities in supplying such information as may be necessary for such holder of Restricted Securities to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act (under Rule 144 or Rule 144A thereunder or otherwise) for the sale of any of the Restricted Securities by any holder of Restricted Securities. 11. Registration Rights. 11.1 Demand Registration Rights. (a) Upon written request at any time by holders of Series A Registrable Securities representing in the aggregate at least 50% of the total number of Series A Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Series A Registrable Securities, as requested by the holders of Series A Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Series A Registrable Securities may require the Company to effect no more than one registration under the Securities Act upon the request of the holders of the Series A Registrable Securities pursuant to this Section 11.1(a). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute a registration pursuant to this Section 11.1(a). A request by a holder of Series A Registrable Securities to have the Company effect the registration of Series A Registrable Securities shall not obligate the holder to convert them into Common Stock, whether or not the registration of the Series A Registrable Securities shall become effective, unless and until the Series A Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(a) are in addition to those provided for in Section 11.1(e). 28. (b) Upon written request at any time by holders of Series B Registrable Securities representing in the aggregate at least 50% of the total number of Series B Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Series B Registrable Securities, as requested by the holders of Series B Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Series B Registrable Securities may require the Company to effect no more than one registration under the Securities Act upon the request of the holders of the Series B Registrable Securities pursuant to this Section 11.1(b). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute a registration pursuant to this Section 11.1(b). A request by a holder of Series B Registrable Securities to have the Company effect the registration of Series B Registrable Securities shall not obligate the holder to convert them into Common Stock, whether or not the registration of the Series B Registrable Securities shall become effective, unless and until the Series B Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(b) are in addition to those provided for in Section 11.1(e). (c) Upon written request at any time by holders of Series C Registrable Securities representing in the aggregate at least 50% of the total number of Series C Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Series C Registrable Securities, as requested by the holders of Series C Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Series C Registrable Securities may require the Company to effect no more than one registration under the Securities Act upon the request of the holders of the Series C Registrable Securities pursuant to this Section 11.1(c). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute a registration pursuant to this Section 11.1(c). A request by a holder of Series C Registrable Securities to have the Company effect the registration of Series C Registrable Securities shall not obligate the holder to convert them into Common Stock, whether or not the registration of the Series C Registrable Securities shall become effective, unless and until the Series C Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(c) are in addition to those provided for in Section 11.1(e). (d) Upon written request at any time by holders of Series D Registrable Securities representing in the aggregate at least 50% of the total number of Series D Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Series D Registrable Securities, as requested by the holders of Series D Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Series D Registrable Securities may require the Company to effect no more than one registration under the Securities Act upon the request of the holders of the Series D Registrable Securities pursuant to this Section 11.1(d). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute a registration pursuant to this Section 11.1(d). A request by a holder of Series D Registrable Securities to have the Company effect the registration of Series D Registrable Securities shall not obligate the holder to convert them into Common Stock, whether or not the 29. registration of the Series D Registrable Securities shall become effective, unless and until the Series D Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(d) are in addition to those provided for in Section 11.1(e) (e) Upon written request at any time by holders of Registrable Securities representing in the aggregate at least 50% of the total number of Registrable Securities at the time of such request, the Company shall use its best efforts to effect the registration under the Securities Act and registration or qualification under all applicable state securities laws of the Registrable Securities, as requested by the holders of Registrable Securities, all as provided in the following provisions of this Section 11. Holders of Registrable Securities may require the Company to effect no more than two registrations under the Securities Act, in the aggregate, upon the request of the holders of Registrable Securities pursuant to this Section 11.1(e). Any registration which is not declared effective pursuant to the Securities Act and which does not remain effective as required by Section 11.5(a) below shall not constitute one of the two registrations which the Company is obligated to effect pursuant to this Section 11.1(e). A request by a holder of Shares to have the Company effect the registration of Registrable Securities shall not obligate the holder of Shares to convert them into Common Stock, whether or not the registration of the Registrable Securities shall become effective, unless and until the Registrable Securities are sold pursuant to the registration statement. The registration rights provided for in this Section 11.1(e) are in addition to those provided for in Sections 11.1(a), (b), (c) and (d). 11.2 Registration Requested by Holders. Whenever the Company shall be requested, pursuant to Section 11.1 hereof, to effect the registration of any of the Registrable Securities under the Securities Act (a "Request for Registration"), the Company shall promptly give notice of such proposed registration to all holders of Registrable Securities and thereupon shall, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act and under all applicable state securities laws of: (a) all Registrable Securities which the Company has been requested to register pursuant to the Request for Registration; and (b) all other Registrable Securities which holders of Registrable Securities have, within thirty (30) days after the Company has given such notice, requested the Company to register; (c) all to the extent requisite to permit the sale or other disposition by the holders of the Registrable Securities so to be registered. If the holders of Registrable Securities who requested the registration of Registrable Securities engage one or more underwriters to distribute such Registrable Securities, the Company shall permit the managing underwriter(s) and counsel to the underwriter(s) at the Company's expense to visit and inspect any of the properties of the Company, examine its books, take copies and extracts therefrom and discuss the affairs, finances and accounts of the Company with its officers, employees and public accountants (and by this provision the Company hereby authorizes said accountants to discuss with such underwriter(s) and such counsel its affairs, finances and accounts), at reasonable times and upon reasonable notice, with or without a representative of the Company being present. The Company shall have the right to include in any registration of Registrable Securities required 30. pursuant to this Section 11.2 additional shares of its Common Stock to be issued by the Company ("Company Securities") or shares of Common Stock ("Third Party Registrable Securities") that have the benefit of duly exercised registration rights contractually binding on the Company, provided that if any Registrable Securities to be so registered for sale are to be distributed by or through underwriters, then all Registrable Securities to be so registered for sale and Company Securities and Third Party Registrable Securities, if any, shall be included in such underwriting on the same terms and provided, however, that if, in the written opinion of the managing underwriter(s), the total amount of such securities to be registered will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially and adversely affecting the entire offering, then the Company shall exclude from such underwriting (x) first, the maximum number of Company Securities and Third Party Registrable Securities as is necessary in the opinion of the managing underwriter(s) to reduce the size of the offering and (y) then, the minimum number of Registrable Securities, pro rata to the extent practicable, on the basis of the number of Registrable Securities requested to be registered among the participating holders of Registrable Securities, as is necessary to reduce the size of the offering. A registration that covers both Registrable Securities, Company Securities and Third Party Registrable Securities shall be deemed to have been requested pursuant to a Request for Registration pursuant to the applicable subsection Section 11.1 if the Registrable Securities of the type covered by such subsection constitute at least 50% of the total offering on the effective date of the registration statement but shall not be deemed to be one of the registrations referred to in the applicable subsection of Section 11.1 hereof if Registrable Securities of the type covered by such subsection constitute less than 50% of the total offering on the effective date of the registration statement. 11.3 "Piggyback" Registrations. (a) If the Company at any time proposes other than in accordance with a Request for Registration to register any of its securities under the Securities Act on Form S-1, S-2 or S-3 or on any other form upon which the Registrable Securities may be registered for sale to the general public, whether for its own account or for the account of others, the Company will at each such time give notice to all holders of Registrable Securities of such proposal at least thirty (30) days before the Company files a registration statement. Upon the request of any holder of Registrable Securities given within twenty (20) days after the Company has given such notice, the Company will cause the Registrable Securities which the Company has been requested to register by such holder of Registrable Securities to be registered under the Securities Act, all to the extent requisite to permit the sale or other disposition by such holder of Registrable Securities of the Registrable Securities so registered. (b) If securities are to be registered for sale under a registration not initiated by a Request for Registration and are to be distributed by or through a firm of underwriters, then any Registrable Securities which the Company has been requested to register pursuant to clause (a) of this Section 11.3 shall also be included in such underwriting on the same terms as other securities of the same class as the Registrable Securities included in such underwriting, provided that if, in the written opinion of the managing underwriter(s), the total amount of such securities to be so registered, when added to the Registrable Securities and the securities held by holders of securities other than the Registrable Securities, if any, will exceed the maximum amount of the 31. Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially and adversely affecting the entire offering, then (subject to clause (d) of this Section 11.3) the Company shall exclude from such underwriting (x) first, the maximum number of securities, if any, other than Registrable Securities, being sold for the account of persons other than the Company as is necessary to reduce the size of the offering and (y) second, the minimum number of Registrable Securities, if any, as is necessary in the opinion of the managing underwriter(s) to reduce the size of the offering (any such reduction in Registrable Securities to be made pro rata to the extent practicable on the basis of the number of Registrable Securities requested to be registered among the participating holders of Registrable Securities). (c) If securities are to be registered for sale under a registration not initiated by a Request for Registration and are to be distributed for the account of holders of Third Party Registrable Securities or holders (other than the Company) of other securities of the Company other than Registrable Securities by or through a firm of underwriters of recognized standing under underwriting terms appropriate for such transaction, then any Registrable Securities which the Company has been requested to register pursuant to clause (a) of this Section 11.3 shall also be included in such underwriting on the same terms as other securities included in such underwriting, provided that if, in the written opinion of the managing underwriter or underwriters, the total amount of such securities to be so registered, when added to such Registrable Securities, will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise materially and adversely affecting the entire offering, then the Company shall exclude from such underwriting the number of Registrable Securities and other securities, pro rata to the extent practicable, on the basis of the number of securities requested to be registered, as is necessary in the opinion of the managing underwriter(s) to reduce the size of the offering. (d) Notwithstanding Section 11.3 (a) and (b), the Company shall not exclude more Registrable Securities from registration than is necessary to reduce the number of Registrable Securities to be registered to one-fifth of the total number of securities to be registered, provided, however, that the Company may exclude all Registrable Securities from registration in connection with the Company's Initial Public Offering in its sole discretion, whether or not such exclusion is required in the opinion of the managing underwriter(s). (e) Notwithstanding anything to the contrary contained herein, the provisions of clause (y) of Section 11.3(b) and the provisions of Section 11.3(d) limiting the amount of the Registrable Securities requested to be registered that may be excluded from such registration may be waived by the affirmative vote of holders of 50% of the Registrable Securities requested to be registered. If, by reason of the provisions of Section 11.3(b) or Section 11.3(d), in any public offering other than the Company's Initial Public Offering, more than 10% of the Registrable Securities requested to be registered are excluded from such registration statement, then, in each such case, the holders of the Registrable Securities shall be entitled to an additional demand registration pursuant to Section 11.1(e) and shall be entitled to an additional registration pursuant to Section 11.1 at the Company's expense, without reimbursement, in accordance with Section 11.6. 32. 11.4 Registrations on S-3. At such time as the Company shall have qualified for the use of Form S-3 (or any successor form promulgated under the Securities Act), each holder of Registrable Securities shall have the right to request in writing an unlimited number of registrations on Form S-3 (except that the holders of Series E Registrable Securities shall only have the right to request in writing three (3) registrations on Form S-3), provided that the Registrable Securities proposed to be included in each such registration statement have a proposed aggregate offering price of at least $500,000 and that no holder shall have a right to request that Registrable Securities be registered on Form S-3 during any calendar year if Registrable Securities of such holder were included in a registration statement on Form S-3 pursuant to a request made by such holder during such calendar year. Each such request by a holder shall: (a) specify the number of Registrable Securities which the holder intends to sell or dispose of, and (b) state the intended method by which the holder intends to sell or dispose of such Registrable Securities. Upon receipt of a request pursuant to this Section 11.4, the Company shall use its best efforts to effect such registration or registrations on Form S-3. 11.5 Company's Obligations in Registration. Whenever the Company is obligated to effect the registration of any Registrable Securities under the Securities Act, as expeditiously as possible the Company will use its best efforts to: (a) prepare and file with the Commission, a registration statement with respect to such Registrable Securities and cause such registration statement to become and remain effective, provided, that the Company shall not be required to keep such registration statement effective, or to prepare and file any amendments or supplements thereto, after the later of (i) the last business day of the ninth month following the date on which such registration statement becomes effective under the Securities Act or such longer period during which the holders of the Registrable Securities registered thereunder shall pay all expenses reasonably incurred to keep such registration statement effective with respect to any of the Registrable Securities so registered or (ii) the date on which all of the Registrable Securities registered pursuant to such registration statement have been sold; provided further that in the event the Commission shall have declared any other registration statement with respect to an offering of securities of the Company to be effective within four months prior to the Company's receiving a Request for Registration, the Company may delay the effective date of the registration statement filed in response to the Request for Registration until six months after the effective date of the previous registration statement; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement whenever the holders of Registrable Securities covered by such registration statement shall desire to dispose of the same; (c) furnish to the holders of Registrable Securities for whom such Registrable Securities are registered or are to be registered such number of copies of a printed prospectus, including a preliminary prospectus and any amendments or supplements thereto, in conformity with the requirements of the Securities Act, and such other documents as such holders of 33. Registrable Securities may reasonably request in order to facilitate the disposition of such Registrable Securities; (d) notify each holder of Registrable Securities, at any time when a prospectus relating to the Registrable Securities covered by such registration statement is required to be delivered under the Securities Act, of the Company's becoming aware that the prospectus in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and at the request of any holder of Registrable Securities, prepare and furnish to such holder any reasonable number of copies of any supplement to or amendment of such prospectus necessary so that, as thereafter delivered to any purchaser of the Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (e) register or qualify the Registrable Securities covered by such registration statement under such securities or blue sky laws of such jurisdictions as the holders of Registrable Securities for whom such Registrable Securities are registered or are to be registered shall reasonably request, and do any and all other reasonable acts and things which may be necessary or advisable to enable such holders of Registrable Securities to consummate the disposition in such jurisdictions of such Registrable Securities; provided, however, that the Company shall not be required to consent to general service of process for all purposes in any jurisdiction where it is not then subject to process, qualify to do business as a foreign corporation where it would not be otherwise required to qualify or submit to liability for state or local taxes where it is not otherwise liable for such taxes; (f) furnish to the holders of Registrable Securities for whom such Registrable Securities are registered or are to be registered an agreement satisfactory in form and substance to them by the Company and each of its officers, directors and holders of 5% or more of any class of capital stock, that during the thirty (30) days before and the 180 days after the effective date of any underwritten public offering, the Company and such officers, directors and 5% security holders shall not offer, sell, contract to sell or otherwise dispose of any shares of capital stock or securities convertible into capital stock, except as part of such underwritten public offering and except that gifts may be made to relatives or their legal representatives upon the condition that the donees agree in writing to be bound by the restrictions contained in this clause (f) of Section 11.5; (g) furnish to the holders of Registrable Securities for whom such Registrable Securities are registered or are to be registered at the closing of the sale of such Registrable Securities by such holders of Registrable Securities a signed copy of (i) an opinion or opinions of counsel for the Company acceptable to such holders of Registrable Securities in form and substance as is customarily given to underwriters in public offerings, and (ii) a "cold comfort" letter from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accounts to underwriters in an underwritten public offering, to the extent that such "cold comfort" letters are then available to selling stockholders; 34. (h) otherwise use its efforts to comply with all applicable rules and regulations of the Commission, and, if required, make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first day of the Company's first calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (i) use its best efforts to cause all Registrable Securities covered by such registration statement to be listed on the principal securities exchange on which similar equity securities issued by the Company are then listed, if the listing of such Registrable Securities is then permitted under the rules of such exchange or, if similar equity securities are not listed, to include the Registrable Securities on the National Association of Securities Dealers Automated Quotation System; (j) in connection with any underwritten offering, enter into an underwriting agreement with the underwriter(s) of such offering in the form customary for such underwriter(s) for similar offerings, including such representations and warranties by the Company, provisions regarding the delivery of opinions of counsel for the Company and accountants' letters, provisions regarding indemnification and contribution, and such other terms and conditions as are at the time customarily contained in such underwriter's underwriting agreements for similar offerings (and, at the request of any holder of Registrable Securities that are to be distributed by such underwriter(s), any or all (as requested by such holder) of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriter(s) shall also be made to and for the benefit of such holder); and (k) permit any holder of Registrable Securities who, in the sole judgment, exercised in good faith, of such holder, might be deemed to be a controlling person of the Company, to participate in the preparation of such registration statement and to require the insertion therein of material, furnished to the Company in writing, that in the judgment of such holder, as aforesaid, should be included, except to the extent that the Company shall reasonably object to the inclusion of such material. 11.6 Payment of Registration Expenses. The costs and expenses of all registrations and qualifications under the Securities Act, and of all other actions which the Company is required to take or effect pursuant to this Section 11, shall be paid by the Company or holders of Third Party Registrable Securities or other securities of the Company other than Registrable Securities, if any (including, without limitation, all registration and filing fees, printing expenses, expenses incident to filings with the National Association of Securities Dealers, Inc., auditing costs and expenses, and the reasonable fees and disbursements of counsel for the Company and one special counsel for the holders of Registrable Securities) and the holders of Registrable Securities shall pay only the underwriting discounts and commissions and transfer taxes, if any, relating to the Registrable Securities sold by them; provided that the Company shall pay without reimbursement such costs and expenses of (i) no more than two registrations which become effective under the Securities Act as a result of Requests for Registration pursuant to Section 11.1 and (ii) no more than three registrations which become effective under the Securities Act as a result of registrations on Form S-3 pursuant to the request of the holders of Series E Registrable Securities under Section 11.4, and provided, further, that in the event more 35. than two registrations as described in clause (i) above or three registrations as described in clause (ii) above, as applicable, become effective under the Securities Act, the holders of Registrable Securities and other securities, if any, included in such registrations shall reimburse the Company pro rata for all registration and filing fees, reasonable printing expenses, reasonable auditing costs and expenses (excluding costs and expenses of the Company's annual audit) and the reasonable fees and expenses of counsel for the Company and the selling stockholders and such reimbursement shall be made to the Company within five (5) business days after the effective date of such a registration statement. 11.7 Information from Holders of Registrable Securities. Notices and requests delivered by holders of Registrable Securities to the Company pursuant to this Section 11 shall contain such information regarding the Registrable Securities to be so registered and the intended method of disposition thereof as shall reasonably be required in connection with the action to be taken. Each holder of Registrable Securities hereby agrees to provide the Company, or its agents or designees, with all information reasonably required in connection with the registration under the Securities Act or any applicable state securities law of any Registrable Securities. 11.8 Indemnification. In the event of any registration under the Securities Act of any Registrable Securities pursuant to this Section 11, the Company shall indemnify and hold harmless each holder of Registrable Securities disposing of such Registrable Securities and each other person, if any, which controls (within the meaning of the Securities Act) such holder of Registrable Securities and each other person (including underwriters) who participates in the offering of such Registrable Securities, against any losses, claims, damages or liabilities, joint or several, to which such holder of Registrable Securities or controlling person or participating person may become subject under the Securities Act or otherwise, to the extent that such losses, claims, damages or liabilities (or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such Registrable Securities were registered under the Securities Act, in any preliminary prospectus or final prospectus contained therein, or in any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein (in the case of a prospectus, in the light of the circumstances under which they were made) or necessary to make the statements therein not misleading, and will reimburse such holder of Registrable Securities and each such controlling person or participating person for any legal or any other expenses reasonably incurred by such holder of Registrable Securities or such controlling person or participating person in connection with investigating or defending any such loss, claim, damage, liability or proceeding, provided, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, preliminary or final prospectus or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such holder of Registrable Securities or such controlling or participating person, as the case may be, specifically for use in the preparation thereof. Each such holder of Registrable Securities will, if requested by the Company prior to the initial filing of any such registration statement, agree in writing, severally but not jointly, to indemnify and hold harmless the Company and each person which controls (within the meaning of the Securities Act) the Company and each other person (including underwriters) who participates in the offering of such 36. Registrable Securities against all losses, claims, damages and liabilities to which the Company or such controlling person or participating person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based upon any untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such Registrable Securities were registered under the Securities Act, or in any preliminary prospectus or final prospectus contained therein, or in any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in the light of the circumstances under which they were made) not misleading, to the extent that any such loss, claim, damage or liability arises out of or is based upon any such statement or omission made in such registration statement, preliminary or final prospectus or amendment or supplement in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such holder of Registrable Securities and specifically stated to be for use in the preparation thereof. Each indemnified party shall cooperate with each indemnifying party in defending any loss, claim, damage, liability or proceeding. (a) Indemnification similar to that specified in the preceding clause of this Section 11.8 (with appropriate modifications) shall be given by the Company and, at the Company's request, each holder of Registrable Securities with respect to any registration or other qualification of securities under any state securities and "blue sky" laws. (b) If the indemnification provided for in clauses (a) and (b) of this Section 11.8 is unavailable or insufficient to hold harmless an indemnified party, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party referred to in clauses (a) and (b) of this Section 11.8 in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other hand in connection with statements or omissions which resulted in losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statements or omissions. The parties agree that it would not be just and equitable if contributions pursuant to this clause were to be determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this clause. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this clause shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any loss, claim, damage, liability or proceeding which is the subject of this clause. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (c) Each indemnified party shall notify the indemnifying party in writing within ten (10) days after its receipt of notice of the commencement of any action against it in respect of which indemnity may be sought from the indemnifying party pursuant to this 37. Section 11.8. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party, the indemnifying party will be entitled to participate in the defense with counsel satisfactory to such indemnified party. Each indemnified party shall cooperate with each indemnifying party in defending any loss, claim, damage, liability or proceeding. (d) Notwithstanding clauses (a) through (c) of this Section 11.8, the aggregate amount which may be recovered by the Company, controlling persons of the Company or underwriters from each holder of Registrable Securities pursuant to the indemnification and contribution provided for in this Section 11.8 shall be limited to the total net proceeds for which the Registrable Securities were sold by such holder of Registrable Securities. (e) Notwithstanding any of the foregoing, if, in connection with an underwritten public offering of Registrable Securities, the Company, the selling stockholders and the underwriter(s) enter into an underwriting or purchase agreement relating to such offering which contains provisions covering indemnification and contribution among the parties, the indemnification and contribution provisions of this Section 11.8 shall be deemed inoperative for purposes of such offering. 12. Small Business Matters. 12.1 Generally: Certain SBIC Covenants. CIT/VC is a Small Business Investment Company ("SBIC") licensed by the United States Small Business Administration ("SBA"). In order for CIT/VC to acquire and hold the Series B Preferred Stock, it obtained from the Company certain representations and rights as set forth below. As a material inducement to CIT/VC to purchase the Series B Preferred Stock pursuant to the Series B Stock Purchase Agreement, the Company made, and hereby makes the following representations and warranties and agrees to comply with the following covenants: (a) Assuming that CIT/VC's investment in the Company satisfies the requirements of 13 C.F.R. (S)107.865(d), and has complied with the requirements of 13 C.F.R. (S)107.865(e), the Company, together with its "affiliates" (as that term is defined in 13 C.F.R. (S)121.103), is a "small business concern" within the meaning of the Small Business Investment Act of 1958, as amended ("SBIA"), and the regulations thereunder, including Title 13, Code of Federal Regulations, (S)121.301(c). The information set forth in the SBA Forms 480, 652 and Part A of Form 1031 regarding the Company and its affiliates, when it was delivered to CIT/VC at the closing of the sale of the Series B Preferred Stock under the Series B Stock Purchase Agreement, was accurate and complete. (b) The proceeds from the sale of the Series B Preferred Stock were or will be used by the Company to (1) finance working capital and other corporate needs and (2) pay expenses related to the transactions contemplated by the Series B Stock Purchase Agreement. No portion of such proceeds (i) were or will be used to provide capital to a corporation licensed under the SBIA, (ii) were or will be used to acquire farm land, (iii) were or will be used to fund production of a single item or defined limited number of items, generally over a defined production period, and such production constituted or will constitute the majority of the activities of the Company and its Subsidiaries (examples include motion pictures and electric generating 38. plants), or (iv) were or will be used for any purpose contrary to the public interest (including, but not limited to, activities which are in violation of law) or inconsistent with free competitive enterprise, in each case, within the meaning of 13 C.F.R. (S)107.720. (c) Neither the Company's nor any of its Subsidiaries' primary business activity involves, directly or indirectly, providing funds to others, the purchase or discounting of debt obligations, factoring or long-term leasing of equipment with no provision for maintenance or repair, and neither the Company nor any of its Subsidiaries is classified under Major Group 65 (Real Estate) of the SIC Manual. The assets of the business of the Company and its Subsidiaries (the "Business") will not be reduced or consumed, generally without replacement, as the life of the Business progresses, and the nature of the business does not require that a stream of cash payments be made to the Business' financing sources, on a basis associated with the continuing sale of assets (examples of such businesses would include real estate development projects and oil and gas wells). (See 13 C.F.R. 107.720) (d) The proceeds from the sale of the Series B Preferred Stock were not or will not be used substantially for a foreign operation. This subsection (d) does not prohibit such proceeds from being used to acquire foreign materials and equipment or foreign property rights for use or sale in the United States. 12.2 Regulatory Compliance Cooperation. (a) CIT/VC agrees to use commercially reasonable best efforts to avoid the occurrence of a Regulatory Problem. In the event that CIT/VC determines that it has a Regulatory Problem, the Company agrees to use commercially reasonable efforts to take all such actions as are reasonably requested by CIT/VC in order (A) to effectuate and facilitate any transfer by CIT/VC of any Securities of the Company then held by CIT/VC to any Person designated by CIT/VC (subject, however, to compliance with Section 3 of this Agreement), (B) to permit CIT/VC (or any Affiliate of CIT/VC) to exchange all or any portion of the voting Securities of the Company then held by such Person on a share-for-share basis for shares of a class of non-voting Securities of the Company, which non-voting Securities shall be identical in all respects to such voting Securities, except that such new Securities shall be non-voting and shall be convertible into voting Securities on such terms as are requested by CIT/VC in light of regulatory considerations then prevailing, and (C) to continue and preserve the respective allocation of the voting interests with respect to the Company arising out of CIT/VC's ownership of voting Securities of the Company and/or provided for in this Agreement before the transfers and amendments referred to above (including entering into such additional agreements as are requested by CIT/VC to permit any Person(s) designated by CIT/VC to exercise any voting power which is relinquished by CIT/VC upon any exchange of voting Securities for nonvoting Securities of the Company); and the Company shall enter into such additional agreements, adopt such amendments to this Agreement, the Company's Charter and the Company's By-laws and other relevant agreements and taking such additional actions, in each case as are reasonably requested by CIT/VC in order to effectuate the intent of the foregoing. If CIT/VC elects to transfer Securities of the Company to a Regulated Holder in order to avoid a Regulatory Problem, the Company shall enter into such agreements with such Regulated Holder as it may reasonably request in order to assist such Regulated Holder in complying with applicable laws, and regulations to which it is subject. Such agreements may include restrictions on the 39. redemption, repurchase or retirement of Securities of the Company that would result or be reasonably expected to result in such Regulated Holder holding more voting securities or total securities (equity and debt) than it is permitted to hold under such laws and regulations. (b) In the event CIT/VC has the right to acquire any of the Company's Securities from the Company or any other Person (as the result of Sections 3 or 4 of this Agreement or otherwise), at CIT/VC's request the Company will offer to sell to CIT/VC non-voting Securities (or, if the Company is not the proposed seller, will arrange for the exchange of any voting securities for non-voting securities immediately prior to or simultaneous with such sale) on the same terms as would have existed had CIT/VC acquired the Securities so offered and immediately requested their exchange for non-voting Securities pursuant to Section 12.1(a) above. (c) In the event that any Subsidiary of the Company ever offers to sell any of its Securities to CIT/VC, then the Company will cause such Subsidiary to enter into agreements with CIT/VC on substantially similar terms as this Section 12. 12.3 Information Rights and Related Covenants. (a) Promptly after the end of each fiscal year (but in any event prior to February 28 of each year), the Company shall provide to CIT/VC a written assessment, in form and substance satisfactory to CIT/VC, of the economic impact of CIT/VC's financing under the Series B Stock Purchase Agreement, specifying the full-time equivalent jobs created or retained, the impact of the financing on the consolidated revenues and profits of the Business and on taxes paid by the Business and its employees (See 13 C.F.R. 107.630(e)). (b) Upon the request of CIT/VC (or any Affiliate of CIT/VC to whom CIT/VC has Transferred any Securities of the Company), the Company will (A) provide to such Person such financial statements and other information as such Person may from time to time reasonably request for the purpose of assessing the Company's financial condition and (B) furnish to such Person all information reasonably requested by it in order for it to prepare and file SBA Form 468 and any other information reasonably requested or required by the SBA or any successor entity thereto. (c) The Company will at all times comply with the non-discrimination requirements of 13 C.F.R., Parts 112, 113 and 117. 