home site map contact us
Deltagen
about deltagen
target discovery and validation
drug discovery
drug metabolism
pre clinical development
investor resources
news room

Other Information


MD&A and Risk Factors - Full-Year 2005
 

December 31, 2005


Management's Discussion and Analysis

of Financial Conditions and Results of Operations

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS*

The audited full-year 2005 consolidated balance sheet for the Company has been posted on the Company's website. Although adjustments to the financial results for 2005 have been made, the Company has not updated and does not intend to update Management's Discussion & Analysis and Risk Factors for 2005. Adjustments to the 2005 and first quarter 2006 financial results are discussed in Notes to the Financial Statements for the second quarter of 2006, which will be posted on the Company's website.

This report contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

  .   the marketing and sales of our products and services;

  .   our ability to sustain licensing and other contract-based revenues;

  .   the benefits of knockout mice programs and, in particular, our technologies and products, to the pharmaceutical industry;

  .   the increasing competition we face in the field of knockout mice from both commercial and government organizations;

  .   the impact of our recent NIH Contract on future business;

  .   the requirements of pharmaceutical and biotechnology companies;

  .   our future revenues and profitability;

  .   limitations or failures in the drug discovery, development and approval processes by our partners and collaborators;

  .   our patent applications and licensed technologies;

  .   our ability to attract customers and establish licensing and other agreements;

  .   our ability to successfully execute our business plan and to meet contractual obligations, in view of the Company's limited staff; and

  .   liquidity and capital resources.

In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our estimates and assumptions only as of the date of this report.

You should read this report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE NOTES ACCOMPANYING THE FINANCIAL STATEMENTS.

1. History and Business of the Company

a. Business Overview and Major Pre-Petition Events

At its inception, Deltagen's goal was to become a leader in providing in vivo derived mammalian gene function information to the pharmaceutical industry to help define the function and disease relevance of mammalian genes for the purposes of discovering and validating novel drug targets. To that end, the Company embarked on an effort to establish a high-throughput knockout ("KO") mouse production and analysis operation, in which mice have had a single gene targeted for deletion (i.e., knocked out) and have been studied to determine phenotypic changes in the mice attributable to the gene deletion.

Deltagen built its production "pipeline" upon a technology known as homologous recombination, in which a specific gene of interest is selectively knocked out. This technology is contrasted with random knockout technologies, such as chemical or other mutagenesis and gene trapping techniques, which have the advantage of being more rapid, but which lead to random and less reliable mutations. In homologous recombination, a targeting construct or vector is created with a sequence that will lead to functional deletion of the target gene sequence. The construct is introduced into a mouse embryonic stem ("ES") cell. ES cells derived from a successful recombination event are then injected into a mouse blastocyst, which is then implanted into a pseudopregnant female mouse. Chimeric progeny containing the homologously recombined DNA in their germ cells can be used to breed animals in which all cells of the animal contain the homologously recombined DNA. The KO mouse lines can be maintained as live mice through successive rounds of breeding, or can be cryopreserved as embryos. Mice can also be regenerated from frozen sperm obtained from the KO mice or from the selected ES cells or embryos that are frozen.

The Company built a proprietary database called DeltaBase to store the comprehensive phenotypic data obtained from analysis and observation of the KO mice. DeltaBase was designed to accommodate data relating to 250 knockout mouse lines per year, to be released to DeltaBase subscribers on a quarterly basis at the rate of 62-63 targets per quarter. DeltaBase is accessed and manipulated through customized software developed by Deltagen referred to as DeltaDiscoveryT.

Deltagen marketed DeltaBase to the pharmaceutical and biotechnology industries as a means to help define the role that genes play in biological processes and disease. The genes analyzed in DeltaBase were selected based upon their relevance and usefulness as drug targets. Phenotypic data were generated by comprehensively studying knockout mice through a standardized, detailed and extensive analysis program in order to determine the function and role that a particular gene plays in the mouse and that gene's suitability as a drug target. In addition to accessing target validation data, DeltaBase subscribers have had access to the knockout mice used to generate the data contained in DeltaBase. Deltagen started commercializing DeltaBase in September 2000.

In Spring 2000, after receiving three initial rounds of private financing, Deltagen prepared to go public. Prior to Deltagen's planned initial public offering, Deltagen's principal competitor, Lexicon Genetics Incorporated ("Lexicon"), based in The Woodlands, Texas, instituted a patent infringement suit against Deltagen. Deltagen's initial public offering occurred in August 2000, when Deltagen's stock began trading on the Nasdaq stock exchange.

As part of its initial public offering, Deltagen raised about $120 million on the issuance of 15 million shares. Since that time, Deltagen has issued additional shares under its equity incentive plans, through private equity placements and in connection with acquisitions of several companies. At present, there are approximately 39 million outstanding shares of Deltagen stock.

In its litigation against Deltagen, Lexicon alleged that Deltagen had infringed U.S. Patent 5,789,215 (the "'215 Patent"), a patent directed to the use of so-called "isogenic DNA" in homologous recombination. Deltagen believed that the '215 patent was invalid and unenforceable. Deltagen asserted antitrust and business tort counterclaims against Lexicon.

Deltagen's disputes with Lexicon were settled in September 2001. The settlement resolved the patent infringement action over the '215 patent and another patent infringement suit against Deltagen on patents referred to as the Capecchi patents, which involved positive-negative selection methods. As part of the settlement, all litigation was withdrawn and Deltagen and Lexicon entered into a Sublicense Agreement, which provided for cross-licensing of the patents of each company, and a DeltaBase Collaboration Agreement, which authorized Lexicon to gain access to DeltaBase and Deltagen's knockout mouse materials.

Deltagen had three primary subscribers to DeltaBase: (1) Glaxo Group Limited and GlaxoSmithKline Research and Development Limited (together, "GSK"); (2) Pfizer Inc ("Pfizer"); and (3) Merck & Co., Inc. ("Merck"). The DeltaBase agreements provided each of these companies with the right to access DeltaBase information on gene function and validated gene targets for a specified subscription term and, if elected, extended access periods. Deltagen delivered the first quarterly release of DeltaBase to GSK and Pfizer in September 2000. Deltagen entered into a DeltaBase agreement with Merck in February 2002.

