0000898430-01-503170.txt : 20011101 0000898430-01-503170.hdr.sgml : 20011101 ACCESSION NUMBER: 0000898430-01-503170 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011030 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29173 FILM NUMBER: 1769447 BUSINESS ADDRESS: STREET 1: 4955 DIRECTORS PLACE CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 858-526-5000 MAIL ADDRESS: STREET 1: 4955 DIRECTORS PLACE CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 d10q.htm FORM 10-Q Form 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
          For the quarterly period ended September 30, 2001.
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File number 000-29173
 
DIVERSA CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
22-3297375
(I.R.S. Employer
Identification Number)
4955 Directors Place, San Diego, California
(Address of principal executive offices)
 
92121
(Zip Code)
 
Registrant’s telephone number, including area code is (858) 526-5000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    ¨  No
 
Th
e number of shares of the Registrant’s Common Stock outstanding as of October 26, 2001 was 35,458,912.
 
 
DIVERSA CORPORATION
 
INDEX
 
       
Page No.
PART I—FINANCIAL INFORMATION
        
Item 1.
  
Financial Statements (Unaudited)
        
         
3
 

         
4
 

         
5
 
         
6
 
Item 2.
         
8
 
Item 3.
         
12
 
PART II—OTHER INFORMATION
        
Item 1.
         
13
 
Item 2.
         
13
 
Item 3.
         
13
 
Item 4.
         
13
 
Item 5.
         
13
 
Item 6.
         
13
 
      
14
 

2
 
 
Item 1.    Financial Statements
 
DIVERSA CORPORATION
 
CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
  
September 30,
2001
  
December 31,
2000
  
(Unaudited)
  
(Note)
ASSETS
    
 
      
 
 
Current assets:
    
 
      
 
 
          Cash and cash equivalents
    
$  79,128
      
$  62,382
 
          Short-term investments
    
125,438
      
148,874
 
          Accounts receivable
    
1,171
      
587
 
          Other current assets
    
2,487
      
5,849
 
    
      
 
                   Total current assets
    
208,224
      
217,692
 
Property and equipment, net
    
21,159
      
14,903
 
Acquired technology rights, net
    
2,214
      
2,331
 
Other assets
    
1,492
      
335
 
    
      
 
                   Total assets
    
$233,089
      
$235,261
 
    
      
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
 
      
 
 
Current liabilities:
    
 
      
 
 
          Accounts payable
    
$    3,426
      
$    2,002
 
          Accrued liabilities
    
4,537
      
6,108
 
          Deferred revenue
    
8,070
      
8,101
 
          Current portion of capital lease obligations
    
1,013
      
819
 
          Current portion of notes payable
    
3,193
      
1,439
 
    
      
 
                   Total current liabilities
    
20,239
      
18,469
 
             
Capital lease obligations, less current portion
    
1,975
      
2,688
 
Notes payable, less current portion
    
10,151
      
5,494
 
Deposit from sublessee
    
—  
      
300
 
Long-term deferred revenue
    
9,725
      
14,236
 
             
Stockholders’ equity:
    
 
      
 
 
          Common stock, $0.001 par value, 65,000,000 shares authorized,
               35,416,916 and 34,890,806 shares issued and outstanding at September 30,
               2001 and December 31, 2000, respectively
    
35
      
35
 
          Additional paid-in capital
    
263,234
      
260,929
 
          Deferred compensation
    
(989
)
      
(2,137
)
 
          Accumulated deficit
    
(73,890
)
      
(65,725
)
 
          Accumulated other comprehensive income
    
2,609
      
972
 
    
      
 
                   Total stockholders’ equity
    
190,999
      
194,074
 
    
      
 
                   Total liabilities and stockholders’ equity
    
$233,089
      
$235,261
 
    
      
 
Note:
 
The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
 
See accompanying notes to condensed financial statements.