12.4 Remedies. The Company understands that its violation of this Agreement may result in CIT/VC being required by the SBA to sell the Series B Preferred Stock, and such sale may be at depressed prices due to the circumstances and timing of the sale. Therefore, in addition to all other remedies available to CIT/VC for the Company's violation of this Agreement, the Company agrees that CIT/VC shall be entitled to seek specific enforcement or other equitable relief to prevent a violation by the Company of the terms of this Agreement, and the Company waives any requirement that CIT/VC posts any bond as a condition to seeking or obtaining equitable relief. CIT/VC acknowledges and agrees that the remedies available to CIT/VC for the Company's violation of this Agreement shall be limited to whatever equitable relief may be available (such as specific performance, injunctive relief and rescission), damages 40. resulting from CIT/VC being required to divest the Series B Preferred Stock and costs of enforcement. CIT/VC expressly waives any claims for damages resulting from any loss of, or restrictions imposed upon the use of, its SBIC license as a result of the Company's breach of Section 12 of this Agreement. 13. Duration of Agreement. The rights and obligations of each Stockholder, except the rights and obligations contained in Sections 3.1, 3.2, 3.3(c), 10, 11 and 12 hereof, and the covenants hereunder to that Stockholder shall terminate as to each Stockholder upon the closing of the Initial Public Offering by the Company. The obligations contained in Sections 8, 11 and 12 shall survive indefinitely until, by their respective terms, they are no longer applicable. 14. Additional Remedies. In case any one or more of the covenants and/or agreements set forth in this Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, the Series D Stock Purchase Agreement and/or the Series E Stock Purchase Agreement shall have been breached by any party hereto, the party or parties entitled to the benefit of such covenants or agreements may proceed to protect and enforce their rights either by proceeding in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach; and/or an action for specific performance of any such covenant or agreement contained in this Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, the Series D Stock Purchase Agreement and/or the Series E Stock Purchase Agreement and/or a temporary or permanent injunction, in any case without showing any actual damage and without establishing, in the case of an equitable proceeding, that the remedy at law is inadequate. The rights, powers and remedies of the parties under this Agreement are cumulative and not exclusive of any other right, power or remedy which such parties may have under any other agreement or law. No single or partial assertion or exercise of any right, power or remedy of a party hereunder shall preclude any other or further assertion or exercise thereof. Any purported Transfer in violation of the provisions of this Agreement shall be void ab initio. 15. Successors and Assigns; Limitation on Assignment. Except as otherwise expressly provided herein, this Agreement shall bind and inure to the benefit of the Company, each of the Stockholders and the respective successors or heirs and personal representatives and permitted assigns of the Company and each of the Stockholders. Each Stockholder agrees further that, it shall not sell any Shares to any Person not a party to this Agreement unless such Person contemporaneously with such sale executes and delivers to the Company an agreement to be bound by the Stockholders' obligations hereunder, whereupon such Person shall have the same obligations as the Preferred Stockholders under this Agreement. The terms, representations, warranties and covenants contained in Sections 6 and 7 hereof shall be binding upon and shall inure to the benefit of and be enforceable by, the Preferred Stockholders and their respective successors, transferees and assignees, provided, that the rights granted to the Preferred Stockholders by Sections 6.3 and 6.4 may not be transferred or assigned to, and shall not inure to the benefit of, a successor, transferee or assignee of the Preferred Stockholders which is engaged in any business which directly competes with the Company in any line of business engaged in, or planned to be engaged in, by the Company. It is understood and agreed among the parties hereto that this Agreement and the representations, warranties, and covenants made herein are made expressly and solely for the benefit of the other party or parties hereto (or their respective 41. successors or permitted assigns), and that no other person shall be entitled or be deemed to be a third-party beneficiary of any party's rights under this Agreement. 16. Entire Agreement. This Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, the Series D Stock Purchase Agreement, the Series E Stock Purchase Agreement, the Charter and the By-Laws of the Company and each of the other documents delivered in connection with the sale by the Company of its Series E Preferred Stock pursuant to the Series E Stock Purchase Agreement contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior stockholders' agreements, including the Prior Stockholders' Agreement and the Original Stockholders' Agreement, and all other prior and contemporaneous arrangements or understandings with respect thereto. The parties hereto, including the Company and the holders of at least 75% in interest of the outstanding shares of Series A, B, C and D Preferred Stock, voting together as a class, hereby agree that all rights granted and covenants made under the Prior Stockholders' Agreement are hereby waived, released and terminated in their entirety and shall have no further force or effect whatsoever. The rights and covenants provided herein set forth the sole and entire agreement between the parties hereto with respect to the subject matter hereof. 17. Notices. All notices, requests, consents and other communications hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person, duly sent by first class registered or certified mail, postage prepaid, or telecopied or telexed, addressed or telecopied to such party at the address or telecopier number set forth below, or such other address or telecopier number as may hereafter be designated in writing by the addressee in a notice complying as to delivery with the terms of this Section 17; provided, however, that if the Stockholder is foreign, notice shall be sent by both air courier, and telecopied or telexed to such Stockholder: If to the Company: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Attention: Chief Executive Officer Telecopier No.: (619) 623-5180 with a copy to: Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, CA 92121 Telecopier: (619) 453-3555 Attention: M. Wainwright Fishburn, Esq. If to any other party to this Stockholders' Agreement, to the address listed for such party on Schedule 17 hereto, or for persons who become party to this Stockholders' Agreement after 42. its initial execution, to the address listed for such person on the signature page to this Stockholders' Agreement. All such notices, requests, consents and communications shall be deemed to have been given (a) in the case of personal delivery, on the date of such delivery, (b) in the case of telex or telecopier transmission, on the date on which the sender receives machine confirmation of such transmission, and (c) in the case of mailing, on the fifth business day following the date of such mailing. 18. Changes. The terms and provisions of Sections 5, 6 and 7 of this Agreement may not be modified or amended, or any of the provisions thereof waived, temporarily or permanently, except pursuant to the written consent of (a) the Company, and (b) the holders of at least 75% in interest of the Covenant Preferred Shares, voting together as a class. Except as expressly set forth in the preceding sentence and Section 11.3(e), the terms and provisions of this Agreement may not be modified or amended, or any of the provisions hereof waived, temporarily or permanently, except pursuant to the written consent of (i) the Company, and (ii) the holders of at least 75% in interest of the Preferred Shares, voting together as a class. 19. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 20. Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 21. Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of names and pronouns shall include the plural and vice-versa. 22. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability. Such prohibition or unenforceability in any one jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 23. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed wholly therein. 24. New York Life Insurance Company Compliance Obligations. Nothing in this Agreement shall diminish the continuing obligations of New York Life Insurance Company to comply with applicable requirements of law that it maintain responsibility for the disposition of, and control over its admitted assets, investments and property, including (without limiting the generality of the foregoing) the provisions of Section 1411(b) of the New York Insurance Law, as amended, and as hereinafter from time to time in effect. 43. In Witness Whereof, the parties hereto have executed this Agreement on the date first above written, in the case of corporations by their respective officers thereunto duly authorized. Diversa Corporation By:_____________________________________ Name:___________________________________ Title:__________________________________ Stockholders: HealthCare Ventures III, L.P. By: HealthCare Partners III, L.P. its: General Partner By:_____________________________________ Name:___________________________________ Title:__________________________________ HealthCare Ventures IV, L.P. By: HealthCare Partners IV, L.P. its: General Partner By:_____________________________________ Name:___________________________________ Title:__________________________________ HealthCare Ventures V, L.P. By: HealthCare Partners V, L.P. its: General Partner By:_____________________________________ Name:___________________________________ Title:__________________________________ 44. APA Excelsior IV/Offshore, L.P. By: Patricof & Co. Ventures, Inc. its: Investment Advisor By:_____________________________________ Name:___________________________________ Title:__________________________________ APA Excelsior IV, L.P. By: APA Excelsior IV Partners, L.P. its: General Partner By: Patricof & Co. Managers, Inc. its: General Partner By:_____________________________________ Name:___________________________________ Title:__________________________________ The P/A Fund, L.P. By: APA Pennsylvania Partners II, L.P. its: General Partner By:_____________________________________ Name:___________________________________ Title:__________________________________ Patricof Private Investment Club, L.P. By: Patricof & Co. Managers, Inc. its: General Partner By:_____________________________________ Name:___________________________________ Title:__________________________________ 45. Larry Abrams _______________________________ Aetna Life Insurance Company By:____________________________ Name:__________________________ Title:_________________________ Axiom Venture Partners, L.P. By:____________________________ Name:__________________________ Title:_________________________ William Baum ________________________________ Benefit Capital Management Corporation as Investment Manager for The Prudential Insurance Company of America (Separate Account No. VCA-GA-5298) By:_____________________________ Name:___________________________ Title:__________________________ Terrance J. Bruggeman ________________________________ Lee S. Casty _________________________________ 46. The Cit Group/Venture Capital, Inc. By:________________________________ Name:______________________________ Title:_____________________________ CSK Venture Capital Co., Ltd. By:________________________________ Name:______________________________ Title:_____________________________ The Donald D. Johnston Trust By:________________________________ Donald D. Johnston, Trustee Finfeeds International Limited By:________________________________ Name:______________________________ Title:_____________________________ Donald C. Garaventi ___________________________________ GC&H Investments By:________________________________ Name:______________________________ Title:_____________________________ Barry Glickman __________________________________ 47. Hudson Trust By:_______________________________ Name:_____________________________ Title:____________________________ Frank Landsberger __________________________________ Kenneth F. Logue ___________________________________ Mentus Money Purchase Plan By:___________________________ Name:_________________________ Title:________________________ New York Life Insurance By:____________________________ Name:__________________________ Title:_________________________ Novartis Agribusiness Biotechnology Research, Inc. By:____________________________ Name:__________________________ Title:_________________________ 48. Rho Management Trust II By:____________________________ Name:__________________________ Title:_________________________ Raymond D. Rice _______________________________ Jay M. Short _______________________________ R. Patrick Simms _______________________________ Melvin I. Simon _______________________________ State of Michigan By:____________________________ Name:__________________________ Title:_________________________ Kathleen H. Van Sleen _______________________________ 49. SCHEDULE OF SERIES E INVESTORS Name and Address No. of Shares Novartis Agribusiness 5,555,556 Biotechnology Research, Inc. 3054 Cornwallis Road Research Triangle Park, NC 27709 --------- Total 5,555,556 SCHEDULE 7.3 OUTSTANDING OPTIONS, WARRANTS AND RIGHTS SCHEDULE 17 NOTICES If to HealthCare Ventures III, L.P., HealthCare Ventures IV, L.P. and HealthCare Ventures, V, L.P.: Twin Towers at Metro Park 379 Thornall Street Edison, New Jersey 08837 Fax No.: (908) 906-1450 Attention: Jeffrey Steinberg with a copy to: Pepper, Hamilton & Scheetz LLP 1235 Westlakes Drive, Suite 400 Berwyn, Pennsylvania 19312-2401 Fax No.: (610) 640-7835 Attention: Chris Miller If to APA Excelsior IV, L.P.; APA Excelsior IV/Offshore, L.P.; The P/A Fund, L.P.; or Patricof Private Investment Club, L.P.: Patricof & Co. Ventures, Inc. 445 Park Avenue 11th Floor New York, New York 10022 Fax No.: (212) 319-6155 Attention: Patricia M. Cloherty with a copy to: Shereff, Friedman, Hoffman & Goodman, LLP 919 Third Avenue 20th Floor New York, NY 10022 Fax No.: (212) 758-9526 Attention: Robert M. Friedman, Esq. If to Mr. Larry Abrams: 24 Central Park South New York, New York 10019 Fax No.: (212) 758-2976 If to Aetna Life Insurance Company: Aetna Life Insurance Company 151 Farmington Avenue, - RC21 Hartford, CT 06156-9000 Fax No.: (860) 273-8650 Attention: David M. Clarke If to Axiom Venture Partners, L.P.: Axiom Venture Partners, L.P. City Place II, 17/th/ Floor 185 Asylum Street Hartford, Connecticut 06103 Attention: Samuel F. McKay Fax No.: (203) 548-7797 If to William Baum: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to Benefit Capital Management Corporation: 39 Old Ridgebury Road Danbury, CT 06817 Fax No.: (203) 794-2693 Attention: Susan DeCarlo If to Terrance J. Bruggeman: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to Mr. Lee S. Casty: c/o French-American Securities, Inc. 200 West Adams Street Suite No. 1500 Chicago, IL 60606 Fax No.: (312) 407-5746 If to The CIT Group/Venture Capital, Inc.: The CIT Group/Venture Capital, Inc. 650 CIT Drive Livingston, NJ 07039 Fax No.: (201) 740-5555 Attention: Bruce Schackman If to CSK Venture Capital Co., Ltd.: Kenchiku Kaikan 7/th/ Floor 5-26-20 Shiba Minatoku, Tokyo 108 Japan Fax No.: 81.03.3457.7070 Attention: Fumio Takahashi If to The Donald D. Johnston Trust: The Donald D. Johnston Trust 18 Oyster Shell Lane Hilton Head Island, SC 29926 Fax No.: (803) 681-6493 Attention: Donald P. Johnston, Trustee If to Finnfeeds International Limited: Finnfeeds International Limited P.O. Box 777 Marlborough, Wiltshire, UK Fax No.: 44(0)1672517778 Attention: Richard Cooper with a copy to: Carter, Ledyard & Milburn 2 Wall Street New York, NY 10005 Fax No.: (212) 732-3232 Attention: Kirstin T. Knight, Esq. If to Donald C. Garaventi: 330 Indian Harbor Boulevard Vero Beach, FL 32963 Fax No.: (561) 234-2374 If to GC&H Investments: c/o Cooley Godward LLp 4365 Executive Drive Suite 1100 San Diego, CA 92121-2128 Fax No.: (619) 453-3555 Attention: Wain Fishburn, Esq. If to Barry Glickman: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to Hudson Trust: c/o Summit Asset Management Company, Inc. 666 Plainsboro Road Suite 445, The Office Center Plainsboro, NJ 08536 Fax No.: (609) 275-1892 Attention: Irene S. March If to Frank Landsberger: Mojave Therpeutic, Inc. 715 Olde Saw Mill River Road Terrytown, NY 10591 Fax No.: (914) 347-0292 If to Kenneth F. Logue: Logue and Rice 8000 Towers Crescent Drive Suite 650 Vienna, VA 22182-2700 Fax No.: (703) 761-4248 If to Mentus Money Purchase Plan: Aventine 8910 University Center Lane Suite 750 San Diego, CA 92122-1085 Fax No.: (619) 455-6872 Attention: Guy Iannuzzi If to New York Life Insurance: 51 Madison Avenue New York, NY 10010 Fax No.: (212) 447-4122 Attention: Himi Kittner If to Novartis Agribusiness Biotechnology Research, Inc.: Novartis Agribusiness Biotechnology Research, Inc. 3054 Cornwallis Road Research Triangle Park, NC 27709 Fax No.: (919) 541-8585 Attention: Dr. Juanjo Estruch with a copy to: Novartis Seeds, Inc. 7240 Holsclaw Road Gilroy, CA 95020-8027 Fax No.: (408) 848-8129 Attention: Allen E. Norris, Esq. If to Rho Management Trust II: Rho Management Trust II 767 Fifth Avenue 43rd Floor New York, New York 10153 Fax No.: (212) 751-3613 Attention: Joshua Ruch with a copy to: Gregory F.W. Todd, Esq. 888 Seventh Avenue, Suite 4500 New York, NY 10019 Fax No.: (212) 246-5151 If to Raymond D. Rice: Logue and Rice 8000 Towers Crescent Drive Suite 650 Vienna, VA 22182-2700 Fax No.: (703) 761-4248 If to Jay M. Short: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to R. Patrick Simms: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 If to Melvin I. Simon 1075 Old Mill Road Pasadena, CA 91108 Fax No.: (818) 577-9266 If to State of Michigan: Acting Administrator State of Michigan Department of Treasury Treasury Building 430 West Allegan Lansing, MI 48922 Fax No.: (517) 335-3668 Attention: Garry Neal If to Kathleen H. Van Sleen: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 LIST OF SCHEDULES Schedule of Series E Investors Schedule 7.3 - Outstanding Options, Warrants and Rights Schedule 17 - Notices LIST OF EXHIBITS Exhibit A - Quarterly Financial Summary iv. Exhibit A FORM OF QUARTERLY FINANCIAL SUMMARY Exhibit C AMENDED AND RESTATED VOTING AGREEMENT AMENDED AND RESTATED VOTING AGREEMENT This Amended and Restated Voting Agreement dated as of January 25, 1999 (this "Agreement"), by and among Diversa Corporation (the "Company") and the Preferred Stockholders (defined below) and Common Stockholders (defined below) who are signatories to this Agreement. R E C I T A L S: Whereas, in connection with the purchase and sale of Preferred Stock (defined below) the Company has entered into certain Preferred Stock Agreements (defined below) with the Preferred Stockholders; Whereas, the Company has made certain representations, warranties, covenants and agreements in the Preferred Stock Agreements, and has granted certain remedies to the Preferred Stockholders in the Preferred Stock Agreements and the Certificate of Incorporation (defined below) in the case of an Event of Noncompliance (defined below); and Whereas, in order to induce the Preferred Stockholders to enter into the Preferred Stock Agreements, the Common Stockholders agreed to execute a Voting Agreement, originally dated as of May 13, 1996, and as amended on July 14, 1997 and October 22, 1997 (the "Prior Voting Agreement"), to allow the Preferred Stockholders to fully exercise any and all remedies which are available to the Preferred Stockholders under the Preferred Stock Agreements and under the Certificate of Incorporation; Whereas, the Company is entering, or will enter, into a Stock Purchase Agreement with the investor(s) listed on the Schedule of Series E Investors to the Stockholders' Agreement (the "Series E Investors") pursuant to which the Company will sell shares of its Series E Preferred Stock to the Series E Investors; and Whereas, in connection with the sale of the Series E Preferred Stock to the Series E Investors, the Company and the Stockholders desire to terminate the Prior Voting Agreement in its entirety with such Prior Voting Agreement being superceded and replaced in its entirety with this Agreement; Now, Therefore, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the parties hereto agree as follows: 1. Definitions. "Certificate of Incorporation" shall mean the Seventh Restated Certificate of Incorporation of the Company, as the same may be restated and amended from time to time. "Common Stock" shall mean the Common Stock, $.001 par value per share, of the Company. 1. "Common Stockholder" shall mean each Person who becomes a party to this Agreement and who has purchased Common Stock from the Company or who acquires Common Stock upon the conversion or exercise of any securities convertible into or exercisable for Common Stock, by Transfer or otherwise, or who acquires (by Transfer or otherwise) any security of the Company convertible into or exercisable for Common Stock, or who acquires (by Transfer or otherwise) any other security of the Company which by contract or statute has voting rights. "Defaulting Stockholder" shall have the meaning set forth in Section 5 of this Agreement. "Event of Noncompliance" shall have the meaning set forth in Section 9 of the Stockholders' Agreement. A summary of certain Events of Noncompliance is attached hereto as Exhibit A. "Initial Public Offering" shall mean the Company's initial distribution of Common Stock in an underwritten public offering to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission pursuant to the Securities Act at a price per share which is not less than 300% of the Conversion Price (as defined in the Certificate of Incorporation) of the Series B Preferred Stock in effect at the time of such public offering and resulting in gross proceeds (before underwriting commissions and offering expenses) to the Company of not less than $15 million. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, trust association, unincorporated organization, other entity, or governmental body. "Preferred Stock" shall mean the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock. "Preferred Stock Agreements" shall mean, collectively, the Series A Preferred Stock Purchase Agreement, the Series B Preferred Stock Purchase Agreement, the Series C Preferred Stock Purchase Agreement, the Series D Preferred Stock Purchase Agreement and the Stockholders' Agreement. "Preferred Stockholder" shall mean any holder of Preferred Stock and any Person to whom shares of Preferred Stock are Transferred and who becomes a party to the Stockholders' Agreement. "Preferred Stock Designee" shall mean the person appointed by the holders of at least 75% in interest of the Preferred Stock voting together as a class. In the event the Preferred Stockholders elect not to appoint a Preferred Stock Designee, then references to the Preferred Stock Designee shall be deemed references to the Preferred Stockholders and action to be taken by the Preferred Stock Designee may be taken by the holders of at least 75% in interest of the Preferred Stock, voting together as a class. "Securities Act" shall mean the Securities Act of 1933, as amended, and any successor statute and the rules and regulations of the Securities and Exchange Commission thereunder, as shall be in effect at the applicable time. 2. "Series A Preferred Stock" shall mean the Series A Convertible Preferred Stock, $.001 par value per share, of the Company. "Series A Preferred Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of December 21, 1994 by and among Industrial Genome Sciences, Inc. and the parties thereto, as amended by the Stock Purchase Agreement and Amendment to Stock Purchase Agreement, dated March 15, 1995 by and among Industrial BioCatalysis Corporation and the parties thereto, as amended by the Stock Purchase Agreement and Amendment to Stock Purchase Agreement dated July 28, 1995 by and among Recombinant BioCatalysis, Inc. and the parties thereto, as amended by Amendment No. 3 to the Stock Purchase Agreement dated May 13, 1996 by and among Diversa Corporation and the parties thereto. "Series B Preferred Stock" shall mean the Series B Convertible Preferred Stock, $.001 par value per share, of the Company. "Series B Preferred Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of May 13, 1996, by and among the Company and the purchasers of the Series B Preferred Stock named therein. "Series C Preferred Stock" shall mean the Series C Convertible Preferred Stock, $.001 par value per share, of the Company. "Series C Preferred Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of July 14, 1997, by and between the Company and Finnfeeds International Limited. "Series D Preferred Stock" shall mean the Series D Convertible Preferred Stock, $.001 par value per share, of the Company. "Series D Preferred Stock Purchase Agreement" shall mean the Stock Purchase Agreement, dated as of October 22, 1997, by and between the Company and the Series D Investors named therein. "Series E Preferred Stock" shall mean the Series E Preferred Stock, $.001 par value per share, of the Company. "Shares" shall mean and include all shares of voting capital stock, including without limitation the Common Stock, of the Company now owned or hereafter acquired by any Common Stockholder or transferee of such Stockholder and any other security of the Company which by contract or statute has voting rights. "Stockholders' Agreement" shall mean the Amended and Restated Stockholders' Agreement, dated of even date herewith, between the Company and the Stockholders named therein, as the same may be amended from time to time, a copy of which is on file at the offices of the Company. "Transfer" shall include any sale, assignment, transfer, pledge, encumbrance, or other disposition of, or the subjecting to a security interest of, any Common Stock subject to this 3. Agreement, or any disposition of any Common Stock subject to this Agreement or of any interest therein which would constitute a sale thereof within the meaning of the Securities Act. 2. Term. This Agreement shall expire upon the earlier of (i) the closing of the Initial Public Offering, or (ii) the date on which there are no longer outstanding any shares of Preferred Stock. 3. Representations, Warranties and Covenants. (a) Notwithstanding any provisions to the contrary in any other agreement, each Common Stockholder agrees that, until this Voting Agreement has been terminated, each Common Stockholder shall not Transfer any Shares, unless the proposed transferee of such Shares agrees to become a signatory to this Agreement. (b) Each Common Stockholder hereby represents that he, she or it entered into the Prior Agreement and is entering into this Agreement to enable the Company to sell its Preferred Stock and to induce Preferred Stockholders to enter into the Preferred Stock Agreements and to approve the Certificate of Incorporation. (c) The Company agrees that it shall not issue any Shares (other than Shares issuable upon the exercise or conversion of currently outstanding securities of the Company) to any Person unless as a condition precedent to such issuance such Person shall execute a counterpart copy of this Agreement (unless such Person is already a party to this Agreement). 4. Voting and Proxy (a) If an Event of Noncompliance shall have been declared in accordance with the Stockholders' Agreement, then, with respect to all actions to be taken by the Company or its stockholders (whether by proxy or consent) on which the Common Stockholders have the right, by statute or otherwise, to vote, whether as a separate class or together with other classes of the Company's capital stock, each Common Stockholder hereby irrevocably (i) makes, constitutes and appoints the Preferred Stock Designee to act as such Common Stockholder's true and lawful proxy and attorney-in-fact in the name and on behalf of such Common Stockholder, with full power to appoint a substitute or substitutes with respect to the Shares owned by such Common Stockholder, (ii) directs the Preferred Stock Designee to vote the Shares owned by such Common Stockholder, at any time and from time to time, with respect to all actions to be taken by the Company or its stockholders (whether by proxy or consent) on which the Common Stockholders have the right, by statute or otherwise, to vote, whether as a separate class or together with other classes of the Company's capital stock, in the place and stead of the Common Stockholder and (iii) agrees to cooperate generally with the Preferred Stock Designee and the Preferred Stockholders in implementing the decisions of the Preferred Stockholders with respect to the future course of the Company. By giving this proxy each Common Stockholder hereby revokes any other proxy granted by such Common Stockholder to vote any of the Shares owned by him, her or it. The proxy granted herein shall expire on the date of termination of this Agreement. (b) All power and authority hereby conferred is coupled with an interest and is irrevocable, shall not be terminated by any act of the Common Stockholders or any of them or by operation of law, by lack of appropriate power or authority, or by the occurrence of any other event or events and shall be binding upon all beneficiaries, heirs at law, legatees, distributees, successors, 4. assigns and legal representatives of any of the Common Stockholders. If after the execution of this Agreement any holder of Common Stock shall cease to have appropriate power or authority, or if any other such event or events shall occur, the Preferred Stock Designee is nevertheless authorized and directed to vote any Shares owned by a Defaulting Stockholder in accordance with the terms of this Agreement as if such lack of appropriate power or authority or other event or events had not occurred and regardless of notice thereof. (c) Each Common Stockholder agrees to use good faith efforts to cause any record owner of Common Stock of which the Common Stockholder is the sole (or jointly with spouse) beneficial owner to grant to the Preferred Stock Designee a proxy of the same effect as that contained herein. Each Common Stockholder shall perform such further acts and execute such further documents as may be required to vest in the Preferred Stock Designee the sole power to vote any shares owned by such Common Stockholder as required herein. (d) In the event any recapitalization, reorganization, sale of assets or other transaction is approved by means of the proxy granted hereunder, the Company shall obtain a valuation which allocates the total consideration to be received by the respective classes of equity securities of the Company in any such transaction. Any such valuation shall be made by a reputable, independent investment banking firm, or other reputable, independent firm experienced in valuations, selected by the Preferred Stockholders. 5. Further Assurances. Each party hereto shall perform such further acts and execute such further documents as may be required to carry out the provisions of this Agreement. 6. Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. None of the Common Stockholders shall assign any rights or delegate any duties hereunder without the prior written consent of the holders of at least 75% in interest of the Preferred Stock, voting together as a class, and any assignment made without such consent shall be void and constitute a default hereunder. 7. Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the Preferred Stockholders shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof or thereof in any court of the United States or any state thereof having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity, and the Common Stockholder(s) waive(s) any requirement that any or all Preferred Stockholders post any bond as a condition to seeking or obtaining equitable relief. 8. Notices. Any notice, demand, request, waiver, or other communication under this Agreement shall be in writing (including facsimile or similar writing) and shall be deemed to have been duly given (i) on the date of service if personally served, (ii) on the third day after mailing if mailed to the party to whom notice is to be given, by first class mail, registered, return receipt requested, postage prepaid, (iii) on the next day after sending, if sent by overnight service, or (iv) on the date sent if sent by facsimile, to the parties at the following addresses or facsimile numbers with a copy sent by mail as aforesaid on the same date (or at such other address or facsimile number for a party as shall be specified by like notice): 5. If to the Company: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Fax No.: (619) 623-5180 Attention: Chief Executive Officer with a copy to: Cooley Godward LLP 4365 Executive Drive, Suite 1100 San Diego, CA 92121 Telecopier: (619) 453-3555 Attention: M. Wainwright Fishburn, Esq. If to a Preferred Stockholder to the address listed for such Preferred Stockholder in the Stockholders' Agreement. If to a Common Stockholder to the address listed for such Common Stockholder in the books and records of the Company. 9. Severability. In the event that any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, in whole or in part, the validity of the remaining provisions shall not be affected and the remaining portion of any provision held to be invalid, illegal or unenforceable shall in no way be affected, prejudiced or disturbed thereby. 10. Termination of Prior Agreement. The parties hereto, including the Company and the holders of at least 75% in interest of the outstanding shares of Preferred Stock, voting together as a class, hereby agree that all rights granted and covenants made under the Prior Agreement are hereby waived, released and terminated in their entirety and shall have no further force or effect whatsoever. The rights and covenants provided herein set forth the sole and entire agreement between the parties hereto with respect to the subject matter hereof. 11. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute a single agreement. 12. Governing Law. This Agreement shall be construed in accordance with, and governed by, the internal laws of the State of Delaware, without giving effect to the principles of conflict of laws thereof. Any legal action, suit or proceeding arising out of or relating to this Agreement may be instituted in any state or federal court located within the County of New York, State of New York, and each party hereto agrees not to assert, by way of motion, as a defense, or otherwise, in any such action, suit or proceeding, any claim that it is not subject personally to the jurisdiction of such court or that such court is an inconvenient forum, that the venue of the action, suit or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. Each party hereto further irrevocably submits to the jurisdiction of any such court in any such action, suit or proceeding. 6. 13. No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the parties hereto and their respective successors and permitted assigns. 14. Amendments. The terms and provisions of this Agreement may be modified, altered, supplemented or amended, and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of at least 75% in interest of the outstanding Preferred Stock, voting together as a class. Any modification, alteration, supplement, amendment or waiver effected in accordance with this Section 13 shall be binding upon each Preferred Stockholder and Common Stockholder who are signatories hereto. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7. EXHIBIT A/1/ Events of Noncompliance Occurrence of Event of Noncompliance. An event of noncompliance (an "Event of Noncompliance") hereunder shall occur if: (a) the Company fails in any material respect to perform or observe any of the covenants contained in this Stockholders' Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, or the Series D Stock Purchase Agreement, or fails in any material respect to comply with any of the provisions of this Stockholders' Agreement, the Series A Stock Purchase Agreement, the Series B Stock Purchase Agreement, the Series C Stock Purchase Agreement, the Series D Stock Purchase Agreement or of its Charter applicable to the Preferred Shares or the Registrable Securities; (b) the Company's representations and warranties contained in this Stockholders' Agreement, the Series A Stock Purchase Agreement (including the Schedules and Exhibits attached thereto), the Series B Stock Purchase Agreement (including the Schedules and Exhibits attached thereto), the Series C Stock Purchase Agreement (including the Schedules and Exhibits attached thereto) or the Series D Stock Purchase Agreement (including the Schedules and Exhibits attached thereto) shall be untrue or misleading in any material respect as of the time when made or as of the closings of such agreements; (c) the Company shall become insolvent, make an assignment for the benefit of its creditors, call a meeting of its creditors to obtain any general financial accommodation or suspend business; any material obligation of the Company shall be accelerated or shall not be paid when due; any judicial judgment or settlement shall be outstanding, or a case under any provision of Title 11 of the United States Code, 11 U.S.C. (S) 101 et seq. (the "Bankruptcy Code"), or any comparable law of any jurisdiction, including provisions for receivership or reorganization, shall be commenced by or against the Company which, in the case of an action being commenced against the Company under the Bankruptcy Code, shall remain unstayed or undismissed for a period of sixty (60) days; (d) the Company fails to complete, on or before May 13, 2001 either: (i) an Initial Public Offering, (ii) a sale, liquidation or dissolution of the Company, or (iii) a sale, transfer or disposition of substantially all of the assets of the Company; (e) the Company (x) incurs Indebtedness or Commitments in violation of Section 7.1 hereto, (y) pays dividends in violation of Section 7.2 hereto, and/or (z) issues shares of Capital Stock in violation of Section 7.3 hereto/2/; - ---------------------------- /1/ Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Stockholder's Agreement. /2/ References are to Sections 7.1, 7.2 and 7.3 of the Stockholder's Agreement. A-1 (f) a default or an event of default shall occur or exist with respect to any debt or indebtedness of the Company; or (g) a default or an event of default shall occur or exist with respect to any material contract of the Company, which default could give rise to a material claim by a third party against the Company or the Company's assets. A-2 Exhibit D MEMORANDUM REGARDING STOCK PURCHASE AGREEMENT MEMORANDUM REGARDING STOCK PURCHASE AGREEMENT --------------------------------------------- In connection with the Stock Purchase Agreement between Novartis Agribusiness Biotechnology Research, Inc. ("Novartis") and Diversa Corporation ("Diversa"), dated as of January __, 1999, pursuant to which Novartis is purchasing 5,555,556 shares of Series E Preferred Stock of Diversa, Diversa declares that for an aggregate amount of $12,500,001 (the "Transaction Amount") that [****] of such Transaction Amount reflects a fee for access to the Diversa technology specified in the Collaboration Agreement between Novartis and Diversa, dated as of January 25, 1999 (the "Collaboration Agreement") that is in existence as of the date of the Collaboration Agreement, and [****] of such Transaction Amount reflects payment of research funding for the [****] full time equivalent personnel of Diversa on an annualized basis under the Collaboration Agreement. DIVERSA CORPORATION By:_______________________ Kathleen H. Van Sleen Chief Financial Officer Date: January 25, 1999 Acknowledgement: Novartis Agribusiness Biotechnology Research, Inc. acknowledges that the above statement accurately reflects its understanding of the financial allocation of the aggregate amount of the transaction specified. NOVARTIS AGRIBUSINESS BIOTECHNOLOGY RESEARCH, INC. By:________________________________ Title:_____________________________ Date: January 25, 1999 * CONFIDENTIAL TREATMENT REQUESTED EX-10.20 8 COLLABORATION AGREEMENT EXHIBIT 10.20 Confidential Treatment Requested Under 17 C.F.R. (S)(S) 200.80(b)(4) 200.83 and 230.406 COLLABORATION AGREEMENT This Collaboration Agreement (the "Agreement") entered into as of June 28, 1999 (the "Effective Date"), is by and between Rhone-Poulenc Animal Nutrition S.A. ("RPAN"), a French corporation with headquarters located at 42 avenue Aristide Briand, 92160 Antony (France), and Diversa Corporation ("Diversa") a Delaware corporation with headquarters located at 10665 Sorrento Valley Road, San Diego, California 92121, collectively the ("Parties"). Whereas, Diversa has expertise in the discovery and development of, and has discovered and developed enzymes, as well as proprietary technologies for the rapid discovery, development and optimization of enzymes; Whereas, RPAN has expertise in the use of enzymes and in particular for the production of [*****]. Whereas, RPAN and Diversa wish to collaborate to discover and develop a [*****] to be used in the production of [*****] as set forth in the project plan attached hereto as Exhibit A (the "Project Plan"). Now, Therefore, in consideration of the mutual covenants set forth in this Agreement, the Parties hereby agree as follows: 1. Definitions "Base Catalyst" means the catalyst provided by RPAN to Diversa comprising the RPAN Enzyme (defined below) immobilized in [*****]. "Catalyst" means the catalyst comprising an Option Enzyme (defined below) or a Licensed Enzyme (defined below) immobilized in [*****]. "Catalyst Activity" means activity obtained in Phase V of the enzyme performance assessment procedure as set forth in Exhibit B hereto. "Derivative Enzyme" means any derivative of the Licensed Enzyme derived through Diversa's application of the Evolution Technology or any [*****] discovered through the use of the RPAN Enzyme in the Hybridization Technology. "Enzyme" means any [*****] discovered and/or developed by Diversa for RPAN during the course of the collaboration. "[*****]" [*****]. "[*****]" [*****]. "Licensed Enzyme" means the Option Enzyme licensed to RPAN upon exercise of the Option. "Option Enzyme" means the Enzyme provided by Diversa to RPAN for evaluation under the Project Plan. "Product" means [*****]. 