Beginning February 2001, Deltagen commenced operations of a European subsidiary, Deltagen Europe S.A. ("Deltagen Europe"), based in Strasbourg, France. In connection with this European subsidiary, Deltagen loaned approximately $2 million to a development group called ALSABAIL for the purchase of a parcel of land and the design and development of facilities on that parcel. The land was purchased and the facilities were designed, but there was no construction.

In July 2001, Deltagen acquired Arcaris, Inc. ("Arcaris"), which was renamed Deltagen Proteomics Inc. Located in Salt Lake City, Utah, Arcaris had developed technologies consisting of genetic, proteomic and cell-biological systems for the identification and validation of drug targets and the creation of small molecule screens. Deltagen intended to use the information generated through these technologies to advance the discovery of new disease targets by defining the role of novel non-traditional targets within intracellular pathways with particular relevance to oncology, viral and infectious diseases. Additionally, the technologies developed by Arcaris were intended to facilitate the rapid development of small molecule screens against identified targets.

In August 2001, Deltagen entered into a secreted protein agreement with Eli Lilly and Company ("Lilly") to evaluate, and potentially develop and commercialize, therapeutic secreted proteins. Under the terms of the agreement, Lilly was to provide potential targets from its secreted protein pipeline for which Deltagen would further evaluate the therapeutic potential in mammalian models. Approximately 40 targets were involved in the collaboration. Among those secreted proteins with potential therapeutic value, each company had the right to select proteins for commercial development, with each company receiving royalties based on sales of therapeutic products. The agreement provided Lilly with certain acquisition, co-promotion, co-marketing and profit-sharing options with respect to therapeutic products developed and commercialized by Deltagen. The agreement also provided Deltagen with certain co-promotion, co-development and profit-sharing opportunities. Deltagen's efforts to generate and study KO mice under this collaboration ceased as a result of Deltagen's bankruptcy filing. Deltagen's rights under this collaboration were transferred to Lilly during the Chapter 11 Case, subject to certain royalty obligations to Deltagen.

In October 2001, Deltagen entered into a collaboration agreement with Hyseq Inc., now called Nuvelo, Inc. ("Nuvelo"), to research, develop and commercialize biopharmaceutical products based on secreted proteins. Under the terms of the agreement, Nuvelo was to provide Deltagen with gene sequences encoding secreted proteins and Deltagen would utilize its proprietary in vivo mammalian gene knockout technology to discover and validate potential commercially relevant biopharmaceutical drug targets. Approximately 160 targets were involved in the collaboration. Deltagen and Nuvelo were to each have certain joint development and commercialization rights around potential biopharmaceutical drug targets discovered through the collaboration. Deltagen's efforts to generate and study KO mice under this collaboration ceased as a result of Deltagen's bankruptcy filing. Deltagen and Nuvelo reached a voluntary settlement and termination of this collaboration during the Chapter 11 Case.

During 2002, Deltagen redirected its business away from commercializing KO mouse products and toward becoming an integrated target validation and drug discovery and development biopharmaceutical company.

In February 2002, Deltagen completed the acquisition of BMSPRL, L.L.C. ("BRMSPRL"), formerly known as CombiChem, Inc., from Bristol-Myers Squibb Company. BRMSPRL, which was located in San Diego, California, was renamed Deltagen Research Laboratories, L.L.C. ("DRL"). BMSPRL had no ongoing research and development projects at the time of the acquisition. Thus, in order to fuel the medicinal chemistry efforts at DRL, Deltagen instituted advanced phenotyping programs in the areas of metabolism, with a focus on diabetes and obesity, and immunology/inflammatory disease. The phenotypic data in these programs were obtained on the same DeltaBase mouse lines provided to DeltaBase subscribers, but such advanced data were not released to subscribers. These programs are now referred to as Advanced Phenotypic Program in Diabetes and Obesity ("APPIDO") and Advanced Phenotypic Program in Immunology ("APPI").

In March 2002, Deltagen acquired XenoPharm, Inc. ("Xenopharm"), a San Diego, California-based private company. XenoPharm has a proprietary technology platform useful for pharmaceutical, biotechnology, chemical and agricultural companies to better understand and predict reactions of foreign substances called "xenobiotics" in human systems.

By late 2002, Deltagen (including its subsidiaries) had grown to more than 500 employees and consisted of facilities and subsidiary operations at ten sites. Deltagen's multiple lease obligations stemming from its various acquisitions had greatly increased Deltagen's expenses. At the same time, Deltagen's revenues and new customer agreements stagnated. Deltagen obtained an additional round of financing in 2002 totaling approximately $22 million, but this was insufficient to offset Deltagen's increased expenditures.

In October 2002, Deltagen commenced a cost savings and business realignment plan to reduce expenses. As part of that effort, the Company reduced its staff by approximately 130 employees, closed its San Diego and Salt Lake City facilities, and essentially ceased operations at DRL, XenoPharm, and DPI. At the same time, Deltagen introduced its DeltaOneTM product, which permitted customers to license KO mice and/or related phenotypic data for specific, individual DeltaBase targets.

In early 2003, when it appeared that DeltaBase subscribers were unlikely to renew their subscriptions and Deltagen had not signed new full-term subscribers, Deltagen implemented two more rounds of staff reductions and ceased operations at Deltagen Europe. Concurrently, Deltagen entered into lease restructuring negotiations with several of its landlords and vacated facilities located in Menlo Park and Alameda, California.

In early April 2003, Deltagen obtained a secured minimum commitment of $10 million in equity capital from certain existing institutional investors to purchase preferred stock in a private placement. Deltagen also obtained a secured bridge loan of $5 million from the same investors. The loan was secured by substantially all of Deltagen's assets and was payable in full, plus interest at a rate of 10% per annum, on July 1, 2003. Additional financing was contingent upon the satisfaction of certain commercial milestones and the successful restructuring of the Company's leases.