3
 
DIVERSA CORPORATION
 
(In thousands, except per share data)
(Unaudited)
 
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
2001
  
2000
  
2001
  
2000
Revenue:
  
 
  
 
  
 
  
 
          Collaborative
  
$  8,783
  
$  5,202
  
$25,058
  
$14,267
          Grant and product
  
277
  
376
  
979
  
1,090
  
  
  
  
Total revenue
  
9,060
  
5,578
  
26,037
  
15,357
  
  
  
  
Operating costs and expenses:
  
 
  
 
  
 
  
 
          Research and development
  
11,442
  
6,726
  
32,499
  
16,823
          Selling, general and administrative
  
2,350
  
1,875
  
7,024
  
4,885
          Non-cash, stock-based compensation charges
  
586
  
1,647
  
2,009
  
9,019
  
  
  
  
Total operating costs and expenses
  
14,378
  
10,248
  
41,532
  
30,727
  
  
  
  
Loss from operations
  
(5,318
)
  
(4,670
)
  
(15,495
)
  
(15,370
)
Interest income, net
  
2,285
  
3,337
  
8,811
  
7,847
Other income (expense), net
  
(849
)
  
22
  
(1,480
)
  
38
  
  
  
  
Loss before income taxes
  
(3,882
)
  
(1,311
)
  
(8,164
)
  
(7,485
)
Provision for income taxes
  
—  
  
75
  
—  
  
225
  
  
  
  
Net loss before preferred dividends
  
(3,882
)
  
(1,386
)
  
(8,164
)
  
(7,710
)
Dividends on preferred stock
  
—  
  
—  
  
—  
  
310
  
  
  
  
Net loss applicable to common stockholders
  
$  (3,882
)
  
$  (1,386
)
  
$  (8,164
)
  
$  (8,020
)
  
  
  
  
Net loss per share, basic and diluted
  
$    (0.11
)
  
$    (0.04
)
  
$    (0.23
)
  
$    (0.27
)
           
Weighted average shares used in calculating basic and diluted net
loss per share
  
35,347
  
34,801
  
35,161
  
29,602
 
 
See accompanying notes to condensed financial statements.

4
 
DIVERSA CORPORATION
 
(In thousands)
(Unaudited)
 
  
Nine Months Ended
September 30,
  
2001
  
2000
Operating activities:
  
 
  
 
          Net loss applicable to common stockholders
  
$   (8,164
)
  
$     (8,020
)
          Adjustments to reconcile net loss to net cash provided by (used in) operating
               activities:
  
 
  
 
                   Depreciation and amortization
  
4,080
  
1,689
                   Dividends to Series A, B and D preferred stockholders
  
—  
  
310
                   Non-cash, stock based compensation charges
  
2,009
  
9,019
                   Changes in operating assets and liabilities:
  
 
  
 
                             Accounts receivable
  
(584
)
  
14,819
                             Other assets
  
3,298
  
(863
)
                             Accounts payable and accrued expenses
  
(147
)
  
2,666
                             Deferred revenue
  
(4,542
)
  
3,886
  
  
                                       Net cash provided by (used in) operating activities
  
(4,050
)
  
23,506
  
  
Investing activities:
  
 
  
 
          Purchases of short-term investments
  
(61,375
)
  
(122,570
)
          Sales and maturities of short-term investments
  
86,448
  
8,458
          Purchases of property and equipment
  
(10,219
)
  
(9,583
)
          Other
  
(1,393
)
  
—  
  
  
                                       Net cash provided by (used in) investing activities
  
13,461
  
(123,695
)
  
  
Financing activities:
  
 
  
 
          Net proceeds from sale of common stock
  
1,443
  
185,640
          Principal payments on capital leases
  
(519
)
  
(453
)
          Principal payments on notes payable
  
(1,264
)
  
(108
)
          Advances under capital lease obligations
  
—  
  
819
          Advances under notes payable
  
7,675
  
5,029
          Repayment of notes receivable from stockholders
  
—  
  
36
  
  
                                       Net cash provided by financing activities
  
7,335
  
190,963
  
  
Net increase in cash and cash equivalents
  
16,746
  
90,774
Cash and cash equivalents at beginning of period
  
62,382
  
2,490
  
  
Cash and cash equivalents at end of period
  
$79,128
  
$   93,264
  
  
 
See accompanying notes to condensed financial statements.

5
 
DIVERSA CORPORATION
 
(Unaudited)
 
1.    Organization and Business
 
          Diversa Corporation (the “Company”) was incorporated under the laws of the State of Delaware on December 21, 1992 and received initial funding to commence its operations in May 1994. The Company is developing and applying its proprietary technologies to discover and evolve novel genes and gene pathways from diverse sources. The Company is utilizing its fully integrated approach to develop novel enzymes and other biologically active compounds, such as orally active drugs, produced by these genes and gene pathways. The Company’s proprietary evolution technologies facilitate the optimization of genes to enable product solutions for the pharmaceutical, agricultural, chemical processing, and industrial markets.
 
