<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1999
REGISTRATION NO. 333-87085
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
INVITROGEN CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2836 33-0373077
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
1600 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008
(760) 603-7200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
JAMES R. GLYNN
CHIEF FINANCIAL OFFICER
INVITROGEN CORPORATION
1600 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008
(760) 603-7200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
CAMERON JAY RAINS, ESQ. MICHAEL W. HALL, ESQ.
JEFFREY T. BAGLIO, ESQ. HOWARD L. ARMSTRONG, ESQ.
Gray Cary Ware & Freidenrich LLP Latham & Watkins
4365 Executive Drive, Suite 1600 701 "B" Street, Suite 2100
San Diego, CA 92121 San Diego, CA 92101
(858) 677-1400 (619) 236-1234
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
SUBJECT TO COMPLETION - DATED OCTOBER 1, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 1999
[LOGO]-Registered Trademark-
5,000,000 SHARES OF COMMON STOCK
----------------------------------------------------------------------
THE COMPANY:
- We develop, manufacture and sell research kits and products and provide
services designed to facilitate molecular biology research.
NASDAQ SYMBOL: IVGN
THE OFFERING:
- Invitrogen is offering 1,500,000 shares and existing stockholders are
offering 3,500,000 shares.
- The underwriters have an option to purchase an additional 750,000 shares
from Invitrogen and the existing stockholders participating in this
offering to cover over-allotments.
- There is an existing market for our shares. The last reported sale price
for our common stock on , 1999, was $ per share.
- Closing: , 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE TOTAL
- ----------------------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees:
Proceeds to Invitrogen:
Proceeds to selling stockholders:
- ----------------------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
The undersigned is facilitating Internet distribution
DLJDIRECT INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 16
Price Range of Common Stock.................... 16
Dividend Policy................................ 16
Capitalization................................. 17
Invitrogen Selected Consolidated Financial
Data......................................... 18
Unaudited Selected Pro Forma Combined
Consolidated Financial Data.................. 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
<CAPTION>
PAGE
<S> <C>
Business....................................... 27
Management..................................... 51
Certain Transactions........................... 59
Principal and Selling Stockholders............. 60
Description of Capital Stock................... 62
Shares Eligible for Future Sale................ 64
Underwriting................................... 66
Legal Matters.................................. 68
Experts........................................ 68
Additional Information......................... 68
Index to Financial Statements.................. F-1
</TABLE>
------------------------
Discovery Line-TM-, DNA DipStick-TM-, Gene Pool-TM-, Hybrid Hunter-TM-,
Micro-FastTrack-TM-, Northern Territory-TM- and Zero Background-TM- are
trademarks of Invitrogen. The Invitrogen logo, MaxBac-Registered Trademark-,
FastTrack-Registered Trademark-, One Shot-Registered Trademark-, TA
Cloning-Registered Trademark-, TOPO-Registered Trademark- and Zero
Blunt-Registered Trademark- are Invitrogen trademarks which have been registered
with the United States Patent and Trademark Office.
FastTrack-Registered Trademark-, GeneStorm-Registered Trademark-,
Invitrogenomics-Registered Trademark-, Morphagen-Registered Trademark-and
Morphatides-Registered Trademark- are trademarks of Invitrogen for which
registration applications have been filed with the United States Patent and
Trademark Office.
XCell II-TM-, Blue Horizon-TM-, Mark12-TM- and Coomassie-TM-are trademarks
of NOVEX. NOVEX-Registered Trademark-, Serva-Registered Trademark-,
Quickpoint-Registered Trademark-, NuPAGE-Registered Trademark-,
Powerease-Registered Trademark-, SeeBlue-Registered Trademark-,
Multi-Mark-Registered Trademark-and SilverXpress-Registered Trademark- are
trademarks of NOVEX which have been registered with the United States Patent and
Trademark Office. WesternBreeze-TM- is a trademark of NOVEX for which an
application for registration has been filed with the United States Patent and
Trademark Office.
All other trademarks or trade names referred to in this prospectus are the
property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES IN THIS OFFERING. WE
URGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY. UNLESS STATED OTHERWISE, THE
INFORMATION CONTAINED IN THE PROSPECTUS ASSUMES THAT THE UNDERWRITER'S
OVER-ALLOTMENT OPTION TO PURCHASE 750,000 SHARES FROM INVITROGEN AND THE SELLING
STOCKHOLDERS IS NOT EXERCISED.
THROUGHOUT THIS PROSPECTUS, UNLESS OTHERWISE INDICATED, "INVITROGEN," "WE,"
"OUR," AND "US" REFER TO INVITROGEN AND ALL OF ITS SUBSIDIARIES, INCLUDING THE
OPERATIONS OF NOVEX.
INVITROGEN CORPORATION
Invitrogen develops, manufactures and markets research tools in kit form and
provides other research products and services to corporate, academic and
government entities. Our research kits simplify and improve gene cloning, gene
expression and gene analysis techniques as well as other molecular biology
activities (see "Business--Scientific Overview"). These techniques and
activities are used to study how a cell is regulated by its genetic material,
known as functional genomics, and to search for drugs that can treat diseases.
Our kits and products allow researchers to perform these activities more
accurately, efficiently and with greater reproducibility compared to
conventional research methods. Our kits and products have made molecular biology
research techniques more accessible to pharmaceutical, biotechnology,
agricultural, government and academic researchers with backgrounds in a wide
range of scientific disciplines. In 1998 we began marketing our
"high-throughput" gene cloning and expression technology, which allows us to
clone and expression-test genes on an industrial scale. We are utilizing this
high-throughput technology to generate additional license, service and product
opportunities. In August 1999, Invitrogen merged with NOVEX, a developer and
manufacturer of pre-cast electrophoresis gels and associated products for gene
and protein analysis. From 1994 through 1998, Invitrogen and NOVEX, on a pro
forma combined basis, experienced compound annual growth in revenue of 27% and
net income of 60%.
Based on independent market studies, in 1998 researchers spent over $1.4
billion on molecular biology products and supplies such as chemicals, reagents,
enzymes and kits. Gene cloning, expression and analysis kits represent a rapidly
emerging segment of the molecular biology product and supply market. Based on
independent market studies, we project sales of gene cloning, expression and
analysis kits to grow approximately 21% in 1999, compared to approximately 14%
growth in 1999 for the overall molecular biology product and supply market. We
believe the gene cloning, expression and analysis kit market will continue to
expand due to several factors, including:
- Increasing levels of government funding for the study of genetic material
and molecular biology research;
- Increasing availability of new data from the Human Genome Project, a
federally funded effort to identify all human genes, and other genome
sequencing projects;
- Proliferation of high-throughput molecular biology research techniques;
and
- Accelerated investment in commercial research activities.
We offer approximately 700 kits and other products that researchers use to
conduct key molecular biology research activities. Our kits and products make
molecular biology techniques easier, faster and more accessible to an
increasingly broad community of researchers. For example, as compared to
conventional cloning methods, our proprietary cloning method, known as TOPO TA
Cloning, reduces the time required for a key step in the gene cloning process
from 12 hours to five minutes, reduces total experiment completion time from
three to five days to one day and increases the cloning success rate from 50-60%
to over 90%. Based on our 1998 sales of these kits, we estimate that researchers
who
3
<PAGE>
used TOPO TA Cloning Kits in 1998 saved over 7 million hours compared to
standard cloning methods.
In 1998 we developed a high-throughput gene cloning and expression system by
scaling up our TOPO TA Cloning technology and automating much of the cloning and
expression process. We are marketing this technology under the name
Invitrogenomics. We are using this new technology to rapidly clone and patent
full-length gene libraries, which we are licensing and selling. To date, we have
assembled libraries of over 2,300 full-length cloned human genes that correctly
express their specific proteins. In addition, we are using this technology to
provide gene cloning and expression services on a contract basis to
pharmaceutical, biotechnology and agricultural companies that wish to reduce the
time and costs associated with identifying and validating new drug targets and
developing novel therapeutics.
We believe we have assembled one of the broadest portfolios of gene cloning,
expression and analysis related intellectual property in our industry. To date,
we have obtained over 85 licenses, which provide us with access to over 200
patents and applications covering gene cloning, expression and analysis
materials and techniques. In total, we own or control 28 issued and pending
patents and applications. We believe our intellectual property portfolio has
established us as a licensing partner of choice for corporate and academic
researchers who wish to commercialize their gene cloning, gene expression and
gene analysis-related discoveries. We believe our leadership position derives
from our ability to rapidly enhance the value of the technologies we license by
combining them with our existing products and licensed technologies.
Our principal offices are located at 1600 Faraday Avenue, Carlsbad,
California 92008. Our telephone number is (760) 603-7200. Our website address is
www.invitrogen.com. Our website is not a part of this prospectus.
MERGER WITH NOVEX
On August 17, 1999 we completed our merger with NOVEX. As consideration for
the merger we issued approximately 2.5 million shares of our common stock and
assumed options which were converted into options to purchase approximately
500,000 shares of our common stock. Invitrogen merged with NOVEX because we
believe that NOVEX's pre-cast gel electrophoresis product lines are highly
complementary with Invitrogen's product lines. In connection with the
integration of NOVEX, we recently reduced the size of our U.S. workforce by
approximately 14%.