In late April 2003, Lexicon sent letters (1) asserting that Deltagen had breached the DeltaBase Collaboration Agreement, and (2) seeking to terminate the Sublicense Agreement. Both agreements were executed in September 2001 as part of the global settlement of patent infringement litigation between the parties. Lexicon also asserted a claim against Deltagen for $25 million for the alleged breach of the DeltaBase Collaboration Agreement. In May 2003, Deltagen commenced an arbitration proceeding against Lexicon seeking, among other things, a determination that Deltagen had not breached the DeltaBase Collaboration Agreement and that Lexicon's purported termination of the Sublicense Agreement was invalid. The arbitration was stayed by virtue of Deltagen's bankruptcy filing. In November 2003, Lexicon filed a proof of claim in Deltagen's Chapter 11 Case against Deltagen's estate asserting a general unsecured claim in the amount of $25 million, plus costs, fees and other damages.

Although Deltagen was able to successfully close the $5 million bridge loan, the contemplated preferred stock investment did not occur. As a result, in light of the Company's inability to generate sufficient revenues to sustain operations, Deltagen filed for chapter 11 bankruptcy protection on June 27, 2003 in order to allow the Company to reorganize its affairs and maximize the value of its assets.

b.    Major Post-Petition (including 2005) Events

During the course of its Chapter 11 Case, Deltagen sold its surplus assets, rejected certain leases, and streamlined its operations to the minimum necessary to sustain the Company's licensing business and preserve its entitlement to various royalties and milestones payable by licensees. Deltagen also continued to enter into "ordinary course" licensing transactions relating to Deltagen's KO mouse materials and phenotypic data accessible through DeltaBase, DeltaDiscovery and DeltaOne.

In mid-2004, Deltagen negotiated an amendment to a license agreement with Cellectis, S.A. ("Cellectis"). Pursuant to the amended agreement, Deltagen and Cellectis agreed to reduce and restructure the license fees and royalty payments otherwise payable by Deltagen to Cellectis for certain patent rights that Deltagen may require in the future. Deltagen was authorized by the Bankruptcy Court to assume the amended agreement on September 7, 2004.

On June 15, 2004, the Bankruptcy Court approved a stipulation between Deltagen and Bristol-Myers Squibb Company ("BMS") to modify the automatic stay to permit the application (and extinguishment) of a pre-petition credit in the amount of $5 million held by BMS against certain post-petition deliveries of data and materials owed by Deltagen under the terms of a pre-petition license agreement. Deltagen believes that addressing such credit by satisfaction in kind, rather than payment in cash, significantly reduced the cost to the estate of satisfying this claim.

As mentioned above, prior to the bankruptcy, Deltagen and Nuvelo entered into an agreement to collaborate on the discovery and research of certain genes encoding secreted proteins that may have potential as commercial drug and therapeutic products. Secreted proteins are proteins that are synthesized for export from a cell or to the surface membrane of a cell where they play a role in the communication between cells. Insulin is a well-known example of a secreted protein. Nuvelo is the owner of certain intellectual property rights (including patents and patent applications) surrounding the discovery and utility of genes possibly encoding secreted proteins. Under the parties' prepetition agreement, Nuvelo would select certain gene targets that, based on its proprietary bio-informatics research and the priority of its patent positions, appeared to have promise as potential sources of secreted proteins. After the parties reached consensus on the most promising gene sequences, Deltagen would use its intellectual property and phenotyping expertise to research and study the targets. Deltagen had developed a proprietary, high-volume, assembly-line method to generate detailed physiological, pathological and behavioral data related to gene functions. Under the agreement, Nuvelo would provide funding to Deltagen to conduct the development project. In March 2003, the parties designated 161 gene sequences (the "Project Genes") for further analysis and study under the Collaboration Agreement. Shortly thereafter, however, due to financial constraints, Deltagen discontinued further development activities under the agreement and a number of disputes arose between the parties about their respective obligations under the agreement. Deltagen and Nuvelo resolved their disputes pursuant to a settlement agreement that was approved by the Bankruptcy Court on March 9, 2004. Under the agreement, the parties released their respective obligations under the prepetition collaboration agreement and divided the rights and related technical data that were the subject of the collaboration effort. Deltagen received 46 of the genes covered by the collaboration and Nuvelo received the remaining 115 genes.

Also, as mentioned above, prior to the bankruptcy, Deltagen and Lilly entered into a secreted protein agreement to evaluate, and potentially develop and commercialize, therapeutic secreted proteins. Under the terms of the agreement, the parties had designated forty (40) project genes for further analysis and study. As a result of financial problems, however, Deltagen discontinued its services under the agreement prior to the Petition Date. During the Chapter 11 Case, Deltagen and Lilly reached an agreement to resolve their disputes, which was approved by the Bankruptcy Court on July 2, 2004. Pursuant to the agreement, (1) Deltagen rejected, and was relieved from, any remaining obligations under the parties' joint development program; and (2) Lilly elected to retain its rights, pursuant to section 365(n)(1)(B) of the Bankruptcy Code, in certain of Deltagen's intellectual property and will be subject to certain royalty obligations.

In October 2004, Deltagen entered into an arrangement with Mitsubishi Corporation, under which Mitsubishi Corporation serves as Deltagen's exclusive sales and marketing representatives in Japan.

On November 1, 2004, the Bankruptcy Court authorized Deltagen to assume and assign to Rinat Neuroscience Corp. ("Rinat") a lease of nonresidential real property at 1031 Bing Street, San Carlos, California, where Deltagen's headquarters are currently located. By virtue of this transaction, Deltagen was able to (1) amend its existing lease for these premises to eliminate any liability to the estate, (2) assign such lease to Rinat which agreed to pay Deltagen approximately $8,000 per month in compensation through December 31, 2006 (with an option through the end of 2011), (3) sell certain surplus personal property at the premises to Rinat for $550,000, and (4) eliminate future rent expense, while preserving a limited amount of space necessary for Deltagen's continued operations at no cost to the estate.

On January 18, 2005, the Bankruptcy Court authorized Deltagen to terminate a license agreement with the University of Edinburgh, pursuant to which the Debtor had been granted an exclusive, worldwide license in (and right to sub-license) certain patented technology involving vectors and the capturing of genes. Deltagen initially moved to terminate the license agreement in exchange for payment from the University of Edinburgh in the amount of $102,500, but Lexicon offered $200,000 for an assignment of the license. The University of Edinburgh subsequently overbid Lexicon and paid Deltagen the sum of $250,000 to terminate the license.