1. *Confidential Treatment Requested "RPAN Enzyme" means the [*****] provided by RPAN to Diversa under this Agreement. 2. Collaboration RPAN and Diversa shall collaborate to discover and develop an enzyme having [*****] activity to be used in the Catalyst to produce the Product as set forth in the project plan attached hereto as Exhibit A (the "Project Plan"). 3. Option 3.1 Option Grant. Subject to the terms and conditions of this Agreement, Diversa will grant to RPAN an exclusive option (the "Option") to obtain an exclusive, worldwide, royalty-bearing license (the "License") under Section 4.1 to use one of the Option Enzymes to produce the Catalyst and the Product. 3.2 Option Period. The Option will commence immediately upon delivery of the Option Enzymes satisfying the criteria set forth in the Project Plan, and remain in effect for a period of [*****] thereafter (the "Option Period"). 3.3 Exercise of Option. RPAN may exercise the Option by providing Diversa written notice of the exercise of such Option at any time during the Option Period. If RPAN does not exercise the Option during the Option Period, the Option shall expire, and RPAN shall have no further rights thereunder and both parties shall return or destroy all forms of Confidential Information provided to the other party under this Agreement relating to the discovery and development of the Option Enzymes subject to such Option, within [*****] after such expiration. 4. License Terms 4.1 License Grant. Upon exercise of the Option, and payment of the license fee set forth in Section 5.2 herein, Diversa will grant to RPAN an exclusive, worldwide license, including the right to grant sublicenses, to use the Licensed Enzyme to the extent necessary to make and have made the Catalyst to use in the production of the Product (the "License"). 4.2 Term of license. The License will become effective upon payment of the license fee as set forth in Section 5.2 and will continue, in any country, until the expiration of the last to expire patent rights covering the Licensed Enzyme in any country (the "Royalty Term"). 4.3 Right to Sublicense. RPAN will have the right to grant sublicenses to affiliates and third parties, provided that the terms of such sublicenses are consistent with the terms of this Agreement. 4.4 Right of First Refusal. RPAN will have a right of first refusal to obtain a license from Diversa to use the Licensed Enzyme to make and have made certain molecules related to the product specified in Exhibit D ("Related Molecules"). In the event that Diversa proposes to grant such a license to any third party. Diversa will notify RPAN in writing of the offer of such license and the terms upon which such license is proposed to be granted to such third party (the "Offer"). RPAN shall have a period of ninety (90) days from the date of such notice in which to review the Offer and notify Diversa in writing that it wishes to acquire such rights on such or similar terms. If RPAN provides such notice within such ninety (90) day period, then the parties shall proceed diligently in good faith to enter into a definitive agreement with regard to such rights on customary terms for similar licenses. If RPAN does not provide written notice of its wish to acquire such rights or provides written notice that it is not interested in acquiring such rights on the terms presented in the offer within such ninety (90) day period, then Diversa shall be free to grant such rights to a third party on terms no more favorable to such third party than the terms set forth in the Offer. 2. *Confidential Treatment Requested 5. Payments 5.1 Research Funding Payment. Upon execution of the Collaboration Agreement, RPAN will pay [*****] to Diversa, a payment which is estimated to by [*****] of the total costs required to conduct the research hereunder. Diversa will fund the remaining [*****] of such costs. 5.2 License Fee. Upon RPAN's exercise of the Option as set forth in Section 3, it will pay Diversa a non-refundable license fee of [*****]. 5.3 Royalties. RPAN will pay Diversa a royalty equal to [*****] of the cost savings ("Cost Savings") generated by using the Licensed Enzyme in the Catalyst to make the Product. The Cost Savings will be calculated from the work performed in Phase V of the Enzyme Performance Assessment Procedure defined in Exhibit B attached hereto. Further, the [*****]. In the event the Catalyst demonstrates [*****] and a [*****] over the Base Catalyst, as determined from the tests performed under Exhibit B, RPAN will pay Diversa a royalty of [*****] of Product produced by RPAN, its affiliates or sublicensees. Said payment shall be based on estimated cost savings in the Catalyst of approximately [*****] of Product produced. RPAN and Diversa will mutually agree upon the applicable royalty payable to Diversa for [*****]. Such agreed upon royalty shall be in writing and attached hereto as an addendum. For increases in [*****], the royalty will be equal to [*****] (See Exhibit C). 5.4 Royalty Period. Royalties shall be paid on a [*****] basis. Each [*****] in which the Cost Savings are generated from the use of Licensed Enzymes in the production of the Product shall be a "Royalty Period". Royalties are payable within [*****] after the end of each Royalty Period. 5.5 Reports. At the same time as each royalty payment is due, RPAN shall deliver to Diversa a report based upon the Royalty Period for which the payment is due, containing the following information: (a) Cost Savings generated during the applicable Royalty Period; (b) Calculation of amount due to Diversa. All amounts payable under this Section will first be calculated in the currency of sale and then converted into U.S. dollars. The buying rates involved for the currency of the United States into which the currencies involved are being exchanged shall be the one quoted by The Wall Street Journal at the close of ----------------------- business on the last business day of the applicable Royalty Period. Such amounts shall be paid without deduction, except as required by law, of any withholding taxes, value-added taxes, or other charges applicable to such payments 5.6 Records. RPAN shall maintain complete and accurate records of the Licensed Enzyme used or sold by them or their Sublicensees under this Agreement, and any amounts payable to Diversa in relation such use or sale, which records shall contain sufficient information for Diversa to confirm the accuracy of such records. RPAN shall retain such records for at least [*****] after the conclusion of the Royalty Term. Diversa (acting as the "Auditing Party") shall have the right, at its own expense, to cause an independent certified public 3. *Confidential Treatment Requested accountant reasonably acceptable to RPAN, to inspect such records of RPAN (the "Audited Party") during normal business hours for the sole purpose of verifying any reports and payments delivered under this Agreement. Such accountant shall not disclose to the Auditing Party any information other than information relating to accuracy of reports and payments delivered under this Agreement and shall provide the Audited Party with a copy of any report given to the Auditing Party. The Parties shall reconcile any underpayment or overpayment within [*****] after the accountant delivers the results of the audit. The Auditing Party shall bear the full cost of the audit unless, the audit performed under this Section reveals an underpayment in excess of [*****] in any period, in which case the Audited Party shall bear the full cost of such audit. Diversa may exercise its rights under this Section only once every year and only with reasonable prior notice to RPAN. 5.7 [*****]. In the event RPAN wishes to exercise such option, the parties shall negotiate in good faith [*****] which shall be based on, but not limited to, [*****]. This [*****] shall also take into consideration [*****] 6. Confidentiality 6.1 Definition of Confidential Information. Confidential Information shall mean any technical or business information, whether orally or in writing, furnished by either party (the "Disclosing Party") to the other Party (the "Receiving Party") in connection with this Agreement. Such Confidential Information shall include, without limitation, the existence and terms of this Agreement, the identity of an Enzyme, the Enzyme, any gene encoding such Enzyme, if relevant, the use of an Enzyme, trade secrets, know-how, inventions, technical data or specifications, testing methods, business or financial information, research and development activities, product and marketing plans, and customer and supplier information, including, but not limited to, such items that become known to a Party during visits to the facilities of the other Party. 6.2 Obligations. The Receiving Party agrees that it shall: (a) Maintain all Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to its directors, officers, employees, consultants and advisors who are obligated to maintain the confidential nature of such Confidential Information and who need to know such Confidential Information for the purposes set forth in this Agreement; (b) Use all Confidential Information solely for the purposes set forth in, or as permitted by, this Agreement; and (c) Allow its directors, officers, employees, consultants and advisors to reproduce the Confidential Information only to the extent necessary to effect the purposes set forth in this Agreement, with all such reproductions being considered Confidential Information. Each Party shall be responsible for any breaches of this Section 6.2. by any of its directors, officers, employees, consultants and advisors. 6.3 Exceptions. The obligations of the Receiving Party under Section 6.2. above shall not apply to any specific Confidential Information to the extent that the Receiving Party can demonstrate that such Confidential Information: 4. *Confidential Treatment Requested (a) Was in the public domain prior to the time of its disclosure under this Agreement; (b) Entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party or its directors, officers, employees, consultants, advisors or agents; (c) Was or is independently developed or discovered by the Receiving Party without use of the Confidential Information, and which can be demonstrated by written record; (d) Is or was disclosed to the Receiving Party at any time, whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality to the Disclosing Party with respect to such Confidential Information; or (e) Is required to be disclosed to comply with applicable laws or regulations (such as disclosure to the SEC, the EPA, the FDA, or the United States Patent and Trademark Office or to their foreign equivalents), or to comply with a court or administrative order, provided that the Disclosing Party receives prior written notice of such disclosure and that the Receiving Party takes all reasonable and lawful actions to obtain confidential treatment for such disclosure and, if possible, to minimize the extent of such disclosure. 6.4 Survival of Obligations. The obligations set forth in Sections 6.1, 6.2 and 6.3 shall remain in effect after termination or expiration of this Agreement for a period of [*****]. 6.5 Public Announcement. The Parties shall issue a joint press release regarding this Agreement, the text of which shall be subject to mutual agreement of the Parties. Except for the information disclosed in the joint press release, neither party shall use the name of the other party or reveal the existence of or terms of this Agreement in any publicity or advertising without the prior written approval of the other party, except that (i) either party may use the text of a written statement approved in advance by both parties without further approval, and (ii) either party shall have the right to identify the other party and to disclose the terms of this Agreement as required by applicable securities laws or other applicable law or regulation, provided that the receiving party takes reasonable and lawful actions to minimize the degree of such disclosure. 7. Intellectual Property 7.1 Ownership of Inventions. All intellectual property rights which are in the possession of either party as of the Effective Date of this Agreement will remain in the possession of that party. Ownership of inventions conceived of or reduced to practice during the course of the collaboration (the "Inventions") will be as follows: Inventions involving Option Enzymes or Products. . Diversa shall own all Inventions claiming compositions of matter, uses or methods of or otherwise involving, any Option Enzyme or any derivative or analog thereof (including any Derivative Enzyme). . RPAN will own all Inventions claiming composition of matter uses or methods of or otherwise involving the Base Catalyst and the Products. Inventions involving Assays. . Diversa will own all Inventions relating to any assays designed and/or developed in the course of the collaboration that are conceived of solely by Diversa. 5. *Confidential Treatment Requested . Diversa will own all Inventions relating to any assays designed and/or developed in the course of the collaboration that are conceived of jointly by Diversa and RPAN provided, however, that Diversa (i) will not use, or grant any third party the right to use, any such assays that incorporates or was designed and/or developed using any information or materials provided to Diversa by RPAN other than for research under this Agreement and (ii) will grant RPAN a free non-exclusive, non transferable license to use any such assays solely for RPAN's internal research purposes. . RPAN will own all Inventions relating to any assays designed and/or developed in the course of the collaboration with Diversa that are conceived of solely by RPAN. 7.2 Other Inventions. Except as specifically provided above, ownership of all other Inventions will be determined in accordance with the rules of inventorship under United States patent law. 8. Patent Matters 8.1 Responsibilities. Each party will be responsible for filing, prosecuting, maintaining, defending and enforcing any patent applications, patents and other intellectual property rights owned by such party, and the parties will decide upon mutual agreement which party will be responsible for filing, prosecuting, maintaining, defending and enforcing any patent applications, patents and other intellectual property rights owned jointly by the parties on a case by case basis. 8.2 In the event that either party desires to abandon any patent application, patent or other intellectual property right involving the [*****], or if such party later declines responsibility for any such patent application, patent or other intellectual property right, such party shall provide reasonable prior written notice to the other party of such intention to abandon or decline responsibility, and the other party shall have the right, at its own expense, to file, prosecute, and maintain such patent application, patent or other intellectual property right. 9. Term and Termination 9.1 Term. The term of this Agreement shall begin as of the Effective Date and shall continue until the expiration of the Option Period, provided, however, that if the Option is exercised, this Agreement shall continue until the last day of the Royalty Term, unless earlier terminated as set forth below. 9.2 Termination. 9.2.1 Mutual Consent. This Agreement may be terminated at any time by mutual written agreement of the Parties. 9.2.2 Material Breach. In the event that a Party commits a material breach of any of its obligations under this Agreement and such Party fails (i) to remedy that breach within thirty (30) days after receiving written notice thereof from the other Party or (ii) to commence dispute resolution pursuant to Section 10.3, within thirty (30) days after receiving written notice of that breach from the other Party, the other Party may immediately terminate this Agreement upon written notice to the breaching Party. 9.3 Disposition of Confidential Information. In the event of termination or expiration of this Agreement, the Parties shall return or destroy all forms of Confidential Information provided to them under this Agreement, within [*****] after such termination or expiration, provided, however, that each Party may retain one copy of such Confidential Information for record keeping purposes only. 6. *Confidential Treatment Requested 9.4 Effect of Termination or Expiration. Termination or expiration of this Agreement shall not relieve the parties of any obligation accruing prior to such termination or expiration and shall not terminate any License granted or License Agreement entered into prior to such termination or expiration. The provisions of Sections 5.6, Articles 6 and 7 shall survive the expiration or termination of this Agreement. 10. Miscellaneous 10.1 Relationship of Parties. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the parties. No party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein. 10.2 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York other than those provisions governing conflicts of law. 10.3 Dispute Resolution Procedures. The Parties recognize that disputes as to certain matters may from time to time arise which relate to either Party's rights and/or obligations hereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of such disputes in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Section 10.3 if and when such a dispute arises between the Parties. If a dispute arises between the Parties relating to the interpretation or performance of this Agreement or the grounds for the termination thereof, the Parties agree to hold a meeting, attended by individuals with decision-making authority regarding the dispute, to attempt in good faith to negotiate a resolution of the dispute prior to pursuing other available remedies. If, within [*****] after such meeting, the Parties have not succeeded in negotiating a resolution of the dispute, such dispute shall be finally settled only in San Diego, California, in accordance with the rules and procedures of the American Arbitration Association by three arbitrators knowledgeable as to biotechnology industry standards. Each Party shall select one arbitrator [*****] after the institution of the arbitration proceeding and the third arbitrator will be selected by mutual agreement of the other two arbitrators within [*****] of the appointment of the two arbitrators selected by the Parties. All of the arbitrators will be neutral, impartial, independent of the Parties and others having any known interest in the outcome; will abide by the ABA and AAA Cannons of Ethics for neutral arbitrators, and will have no ex parte communications about the case or about the appointment of the third arbitrator or the arbitrator's views on matters of law with either Party in the appointing process or otherwise during the pendency of the arbitration. The Parties shall bear the costs of arbitration equally unless the arbitrators, pursuant to their right, but not their obligation, require the non-prevailing Party to bear all or any unequal portion of the prevailing Party's costs. The arbitrators shall prepare and deliver a written, reasoned opinion conferring their decision within [*****] of the final arbitration hearing. The arbitrators shall not have the power to award punitive damages under this Agreement and such an award is expressly prohibited. The decision of the arbitrators shall be final and binding on all of the Parties. Judgment on the award so rendered may be entered in any court of competent jurisdiction at the option of the successful Party. The rights and obligations of the Parties to arbitrate any dispute relating to the interpretation or performance of this Agreement or the grounds for the termination thereof shall survive the expiration or termination of this Agreement for any reason. 10.4 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 10.5 Headings. All headings in this Agreement are for convenience only and shall not affect the meaning of any provision hereof. 7. *Confidential Treatment Requested 10.6 Binding Effect. This Agreement and all rights and obligations hereunder shall inure to the benefit of and be binding upon the Parties, their Affiliates, and their respective lawful successors and assigns. 10.7 Assignment. Except as otherwise provided herein, neither this Agreement nor any interest hereunder will be assignable in part or in whole by any Party without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement to any of its Affiliates or to any successor by merger or sale of substantially all of its business to which this Agreement relates This Agreement will be binding upon the successors and permitted assigns of the Parties. Any assignment which is not in accordance with this Section will be void. 10.8 Notices. All notices, requests, demands and other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given upon the date of receipt if delivered by hand, recognized international overnight courier, confirmed facsimile transmission, or registered or certified mail, return receipt requested, postage prepaid to the following addresses or facsimile numbers: If to RPAN: If to Diversa: RPAN Diversa Corporation 42 avenue Aristide Briand 10665 Sorrento Valley Road 92160 Antony, France San Diego, California 92121 Attention: Research Director Attention: Carolyn Erickson Copy: General Counsel - Tel: (619) 623-5104 Legal Department Fax: (619) 623-5180 Tel: (33) 1-46-74-70-00 Fax: (33) 1-40-96-96-96 Either party may change its designated address and facsimile number by notice to the other party in the manner provided in this Section. 10.9 Amendment and Waiver. This Agreement may be amended, supplemented, or otherwise modified only by means of a written instrument signed by the Parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 10.10 Severability. In the event that any provision of this Agreement shall, for any reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and the parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent. 10.11 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements or understandings between the parties relating to the subject matter hereof. 10.12 Regulatory Filings. RPAN shall have sole responsibility for making all regulatory filings worldwide, including, without limitation, obtaining the necessary approvals to market Products. Diversa will cooperate to provide information required to make and maintain such filings, as appropriate, 8. by either party by registered airmail or by telefax. In case of such termination the terminating party will not be required to pay to the other party any indemnity whatsoever. Accepted and Agreed to: Rhone-Poulenc Animal Nutrition Diversa Corporation Signature: /s/ Bernard Le Roux Signature: /s/ Jay M. Short ------------------------ ----------------------------------------------------------- Name: Bernard Le Roux Name: Jay M. Short ----------------------------- ---------------------------------------------------------------- Title: V.P. R & D RPAN Title: President Chief Executive Officer and Chief Technology Officer ---------------------------- --------------------------------------------------------------- Date: July 8, 1999 Date: June 28, 1999 ----------------------------- ----------------------------------------------------------------
9. Exhibit A - Project Plan PARTNERSHIP PROJECT R&D PLAN Discovery of a [*****] for the [*****] for use as a [*****] Background: [*****] [*****] [*****] [*****] [*****] 1. [*****] 2. [*****] 3. [*****] 4. [*****] 5. [*****] RPAN: Project Performance and Delivery: 1. [*****] 2. [*****] 3. [*****] 4. [*****] 5. [*****] 6. [*****] 7. [*****] 8. [*****] 10. *Confidential Treatment Requested Diversa: Project Performance and Delivery: 1. [*****] 2. [*****] Diversa Effort [*****] [*****] 11. *Confidential Treatment Requested Exhibit B RPAN's ENZYME PERFORMANCE ASSESSMENT PROCEDURE Phase 1: [*****] 1. [*****] 2. [*****] Approximate Time Required: [*****] [*****] Phase II: [*****] [*****] 3. [*****] Approximate Time Required: [*****] Phase III: [*****] 1. [*****] Approximate Time Required: [*****] Phase IV: [*****] 1. [*****] Approximate Time Required [*****] Phase V: [*****] 1. [*****] 2. [*****] Approximate Time Required: [*****] [*****] 12. *Confidential Treatment Requested Exhibit C [*****] [*****] C-1. *Confidential Treatment Requested Exhibit D LIST OF RELATED MOLECULES [*****] D-1. *Confidential Treatment Requested EX-10.21 9 LICENSE AGREEMENT EXHIBIT 10.21 Confidential Treatment Requested Under 17 C.F.R. (S)(S) 200.80(b)(4) 200.83 and 230.406 LICENSE AGREEMENT This Agreement is made as of the 29/th/ day of March, 1999 by and between Invitrogen Corporation, a corporation organized and existing under the laws of the State of Delaware, with principal offices located at 1600 Faraday Avenue, Carlsbad, California, 92008, ("Licensor") and Diversa Corporation, having its principal place of business 10665 Sorrento Valley Road, San Diego, CA 92121 ("Licensee"). 1. Definitions 1.1 Affiliate means any business entity controlled by or under common control with Licensee. For the purposes hereof, "control" shall mean, as to any entity, effective ownership of greater than [*****] of the [*****]. 1.2 Licensed Patent Rights means the United States Patent Application [*****] and [*****] licensed to Licensor, including all [*****] and [*****]. Said list will be periodically updated by Licensor. 1.3 Licensed Products means any [*****] or any [*****]. 1.4 Net Sales means the dollar amount of [*****] of Licensed Product(s) by Licensee and/or Affiliates, less [*****]. 1.5 Effective Date means the first date appearing above. 1.6 Field Of Use means cloning of DNA inserts from uncultured organisms only in conjunction with LICENSEE'S proprietary technology. For purposes of this paragraph "Licensee's proprietary technology" shall mean technology within the ambit of any claim in an issued or pending patent claim of [*****] and any [*****]. 1.7 Territory means the world. 2. License Grant 2.1 Licensor hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, an exclusive license to practice Licensed Patent Rights in the Field Of Use in order to make, but not to have made, use, and sell Licensed Products throughout the Territory for the term of this Agreement. 1. *Confidential Treatment Requested 2.2 Additionally, Licensor hereby grants to Licensee and Licensee accepts, subject to the terms and conditions of this Agreement, a non-exclusive license to use Licensed Patent Rights for [*****] for Licensee's [*****]. "[*****]" shall include [*****] and excludes [*****] Notwithstanding the foregoing, Licensee shall be free to commercialize any product resulting from Licensee's use of the Licensed Patent Rights in its research and discovery without incurring any further royalty obligations. 2.3 For purposes of Licensee's practice of the [*****], Licensor shall provide Licensee annually with [*****] as set forth in Exhibit A hereto. Licensee may purchase additional quantities of [*****] needed subject to the pricing schedule set forth in Exhibit A. In the event that Licensor sells [*****] to a third party for a [*****] than that set forth on Exhibit A, then such [*****] shall be extended to Licensee. 2.4 Licensee shall have the right to extend the licenses granted herein to Affiliates subject to the terms and conditions of this Agreement. Licensee shall have no right to grant sublicenses hereunder. 3. License Grant Fee 3.1 In consideration for the license granted under paragraph 2.1, Licensee agrees to pay to Licensor a [*****] license grant fee of [*****] United States dollars payable within [*****] following the execution of this Agreement. 3.2 Licensee further agrees to pay Licensor an annual license maintenance fee in the sum of [*****] payable beginning [*****] from the end of the [*****] following the EFFECTIVE DATE of this Agreement and continuing [*****] for the life of this Agreement. 3.3 In consideration of the license granted in paragraph 2.2, Licensee shall [*****] grant to Licensor a first option for a license to make, use, import, offer and sell in the research reagent market, as described below, at least [*****], but no more than [*****] of Licensee's [*****]. Such enzymes shall be selected from (i) Licensee's [*****] DNA modifying [*****] enzymes [*****] or (ii) novel DNA modifying [*****] enzymes [*****] during the term of the Agreement provided; however, that [*****] ((i) and (ii) are collectively referred to below as [*****]). Prior to transfer, Licensee will provide [*****] as well as other information if available, for the [*****] and [*****]. In the event that Licensor finds that any such [*****] as represented by 2. *Confidential Treatment Requested Licensee, then Licensee shall provide [*****]. Licensee may, in its sole discretion, also provide [*****] as they become available to Licensor, which Licensor shall use solely for the purpose of [*****] which may be licensed hereunder. Licensor may exercise its option on up to [*****] within [*****]. In the event that, by the [*****] of this Agreement, either (i) Licensee has not provided [*****] to Licensor for evaluation as set forth herein or (ii) Licensor has not exercised its option to license at least [*****] as set forth hereunder, then [*****]. For clarity, "first option" means [*****]. 3.4 Licensor may exercise such option by written notice to Licensee at any time up to [*****] from the date Licensee provides [*****] to Licensor for evaluation. Each [*****] shall be provided to Licensor by Licensee one time only and each transfer shall be under the terms of a materials transfer agreement in substantially the same form as Exhibit B hereto ("MTA"). Upon such notice of option exercise by Licensor the parties shall enter into license negotiations for the research reagent market. Such license shall not require any [*****] but shall include, but not be limited to, a royalty rate of between [*****], a provision that Licensee shall be named as the source of products licensed thereunder in all [*****] and such other terms and conditions as are commercially reasonable and customary in such agreements. 4. License Term 4.1 The license agreement will remain in effect the later of ten (10) years or for so long as there are patents within License Patent Rights still in force. 5. Royalties 5.1 Commencing on the Effective Date, Licensee shall pay to Licensor during the term of this agreement a royalty of [*****] sold under the license granted in paragraph 2.1. 5.2 In the event that the royalty burden on any given Licensed Product is increased due to the need for licensing additional components, the royalty payable hereunder will be reduced by [*****] for each additional [*****] due to third parties. Notwithstanding the foregoing, in no event shall the royalty due Licensor be reduced to [*****] of the royalty specified in paragraph 5. 1. 3. *Confidential Treatment Requested 6. Reporting 6.1 Licensee shall submit to Licensor within [*****] after the end of each [*****] during the term of this Agreement, reports setting forth for the preceding [*****] the following information: (1) the number of each Licensed Product sold by Licensee and its Affiliates; (2) total billings for each Licensed Product; (3) deductions applicable to determine the Net Sales thereof; and (4) the amount of royalty due with respect to Licensee' sale of each Licensed Product; and with each such report pay the amount of royalty due. Such report shall be certified as correct by an officer of Licensee. 6.2 All payments due hereunder shall be payable in United States dollars. Conversion of foreign currency to U.S. dollars shall be made at the conversion rate existing in the United States as reported in the Wall Street Journal on the last working day of each royalty reporting period. 6.3 Late payments shall be subject to an interest charge of [*****]. Interest shall be calculated pro rata for lateness that includes [*****]. 7. Record Keeping 7.1 Licensee shall keep, and shall require its Affiliates to keep accurate and correct records of Licensed Products made, used or sold under this Agreement appropriate to determine the amount of royalties due hereunder to Licensor. Such records shall be retained for [*****] following a given reporting period. They shall be available during normal business hours for inspection at the expense of Licensor for the sole purpose of verifying reports and payments hereunder. In the event that an inspection shows an under reporting and underpayment in excess of [*****] for any [*****] period, then Licensee shall pay the cost of such inspection as well as any additional sum that would have been payable to Licensor had Licensee reported correctly, plus interest due for lateness as specified above. 8. Intellectual Property Rights 8.1 All right, title and interest in and to all inventions, compositions, and methods which cannot be practiced without LICENSED PATENT RIGHTS conceived and/or reduced to practice solely by LICENSEE ("LICENSEE INVENTIONS") shall be owned by Licensee. 4. *Confidential Treatment Requested 8.2 All right, title and interest in and to all inventions, compositions, and methods dominated by LICENSED PATENT RIGHTS conceived and/or reduced to practice solely by LICENSOR ("LICENSOR INVENTIONS") shall be owned by Licensor. 8.3 All right, title and interest in and to all inventions dominated by PATENT RIGHTS conceived and reduced to practice jointly by LICENSOR AND LICENSEE ("JOINT INVENTIONS") shall be owned jointly by Licensor and Licensee. 8.4 Licensor will automatically receive a royalty free, paid-up non- exclusive license to LICENSEE INVENTIONS for all purposes outside the Field Of Use. 8.5 Licensee will automatically receive a non-exclusive license to LICENSOR INVENTIONS within the FIELD OF USE without further license grant fees, but with running royalties payable according to Section 5. 8.6 Exclusive licenses between the parties for Joint Inventions may be granted and shall be negotiated in good faith. 9. Infringement 9.1 Licensee shall promptly notify Licensor of any suspected infringement of any Licensed Patent Rights by a third party. Licensee and Licensor each shall have the right to institute an action of infringement in the Field Of Use of the Licensed Patent Rights in accordance with the following: (a) If Licensor and Licensee agree to institute suit jointly, the suit shall be brought in both their names, the out-of-pocket costs thereof shall be borne equally, and any recovery or settlement shall be shared equally. Licensee and Licensor shall agree on the manner in which they shall exercise control over such action. Licensor may be represented, if it so desires, by separate counsel of its own selection, the fees for which shall be paid by Licensor. (b) In the absence of an agreement to institute a suit jointly, Licensor may institute suit and, at its option, join Licensee as a plaintiff. Licensee shall execute all papers and perform such other acts as may be reasonably required in the circumstances, at the expense of Licensor. Licensor shall bear the entire cost of such litigation and shall be entitled to retain the entire amount of any recovery or settlement. (c) In the absence of an agreement to institute a suit jointly and if Licensor notifies Licensee that it has decided not to join in or institute a suit, as provided in (a) or (b) above, Licensee may institute a suit and, at its option, join Licensor as a plaintiff. Licensor shall execute all papers and perform such other acts as may be reasonably required in the circumstances, at the expense of Licensee. Licensee shall bear the entire cost of such litigation and shall be entitled to retain the entire amount of any recovery or settlement. 5. *Confidential Treatment Requested (d) If Licensor decides to institute suit, it shall notify Licensee in writing within [*****]. Licensee's failure to notify Licensor in writing, within [*****] after the date of Licensor's notice, that it will join in enforcing the patent pursuant to the above provisions shall constitute an assignment by Licensee to Licensor all rights, causes of action and damages resulting from any infringement alleged in the suit and Licensor shall be entitled to retain the entire amount of any recovery or settlement. (e) Should either Licensee or Licensor commence a suit under the above provisions and thereafter elect to abandon same, it shall give timely notice to the other party who may, at its discretion, continue prosecution of the suit. The parties will negotiate in good faith to allocate the expenses and proceeds of such suit. 9.2 In the event that a declaratory judgment action alleging invalidity of any of the Licensed Patent Rights shall be brought against Licensee or Licensor, then Licensor, at its sole option, shall have the right to intervene and take over the sole defense of such action at its own expense. Licensor shall have exclusive control of any enforcement of Licensed Patent Rights outside the Field Of Use. 10. Termination 10.1 The obligation to pay royalties on a Licensed Product shall expire when all patents within Licensed Patent Rights covering that Licensed Product have expired in the jurisdiction where the Licensed Product is sold to its ultimate consumer. 10.2 In the event Licensee fails to make payments due hereunder, Licensor shall have the right to terminate this Agreement upon ninety (90) days written notice, unless within the ninety (90) day notice period Licensee makes all outstanding payments plus interest. 10.3 In the event that Licensee shall be in default in the performance of any obligation under this Agreement (other than as provided in 10.2 above), and if the default has not been remedied within ninety (90) days after the date of notice in writing specifying the nature of such default, Licensor may terminate this Agreement immediately by further written notice to Licensee. 10.4 This Agreement and all licenses granted under it shall terminate automatically should Licensee commit any act of bankruptcy, become insolvent, file a petition under any bankruptcy or insolvency act, or have any such petition filed against it, or make any assignment for the benefit of its creditors. 10.5 Licensee shall have the right to terminate this Agreement for any reason or no reason upon ninety (90) days written notice to Licensor. 10.6 In the event of any termination or expiration, Licensee shall have the right to continue selling Licensed Products until finished goods in existence on the date of final notice of termination are sold, or [*****] whichever is sooner, provided however that such right shall not apply to voluntary termination under paragraph 10.5. Such sales will be subject to the 6. *Confidential Treatment Requested provisions of the Agreement. Following the [*****] or immediately upon the effective date of a termination under paragraph 10.5, Licensee will destroy all remaining materials which may be used to practice Licensed Patent Rights, or which were produced under licenses granted herein and an officer of Licensee shall certify such destruction to Licensor in writing under oath. 11. Breach And Cure 11.1 In addition to applicable legal standards, Licensee shall be in material breach of this Agreement for failure to pay any fees under Section III or any royalties pursuant to Section V. 11.2 Either party shall have the right to cure its material breach. The cure shall be effected within a reasonable time but in no event later than [*****] after written notice of breach given by the party claiming breach and specifying the nature of the breach. 