2.    Basis of Presentation
 
          The accompanying unaudited condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the results of the interim periods presented, have been included. The results of operations for the interim periods are not necessarily indicative of results to be expected for any other interim period or for the year as a whole. These unaudited condensed financial statements and footnotes thereto should be read in conjunction with the audited financial statements and footnotes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.
 
          The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the condensed financial statements and related footnotes. Changes in the estimates may affect amounts reported in future periods.
 
          Certain reclassifications of prior year balances have been made to conform to the current format.
 
3.    Strategic Alliances
 
          In June 2001, the Company signed a term sheet releasing IntraBiotics Pharmaceuticals, Inc. (“IntraBiotics”) from all obligations under the Drug Discovery, Development, and License Agreement signed in January 2001. Under the term sheet and subsequent definitive release agreement signed in July 2001, IntraBiotics will make additional aggregate payments of $2.45 million to the Company in 2001, of which $1.45 million was received and recognized as revenue in July 2001. Also in July 2001, IntraBiotics issued the Company warrants to purchase 700,000 shares of IntraBiotics’s common stock at an exercise price of $2.00 per share.
 
4.    Computation of Net Loss Per Share
 
          In accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share, basic and diluted net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Pro forma net loss per common share has been computed for the nine months ended September 30, 2000 as described above, and also gives effect to the assumed conversion of preferred stock (using the “as if converted” method), which automatically converted to common stock upon completion of the Company’s initial public offering in February 2000, at the original dates of issuance.

6
 
          The following table presents the calculation of basic, diluted, and pro forma basic and diluted net loss per common share:
 
(In thousands, except per share data)
 
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
2001
  
2000
  
2001
  
2000
Net loss applicable to common stockholders
  
$   (3,882
)
  
$   (1,386
)
  
$   (8,164
)
  
$   (8,020
)
Historical net loss per common share, basic and diluted
  
$      (0.11
)
  
$      (0.04
)
  
$      (0.23
)
  
$      (0.27
)
Weighted average shares used in computing basic and diluted net loss
     per common share
  
35,347
  
34,801
  
35,161
  
29,602
Pro forma net loss per common share, basic and diluted
  
—  
  
—  
  
—  
  
$      (0.24
)
Weighted average shares used in computing pro forma basic and
     diluted net loss per common share
  
—  
  
—  
  
—  
  
33,011
 
          The Company has excluded all outstanding stock options and warrants from the calculation of diluted net loss per common share because all such securities are antidilutive for all applicable periods presented.
 
5.    Recently Issued Accounting Standards
 
          In July 2001, the Financial Accounting Standards Board issued FASB Statements Nos. 141 and 142, Business Combinations and Goodwill and Other Intangible Assets (“FAS 141” and “FAS 142,” respectively). FAS 141 replaces Accounting Principles Board Opinion No. 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted under certain circumstances. The adoption of these standards is not expected to have a material impact on the Company’s results of operations and financial position.
 
6.    Comprehensive Loss
 
          FASB Statement No. 130, Reporting Comprehensive Income (“FAS 130”), requires reporting and displaying comprehensive income (loss) and its components which, for the Company, includes net loss and unrealized gains and losses on investments. In accordance with FAS 130, the accumulated balance of other comprehensive income is disclosed as a separate component of stockholders’ equity.
 
          For the three and nine months ended September 30, 2001 and 2000, the comprehensive loss consisted of:
 
(In thousands)
 
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
2001
  
2000
  
2001
  
2000
Net loss before preferred dividends
  
$(3,882
)
  
$(1,386
)
  
$(8,164
)
  
$(7,710
)
Other comprehensive gain:
  
 
  
 
  
 
  
 
          Unrealized gain on investments
  
986
  
445
  
1,637
  
328
  
  
  
  
Comprehensive loss
  
$(2,896
)
  
$    (941
)
  
$(6,527
)
  
$(7,382
)
  
  
  
  

7
 
 
          The statements in this quarterly report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. These include statements related to investments in our core technologies, the discovery, development, and/or optimization of novel genes, enzymes, and other biologically active compounds, the development and commercialization of products and product candidates, the benefits to be derived from our current and future strategic alliances, and our estimates regarding future revenue, profitability, and capital requirements, all of which are prospective. Such statements are only predictions and reflect our expectations and assumptions as of the date of this report based on currently available operating, financial, and competitive information. The actual events or results may differ materially from those projected in such forward-looking statements. Actual results could differ materially from those currently anticipated due to a number of factors, including those identified below and in our other publicly available documents. These forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any of these forward-looking statements after the filing of this quarterly report to reflect actual results, changes in our expectations, or otherwise.  
 