In early 2005, Deltagen and Lexicon, as well as its master licensors (The University of Utah Research Foundation and Medarex, Inc., as successor in interest to GenPharm International, Inc.), reached a global settlement of their disputes, which was approved by the Bankruptcy Court on March 14, 2005. The agreement was encompassed in an amendment to the parties' prepetition agreements and contained four principal components. First, the parties agreed on a settlement amount necessary to cure all defaults under the prepetition agreements, for which Lexicon had filed a claim for damages in an amount of $25 million. Deltagen disputed both its liability, and the amount claimed by Lexicon, for such alleged damages. Under the settlement, the parties agreed to a full cure of any and all defaults by means of a $4 million cash payment by Deltagen and certain deferred, contingent royalty payments based on Deltagen's receipt of net revenues after September 1, 2004, from the licensing of completed and future knockout mice. In the case of licensing revenues for completed knockouts, the maximum, aggregate amount of royalty payments due to Lexicon is $6 million. Deltagen, however, made no guarantees about any minimum royalty payments that may become payable to Lexicon. As of December 31, 2005, Deltagen had made royalty payments to Lexicon in an aggregate amount of $437,558. For future knockouts, there is no maximum, aggregate amount of royalties, but the royalty rate for such new materials and related phenotypic information is lower than the rate for completed knockouts. Second, the parties agreed to amend the prepetition agreements to limit the annual number of new knockout mice that Deltagen may generate and use in the future. Third, the parties agreed to amend their DeltaBase Agreement to acknowledge that Deltagen has fully satisfied all outstanding delivery and performance obligations under the agreement. Nonetheless, Lexicon remains obligated under specified conditions to Deltagen for milestone and royalty payments for drug compounds that are discovered based on the use of Deltagen's data and materials (payable in the amounts and at the times set forth in the DeltaBase Agreement). Fourth, the parties agreed to exchange general releases for all known and unknown claims related to activities and knockouts generated prior to approval of the agreement. In connection with the release, the prepetition arbitration between the parties was dismissed and the proof of claim filed by Lexicon was withdrawn with prejudice.

In early-to-mid 2005, Deltagen reached agreements with GSK, Merck and Pfizer regarding assumption of those parties' respective DeltaBase agreements. Deltagen's agreements with GSK and Merck were amended, among other things, in order to (1) restructure the fees payable for extensions of annual access terms; and (2) modify certain terms governing deliveries of knockout mice materials by Deltagen. As part of the assumption of Deltagen's agreement with GSK, GSK agreed to withdraw with prejudice its duplicate contingent proofs of claim against Deltagen, each asserting at least $27,844,000 for damages that would arise had Deltagen rejected its agreements with GSK. Deltagen's agreement with Pfizer was assumed with Pfizer acknowledging that Deltagen had satisfied all delivery obligations. The Bankruptcy Court approved the assumption of Deltagen's agreements with Merck and Pfizer by separate orders dated February 24, 2005, and approved Deltagen's assumption of its agreement with GSK on July 26, 2005. All terms and conditions of Deltagen's agreements with GSK and Merck, as amended, and Pfizer are currently in full force and effect, including GSK's, Merck's and Pfizer's respective obligations to make milestone payments to Deltagen subject to certain conditions in the agreements.

In Summer 2005, a sale of the parcel of land that was intended for development by Deltagen Europe was consummated. In late 2005, Deltagen Europe recovered approximately $1.8 million associated with the land sale, and Deltagen Europe has applied with the French government for tax credits relating to research expenditures in 2001 and 2002 in the cumulative amount of approximately $1 million. Deltagen Europe expects to receive these tax credits in 2006.

In Spring 2005, Deltagen negotiated a license arrangement with Stem Cell Sciences Limited ("SCS"), pursuant to which Deltagen received a perpetual, retrospective and prospective license under SCS' rights to certain technology involving IRES vectors in exchange for a payment by Deltagen of $200,000 and provision of certain mouse materials to SCS. Deltagen will also owe SCS ongoing royalties on licensing revenues collected from certain contracts executed by Deltagen after September 1, 2004.

In late September 2005, the United States Government, through the National Institutes of Health ("NIH"), awarded Deltagen a three-year contract in response to a proposal submitted by Deltagen in response to a Request for Proposal issued by the NIH in April 2005 (the "NIH Contract"). Under the NIH Contract, the NIH is eligible for a period of three years to order for delivery to designated repositories any of the approximately 750 knockout mouse lines (and related phenotypic data) that populate the DeltaBase database product. The NIH is permitted to publish the phenotypic data and make the knockout mouse materials available for licensing to academic and non-profit institutions for their research use ("Academics"). Commercial entities are not permitted to obtain knockout lines under the NIH Contract and cannot engage in contract research with Academics to access the knockout lines or rights in discoveries and results obtained by Academics. Deltagen retained exclusive rights to continue licensing all of its knockout mouse lines to commercial entities. The maximum revenue from the NIH Contract is $25 million, if all of the knockout mouse lines are ordered by the NIH during the term. Under the NIH Contract, 37.5% of the price is due upon delivery and initial inspection, and the remaining 62.5% of the price is due upon detailed inspection and acceptance, which process is not to exceed six months from delivery. The NIH Contract permits The Wellcome Trust, a non-profit organization based in England, to order, as a partner to the NIH, knockout lines under the terms of the NIH Contract. On September 30, 2005, the NIH placed an initial delivery order for 129 knockout lines, for a total price of $5.16 million. Delivery of the materials and related phenotypic data specified in the initial delivery order was completed in November 2005. No other delivery orders have been submitted, and neither the NIH nor The Wellcome Trust has any obligation to place any future orders under the NIH Contract.

In late 2005, the Company entered into an arrangement with Charles River Laboratories of Wilmington, Massachusetts ("CRL"). CRL, a global provider of solutions that advance the drug discovery and development process for the biopharmaceutical industry, became the exclusive custodian and worldwide distributor of Deltagen's repository of knockout mouse materials. Under this arrangement, CRL agreed to reduce the claim it had filed in Deltagen's Chapter 11 Case from approximately $985,000 to $250,000. Deltagen is eligible to receive the benefit of CRL's suite of services at discounted rates.