12. Warranty 12.1 Licensor represents and warrants it has the authority to issue the licenses granted herein under License Patent Rights. Licensor warrants that, as of Effective Date, it has disclosed to Licensee any claims, rights or allegations by third parties of which it is aware which may conflict or overlap with License Patent Rights. Licensor does not warrant the validity of the License Patent Rights licensed hereunder and makes no representation whatsoever with regard to the scope of the License Patent Rights, or that such License Patent Rights may be exploited by Licensee or an Affiliate of Licensee without infringing other patents. Licensor EXPRESSLY DISCLAIMS ANY OTHER IMPLIED OR EXPRESS WARRANTIES AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE LICENSED PATENT RIGHTS OR LICENSED PRODUCTS CONTEMPLATED BY THIS Agreement. 13. Indemnification 13.1 Licensee shall indemnify, defend and hold harmless Licensor against any liability, damage, loss or expense (including reasonable attorneys' fees and expenses of litigation) incurred by or imposed upon Licensor in connection with any claim, suit, action, demand or judgment arising out of any theory of product liability (including, but not limited to, actions in the form of tort, warranty, or strict liability) relating to any product, process or service made, used or sold pursuant to any right or license granted under this Agreement. 14. Publicity 14.1 All public announcements regarding the existence or terms of this Agreement shall be coordinated between Licensor and Licensee and shall be made only by mutual agreement. 15. Notices 15.1 Notices regarding termination of this Agreement shall be made by certified mail, return 7. *Confidential Treatment Requested receipt requested or by a courier service requiring a signature upon receipt. 15.2 All other notices or documents to be given hereunder may be sent in a pre-paid letter to the address of the relevant party set out in this Agreement or to such other address as the parties may designate in writing for the purposes of this part. Any notice sent by U.S. Mail shall be deemed (in the absence of evidence of earlier receipt) to have been delivered [*****] after dispatch. 16. Miscellaneous 16.1 This Agreement shall be governed by California law applicable to agreements made and to be performed in California. 16.2 This Agreement shall be binding on the parties hereto and upon their respective heirs, administrators, successors and assigns. This Agreement may not be assigned by either party without the written consent of the other party, except that Licensee may assign this Agreement as part of a sale of transfer of all, or substantially all, of the assets of Licensee to which the Agreement relates. 16.3 This Agreement sets forth the entire agreement between the parties concerning the subject matter hereof and merges all previous agreements or communications. 16.4 Should any provision of this Agreement be held invalid, illegal or unenforceable by a court of competent jurisdiction, such provision shall be considered void. All other provisions, rights and obligations shall continue without regard to such holding. 16.5 No amendment or modification of this Agreement shall be valid or binding upon the parties unless made in writing and signed by both parties. 16.6 A waiver by either party of a breach by the other of any term of this Agreement shall not prevent the subsequent enforcement of that term and shall not be deemed a waiver of any subsequent, prior or continuing breach. In Witness Whereof, the Licensor and Licensee have executed this Agreement as of the Effective Date. Licensor, by: Licensee, by: /s/ Warner Broadus /s/ Carolyn Erickson - ------------------------------------- ----------------------------- Signature Signature Warner Broadus Carolyn Erickson - ------------------------------------- ----------------------------- Printed Name Printed Name General Counsel & Assistant Secretary Director, IP - ------------------------------------- ----------------------------- Title Title 8. *Confidential Treatment Requested EXHIBIT A Included in the Agreement: [*****]. Licensee may purchase [*****]. A-1. *Confidential Treatment Requested EXHIBIT B Materials Transfer Agreement Effective as of ____________, 1999, this Agreement ("Agreement") is made and entered into by and between Diversa Corporation, a Delaware corporation with headquarters at 10665 Sorrento Valley Road, San Diego, CA 92121 (hereinafter "Diversa"), and _____________, a ___________________ corporation with headquarters at ____________________________ (hereinafter "Recipient"), collectively known as "The Parties." WHEREAS, Diversa will provide Recipient with [*****] as set forth in Exhibit A attached hereto and hereinafter referred to as "Material"; WHEREAS, Recipient desires to evaluate the Material; WHEREAS, Recipient is willing to receive the Material pursuant to the terms and conditions of this Agreement; WHEREAS, Diversa agrees to provide the Material to Recipient pursuant to the terms and conditions of this Agreement; NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the Parties mutually agree to the following terms: 1. Diversa will provide to Recipient the following Material: Diversa shall provide Recipient with [*****] set forth in Exhibit A to allow Recipient to [*****]. 2. Recipient agrees that the Material shall be used solely for the purpose of evaluation of the potential usefulness of the Material in Recipients processes. The Material shall not be used in research that is subject to consulting or licensing obligations of any third party without the prior written consent of Diversa. 3. The Material delivered hereby is experimental in nature. DIVERSA MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Diversa makes no representation that the use of the Material will not infringe any patent or proprietary rights of third parties. 4. Recipient agrees that the Material shall not be distributed to any third party or entity, except affiliates and subsidiaries of Recipient, without the prior written consent of Diversa. 5. Recipient agrees that dissemination of the Material shall be limited to those employees of Recipient with a special need to know and work with such Material. 6. Information transferred under this Agreement, including but not limited to the Material and all information related to the Material, shall be "Confidential Information". Recipient shall not disclose to third parties any Confidential Information received from Diversa hereunder, provided, however, that Recipient shall have no objections to Diversa with respect to the use, or disclosure to others not party to this Agreement, of such information which: a) prior to disclosure was known to or in the possession of Recipient as evidenced by its written records; or b) is or becomes publicly known during the term of this Agreement, other than through a breach of Recipient's obligations hereunder; or c) is received from a third party having no obligations of confidentiality to Diversa hereunder; or d) is developed by Recipient independently of any disclosures made under this Agreement as evidenced by its written records; or B-1. *Confidential Treatment Requested e) is required by law or bona fide legal process to be disclosed, provided that Recipient takes all reasonable steps to restrict and maintain the confidentiality of such disclosure and provides reasonable notice to Diversa; or f) is authorized to be released in a written release by Diversa. 7. Recipient agrees to return all documents, samples, and other tangible items containing or representing Confidential Information, and all copies thereof, erase or destroy all Confidential Information contained in computer memory or data storage apparatus, and certify in writing that it has complied with the terms of this Paragraph 7, provided that Recipient may, upon written notice to Diversa, retain in confidence a single copy of that Confidential Information in the offices of Recipient's legal counsel for legal records. 8. Recipient acknowledges that all right, title and interest in and to the Materials belongs solely to Diversa. Recipient shall not modify the Materials in any way, reverse engineer the Materials, use the Materials for reproduction, offer the Materials or any derivative thereof for resale, use the Materials in any form of human or animal testing. 9. [*****]. 10. No rights under any intellectual property of Diversa or rights in any other Material or Confidential Information that could not have been attained, but for this Material, is granted or implied as a result of providing this Material to Recipient. 11. None of the Material provided hereunder shall be used for any commercial development directly or indirectly unless a license granting the same is executed between the Parties. Recipient agrees that the Material, method of using the Material, or any other material that could not have been made but for the Material, shall not be sold or otherwise transferred to any third party. 12. Diversa shall not be liable for any use of the Material or related know-how and Recipient agrees to indemnify, defend, and hold harmless Diversa and its officers, directors, shareholders, employees, agents, and representatives (collectively "Indemnitee") against all liability, demands, claims, costs, losses, damages, recoveries, settlements, and expenses (including interest, penalties, attorney fees, accounting fees, expert witness fees, costs, and expenses) incurred by Indemnitee, known or unknown, contingent or otherwise, directly or indirectly arising from or related to this Agreement or the use of the Material or related know-how hereunder. 13. This Agreement and rights thereunder shall not be assigned or transferred, directly or indirectly, in whole or in part by the Parties. 14. This Agreement shall be effective for five (5) years from the date set forth above. 15. The Parties may terminate this Agreement on [*****] written notice; however, upon termination of this Agreement, nothing herein shall be construed to release the Parties from any obligation that matured prior to the effective date of such termination. In the event this Agreement is terminated for any reason, the rights and obligations of Paragraphs 6, 7, 8, 9, 10, 11 and 12 shall survive termination of this Agreement. 16. The Parties represent and warrant that each has the authority to undertake the obligations set forth in this Agreement without breaching or violating any contractual or statutory obligation owed to another. B-2. *Confidential Treatment Requested 17. The provisions of this Agreement are severable and in the event any provisions of this Agreement are determined to be held invalid or unenforceable under any controlling body of law, such invalidity or unenforceability shall not in any way affect the validity and enforceability of the remaining provisions hereof. 18. This Agreement constitutes the entire agreement and understanding between the Parties concerning the subject matter thereof. It merges with and supersedes all previous agreements and understandings between the Parties. 19. This Agreement shall be construed in accordance with the laws of the State of California without regard to its conflict of laws principles. 20. After receipt of the executed Agreement, Diversa will arrange to provide Recipient with the Materials. IN WITNESS WHEREOF, the Parties have, through duly authorized representatives, executed this Agreement, effective as of the date set forth above. Diversa Corporation ___________________________ ________________________________________ Name Carolyn Erickson Director, Intellectual Property Title:____________________ B-3. EXHIBIT A TO BE PROVIDED EX-10.22 10 LICENSE AGREEMENT EXHIBIT 10.22 SECOND AMENDMENT The License Agreement ("Agreement") between Mycogen Corporation ("MYCOGEN") and Diversa Corporation ("DIVERSA"), dated December 19, 1997, was amended on March 6, 1998 ("March 6/th/ Amendment"). In order to avoid possible misunderstandings as to the rights and obligations arising under the Agreement, as amended, the following understandings are hereby confirmed: 1. MYCOGEN Technology is defined in Section 1.6 of the Agreement. MYCOGEN Technology includes information, techniques, data, materials and chemicals relating to MYCOGEN's proprietary [*****] gene expression system. In particular, MYCOGEN Technology includes, but is not limited to, the host strains and expression plasmids of [*****] which were provided to DIVERSA by MYCOGEN, and all information pertaining to the use of such strains, including methods and materials used to cultivate these strains and recover Products, which were provided to DIVERSA by MYCOGEN. 2. Pursuant to Section 11.2 of the March 6/th/ Amendment, DIVERSA agreed that it shall not make any improvements, adaptations, modifications to, or reverse engineer any part of the MYCOGEN Technology. Consistent with the March 6th Amendment, DIVERSA will not improve, adapt, modify or reverse engineer the host strains, expression plasmids, or cultivation and recovery methods of [*****] provided to DIVERSA by MYCOGEN, with the exception of any modifications to methods of cultivation of the [*****] host strains or recovery and expression of the proteins that are required to be made by DIVERSA in order to allow DIVERSA to economically commercialize Products. In particular, prohibited improvements, adaptations or modifications of MYCOGEN Technology include, but are not limited to, [*****] of the [*****] host strains provided to DIVERSA by MYCOGEN and [*****] to improve or modify the [*****] host strains that are part of the MYCOGEN Technology. 3. Appendix A to this Second Amendment further exemplifies: (i) Know-How owned or Controlled by MYCOGEN, which is included in the definition of MYCOGEN Technology in the Agreement, and (ii) improvements to MYCOGEN Technology as described in the March 6/th/ Amendment. 4. Any improvements, adaptations or modifications of MYCOGEN Technology made by DIVERSA to allow DIVERSA to express, recover and commercialize Products in the System become the sole property of MYCOGEN pursuant to Section 11.2 of the March 6/th/ Amendment. DIVERSA shall promptly disclose to MYCOGEN any such improvements, adaptations or modifications of MYCOGEN Technology made by DIVERSA including any improvement, adaptation or modification of the [*****] host strains and expression plasmids transferred to DIVERSA by MYCOGEN and methods used to cultivate the organisms and recover Products or other enzymes. MYCOGEN shall have the right to use such improvements, adaptations and modifications for the production of enzymes, including the production of enzymes for third parties. 5. The license granted to DIVERSA under the MYCOGEN Technology, pursuant to Section 2.1 of the Agreement, is to use the System to produce, make, have made, use, offer for sale, sell and import Product(s) and other enzymes. The System is defined in Section 1.8 of the Agreement to mean MYCOGEN's proprietary [*****] gene expression system, including the host strain, expression plasmids, and proprietary cultivation and recovery methods transferred to DIVERSA by MYCOGEN under the terms of the license. The license granted to DIVERSA by MYCOGEN under the Agreement, as amended on March 6, 1998, is limited to use of the System as defined in the Agreement. No rights are granted to use any improvements, adaptations or modifications of MYCOGEN's proprietary [*****] host strains and expression plasmids, except as provided in Paragraphs 2 and 4 of this Second Amendment. It is understood that the Agreement as amended does not prevent DIVERSA from using information that is both subject to the exceptions in Section 5.2(a) to (d) of the Agreement and not covered by patents owned or controlled by MYCOGEN or its Affiliates to independently develop gene expression systems without the aid, application or use of Confidential Information received from MYCOGEN. 6. Nothing in the Agreement or the March 6/th/ Amendment shall be construed to grant to DIVERSA any rights in MYCOGEN's Know-how developed after December 19, 1997, except with respect to improvements, adaptations or modifications that are derived by MYCOGEN from DIVERSA Know-How, as provided in Section 11.1 of the March 6/th/ Amendment, 1. *Confidential Treatment Requested where this DIVERSA Know-how is Confidential Information of DIVERSA received by MYCOGEN and this Confidential Information is not subject to any exception in Section 5.2 of the Agreement. 7. This Second Amendment is a confirmation and clarification of obligations existing under the Agreement and March 6/th/ Amendment and as such shall be deemed effective as of March 6, 1998. The definitions of terms defined in the Agreement and March 6/th/ Amendment are incorporated herein to the extent such terms have not been expressly explained or clarified by this Second Amendment. ACCEPTED AND AGREED TO: MYCOGEN CORPORATION DIVERSA CORPORATION /s/ Ronald L. Meeusen /s/ Jay M. Short - ----------------------------- ------------------------------- Name: Name: JAY M. SHORT Title: V.P. R&D Title: CEO Date: 7-30-99 Date: 7-20-99 2. *Confidential Treatment Requested APPENDIX A Exemplification of MYCOGEN Technology and Improvements "MYCOGEN Technology", as defined in the License Agreement of December 19, 1997 between MYCOGEN and DIVERSA ("Agreement"), includes, but is not limited to, the following Know-How owned or Controlled by MYCOGEN on the Effective Date of the License Agreement that in each case was transferred to DIVERSA by MYCOGEN under the terms of the Agreement: A. [*****] B. [*****] C. [*****] 1. [*****] 2. [*****] 3. [*****] 4. [*****] 5. [*****] 6. [*****] 7. [*****] 8. [*****] 1. *Confidential Treatment Requested 9. [*****] 10. [*****] 11. [*****] 12. [*****] 13. [*****] 14. [*****] 15. [*****] 16. [*****] 17. [*****] D. All documentation for regulatory submissions relating to products produced in [*****], including TSCA premanufacture notices and toxicology data E. Confidential Information related to business information of MYCOGEN and its affiliates pertaining to plans for development and commercialization of [*****] gene expression system 2. *Confidential Treatment Requested IMPROVEMENTS TO MYCOGEN TECHNOLOGY Improvements, adaptations and modifications of the MYCOGEN Technology, which are described as "Improvements" in the March 6, 1998 Amendment of the Agreement include, but are not limited to, changes in the Know-How provided by MYCOGEN related to [*****] host strains, plasmids, vectors, raw material specifications, or recipe variables to produce make or have made Products or other enzymes. Products and Know-How are defined in the Agreement. IMPROVEMENTS TO MYCOGEN TECHNOLOGY CONFIDENTIAL AMENDMENT March 6, 1998 Effective immediately, the License Agreement between Diversa Corporation (hereinafter "DIVERSA"), and Mycogen Corporation (hereinafter, "MYCOGEN"), effective December, 1997, is hereby amended as follows: 1. Article 1 - Definitions shall be amended to include the following definitions: 1.10 "DIVERSA Inventions" means all inventions, discoveries, modifications, improvements, technical information and know-how, whether patentable or not made by DIVERSA's employees or agents alone or in conjunction with employees or agents of third parties. 1.11 "MYCOGEN Inventions" means all inventions, discoveries, modifications, improvements, technical information and know-how, whether patentable or not, made by MYCOGEN's employees or agents alone or in conjunction with employees or agents of third parties. 1.12 "Joint Inventions" means all inventions, discoveries, modifications, improvements, technical information and know-how, whether patentable or not, made jointly by DIVERSA's and MYCOGEN's employees or agents. 2. Article 11 - Intellectual Property Ownership shall be added to the Agreement and shall read as follows: 11.1 Improvements to DIVERSA Know-How. MYCOGEN agrees that it shall not make any improvements, adaptations or modifications (collectively "Improvements") to, or reverse engineer any part of DIVERSA Know-How, Notwithstanding the foregoing, any Improvements to DIVERSA Know-How made by MYCOGEN shall become the sole property of DIVERSA. 11.2 Improvements to MYCOGEN Technology. DIVERSA agrees that it shall not make any Improvements to, or reverse engineer any part of, the MYCOGEN Technology. Notwithstanding the foregoing, any Improvements to the MYCOGEN Technology made by DIVERSA shall become the sole property of MYCOGEN. All such Improvements will be incorporated into the license granted to DIVERSA pursuant to this Agreement. 11.3 Except as set forth in Sections 11.1 and 11.2, DIVERSA shall have exclusive ownership and title to DIVERSA's Inventions, and MYCOGEN shall have exclusive ownership and title to MYCOGEN's Inventions. 11.4 Except as set forth in Sections 11.1 and 11.2, DIVERSA and MYCOGEN shall have joint ownership and title to Joint Inventions. Further, in the event of any such Joint Invention, the parties shall grant to each other a nonexclusive, irrevocable, royalty free license, without the right to grant sublicenses, to make, use, import, sell, offer to sell, have made and have used any such Invention resulting from work under this Agreement. 11.5 DIVERSA shall have the right to prepare, file, prosecute and maintain patent applications and patents, continuations, continuations-in-part, divisionals, reissues, additions, renewals, or extensions thereof covering DIVERSA's Inventions, in countries and regions of its choice throughout the world, for which DIVERSA shall bear all costs. 11.6 MYCOGEN shall have the right to prepare, file, prosecute and maintain patent applications and patents, continuations, continuations-in-part, divisionals, reissues, additions, renewals, or extensions thereof covering MYCOGEN's Inventions, in countries and regions of its choice throughout the world, for which MYCOGEN shall bear all costs. 1. *Confidential Treatment Requested 11.7 DIVERSA shall have the right to prepare, file, prosecute and maintain patent applications and patents, continuations, continuations-in-part, divisionals, reissues, additions, renewals, or extensions thereof covering Joint Inventions, in countries and regions of choice throughout the world, for which DIVERSA and MYCOGEN shall share all costs equally with the following exceptions: (a) In the event MYCOGEN elects not to protect nor share in the aforementioned costs to protect any Joint Invention, and DIVERSA desires to file, prosecute or maintain a patent application or patent in that country. DIVERSA may do so in the name of both DIVERSA and MYCOGEN subject to MYCOGEN's consent which consent shall not be unreasonably withheld. Upon this election, MYCOGEN agrees to promptly appoint DIVERSA as its attorney-in-fact for the limited purpose of executing all documents and performing any other act necessary to file, prosecute or maintain a patent application or patent in any country of choice. (b) In the event DIVERSA elects not to protect nor share in the aforementioned costs to protect any Joint Invention and MYCOGEN desires to file, prosecute or maintain a patent application or patent in that country, MYCOGEN may do so in the name of both MYCOGEN and DIVERSA, subject to DIVERSA's consent which consent shall not be reasonably withheld. Upon this election, DIVERSA agrees to promptly appoint MYCOGEN as its attorney-in-fact for the limited purpose of executing all documents and performing any other act necessary to file, prosecute, or maintain a patent application or patent in any country of choice. DIVERSA shall invoice MYCOGEN for MYCOGEN's share of such expenses, which invoice shall be paid by MYCOGEN within thirty (30) days. 11.8 Each party shall provide reasonable assistance to the other party to facilitate filing and prosecution of all patent applications and maintaining and extending patents covering inventions and discoveries subject to this section and shall execute all documents deemed necessary or desirable therefor. All of the other terms and conditions of the Agreement shall remain in full force and effect. CONFIDENTIAL IN WITNESS WHEREOF, the parties have caused this instrument to be executed by their duly authorized officers as of the day and year set forth below. ACCEPTED AND AGREED TO: Mycogen Corporation /s/ Andrew L. Barnes - ------------------------------- Print Name: Andrew L. Barnes -------------------- Print Title: Exec. VP ------------------- Date: 3/10/98 -------------------------- Diversa Corporation /s/ Patrick Simms - ------------------------------- Patrick Simms Vice President Date: 3/6/98 -------------------------- 2. *Confidential Treatment Requested License Agreement This License Agreement (the "Agreement"), dated as of December, 1997 (the "Effective Date"), is made by and between Mycogen Corporation, a California corporation 92121 ("MYCOGEN"), and Diversa Corporation, a Delaware corporation having its principal offices at 10665 Sorrento Valley Road, San Diego, California 92121 ("Diversa"). Recitals Whereas, MYCOGEN possesses a proprietary gene expression System (as defined below) and other proprietary rights, know-how and experience relating to gene expression; Whereas, DIVERSA desires to obtain immediate access and a worldwide, exclusive license to utilize such gene expression System to produce Product(s); (as defined below) ; Whereas, MYCOGEN desires to grant DIVERSA immediate access and a worldwide, exclusive license to utilize such gene expression System to produce Product(s); Now, Therefore, in consideration of the mutual covenants and promises set forth in the Agreement, the parties agree as follows: Article 1 - Definitions 1.1 "Affiliate" means an individual, trust, business trust, joint venture, partnership, corporation, association or any other entity which owns, is owned by or is under common ownership with a party. For the purposes of this definition, the term "owns" (including, with correlative meanings, the terms "owned by" and under common ownership with") as used with respect to any party, shall mean the possession (directly or indirectly) of more than 50% of the outstanding voting securities of a corporation or comparable equity interest in any other type of entity. 1.2 "Confidential Information" means all information and materials received by either party from the other party pursuant to this Agreement and all information and materials developed in the course of the Research Activities, including, without limitation, Know-How of each party. Confidential Information disclosed in tangible form shall be marked " Confidential," "Proprietary" or in some other manner to indicate its confidential nature. If disclosed orally, Confidential Information shall be designated as confidential at the time of disclosure and reduced to a written summary by the disclosing party and shall be marked in a manner to indicated its confidential nature and delivered to the receiving party within 45 days after disclosure. 1.3 "Control" means the ability to grant a license or sublicense as provided for herein without violating the terms of any agreement with or other arrangement with any Third Party. 1.4 "Gross Revenues" means the gross amount received by DIVERSA as a direct result of sale of Product(s) and other enzymes by DIVERSA, its Affiliates or their distributors, less allowances on returned or rejected goods, prepaid freight, sales or other taxes (other than taxes based on net income) refunds transportation charges (if separately stated or invoiced), rebates, cash, trade and quantity discounts actually paid. Transfer of a Product to an Affiliate for sale by the Affiliate shall not be considered a sale. In the case of such a transfer to an Affiliate, the Gross Revenues shall be based on the gross amount invoiced for the Product(s) by the Affiliate as invoiced to its customer. Sale of a Product to an Affiliate by Diversa shall be considered a sale and shall be included in Gross Revenues. In the event a Product is sold as a Combination Product, Gross Revenues, for purposes of determining royalty payments on the Combination Product shall be calculated as provided in this paragraph. The term "Combination Product", shall mean a product consisting of a Product and at least one other Biologically Active Component. The term "Biologically Active Component shall mean a biologically active component of a Combination Product that is itself essential to the function of the Combination Product. For purposes of this Agreement, a Product is not a Combination Product if it consists solely of one or more Product(s) and one or more other components that are not Biologically Active Components (Gross Revenues in a Combination Product shall be calculated by multiplying Gross Revenues of the Combination Product by the fraction A/(A+B) where A is the value of the Product(s) without the other biologically Active Components, and B is the value of the other biologically Active Components without the Product(s). 1. * Confidential Treatment Requested 1.5 "Know-How" means information, techniques, data, materials and chemicals (whether or not patentable), including, without limitation, inventions, techniques, practices, methods, knowledge, know-how, skill, experience, test data, analytical and quality control data, patent and legal data or descriptions, sales and manufacturing data. 1.6 "MYCOGEN Technology" means the Know-How owned or Controlled by MYCOGEN necessary or appropriate to develop, manufacture and commercialize Product(s), including, without limitation, the Know-How relating to the System, including the host strain and plasmid vectors. 1.7 "Product(s)" means any enzyme which is obtained by expressing any gene or combination of genes owned by or licensed to DIVERSA using the System, including, without limitation, any enzyme sold as an industrial enzyme or pharmaceutical intermediate. 1.8 "System" means MYCOGEN's proprietary [****] gene expression system used to produce the Product(s). 1.9 "Third Party" means any entity other than DIVERSA or MYCOGEN or an Affiliate of DIVERSA or MYCOGEN. Article 2 - License Grant 2.1 License. Subject to the terms and conditions set forth herein, MYCOGEN hereby grants to DIVERSA an exclusive, worldwide license, including the right to grant sublicenses pursuant to section 2.2, under the MYCOGEN Technology to use the System to produce, make, have made, use, offer for sale, sell and import Product(s) and other enzymes, with the exception that Diversa shall not use the System to contract manufacture any enzyme for any third party. Notwithstanding the foregoing, MYCOGEN and its Affiliates retain the rights to use the System for the production of enzymes, including for the production of enzymes for third parties by MYCOGEN. 2.2 Sublicense. MYCOGEN and DIVERSA contemplate that DIVERSA may from time to time desire to grant sublicenses to third parties to use the System to produce Product(s) for DIVERSA to be offered for sale by DIVERSA. Accordingly, DIVERSA shall have the right to grant one or more sublicenses to any third party to use the System to produce Product(s), provided that any such sublicense expressly provides that (i) the sublicensees shall have no right to sublicense the System, and (ii) the sublicensee shall be subject in all respects to provisions in this Agreement. Article 3 - Payments And Royalties 3.1 Payments. In partial consideration for the rights granted herein, DIVERSA shall pay to MYCOGEN a [****], [****] of this Agreement. 3.2 Royalty. DIVERSA shall pay to MYCOGEN a royalty equal to [****]. 3.3 [****] 2. *Confidential Treatment Requested 3.4 Duration of Royalty Obligations. Royalty obligations shall continue for the term of this Agreement. 3.5 Reduction in Royalty Rate. In the event that DIVERSA is or becomes obligated to pay additional royalties to MYCOGEN or any third party under separate license agreement(s) for use of the System, then up to 50% of the additional or third party royalties owed shall be credited against royalties owed to MYCOGEN under the terms of this Agreement. In no event, however, shall the royalty obligation owed to MYCOGEN be reduced below 2% of Gross Revenues of the Product(s) for any relevant royalty payment period. Article 4 - Payments and Reports 4.1 Semi-Annual Payments. Royalties shall be calculated on a semi-annual basis, and payable within 60 days after the end of each calendar six month period based upon Gross Revenues during the previous calendar six month period. All payments will be made in U.S. Dollars. The exchange rate for conversion of any currency to U.S. Dollars will be the exchange rate prevailing at Citibank N.A. in New York for the last business day of each such calendar period. Interest will be paid on the outstanding balance of any late payments at the prime rate of interest reported by Citibank, N.A. in New York, as such rate may change from time to time plus 2% per annum from the due date until the date that such payment in full is actually received. DIVERSA will assume the risk of any inconvertibility of any currency. 4.2 Reports. DIVERSA shall furnish to MYCOGEN, at the same time as each royalty payment is due, a written report of Gross Revenues of each Product and the royalty due and payable, for the calendar six month period upon which the royalty payment is based. 4.3 Records. DIVERSA shall keep full, complete and proper records and accounts of Gross Revenues of each Product, in sufficient detail to enable the royalties payable to MYCOGEN to be determined. Upon reasonable notice to DIVERSA, MYCOGEN shall have the right through an independent certified public accountant to audit DIVERSA's records pertaining to the Product(s) during normal business hours to verify the royalties payable pursuant to this Agreement; provided, however, that such audit shall not take place more often than once a year and shall not cover such records for more than the preceding three years and provided further that such accountant shall report to MYCOGEN only as to the accuracy of the royalty reports and payments submitted by DIVERSA to MYCOGEN hereunder. Such audit shall be at MYCOGEN expense; provided, however, in the event the audit discloses that MYCOGEN was underpaid royalties by at least 5% for any calendar six month period then DIVERSA shall reimburse MYCOGEN for audit costs together with an amount equal to the additional royalties to which MYCOGEN is entitled. DIVERSA shall preserve and maintain all such records and accounts required for audit for a period of three years after the calendar six month period for which the record applies. Article 5 - Confidentiality 5.1 Nondisclosure. During the Term of this Agreement, and for a period of five years thereafter, each party will maintain all Confidential Information as confidential and will not disclose any Confidential Information to any Third Party or use any Confidential Information for any purpose except (a) as expressly authorized by this Agreement, (b) as required by law or court order, or (c) to its Affiliates. Each party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that its Affiliates, employees, agents, consultants and other representatives do not disclose or make any unauthorized use of the Confidential Information. Each party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. 5.2 Exceptions. Confidential Information shall not include any information which the receiving party can prove by competent evidence: 3. *Confidential Treatment Requested a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving party, generally known or available; b) is known by the receiving party at the time of receiving such information, as evidenced by its records; c) is hereafter furnished to the receiving party by a Third Party, as a matter of right and without restriction on disclosure; d) is independently developed by the receiving party without the aid, application or use of Confidential Information; or e) is the subject of a written permission to disclose provided by the disclosing party. Article 6 - Representations, Warranties And Covenants 6.1 Corporate Power. Each party hereby represents and warrants that such party is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. 6.2 Due Authorization. Each party hereby represents and warrants that such party is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. 6.3 Binding Agreement. Each party hereby represents and warrants that this Agreement is a legal and valid obligation binding upon it and is enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by such party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it. 6.4 Disclaimer Of Warranties By Mycogen. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, MYCOGEN DOES NOT MAKE ANY REPRESENTATION OR WARRANTY TO DIVERSA OF ANY NATURE, EXPRESS OR IMPLIED, THAT THE SYSTEM WILL BE USEFUL FOR, OR ACHIEVE ANY PARTICULAR RESULTS. MYCOGEN SPECIFICALLY DISCLAIMS ANY WARRANTY OF NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Article 7 - Term And Termination 7.1 Term. This Agreement shall commence as of January 1, 1998, and shall continue unless terminated in accordance with the terms of this Agreement. 7.2 Termination for Cause. Either party may terminate this Agreement upon 60 days written notice upon the occurrence of any of the following: a) Upon or after the bankruptcy, insolvency, dissolution or winding up of the other party (other than dissolution or winding up for the purposes of reconstruction or amalgamation); or b) Upon or after the breach of any material provision of this Agreement by the other party if the breaching party has not cured such breach or diligently proceeded to cure such breach within the 60 day period following written notice of termination by the other party. 7.3 Effects of Termination. Expiration or termination of this Agreement shall not relieve the parties of any obligation accruing prior to such expiration or termination. The provisions of Sections 4.3, 6.4 and 7.3 and Articles 5, 8 and 9 shall survive termination or expiration of this Agreement. Article 8 - Dispute Resolution 8.1 Disputes. The parties recognize that disputes as to certain matters may from time to time arise which relate to either party's rights and/or obligations hereunder. It is the objective of the parties to 4. establish procedures to facilitate the resolution of such disputes in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the parties agree to follow the procedures set forth in this Article 8 if and when such a dispute arises between the parties. 8.2 Procedure. If a dispute arises between the parties relating to the interpretation or performance of this Agreement or the grounds for the termination thereof, the parties agree to hold a meeting, attended by individuals with decision-making authority regarding the dispute, to attempt in good faith to negotiate a resolution of the dispute prior to pursuing other available remedies. If, within 30 days after such meeting, the parties have not succeeded in negotiating a resolution of the dispute, such dispute shall be finally settled only in San Diego, California, in accordance with the rules and procedures of the American Arbitration Association by three arbitrators knowledgeable as to biotechnology industry standards. Each party shall select one arbitrator within 30 days after the institution of the arbitration proceeding and the third arbitrator will be selected by mutual agreement of the other two arbitrators within 30 days of the appointment of the two arbitrators selected by the parties. All of the arbitrators will be neutral, impartial, independent of the parties and others having any known interest in the outcome; will abide by the ABA and AAA Cannons of Ethics for neutral arbitrators, and will have no ex parte communications about the case or about the appointment of the third arbitrator or the arbitrator's views on matters of law with either party in the appointing process or otherwise during the pendency of the arbitration. The parties shall bear the costs of arbitration equally unless the arbitrators, pursuant to their right, but not their obligation, require the non-prevailing party to bear all or any unequal portion of the prevailing party's costs. The arbitrators shall prepare and deliver a written, reasoned opinion conferring their decision within 30 days of the final arbitration hearing. The arbitrators shall not have the power to award punitive damages under this Agreement and such an award is expressly prohibited. The decision of the arbitrators shall be final and binding on all of the parties. Judgment on the award so rendered may be entered in any court of competent jurisdiction at the option of the successful party. The rights and obligations of the parties to arbitrate any dispute relating to the interpretation or performance of this Agreement or the grounds for the termination thereof shall survive the expiration or termination of this Agreement for any reason. Article 9 - Indemnification And Insurance 9.1 Patent Infringement Indemnification. DIVERSA will at all times during the term of this Agreement and thereafter, indemnify, defend and hold harmless MYCOGEN and its directors, officers, employees, and affiliates, against any claim, proceeding, demand, liability, or expense (including legal expenses and reasonable attorney's fees) which relates to any action brought by a third party alleging infringement of a U.S. or foreign patent as a result of the activities of DIVERSA under this Agreement, except to the extent that such alleged infringement is the direct result of an activity of MYCOGEN. MYCOGEN will at all times during the term of this Agreement and thereafter, indemnify, defend and hold harmless DIVERSA and its directors, officers, employees, and affiliates, against any claim, proceeding, demand, liability, or expense (including legal expenses and reasonable attorney's fees) which relates to any action brought by a third party alleging infringement of a U.S. or foreign patent as a result of the activities of MYCOGEN under this Agreement, except to the extent that such alleged infringement is the direct result of an activity of DIVERSA. 