          The following information should be read in conjunction with the condensed financial statements and the notes thereto included in Item 1 of this quarterly report. We also urge readers to review and consider our disclosures describing various factors that affect our business in our Annual Report on Form 10-K for the year ended December 31, 2000, including the disclosures under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors Related to Our Business,” as well as the audited financial statements and notes thereto contained in such report.  
 
Overview  
 
          We were incorporated in December 1992 and began operations in May 1994. We are developing and applying proprietary technologies to discover and evolve novel genes and gene pathways from diverse sources. We use our fully integrated approach to develop novel enzymes and other biologically active compounds, such as orally active drugs, produced by these genes and gene pathways. Our proprietary evolution technologies facilitate the optimization of genes to enable product solutions for the pharmaceutical, agricultural, chemical processing, and industrial markets. To date, we have generated revenue from research collaborations, government grants, and enzyme product sales and royalties. Our strategic partners include Aventis Animal Nutrition S.A., Celera Genomics, The Dow Chemical Company, GlaxoSmithKline plc, Invitrogen Corporation, and Syngenta Biotechnology, Inc. We have also formed joint ventures with The Dow Chemical Company, named Innovase LLC, and with Syngenta Seeds AG, named Zymetrics, Inc. Our current government grants are from the National Science Foundation, the National Institute of General Medical Sciences, the National Cancer Institute, and the National Institute of Environmental Health Sciences. Our product related revenues to date are comprised of sales of research kits and our oil and gas recovery enzymes, Pyrolase™ 160 and Pyrolase 200, and royalties from sales of ThermalAce™, a DNA polymerase licensed to Invitrogen Corporation for molecular biology research applications.  
 
          We have dedicated substantial resources to the development of our proprietary technologies, which include capabilities for sample collection from the world’s microbial populations, generation of environmental gene libraries, screening of these libraries using ultra high-throughput methods capable of analyzing more than one billion genes per day, and optimization based on our gene evolution technologies.  
 
          Our revenue has increased significantly since our inception, and for the quarter ended September 30, 2001, revenue grew 62% compared to the quarter ended September 30, 2000. This increase was primarily attributable to research funding received under our strategic collaboration agreements. Research revenues are earned and recognized on a percentage of completion basis as research costs are incurred in accordance with the provisions of each strategic alliance agreement. Fees received to initiate research projects are deferred and recognized over the research period. Fees received for exclusivity in a field are deferred and recognized over the period of the

8  
exclusivity. Milestone payments are recognized when earned, as evidenced by written acknowledgement from the collaborator, provided that:
 
 
•
 
the milestone event is substantive and its achievement was not reasonably assured at the inception of the agreement; and
 
 
•
 
our performance obligations after the milestone achievement will continue to be funded by the collaborator at a level comparable to the level before the milestone achievement.
 
Our strategic partners often pay us before we recognize the revenue, and these payments are deferred until earned. As of September 30, 2001, we had current and long-term deferred revenue totaling $17.8 million.
 
          We have incurred substantial operating losses since our inception. As of September 30, 2001, our accumulated deficit was $73.9 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
 
Three Months Ended September 30, 2001 and 2000
 
 
Revenue
 
          Our revenue increased $3.5 million to $9.1 million for the quarter ended September 30, 2001 from $5.6 million for the same period in 2000. This increase was primarily attributable to additional research funding received under our strategic collaboration agreements. The two most significant components of third quarter 2001 revenues are related to research funding from Zymetrics, Inc., our agricultural products contract joint venture with Syngenta Seeds AG, and Innovase LLC, our 50/50 industrial enzyme joint venture with The Dow Chemical Company. Revenue from collaborations accounted for 97% and 93% of total revenue for the quarters ended September 30, 2001 and 2000, respectively.
 