Following the bankruptcy filing, Deltagen was delisted from Nasdaq and deregistered under the Securities Exchange Act of 1934. As a result, Deltagen has no legal obligation to resume making periodic filings with the Securities and Exchange Commission or otherwise provide public disclosure with respect to its results of operations or other matters. Although Deltagen announced on December 19, 2005 that it intended to announce its 2005 financial results sometime during the first quarter of 2006 and that it currently intends to announce quarterly results for 2006, it may change this intent at any time and stop further disclosure with respect to its results of operations or other matters.


c. Products and Major Collaborations

Our customers and partners/colaborators include the world's largest pharmaceutical companies, GlaxoSmithKline plc, Merck & Co., Inc., Pfizer Inc., Eli Lilly and Company and Schering-Plough Research Institute, as well as significant biotechnology and biopharmaceutical companies including Lexicon Genetics Incorporated.

To date, we have generated revenue from our DeltaBase, DeltaSelectTM and DeltaOne products and programs.

DeltaBase is our proprietary database that provides information, based on knockout mouse studies, on gene function and validated gene targets for drug discovery. We created DeltaBase to be marketed to the pharmaceutical and biotechnology industries to help define the role that genes play in biological processes and disease. We selected genes for DeltaBase based upon what we believe to be their potential to become useful drug targets. We generated information on these genes by comprehensively analyzing knockout mice made through our proprietary gene knockout methods. Each knockout mouse underwent a standardized, detailed and extensive analysis in order to determine the function and role that a particular gene plays in the mouse and that gene's suitability as a drug target. In addition to accessing target validation data, DeltaBase collaborators have access to the knockout mice used to generate this data.

The DeltaSelect program was our initial program. Customers received target validation information for selected genes on a fee-for-service basis. This program was provided to validate our proprietary technology and promote interest in the DeltaBase product that became available in 2000. We believe that the DeltaSelect program provided validation of our proprietary platform technology and promoted interest in DeltaBase, however, the revenues generated from the DeltaSelect program have to date not been significant and have with time become historically less significant. In 2005, the Company received no revenues associated with the DeltaSelect program and we anticipate that revenues from DeltaSelect will continue to be insignificant or zero.

In 2002, we launched a product line known as DeltaOne that offers access to our portfolio of knockout mice and/or accompanying phenotypic data, as well as any corresponding intellectual property, on a gene-by-gene basis. In 2005, revenues from our DeltaOne program were the principal source of contract revenues for the Company.

We have DeltaBase agreements with GlaxoSmithKline, Pfizer and Merck (the "DeltaBase Collaborations"). Each of these agreements provides for payments aggregating approximately $15 million in exchange for three years' worth of DeltaBase targets. These three-year subscription terms expired in 2003, with Deltagen's last quarterly delivery of DeltaBase in June 2003. However, Deltagen has received and may continue to receive additional revenues associated with annual access extension fees under the DeltaBase Collaborations where such collaborators opt to continue accessing the DeltaBase database and associated intellectual property and/or associated knockout mouse materials. In addition, Deltagen may receive milestone payments under the DeltaBase Collaborations based on issuance of certain patents to Deltagen and the collaborators' drug development and approval activities relating to DeltaBase.

2. Critical Accounting Policies and Estimates

The consolidated financial statements as of Deltagen for the year ended December 31, 2005 have been prepared in accordance with accounting principles generally accepted in the United States of America for annual financial information. These consolidated financial statements have been prepared so that they present fairly, in the opinion of management, the Company's financial position and its results of operations and its cash flows for the period presented.

Under our revenue recognition policy, revenues are recognized when a definitive agreement with a determinable price exists, product delivery and/or invoicing (in each case where there is reasonable assurance of meeting customer-specified criteria) have occurred, and collectibility is reasonably assured.


3. Results of Operations for 2005

The company's consolidated revenues for the year ended December 31, 2005 totaled $6.70 million.  The revenues were primarily attributable to license fees associated with the provision of knockout mice and related phenotypic data under its DeltaOneTM program, access extension fees under its DeltaBase collaborations and amounts received under Deltagen's contract with the National Institutes of Health (NIH).  The company booked revenues of $1.9 million in 2005 pursuant to the NIH contract. The company had interest income of $0.31 million for the year ended December 31, 2005.

Total consolidated expenses for the year ended December 31, 2005 were $7.16 million.  The expenses were primarily attributable to salaries and management costs, and other general and administrative expenses, license fees and third-party royalty obligations, as well as legal fees associated with the administration of the company's Chapter 11Case and patent prosecution expenses.

Net loss for the year ended December 31, 2005 was $0.15 million.  Net loss per share for the year ended December 31, 2005 was $0.0039. 

As of December 31, 2005, the company had $11.56 million in consolidated cash and cash equivalents.

4.    Outlook

A financial forecast for the company for calendar years 2006-2008, based on continuation of its current business, was presented in the Disclosure Statement filed in September 2005 as required by applicable bankruptcy laws. This financial forecast included specified amounts the company expected to receive under the NIH Contract during that period.  At present, the company expects that up to approximately $2.75 million originally forecasted to be received in 2006 pursuant to the NIH Contract will be received in later years during the term of the NIH Contract. Due to subsequent events, investors should not rely on the Disclosure Statement projections or on the monthly operating reports or other financial documents filed with the bankruptcy court pursuant to the company's chapter 11 case. The company does not intend to update these projections or provide new projections in the future.

Risk Factors Affecting Future Operating Results

We have incurred substantial losses since our inception and we may never achieve profitability, which in turn may harm our future operating performance and may cause the market price of our stock to decline.

We have had net losses every year since our inception in 1997. Because continued revenues are uncertain and difficult to predict, we may continue to be unprofitable and we may never achieve profitability. If we do not become profitable within the time frame expected by securities analysts or investors, the market price of our stock will likely decline. If we do not achieve profitability, we may not be able to sustain or increase profitability in the future.

Our revenues are heavily dependent upon one source and if the revenue from this single source does not substantially meet expectations, the Company may not have sufficient revenues or financial resources to sustain its operations.

A significant portion of the company's revenues for calendar years 2006-2008 is expected to come from the NIH Contract. However, the NIH has no obligation to place any further delivery orders under the NIH Contract. If the revenues from the NIH Contract do not substantially approach or meet such expectations, the Company may not have sufficient revenues or financial resources to sustain its operations.

We may need to raise additional capital that may not be available, which if not available, may adversely affect our operations.