9.2 Product Liability Indemnification. DIVERSA will at all times during the term of this Agreement and thereafter, indemnify, defend and hold harmless MYCOGEN and its directors, officers, employees, and affiliates, against any claim, proceeding, demand, liability, or expense (including legal expenses and reasonable attorney's fees) which relates to injury to persons or property, or against any other claim, proceeding, demand, expense and liability of any kind whatsoever resulting from the production, manufacture, sale, use, lease, consumption or advertisement of Product(s), except to the extent that such alleged infringement is the direct result of an activity of MYCOGEN. 9.3 Obligation of Agents. DIVERSA will require all agents who are involved with the development, manufacturing, use or sale of Product(s), process or service relating to this Agreement to provide the same level of indemnification as set forth in this section. 5. *Confidential Treatment Requested 9.4 Survival. This Clause 9 will survive expiration or termination of this Agreement. Article 10 - Miscellaneous 10.1 Assignment. (a) Neither party will have the right to assign its rights or obligations under this Agreement with the prior written consent of the other party. Any attempted assignment in violation of this provision will be void. However, this Agreement shall survive any merger, reorganization or sale of all or substantially all of the assets of either party with or into another party and no consent for such transaction shall be required hereunder; provided, however, that in the event of such transaction, no intellectual property rights of the acquiring corporation shall be included in the technology licensed hereunder. (b) This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties. Any assignment not in accordance with this Agreement shall be void. 10.2 Force Majeure. Neither party shall lose any rights hereunder or be liable to the other party for damages or losses on account of failure of performance by the defaulting party if the failure is occasioned by government action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or any other similar cause beyond the control of the defaulting party; provided, however, that the party claiming force majeure has exerted all reasonable efforts to avoid or remedy such condition. 10.3 Notices. Any notices or communications provided for in this Agreement to be made by either of the parties to the other shall be in writing and delivered personally or sent by United States mail, registered or certified, postage paid, by overnight delivery service such as FedEx or UPS or by facsimile, with confirmation of receipt, addressed as follows: If to DIVERSA: Diversa Corporation 10665 Sorrento Valley Road San Diego, CA 92121 Attn: Carolyn A. Erickson Director Intellectual property Phone No. (619)623-5104 Fax No. (619)623-5190 If to MYCOGEN: MYCOGEN Corporation 5501 Oberlin Drive San Diego, CA 92121 Attn: [*****] Either party may by like notice specify or change an address to which notices and communications shall thereafter be sent. Notices sent by facsimile shall be effective upon confirmation of receipt, notices sent by mail or overnight delivery service shall be effective upon receipt, and notices given personally shall be effective when delivered. 10.4 Governing Law. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of California, as such laws are applied to contracts entered into and to be performed entirely within the State of California by California residents. 6. *Confidential Treatment Requested 10.5 Waiver. Except as specifically provided for herein, the waiver from time to time by either of the parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such party's rights or remedies provided in this Agreement. 10.6 Severability. If any term, covenant or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be held to be invalid or unenforceable, then (a) the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law; and (b) the parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid or unenforceable, it being the intent of the parties that the basic purposes of this Agreement are to be effectuated. 10.7 Independent Contractors. It is expressly agreed that DIVERSA and MYCOGEN shall be independent contractors and that the relationship between the two parties shall not constitute a partnership or agency of any kind. Neither DIVERSA nor MYCOGEN shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other, without the prior written authorization of the party to do so. 10.8 Entire Agreement; Amendment. This Agreement sets forth all of the covenants, promises, agreements, warranties, representations, conditions and understandings between the parties hereto, and supersedes and terminates all prior agreements and understanding between the parties with respect to the subject matter hereof. There are no covenants, promises, agreements, warranties, representations conditions or understandings, either oral or written, between the parties other than as set forth herein and therein. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon the parties hereto unless reduced to writing and signed by the respective authorized officers of the parties. 10.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7. In Witness Whereof, the parties have executed this License Agreement as of the date first set forth above. Mycogen Corporation Diversa Corporation By: /s/ Andrew C. Barnes /s/ Patrick Simms ---------------------------------- ------------------------------ Patrick Simms Name: Andrew C. Barnes Vice President -------------------------------- Title: Exec. VP ------------------------------- 8. EX-10.23 11 PATENT CROSS LICENSE AGREEMENT EXHIBIT 10.23 Confidential Treatment Requested Under 17 C.F.R. (S)(S) 200.80(b)(4) 200.83 and 230.406 PATENT CROSS-LICENSE AGREEMENT This agreement ("Agreement"), effective as of the 18/th/ day of November, 1999 ("Effective Date"), is made by and between Terragen Discovery Inc., a British Columbia corporation ("Terragen"), having its principal place of business at Suite 300-2386 East Mall - UBC, Vancouver, British Columbia, Canada V6T 1Z3, and Diversa Corporation, a Delaware corporation ("Diversa"), having its principal place of business at 10665 Sorrento Valley Road, San Diego, California 92121. Whereas, Terragen is the owner of [*****] Terragen Patent Rights (as hereinafter defined), and Diversa is the owner of [*****] Diversa Patent Rights (as hereinafter defined), both embodying technologies applicable in discovery of multi-gene pathways and biomolecules of interest; Whereas, each party is desirous of acquiring certain rights under the other party's patent rights to use the other party's technology for the [*****]; and Whereas, each party is willing to grant the other party such rights in accordance with the terms and conditions set forth in this Agreement. Now, Therefore, in consideration of the foregoing recitals and the mutual covenants and conditions set forth herein, Terragen and Diversa hereby agree as follows: ARTICLE 1 DEFINITIONS "[*****]" shall mean a [*****] "Diversa Patent Rights" shall mean patents and patent applications set forth in Exhibit A hereto, and all continuations-in-part, continuations, divisionals, reissues, re-examinations or extensions thereof, and any foreign patents and patent applications corresponding thereto. Diversa may modify Exhibit A from time to time by providing written notice to Terragen to include patents and patent applications that may be required in order for Terragen to practice Diversa Patent Rights or Terragen Patent Rights. "Diversa Products" shall refer to all products made, use, sold, offered for sale or imported by Diversa that but for the licenses granted herein would infringe Terragen Patent Rights. "Field 1" shall mean small molecules for pharmaceutical applications. "Field 2" shall mean all fields except Field 1. "Patent Rights" shall refer to Terragen Patent Rights and Diversa Patent Rights. "[*****]" shall mean a [*****]. "Terragen Patent Rights" shall mean patents and patent applications set forth in Exhibit B hereto, and all continuations-in-part, continuations, divisionals, reissues, re-examinations or extensions thereof, and any foreign patents and patent applications corresponding thereto, as well as any patents and patent applications necessary to practice microdroplet screening technologies as described in the patents and patent applications in Exhibit B. Terragen may modify Exhibit B from time to time by providing written 1. *Confidential Treatment Requested notice to Diversa to include patents and patent applications that may be required in order for Diversa to practice Diversa Patent Rights or Terragen Patent Rights. "Terragen Products" shall refer to small molecules generated by the expression of partial, complete or hybrid gene pathways made, used, sold, offered for sale or imported by Terragen that but for the license granted herein would infringe Diversa Patent Rights. It is understood that small molecules do not include proteins or nucleic acids. "Valid Claim" shall mean: (i) a claim of an issued and unexpired patent that has not been revoked or held unenforceable or invalid by a decision of a court or other governmental body of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been statutorally disclaimed; or (ii) a claim included in a pending patent application that is actively prosecuted and which has not been cancelled, withdrawn, finally determined to be unallowable by the applicable governmental body pursuant to an unappealable decision and/or abandoned in accordance with the terms hereof. ARTICLE 2 LICENSE GRANT 2.1 Terragen License Grant. Subject to the terms and conditions set forth herein, Terragen hereby grants to Diversa the following: (a) a co-exclusive, non-royalty bearing, worldwide, [*****] license under Terragen Patent Rights to [*****] in Field 2. This license shall [*****] to the [*****]. During the term of the license, Terragen will [*****] to [*****] under [*****] in Field 2 to [*****]. (b) a non-exclusive, non-royalty bearing, non-sublicenseable, worldwide license under Terragen Patent Rights to [*****] in Field 1, provided that [*****] from the Effective Date, the license under this subparagraph shall [*****]. This license shall [*****]. 2.2 Diversa License Grant. Subject to the terms and conditions set forth herein, Diversa hereby grants to Terragen the following: (a) a non-exclusive, non-royalty bearing, worldwide, [*****] license under Diversa Patent Rights to [*****] in Field 1. 2.3 License Limitations. (a) Diversa agrees that it will not [*****] in [*****] of Diversa Products in Field [*****] for a period of [*****] from the Effective Date. (b) Terragen agrees that it will not [*****] in the [*****] and/or [*****] of Terragen Products for a period of [*****] from the Effective Date. ARTICLE 3 CONSIDERATION 3.1 Fees. In consideration of the licenses granted to Diversa by Terragen under the terms of this Agreement, Diversa has granted the license referred to in Section 2.2 and will pay Terragen the following: (a) a one time up front payment of two million five hundred thousand dollars (US$2,500,000) within thirty (30) days of the Effective Date; 2. *Confidential Treatment Requested (b) an annual maintenance fee of one hundred thousand dollars (US$100,000) within thirty (30) days of each anniversary date of the Effective Date until all Valid Claims included in the Terragen Patent Rights have expired unless the Agreement is terminated earlier pursuant to Article 7 below. ARTICLE 4 INTELLECTUAL PROPERTY 4.1 Except as permitted below, in further consideration of the licenses granted under the terms of this Agreement, Terragen will not institute a legal action challenging the validity and/or enforceability of Diversa Patent Rights, and Diversa will not institute any legal action challenging the validity and/or enforceability of Terragen Patent Rights, in each case, during the term of this Agreement. "Legal action challenging the validity and/or enforceability of Diversa Patent Rights/Terragen Patent Rights" shall include, but is not limited to, pre-grant or post-grant opposition proceedings, utility suits, reexamination proceedings, declaratory judgement actions, and civil actions under 35 U.S.C. (S) 291 (interfering patents). 4.2 Except as permitted below, in further consideration of the licenses granted under the terms of this Agreement, neither party shall take any action to hinder or delay prosecution of patents or patent applications owned or controlled by the other party and within the scope of Patent Rights without the prior written consent of said other party during the term of this Agreement. "Action taken to hinder or delay prosecution of patent applications" shall include, but is not limited to, formal or informal protests and third-party observations. 4.3 Upon the execution of this Agreement, a party who has brought a pending legal action challenging the validity or enforceability of any patent or patent application owned or controlled by the other party and within the scope of Patent Rights, shall take appropriate steps to terminate said pending legal action. 4.4 Notwithstanding the provisions of sections 4.1 and 4.2, a party may present and prosecute one or more claims that are directed to the same patentable invention as any claim(s) of the other party. Claims may be presented to satisfy the provisions of 35 U.S.C. (S) 135(b) or otherwise, e.g., at the request of an Examiner. 4.5 Notwithstanding the provisions of sections 4.1 and 4.2, in the event a patent infringement action is brought against a party to this Agreement, the party charged with infringement shall be permitted to raise all defenses permitted by law, including invalidity or unenforceability of the patent asserted against the party charged with infringement. 4.6 Notwithstanding the provisions of sections 4.1 and 4.2, nothing in this agreement shall prevent a party from disclosing material information to the Patent and Trademark Office to satisfy the duty of disclosure under 37 C.F.R. (S) 1.56. 4.7 If the United States Patent and Trademark Office declares an interference proceeding involving Terragen Patent Rights and Diversa Patent Rights, the parties will negotiate a settlement of such an interference in good faith. These negotiations will address all priority and non-priority issues that could have been brought in the interference. 4.8 Infringement by Third Parties. (a) In the event that either party determines that a third party is making, using, or selling a product that may infringe a patent included in the Patent Rights, it will promptly notify the other party in writing. (b) Except as provided under Section 4.8(c), the party in whose name the allegedly infringed Patent Rights are registered shall be solely responsible for determining whether to bring suit 3. *Confidential Treatment Requested against such alleged infringer and controlling such suit, and the other party shall take all reasonable steps to assist in such suit, provided that the expenses of the other party are paid by the controlling party. (c) If the matter involves an alleged infringement of the Terragen Patent Rights in Field 2, then Terragen shall be initially responsible for determining whether to bring suit against such alleged infringer. In the event Terragen decides to bring suit, it shall give prompt written notice to Diversa of that fact, and Diversa shall take all reasonable steps to assist Terragen in such suit. Terragen shall be entitled to all amounts recovered in such suit (other than amount to be paid to Diversa, should Diversa elect to join in such suit as provided for herein), except that Diversa shall have the right to elect to pay up to fifty percent (50%) of the litigation costs and receive a percentage of any recovery equal to the percentage of total litigation costs, including reasonable attorneys' fees, paid by Diversa. Diversa must make such election within sixty (60) days of its receipt of Terragen's notice that it has decided to bring suit. Diversa shall also have the right to be represented by separate counsel in any such suit. Terragen shall have control over any such suit, and decisions as to settlement, methods and/or terms and conditions for resolving the suit shall be made by Terragen after good faith consultation with Diversa. Upon the earlier of (i) Terragen's election not to bring a suit against the alleged infringer, as indicated by prompt written notice to Diversa, or (ii) 180 days after Terragen has notice of such alleged infringement if Terragen has not been able to cause the alleged infringer to cease infringement, Diversa shall have the right, at its option, to commence such action at its own cost and expense, in which case Diversa shall have control over such suit and be entitled to all amounts recovered in such action, subject to payment of any costs of Terragen in assisting in such suit. Subject to the right to receive payment for its costs out of amounts recovered as aforesaid, Terragen shall take all reasonable steps to assist Diversa in such suit. 4.9 Parties to Maintain Patent Rights. Each party shall have the obligation and be responsible at its own cost and expense for maintaining and extending those Patent Rights under its control for the term of this License. Subject to Section 4.10, each party shall use good faith efforts to prosecute, issue and maintain all Patent Rights. 4.10 Notice of Patent Lapse of Patent Rights. In the event that a party elects to abandon any of the Patent Rights under its control, it shall promptly advise the other party of the grant, lapse, nullification, revocation, surrender, or invalidation of any such Patent Rights at least in advance of any abandonment to enable the other party (the "Assuming Party") to assume that prosecution, at the Assuming Party's expense, should the Assuming Party not agree to such abandonment. ARTICLE 5 LIMITED WARRANTIES/INDEMNIFICATION/LITIGATION 5.1 Limited Warranty. Each party warrants to the other that it has the full right and power to make the representations and agreements set forth herein. Terragen warrants that Exhibit B lists patent applications filed on or before the Effective Date owned by Terragen, and Diversa warrants that Exhibit A lists patent applications filed on or before the Effective Date owned by Diversa. 5.2 No Other Warranties by Terragen. WITH RESPECT TO TERRAGEN PATENT RIGHTS AND TERRAGEN TECHNOLOGY, TERRAGEN EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND AND MAKES NO EXPRESS OR IMPLIED WARRANTIES WHATSOEVER INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY, SATISFACTORY QUALITY OR FITNESS FOR A PARTICULAR PURPOSE, EXCEPT AS EXPRESSLY PROVIDED IN PARAGRAPH 5.1 ABOVE. TERRAGEN EXPRESSLY DISCLAIMS ALL WARRANTIES AS TO THE VALIDITY OR SCOPE OF TERRAGEN PATENT RIGHTS, OR THAT THE TERRAGEN TECHNOLOGY WILL BE FREE FROM INFRINGEMENT OF PATENTS OR PROPRIETARY RIGHTS OF THIRD PARTIES, OR THAT NO THIRD PARTIES ARE IN ANY WAY INFRINGING TERRAGEN PATENT RIGHTS. In no event shall Terragen be liable for any consequential, indirect, or incidental damages. Further, Diversa shall make no statements, representations or warranties whatsoever to any third party which are inconsistent with this disclaimer by Terragen. 4. 5.3 No Other Warranties by Diversa. WITH RESPECT TO DIVERSA PATENT RIGHTS AND DIVERSA TECHNOLOGY, DIVERSA EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND AND MAKES NO EXPRESS OR IMPLIED WARRANTIES WHATSOEVER INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY, SATISFACTORY QUALITY OR FITNESS FOR A PARTICULAR PURPOSE, EXCEPT AS EXPRESSLY PROVIDED IN PARAGRAPH 5.1 ABOVE. DIVERSA EXPRESSLY DISCLAIMS ALL WARRANTIES AS TO THE VALIDITY OR SCOPE OF DIVERSA PATENT RIGHTS, OR THAT THE DIVERSA TECHNOLOGY WILL BE FREE FROM INFRINGEMENT OF PATENTS OR PROPRIETARY RIGHTS OF THIRD PARTIES, OR THAT NO THIRD PARTIES ARE IN ANY WAY INFRINGING DIVERSA PATENT RIGHTS. In no event shall Diversa be liable for any consequential, indirect, or incidental damages. Further, Terragen shall make no statements, representations or warranties whatsoever to any third party which are inconsistent with this disclaimer by Diversa. 5.4 Infringement Litigation. Each party shall notify the other party in writing in the event that any third party shall commence or threaten to commence an action against Terragen or Diversa alleging that the practice of a method or process embodied in one or more claims of Diversa Patent Rights or Terragen Patent Rights infringes a patent of a third party. Each party shall keep the other reasonably informed with respect to the progress of any such action from time to time. Upon a party's reasonable request and at its expense, the other party shall cooperate with the requesting party and its counsel with respect to the defense of any such action against the requesting party. ARTICLE 6 CONFIDENTIALITY 6.1 Definition of Confidential Information. Confidential Information shall mean any technical, business or other proprietary information, whether orally or in writing, furnished by one party (the "Disclosing Party") to the other party (the "Receiving Party) in connection with this Agreement. Such Confidential Information shall include, without limitation, the terms of this Agreement, Diversa Patent Rights, and Terragen Patent Rights. 6.2 Obligations. The Receiving Party agrees that it shall: (a) Maintain all Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to its Affiliates, directors, officers, employees, consultants and advisors who are obligated to maintain the confidential nature of such Confidential Information and who need to know such Confidential Information for the purposes set forth in this Agreement; (b) Use all Confidential Information solely for the purposes set forth in, or as permitted by, this Agreement; and (c) Allow its Affiliates, directors, officers, employees, consultants and advisors to reproduce the Confidential Information only to the extent necessary to effect the purposes set forth in this Agreement, with all such reproductions being considered Confidential Information. Each Party shall be responsible for any breaches of this Section 6.2 by any of its Affiliates, directors, officers, employees, consultants and advisors. 6.3 Exceptions. The obligations of the Receiving Party under Section 6.2 above shall not apply to any specific Confidential Information to the extent that the Receiving Party can demonstrate by written record that such Confidential Information: (a) Was in the public domain prior to the time of its disclosure under this Agreement; 5. (b) Entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party or its Affiliates, directors, officers, employees, consultants, advisors or agents; (c) Was or is independently developed or discovered by the Receiving Party without use of the Confidential Information; (d) Is or was disclosed to the Receiving Party at any time, whether prior to or after the time of its disclosure under this Agreement, by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality to the Disclosing Party with respect to such Confidential Information; or (e) Is required to be disclosed to comply with applicable laws or regulations (such as disclosure to the SEC, the EPA, the FDA, or the United States Patent and Trademark Office or to their foreign equivalents), or to comply with a court or administrative order, provided that the Disclosing Party receives prior written notice of such disclosure and that the Receiving Party takes all reasonable and lawful actions to obtain confidential treatment for such disclosure and, if possible, to minimize the extent of such disclosure. 6.4 Survival of Obligations. The obligations set forth in Sections 6.1, 6.2 and 6.3 shall remain in effect after termination or expiration of this Agreement, until such time as the Confidential Information falls into one of the exceptions listed in Section 6.3. 6.5 Publicity. The parties shall issue a joint press release regarding this Agreement, the text of which shall be subject to mutual agreement of the parties. Except for the information disclosed in the joint press release, neither party shall use the name of the other party or reveal the terms of this Agreement in any publicity or advertising without the prior written approval of the other party, except that (i) either party may use the text of a written statement approved in advance by both parties without further approval, and (ii) either Party shall have the right to identify the other party and to disclose the terms of this Agreement as required by applicable securities laws or other applicable law or regulation, provided that the receiving party takes reasonable and lawful actions to minimize the degree of such disclosure. ARTICLE 7 TERM AND TERMINATION 7.1 Diversa License Term. The term of the licenses granted to Diversa by Terragen pursuant to this Agreement shall expire on a country by country basis, upon the expiration of the last to expire Valid Claim within the Terragen Patent Rights. 7.2 Terragen License Term. The term of the license granted to Terragen by Diversa pursuant to this Agreement shall expire on a country by country basis, upon the expiration of the last to expire Valid Claim within the Diversa Patent Rights. 7.3 Termination Upon Material Breach. Either party may terminate the licenses granted to the other party under this Agreement if such other party breaches any material term of this Agreement and does not cure such breach within sixty (60) days following written notice; except for non-payment of money, in which case the cure period shall be reduced to fifteen (15) days. Any right to terminate arising under this Section 7.3 shall be stayed until resolved under Section 9.2 if, during the relevant cure period, the party alleged to have been in default shall: (i) have initiated arbitration in accordance with Section 9.2 below, with respect to the alleged default; and 6. (ii) be diligently and in good faith co-operating in the prompt resolution of such arbitration proceedings. 7.4 Termination Upon Bankruptcy. If either party (the "Insolvent Party") files for protection under bankruptcy laws, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its property, files a voluntary petition under any bankruptcy or insolvency act or has any such petition filed against it which is not discharged within sixty (60) days of the filing thereof, then the other party may, at its sole election upon notice to the Insolvent Party, terminate the rights granted to the Insolvent Party by written notice to such Insolvent Party. 7.5 Termination upon Patent Right Lapse. Either party may terminate the license granted to the other party under this Agreement if the other party's Patent Rights have lapsed, been canceled or abandoned, been admitted to be invalid or unenforceable through reissue or disclaimer or have been declared invalid by decision or judgment of a court of competent jurisdiction. 7.6 Termination Upon Licensed Rights Representing Majority of Assets. Either party may terminate the licenses granted to the other party under this Agreement if the licenses granted to the other party under this Agreement represent more than 50% of the total assets of the other party. 7.7 Terragen Termination Rights Upon Certain Diversa Acquisitions/Mergers. Terragen may terminate the licenses granted to Diversa under this Agreement in the event that Diversa transfers all or substantially all of its business whether by way of merger, sale of stock, sale of assets or otherwise to a [****] within two (2) years of the Effective Date. In the event the license to Diversa is terminated by Terragen pursuant this Section 7.7, such termination will be effective upon the date of such transfer. 7.8 Diversa Termination Rights Upon Certain Terragen Acquisitions/Mergers. Diversa may terminate the license granted to Terragen under this Agreement in the event that Terragen transfers all or substantially all of its business, whether by way of merger, sale of stock, sale of assets or otherwise [****] during the term of this Agreement. In the event the license to Terragen is terminated by Diversa pursuant this Section 7.8, such termination will be effective upon the date of such transfer. Further, in the event Terragen transfers all or substantially all of its business, whether by way of merger, sale of stock, sale of assets or otherwise to a [****] without prior written approval from Diversa within five (5) years of the Effective Date, Terragen shall reimburse Diversa the two (2) million five hundred thousand dollars ($2,500,000) paid Terragen by Diversa pursuant to Section 3.1 above, within ninety (90) days of such transfer. 7.9 Rights Upon Expiration. Upon expiration of the licenses granted hereunder, neither party shall have any further rights or obligations with respect to this Agreement in the countries with respect to which this Agreement has then expired, except that expiration shall not relieve each party of any obligations accruing prior to such expiration or of its obligations under Articles 4, 5 and 6 herein. This Section 7.9 (and the sections referenced herein) shall survive expiration of this Agreement. 7.10 Rights Upon Termination. Upon termination of the licenses granted by one party (the "Terminating Party") to the other party (the "Terminated Party") under this Agreement, the licenses granted by the Terminated Party to the Terminated Party shall remain in full force effect until expiration or termination in accordance with this Agreement. Any termination of licenses granted under this Agreement shall not relieve either party of any obligations with respect to such licenses accrued prior to the date of such termination or its obligations under Articles 4, 5 and 6 herein. This Section 7.10 (and the sections referenced herein) shall survive termination of this Agreement. 7. *Confidential Treatment Requested ARTICLE 8 ASSIGNMENT, CHANGE OF OWNERSHIP, RIGHTS UPON DISSOLUTION 8.1 Assignment. Except as otherwise expressly provided herein, neither this Agreement nor any interest hereunder shall be assignable, nor any other obligation delegable, by either party without the prior written consent of the other; provided, however, that (subject to sections 7.7 and 7.8 above) a Party may assign this Agreement to any affiliate of it or to any successor by law or by sale of all or substantially all of its assets, provided that the assigning party shall guarantee and remain liable and responsible for the performance and further observance of all the assigning party's duties and obligations hereunder; provided further that, in the event of such transaction, no intellectual property rights of any person (other than Diversa or Terragen) that is an acquiring party shall be included in the technology licensed hereunder. The terms and provisions of this Agreement shall be binding upon the successors and permitted assigns of the parties. Any assignment not in accordance with this Section 8.1 shall be void. 8.2 Diversa Rights Upon Dissolution, Liquidation, Winding Up of Terragen. Diversa will have a right of first option to negotiate the purchase of the Terragen Patent Rights in the event of the dissolution, liquidation or winding up of Terragen (an "Event") (subject to Section 9.12 hereof and to applicable bankruptcy laws) within five (5) years of the Effective Date. Terragen will provide prompt written notice to Diversa of any Event or proposed Event. Diversa may exercise its option to negotiate the purchase of the Terragen Patent Rights by providing Terragen written notice within sixty (60) days after the date of such notice to Diversa by Terragen. If Diversa elects to exercise such option, the parties shall negotiate in good faith with the goal of entering into a definitive agreement within ninety (90) days after the date of Diversa's notice to Terragen. If Diversa does not exercise such option within the sixty (60) day option period or the parties are unable to enter into a definitive agreement within the ninety (90) day period after Diversa's notice to Terragen that is has exercised the option (or such longer period as the parties may mutually agree in writing), then Terragen shall be free to sell or otherwise transfer the Terragen Patent Rights to a third party; provided that, for a period of six months following the end of the negotiation period, Terragen may not sell or otherwise transfer the Terragen Patent Rights to any third party containing terms and conditions which, in the aggregate, are more favorable to such third party than the terms and conditions last offered to Diversa by Terragen, unless Terragen first offers Diversa the opportunity to purchase the Terragen Patent Rights on such terms and conditions. ARTICLE 9 GENERAL PROVISIONS 9.1 Independent Contractors. Terragen and Diversa shall be independent contractors and shall not be deemed to be partners, joint venturers or each other's agents and neither party shall have the right to act on behalf of the other except as is expressly set forth in this Agreement. 9.2 Arbitration. The Parties shall mutually consult in good faith in an attempt to settle amicably in the spirit of co-operation any and all disputes arising out of or in connection with this Agreement or questions regarding the interpretation of the provisions hereof. All controversies or claims under this Agreement, the enforcement or interpretation hereof, or because of an alleged breach, default or misrepresentation under the provisions hereof that cannot be settled amicably within [*****] from the date of notification of either party to the other of such dispute or question, which notice shall specify the details of such dispute or question, shall be settled by final and binding arbitration in English, by one arbitrator appointed by the American Arbitration Association ("AAA"). If the parties cannot agree on the arbitrator to be so appointed, each party shall be entitled to appoint one (1) arbitrator, and the [*****] arbitrators so appointed shall agree upon a third. The arbitrator(s) shall have the technical expertise required to understand and arbitrate the dispute. The arbitration shall be conducted in San Diego, California, if initiated by Terragen and in Vancouver, British Columbia, if initiated by Diversa, in each case, in accordance with the then-existing Commercial Arbitration Rules of the AAA. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof; provided, however, that the law applicable to any controversy shall be the law of the State of California or Federal Patent Law, as applicable, regardless of its or any other jurisdiction's choice of law principles. Notwithstanding the foregoing, either party may 8. *Confidential Treatment Requested apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction or other interim or conservatory relief, as necessary, without breach of this arbitration agreement and without any abridgement of the powers of the arbitrator. In no event shall the demand for arbitration be made after the date when institution of a legal or equitable proceeding based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. The costs of any arbitration, including administrative and arbitrators' fees, shall be shared equally by the parties and each party shall bear its own costs and attorneys' and witness' fees, provided however, that the prevailing party, if determined by the arbitrator(s), shall be entitled to an award against the other party in the amount of the prevailing party's costs (including arbitration costs) and reasonable attorneys' fees. 9.3 Entire Agreement. This Agreement, together with the Non-Disclosure Agreement signed by the parties dated [*****] sets forth the entire agreement and understanding between the parties as to the subject matter hereof. There shall be no amendments or modifications to this Agreement, except by a written document signed by both parties. 9.4 California Law. This Agreement shall be construed and enforced in accordance with the laws of the State of California without giving effect to its principles of conflicts of law. 9.5 Severability. If any provision of this Agreement is ultimately held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 9.6 No Waiver. Any delay in enforcing a party's rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of a party's right to the future enforcement of its rights under this Agreement. 9.7 Notices. Any notices in writing and payments to be made provided herein shall be deemed duly given and made if sent by courier or by certified or registered mail, postage prepaid, to the addressees below. Either party may change its address or its designated management representative by written notice to the other party. The date of giving such notices and payments shall be the date of mailing. To Terragen: Terragen Discovery Inc. Suite 300 2386 East Mall UBC Vancouver, British Columbia, Canada V6T 1Z3 Attention: Dr. Mario Thomas Chief Executive Officer To Diversa Corporation: Diversa Corporation 10665 Sorrento Valley Road San Diego, California 92121 Attention: Dr. Jay Short CEO, CTO and President 9.8 Captions. Captions and headings are relied on for convenience only and in no way are to be construed to define, limit or affect the construction or interpretation hereof. 9. 9.9 Governmental Approvals. Each party shall be responsible for obtaining all necessary governmental approvals for the development, testing, production, distribution, sale and use of any products discovered and developed by such party using Diversa Technology or Terragen Technology licensed hereunder, at such party's sole expense. Each party shall have sole responsibility for any warning labels, packaging, instructions to use, and quality control with respect to any such product. 9.10 Compliance With Laws and Regulations. Each party shall comply with all United States and foreign laws, regulations, rules and orders applicable to use of the Diversa Technology or Terragen Technology, as applicable, the development, testing, production, distribution, export, packaging, labeling, sales and use of products derived from the use of the Diversa Technology or Terragen Technology, as applicable. 9.11 No Use of Name. Neither party shall use in advertising, promotion or sale of products, or the provision of services using the Diversa Technology or Terragen Technology, as applicable, any trade name, trademark, servicemark, trade-dress or other designation, or any confusingly similar variation thereof, of the other party, unless consented to in writing by such other party. 9.12 Section 365(n). All licenses granted under the Agreement will be deemed licenses of rights to intellectual property for purposes of Section 365(n) of the US Bankruptcy Code and a licensee under the Agreement will retain and may fully exercise all of its rights and elections under the US Bankruptcy Code. 9.13 Counterparts. This Agreement may be executed in counterparts, each of which, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. Terragen Discovery, Inc. Diversa Corporation /s/ Mario Thomas /s/ Jay M. Short - -------------------------------- ----------------------------------- Dr. Mario Thomas Dr. Jay M. Short President CEO, President and CTO 10. EXHIBIT A [*****] Patent Rights Issued Patent Number/ Serial Number Title [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] *Confidential Treatment Requested EXHIBIT B [*****] Patent Rights Issued Patent Number/ Serial Number Title [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] [*****] *Confidential Treatment Requested EX-10.24 12 JOINT VENTURE AGREEMENT EXHIBIT 10.24 Confidential Treatment Requested Under 17 C.F.R. (S)(S) 200.80(b)(4) 200.83 and 230.406 JOINT VENTURE AGREEMENT This Joint Venture Agreement (the "Agreement") dated and effective as of December 1, 1999 (the "Effective Date"), is entered into by Diversa Corporation ('Diversa"), a Delaware corporation, and Novartis Seeds AG ("Novartis"), a corporation organized under the laws of Switzerland (individually a "Party" and collectively the "Parties"). RECITALS Whereas, the Parties desire to establish a joint venture (the "Joint Venture") to develop and commercialize enzyme-related products for the animal feed and agricultural product processing markets through a combination of licensing, technology development and product development; Whereas, Diversa, among others, will perform research and development activities for the Joint Venture pursuant to appropriate agreements; Whereas, Novartis will cause the formation of a new wholly-owned, affiliated company ("Newco") which will be responsible for commercializing products resulting from the Joint Venture with respect to non-transgenic products; Whereas, Novartis will be responsible for commercializing products resulting from the Joint Venture with respect to transgenic crops; Whereas, each Party will lend its expertise to the successful achievement of Newco's commercialization objectives; Whereas, the Parties agree that Newco will manage and direct the business of the Joint Venture with respect to non-transgenic products; Whereas, the Parties desire to enter into a written agreement providing for the formation and performance of each Party's activities under the Joint Venture; and Now, Therefore, in consideration of the mutual covenants set forth in this Agreement, the parties hereby agree as follows: 1. Definitions. "Affiliate" shall mean any entity that directly or indirectly controls, is controlled by or is under common control, with Novartis, or Diversa, as the case may be, where control means direct or indirect possession of more than [*****] of the outstanding voting securities of a corporation or a comparable equity interest in any other type of entity, or operational control of such entity. "Agreement" shall mean this Joint Venture Agreement. 