 
Research and Development Expenses
 
          Our research and development expenses increased $4.7 million to $11.4 million for the quarter ended September 30, 2001 from $6.7 million for the same period in 2000. This increase was primarily attributable to expansion of collaborative research activities and investment in several key internal products and technologies. We expect that our research and development expenses will continue to increase substantially to support our collaborative research activities and our internal products and technologies.
 
 
Selling, General and Administrative Expenses
 
          Our selling, general and administrative expenses increased $0.5 million to $2.4 million for the quarter ended September 30, 2001 from $1.9 million for the same period in 2000. This increase was primarily attributable to the expansion of our business development and marketing efforts. We expect that our selling, general and administrative expenses will continue to increase to support our further growth.
 
 
Non-Cash, Stock-Based Compensation Charges
 
          Deferred compensation for options granted to employees has been determined as the difference between the exercise price and the fair value of our common stock 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.

9
 
          For the quarter ended September 30, 2001, we recorded amortization of deferred compensation of approximately $0.3 million, compared to $0.9 million for the quarter ended September 30, 2000. We also recorded non-cash compensation charges of $0.3 million in the quarter ended September 30, 2001 for stock options granted to consultants.
 
 
Interest Income, net
 
          Interest income on cash and short-term investments decreased to $2.6 million for the quarter ended September 30, 2001 from $3.5 million for the same period in 2000, primarily due to lower interest rates. Interest expense increased $0.1 million to $0.3 million for the quarter ended September 30, 2001, primarily due to interest on borrowings under our equipment financing line of credit.
 
 
Other Income (Expense), net
 
          We recorded other expenses of $0.9 million for the quarter ended September 30, 2001 compared to other income of $22,000 for the same period in 2000. The increase in other expenses is primarily attributable to our share of the net loss of Innovase LLC, our joint venture with The Dow Chemical Company, which we have accounted for using the equity method.
 
 
Provision for Income Taxes
 
          During the quarter ended September 30, 2001, we incurred a net operating loss and, accordingly, did not record a provision for income taxes. We recorded a provision for income taxes of $75,000 for the quarter ended September 30, 2000 based on our estimated tax liability for 2000, assuming we were subject to alternative minimum taxes under which net operating loss carryforwards were available to offset 90% of our tax liability.
 
Nine Months Ended September 30, 2001 and 2000
 
 
Revenue
 
          Our revenue increased $10.6 million to $26.0 million for the nine months ended September 30, 2001 from $15.4 million for the same period in 2000. This increase was primarily attributable to additional research funding received under our strategic collaboration agreements. Revenue from collaborations accounted for 96% and 93% of total revenue for the nine months ended September 30, 2001 and 2000, respectively.
 
 
Research and Development Expenses
 
          Our research and development expenses increased $15.7 million to $32.5 million for the nine months ended September 30, 2001 from $16.8 million for the same period in 2000. This increase was primarily attributable to expansion of collaborative research activities and investment in several key internal products and technologies.
 
 
Selling, General and Administrative Expenses
 
          Our selling, general and administrative expenses increased $2.1 million to $7.0 million for the nine months ended September 30, 2001 from $4.9 million for the same period in 2000. This increase was primarily attributable to the expansion of our business development and marketing efforts as well as increased costs associated with being a public company.
 
 
Non-Cash, Stock-Based Compensation Charges
 
          For the nine months ended September 30, 2001, we recorded amortization of deferred compensation of approximately $1.1 million, compared to amortization of deferred compensation of $3.2 million for the nine

10
months ended September 30, 2000. We also recorded aggregate non-cash compensation charges of $0.9 million for the nine months ended September 30, 2001 for stock options granted to consultants.
 
 
Interest Income, net
 
          Interest income on cash and short-term investments increased to $8.8 million for the nine months ended September 30, 2001 from $8.2 million for the same period in 2000, due to higher average cash balances following our initial public offering in February 2000. Also included in interest income for the nine months ended September 30, 2001 was $0.8 million of amortization related to the discount on a receivable that was collected in June 2001. Interest expense was $0.8 million and $0.4 million for the nine months ended September 30, 2001 and 2000, respectively. The increase in interest expense was due to interest on borrowings under our equipment financing line of credit.
 
