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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.
|-- | ------------------------------------------------------------------------------------------------------




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DIVERSA CORPORATION





INDEX





Page No.PART IFINANCIAL INFORMATIONItem 1.

Financial Statements (Unaudited)Condensed Balance Sheets as of September 30, 2001 and December 31, 2000


3Condensed Statements of Operations for the three and nine months ended September 30,      2001 and 2000


4Condensed Statements of Cash Flows for the nine months ended September 30, 2001      and 2000


5Notes to Condensed Financial Statements


6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations


8Item 3.

Quantitative and Qualitative Disclosures about Market Risk


12PART IIOTHER INFORMATIONItem 1.

Legal Proceedings


13Item 2.

Changes in Securities and Use of Proceeds


13Item 3.

Defaults Upon Senior Securities


13Item 4.

Submission of Matters to a Vote of Securities Holders


13Item 5.

Other Information


13Item 6.

Exhibits and Reports on Form 8-K


13SIGNATURES


14




2


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PART IFINANCIAL INFORMATION





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)ASSETSCurrent assets:Cash and cash equivalents


$  79,128




$  62,382Short-term investments


125,438




148,874Accounts receivable


1,171




587Other current assets


2,487




5,849Total
current assets


208,224




217,692Property and equipment, net


21,159




14,903Acquired technology rights, net


2,214




2,331Other assets


1,492




335Total
assets


$233,089




$235,261LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable


$    3,426




$    2,002Accrued liabilities


4,537




6,108Deferred revenue


8,070




8,101Current portion of capital lease obligations


1,013




819Current portion of notes payable


3,193




1,439Total
current liabilities


20,239




18,469Capital lease obligations, less current portion


1,975




2,688Notes payable, less current portion


10,151




5,494Deposit from sublessee







300Long-term deferred revenue


9,725




14,236Stockholders 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




35Additional paid-in capital


263,234




260,929Deferred compensation


(989
)



(2,137
)Accumulated deficit


(73,890
)



(65,725
)Accumulated other comprehensive income


2,609




972Total
stockholders equity


190,999




194,074Total
liabilities and stockholders equity


$233,089




$235,261


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|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


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DIVERSA CORPORATION





CONDENSED STATEMENTS OF OPERATIONS


(In thousands, except per share data)


(Unaudited)





Three Months Ended September 30,

Nine Months Ended September 30,2001

2000

2001

2000Revenue:Collaborative

$  8,783


$  5,202


$25,058


$14,267Grant and product

277


376


979


1,090Total revenue

9,060


5,578


26,037


15,357Operating costs and expenses:Research and development

11,442


6,726


32,499


16,823Selling, general and administrative

2,350


1,875


7,024


4,885Non-cash, stock-based compensation charges

586


1,647


2,009


9,019Total operating costs and expenses

14,378


10,248


41,532


30,727Loss from operations

(5,318
)

(4,670
)

(15,495
)

(15,370
)Interest income, net

2,285


3,337


8,811


7,847Other income (expense), net

(849
)

22


(1,480
)

38Loss before income taxes

(3,882
)

(1,311
)

(8,164
)

(7,485
)Provision for income taxes




75





225Net loss before preferred dividends

(3,882
)

(1,386
)

(8,164
)

(7,710
)Dividends on preferred stock










310Net 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


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DIVERSA CORPORATION





CONDENSED STATEMENTS OF CASH FLOWS


(In thousands)


(Unaudited)





Nine Months Ended September 30,2001

2000Operating 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


1,689Dividends
to Series A, B and D preferred stockholders




310Non-cash,
stock based compensation charges

2,009


9,019Changes
in operating assets and liabilities:Accounts receivable

(584
)

14,819Other assets

3,298


(863
)Accounts payable and
accrued expenses

(147
)

2,666Deferred revenue

(4,542
)

3,886Net cash provided by (used in) operating activities

(4,050
)

23,506Investing activities:Purchases of short-term investments

(61,375
)

(122,570
)Sales and maturities of short-term investments

86,448


8,458Purchases 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


185,640Principal payments on capital leases

(519
)

(453
)Principal payments on notes payable

(1,264
)

(108
)Advances under capital lease obligations




819Advances under notes payable

7,675


5,029Repayment of notes receivable from stockholders




36Net cash provided by financing activities

7,335


190,963Net increase in cash and cash equivalents

16,746


90,774Cash and cash equivalents at beginning of period

62,382


2,490Cash and cash equivalents at end of period

$79,128


$   93,264





See accompanying notes to condensed financial statements.




5


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DIVERSA CORPORATION





NOTES TO CONDENSED FINANCIAL STATEMENTS


(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


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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

2000Net 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


29,602Proforma 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

2000Net loss before preferred dividends

$(3,882
)

$(1,386
)

$(8,164
)

$(7,710
)Other comprehensive gain:Unrealized gain on investments

986


445


1,637


328Comprehensive loss

$(2,896
)

$    (941
)

$(6,527
)

$(7,382
)




7


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Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations





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


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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


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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


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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.







11


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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.





Item 3.     Quantitative and Qualitative Disclosures about Market Risk





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.




12


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PART IIOTHER INFORMATION





Item 1.    Legal Proceedings





None





Item 2.    Changes in Securities and Use of Proceeds





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.





Item 3.    Defaults Upon Senior Securities





None





Item 4.    Submission of Matters to a Vote of Securities Holders





None





Item 5.    Other Information





None





Item 6.    Exhibits and Reports on Form 8-K





None




13


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SIGNATURES





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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