1. *Confidential Treatment Requested "Agricultural Product Processing Field" shall mean the use of Biomolecules on or in Crops to alter, modify or improve the performance or other characteristics of the Crop. This field specifically excludes the [*****] Field. "Animal Feed Field" shall mean the use of Biomolecules on or in Crops for feed applications to alter, modify or improve feed conversion and/or animal nutrition. This field specifically excludes all vaccines and therapeutic applications. "Biomolecule(s)" shall mean enzymes and/or genes encoding them. "Board" shall mean the Board of Directors of Newco. "Change of Control" shall mean any of the following transactions involving another company (other than Novartis or any of its Affiliates) (a) a merger or consolidation of Diversa which results in the voting securities of Diversa outstanding immediately prior thereto ceasing to represent at least [*****] of the combined voting power of the surviving entity immediately after such merger or consolidation; (b) the sale of all or substantially all of the assets of Diversa; or (c) any one person (other than Diversa, any trustee or other fiduciary holding securities under an employee benefit plan of Diversa, or any corporation owned directly or indirectly by the stockholders of Diversa, in substantially the same proportion as their ownership of stock of Diversa), together with any of such person's "affiliates" or "associates", as such terms are used in the Securities Exchange Act of 1934, as amended, becoming the beneficial owner of [*****] or more of the combined voting power of the outstanding securities of Diversa or by contract or otherwise having the right to control the Board of Directors or equivalent governing body of Diversa or the ability to cause the direction of management of Diversa. "Commercial Development Biomolecule" shall mean Diversa Biomolecules and/or Derivative Newco Biomolecules that have been, pursuant to Preliminary Efficacy Trials, designated by Newco in accordance with the Research and Development Agreement, for commercialization in or as a Product. "Confidential Information" shall have the meaning set forth in Section 7.1. "Crop" shall mean any component of any cultivated plant species, including, [*****] "Derivative Newco Biomolecules" shall mean all Biomolecules that are derived or discovered from Newco Biomolecules through application of Diversa Technology, and any derivatives of such Biomolecules. [*****] shall mean the difference in value between [*****] and [*****] containing [*****] determined in accordance with the definition of Net Sales (excluding the provisions applicable to 2. *Confidential Treatment Requested Combination Products), as established by competent written records, with the intent of determining the value contributed to such product(s) by the Commercial Development Biomolecule(s). "Disclosing Party" shall mean that Party disclosing Confidential Information to the other Party under Section 7. "Diversa Biomolecules" shall mean all Biomolecules owned by, or licensed to Diversa, with the right to license or sublicense, as of the Effective Date or during the Research Period. "Diversa Know-How" shall mean all trade secrets, inventions, data, processes, procedures, devices, methods, formulas, media and/or all lines, Biomolecules, clones, strains, genes, reagents, protocols and marketing and other information or know-how including improvements thereon, whether or not patentable, which are not covered by the Diversa Patent Rights, but which are necessary or useful for the commercial exploitation of the Diversa Patent Rights or the conduct of the Projects or otherwise relate to Biomolecules or Products, and which are owned by or licensed to Diversa, with the right to license, as of the Effective Date or otherwise during the Research Period, "Diversa Patent Rights" shall mean all patent and provisional patent applications, issued and subsisting patents and substitutions, divisionals, continuations, continuations-in-part, reissues, reexaminations, extensions and supplementary protection certificates thereof, including foreign counterparts of the foregoing, in each case which are owned by or licensed to Diversa, with the right to license, as of the Effective Date or otherwise during the Research Period, which are necessary or useful to achieve the commercial objectives of the Joint Venture, or otherwise relate to Biomolecules or Products arising from the conduct of the Projects. Without limiting the generality of the foregoing, Diversa Patent Rights include any patents and patent applications claiming Inventions owned by Diversa under the terms of the Research and Development Agreement. "Diversa Technology" shall mean the Diversa Know-How and the Diversa Patent Rights. "Fields" shall mean the Animal Feed Field and the Agricultural Product Processing Field. "Inventions" shall mean all inventions, discoveries, developments and improvements conceived of in the course of work performed on any Project. "Joint Venture Period" shall mean the period beginning on the Effective Date and ending on the fifth anniversary of the Effective Date. "Management Expenses" shall mean all actual expenses incurred by Newco in the management of the Joint Venture, including expenses of the President and other employees or consultants of Newco as provided in Section 6.1. 3. "Net Sales" shall mean the [*****] of a Royalty-Bearing [*****] sold by Novartis or any of its Affiliates or by Sublicensees less discounts, rebates, returns, taxes (other than income tax), transportation costs, and insurance in amounts actually incurred and customary in the trade. For each Royalty-Bearing [*****], the [*****] shall include [*****] as applicable, [*****] of such Royalty-Bearing [*****] even if such amounts [*****] of such Royalty-Bearing [*****] including, without limitation, [*****]. With respect to sales by Novartis or any of its Affiliates or Sublicensees of any product which incorporates both (i) [*****] Royalty-Bearing [*****] and (ii) [*****] or [*****] or [*****] that involve an additional trait (a "Combination Product"), Net Sales shall be calculated by multiplying the [*****] by the [*****]. The [*****] as used herein, shall mean [*****]. The fair market value of such components shall be equal to [*****]; provided, however, that, in the event that the [*****] of any such component is not available, the fair market value of such component shall be [*****]. "Newco Biomolecules" shall mean all Biomolecules which are provided by Newco to Diversa under the Research and Development Agreement. "Novartis/Newco Agreement" shall mean that agreement between Novartis and Newco under which Novartis grants to Newco, all rights, to the extent Novartis has such a transferable right, required for Newco to commercialize Products for non-transgenic applications. "Novartis Patent Rights" shall mean all patent and provisional patent applications, issued and subsisting patents and substitutions, divisionals, continuations, continuations in-part, reissues, reexaminations, extensions and supplementary protection certificates thereof, including foreign counterparts of the foregoing owned by or licensed to Novartis or any of its Affiliates, with the right to license, as of the Effective Date or otherwise during the Research Period, claiming inventions owned (or in-licensed) and controlled by Novartis or any of its Affiliates which are necessary or useful to the achieve the commercial objectives of the Joint Venture, or otherwise relate to Biomolecules or Products arising from the conduct of the Projects. Without limiting the generality of the foregoing, Novartis Patent Rights include any patents and patent 4. *Confidential Treatment Requested applications claiming Inventions owned by Newco under the terms of the Research and Development Agreement. "Preliminary Efficacy Trials" shall mean, with respect to each Commercial Development Biomolecule, preliminary testing conducted by or for Novartis or Newco to determine functional efficacy conducted under anticipated use conditions, generally outside of a laboratory environment. Preliminary Efficacy Trials [*****], such as [*****] in the [*****] and [*****] for [*****] including [*****] for [*****] and [*****] trials, [*****] for [*****]. "President" shall mean the executive officer of Newco appointed by the Board pursuant to Section 5.1. "Product" when used without further qualification shall mean a commercial product containing or consisting of any Biomolecule designated in accordance with the Research and Development Agreement as a Commercial Development Biomolecule. "Profit" shall mean an amount, which shall not be less than zero, equal to (a) [*****] less (b) [*****] (but excluding [*****] and any payment by [*****] under the [*****], in each case calculated in accordance with U.S. generally accepted accounting principles consistently applied. "Project(s)" shall mean research efforts undertaken pursuant to the terms of the Research and Development Agreement. "Receiving Party" shall mean that Party receiving Confidential Information under Section 7.1. "Research and Development Agreement" shall mean that certain Research and Development Agreement, dated on or about the Effective Date, between Newco and Diversa. "Research FTE" shall mean the equivalent of one full year of work on a full time basis by a scientist or other professional possessing skills and experience necessary to carry out the Project by a Party, determined in accordance with such Party's normal policies and procedures. "Research Period" shall mean the period beginning on the Effective Date and ending upon the termination or expiration of the Research and Development Agreement. "Royalty-Bearing [*****] shall mean any Product that is a commercial transgenic Crop. "Royalty Period" shall mean, with respect to each Royalty-Bearing [*****] in any country, every [*****] or [*****] commencing with the [*****] 5. *Confidential Treatment Requested and ending upon the later to occur of (a) [*****], or (b) [*****], or (c) [*****]. "Sublicensee" shall mean any third party (other than an Affiliate of Novartis or an Affiliate of Diversa) licensed by Novartis or its Affiliates to make, use (except where the implied right to use accompanies the sale to the third party of any Royalty-Bearing [*****] by Novartis or its Affiliates or Sublicensees), sell, import, export, advertise, promote and otherwise commercialize any Royalty-Bearing [*****]. "Valid Claim" shall mean a claim included in any pending patent application or any issued patent included within the Novartis Patent Rights or the Diversa Patent Rights, which, if with respect to any pending claim, has not been irrevocably abandoned or held to be unpatentable by a court or other authority of competent jurisdiction in a proceeding which is not reversed, not appealable and not appealed, or, with respect to any issued claim, has not been held invalid by a decision of a court or other authority of competent jurisdiction which is not reversed, not appealable and not appealed. "Year" shall mean any consecutive 12-month period during the Joint Venture Period that begins on the Effective Date or the [*****] anniversary of the Effective Date. For example, Year 1 shall be the consecutive 12-month period beginning on the Effective Date. The above definitions are intended to encompass the defined terms in both the singular and plural tenses. 2. Purpose; Grant of Exclusive License; Preferred Manufacturer. 2.1 Purpose. The purpose of the Joint Venture is to develop and commercialize enzyme-related products in the Animal Feed Field and the Agricultural Product Processing Field. It is anticipated that Newco will negotiate and enter into agreements with third parties providing for the sublicense of Products to such third parties in the Fields, for [*****] pursuant to the terms of license agreements between Newco and such third parties. It is anticipated that Novartis will commercialize Products in the Fields for [*****]. In furtherance of this purpose, and to the extent that each Party has the right to do so, each Party hereby agrees to (a) make available to Newco those rights and technology which are necessary for Newco to commercialize Products for [*****], and (b) Diversa agrees to make available to Novartis those rights and technology, which are necessary for Novartis to commercialize Products for [*****]. 2.2 Grant of Exclusive License. Subject to the royalty payment obligations under 6. *Confidential Treatment Requested Sections 6.5 and 6.6, Diversa hereby grants to Novartis an exclusive, worldwide license, with the right to sublicense, under the Diversa Technology for making, using, selling, offering for sale, and importing Products in the Animal Feed Field, In addition, subject to the royalty payment obligations under Sections 6.5 and 6.6, Diversa hereby grants to Novartis an exclusive, worldwide license, with the right to sublicense, under the Diversa Technology for making, using, selling, offering for sale, and importing Products in the Agricultural Product Processing Field, such license to be limited to mutually agreed upon Projects. Novartis agrees to make available to Newco, by way of the Novartis/Newco Agreement, those rights under this Section 2.2 which are necessary for Newco to commercialize Products for non-transgenic applications. 2.3 Preferred Manufacturer. Novartis hereby agrees that Newco will include a bid from Diversa for manufacturing by fermentation in any proposal made to a third party licensee seeking a source for manufacture, and Diversa will negotiate with the third party the terms upon which Diversa would produce such Commercial Development Biomolecules by fermentation, such terms to include a supply guarantee sufficient to meet the commercial objectives of the Joint Venture with respect to such third party licensee. For the avoidance of doubt, Novartis has sole exclusive right to produce Commercial Development Biomolecules by means other than fermentation. 3. [This Section Was Intentionally Deleted] 4. Board of Directors. 4.1 Board of Directors of Newco. The Board of Directors of Newco shall oversee the operations of the Joint Venture with respect to [*****] in a manner consistent with the articles of incorporation of Newco and operation of a Novartis Affiliate. The Board shall be comprised of not more than fifteen regular members elected by the shareholder(s) of Newco. The Parties agree that the initial Board shall be composed of seven regular members. Novartis shall have the right to nominate [*****] regular members for the initial Board, and Diversa shall have the right to nominate [*****] regular members for the initial Board. In addition, a [*****] member of the initial Board shall be elected by the shareholder(s) from a list of nominees submitted by either, or both, Parties. The shareholder(s) of Newco shall authorize one of these members to serve as the chairman of the Board. Each regular member shall have [*****] vote, and all decisions shall be by majority vote consistent with this Agreement except as provided in Section 4.3. Withdrawal or removal of a Board member shall be performed consistent with the articles of incorporation of Newco. If a Party's nominated member resigns or is removed from the Board, then only such Party may nominate a replacement for the departing member. 4.2 Board Meetings and Actions. The chairman of the Board will call semi- annual meetings as determined by Board resolution. He shall send written notice at least 10 days in advance of such meetings to each regular member of the Board. Special Board meetings, however, may be called by any regular member at any time by reasonable prior written notice to 7. *Confidential Treatment Requested all regular members. Telephonic meetings of the Board may be held as necessary. A telephonic meeting is valid if all members in attendance are able to hear each other simultaneously. A waiver of notice as to the time and place for any meeting may be executed by all of the members of the Board. The Board will appoint a Secretary, who will keep the minutes of the meetings and distribute them to all members. A quorum, as defined in the articles of incorporation for Newco, shall be required for the transaction of business; provided that at least [*****] must be present to constitute a quorum. Should a [*****] representative fail to appear at a properly noticed Board meeting, whether regular or Special, for [*****] then [*****] shall forfeit, without recourse, the right of having at least [*****] being present to constitute a quorum. The Board may also act without conducting a formal meeting by the execution of a unanimous consent resolution that provides a summary description of the action to be taken and other pertinent information necessary to inform the members entitled to vote on such matters. 4.3 Requirement for [*****] of the Board. The approval of greater than [*****] of the sitting Board members shall be required for any of the following: 4.3.1 Approval, in advance of the next fiscal year, of the annual strategic business plan and financial plan of Newco and any activity outside the scope of such business and financial plan; 4.3.2 Any agreement or contract entered into between Newco and Diversa, or any agreement or contract between Newco and Novartis that materially impact the terms of this Agreement or termination of or waiver of compliance with any such agreements or contracts; 4.3.3 Approval of any dissolution, liquidation, merger, consolidation, business combination or similar transaction involving Newco; 4.3.4 Any change in the authorized number of members of the Board, or the representation of each Party; and 4.3.5 Approval of the terms of reference under which the officers of Newco are authorized to act on behalf of Newco. 5. Operational Management. 5.1 Appointment and Responsibility of the President. The President of Newco shall be appointed by the Board. Subject only to the overall direction of the Board, including the obligation to implement the orders and resolutions of the Board, and to the limitations set forth in Section 4, the President shall (i) be responsible for the direction, performance and supervision of the Joint Venture in accordance with the terms of reference, policies and procedures established by the Board; (ii) prepare budgets and reports relating to activities under the Joint Venture, including an annual budget for Management Expenses; (iii) hire and terminate the other employees and consultants of Newco in accordance with guidelines established by the Board; (iv) negotiate and enter into agreements with third parties 8. *Confidential Treatment Requested within the terms of reference established by the Board; and (v) provide reports to the Board at the semi-annual Board meetings. The President may be replaced or removed by the Board. The President shall serve until replaced or removed by the Board. 5.2 Authority of the President. The President may delegate his/her authority to another officer of Newco. Notwithstanding any other provisions of this Agreement, in no circumstances may the President, or any other officer, employee or agent of Newco, take any of the actions set forth in Section 4.3 without the prior approval of the Board. The President shall report in writing at least quarterly to the chairman (with copies to other Board members) on the progress of the Projects as well as the status of other Joint Venture activities. Such report shall include Project results and general status updates and operational budget summaries, including explanations of any variance from budget. The report shall inform the chairman of any anticipated or actual problems in regard to the Projects or the general business of Newco, including any significant changes in schedule or staffing. 6. Contributions, Other Payments, Profit Sharing. 6.1 Contributions. 6.1.1 On or about the Effective Date, it is anticipated that Diversa and Newco will enter into the Research and Development Agreement. 6.1.2 During the Joint Venture Period, it is anticipated that Newco will employ or engage as consultants the following number of full-time equivalents ("FTEs") for the management of the activities of the Joint Venture: Year Management FTEs Year 1 [*****] Year 2 [*****] Year 3 [*****] Year 4 [*****] Year 5 [*****] 6.1.3 During the Joint Venture Period, Novartis and Diversa will share the payment of all Management Expenses in the ratio of [*****] payable by Novartis and [*****] payable by Diversa; provided that Management Expenses over the Joint Venture Period shall not exceed a total of [*****]. The President will establish an annual budget for Management Expenses, subject to Board approval. Management Expenses shall be paid promptly following receipt of a quarterly invoice from Newco detailing the applicable expenses. Following the Joint Venture Period, Diversa will not be responsible for any Management Expenses, except as otherwise agreed in writing by the Parties. 6.2 Exclusivity Fees. In consideration of the grant of exclusive rights to Novartis pursuant to Section 2.2: 9. *Confidential Treatment Requested 6.2.1 Within [*****] of the execution of this Agreement, subject to approval by the appropriate regulatory or governmental authorities, Novartis shall pay to Diversa [*****] in consideration of the exclusive rights in the [*****] granted to Novartis, pursuant to Section 2.2; and 6.2.2 Upon the [*****] anniversary of the Effective Date, Novartis shall pay to Diversa [*****] in consideration of the exclusive rights in the [*****] pursuant to Section 2.2. 6.3 Research Funding. During the Joint Venture Period, Novartis will fund, or will cause to be funded, under the terms of the Research and Development Agreement the minimum total number of Research FTEs for research and related activities of the Joint Venture indicated in the column "Total Research FTEs" below, which includes the minimum number of Research FTEs at Diverse indicated in the column "Diversa Research FTEs" below. Funding for the Research FTEs for research and related activities of the Joint Venture conducted at Diversa shall be provided to Diversa through Newco pursuant to the Research and Development Agreement. Subsequent to [*****] and until such time as the Research and Development Agreement is entered into by the Parties, payments shall be made in accordance with the Letter of Intent executed between the Parties on [*****] Any such payments made pursuant to the Letter of Intent shall be applied to the FTE payment obligations under the Research and Development Agreement.
Year Total Research FTEs Diversa Research FTEs Year 1 [*****] [*****] Year 2 [*****] [*****] Year 3 [*****] [*****] Year 4 [*****] [*****] Year 5 [*****] [*****]
The cost per Research FTE for the first [*****] of the Joint Venture Period shall be [*****] for Diversa Research FTEs and [*****] for all other Research FTEs. Beginning in the [*****] year of the Joint Venture Period, a cost-of- living adjustment will be applied to all Research FTEs. Thereafter, the cost- of-living adjustment will be applied on a yearly basis and will be based on standard Consumer Price Index values. 6.4 Commercialization Payments. In consideration of the licenses granted to Novartis by Diversa, Novartis shall pay to Diversa commercialization fees for each Commercial Development Biomolecule within [*****] after the first commercial sale of the first Product as follows: (a) [*****] for Products that are [*****] and (b) [*****] for all other Products. 6.5 Profit Sharing. In consideration of the rights granted under Section 2.2, Diversa and Novartis shall each share in all Profit of Newco as follows: (a) [*****] shall receive [*****] of the [*****] of Profit, and (b) thereafter, Novartis shall receive [*****] and Diversa shall receive [*****] of all Profit paid as a royalty to each, and (c) thereafter, the Novartis U.S. 10. *Confidential Treatment Requested parent company of Newco shall receive the remaining [*****] of Profits paid as a dividend. Profit shall be calculated on [*****], but each of Diversa and Novartis shall receive [*****] on their respective share of the Profit paid as [*****] after the [*****] based upon the [*****] adjusted [*****] and [*****] to take account of [*****]. Copies of Newco's financial statements will be provided to Diversa within [*****]. 6.6 Royalties from Novartis to Diversa. Regarding the sale by Novartis, its Affiliates and Sublicensees of Royalty-Bearing [*****] in the applicable Fields, Novartis shall pay Diversa, as a royalty, [*****] of Differential Net Sales on a [*****] within [*****] after the end of the applicable [*****] provided that, if Differential Net Sales cannot be determined, Diversa and Novartis will assess in good faith the [*****] [*****] and will [*****] based on [*****] which would be comparable to the royalty on Differential Net Sales described above. In those cases where Novartis must obtain a third party license specific to bringing a Commercial Development Biomolecule to market, the amortized cost of such license will be deducted from Differential Net Sales before calculating the royalty due to Diversa. 6.7 Reports and Payments. Within [*****] after the conclusion of each Royalty Period, Novartis shall pay to Diversa the estimated royalty payment due for such Royalty Period based on the royalty rates applicable to units of Royalty-Bearing [*****] shipped during such Royalty Period less estimated returns, and shall deliver to Diversa a report containing the following information: (a) Adjustments and calculation of Net Sales for the applicable Royalty Period in each country of sale; and (b) Calculation of royalty. Any corrections to the [*****] royalty payment will be established at the end of the [*****] and factored into the corresponding royalty payment for such [*****]. All amounts payable under this Section will first be calculated in the currency of sale and then converted into U.S. dollars. The buying rates involved for the currency of the United States into which the currencies involved are being exchanged shall be the one quoted by The Wall Street Journal at the close of business on the last business day of the applicable Royalty Period. Such amounts shall be paid without deduction, except as required by law, of any withholding taxes, value-added taxes, or other charges applicable to such payments. 6.8 Records. Novartis and its Affiliates shall maintain complete and accurate records of Royalty Bearing [*****] made, used or sold by them or their Sublicensees under this Agreement, and any amounts payable to Diversa in relation to Royalty Bearing [*****] which records shall contain sufficient information to Diversa to confirm the accuracy of any reports delivered to them in accordance with Section 6.7. Novartis and its Affiliates shall retain such records relating to a given Royalty Period for at least three (3) years after the conclusion of that Royalty Period. Diversa (acting as the "Auditing Party") shall 11. *Confidential Treatment Requested have the right, at its own expense, to cause an independent certified public accountant reasonably acceptable to Novartis, to inspect such records of Novartis or its Affiliates (the "Audited Party") during normal business hours for the sole purpose of verifying any reports and payments delivered under this Agreement. Such accountant shall not disclose to the Auditing Party any information other than information relating to accuracy of reports and payments delivered under this Agreement and shall provide the Audited Party with a copy of any report given to the Auditing Party. The Parties shall reconcile any underpayment or overpayment within [*****] after the accountant delivers the results of the audit. The Auditing Party shall bear the full cost of the audit unless, the audit performed under this Section reveals an underpayment in excess of [*****] in any Royalty Period, in which case the Audited Party shall bear the full cost of such audit. Diversa may exercise its rights under this Section only once every year and only with reasonable prior notice to Novartis. Novartis shall use commercially reasonable efforts to ensure that said auditor will have access to records of Royalty-Bearing Transgenic Products sold by its Affiliates. 6.9 Late Payments. In the event that any payment, including royalty payments, due hereunder is not made when due, the payment shall accrue interest from that date due at the rate of [*****] per month; provided however, that in no event shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit Diversa nor Novartis from exercising any other rights it may have as a consequence of the lateness of any payment 6.10 Commercialization Outside the Fields. In the event that (a) Diversa pursues commercialization of any Commercial Development Biomolecule contained in a Product outside the Fields, (b) Newco has not exercised its right of first option under the Research and Development Agreement, and (c) Diversa desires to commercialize a Product containing such Commercial Development Biomolecule outside the Field by itself or through a third party license, Diversa agrees to pay Novartis a royalty on sales of such Products under commercially reasonable terms and conditions set forth in a separate agreement entered into and negotiated in good faith between the Parties prior to such commercialization. 6.11 Payments in U.S. Dollars. All payments due under this Agreement shall be payable in United States dollars by wire transfer to an account designated by the Party entitled to receive the payment. 7. Confidential Information. 7.1 Definition of Confidential Information. Confidential Information shall mean any technical or business information, whether orally or in writing, furnished by the Disclosing Party to the Receiving Party in connection with this Agreement. Such Confidential Information shall include, without limitation, the existence and terms of this Agreement, the identity of a Biomolecule, the Biomolecule, any gene encoding such Biomolecule, if relevant, the use of a Biomolecule, patent rights, trade secrets, know-how, inventions, technical data or specifications, testing methods, business or financial information, research and development activities, product and marketing plans, and customer and supplier information, including, but 12. *Confidential Treatment Requested not limited to, such terms that become known to a Party during visits to the facilities of any other Party. 7.2 Obligations. The Receiving Party agrees that it shall: 7.2.1 Maintain all Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to its Affiliates, directors, officers, employees, consultants and advisors who are obligated to maintain the confidential nature of such Confidential Information and who need to know such Confidential Information for the purposes set forth in this Agreement. Further, each Party will be entitled to disclose to its Sublicensees that Confidential Information of the other Party as those Sublicensees need to know in order to commercialize Products, provided that those Sublicensees are obligated to maintain the confidential nature of such Confidential Information; 7.2.2 Use all Confidential Information solely for the purposes set forth in, or as permitted by, this Agreement; 7.2.3 Allow its Affiliates, directors, officers, employees, consultants and advisors to reproduce the Confidential Information only to the extent necessary to effect the purposes set forth in this Agreement, with all such reproductions being considered Confidential Information; and 7.2.4 If the Receiving Party is Novartis, then Novartis shall also have the right to disclose Confidential Information to Novartis Agricultural Discovery Institute, Inc. (NADII) provided that NADII is obligated to maintain the confidential nature of such Confidential Information. Each Party shall be responsible for any breaches of this Section 7.2 by any of its Affiliates, directors, officers, employees, consultants and advisors, and, in the case of Novartis, also for any breach of this Section 7.2 by NADII. 7.3 Exceptions. The obligations of the Receiving Party under Section 7.2. above shall not apply to any specific Confidential Information to the extent that the Receiving Party can demonstrate that such Confidential Information: 7.3.1 Was in the public domain prior to the time of its disclosure under this Agreement; 7.3.2 Entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party or its Affiliates, directors, officers, employees, consultants, advisors or agents; 7.3.3 Was or is independently developed or discovered by the Receiving Party without use of the Confidential Information, and which can be demonstrated by written record; 13. 7.3.4 Is or was disclosed to the Receiving Party at any time, whether prior to or after the time of its disclosure under this Agreement by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality to the Disclosing Party with respect to such Confidential Information; or 7.3.5 Is required to be disclosed to comply with applicable laws or regulations (such as disclosure to the SEC, the EPA, the FDA, or the United States Patent and Trademark Office or to their foreign equivalents), or to comply with a court or administrative order, provided that the Disclosing Party receives prior written notice of such disclosure and that the Receiving Party takes all reasonable and lawful actions to obtain confidential treatment for such disclosure and, if possible, to minimize the extent of such disclosure. 7.4 Survival of Obligations. The obligations set forth in Sections 7.1, 7.2 and 7.3 shall remain in effect after termination or expiration of this Agreement for a period of [*****]. 7.5 Public Announcement. The Parties shall issue a Joint press release regarding the Joint Venture, the text of which shall be subject to mutual written agreement of the Parties. Except for the information disclosed in the joint press release, no Party shall use the name of any other Party or reveal the existence of or terms of this Agreement in any publicity or advertising without the prior written approval of the other party, except that (i) a Party may use the text of a written statement approved in advance by the Parties without further approval, and (ii) a party shall have the right to identify the other parties and to disclose the terms of this Agreement as required by applicable securities laws or other applicable law or regulation, provided that such Party takes reasonable and lawful actions to minimize the degree of such disclosure. 8. Representations And Warranties. 8.1 Authorization. Each Party represents and warrants to the other that it has the legal right and power to enter into this Agreement and to fully perform its obligations hereunder, and that the performance of such obligations will not conflict with its charter documents or any agreements, contracts, or other arrangements to which it is a party. Novartis will strive to cause the U.S. parent company of Newco to comply with the applicable provisions of this Agreement. 8.2 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION AND EXTENDS NO WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES AS TO MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. 8.3 Limitation of Liability. IN NO EVENT WILL EITHER PARTY, ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR AFFILIATES BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, WHETHER BASED UPON A CLAIM OR ACTION OF 14. *Confidential Treatment Requested CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER TORT, OR OTHERWISE, ARISING OUT OF THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS TO THE OTHER PARTY THAT IN CARRYING OUT ITS OBLIGATIONS UNDER THIS AGREEMENT IT WILL NOT KNOWINGLY VIOLATE OR INFRINGE THE VALID AND ENFORCEABLE INTELLECTUAL PROPERTY RIGHTS, INCLUDING THOSE CONFERRED BY A VALID, ENFORCEABLE US PATENT, OF ANY THIRD PARTY, NOR AID AND ABET THE OTHER PARTY IN ANY SUCH VIOLATION OR INFRINGEMENT. 9. Term; Termination. 9.1 Term. The term of this Agreement will commence as of the Effective Date and will continue until the end of the Joint Venture Period unless terminated earlier in accordance with Section 9.2 or extended by mutual agreement of the Parties. Novartis shall have an exclusive option to extend the Joint Venture Period for a period of five (5) years, subject to the execution of an extension of the Research and Development Agreement under mutually agreeable terms, and further provided that the exercise of such option shall not require the payment to Diversa of any additional exclusivity fees. Diversa and Novartis will commence negotiations twelve months prior to the end of the Joint Venture Period to extend the Joint Venture Period on mutually acceptable terms, and complete such negotiations six months prior to the end of the Joint Venture Period. If the Joint Venture Period is not extended pursuant to the preceding sentence, Diversa. and Novartis will negotiate in good faith to establish a staged reduction in the number of Research FTEs at Diversa and funding for such Research FTEs over the two-year period following the end of the Joint Venture Period. 9.2 Termination. 9.2.1 Change of Control. Novartis shall have the right to terminate this Agreement upon the occurrence of a Change of Control during the term of this Agreement by providing written notice of termination to Diversa within sixty (60) days following receipt of written notice of the occurrence of such Change of Control. In the event that Novartis does not terminate this Agreement under this Section 9.2.1, this Agreement will be binding upon Novartis, Diversa or any successor to Diversa in such Change of Control. Diversa may notify Novartis in advance of a proposed Change of Control and, if Novartis approves of such Change of Control in writing or notifies Diversa in writing that it does not intend to terminate this Agreement within forty five (45) days after such notice from Diversa, then the foregoing right of termination shall be deemed waived. 9.2.2 Mutual Consent. This Agreement may be terminated at any time by mutual written agreement of the Parties. 9.2.3 Material Breach. In the event that a Party commits a material breach of any of its obligations under this Agreement or any party commits a material breach under the Research and Development Agreement, or the Novartis/Newco Agreement, and such party fails (i) to remedy that breach within [*****] after receiving written notice thereof 15. *Confidential Treatment Requested from the other party to such agreement or (ii) to commence dispute resolution under such agreement, within [*****] after receiving written notice of that breach from the non-breaching party or parties, the non-breaching party or parties may immediately terminate this Agreement and the Research and Development Agreement or Novartis/Newco Agreement, as applicable, upon written notice to the breaching party. 9.2.4 Breach of Payment Obligations. In the event that a party fails to make timely payment of any amounts due under this Agreement, or under the Research and Development Agreement within 10 business days after demand therefor, the non-breaching party or parties may terminate any of these agreements upon 30 days prior written notice, unless the breaching party cures such breach by paying all past-due amounts within such 30 day notice period, provided that such breaching party shall be entitled to use such cure provision no more than once in any 12 month period. 