Our products and services may not in the future produce revenues that, together with our existing cash and other resources, are adequate to meet our anticipated cash needs. We plan to continue to fund our operations from our existing cash balances and cash flows, but may need to raise additional funds from the sale of stock, either through private financing and/or a public offering, or from debt financing. If and when we may need additional funding, we may be unable to obtain it on favorable terms, or at all. If adequate funds are not available, we may have to curtail operations significantly or liquidate.

We have only a finite inventory of products and unless we are able to expand our inventory, we may not be able to achieve or sustain sufficient revenues to fund our operations.

At present, and for the last two years, we have had a finite and static product inventory. We have no current research and development operations or activities. We have approximately 900 knockout mouse lines at the mouse stage (cryopreserved as frozen embryos) and approximately 450 knockout lines at the ES cell stage. Because we have a finite and, at present, static, inventory of products available for licensing to third parties, we will likely not be able to sustain our business unless we expand our product inventory. And, even if we desire to expand our product inventory, it may not be feasible to do so depending on competition and third party license restrictions.

Almost all of our knockout mouse inventory is stored and managed by a single third party service provider, and a natural disaster at one or more of their facilities is possible and could result in a prolonged interruption of our business or a complete loss of our product inventory.

Almost all of our knockout mouse inventory is stored and managed by CRL. We and CRL have taken precautions to safeguard our inventory, including through insurance, storage of materials off-site at a back-up facility, and the storage of multiple and redundant embodiments of the knockout mouse inventory to allow for their possible regeneration. However, a natural disaster, such as an earthquake, fire, power loss or flood, could cause substantial delays or result in the complete loss of our product inventory.

There are only a finite number of current and potential pharmaceutical customers and, therefore, we may not succeed, especially if there is continued consolidation in the pharmaceutical industry.

We currently have DeltaBase or DeltaOne relationships with most of the world's largest pharmaceutical companies. Because of our reliance on revenues generated under our DeltaBase and DeltaOne agreements, we may not succeed unless we can attract more customers or expand our relationships with existing customers.

Over the past several years, companies in the pharmaceutical industry have undergone significant consolidation. As such companies merge, we will have fewer potential customers for our products. Also, if two or more of our present or future customers merge, we may not be able to receive the same fees under agreements with the combined entities that we were able to receive under agreements with these customers prior to their merger. Moreover, if one of our customers merges with an entity that is not a customer, the new combined entity may prematurely terminate our agreement. Any of these developments could materially harm our business or financial condition.

We may experience intense competition from other entities, and this competition could adversely affect our business.

The human and mouse genomes contain a finite number of genes. The human genome has been mapped and identified. Our competitors have identified and will continue to identify the sequence of numerous genes in order to obtain proprietary positions with respect to those genes. In addition, our competitors may seek to identify and determine the biological function of numerous genes in order to obtain intellectual property rights with respect to specific uses of these genes, and they may accomplish this before we do. We believe that the first company to determine the functions of commercially relevant genes or the commercially relevant portions of the genome will have a competitive advantage.

A number of companies, institutions and government-financed entities are engaged in gene sequencing, gene discovery, gene expression analysis, gene function determination and other gene-related service businesses. Many of these companies, institutions and entities have greater financial and human resources than we do and have been conducting research longer than we have. Significant competition also arises from entities using standard target identification approaches, traditional knockout mouse technology and other functional genomics technologies. These competitors may have or may acquire intellectual property rights in functional or other data that are superior to or dominant over our rights. Furthermore, other methods for conducting functional genomics research may ultimately prove more advanced, in some or all respects, to the use of knockout mice. In addition, technologies more advanced than or superior to our gene function identification technology may be developed, thereby rendering our technologies obsolete. We expect that competition in our industry will continue to intensify. We also believe that some pharmaceutical and biotechnology companies are discussing the possibility of working together to discover the functions of genes and share gene function-related data among themselves. The formation of this type of consortium could reduce the prospective customer base for or interest in our gene function-related business. Moreover, the pharmaceutical industry has undergone significant mergers and this trend is expected to continue. This concentration of the industry could further limit our potential customer base and therefore materially harm our business.

Also, the NIH and other government entities have announced their intent to create a public inventory of knockout mice for the entire genome. Specifically, the NIH has announced its desire and intent to knock out the entire genome in mice (the Knockout Mouse Project, or KOMP). With respect to the KOMP, attendees at a Banbury meeting during the fall of 2003 recommended construction of a public resource comprised of a comprehensive collection of mouse knockout mutations, i.e., a library composed of a marked null mutation in every gene of the mouse genome. Since the Banbury meeting, there has been a significant amount of activity around the world to implement the recommendations. In March 2005, the NIH held a workshop to discuss the current status of the field, international initiatives being planned to produce more knockouts, and the role that NIH should play to ensure that the envisioned mouse knockout resource is completed. The workshop endorsed the Banbury recommendations, and added additional recommendations: 1) completion of the resource by construction of marked nulls in the 10,000 mouse genes in which nulls have not already been generated; 2) development of C57BL/6 ES cell lines as a system for generation of knockout mutants in an experimentally tractable genetic background; 3) "repatriation" (collection into a publicly accessible repository) of existing ES cells and mice as, otherwise, these mutants will have to be remade at considerable additional expense. The NIH has subsequently released a Request for Proposal soliciting proposals from both commercial and academic institutions with regards to a genome-wide knockout mouse project. Also at the workshop, representatives of other international efforts to make knockout mice described their plans. The most advanced of these, in terms of implementation, is a European project, known as EUCOMM, which plans to generate a large resource of conditional mutations in ES cells. Other conditional knockout programs are planned elsewhere, and the meeting attendees supported the concept that an NIH-supported collection of null mutations would be a very important complement to the collection of conditional knockouts. If these NIH or other governmental knockout efforts materialize, the competition for Deltagen would be very high and Deltagen may not succeed in competing against these efforts.

We may require substantial amounts of capital to fund our business and if we do not have sufficient capital we will not be able to sustain our operations.

Our cash requirements depend on numerous factors, including:

.   our ability to attract and retain customers for our database and other products and services;

.   leasing and possible expansion of facilities;

.   expenses in connection with the possible expansion of our knockout mouse product inventory or services; and

  .   expenditures in connection with license agreements and acquisitions of and investments in complementary technologies and businesses.