Our NOVEX subsidiary develops, manufactures and markets research
electrophoresis products in pre-cast form, which improves the speed, reliability
and convenience of gel electrophoresis. Gel electrophoresis is a technique that
is used as a tool to visualize the results of many different types of molecular
biology experiments. As such, it is an integral part of the majority of the
molecular biology activities that our kits and other products address. NOVEX
offers approximately 450 products that enable researchers to complete their
experiments more accurately, efficiently and with greater reproducibility
compared to traditional electrophoresis methods. For example, our pre-cast gels
eliminate the time required to make gels in the laboratory, resulting in savings
of 1-2 hours every time a gel is purchased from us rather than made by the
researcher.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered:
By Invitrogen.................................... 1,500,000 shares
By the selling stockholders...................... 3,500,000 shares
Total.......................................... 5,000,000 shares
Common stock to be outstanding after this
offering......................................... 17,836,506 shares
Use of proceeds.................................... - Continued development and manufacture
of our existing products and services
- Research and development of
additional products and services
- Working capital and general corporate
purposes, including potential
acquisitions of products,
technologies or companies
Risk factors....................................... For a discussion of certain
considerations relevant to an
investment in our common stock, see
"Risk Factors."
Nasdaq National Market symbol...................... IVGN
</TABLE>
The number of shares outstanding after this offering is based on shares
outstanding as of August 31, 1999 and:
- Includes 330,000 shares issuable upon exercise of options at a weighted
average exercise price of $1.75 which we anticipate selling stockholders
will exercise prior to this offering.
- Excludes the remaining 3,795,525 shares of common stock issuable upon
exercise of outstanding stock options at a weighted average exercise
price of $9.87 per share.
5
<PAGE>
UNAUDITED SUMMARY PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA
We have presented below the unaudited pro forma combined consolidated
financial data that reflects the pooling of interests method of accounting and
is intended to give you a better picture of what our business might have looked
like had our merger with NOVEX occurred on January 1, 1996. The unaudited
summary pro forma combined consolidated financial data for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999
include both Invitrogen's and NOVEX's financial data for those periods. The
unaudited summary pro forma combined balance sheet data assumes that the merger
occurred on June 30, 1999. The companies may have performed differently if they
had been combined. You should not rely on the pro forma information as being
indicative of the historical results that would have occurred or the future
results that will result after the merger. The unaudited pro forma combined as
adjusted balance sheet data as of June 30, 1999, has been adjusted to reflect
the sale of 1,500,000 shares of common stock by Invitrogen at a price of $24.875
per share, the anticipated exercise of options to purchase 330,000 shares of
common stock by selling stockholders at a weighted average exercise price of
$1.75 and the application of the net proceeds from such sale. See "Use of
Proceeds."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues...................................................... $ 32,556 $ 41,182 $ 53,660 $ 24,705 $ 33,766
Cost of revenues.............................................. 12,094 15,958 19,191 8,280 11,578
--------- --------- --------- --------- ---------
Gross margin................................................ 20,462 25,224 34,469 16,425 22,188
Operating expenses:
Sales and marketing......................................... 6,563 8,305 11,352 5,311 7,006
General and administrative.................................. 6,291 7,312 8,091 3,909 4,398
Research and development.................................... 3,882 5,918 8,603 4,049 4,910
--------- --------- --------- --------- ---------
Total operating expenses.................................. 16,736 21,535 28,046 13,269 16,314
--------- --------- --------- --------- ---------
Income from operations........................................ 3,726 3,689 6,423 3,156 5,874
Other income and expense, net................................. 28 117 217 47 258
--------- --------- --------- --------- ---------
Income before taxes........................................... 3,754 3,806 6,640 3,203 6,132
Provision for income taxes.................................... 1,418 1,371 2,410 1,171 2,184
--------- --------- --------- --------- ---------
Net income.................................................... 2,336 2,435 4,230 2,032 3,948
Less: Preferred stock dividends............................... -- (475) (900) (450) (163)
Accretion of non-voting redeemable common stock.......... (171) (175) (204) (98) (74)
Accretion of beneficial conversion feature related to
convertible preferred stock.............................. -- (15,000) -- -- --
Adjustment to beneficial conversion feature related to
convertible preferred stock.............................. -- -- -- -- 985
--------- --------- --------- --------- ---------
Net income (loss) applicable to common shares............ $ 2,165 $ (13,215) $ 3,126 $ 1,484 $ 4,696
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per share:
Basic....................................................... $ 0.20 $ (1.15) $ 0.26 $ 0.12 $ 0.32
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted..................................................... $ 0.17 $ (1.15) $ 0.23 $ 0.11 $ 0.27
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares used in per share calculation:
Basic....................................................... 10,831 11,461 12,152 12,157 14,645
Diluted..................................................... 12,554 11,461 13,883 13,581 17,101
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------
<S> <C> <C>
PRO FORMA
PRO FORMA COMBINED
COMBINED AS ADJUSTED
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....................................... $ 38,644 $ 73,968
Total assets............................................................................ 68,910 104,234
Long-term obligations, less current maturities.......................................... 1,489 1,489
Total stockholders' equity.............................................................. 54,771 90,095
</TABLE>
6
<PAGE>
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THERE ARE
VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER
THESE RISK FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS.
FAILURE TO SUCCESSFULLY INTEGRATE NOVEX INTO OUR OPERATIONS COULD REDUCE OUR
PROFITABILITY
We closed our merger with NOVEX on August 17, 1999. NOVEX is now a
wholly-owned subsidiary of Invitrogen. Integrating the two companies' operations
is ongoing and will require significant efforts from each company, including the
coordination of research and development and sales and marketing efforts.
Invitrogen may find it difficult to integrate the operations of NOVEX. Personnel
may leave or be terminated because of the merger. We recently reduced the size
of our U.S. workforce by approximately 14% in connection with the integration of
the two companies. Also, David E. McCarty, former President and Chief Executive
Officer of NOVEX, former Executive Vice President of Invitrogen and a selling
stockholder in this offering is no longer our employee, but continues as a
director of Invitrogen. Such employee resignations or terminations may require
us to make severance or other payments and may result in related litigation.
Three former employees of Invitrogen, including Mr. McCarty, have retained
counsel and threatened to take legal action against us arising out of the
termination of their employment. These former employees allege fraud and
wrongful termination in connection with the termination of their employment
following the merger between Invitrogen and NOVEX and the reduction of our U.S.
workforce. These former employees have indicated that their damages would
include lost earnings and the value of unvested stock options which they lost as
a result of the termination of their employment. Although no formal legal
proceedings have been filed and no specific demands have been made, actions may
be filed against us in the future. Additionally, other former employees could
assert similar or other claims arising out of the termination of their
employment. We are currently evaluating all such claims and no assurances can be
given as to the outcome of any resulting litigation.
NOVEX customers, distributors or suppliers may terminate their arrangements
with NOVEX, or demand amended terms to these arrangements, because of the
merger. Invitrogen management may have their attention diverted while trying to
integrate the two companies. Such diversion of management's attention or
difficulties in the transition process could have a material adverse impact on
us. If we are not able to successfully integrate the operations of NOVEX, our
expectations of future results of operations may not be met. Factors which will
determine the success of the merger include:
- Changes in the favorable market reaction to NOVEX's and Invitrogen's
significant products;
- Competitive factors, including technological advances attained by
competitors and patents granted to or contested by competitors, which
would result in their ability to compete against us more effectively;
- The ability of the combined company to increase sales of both NOVEX and
Invitrogen products; and
- The ability of the combined company to operate efficiently and achieve
cost savings.
Even if the two companies are able to integrate operations, there can be no
assurance that the anticipated synergies will be achieved. The failure to
achieve such synergies could have a material adverse effect on the business,
results of operations and financial condition of the combined company.
FAILURE TO MANAGE GROWTH COULD IMPAIR OUR BUSINESS
Our business has grown rapidly. Our pro forma combined net revenues
increased from $32.6 million in 1996 to $53.7 million in 1998. During that same
period we significantly expanded our operations
7
<PAGE>
in the United States and in Europe. The number of employees of Invitrogen and
NOVEX combined has increased from approximately 220 at December 31, 1996 to over
400 at August 31, 1999.
It is very difficult to manage this rapid growth, and our future success
depends on our ability to implement:
- Research and product development;
- Sales and marketing programs;
- Customer support programs;
- Operational and financial control systems; and
- Recruiting and training new personnel.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We expect that we will need to continue to improve our
financial and managerial controls, reporting systems and procedures and to
expand and train our work force worldwide.
We are in the process of upgrading and integrating our enterprise-wide
financial and manufacturing information system. If we fail to successfully
complete this process we could experience manufacturing and shipping delays
which, in turn, could cause increased manufacturing costs and deferred or lost
sales.
We have developed a high-throughput gene cloning and expression system by
scaling up our TOPO TA Cloning technology. We are commercializing this
technology under the name Invitrogenomics. Our future business growth depends in
part on the success of our Invitrogenomics products and services. In order to
succeed in this business we may need to hire additional senior managers.
Moreover, operation of Invitrogenomics may present unfamiliar management
challenges that we might not successfully address. We may not be able to locate
or hire the necessary managers or successfully address the potentially
unfamiliar management issues that may occur in Invitrogenomics or other areas of
our business.