 
Other Income (Expense), net
 
          We recorded other expenses of $1.5 million for the nine months ended September 30, 2001 compared to other income of $38,000 for the same period in 2000. The increase in other expenses is primarily attributable to our share of the net loss of Innovase LLC, our joint venture with The Dow Chemical Company, which we have accounted for using the equity method.
 
 
Provision for Income Taxes
 
          During the nine months ended September 30, 2001, we incurred a net operating loss and, accordingly, did not record a provision for income taxes. We recorded a provision for income taxes of $225,000 for the nine months ended September 30, 2000 based on our estimated tax liability for 2000, assuming we were subject to alternative minimum taxes under which net operating loss carryforwards were available to offset 90% of our tax liability.
 
Liquidity and Capital Resources
 
          Since inception, we have financed our business primarily through the sale of common and preferred stock and funding from strategic partners and government grants. Our strategic partners have provided us with $77.0 million in funding from our inception through September 30, 2001, and are also committed to fund at least an additional $54.1 million through 2005 under existing agreements, excluding milestone payments, license and commercialization fees, and royalties or profit sharing. As of September 30, 2001, we had cash, cash equivalents and short-term investments of approximately $204.6 million. Our short-term investments as of such date consisted of U.S. Treasury and government agency obligations and investment-grade corporate obligations. In September 2001, we entered into a new equipment financing line of credit with a lender to finance up to $5.0 million in equipment purchases through June 2002. As of September 30, 2001, we had $1.6 million available for future borrowing.
 
          We relocated to our new executive offices and research and development facility in November 2000. As part of the move, we constructed a pilot manufacturing plant to be used for process development activities. Our costs for property and equipment relating to the pilot manufacturing plant were approximately $3.6 million, all of which we funded through working capital and our then-existing equipment financing line of credit. We entered into a lease agreement for our second research and development facility to be built to our specifications. The facility is expected to be completed in the first quarter of 2002. As of September 30, 2001, we had commitments of approximately $4.0 million for property and equipment related to the new facility.
 
          Our operating activities used cash of $3.7 million for the nine months ended September 30, 2001. Our cash used by operating activities consisted primarily of cash used to fund operations.
 
          Our investing activities provided cash of $13.5 million for the nine months ended September 30, 2001. Our investing activities consisted primarily of sales and maturities of short-term investments offset by purchases of short-term investments and property and equipment.
 

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          Our financing activities provided $6.9 million for the nine months ended September 30, 2001. Our financing activities consisted primarily of advances under notes payable and proceeds from the exercise of stock options and warrants, partially offset by payments on notes payable.
 
          We expect that our current cash and cash equivalents, short-term investments, and funding from existing strategic alliances and grants will be sufficient to fund our operations for the foreseeable future. This estimate is a forward-looking statement that involves risks and uncertainties. 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 maintain our strategic alliances and establish new strategic alliance relationships, our ability, alone or with our strategic partners, to commercialize products successfully, and competing technological and market developments. Therefore, it is possible that we may seek additional financing in the future, whether through private or public equity offerings, debt financings, or strategic alliances, which may not be available on terms favorable to us, if at all. In addition, if we enter into financing arrangements in the future, such arrangements could dilute our stockholders’ ownership interests and adversely affect their rights.
 
 
          Our exposure to market risk for changes in interest rates is limited 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 new debt 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 decrease the fair value of our interest sensitive financial instruments at September 30, 2001 and December 31, 2000 by $1.1 million and $1.4 million, respectively. Declines in interest rates over time will reduce our interest income, while increases in interest rates over time will increase our interest expense.

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PART II—OTHER INFORMATION  
 
 
          None  
 
 
          Our Registration Statement on Form S-1 (File No. 333-92853) relating to the initial public offering of our common stock was declared effective by the Securities and Exchange Commission on February 11, 2000. Upon completion of our initial public offering, we received net proceeds of $184.7 million after expenses. From the time of receipt through September 30, 2001, we have continued to invest the net proceeds from the offering in cash equivalents and short-term investments.  
 
 
          None  
 
 
          None  
 
 
          None  
 
 
          None  

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          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
DI
VERSA CORPORATION
 
Da
te: October 29, 2001
 
/s/  
   KARIN EASTHAM      
 
Ka
rin Eastham
 
Sen
ior Vice President, Finance,
 
Ch
ief Financial Officer and Secretary
 
(Pr
incipal Financial and Accounting Officer)

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