We may require substantial amounts of capital to fund our business operations. The rate at which our capital is utilized is affected by the operational and developmental costs incurred and the extent to which our products generate revenue. If we do not have sufficient capital, we will not be able to sustain our operations.

The value of our stock may be adversely affected by the lack of liquidity in the market for our stock and if we decide to stop disclosure with respect to our results of operations or other matters.

Following our bankruptcy filing, we were delisted from Nasdaq. The limited liquidity available in the "Pink Sheets" market may adversely affect the value of our stock. Also following our bankruptcy, we were deregistered under the Securities Exchange Act of 1934. As a result, Deltagen has no legal obligation to resume making periodic filings with the Securities and Exchange Commission or otherwise provide public disclosure with respect to its results of operations or other matters. Although Deltagen announced on December 19, 2005 that it intended to announce its 2005 financial results sometime during the first quarter of 2006 and that it currently intends to announce quarterly results for 2006, it may change this intent at any time and stop further disclosure with respect to its results of operations or other matters. If we decide to stop such disclosure, the value of our stock may be adversely affected.

There have been very few drugs developed and commercialized using genomics-based research and, therefore, the future of our products and programs is uncertain.

Very few of the limited number of drugs developed to date using genomics-based research have reached the commercial market. We cannot assure you that genomics-based drug development efforts will ultimately be commercially successful. We cannot assure you that a particular gene function in a mouse will have any correlation to a human patient's response to a particular drug. It is difficult to successfully select those genes with the most potential for commercial development. Furthermore, we do not know that any products based on genes that are the subject of our research can be successfully developed or commercialized. If commercial opportunities are not realized from genomics-based research, our existing customers could stop using our products or we could have difficulty attracting or retaining customers and, in any event, we would not realize any product royalties or milestone payments.

Our DeltaBase customers will control the development and commercialization of products, which may mean that our collaborations will never result in any royalty or milestone payments or third party product sales.

We have full DeltaBase collaborations with only three customers and we do not expect to enter into any future full DeltaBase collaborations. Under these DeltaBase agreements, collaborators are obligated, subject to fulfillment by Deltagen of certain specified requirements, to make milestone and/or royalty payments based on the commercial development of therapeutic or diagnostic compounds derived from access to our mice, database, technology or intellectual property. However, we have limited or no control over the resources that any customer may devote to product development based on its access to our database. These customers may breach or terminate their agreements with us, and they are not obligated to conduct any product discovery, development or commercialization activities at all. Further, our customers may decide not to develop products arising out of our agreements or may not devote sufficient resources to the development, approval, manufacture, marketing or sale of these products. If any of these events occurs, our customers may not develop or commercialize any products based on our gene function research, technologies or intellectual property, we would not receive milestone payments or royalties on product sales and the results of our operations would suffer. Furthermore, our customers may resist sharing revenue derived from the successful commercialization of a drug through royalty payments or others may have competing claims to all or a portion of such revenues.

There are a finite number of gene families upon which pharmaceutical and biotechnology companies focus their research, which limits our potential revenue and growth.

Our current and potential customers traditionally focus their research and development efforts on a finite number of gene families that they view as reliable drug targets. Our ability to attract and retain customers to our products will depend, in part, on the willingness of our customers to expand their research and development activities to other gene families. If our customers do not do this, we may fail to attract new customers for our products and, as a result, our business and financial condition may be significantly harmed.

We may fail to meet market expectations, which could cause our stock price to decline.

The following are among the factors that could cause our operating results to vary significantly from market expectations:

.   changes in the demand for and pricing of our products and services;

.   the nature, pricing and timing of other products and services provided by us or our competitors;

.   changes in the research and development budgets of our customers;

.   acquisition, licensing and other costs related to our operations;

.   the timing of milestone, licensing and other payments under the terms of our customer agreements and agreements pursuant to which others license technology to us;

.   our capital needs and availability of additional capital;

.   expenses related to, and the results of, patent filings and other proceedings relating to intellectual property rights, including litigation and similar expenses; and

.   our unpredictable revenue sources as described below.

Our revenues are and will be unpredictable and this may harm our financial condition.

The amount and timing of revenues that we may have from our business will be unpredictable because:

.   the timing of our DeltaBase, DeltaOne and other agreements are determined largely by our customers;

.   access extension fees under our DeltaBase agreements with GlaxoSmithKline, Pfizer and Merck may be terminated at any time at the sole discretion of these collaborators;

.   whether any products are commercialized and generate royalty and/or milestone payments depends on the efforts, timing and willingness of our customers;

.   we do not expect to receive any milestone or royalty payment under licenses and other arrangements for a substantial period of time, if ever; and

.   to date, we have entered into only four customer agreements for our entire DeltaBase gene function database and do not expect to enter into any additional agreements involving the entire DeltaBase product.

As a result, our results may be below market expectations. If this happens, the price of our common stock may decline.

We may have conflicts with our customers, which will hurt our business prospects.

Disagreements or other conflicts could arise with our customers or their partners over rights to our intellectual property or our rights to share in any of the future revenues of compounds or therapeutic approaches developed by our customers. These kinds of disagreements could result in costly and time-consuming litigation and could have a negative impact on our relationship with existing customers. Any conflict with our customers could reduce our ability to attract additional customers or enter into future customer agreements. Some of our customers could also become competitors in the future. Our customers could develop competing products, preclude us from entering into agreements with their competitors or terminate their agreements with us prematurely.

We may engage in future acquisitions or licenses, which could adversely affect your investment in us as we may never realize any benefits from such acquisitions or licenses, which also could be expensive and time consuming.

We may acquire and license additional products and programs, if we determine that these products or programs complement our existing technology or augment our existing information technology platforms. We currently have no firm commitments or agreements with respect to any material acquisitions. If we do undertake any transactions of this sort, the process of integrating an acquired business, technology, service or product may result in operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any acquisition or license. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, which could adversely affect our results of operations and financial condition.

We depend on key employees, and without the services of our key employees, we may not achieve profitability or remain viable.

The company currently has only three full-time employees. The loss of any of their services could seriously harm our business.