We recently merged with NOVEX, requiring additional investments in
operations, product research and development and sales and marketing which are
significant expenses. Failure to successfully manage and coordinate the growth
of the combined company could adversely impact our revenue and profits.
REDUCTION IN RESEARCH AND DEVELOPMENT BUDGETS AND GOVERNMENT FUNDING MAY IMPACT
SALES
Our customers include researchers at pharmaceutical and biotechnology
companies, academic institutions and government and private laboratories.
Fluctuations in the research and development budgets of these researchers and
their organizations could have a significant effect on the demand for our
products. Research and development budgets fluctuate due to changes in available
resources, spending priorities and institutional budgetary policies. Our
business could be seriously damaged by any significant decrease in life sciences
research and development expenditures by pharmaceutical and biotechnology
companies, academic institutions or government and private laboratories.
In recent years, the United States pharmaceutical industry has undergone
substantial downsizing and consolidation. Further mergers or corporate
consolidations in the pharmaceutical industry could cause us to lose existing
customers and potential future customers, which could have a material adverse
effect on our business, financial condition and results of operations.
A significant portion of our sales have been to researchers, universities,
government laboratories and private foundations whose funding is dependent upon
grants from government agencies such as the U.S. National Institutes of Health
and similar domestic and international agencies. Also, a portion of our direct
revenues comes from NIH Small Business Innovation Research grant funds. Although
the
8
<PAGE>
level of research funding has increased during the past several years, we cannot
assure you that this trend will continue. Government funding of research and
development is subject to the political process, which is inherently fluid and
unpredictable. Also, government proposals to reduce or eliminate budgetary
deficits have sometimes included reduced allocations to the NIH and other
government agencies that fund research and development activities. A reduction
in government funding for the NIH or other government research agencies could
seriously damage our business.
Our customers generally receive funds from approved grants at particular
times of the year, as determined by the federal government. Grants have, in the
past, been frozen for extended periods or have otherwise become unavailable to
various institutions without advance notice. The timing of the receipt of grant
funds affects the timing of purchase decisions by our customers and, as a
result, can cause fluctuations in our sales and operating results.
FAILURE TO LICENSE NEW TECHNOLOGIES COULD IMPAIR OUR NEW PRODUCT DEVELOPMENT
Our business model of providing products to researchers working on a variety
of genetic projects requires us to develop a wide spectrum of products. To
generate broad product lines it is advantageous to sometimes license
technologies from the scientific community at large rather than depending
exclusively on our own employees. As a result, we believe our ability to
in-license new technologies from third parties is and will continue to be
critical to our ability to offer new products. On a pro forma combined basis,
over 40% of our revenues are from products manufactured or sold under licenses
from third parties.
From time to time we are notified or become aware of patents held by third
parties which are related to technologies we are selling or may sell in the
future. After a review of these patents, we may decide to obtain a license for
these technologies from such third parties. We are currently in the process of
negotiating several such licenses and expect that we will also negotiate these
types of licenses in the future. There can be no assurances that we will be able
to negotiate such licenses on favorable terms, or at all.
Our ability to gain access to technologies needed for new products and
services depends in part on our ability to convince inventors that we can
successfully commercialize their inventions. We cannot assure you that we will
be able to continue to identify new technologies developed by others. Even if we
are able to identify new technologies of interest, we may not be able to
negotiate a license on favorable terms, or at all.
LOSS OF LICENSES COULD HURT OUR PERFORMANCE
Some of our licenses do not run for the length of the underlying patent. We
may not be able to renew our existing licenses on favorable terms, or at all. If
we lose the rights to a patented technology, we may need to stop selling certain
of our products or redesign our products or lose a competitive advantage.
Potential competitors could in-license technologies that we fail to license and
potentially erode our market share for certain products.
Our licenses typically subject us to various commercialization, sublicensing
and other obligations. If we fail to comply with these requirements we could
lose important rights under a license, such as the right to exclusivity in a
certain market. In some cases, we could also lose all rights under a license. In
addition, certain rights granted under the license could be lost for reasons out
of our control. For example, the licensor could lose patent protection for a
number of reasons, including invalidity of the licensed patent. We typically do
not receive significant indemnification from a licensor against third party
claims of intellectual property infringement. See "Business--Technology
Licensing" regarding our current licenses.
9
<PAGE>
OUR MARKET SHARE DEPENDS ON NEW PRODUCT INTRODUCTIONS AND ACCEPTANCE
The market for our products and services is only about fifteen years old.
Rapid technological change and frequent new product introductions are typical
for the market. For example, prepackaged kits to perform research in particular
cell lines and already-isolated genetic material are only now coming into
widespread use among researchers. Our future success will depend in part on
continuous, timely development and introduction of new products that address
evolving market requirements. We believe successful new product introductions
provide a significant competitive advantage because customers make an investment
of time in selecting and learning to use a new product, and are reluctant to
switch thereafter. To the extent we fail to introduce new and innovative
products, we may lose market share to our competitors, which will be difficult
or impossible to regain. An inability, for technological or other reasons, to
successfully develop and introduce new products could reduce our growth rate or
damage our business.
We have made a substantial investment in developing the technology
underlying Invitrogenomics products and services. The products portion of
Invitrogenomics was launched commercially in 1998, and has not achieved
significant revenues. We cannot be sure that Invitrogenomics will achieve any
commercial success or that revenues will equal or exceed the cost of our
investment.
In the past we have experienced, and are likely to experience in the future,
delays in the development and introduction of products. We cannot assure you
that we will keep pace with the rapid rate of change in life sciences research,
or that our new products will adequately meet the requirements of the
marketplace or achieve market acceptance. Some of the factors affecting market
acceptance of new products include:
- Availability, quality and price relative to competitive products;
- The timing of introduction of the product relative to competitive
products;
- Scientists' opinion of the product's utility;
- Citation of the product in published research; and
- General trends in life sciences research.
The expenses or losses associated with unsuccessful product development
activities or lack of market acceptance of our new products could materially
adversely affect our business, operating results and financial condition.
LOSS OF KEY PERSONNEL COULD HURT OUR BUSINESS
Our products and services are highly technical in nature. In general only
highly qualified and trained scientists have the necessary skills to develop and
market our products and provide our services. We face intense competition for
these professionals from our competitors and our customers, marketing partners
and companies throughout our industry. Any failure on our part to hire, train
and retain a sufficient number of qualified professionals would seriously damage
our business. We do not generally enter into employment agreements requiring
these employees to continue in our employment for any period of time. See
"Management."
COMPETITION IN THE LIFE SCIENCES RESEARCH MARKET COULD REDUCE SALES
The markets for our products are very competitive and price sensitive. Many
other life sciences research product suppliers have greater financial,
operational, sales and marketing resources, and more experience in research and
development than we do. These and other companies may have developed or could in
the future develop new technologies that compete with our products or even
render our products obsolete. If a competitor develops superior technology or
cost-effective alternatives to our kits and other products, our business,
operating results and financial condition could be materially adversely
affected.
10
<PAGE>
The market for our electrophoresis products is also subject to specific
competitive risks. The recent sale by FMC of its BioProducts division to a
competitor of NOVEX may result in additional market and pricing pressure on our
products. Further, NOVEX recently increased its prices, which may be met with
customer resistance and could give competing companies an additional opening
into our markets. The gel electrophoresis market is highly price competitive.
Our competitors have in the past and may in the future compete by lowering
prices on certain products. In certain cases, we may respond by lowering our
prices which would reduce revenues and profits. Conversely, failure to
anticipate and respond to price competition may hurt our market share.
We believe that customers in our markets display a significant amount of
loyalty to their initial supplier of a particular product. Therefore, it may be
difficult to generate sales to customers who have purchased products from
competitors. To the extent we are unable to be the first to develop and supply
new products, our competitive position will suffer. See "Business--Competition"
for more information.
DISTRIBUTORS MAY FORCE US TO USE MORE EXPENSIVE MARKETING AND DISTRIBUTION
CHANNELS
Certain of our customers have developed purchasing initiatives to reduce the
number of vendors they purchase from in order to lower their supply costs. In
some cases these accounts have established agreements with large distributors,
which include discounts and the distributors' direct involvement with the
purchasing process. These activities may force us to supply the large
distributors with our products at a discount to reach those customers. For
similar reasons many larger customers, including the federal government, have
requested and may in the future request special pricing arrangements, including
blanket purchase agreements. These agreements may limit our pricing flexibility,
especially with respect to our electrophoresis products, which could adversely
impact our business, financial condition and results of operations. Currently we
do not have the capability to accept and process orders through our website.
Accordingly, we may implement sales through Internet vendors. Internet sales
through third parties may negatively impact our gross margins as the commission
paid on Internet sales would be an additional cost not incurred through the use
of non-Internet vendors.
WE RELY ON THIRD-PARTY MANUFACTURERS TO MANUFACTURE SOME OF OUR PRODUCTS AND
COMPONENTS
We rely on third-party manufacturers to supply many of our raw materials,
product components and in some cases, entire products. In particular, we
purchase all of the cassettes used in our electrophoresis pre-cast gels from a
single third-party manufacturer. Also, we recently contracted with an outside
vendor for the production of our PowerEase instrument products. Manufacturing
problems may occur with these and other outside sources. If such problems occur,
there can be no assurance that we will be able to manufacture our products
profitably or on time.