9.3 Disposition of Confidential Information. In the event of termination or expiration of this Agreement, the Parties shall return or destroy a forms of Confidential Information provided to them under this Agreement within 30 days after such termination or expiration, provided, however, that each Party may retain one copy of such Confidential Information for the sole purpose of use in any litigation resulting from this Agreement or the activities undertaken pursuant thereto, and further provided that each Party shall retain full use of Confidential Information as provided under this Agreement to the extent it relates to any of the rights accrued to a Party hereunder prior to such termination or expiration. 9.4 Effect of Termination or Expiration. Termination or expiration of this Agreement shall not relieve the parties of any obligation accruing prior to such termination or expiration, nor shall it encumber any of the rights accrued to a Party hereunder prior to such termination or expiration. In addition, upon termination or expiration of this Agreement, the rights granted to the Parties under Sections 2.1, 2.2 and 2.3 for Diversa Technology shall survive but only as they relate to (a) Transferred Biomolecules as defined in the Research and Development Agreement, or (b) Commercial Development Biomolecules. Further, Diversa will not assert against Novartis, its Affiliates or Sublicensees any rights to patents or know-how it may develop or acquire after the Research Period with respect to such Transferred Biomolecules or Commercial Development Biomolecules, and further provided that the financial obligations of each Party with respect to Transferred Biomolecules or Commercial Development Biomolecules under the provisions of Sections 6.4, 6.5, 6.6, 6.7 and 6.10 shall survive termination or expiration of this Agreement but only to the extent that the Parties mutually agree through good faith negotiation to payment at royalty rates equivalent thereunder but in the absence of the Joint Venture. Further, the provisions of Sections 7.1, 7.2, 7.3, 7.4, 8.2, 8.3, 9.3, 9.4 and 10 shall survive the expiration or termination of this Agreement. Termination of this Agreement pursuant to Section 9.2 shall not limit any other rights and remedies of the terminating party. 10. Miscellaneous. 10.1 Relationship of Parties. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency or employer-employee relationship between the 16. *Confidential Treatment Requested parties. No Party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein. 10.2 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware other than those provisions governing conflicts of law. 10.3 Dispute Resolution Procedures. 10.3.1 The Parties hereby agree that they will attempt in good faith to resolve any controversy, claim or dispute arising out of or relating to this Agreement ("Dispute") promptly by negotiations. Any such dispute which is not settled by the parties within 15 days after notice of such Dispute is given by one Party to the others in writing shall be referred to the Chief Executive Officer of Diversa and the appropriate Senior Executive of Novartis who are authorized to settle such Disputes on behalf of their respective companies ("Senior Executives"). The Senior Executives will meet for negotiations within 15 days of such notice of Dispute, at a time and place mutually acceptable to both Senior Executives. If the Dispute has not been resolved within 30 days after the end of the 15 day negotiation period referred to above (which period may be extended by mutual agreement), unless otherwise specifically provided for herein, any Dispute will be settled first by non-binding mediation and thereafter by arbitration as described in Sections 10.3.2 and 10.3.3 below. 10.3.2 Any Dispute which is not resolved by the Parties within the time period described in Section 10.3.1 shall be submitted to an alternative dispute resolution process ("ADR"). Within five business days after the expiration of the 30-day period set forth in Section 10.3.1, each of Diversa and Novartis shall select for itself a representative with the authority to bind such Party and shall notify the other Party in writing of the name and title of such representative. Within 10 business days after the date of delivery of such notice, the representatives shall schedule a date for engaging in non-binding ADR with a neutral mediator or dispute resolution firm mutually acceptable to both representatives. Any such mediation shall be held in [*****] if brought by Novartis and Research Triangle Park, [*****] if brought by Diversa. Thereafter, the representatives of Diversa and Novartis shall engage in good faith in an ADR process under the auspices of such individual or firm. If the representatives of the Diversa and Novartis have not been able to resolve the Dispute within 30 business days after the conclusion of the ADR process, or if the representatives of such Parties fail to schedule a date for engaging in non-binding ADR within the 10-day period set forth above, the Dispute shall be settled by binding arbitration as set forth in Section 10.3.3 below. If the representatives of Diversa and Novartis resolve the dispute within the 30-day period set forth above, then such resolution shall be binding upon all Parties. If Diversa or Novartis fails to abide by such resolution, the other Party can immediately refer the matter to arbitration under Section 10.3.3. 10.3.3 If the parties have not been able to resolve the dispute as provided in Sections 10.3.1 and 10.3.2 above, the Dispute shall be finally settled by binding arbitration. Any arbitration hereunder shall be conducted under rules of conciliation and arbitration of the 17. *Confidential Treatment Requested International Chamber of Commerce by three arbitrators chosen according to the following procedure: each of Diversa and Novartis shall appoint one arbitrator and the two so nominated shall choose the third. If the arbitrators chosen by the Parties cannot agree on the choice of the third arbitrator within a period of 30 days after their appointment, then the third arbitrator with such requisite qualifications shall be appointed by the Court of Arbitration of the International Chamber of Commerce. Any such arbitration shall be held in San Diego, California if brought by Novartis and Paris, France if brought by Diversa, or such other location as the arbitrators may agree, and shall be conducted in English. The arbitral award (i) shall be final and binding upon all Parties; and (ii) may be entered in any court of competent jurisdiction. 10.3.4 Nothing contained in this Section or any other provisions of this Agreement shall be construed to limit or preclude Diversa or Novartis from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief to compel the other Parties to comply with their obligations hereunder before or during the pendency of mediation or arbitration proceedings. 10.4 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 10.5 Headings. All headings in this Agreement are for convenience only and shall not affect the meaning of any provision hereof 10.6 Binding Effect. This Agreement and all rights and obligations hereunder shall inure to the benefit of and be binding upon the Parties and their respective lawful successors and assigns (including, without limitation, any successor to Diversa upon a Change of Control). 10.7 Assignment. Except as otherwise provided herein, including the Change of Control provisions of Section 9.2.1, neither this Agreement nor any interest hereunder will be assignable in part or in whole by any Party without the prior written consent of the other Parties; provided, however, that Novartis and Diversa may assign this Agreement to any of their respective Affiliates or to any successor by merger or sale of substantially all of its business to which this Agreement relates (provided that, in the event of such merger or sale, no intellectual property of any acquiring or acquired corporation that is not a Party shall be included in the technology licensed hereunder). This agreement will be binding upon the successors and permitted assigns of the Parties. Any assignment which is not in accordance with this Section will be void. 10.8 Notices. All notices, requests, demands and other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given upon the date of receipt if delivered by hand, recognized international overnight courier, confirmed facsimile transmission, or registered or certified mail, return receipt requested, postage prepaid to the following addresses or facsimile numbers: 18. If to Novartis: If to Diversa: Novartis Seeds AG Diversa Corporation Schwarzwaldallee 215 10665 Sorrento Valley Road CH-4002 Basel San Diego, California 92121 Attention: Wally Beversdorf Attention: Carolyn Erickson Tel: (+4161) 697-3650 Tel: (858) 453-7020 Fax: (+4161) 697-3972 Fax: (858) 453-7032 with a copy to: with a copy to: Novartis Seeds AG Cooley Godward LLP Schwarzwaldallee 215 4365 Executive Drive, Suite 1100 CH-4002 Basel San Diego, CA 9221 Attention: Verena Trutmann Attention: L. Kay Chandler Tel: (+41.61) 697-2375 Tel: (858) 550-6000 Fax: (+4161) 697-2590 Fax: (858) 453-3555 A Party may change its designated address and facsimile number by notice to the other Parties in the manner provided in this Section. 10.9 Amendment and Waiver. This Agreement may be amended, supplemented, or otherwise modified only by means of a written instrument signed by all of the Parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 10.10 Severability. In the event that any provision of this Agreement shall, for any reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and the Parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent. 10.11 Entire Agreement. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements or understandings between the Parties relating to the subject matter hereof, including but not limited to the Letter of Intent executed by the Parties and dated [*****]. Notwithstanding the foregoing, the provisions of the Letter of Intent with respect to research and development, including, without limitation, research funding, shall remain in full force and effect until both this Agreement and the Research and Development Agreement have been fully executed. 10.12 Force Majeure. No Party shall be held liable or responsible to the other party, nor be deemed to be in breach of this Agreement, for failure or delay in fulfilling or performing any provisions of this Agreement (other than payment obligations) when such failure or delay is caused by or results from any cause whatsoever outside the reasonable control of the 19. *Confidential Treatment Requested party concerned including, but not limited to, fire, explosion, breakdown of plant, damage to plant material by pests or otherwise, strike, lock-out, labor disputes, casualty or accident, lack or failure of transportation facilities, flood, lack or failure of sources of supply or of labor, raw materials or energy, civil commotion, embargo, any law, regulation, decision, demand or requirement of any national or local government or authority. The Party claiming relief shall, without delay, notify the other party by registered airmail or by telefax of the interruption and cessation thereof and shall use its best efforts to remedy the effects of such hindrance with all reasonable dispatch. The onus of proving that any such Force Majeure event exists shall rest upon the Party so asserting. During the period that a Party is prevented from performing its obligations under this Agreement due to a Force Majeure event, the other Parties may, in their sole discretion, suspend any obligations that relate thereto. Upon cessation of such Force Majeure event, the Parties hereto shall use their best efforts to make up for any suspended obligations. If such Force Majeure event is anticipated to continue, or has existed for nine (9) consecutive months or more, this Agreement may be forthwith terminated by any Party by registered mail or by telefax. In case of such termination, the terminating Party will not be required to pay to the other Parties any indemnity whatsoever. In Witness Whereof, the undersigned have duly executed and delivered this Agreement as a sealed instrument effective as of the date first above written. Novartis Seeds AG Diversa Corporation /s/ W.D. Beversdorf /s/ William H. Baum - ------------------------ ---------------------------- By: W.D. Beversdorf By: William H. Baum -------------------- ------------------------ Title: Head, R & D Title: Sr. V. P. - Bus. Div. ----------------- --------------------- /s/ Verena Trutmann - ------------------------ By: Verena Trutmann -------------------- Title: General Counsel ----------------- 20. EX-10.25 13 RESEARCH LEASE EXHIBIT 10.25 RESEARCH LEASE Equipment: CellSys 100(TM) Microdrop Maker (includes ice-water bath container and a 12.3 cm autoclavable stainless steel shaft/blade assembly) as described in Exhibit B, Equipment Specifications. Reagents: 1.8 liters of sterilized CelMix(TM) 200 Emulsion Matrix and 120 x 0.4 ml aliquots of sterilized CelBioGel(TM) Encapsulation Matrix. Exhibit A lists the patents covering the Equipment and Reagents; Exhibit B lists the Equipment specifications. ONE CELL SYSTEMS, INC. (LESSOR) 100 Inman Street Cambridge, MA 02139 DIVIERSA CORPORATION (LESSEE) 10665 Sorrento Valley Road San Diego, CA 92121 Equipment Location Address (if different than above): Street: _____________________________________________________ City: _____________________ State: ___________ Zip: _______ Renewal Lease Term: 12 months; January 1, 1999 through December 31, 1999. Lease Payment: US $20,000 for the Renewal Lease Term. Payment Schedule: US $20,000 due by March 15, 1999. LEASE TERMS AND CONDITIONS Lessee requests that Lessor lease to Lessee the personal property shown above (the "Equipment") for research purposes only. Lessee's offer will be binding on Lessor when Lessor accepts it by having an authorized employee sign in the space provided below. All Lease Payments and other sums due and to become due shall be payable to Lessor at Lessor's offices at 100 Inman Street, Cambridge, MA 02139. 1. Lease-Payment. The Lease Payment for the Renewal Lease Term is US $20,000 which is due by March 15, 1999. 2. Equipment Location. Equipment shall be delivered to, and not be removed without Lessor's prior written consent from the "Equipment Location" shown above or if no location is specified, Lessee's billing address. Lessor shall have the right to inspect Equipment at any reasonable time during business hours with reasonable notice. 1. 3. Reagent Shipments. Unless directed to the contrary by Lessee in writing, Lessor shall ship at the beginning of each month of the Lease to the Equipment Location 150 ml of sterilized CelMix(TM) 200 Emulsion Matrix and 10 x 0.4 ml aliquots of sterilized CelBioGel(TM) Encapsulation Matrix. These shipments will be F.O.B. Cambridge, MA; Lessor will prepay the freight and invoice Lessee accordingly, or, at Lessee's direction, utilize Lessee's FedEx account number (1754-9278-0). 4. Ownership; Personal Property. This equipment is Lessor's property, and no rights or interests in it are conveyed except as expressly set forth herein. The Equipment is and shall at all times remain personal property. 5. Use of Equipment and Reagents. The Equipment and Reagents can be used only for Lessee's own internal research purposes. Lessee cannot sell or provide services (now or in the future) that use or encompass the Equipment or Reagents to third parties; Lessee cannot sell or provide products (now or in the future) that either use or were developed (in whole or in part) with the Equipment or Reagents or are manufactured by the Equipment to third parties. Lessee's obligations and Lessor's rights under this Section 5 shall survive Lease expiration or termination. 6. Assignment, Offset. LESSEE MAY NOT ASSIGN, TRANSFER, OR SUBLET ANY INTEREST IN THIS LEASE OR THE EQUIPMENT WITHOUT LESSOR'S PRIOR WRITTEN CONSENT. Lessor may assign this Lease or mortgage the Equipment, or both, in whole or in part without notice to Lessee. If Lessee receives notice, Lessee will acknowledge receipt thereof in writing. Each assignee or mortgagee of Lessor shall have all Lessor's rights, but none of Lessor's obligations under this Lease. Lessee shall not assert against assignee or mortgagee any defenses, counterclaims, or offsets Lessee may have against Lessor. This Lease inures to the benefit of and is binding upon the heirs, legatees, successors, and assigns of the parties hereto. Lessee acknowledges that any assignment by Lessor will neither materially change Lessee's duties hereunder nor increase Lessee's burdens or risks hereunder. 7. Lessee's Options After Expiration of Renewal Lease Term. At least 30 days prior to the expiration of the Renewal Lease Term Lessor will send to Lessee 1) notification that Lessee's Renewal Lease will expire as of a particular date and 2) a Continuing Lease specifying the terms and conditions upon which Lessee can continue to lease the Equipment; the Lease Payment in the Continuing Lease will be no more than 125% of the Lease Payment in the Renewal Lease Term. Within ten days after the expiration of the Renewal Lease Term and assuming that no default has occurred and is continuing, Lessee has the following Options: (A) to release the Equipment on the terms and conditions specified in the Continuing Lease, or (B) to surrender the Equipment, 8. Taxes, No Liens. As Lessor directs, Lessee shall pay all charges and taxes (local, state, and federal) incurred by Lessor which may now or hereafter be imposed or levied upon the leasing, possession, or use of the Equipment, excluding, however, all taxes on or measured by Lessor's net income. Lessee shall keep the Equipment free and clear of all liens and encumbrances. 9. Indemnity. Lessee shall indemnify, defend, and hold Lessor harmless from any costs, expenses, damages, fines, claims, or lawsuits arising from the lease, possession, use, condition, 2. or return of the Equipment. The obligations under this Section 9 shall survive Lease expiration or termination. 10. Lease Term, Noncancelability, Nonassignability. This lease shall continue fur the number of months shown in the space above as the Renewal Lease Term and end after Lessee has fulfilled all Lessee's obligations. THIS LEASE CANNOT BE CANCELED OR TERMINATED FOR ANY REASON EXCEPT AS EXPRESSLY PROVIDED HEREIN. LESSEE MAY NOT ASSIGN, TRANSFER, OR SUBLET ANY INTEREST IN THIS LEASE OR THE EQUIPMENT WITHOUT LESSOR'S PRIOR WRITTEN CONSENT. 11. Warranty and Maintenance. Lessor warrants that the Equipment is free from defects in materials and workmanship for the duration of this Lease and will perform substantially in accordance with the Equipment documentation for the life of the Equipment. Lessor will provide all labor and parts required to maintain the Equipment in operating condition for the duration of this Lease. Lessee is responsible for any freight and shipping charges associated with any non-warranty repair or maintenance of the Equipment. 12. Disclaimer of Other Warranties. Section 11 contains the only Warranty of any kind, express or implied, including but not limited to the implied warranties of merchantability and fitness for a particular purpose, that are made by Lessor on this Equipment. No oral or written information or advice given by Lessor or Lessor's employees shall create a warranty or in any way increase the scope of this Warranty, and Lessee may not rely on any such information or advice. 13. Late Payment Charges. If any payment to Lessor required herein is not paid on or before its due date, Lessee shall pay to Lessor interest on any such late payment from the due date thereof until the date paid at the lesser of 1.5% per month or the maximum rate allowed by law. 14. Default. If Lessee's failure to perform any obligation hereunder continues for thirty days after Lessor demands in writing performance thereof, Lessor may take possession of any Equipment, which possession shall not terminate Lessee's obligations under this Lease. Lessee will he responsible for Lessor's legal costs and expenses. 15. Insurance. Lessee shall at Lessee's expense provide and maintain (a) insurance against loss, theft, damage or destruction of the Equipment for its full replacement value, naming Lessor as the loss payee, and (b) public liability and property damage insurance naming Lessor as additional insured. Such insurance (and written evidence thereof delivered to Lessor at Lessor's request) shall be satisfactory to Lessor. If Lessee fails to provide such evidence, Lessor will have the right, but no obligation, to have such insurance protecting Lessor placed at Lessee's expense. 3. 1.6. Patents. All inventions and discoveries, whether or not patentable, which are conceived or reduced to practice by Lessee while utilizing the Equipment and/or Reagents shall be the sole and exclusive property of Lessee, provided however, that any patent claims reciting the Equipment (specifically or generically) and/or Reagents (specifically or generically which can form "bead polymers" or "gel microdrops" as described in the Patents listed in Exhibit A of this Lease) individually or as a component of a product or a process shall be jointly owned by the Lessor and Lessee. Lessor's rights under this Section 16 shall survive Lease expiration or termination. 17. Miscellaneous; Lessee Waivers; Consent to Jurisdiction. This instrument constitutes the entire agreement between the parties as to the subject matter contained herein, and it shall not be amended, altered, or changed except by a written agreement signed by the parties hereto and no provision of this Lease can be waived except by Lessor's written consent. Lessee authorizes Lessor to do all acts which Lessor may reasonably deem necessary to protect Lessor's interests hereunder. This is a contract of lease only and nothing shall create in Lessor solely a security interest or give Lessee an equity or other property interest in the Equipment except as specifically provided herein. The Undersigned affirms that he/she are duly authorized to execute this Lease Contract: One Cell Systems, Inc. (Lessor) by: Diversa Corporation (Lessee) by: /s/ Edward O'Lear /s/ Carolyn Erickson - ------------------------------------ ----------------------------------- Edward O'Lear Carolyn Erickson Vice President Director, IP Date: February 16, 1999 4. EXHIBIT A PATENTS The following Patents and pending patent applications cover the encapsulation of a variety of biological substances using the Reagents (both specifically and generically) and Equipment (both specifically and generically) and then assaying for a variety of parameters: U.S. 4,399,219; 4,401,755;4,643,968;4,647,536; 4,916,060; 4,959,301; 5,055,390; 5,225,332; European 0 007 887 and 0 070 318;EPC 83000 856 2; Canadian 1,174,952; 1,179,583; 1,230,566; Swedish 820 1401-0; and other pending applications throughout the world. EXHIBIT B EQUIPMENT SPECIFICATIONS Included with the CellSys 100(TM) microdrop maker are an ice water bath container and a 12.3 cm stainless steel shaft/blade assembly. The CellSys 100(TM) microdrop maker is a sophisticated emulsifier designed to maximize cell encapsulation while preserving cell integrity. High rotation speeds and unique blade configuration allow the selection of microdrop diameter sizes between 10u and 200u. Physical Dimensions: Width: 20.3 cm Depth: 25.4 cm Height: 38.1 cm Weight: 6.8 kg Power Input: 110-135 VAC, 50/60Hz, 1 amp Rotational Speed Ranges: OFF to 2800 rpm The CellSys 100(TM) microdrop maker is equipped with a moveable stage allowing immersion of the oil-agarose emulsion in an ice water bath while maintaining the proper shear force for uniform preparation of solidified gel microdrops. The CellSys 100(TM) microdrop maker's, compact size conserves laboratory space and facilitates transfer into a laminar flow hood. 5. EX-10.26 14 RESEARCH & DEVELOPMENT AGREEMENT EXHIBIT 10.26 Confidential Treatment Requested Under 17 C.F.R. (S)(S) 200.80(b)(4) 200.83 and 230.406 RESEARCH AND DEVELOPMENT AGREEMENT between NOVARTIS ENZYMES, INC. and DIVERSA CORPORATION *Confidential Treatment Requested RESEARCH AND DEVELOPMENT AGREEMENT This Research and Development Agreement, dated and effective as of December 1, 1999 (the "Effective Date"), is between Diversa Corporation ("Diversa"), a Delaware corporation, and Novartis Enzymes, Inc. ("NEI"), a Delaware corporation and wholly-owned subsidiary of Novartis Seeds AG ("Novartis"). Diversa and NEI are referred to herein individually as a "Party" and collectively as the "Parties." R E C I T A L S --------------- WHEREAS, Diversa has discovered and developed Biomolecules (as defined below), as well as proprietary technologies for the rapid discovery, development and optimization of Biomolecules; WHEREAS, Novartis has caused the formation of a new wholly-owned, affiliated company known as NEI, referred to as "Newco" in the Joint Venture Agreement, which desires to commercialize products useful in the animal feed and the agricultural product processing markets; and WHEREAS, NEI and Diversa desire to enter into a relationship whereby Diversa discovers, develops and delivers Biomolecules to NEI for NEI to use in the production and commercialization of products in the areas of animal feed and agricultural product processing; WHEREAS, NEI also may transfer to Novartis such Biomolecules as are appropriate for the development of commercial products with respect to transgenic crops; NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, the parties hereby agree as follows: 1. Definitions. ------------ "Affiliate" shall mean any entity that directly or indirectly controls, is --------- controlled by or is under common control, with NEI or Diversa, as the case may be, where "control" means direct or indirect possession of more than [*****] of the outstanding voting securities of a corporation or a comparable equity interest in any other type of entity, or operational control of such entity. "Agreement" shall mean this Research and Development Agreement. --------- "Agricultural Product Processing Field" shall mean the use of Biomolecules ------------------------------------- on or in Crops to alter, modify or improve the performance or other characteristics of the Crop. This field specifically excludes the [*****] Field. "Agricultural Product Processing Projects" shall mean the Projects defined ---------------------------------------- by the RAC pursuant to Section 3.1 in which the field of use of the applicable Biomolecule(s) is within the Agricultural Product Processing Field. 2. *Confidential Treatment Requested "Alternate" shall have the meaning set forth in Section 3.4. --------- "Animal Feed Field" shall mean the use of Biomolecules on or in Crops for ----------------- feed applications to alter, modify or improve feed conversion and/or animal nutrition. This field specifically excludes all vaccines and therapeutic applications. "Biomolecule(s)" shall mean enzymes and/or genes encoding them. -------------- "Change of Control" shall mean any of the following transactions involving ----------------- another company (other than NEI or any of its Affiliates) (a) a merger or consolidation of Diversa which results in the voting securities of Diversa outstanding immediately prior thereto ceasing to represent at least [*****] of the combined voting power of the surviving entity immediately after such merger or consolidation; (b) the sale of all or substantially all of the assets of Diversa; or (c) any one person (other than Diversa, any trustee or other fiduciary holding securities under an employee benefit plan of Diversa, or any corporation owned directly or indirectly by the stockholders of Diversa, in substantially the same proportion as their ownership of stock of Diversa), together with any of such person's "affiliates" or "associates", as such terms are used in the Securities Exchange Act of 1934, as amended, becoming the beneficial owner of 50% or more of the combined voting power of the outstanding securities of Diversa or by contract or otherwise having the right to control the Board of Directors or equivalent governing body of Diversa or the ability to cause the direction of management of Diversa. "Commercial Development Biomolecule" shall mean Diversa Biomolecules and/or ---------------------------------- Derivative NEI Biomolecules that have been, pursuant to Preliminary Efficacy Trials, designated by NEI in accordance with this Agreement, for commercialization in or as a Product. "Committee Member" shall have the meaning set forth in Section 3. ---------------- "Confidential Information" shall have the meaning set forth in Section 7.1. ------------------------ "Crop" shall mean any component of any cultivated plant species, including, ---- [*****]. "Derivative NEI Biomolecules" shall mean all Biomolecules that are derived --------------------------- or discovered from NEI Biomolecules through application of Diversa Technology and any derivatives of such Biomolecules. "Disclosing Party" shall mean that Party disclosing Confidential ---------------- Information to the other Party under Section 7. 3. *Confidential Treatment Requested "Diversa Biomolecules" shall mean all Biomolecules owned by, or licensed -------------------- to, Diversa, with the right to license or sublicense, as of the Effective Date or during the Research Period. "Diversa Know-How" shall mean all know-how, trade secrets, inventions, ---------------- data, processes, procedures, devices, methods, formulas, media and/or all lines, Biomolecules, clones, strains, genes, reagents, protocols and marketing and other information, including improvements thereon, whether or not patentable, which are not covered by the Diversa Patent Rights, but which are necessary or useful for the commercial exploitation of the Diversa Patent Rights or the conduct of the Projects or otherwise relate to Biomolecules or Products, and which are owned by or licensed to Diversa, with the right to license, as of the Effective Date or otherwise during the Research Period. "Diversa Inventions" shall mean those Inventions over which Diversa has ------------------ exclusive ownership and control as provided in Section 5.1. "Diversa Patent Rights" shall mean all patent and provisional patent --------------------- applications, issued and subsisting patents and substitutions, divisionals, continuations, continuations-in-part, reissues, reexaminations, extensions and supplementary protection certificates thereof, including foreign counterparts of the foregoing, in each case which are owned by or licensed to Diversa, with the right to license, as of the Effective Date or otherwise during the Research Period, which are necessary or useful for the conduct of the Projects or otherwise relate to Biomolecules or Products arising from the conduct of the Projects. Without limiting the generality of the foregoing, Diversa Patent Rights include any patents and patent applications claiming Inventions owned by Diversa under Sections 5.1.1, 5.1.3 and 5.1.4. "Diversa Technology" shall mean the Diversa Know-How and the Diversa Patent ------------------ Rights. "Fields" shall mean the Animal Feed Field and the Agricultural Product ------ Processing Field. "Indemnitees" shall have the meaning set forth in Section 9.1. ----------- "Indemnitor" shall have the meaning set forth in Section 9.1. ---------- "Inventions" shall have the meaning set forth in Section 5.1. ---------- "Joint Inventions" shall have the meaning set forth in Section 5.2.3. ---------------- "Joint Venture Agreement" shall mean that certain Joint Venture Agreement, ----------------------- dated as of its effective date, by and between Diversa and Novartis Seeds AG. "[*****]" shall mean, with respect to each Project, the [*****] activity level against a [*****] according to the Project Plan. "NEI Biomolecules" shall mean all Biomolecules owned by, or licensed to, ---------------- NEI, with the right to license or sublicense which are provided by NEI to Diversa under this Agreement. 4. *Confidential Treatment Requested "NEI Inventions" shall mean those Inventions over which NEI has exclusive -------------- ownership and control as provided in Section 5.1. "NEI Patent Rights" shall mean all patent and provisional patent ----------------- applications, issued and subsisting patents and substitutions, divisionals, continuations, continuations-in-part, reissues, reexaminations, extensions and supplementary protection certificates thereof, including foreign counterparts of the foregoing, in each case which are owned by or licensed to NEI, with the right to license, as of the Effective Date or otherwise during the Research Period, which are necessary or useful for the conduct of the Projects or otherwise relate to Biomolecules or Products. Without limiting the generality of the foregoing, NEI Patent Rights include any patents and patent applications claiming Inventions owned by NEI under Sections 5.1.2, 5.1.3 and 5.1.5. "Preliminary Efficacy Trials" shall mean, with respect to each Commercial --------------------------- Development Biomolecule and Transferred Biomolecule, preliminary testing conducted by or for NEI to determine functional efficacy conducted under anticipated use conditions, generally outside of a laboratory environment. Preliminary Efficacy Trials [*****], such as [*****] in the [*****] and [*****] for [*****] including [*****], and [*****] or any other [*****] for [*****]. "Product" when used without further qualification shall mean a commercial ------- product containing or consisting of any Biomolecule designated under this Agreement as a Commercial Development Biomolecule. "Project" shall mean research efforts undertaken pursuant to a Project ------- Plan. "Project Plan" shall mean a written plan prepared by the RAC, documenting ------------ the research and development to be performed by Diversa and the work to be performed by NEI in support of a Project. Such documentation will include [*****], an [*****] of [*****] of [*****] in terms of [*****] and all [*****],[*****] and [*****] for purposes of [*****] and an estimated schedule for completion of the research and development work, as well as specific details regarding the [*****] of Biomolecules delivered by Diversa to NEI (including, without limitation, [*****], the [*****] and details of [*****] plans to [*****]. Each Project Plan may be amended from time to time, as required and subject to approval by the [*****], and incorporated by reference as part of this Agreement. "Receiving Party" shall mean that Party receiving Confidential Information under Section 7. "Research FTE" shall mean the equivalent of one full year of work on a ------------ full-time basis by a scientist or other professional employed or retained as a consultant by Diversa and possessing 5. *Confidential Treatment Requested skills and experience necessary to carry out the Project(s) contemplated by this Agreement, determined in accordance with Diversa's normal policies and procedures. "Research Period" shall mean the period beginning on the Effective Date and --------------- ending upon the termination or expiration of this Agreement. "Responsible Party" shall have the meaning set forth in Section 5.2.3. ----------------- "RAC" shall have the meaning set forth in Section 3. --- "[*****]" shall mean [*****] of a Biomolecule against a [*****] appropriate to the [*****] as determined by the [*****]. "Sublicensee" shall mean any third party (other than an Affiliate of a ----------- Party) licensed by NEI or its Affiliates to make, use (except where the implied right to use accompanies the sale to the third party of any [*****] by NEI or its Affiliates or Sublicensees), sell, import, export, advertise, promote and otherwise commercialize any [*****]. "[*****]" shall mean a [*****] discovered or derived under the terms of this Agreement which [*****]. "Valid Claim" shall mean a claim included in any pending patent application ----------- or any issued patent included within the NEI Patent Rights or the Diversa Patent Rights, which, if with respect to any pending claim, has not been irrevocably abandoned or held to be unpatentable by a court or other authority of competent jurisdiction in a proceeding which is not reversed, not appealable and not appealed, or, with respect to any issued claim, has not been held invalid by a decision of a court or other authority of competent jurisdiction which is not reversed, not appealable and not appealed. "Year" shall mean any consecutive 12-month period during the Research ---- Period that begins on the Effective Date or an anniversary of the Effective Date. For example, Year 1 shall be the consecutive 12-month period beginning on the Effective Date. The above definitions are intended to encompass the defined terms in both the singular and plural tenses. 2. Collaboration. -------------- 2.1. Scope. Diversa agrees to work exclusively with NEI in the Animal ----- Feed Field and on Agricultural Product Processing Projects under the terms of the Joint Venture Agreement during the term of this Agreement. 2.2. Projects. During the Research Period, NEI and Diversa will, with the -------- advice of the RAC, define and perform Projects in the Fields with the goal of identifying or discovering Biomolecules suitable for development by NEI or its Affiliates. Each such proposed Agricultural 6. *Confidential Treatment Requested Product Processing Project and the corresponding Project Plan will be further defined by the RAC in accordance with Section 3. NEI agrees to provide funding in accordance with Section 6.1 for the following minimum number of Diversa FTEs to work on Projects for the following years : [*****] 2.3. Limited Use of [*****] Provided by Diversa. Without limiting any --------------- -------------------- other provision of this Agreement, NEI agrees that it will use [*****] derived from [*****] provided by Diversa pursuant to any Project Plan only for evaluating such [*****] in connection with the Project and will not use such [*****] for any other purpose. NEI may not transfer such [*****] to any other party; provided that NEI may transfer such [*****] to its Affiliates subject to the limitations on use set forth herein and only to the extent necessary to effect the purposes of this Agreement. NEI will inform Diversa in writing of the targets to be used in [*****] such [*****] prior to commencing such [*****]. NEI will provide Diversa with regular written reports (no less frequently than once per quarter) identifying the [*****] and [*****] used in such [*****] and the results of such [*****]. NEI will employ a system to track the identity and use of such clones and to ensure that such [*****] are maintained separately from any other [*****] used by NEI (or any Affiliate of NEI, if applicable) and will provide Diversa with a detailed description of such system prior to the delivery of any [*****] by Diversa to NEI under any Project Plan. 2.4. Biomolecules Provided by a Party. Each Party shall be responsible -------------------------------- for ensuring that all Biomolecules made available by such Party for the collaboration are done so in compliance with any intellectual property rights required by the Biodiversity Convention or legislation related thereto, and such Party shall further bear all obligations associated therewith. 3. Research Advisory Committee. ---------------------------- NEI and Diversa shall establish a research advisory committee (the "RAC") comprised of [*****] persons (each, a "Committee Member"), [*****] of whom shall be appointed by NEI and [*****] of whom shall be appointed by Diversa. The RAC may invite other representatives of the Parties, or other individuals as deemed appropriate by the RAC, to participate in meetings of the RAC, as appropriate, provided that no such representative shall have the right to vote as a Committee Member. Each Committee Member, other representative of a Party or other individual invited to participate in a meeting shall, if not already so obligated to a Party, sign a confidentiality undertaking committing such Committee Member, representative or invited individual to fully comply with and respect the Confidentiality obligations of Section 7. 7. *Confidential Treatment Requested The Committee Members will, within [*****] of executing this Agreement, define and approve the [*****] Projects and Project Plans for this Agreement. 3.1. Responsibilities. The [*****]. The [*****], and all [*****] When ----------------- advising NEI management, the [*****] shall, among other things, [*****], and [*****]. Other responsibilities include, but are not limited to, the following: 3.1.1. Design and Development of Project Plans. The RAC shall take --------------------------------------- into account the desires and directions of NEI management and advise NEI management in writing on all Project Plans undertaken pursuant to this Agreement. The RAC must design and develop all Project Plans to be performed under the terms of this Agreement. Such design and development will be based on, but not limited to, [*****], the [*****], the [*****], especially with respect to [*****], the [*****],[*****]. In addition, for Agricultural Product Processing Projects, the RAC shall advise NEI management as to whether Diversa is free to collaborate or has previously granted rights to a third party for the particular project at the time the project is proposed. Project Plans for the Projects will be an integral part of this Agreement. 