Our future success also will depend in part on the continued service of our Directors and key consultants. We may be unable to retain these individuals and other personnel necessary for our business. Moreover, our business is located in the San Francisco Bay Area of California, where demand for personnel with the skills we seek is extremely high and is likely to remain high. Because of this competition, our compensation costs may increase significantly.

We currently have only thirteen issued or allowed U.S. patents relating to knockout mice or methods of making knockout mice, and if we are unable to protect our proprietary information, our business may be adversely affected.

Our business and competitive position depends upon our ability to protect and exploit our proprietary techniques, methods, compositions, inventions, database information and software technology. However, our strategy of obtaining such proprietary rights around as many genes as possible is unproven. Unauthorized parties may attempt to obtain and use information that we regard as proprietary. Although we intend for our gene function database subscription agreements to require our potential subscribers to control access to our database and information, policing unauthorized use of our database information and software may be difficult.

Numerous applications have been filed by other entities claiming gene sequences. Many patents have already issued and we expect more will issue in the future. In addition, others may discover uses for genes or proteins other than uses covered in any patents issued to us, and these other uses may be separately patentable. We may not be able to obtain additional issued patents on our patent applications because our patent applications may not meet the requirements of the U.S. Patent and Trademark Office ("USPTO"). The holder of a patent covering a particular use of a gene or a protein, isolated gene sequence or deduced amino acid sequence could exclude us from using that gene, protein or sequence. In addition, a number of entities make gene information, techniques and methods publicly available, which may affect our ability to obtain patents.

Some of our patent applications may claim compositions, methods or uses that may also be claimed in patent applications filed by others. In some or all of these applications, a determination of priority of inventorship may need to be decided in an interference proceeding before the USPTO. Regardless of the outcome, this process is time-consuming and expensive.

Issued patents may not provide commercially meaningful protection against competitors. Other companies or institutions may challenge our or our customers' patents or independently develop similar products that could result in a legal action. In the event any researcher or institution infringes upon our or our customers' patent rights, enforcing these rights may be difficult and can be time-consuming. Others may be able to design around these patents or develop unique products or technologies providing effects or results similar to our products or technologies.

Our ability to use our patent rights to limit competition in the creation and use of knockout mice, as well as our ability to obtain patent rights, may be more limited in certain markets outside of the United States because the protections available in other jurisdictions may not be as extensive as those available domestically.

We pursue a policy of having our employees, consultants and advisors execute nondisclosure and nonuse confidentiality agreements, as well as proprietary information and invention agreements when they begin working for us. However, these agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. We also cannot prevent others from independently developing technology or software that might be covered by copyrights issued to us, and trade secret laws do not prevent independent development.

Because knockout mouse and gene-related patents, even if obtained, may not be enforceable, our intellectual property may not have any material value, which would diminish our business prospects.

One of our strategies is to obtain proprietary rights around as many gene knockouts as possible. Although we have filed patent applications covering the large majority of knockout mice we have produced, we currently have only ten issued patents related to knockout mouse compositions. We rely on a combination of copyright and trademark law, trade secrets, non-disclosure agreements and contractual provisions in our agreements with our customers to establish and maintain intellectual property rights. While the USPTO in the past has issued patents to Deltagen and others covering knockout mice, we do not know whether the USPTO will continue to do so and whether or how courts may enforce or interpret those patents, if that becomes necessary. If a court finds these types of inventions to be unpatentable, or interprets them narrowly, the benefits of our strategy may not materialize and our business and financial condition could be significantly harmed.

We may be subject to litigation and infringement claims that may harm our business or reputation, be costly and divert management's attention.

The technology we use in our business may subject us to claims that we infringe on the patents or proprietary rights of others. The risk of this occurring will tend to increase as the genomics, biotechnology and software industries expand, more patents are issued and other companies attempt to discover gene function through mouse gene knockouts and engage in other genomics-related businesses. Furthermore, many of our competitors and other companies performing research on genes have already applied for patents covering some of the genes upon which we perform research, and many patents have already been issued which cover these genes, as well as genes we may wish to use in the future.

We may be involved in future lawsuits alleging patent infringement or other intellectual property rights violations. In addition, litigation may be necessary to:

 .   assert claims of infringement;

 .   enforce our patents, if any;

 .   protect our trade secrets or know-how; and

 .   determine the enforceability, scope and validity of the proprietary rights of others.

We may be unsuccessful in defending or pursuing these lawsuits. Regardless of the outcome, litigation can be very costly, can divert management's efforts and could materially affect our business, operating results, financial condition and cash flows. An adverse determination may subject us to significant liabilities or restrict or prohibit us from selling our products.

Our rights to the use of technologies licensed to us by third parties are not within our control, and without these technologies, our products and programs may not be successful and our business prospects could be harmed.

We rely, in part, on licenses to use certain technologies that are material to our business. We do not own the patents that underlie some of these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to our licensors abiding by the terms of those licenses and not terminating them. In many cases, we do not control the prosecution or filing of the patents to which we hold licenses. Some of the licenses under which we have rights provide us with exclusive rights in specified fields, but we cannot assure you that the scope of our rights under these and other licenses will not be subject to dispute by our licensors or third parties.

We rely on third-party data sources, and without these sources, our products and programs would be incomplete and less appealing to customers, seriously harming our business prospects.

We rely on scientific and other data supplied by third parties, and all of the gene sequence data for our internal programs comes from public genomics data. This data could be defective, be improperly generated or contain errors or other defects, which could corrupt our gene function database and our other programs and services. In addition, we cannot guarantee that our sources acquired this data in compliance with legal requirements. In the event of any such defect, corruption or finding of noncompliance, our business prospects could be adversely affected.

 The future sale of common stock could negatively affect our stock price.

We had approximately 39 million shares of common stock outstanding as of December 31, 2005.

If our common stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales may occur, the market price of our common stock could fall.

Our incorporation documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of your stock.

Our restated certificate of incorporation and bylaws contain provisions that could delay or prevent a change in control of the Company. Some of these provisions:

.   authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, commonly referred to as "blank check" preferred stock, with rights senior to those of common stock;

.   provide for a classified board of directors; and

.   prohibit stockholder action by written consent.

In addition, we are governed by the provisions of Section 203 of Delaware General Corporate Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These and other provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

 

©2006 Deltagen, Inc. All rights reserved.