INTERNATIONAL UNREST OR FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR
RESULTS
Including subsidiaries and distributors, our products are currently marketed
in over 30 countries throughout the world. Our international revenues, which
include revenues from our Netherlands and Germany subsidiaries and export sales,
represented 35% of our pro forma combined revenues in 1998, 29% in 1997 and 26%
in 1996. We expect that international revenues will continue to account for a
significant percentage of our revenues for the foreseeable future, in part
because we intend to expand our international operations.
There are a number of risks arising from our international business,
including:
- General economic and political conditions in the markets in which we
operate;
- Potential increased costs associated with overlapping tax structures;
- Potential trade restrictions and exchange controls;
- More limited protection for intellectual property rights in some
countries;
11
<PAGE>
- Difficulties and costs associated with staffing and managing foreign
operations;
- Uncertain effects of the movement in Europe to a unified currency;
- Slower growth in the European market before the unified currency is fully
adopted;
- Unexpected changes in regulatory requirements;
- The difficulties of compliance with a wide variety of foreign laws and
regulations;
- Longer accounts receivable cycles in certain foreign countries; and
- Import and export licensing requirements.
A significant portion of our business is conducted in currencies other than
the U.S. dollar, which is our reporting currency. We recognize foreign currency
gains or losses arising from our operations in the period incurred. As a result,
currency fluctuations among the U.S. dollar and the currencies in which we do
business have caused and will continue to cause foreign currency transaction
gains and losses. We cannot predict the effects of exchange rate fluctuations
upon our future operating results because of the number of currencies involved,
the variability of currency exposures and the potential volatility of currency
exchange rates. We engage in foreign exchange hedging transactions to manage our
foreign currency exposure, but we cannot assure you that our strategies will
adequately protect our operating results from the effects of exchange rate
fluctuations. For more information see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Currency Hedging and Foreign
Currency Translation."
The Asia/Pacific region has recently experienced unstable economic
conditions and significant devaluation in its currencies. The economic situation
in the region may result in slower payments of outstanding receivable balances.
To date this region has not represented a significant portion of our revenues.
However, to the extent the Asia/Pacific region becomes increasingly important,
or to the extent the factors affecting the region begin to affect other
geographic locations, our business could be damaged.
INABILITY TO PROTECT OUR TECHNOLOGIES COULD AFFECT OUR ABILITY TO COMPETE
Our success depends to a significant degree upon our ability to develop
proprietary products and technologies. However, we cannot assure you that
patents will be granted on any of our patent applications. We also cannot assure
you that the scope of any of our issued patents will be sufficiently broad to
offer meaningful protection. We only have patents issued in selected countries.
Therefore, third parties can make, use and sell products covered by our patents
in any country in which we do not have patent protection. In addition, our
issued patents or patents we license could be successfully challenged,
invalidated or circumvented so that our patent rights would not create an
effective competitive barrier. The right to use our products is given to our
customers under label licenses that are for research purposes only. These
licenses could be contested and no assurances can be made that we would either
be aware of an unauthorized use or be able to enforce the restrictions in a
cost-effective manner. See "Business--Patents and Proprietary Technologies" for
more information regarding our existing and pending patents.
PUBLICITY OF TRADE SECRETS COULD AID OUR COMPETITORS
We attempt to protect our trade secrets by entering into confidentiality
agreements with third parties, employees and consultants. However, these
agreements can be breached and, if they are, there may not be an adequate remedy
available to us. If our trade secrets become known we may lose our competitive
position.
12
<PAGE>
INTELLECTUAL PROPERTY OR OTHER LITIGATION COULD HARM OUR BUSINESS
Litigation regarding patents and other intellectual property rights is
extensive in the biotechnology industry. We are aware that patents have been
applied for and in some cases issued to others claiming technologies which are
closely related to ours. As a result, and in part due to the ambiguities and
evolving nature of intellectual property law, we periodically receive notices of
potential infringement of patents held by others. Although we have to date
successfully resolved these types of claims, we may not be able to do so in the
future.
In the event of an intellectual property dispute we may be forced to
litigate. Such litigation could involve proceedings declared by the U.S. Patent
and Trademark Office or the International Trade Commission, as well as
proceedings brought by affected third parties. Intellectual property litigation
can be extremely expensive, and such expense, as well as the consequences should
we not prevail, could seriously harm our business.
If a third-party claimed an intellectual property right to technology we
use, we might need to discontinue an important product or product line, alter
our products and processes, pay license fees or cease certain activities.
Although we might under these circumstances attempt to obtain a license to such
intellectual property, we may not be able to do so on favorable terms, or at
all.
In addition to intellectual property litigation, other substantial, complex
or extended litigation could result in large expenditures by us and distraction
of our management. For example, lawsuits by employees, stockholders,
collaborators or distributors could be very costly and substantially disrupt our
business. Disputes from time to time with such companies or individuals are not
uncommon and we cannot assure you that we will always be able to resolve them
out of court.
ACCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS
Portions of our operations require the controlled use of hazardous and
radioactive materials. Although we believe our safety procedures comply with the
standards prescribed by federal, state and local regulations, the risk of
accidental contamination of property or injury to individuals from these
materials cannot be completely eliminated. In the event of such an accident, we
could be liable for any damages that result, which could seriously damage our
business. Additionally, any accident could partially or completely shut down our
research and manufacturing facilities and operations.
POTENTIAL PRODUCT LIABILITY CLAIMS COULD AFFECT OUR EARNINGS AND FINANCIAL
CONDITION
We face a potential risk of liability claims based on our products or
services. We carry product liability insurance coverage which is limited in
scope and amount but which we believe to be adequate. We cannot assure you,
however, that we will be able to maintain this insurance at reasonable cost and
on reasonable terms. We also cannot assure you that this insurance will be
adequate to protect us against a product liability claim, should one arise.
VOLATILITY IN OUR STOCK PRICE COULD IMPAIR YOUR INVESTMENT
The price of our common stock may fluctuate substantially due to a variety
of factors, including:
- Quarterly fluctuations in our operating and earnings per share results;
- Technological innovations or new product introductions by us or our
competitors;
- Economic conditions;
- Disputes concerning patents or proprietary rights;
- Changes in earnings estimates by market research analysts;
- Sales of common stock by existing holders;
- Loss of key personnel; and
13
<PAGE>
- Securities class action or other litigation.
The market price for our common stock may also be affected by our ability to
meet analyst's expectations. Any failure to meet such expectations, even
slightly, could have an adverse effect on the market price of our common stock.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against that company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
our management's attention and resources, which could have an adverse effect on
our business, results of operations and financial condition. See "Price Range of
Common Stock."
FUTURE SALES OF CURRENTLY OUTSTANDING SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE
The market price of our common stock could drop as a result of sales of a
large number of shares in the market after this offering or in response to the
perception that such sales could occur. Upon completion of this offering, we
will have outstanding 17,836,506 shares of common stock (based upon shares
outstanding as of August 31, 1999). This assumes no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options after
August 31, 1999, other than options we anticipate the selling stockholders will
exercise in connection with this offering. Of these shares, approximately
11,770,231 will be registered and freely tradable. All of the remaining
approximately 6,066,275 shares are unregistered but may be sold in accordance
with Rule 144 and Rule 701 of the Securities Act of 1933, as amended. Following
this offering, approximately 7,223,938 registered and unregistered shares will
be subject to 90-day lock-up agreements, subject to certain exceptions. After
expiration of the lock-up period, all of such shares will be eligible for
immediate sale, in certain instances subject to the volume limitations of Rule
144. Donaldson, Lufkin & Jenrette can release shares from one or more of the
lock-up agreements without our approval. Holders of 932,942 shares will have the
right to request that we register those shares for sale in the public market.
See "Shares Eligible for Future Sale."
CONTROL OF INVITROGEN BY EXECUTIVE OFFICERS AND DIRECTORS MAY IMPEDE CHANGES TO
INVITROGEN OR ITS POTENTIAL SALE
After this offering, our executive officers and directors collectively will
beneficially own approximately 33.8% of the outstanding common stock. That
percentage would drop to 32.0% if the underwriters' overallotment option is
exercised in full. Executive officers and directors may therefore be able to
exercise effective control of Invitrogen. Such a concentration of ownership may
have the effect of delaying or preventing transactions resulting in a change of
control of Invitrogen, including transactions where stockholders might otherwise
receive a premium for their shares over current market prices. See "Principal
and Selling Stockholders."
ANTI-TAKEOVER PROVISIONS COULD IMPAIR OUR STOCK PRICE
Certain provisions of our certificate of incorporation, bylaws and Delaware
law could be used by our incumbent management to make it substantially more
difficult for a third party to acquire control of Invitrogen. These provisions
could discourage potential takeover attempts and could adversely affect the
market price of our common stock. See "Description of Capital Stock--Delaware
Anti-takeover Law and Certain Charter Provisions."
ABSENCE OF DIVIDENDS COULD REDUCE OUR ATTRACTIVENESS TO INVESTORS
Some investors favor companies that pay dividends, particularly in market
downturns. We have never declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings for funding growth and,
therefore, we do not currently anticipate paying cash dividends
14
<PAGE>
on our common stock in the foreseeable future. Because we may not pay dividends,
your return on this investment likely depends on your selling our stock at a
profit. See "Dividend Policy."