3.1.2. Amendment of Project Plans. All amendments to the Project --------------------------- Plans proposed by the RAC shall be in writing and be subject to the approval of NEI management, and incorporated by reference into this Agreement. Amendments to Project Plans will be an integral part of this Agreement. 3.1.3 Agricultural Product Processing Projects. Work on each ---------------------------------------- Project Plan for Agricultural Product Processing Projects will begin within [*****] of NEI management approval in writing for each relevant Project Plan. Agricultural Product Processing Projects will be established as being [*****] at the time that the applicable Project Plan is approved. 3.1.4. Review of Reports. At certain reporting milestones defined by ----------------- the RAC for each Project, Diversa and NEI shall deliver to the RAC reports containing a complete compilation of all research activities and data derived from the activities undertaken hereunder by such Party as part of the Projects, including revisions to the Project Plans, as appropriate. The RAC will review such data to determine progress made on the Projects, and make a written report of its findings to NEI management on a timely basis. Reports to and from the RAC as 8. *Confidential Treatment Requested well as all meeting minutes and other documents brought to the attention to the RAC shall be subject to the confidentiality provisions contained herein. 3.1.5. [*****] of [*****]. Based on the research and development ---- efforts undertaken pursuant to Project Plans, the RAC shall recommend to NEI management the selection of [*****] or [*****] for [*****]. Such recommendation shall be accompanied by an amendment to the relevant Project Plan with respect to the further [*****] of such [*****]. Based on the information received, the management of NEI shall notify the RAC in writing whether it accepts such [*****] as [*****]. Upon acceptance by NEI, Diversa shall deliver [*****] to NEI and/or Novartis Seeds AG for [*****] and [*****]. 3.1.6. Establishment and Evaluation of [*****]. The RAC must -------------------------------- establish and recommend in writing to NEI management for NEI's approval the [*****] and [*****] for each Project Plan, which shall be consistent with Section [*****] hereof. The RAC will regularly [*****] under each Project Plan to determine whether [*****] thereunder have been achieved. 3.2. Meetings of the RAC. The RAC shall meet at least once per [*****] at -------------------- a location to be determined by the RAC. Within [*****] following each meeting of the RAC, the RAC shall prepare and deliver to both Parties a written report describing the RAC's deliberations, conclusions and proposed actions. Subject to written approval by both parties, such report shall be incorporated as part of this Agreement by reference. 3.3. Requirements for Action. All proposals, actions, recommendations and ----------------------- reports of the RAC will require the unanimous consent of all of its voting members. The Committee Members or Alternates of NEI shall collectively have [*****] on the RAC, and the Committee Members or Alternates of Diversa shall collectively have [*****] on the RAC. 3.4. Members. The initial Committee Members of the RAC shall be designated ------- by each Party in writing within [*****] of executing this Agreement. Diversa and NEI may change one or more of their respective Committee Members; provided, however, that such person is qualified as reasonably demonstrated by that Party. All appointments and withdrawals of appointment shall be made by written notice to the other Party. Diversa and NEI may designate in writing an alternate Committee Member ("Alternate") if the designated Committee Member cannot attend a meeting; provided, however, that such Alternate is qualified as reasonably demonstrated by that party. Any action taken with approval of an Alternate shall be as valid as if taken with the approval of the designated Committee Member. 9. *Confidential Treatment Requested 3.5. Visits to Facilities. Committee Members shall have reasonable --------------------- opportunity to visit the facilities of NEI or Diversa (and such party's Affiliates, if applicable) where activities under this Agreement are in progress, and with reasonable prior notice. Each of Diversa and NEI shall bear its own expenses in connection with such site visits, unless such visits are deemed by the RAC to be part of a Project, in which case the costs will be included as part of the applicable Project Plan. 3.6. Information Sharing. Each of the Parties shall provide to the RAC ------------------- all information in such Party's possession that is relevant to the RAC's deliberations regarding research, development and commercialization efforts related to the Projects. Without limiting the generality of the foregoing, the Parties will provide the RAC with the opportunity to review data from the [*****] to determine the status of the Projects. 3.7. Dispute Resolution. If the RAC fails to achieve unanimous consent ------------------- upon any matter, then it will issue a report on that matter to [****] giving full consideration to the opposing points of view in the RAC. [****] shall then, in consultation with the Research and Development Committee of the Board of Directors of NEI, resolve the matter in the interests of NEI.. 4. Grant of Rights. ---------------- 4.1. Grant of First Option. Subject to the terms and conditions of this --------------------- Agreement, with respect to each [*****], Diversa hereby grants to NEI a right of first option to an exclusive, worldwide, royalty-bearing license (the "License") under the Diversa Technology to use the applicable [*****] to make, have made, use, sell, offer for sale and import Products outside the applicable Field. 4.2 Other Rights. All other rights which are to the benefit of NEI with ------------ respect to Diversa's proprietary interest in Biomolecules are provided for in the Joint Venture Agreement. 5. Intellectual Property Rights. ----------------------------- 5.1. Intellectual Property Ownership. Ownership of all inventions, ------------------------------- discoveries, developments and improvements conceived of in the course of work performed on any Project (the "Inventions") shall be determined in accordance with this Section 5.1. 5.1.1. Diversa shall have exclusive ownership and control, subject to the grant of exclusive license under the Joint Venture Agreement, over [*****] made pursuant to this Agreement ([*****]), including, without limitation, any such Biomolecules, compositions containing any such Biomolecules ([*****]), methods of using such Biomolecules (including methods of using 10. *Confidential Treatment Requested such Biomolecules to make any Product but not methods of using any Product), methods of making such Biomolecules, and Diversa Know-How. 5.1.2. NEI shall have exclusive ownership and control over all Inventions relating to any Product, including, without limitation, such Products, methods of using such Products and methods of making such Products. 5.1.3. With respect to all Inventions relating to all [*****] designed and/or developed in the course of a Project, (a) Diversa shall have exclusive ownership and control over all such Inventions having solely Diversa inventors; (b) Diversa shall have joint ownership and control over all such Inventions having Diversa and NEI inventors; provided that, except as contemplated by the Project, Diversa will not use, and will not provide or grant any rights to any third party to use, any [*****] that incorporates or was designed and/or developed using any information or materials provided to Diversa by NEI; and (c) NEI shall have exclusive ownership and control over all such Inventions having solely NEI inventors. 5.1.4 Subject to Sections 5.1.1, 5.1.2 and 5.1.3, Joint Inventions shall be jointly owned. 5.1.5 Subject to Sections 5.1.1, 5.1.2, 5.1.3, and 5.1.4, Inventions shall be owned by the Party which employs the inventor thereof. 5.1.6 Inventorship of Inventions shall be determined in accordance with United States patent law. 5.1.7. Each Party will (and will cause each of its Affiliates) to make such assignments and take such other actions as may be necessary or appropriate to effect the ownership of Inventions in accordance with this Section 5.1. 5.2. Filing, Prosecution and Maintenance of Patents. ---------------------------------------------- 5.2.1. NEI Patent Rights. NEI shall have the sole right, at its ----------------- own expense, to control the filing, prosecution and maintenance of all NEI Patent Rights. 5.2.2. Diversa Patent Rights. Diversa shall have the sole right, --------------------- at its own expense, to control the filing, prosecution and maintenance of all Diversa Patent Rights. 5.2.3 Patent Rights Claiming Joint Inventions. With respect to --------------------------------------- NEI Patent Rights or Diversa Patent Rights to the extent they claim Inventions conceived of jointly by Diversa and NEI ("Joint Inventions"), the Parties shall mutually agree in writing which Party shall file, prosecute and maintain patent applications and patents protecting Joint Inventions described in Section 5.1.4, the costs for which shall be shared equally between the Parties. The Party responsible for filing, prosecution and maintenance of such patent applications and patents under Section 5.2.1 or 5.2.2, as applicable (the "Responsible Party") will furnish the other Party 11. *Confidential Treatment Requested with copies of documentation of patent applications and patents that claim any Joint Invention and other related correspondence relating thereto to and from governmental patent agencies or other authorities and permit the other Party to offer its comments thereon before the Responsible Party makes a submission to a governmental patent agency or other authority which could materially affect the scope or validity of the patent coverage with respect to such Joint Inventions. The other Party shall offer its comments promptly. If the Responsible Party with respect to patent applications and patents claiming any Joint Invention decides to abandon or not to pursue prosecution of any such patent applications or patents which claim such Joint Invention, it shall permit the other Party, at its option and expense, to undertake such obligations. The Party not undertaking such actions shall fully cooperate with the other Party and shall provide to the other Party whatever assignments and other documents that may be needed in connection therewith. In the event that Parties cannot agree on which Party shall file, prosecute and maintain such patent applications and patents, Joint Inventions shall be protected in patent applications and patents filed, prosecuted and maintained by outside counsel reasonably acceptable to both Parties, with equal control and joint responsibility for costs incurred in connection with the applicable patent applications and patents. 5.3. Cooperation of the Parties. Each Party agrees (and will cause any of -------------------------- its Affiliates) to cooperate fully in the preparation, filing, prosecution and maintenance of any patent rights under this Agreement. Such cooperation includes, but is not limited to: (a) executing all papers and instruments, or using reasonable efforts to cause its employees or agents, to execute such papers and instruments, so as to effectuate the ownership of intellectual property rights set forth in Section 5.1 above and to enable the other Party to file and to prosecute patent applications and to maintain patents in any country; (b) promptly informing the other Party of any matters coming to such Party's attention that may affect the preparation, filing, or prosecution of any such patent applications or the maintenance of any such patents; and (c) undertaking no actions that are potentially deleterious to the preparation, filing, or prosecution of such patent applications or to the maintenance of such patents. 5.4. Infringement by Third Parties. ----------------------------- 5.4.1 Notice. Diversa and NEI shall promptly notify the other in ------ writing of any alleged or threatened infringement by a third party of any patent or patent application included in the Diversa Patent Rights or NEI Patent Rights of which they become aware. Both Parties shall use reasonable efforts in cooperating with each other to terminate such infringement without litigation. 5.4.2 NEI Actions. NEI shall have the first right to bring and ----------- control, by counsel of its own choice, any action or proceeding with respect to infringement of (a) any NEI Patent Rights, and (b) any Diversa Patent Rights with respect to a [*****]. Diversa shall have the right, at its own expense, to participate in any such action 12. *Confidential Treatment Requested regarding the Diversa Patent Rights by counsel of its own choice. Upon written notice to Diversa, NEI may require Diversa to participate in such action as a necessary party to such action, at NEI's expense. If NEI fails to bring an action or proceeding with respect to any such Diversa Patent Rights within (a) ninety (90) days following the notice of alleged infringement or (b) ten (10) days before the time limit, if any, set forth in the appropriate laws and regulations for the filing of such actions, whichever comes first, Diversa shall have the right to bring and control any such action, at its own expense and by counsel of its own choice, and NEI shall have the right, at its own expense, to be represented in any such action by counsel of its own choice. 5.4.3 Diversa Actions. Diversa shall have the right to bring and --------------- control, by counsel of its own choice, any action or proceeding with respect to infringement of any Diversa Patent Rights which are directed to a Diversa Biomolecule transferred under the terms of this Agreement which is not a [*****] at the time of commencement of such action or proceeding. 5.4.4 Cooperation; Awards. In the event a Party brings an ------------------- infringement action, the other Party shall (and will cause any of its Affiliates) cooperate fully, including if required to bring such action, the furnishing of a power of attorney. Neither Party shall have the right to settle any patent infringement litigation under this Section 5.4 in a manner that diminishes the rights or interests of the other Party without the prior written consent of such other Party. Except as otherwise agreed to by the Parties as part of a cost sharing arrangement, any recovery realized as a result of such litigation, after reimbursement of any litigation costs of Diversa and NEI, shall belong to the Party who brought the action. 5.5. Claimed Infringement by Third Parties. Diversa and NEI shall ------------------------------------- promptly notify the other in writing of any allegation by a third party that the exercise of the rights granted to NEI under this Agreement or the activities conducted by either Party under this Agreement infringes or may infringe the intellectual property rights of such third party. Each Party will use reasonable efforts (and will cause any of its Affiliates) to cooperate with the other Party to resolve or defend against such claims. Neither Party shall have the right to settle any patent infringement litigation under this Section 5.5 in a manner that diminishes the rights or interests of the other Party without the prior written consent of such other Party. 6. Payments, Reports, and Records. ------------------------------- 6.1. Research Funding. NEI agrees to fund the [*****] number of Research ---------------- FTEs at Diversa indicated in Section 2.1 above at a cost of [*****] per FTE for the [*****] of this Agreement. Beginning in the third year of this Agreement, a Cost-of-Living Adjustment (COLA) will be applied to all FTEs. Thereafter, the COLA will be applied on a yearly basis and will be based on standard CPI values. 6.2. Payments. Payments due pursuant to the above Section 6.1 shall be -------- made in quarterly installments, in advance. In the event the Effective Date occurs during a calendar quarter, the first payment shall be the sum of the prorated amount due for that calendar quarter plus the amount due for the subsequent full calendar quarter. 13. *Confidential Treatment Requested 6.3. Research Milestone Payments. Each Year for the first five (5) Years ---------------------------- following the Effective Date, NEI shall pay to Diversa research milestones in accordance with the Project Plans for each Project. Such research milestone payments shall not exceed [*****] of the total costs of all research FTEs for each Year, as set forth under the column headed "Total Research FTEs" in Section 6.3 of the Joint Venture Agreement (the "Maximum Annual Milestones"). In any event, each Year for the first [*****] following the Effective Date, NEI shall pay to Diversa guaranteed research milestones equal to [*****] of the Maximum Annual Milestones for such Year. Research milestone payments under this Section 6.3 shall be non-refundable and shall not be credited against any other payments payable to Diversa under this Agreement or under the Joint Venture Agreement. 6.5. Payments in U.S. Dollars. All payments due under this Agreement ------------------------ shall be payable in United States dollars by wire transfer to an account designated by Diversa. 6.6. Records. NEI and its Affiliates shall maintain complete and accurate ------- records of Products made, used or sold by them or their Sublicensees under this Agreement, and any amounts payable to Diversa in relation to Products, which records shall contain sufficient information to permit Diversa to confirm the payments due under the terms of this Agreement, and the Joint Venture Agreement. NEI and its Affiliates shall retain such records relating to a given Product for at least [*****] after the first commercial sale of said Product. Diversa (acting as the "Auditing Party") shall have the right, at its own expense, to cause an independent certified public accountant reasonably acceptable to NEI, to inspect such records of NEI or its Affiliates (the "Audited Party") during normal business hours for the sole purpose of verifying any reports and payments delivered under this Agreement. Such accountant shall not disclose to the Auditing Party any information other than information relating to accuracy of reports and payments delivered under this Agreement and shall provide the Audited Party with a copy of any report given to the Auditing Party. The Parties shall reconcile any payment due within [*****] after the accountant delivers the results of the audit. The Auditing Party shall bear the full cost of the audit unless, the audit performed under this Section reveals lack of payment due under the terms of this Agreement, the License Agreement(s) or the Joint Venture Agreement in which case the Audited Party shall bear the full cost of such audit. Diversa may exercise its rights under this Section only once every year and only with reasonable prior notice to NEI. NEI shall use commercially reasonable efforts to ensure that the other Party will have access to records of Products sold by its Affiliates. 6.7. Late Payments. In the event that any payment due hereunder is ------------- not made when due, the payment shall accrue interest from that date due at the rate of [*****]; provided however, that in no event shall such rate exceed the maximum legal annual interest rate. The payment of such interest shall not limit Diversa from exercising any other rights it may have as a consequence of the lateness of any payment. 14. *Confidential Treatment Requested 7. Confidential Information. ------------------------ 7.1. Confidential Information. Confidential Information shall mean ------------------------- any technical or business information, whether orally or in writing, furnished by the Disclosing Party to the Receiving Party in connection with this Agreement. Such Confidential Information shall include, without limitation, the existence and terms of this Agreement, the identity of a Biomolecule, the Biomolecule, any gene encoding such Biomolecule, if relevant, the use of a Biomolecule, patent rights, trade secrets, know-how, inventions, technical data or specifications, testing methods, business or financial information, research and development activities, product and marketing plans, and customer and supplier information, including, but not limited to, such items that become known to a Party during visits to the facilities of any other Party. 7.2 Obligations. The Receiving Party agrees that it shall: 7.2.1 Maintain all Confidential Information in strict confidence, except that the Receiving Party may disclose or permit the disclosure of any Confidential Information to its Affiliates, directors, officers, employees, consultants and advisors who are obligated to maintain the confidential nature of such Confidential Information and who need to know such Confidential Information for the purposes set forth in this Agreement. Further, each Party will be entitled to disclose to its Sublicensees that Confidential Information of the other Party as those Sublicensees need to know in order to commercialize Products, provided that those Sublicensees are obligated to maintain the confidential nature of such Confidential Information; 7.2.2 Use all Confidential Information solely for the purposes set forth in, or as permitted by, this Agreement; 7.2.3 Allow its Affiliates, directors, officers, employees, consultants and advisors to reproduce the Confidential Information only to the extent necessary to effect the purposes set forth in this Agreement, with all such reproductions being considered Confidential Information; and 7.2.4 If the Receiving Party is Novartis, then Novartis shall also have the right to disclose Confidential Information to Novartis Agricultural Discovery Institute, Inc. ("NADII") provided that NADII is obligated to maintain the confidential nature of such Confidential Information. Each Party shall be responsible for any breaches of this Section 7.2 by any of its Affiliates, directors, officers, employees, consultants and advisors, and, in the case of Novartis, also for any breach of this Section 7.2 by NADII. 7.3 Exceptions. The obligations of the Receiving Party under Section 7.2. above shall not apply to any specific Confidential Information to the extent that the Receiving Party can demonstrate that such Confidential Information: 7.3.1 Was in the public domain prior to the time of its disclosure under this Agreement; 15. 7.3.2 Entered the public domain after the time of its disclosure under this Agreement through means other than an unauthorized disclosure resulting from an act or omission by the Receiving Party or its Affiliates, directors, officers, employees, consultants, advisors or agents; 7.3.3 Was or is independently developed or discovered by the Receiving Party without use of the Confidential Information, and which can be demonstrated by written record; 7.3.4 Is or was disclosed to the Receiving Party at any time, whether prior to or after the time of its disclosure under this Agreement by a third party having no fiduciary relationship with the Disclosing Party and having no obligation of confidentiality to the Disclosing Party with respect to such Confidential Information; or 7.3.5 Is required to be disclosed to comply with applicable laws or regulations (such as disclosure to the SEC, the EPA, the FDA, or the United States Patent and Trademark Office or to their foreign equivalents), or to comply with a court or administrative order, provided that the Disclosing Party receives prior written notice of such disclosure and that the Receiving Party takes all reasonable and lawful actions to obtain confidential treatment for such disclosure and, if possible, to minimize the extent of such disclosure. 7.4 Survival of Obligations. The obligations set forth in Sections 7.1, 7.2 and 7.3 shall remain in effect after termination or expiration of this Agreement for a period of [*****]. 7.4. Publication. Diversa, Novartis and NEI shall cooperate in appropriate ----------- publication of the results of research and development work performed pursuant to the Project Plans, but subject to the predominating interest to obtain patent protection for any patentable subject matter. To this end, prior to any public disclosure of such results, the Party proposing disclosure shall send the other party(ies) a copy of the information to be disclosed, and shall allow the other Party(ies) [*****] from the date of receipt in which to determine whether the information to be disclosed contains subject matter for which patent protection should be sought prior to disclosure, or otherwise contains Confidential Information of the reviewing Party(ies). The Party proposing disclosure shall be free to proceed with the disclosure unless prior to the expiration of such [*****] period the reviewing Party(ies) notify the Party proposing disclosure that the disclosure contains subject matter for which patent protection should be sought or Confidential Information of the reviewing party(ies), and the Party proposing publication shall then delay public disclosure of the information for an additional period to be mutually agreed upon to permit the preparation and filing of a patent application on the subject matter to be disclosed or for the parties to determine a mutually acceptable modification to such publication to protect the Confidential Information of the reviewing Party(ies) adequately. The Party proposing disclosure shall thereafter be free to publish or disclose the information. The determination of authorship for any paper shall be in accordance with accepted scientific practice. 16. *Confidential Treatment Requested 8. Representations and Warranties. ------------------------------ 8.1. Authorization. Each Party represents and warrants to the other that ------------- it has the legal right and power to enter into this Agreement, to extend the rights and licenses granted to the other in this Agreement, and to fully perform its obligations hereunder, and that the performance of such obligations will not conflict with its charter documents or any agreements, contracts, or other arrangements to which it is a party. 8.2 Disclaimer. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER ---------- PARTY MAKES ANY REPRESENTATION OR EXTENDS ANY WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES AS TO MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. 8.3 Limitation of Liability. IN NO EVENT WILL EITHER PARTY, ITS ----------------------- DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR AFFILIATES BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, WHETHER BASED UPON A CLAIM OR ACTION OF CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER TORT, OR OTHERWISE, ARISING OUT OF THIS AGREEMENT. 9. Indemnification. ---------------- 9.1 Indemnification. Each Party (an "Indemnitor") shall indemnify, defend, --------------- and hold harmless the other Party and their directors, officers, employees, and agents and their respective successors, heirs and assigns (an "Indemnitee"), against any liability, damage, loss, or expense incurred by or imposed upon the Indemnitee or any one of them in connection with any claims, settlements, suits, actions, demands, or judgments arising out of any theory of product liability (including, but not limited to, actions in the form of tort, warranty, or strict liability) concerning any product (or any process or service) that is made, used, or sold by the Indemnitor or its Affiliates or Sublicensees pursuant to any right or license granted under this Agreement; provided, however, that such indemnification right shall not apply to any liability, damage, loss, or expense to the extent directly attributable to the negligence, reckless misconduct, or intentional misconduct of the Indemnitee. An Indemnitee shall not be entitled to indemnification for the settlement of any claim pursuant to this Agreement unless it obtains the prior written consent of the Indemnitor to such settlement. 9.2 Procedures. Any Indemnitee that intends to claim indemnification under ---------- Section 9.1 shall promptly notify the Indemnitor of any claim in respect of which the intends to claim such indemnification, and the Indemnitor shall assume the defense thereof with counsel mutually satisfactory to the Parties; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses of no more than the law firm representing all Indemnitees in the proceeding or related proceeding, to be paid by the Indemnitor, if 17. representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceedings. The indemnity agreement in Section 9.1. shall not apply to amounts paid in settlement of any loss, claim, liability or action if such settlement is effected without the consent of the Indemnitor. The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, shall not relieve the Indemnitor of any liability to the Indemnitee under Section 9.1, except to the extent the Indemnitor has been prejudiced by such failure to give notice. Each Party and its Affiliates and their employees and agents shall cooperate fully with the other Party and its legal representatives in the investigation of any action, claim or liability covered by this indemnification. 10. Term; Termination. ------------------ 10.1 Term. The term of this Agreement will commence as of the Effective ---- Date and, unless sooner terminated as provided hereunder, will expire upon the fifth anniversary of the Effective Date, unless extend by mutual agreement of the Parties. 10.2 Termination. ----------- 10.2.1 Change of Control. NEI shall have the right to terminate ----------------- this Agreement upon the occurrence of a Change of Control during the term of this Agreement by providing written notice of termination to Diversa within [*****] following receipt of written notice of the occurrence of such Change of Control. In the event that NEI does not terminate this Agreement under this Section 10.2.1, this Agreement will be binding upon NEI, Diversa or any successor to Diversa in such Change of Control. Diversa may notify NEI in advance of a proposed Change of Control and, if NEI approves of such Change of Control in writing or notifies Diversa in writing that it does not intend to terminate this Agreement within [*****] after such notice from Diversa, then the foregoing right of termination shall be deemed waived. 10.2.2 Mutual Consent. This Agreement may be terminated at any time -------------- by mutual written agreement of the Parties. 10.2.3 Material Breach. In the event that Diversa, or NEI commits a --------------- material breach of any of its obligations under this Agreement or the Joint Venture Agreement and such party fails (i) to remedy that breach within [*****] after receiving written notice thereof from the other party or parties or (ii) to commence dispute resolution pursuant to Section 11.3, within [*****] after receiving written notice of that breach from the other party or parties, the non-breaching party or parties may immediately terminate this Agreement, the Joint Venture Agreement and the Novartis License Agreement, as applicable, upon written notice to the breaching party. 10.2.4 Breach of Payment Obligations. In the event that a party ----------------------------- fails to make timely payment of any amounts due under this Agreement, the Joint Venture Agreement or the 18. *Confidential Treatment Requested Novartis License Agreement within ten (10) business days after demand therefor, the non-breaching party or parties may terminate this Agreement, the Joint Venture Agreement and the Novartis License Agreement, as applicable, upon thirty (30) days prior written notice, unless the breaching party cures such breach by paying all past-due amounts within such thirty (30) day notice period, provided that the breaching party shall be entitled to use such cure provision no more than once in any twelve (12) month period. 10.3. Disposition of Confidential Information. In the event of --------------------------------------- termination or expiration of this Agreement, the Parties shall return or destroy all forms of Confidential Information of the other Party provided to them under this Agreement, within thirty (30) days after such termination or expiration; provided, however, that each Party may retain one copy of such Confidential Information for the sole purpose of use in any litigation resulting from this Agreement or the activities undertaken pursuant to this Agreement; and further provided that each Party shall retain full use of Confidential Information as provided under this Agreement to the extent it relates to any of the rights accrued to a Party hereunder prior to such termination or expiration. 10.4. Effect of Termination or Expiration. Termination or expiration of ----------------------------------- this Agreement shall not relieve the parties of any obligation accruing prior to such termination or expiration, nor shall it encumber any of the rights accrued to a Party hereunder prior to such termination or expiration. Diversa will not take any action to prevent NEI or its Affiliates from commercializing, subsequent to termination or expiration of this Agreement, any Transferred Biomolecule or Commercial Development Biomolecule in the Animal Feed Field or the Agricultural Product Processing Field, or any other field defined in a License related to such Transferred Biomolecule or Commercial Development Biomolecule pursuant to Section 4.1 herein. The financial obligations of each Party with respect to Transferred Biomolecules or Commercial Development Biomolecules under this Agreement and any License executed pursuant to Section 4.1, or the Joint Venture Agreement shall survive termination or expiration of this Agreement but only to the extent that the Parties mutually agree through good faith negotiation to payment at royalty rates equivalent under the Joint Venture Agreement. The provisions of Sections 5.1, 5.2, 5.3, 7, 8.2, 8.3, 9, 10.3, 10.4 and 11 shall survive the expiration or termination of this Agreement. Termination of this Agreement pursuant to Section 10.2 shall not limit any other rights and remedies of the terminating party. 11. Miscellaneous. -------------- 11.1. Relationship of Parties. Nothing in this Agreement is intended ----------------------- or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the parties. No party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein. 11.2. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Delaware other than those provisions governing conflicts of law. 19. 11.3. Dispute Resolution Procedures. Any controversy, claim or dispute ----------------------------- dispute arising out of or relating to this Agreement shall be resolved in accordance with Section 10.3 of the Joint Venture Agreement. 11.4. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 11.5. Headings. All headings in this Agreement are for convenience only --------- and shall not affect the meaning of any provision hereof. 11.6. Binding Effect. This Agreement and all rights and obligations --------------- hereunder shall inure to the benefit of and be binding upon the Parties, their Affiliates, and their respective lawful successors and assigns (including, without limitation, any successor to Diversa upon a Change of Control subject to Section 10.2.1). 11.7. Assignment. Except as otherwise provided herein, neither this ----------- Agreement nor any interest hereunder will be assignable in part or in whole by any Party without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement to any of its Affiliates or to any successor by merger or sale of substantially all of its business to which this Agreement relates (provided that, in the event of such merger or sale, no intellectual property of any acquiring corporation that is not a Party shall be included in the technology licensed hereunder). This Agreement will be binding upon the successors and permitted assigns of the Parties. Any assignment which is not in accordance with this Section will be void. 11.8. Notices. All notices, requests, demands and other communications -------- communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given upon the date of receipt if delivered by hand, recognized international overnight courier, confirmed facsimile transmission, or registered or certified mail, return receipt requested, postage prepaid to the following addresses or facsimile numbers: If to NEI: If to Diversa: Novartis Enzymes, Inc. Diversa Corporation [*****] 10665 Sorrento Valley Road [*****] San Diego, California 92121 [*****] Attention: Carolyn Erickson [*****] Tel: (858) 453-7020 [*****] Fax: (858) 453-7032 20. *Confidential Treatment Requested with a copy to: with a copy to: Novartis Seeds AG Cooley Godward LLP Schwarzwaldallee 215 4365 Executive Drive, Suite 1100 CH-4002 San Diego, CA 9221 Attention: Verena Trutmann Attention: L. Kay Chandler, Esq. Tel: (+4161) 697-2375 Tel: (858) 550-6000 Fax: (+4161) 697-2590 Fax: (858) 453-3555 Either party may change its designated address and facsimile number by notice to the other party in the manner provided in this Section. 11.9. Amendment and Waiver. This Agreement may be amended, supplemented, -------------------- or otherwise modified only by means of a written instrument signed by both parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 11.10. Severability. In the event that any provision of this Agreement ------------ shall, for any reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and the parties shall negotiate in good faith to modify the Agreement to preserve (to the extent possible) their original intent. 11.11. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties with respect to the subject matter hereof and supersedes all prior agreements or understandings between the parties relating to the subject matter hereof. 11.12. Regulatory Filings. NEI shall have sole responsibility for making ------------------ all regulatory filings worldwide, including, without limitation, all filings required by the Biodiversity Convention and other legislation related to the ownership or use of biological resources with respect to a Product. Diversa will cooperate to provide information required to make and maintain such filings, as appropriate. 11.13. Force Majeure. Neither party shall be held liable or responsible ------------- to the other party, nor be deemed to be in breach of this Agreement, for failure or delay in fulfilling or performing any provisions of this Agreement (other than payment obligations) when such failure or delay is caused by or results from any cause whatsoever outside the reasonable control of the party concerned including, but not limited to, fire, explosion, breakdown of plant, damage to plant material by pests or otherwise, strike, lock-out, labor disputes, casualty or accident, lack or failure of transportation facilities, flood, lack or failure of sources of supply or of labor, raw materials or energy, civil commotion, embargo, any law, regulation, decision, demand or requirement of any national or local government or authority (in each case, "Force Majeure"). The party claiming relief shall, without delay, notify the other party by registered airmail or by telefax of the interruption and cessation thereof and shall use its best efforts to remedy the effects of such hindrance with all reasonable dispatch. The onus of proving that any such Force Majeure 21. event exists shall rest upon the party so asserting. During the period that one party is prevented from performing its obligations under this Agreement due to a Force Majeure event, the other party may, in its sole discretion, suspend any obligations that relate thereto. Upon cessation of such Force Majeure event the parties hereto shall use their best efforts to make up for any suspended obligations. If such Force Majeure event is anticipated to continue, or has existed for nine (9) consecutive months or more, this Agreement may be forthwith terminated by either party by registered airmail or by telefax. In case of such termination the terminating party will not be required to pay to the other party any indemnity whatsoever. IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement as a sealed instrument effective as of the date first above written. NOVARTIS ENZYMES, INC. DIVERSA CORPORATION By: /s/ Gary Pace /s/ Jay M. Short -------------------------- ------------------------------------- Gary M. Pace Jay M. Short Vice President & Secretary President and Chief Executive Officer 21. EX-23.1 15 CONSENT OF ERNST AND YOUNG EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Information" and "Experts" and to the use of our report dated January 12, 2000, except for Note 11, as to which the date is February 8, 2000, in Amendment No. 4 to the Registration Statement (Form S-1, Registration No. 333- 92853) and related Prospectus of Diversa Corporation for the registration of shares of its common stock. /s/ ERNST & YOUNG LLP San Diego, California February 8, 2000 -----END PRIVACY-ENHANCED MESSAGE-----