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus, including the above risk
factors, contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, such as statements relating to trends
in revenues, expenses and net income, and are therefore prospective. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," "project," and "continue" or
similar words. You should read statements that contain these words carefully
because they:
- - Discuss our future expectations;
- - Contain projections of our future results of operations or of our financial
condition; and
- - State other "forward-looking" information.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to predict
accurately or over which we have no control. The risk factors listed above, as
well as any similar language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectation we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in these risk factors and elsewhere in this prospectus could
have a material adverse effect on our business, operating results and financial
condition.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to Invitrogen from the sale of the 1,500,000 shares of
common stock at an offering price per share of $24.875 are estimated to be
approximately $34,747,000 after deducting underwriting discounts and commissions
and estimated offering expenses. The net proceeds to Invitrogen would increase
to $40,064,000 if the underwriters exercise their over-allotment option in full.
Invitrogen will not receive any of the proceeds from the sale of common stock by
the selling stockholders.
We intend to use the net proceeds of this offering for:
- The continued development and manufacture of existing products and
services;
- Research and development of additional products and services; and
- Working capital and other general corporate purposes, including potential
acquisitions of products, technologies or companies.
While we from time to time engage in preliminary discussions with respect to
acquisitions, we are not a party to any agreements, understandings or
commitments with respect to such transactions. We will invest the net proceeds
in short-term, interest bearing, investment grade securities.
Based on our current operating plan, we anticipate that the net proceeds of
this offering, together with our available cash, expected interest income and
funds from operations, should be sufficient to finance our capital requirements
for the next two years. This estimate is based on assumptions that could be
negatively impacted by the matters discussed in "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
IVGN. Public trading of our stock began on February 26, 1999. The following
table shows the high and low sales prices per share of our stock for each period
shown since our stock began publicly trading.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999: HIGH LOW
<S> <C> <C>
First quarter (beginning February 26)...................................... $15 1/2 $12
Second quarter............................................................. 26 12 7/8
Third quarter (through September 10)....................................... 31 23 3/8
</TABLE>
On September 10, 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $24 7/8. As of August 31, 1999, there were
16,006,506 shares of common stock outstanding and approximately 243 shareholders
of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not anticipate paying such cash dividends in the foreseeable future. We
currently anticipate that we will retain all of our future earnings for use in
the development and expansion of our business and for general corporate
purposes. Any determination to pay dividends in the future will be at the
discretion of our board of directors and will depend upon our results of
operation, financial condition and other factors as the board of directors, in
its discretion, deems relevant.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Invitrogen as of June
30, 1999. The pro forma combined column assumes that the recent merger with
NOVEX occurred on June 30, 1999. The pro forma combined as adjusted column gives
effect to the application of the net proceeds from the sale of 1,500,000 shares
of common stock to be offered by Invitrogen at an assumed public offering price
of $24.875 per share and the anticipated exercise of options to purchase 330,000
shares of common stock by selling stockholders at a weighted average exercise
price of $1.75 per share. In addition, the calculations in the table do not
reflect the remaining 2,952,434 shares of common stock issuable upon exercise of
outstanding options at June 30, 1999 at an average exercise price of $4.48. See
"Management--Stock Option Plans."
This table should be read in conjunction with the Invitrogen Consolidated
Financial Statements and the related Notes and the Unaudited Pro Forma Combined
Financial Statements and related Notes thereto included elsewhere in this
prospectus. Also see "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------------------
PRO FORMA
PRO FORMA COMBINED
ACTUAL COMBINED AS ADJUSTED
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, less current maturities............................ $ 664 $ 1,489 $ 1,489
Stockholders' equity:
Preferred stock, $0.01 par value: 6,405,884 shares authorized; no shares
issued or outstanding, actual, pro forma and as adjusted.............. -- -- --
Common stock, $0.01 par value: 50,000,000 shares authorized; 13,430,650
shares issued and outstanding actual; 15,960,766 shares issued and
outstanding pro forma; 17,460,766 issued and outstanding as
adjusted.............................................................. 134 160 178
Other stockholders' equity.............................................. 52,845 54,611 89,917
--------- ------- -----------
Total stockholders' equity............................................ 52,979 54,771 90,095
--------- ------- -----------
Total capitalization.................................................. $ 53,643 $ 56,260 $ 91,584
--------- ------- -----------
--------- ------- -----------
</TABLE>
17
<PAGE>
INVITROGEN SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of Invitrogen presented
below as of and for the years ended December 31, 1994, 1995, 1996, 1997 and
1998, as well as interim financial data as of and for the six months ended June
30, 1998 and 1999, are derived from the Invitrogen Consolidated Financial
Statements. The 1995, 1996, 1997 and 1998 full-year financial statements have
been audited by Arthur Andersen LLP, independent public accountants. The June
30, 1998 and 1999 financial data has not been audited. The consolidated balance
sheets as of December 31, 1997 and 1998, the related statements of operations
for each of the three years ended December 31, 1996, 1997 and 1998 together with
the related report of independent public accountants, are included elsewhere in
this prospectus.
The selected consolidated financial data set forth below contains only a
portion of Invitrogen's financial statements, and should be read in conjunction
with the Invitrogen Consolidated Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. In particular, see Notes to
Invitrogen Consolidated Financial Statements for an explanation of the
calculations of earnings per share and per share amounts.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................... $11,754 $14,342 $19,121 $ 24,965 $31,414 $14,873 $19,888
Cost of revenues................................................... 4,554 4,743 5,818 7,989 8,642 4,065 5,087
------- ------- ------- -------- ------- ------- -------
Gross margin..................................................... 7,200 9,599 13,303 16,976 22,772 10,808 14,801
Operating expenses:
Sales and marketing.............................................. 2,685 3,646 4,236 4,959 6,976 3,438 3,878
General and administrative....................................... 2,245 2,542 3,880 3,932 4,428 2,098 2,498
Research and development......................................... 1,623 2,043 2,659 4,416 7,209 3,306 3,963
------- ------- ------- -------- ------- ------- -------
Total operating expenses....................................... 6,553 8,231 10,775 13,307 18,613 8,842 10,339
------- ------- ------- -------- ------- ------- -------
Income from operations............................................. 647 1,368 2,528 3,669 4,159 1,966 4,462
Other income (expense), net........................................ (83) (6) 155 268 457 169 383
------- ------- ------- -------- ------- ------- -------
Income before taxes................................................ 564 1,362 2,683 3,937 4,616 2,135 4,845
Benefit (provision) for income taxes............................... 45 (206) (939) (1,413) (1,638) (761) (1,696)
------- ------- ------- -------- ------- ------- -------
Net income......................................................... 609 1,156 1,744 2,524 2,978 1,374 3,149
Less: Preferred stock dividends.................................... -- -- -- (475) (900) (450) (163)
Accretion of non-voting redeemable common stock................ -- (110) (171) (175) (204) (98) (74)
Accretion of beneficial conversion feature related to
convertible preferred stock.................................. -- -- -- (15,000) -- -- --
Adjustment to beneficial conversion feature related to
convertible preferred stock.................................. -- -- -- -- -- -- 985
------- ------- ------- -------- ------- ------- -------
Net income (loss) applicable to common shares.................. $ 609 $ 1,046 $ 1,573 $(13,126) $ 1,874 $ 826 $ 3,897
------- ------- ------- -------- ------- ------- -------
------- ------- ------- -------- ------- ------- -------
Earnings (loss) per share:
Basic............................................................ $ 0.07 $ 0.11 $ 0.19 $ (1.47) $ 0.19 $ 0.09 $ 0.32
------- ------- ------- -------- ------- ------- -------
------- ------- ------- -------- ------- ------- -------
Diluted.......................................................... $ 0.07 $ 0.11 $ 0.16 $ (1.47) $ 0.17 $ 0.08 $ 0.27
------- ------- ------- -------- ------- ------- -------
------- ------- ------- -------- ------- ------- -------
Weighted average shares used in per share calculation:
Basic............................................................ 9,268 9,602 8,356 8,939 9,626 9,632 12,116
Diluted.......................................................... 9,268 9,602 10,080 8,939 11,208 10,996 14,230
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
JUNE 30,
-----------
1999
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............... $ 631 $ 587 $ 1,381 $ 9,152 $ 6,011 $ 38,533
Total assets.................................................... 4,642 5,992 8,258 18,056 22,815 58,151
Long-term obligations, less current portion..................... 838 433 110 143 83 664
Non-voting redeemable common stock of Invitrogen B.V............ -- 1,143 1,306 1,295 1,599 --
Convertible preferred stock..................................... -- -- -- 15,242 16,141 --
Total stockholders' equity (deficit)............................ 1,111 2,298 3,779 (1,853) 585 52,979
</TABLE>
18
<PAGE>
UNAUDITED SELECTED PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA
We have presented below the unaudited selected pro forma combined
consolidated financial data that reflects the pooling of interests method of
accounting and is intended to give you a better picture of what our business
might have looked like had our merger with NOVEX occurred on January 1, 1994.
The unaudited selected pro forma combined financial data for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 and the six months ended June 30,
1998 and 1999 include both Invitrogen's and NOVEX's financial data for these
periods. The unaudited pro forma combined balance sheet data assumes that the
merger occurred on the date presented. The companies may have performed
differently if they had been combined. You should not rely on the unaudited pro
forma information as being indicative of the historical results that would have
occurred or the future results that will result after the merger.
The financial data set forth below contains only a portion of the financial
statements and should be read in conjunction with the Unaudited Pro Forma
Combined Financial Statements and related Notes thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 20,390 $ 24,728 $ 32,556 $ 41,182 $ 53,660 $ 24,705 $ 33,766
Cost of revenues..................................... 8,926 9,803 12,094 15,958 19,191 8,280 11,578
--------- --------- --------- --------- --------- --------- ---------
Gross margin....................................... 11,464 14,925 20,462 25,224 34,469 16,425 22,188
Operating expenses:
Sales and marketing................................ 4,222 5,068 6,563 8,305 11,352 5,311 7,006
General and administrative......................... 3,723 4,916 6,291 7,312 8,091 3,909 4,398
Research and development........................... 2,737 3,220 3,882 5,918 8,603 4,049 4,910
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses......................... 10,682 13,204 16,736 21,535 28,046 13,269 16,314
--------- --------- --------- --------- --------- --------- ---------
Income from operations............................... 782 1,721 3,726 3,689 6,423 3,156 5,874
Other income (expense), net.......................... (148) (57) 28 117 217 47 258
--------- --------- --------- --------- --------- --------- ---------
Income before taxes.................................. 634 1,664 3,754 3,806 6,640 3,203 6,132
Benefit (provision) for income taxes................. 16 (332) (1,418) (1,371) (2,410) (1,171) (2,184)
--------- --------- --------- --------- --------- --------- ---------
Net income........................................... 650 1,332 2,336 2,435 4,230 2,032 3,948
Less: Preferred stock dividends...................... -- -- -- (475) (900) (450) (163)
Accretion of non-voting redeemable common
stock.......................................... -- (110) (171) (175) (204) (98) (74)
Accretion of beneficial conversion feature
related to convertible preferred stock......... -- -- -- (15,000) -- -- --
Adjustment to beneficial conversion feature
related to convertible preferred stock......... -- -- -- -- -- -- 985
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) applicable to common shares........ $ 650 $ 1,222 $ 2,165 $ (13,215) $ 3,126 $ 1,484 $ 4,696
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per share:
Basic.............................................. $ 0.05 $ 0.10 $ 0.20 $ (1.15) $ 0.26 $ 0.12 $ 0.32
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Diluted............................................ $ 0.05 $ 0.10 $ 0.17 $ (1.15) $ 0.23 $ 0.11 $ 0.27
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares used in per share
calculation:
Basic.............................................. 11,947 11,928 10,831 11,461 12,152 12,157 14,645
Diluted............................................ 11,947 11,928 12,554 11,461 13,883 13,581 17,101
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................ $ 672 $ 649 $ 1,430 $ 9,317 $ 6,530
Total assets..................................................... 7,349 9,877 13,342 23,791 32,050
Long-term obligations, less current portion...................... 838 1,022 698 628 1,577
Non-voting redeemable common stock of Invitrogen B.V............. -- 1,143 1,306 1,295 1,599
Convertible preferred stock...................................... -- -- -- 15,242 16,141
Total stockholders' equity....................................... 2,418 4,098 6,509 984 4,676
<CAPTION>
JUNE 30,
-----------
1999
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................ $ 38,644
Total assets..................................................... 68,910
Long-term obligations, less current portion...................... 1,489
Non-voting redeemable common stock of Invitrogen B.V............. --
Convertible preferred stock...................................... --
Total stockholders' equity....................................... 54,771
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS REFLECT THE OPERATIONS OF INVITROGEN PRIOR TO THE COMPLETION OF THE
MERGER WITH NOVEX, AND UNLESS SPECIFICALLY STATED OTHERWISE, DO NOT INCLUDE
NOVEX'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
We are engaged primarily in the development, manufacturing and marketing of
research kits used to conduct molecular biology research. Substantially all of
our revenue to date has come from the sale of research kits and related products
used by a variety of scientific researchers to conduct gene cloning, expression
and analysis experiments. Our research kits are sold primarily in the United
States, Europe and Japan. Our products are used for research purposes and their
use is not regulated by the United States Food and Drug Administration or by any
comparable international organization.
We manufacture the majority of our research kits and other products in our
manufacturing facilities in Carlsbad and San Diego, California. In addition, we
maintain selected arrangements with third party manufacturers.
The majority of our sales activities are conducted through a dedicated
direct sales organization located in the United States and Europe. We also
conduct marketing and distribution activities at our facility in the United
States and at a facility we own in the Netherlands. A small proportion of our
sales are to international distributors who resell Invitrogen kits to
researchers. These distributors are located in selected territories in Europe,
as well as in Japan and other territories in Asia. We currently have no plans to
establish a direct sales force in these territories, although we may choose in
the future to establish a direct sales organization in additional territories.
We conduct research activities in the United States and business development
activities in the United States and Europe. As part of these activities we
actively seek to license intellectual property from academic, government and
commercial institutions relating to gene cloning, expression and analysis
technologies. To date, we have obtained over 85 licenses, which provide us with
access to over 200 patents covering gene cloning, expression and analysis
materials and techniques.
In June 1998, we began using our high-throughput cloning and expression
technologies, which we market under the name Invitrogenomics. We are using this
technology to rapidly clone and patent full-length genes which we are licensing
and selling. In addition, we use our Invitrogenomics technology to provide gene
cloning and expression services on a contract basis to pharmaceutical,
biotechnology and agricultural companies. Invitrogenomics products and services
have generated limited revenues to date.
Our revenues have increased significantly since our inception, and from 1994
to 1998, we have experienced compound annual revenue growth of 28%. The increase
in our revenues has been due to several factors, including the continued growth
of the market for gene cloning and expression kits, increasing market acceptance
of our gene cloning and expression kits, our introduction of new research kits
for gene cloning, expression and analysis, and the expansion of our direct sales
and marketing efforts. We plan to continue to introduce new research kits, as we
believe continued new product development and rapid product introduction is a
critical competitive factor in the market for molecular biology research kits.
In order to support increased levels of sales and to augment our long-term
competitive position, we anticipate that we will continue to increase
expenditures in sales and marketing, manufacturing and research and development.
We currently manufacture products for inventory and ship products shortly
after the receipt of orders, and anticipate that we will do so in the future.
Accordingly, we have not developed a significant backlog and do not anticipate
we will develop a material backlog in the future.
20
<PAGE>
We have acquired a significant number of patent rights from third parties as
part of our business activities. These patent rights are used as a basis for the
development of our research kits and Invitrogenomics technologies. We have
historically paid and are obligated to pay in the future to such third parties
royalties relating to sales of some of our research kits and selected services.
Royalty expense is recognized as a cost of revenue as the related royalties are
incurred.
We anticipate that our results of operations may fluctuate from quarter to
quarter and will be difficult to predict. The timing and degree of fluctuation
will depend upon several factors, including:
- Changes in customer research budgets which are influenced by the timing of
their research and commercialization efforts and their receipt of
government grants;
- Competitive product introductions;
- Our ability to successfully introduce or transition the market to new
products;
- Market acceptance of existing or new products;
- Our ability to manufacture our products efficiently; and
- Our ability to control or adjust research and development, marketing,
sales and general and administrative expenses in response to changes in
revenues.
In addition, our results of operations could be affected by the timing of
orders from distributors and the mix of sales among distributors and our direct
sales force. Although we have experienced growth in recent years, there can be
no assurance that, in the future, we will sustain revenue growth or remain
profitable on a quarterly or annual basis or that our growth will be consistent
with predictions made by securities analysts. Additionally, quarter to quarter
comparisons of operating results are not necessarily indicative of future
results.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Revenues for the three months ended June 30 increased $2.6
million, or 33%, from $7.7 million in 1998 to $10.3 million for 1999. For these
same periods, revenues in the United States increased $1.8 million, or 35%, from
$5.1 million to $6.9 million, and revenues outside of the United States
increased $0.8 million, or 29%, from $2.6 million to $3.4 million.
For the six months ended June 30, revenues increased $5.0 million, or 34%,
from $14.9 million in 1998 to $19.9 million in 1999. Revenues in the United
States increased $3.5 million, or 36%, from $9.7 million in 1998 to $13.2
million in 1999 and revenues outside of the United States increased $1.5
million, or 30%, from $5.2 million in 1998 to $6.7 million in 1999.
The overall increase in revenues was primarily attributable to continued
market growth for gene cloning and expression kits and increased market
penetration of our gene cloning and gene expression product lines. We expect
that future revenues will be affected by new product introductions, competitive
conditions, customer research budgets, and the rate of expansion of our customer
base.
GROSS MARGIN. Gross margin as a percentage of revenues for the three months
ended June 30, 1999 increased to 75% from 72% reported for the same period in
1998. This improvement resulted from general price increases, higher grant
revenue and lower shipping costs. Also contributing to higher gross margins was
the absence of royalty expense on our TA Cloning products which was discontinued
during the three months ended June 30, 1999 upon our acquisition of sole
ownership of the patents that cover the technologies used in these products.
This acquisition gave Invitrogen exclusive worldwide royalty-free rights as the
sole assignee through 2013, the life of the patents.
21
<PAGE>
For the six months ended June 30, gross margin increased from 73% in 1998 to
74% in 1999. The increase resulted from the improvements during the three months
discussed above.
We believe that gross margin for future periods could be affected by sale
volumes, competitive conditions, royalty payments on licensed technologies, and
foreign exchange factors. Foreign currency fluctuations had a negligible impact
during both periods. The functional currency of our Netherlands subsidiary,
Invitrogen B.V., is the Netherlands Guilder (NLG). The translation from NLG to
Dollars for revenue and expenses is based on the average exchange rate during
the period; large increases or decreases in the spread between currencies have
affected and may continue to affect gross margin and reported income. Invitrogen
B.V. conducts its European business in the currencies of its significant
customers. Exchange gains or losses arising from transactions denominated in
these currencies are recorded using the actual exchange differences on the date
of the transaction. Large increases or decreases in these currency fluctuations
could also impact gross margin and reported profits.
SALES AND MARKETING. Sales and marketing expenses increased $0.1 million
from $1.8 million for the three months ended June 30, 1998 to $1.9 million for
the same period in 1999. As a percentage of revenues, sales and marketing
expenses decreased from 24% to 19% for these periods as our revenue growth
continued to outpace spending for sales and marketing.
For the six months ended June 30, 1999, sales and marketing expenses
increased $0.5 million from $3.4 million in 1998 to $3.9 million in 1999 and as
a percentage of sales declined from 23% in 1998 to 20% in 1999.
We anticipate that sales and marketing will comprise 22% to 23% of revenues
over the next few years as we continue the expansion of our field sales forces
in both the United States and Europe.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended June 30 increased $0.2 million from $1.0 million in 1998 to
$1.2 million in 1999. As a percentage of revenues for the same periods, general
and administrative expenses decreased from 13% to 12%.
For the six months ended June 30, 1999 general and administrative expenses
increased $0.4 million from $2.1 million, or 14% of revenues, in 1998 to $2.5
million, or 13% of revenues in 1999.
The absolute increase resulted from the continued expansion of
administrative resources to support our growth and requirements as a newly
public company. The decline as a percentage of revenues occurred as a fixed
portion of our general and administrative expenses was spread over a larger
revenue base. We expect our aggregate general and administrative expenses for
the remainder of 1999 to be consistent with that of the first half of 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $0.2
million from $1.9 million for the second quarter in 1998 to $2.1 million in
1999. As a percentage of revenues, research and development expenses decreased
from 24% in 1998 to 20% in 1999.
For the six months ended June 30, 1999, research and development expenses
increased $0.7 million to $4.0 million, or 20% of revenues, from $3.3 million
for the same period in 1998, or 22% of revenues.
OTHER INCOME (EXPENSE). Other income increased $0.3 million from $3,000 for
the three months ended June 30, 1998 to $0.3 million for the same period in
1999. The increase was mainly attributable to higher interest and other income,
resulting primarily from the larger balances of cash and investments during the
period.
For the six months ended June 30, other income increased $0.2 million from
$0.2 million in 1998 to $0.4 million in 1999. The increase in other income was
attributable to higher interest income partially offset by higher foreign
currency transaction costs.
22
<PAGE>
PROVISION FOR INCOME TAXES. Our effective tax rate decreased slightly from
36% for the three and six months ended June 30, 1998 to 35% for the same period
in 1999. We currently receive tax credits on certain R&D expenditures; in the
past, these tax credits have been authorized by the U.S. Congress on a year by
year basis and we have no assurance they will be available in future years.
Assuming that the U.S. Congress renews the R&D tax credit legislation, we
anticipate that our effective rate for 1999 will be approximately 35%.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUE. Revenue increased $6.4 million, or 26%, from $25.0 million in 1997
to $31.4 million in 1998. For these same periods, revenues in the United States
increased $3.9 million, or 24%, from $16.4 million to $20.3 million, and revenue
outside the United States increased $2.5 million, or 30%, from $8.6 million to
$11.1 million. The overall increase in revenue was primarily attributable to
continued market growth for gene cloning and expression kits and increased
market penetration of our gene cloning and gene expression product lines. In
addition, in 1998 our new products contributed approximately $2.5 million in
revenue.
GROSS MARGIN. Our gross margin increased from $17.0 million in 1997 to
$22.8 million in 1998. Gross margin as a percentage of revenues increased from
68% to 72% for these periods. Gross margin improvements during the period were
primarily a result of absorbing certain manufacturing labor and overhead costs
over an increased revenue base. Foreign currency fluctuations had a negligible
impact during both periods.
SALES AND MARKETING. Sales and marketing expenses increased 41% from $5.0
million in 1997 to $7.0 million in 1998. As a percentage of revenues, sales and
marketing expenses increased from 20% to 22% for these periods. These increases
resulted from the growth of our field sales force in the United States and
Europe.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
13% from $3.9 million in 1997 to $4.4 million in 1998. As a percentage of
revenues, general and administrative expenses decreased from 16% to 14% for
these periods. The absolute increase resulted from the continued expansion of
administrative resources to support our growth. The decline as a percentage of
revenues occurred as a fixed portion of our general and administrative expenses
was spread over a larger revenue base.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 63%
from $4.4 million in 1997 to $7.2 million in 1998. As a percentage of revenues,
research and development expenses increased from 18% to 23% for these periods.
The increases resulted primarily from the development of our high-throughput
gene cloning and expression technology and greater personnel and research
supplies expense as we continue to expand our gene cloning, expression, analysis
and related products.
OTHER INCOME (EXPENSE). Other income, principally earned interest,
increased $0.2 million, from $0.3 million in 1997, to $0.5 million in 1998. This
increase resulted primarily from the larger average balances of cash and cash
equivalents during the later period.
PROVISION FOR INCOME TAXES. Our effective tax rate decreased slightly from
36% in 1997 to 35% in 1998.
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. Revenue increased $5.8 million, or 31%, from $19.1 million in
1996 to $25.0 million in 1997. Revenues in the United States increased $3.5
million, or 27%, from $12.9 million to $16.4 million, and revenue from outside
the United States increased $2.3 million, or 37%, from $6.2 million to $8.5
million. The overall increase in revenue was primarily attributable to increased
market penetration
23
<PAGE>
of our gene cloning and gene expression product lines. In addition, in 1997 our
new products contributed $2.1 million in revenue.
GROSS MARGIN. Our gross margin increased from $13.3 million in 1996 to
$17.0 million in 1997. Gross margin as a percentage of revenues decreased from
70% to 68% for these periods, primarily as a result of foreign exchange impact
on revenues and to a lesser extent increased royalty payments on licensed
technologies.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 66%
from $2.7 million in 1996 to $4.4 million in 1997. As a percentage of revenues,
research and development expenses increased from 14% to 18% for these periods.
These increases resulted primarily from greater personnel and research supplies
expense as we continued the expansion of our gene cloning and expression
products and the development of our high-throughput gene cloning and expression
technologies.
SALES AND MARKETING. Sales and marketing expenses increased 17% from $4.3
million in 1996 to $5.0 million in 1997. As a percentage of revenues, sales and
marketing expenses declined from 22% to 20% for these periods as certain costs
were spread over a larger revenue base.
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained
flat at $3.9 million in 1996 and 1997. As a percentage of revenues, general and
administrative expenses decreased from 20% to 16% for these periods. During
1996, we incurred a significant one-time expense of $0.8 million for defending
and resolving licensing and patent issues with a competitor.
OTHER INCOME (EXPENSE). Other income, primarily interest earned, increased
73% from $0.2 million in 1996 to $0.3 million in 1997, primarily from higher
average cash balances.
PROVISION FOR INCOME TAXES. Our effective tax rate increased slightly from
35% in 1996 to 36% in 1997, reflecting changes in the utilization of tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities generated $2.6 million during the first
half of 1999. Net cash generated from financing activities totaled $31.8 million
and represents $48.9 million in net proceeds from the sale of common stock in
our initial public offering, reduced by $17.1 million of those proceeds used to
redeem preferred and non-voting common stock and pay accrued dividends. Capital
expenditures and payments for intangible assets for the first six months of 1999
each totaled $1.0 million.
In August 1999 we completed our merger with NOVEX. As consideration for the
merger, we issued approximately 2.5 million shares of our common stock for all
of the outstanding common stock of NOVEX and assumed the outstanding options of
NOVEX which were converted into options to purchase approximately 500,000 shares
of our common stock. Costs incurred as a result of the merger and the related
integration are expected to be approximately $4.4 million.
As of June 30, 1999 we had cash, cash equivalents and short-term investments
totaling $38.5 million and working capital of $43.1 million. Our funds are
currently invested in U.S. Treasury and government agency obligations,
investment-grade commercial paper and interest and dividend-bearing securities.
We expect that our cash, cash equivalents, short term investments, funds
from operations and interest income earned thereon, will be sufficient to fund
our operations for at least two years. Our future capital requirements and the
adequacy of our available funds will depend on many factors, including
scientific progress in our research and development programs, the magnitude of
those programs, our ability to establish collaborative and licensing
arrangements, the cost involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims, competing technological and market developments and
future business acquisitions.
24
<PAGE>
CURRENCY HEDGING AND FOREIGN CURRENCY TRANSLATION
In the normal course of business, Invitrogen B.V. from time to time
purchases exchange-traded put options on U.S. Dollars and U.K. Pounds Sterling
to mitigate foreign currency exposure. At June 30, 1999 outstanding options
totaled $0.8 million and mature on various dates through December 1999.
Invitrogen conducts business transactions with its subsidiary in the
Netherlands and with its foreign distributors, including those in Asia, in U.S.
Dollars. NLG is the functional currency for Invitrogen B.V. The translation from
NLG to the U.S. Dollar for balance sheet accounts is done using the current
exchange rate in effect at the balance sheet date and for revenues and expense
accounts using the average exchange rate during the period. The effects of
translation are recorded as a separate component of stockholder's equity.
Invitrogen B.V. conducts its business with significant customers in their local
European currencies; exchange gains and losses arising from these transactions
are recorded using the actual exchange differences on the date of the
transaction.
YEAR 2000 EFFECT ON COMPUTER SYSTEMS
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, in less than one year,
computer systems and/or software used by many companies in a very wide variety
of applications will experience operating difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century change. Some businesses may be financially affected by such
computer problems.
We believe our existing manufacturing, financial and accounting systems will
be year 2000 compliant prior to January 1, 2000, meaning that they will be
capable of distinguishing 21st century dates from 20th century dates. We are in
the process of replacing a portion of our existing computer system with new
hardware and software that will also be year 2000 compliant and expect to
complete this process in the fourth quarter of 1999.
We are in the process of testing our other internal systems, including
embedded control systems in our manufacturing and storage equipment. We
currently believe these systems are year 2000 compliant. We have made inquiries
of our suppliers to attempt to assess their readiness for the year 2000. The
failure of systems maintained by our customers, distributors, and suppliers
could reduce our revenues, cause us to incur significant expenses to remedy any
problems, or otherwise seriously damage our business.
To date we have spent immaterial amounts to comply with accounting and
statutory requirements regarding the year 2000. We believe that we will spend
minimal additional amounts for year 2000 issues in the foreseeable future. These
assessments have not been independently verified.
If we discover year 2000 errors or defects in our internal systems, we may
have to spend substantial amounts in making repairs. These errors may result in
the temporary failure of our manufacturing, accounting and financial systems,
which in turn would delay the taking and processing of orders for a minimum of
3-5 days.
ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION
On January 1, 1999, certain member states of the European Economic
Community, including the Netherlands, fixed their respective currencies to a new
currency, the Euro. On that day, the Euro became a functional legal currency
within these countries. During the three years beginning on January 1, 1999,
business in these EEC member states will be conducted in both the existing
national currency, such as the Netherlands Guilder, French Franc or Deutsche
Mark, and the Euro. Businesses will be required to complete transition to the
Euro and begin reporting and conducting their transactions in the Euro by
January 1, 2002. On July 1, 2002 the existing national currencies will be
withdrawn and will no longer be considered legal tender.
25
<PAGE>
Companies operating in or conducting business in EEC member states will need
to ensure that their financial and other software systems are capable of
processing transactions and properly handling the existing currencies, as well
as the Euro. We are still assessing the impact that the Euro will have on our
internal systems and products. We believe that our enterprise-wide financial and
manufacturing information systems will be Euro compliant by January 1, 2000.
However, we have not determined the costs related to any problems that may arise
in the future. Any such problems may materially adversely affect our business,
operating results and financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion above under "Currency Hedging and Foreign Currency
Translation" for quantitative and qualitative disclosures about market risk.
26
<PAGE>
BUSINESS
Invitrogen develops, manufactures and markets research tools in kit form and
provides other research products and services to corporate, academic and
government entities. Our research kits simplify and improve gene cloning, gene
expression and gene analysis techniques as well as other molecular biology
activities (see "Business--Scientific Overview"). These techniques and
activities are used to study how a cell is regulated by its genetic material,
known as functional genomics, and to search for drugs that can treat diseases.
Our kits and products allow researchers to perform these activities more
accurately, efficiently and with greater reproducibility compared to
conventional research methods. Our kits and products have made molecular biology
research techniques more accessible to pharmaceutical, biotechnology,
agricultural, government and academic researchers with backgrounds in a wide
range of scientific disciplines. In 1998 we began marketing our
"high-throughput" gene cloning and expression technology, which allows us to
clone and expression-test genes on an industrial scale. We are utilizing this
high-throughput technology to generate additional license, service and product
opportunities. In August 1999, Invitrogen merged with NOVEX, a developer and
manufacturer of pre-cast electrophoresis gels and associated products for gene
and protein analysis. From 1994 through 1998, Invitrogen and NOVEX, on a pro
forma combined basis, experienced compound annual growth in revenue of 27% and
net income of 60%.
Based on independent market studies, in 1998 researchers spent over $1.4
billion on molecular biology products and supplies such as chemicals, reagents,
enzymes and kits. Gene cloning, expression and analysis kits represent a rapidly
emerging segment of the molecular biology product and supply market. Based on
independent market studies, we project sales of gene cloning, expression and
analysis kits to grow approximately 21% in 1999, compared to approximately 14%
growth in 1999 for the overall molecular biology product and supply market. We
believe the gene cloning, expression and analysis kit market will continue to
expand due to several factors, including:
- Increasing levels of government funding for the study of genetic material
and molecular biology research;
- Increasing availability of new data from the Human Genome Project, a
federally funded effort to identify all human genes, and other genome
sequencing projects;
- Proliferation of high-throughput molecular biology research techniques;
and
- Accelerated investment in commercial research activities.
We offer approximately 700 kits and other products that researchers use to
conduct key molecular biology research activities. Our kits and products make
molecular biology techniques easier, faster and more accessible to an
increasingly broad community of researchers. For example, as compared to
conventional cloning methods, our proprietary cloning method, known as TOPO TA
Cloning, reduces the time required for a key step in the gene cloning process
from 12 hours to five minutes, reduces total experiment completion time from
three to five days to one day and increases the cloning success rate from 50-60%
to over 90%. Based on our 1998 sales of these kits, we estimate that researchers
who used TOPO TA Cloning Kits in 1998 saved over 7 million hours compared to
standard cloning methods.
In 1998 we developed a high-throughput gene cloning and expression system by
scaling up our TOPO TA Cloning technology and automating much of the cloning and
expression process. We are marketing this technology under the name
Invitrogenomics. We are using this new technology to rapidly clone and patent
full-length gene libraries, which we are licensing and selling. To date, we have
assembled libraries of over 2,300 full-length cloned human genes that correctly
express their specific proteins. In addition, we are using this technology to
provide gene cloning and expression services on a contract basis to
pharmaceutical, biotechnology and agricultural companies that wish to reduce the
time and costs associated with identifying and validating new drug targets and
developing novel therapeutics.
27
<PAGE>
We believe we have assembled one of the broadest portfolios of gene cloning,
expression and analysis related intellectual property in our industry. To date,
we have obtained over 85 licenses, which provide us with access to over 200
patents and applications covering gene cloning, expression and analysis
materials and techniques. In total, we own or control 28 issued and pending
patents and applications. We believe our intellectual property portfolio has
established us as a licensing partner of choice for corporate and academic
researchers who wish to commercialize their gene cloning, gene expression and
gene analysis-related discoveries. We believe our leadership position derives
from our ability to rapidly enhance the value of the technologies we license by
combining them with our existing products and licensed technologies.
On August 17, 1999 we completed our merger with NOVEX. As consideration for
the merger we issued approximately 2.5 million shares of our common stock and
assumed options which were converted into options to purchase approximately
500,000 shares of our common stock. Invitrogen merged with NOVEX because we
believe that NOVEX's pre-cast gel electrophoresis product lines are highly
complementary with Invitrogen's product lines.
Our NOVEX subsidiary develops, manufactures and markets research
electrophoresis products in pre-cast form, which improves the speed, reliability
and convenience of gel electrophoresis. Gel electrophoresis is a technique that
is used as a tool to visualize the results of many different types of molecular
biology experiments. As such, it is an integral part of the majority of the
molecular biology activities that our kits and other products address. NOVEX
offers approximately 450 products that enable researchers to complete their
experiments more accurately, efficiently and with greater reproducibility
compared to traditional electrophoresis methods. For example, our pre-cast gels
eliminate the time required to make gels in the laboratory, resulting in savings
of 1-2 hours every time a gel is purchased from us rather than made by the
researcher.
NOVEX purchased Serva from Boehringer Ingelheim in 1998. Serva sells fine
chemicals and reagents. This acquisition brought new technologies and
capabilities that extend our technologies further into areas such as
two-dimensional, or 2D, electrophoresis. Serva is one of the few companies in
the world with the technical know-how and equipment required to manufacture
ampholytes immobilized in gels coated on plastic film, which is a desirable
component for the first stage of 2D electrophoresis. We believe this platform
technology fits very well with our existing technologies and will open up
avenues for new product development.
SCIENTIFIC OVERVIEW
All living cells are largely comprised of proteins and contain long chains
of deoxyribonucleic acid, better known as DNA. The entire DNA content of an
organism is called its genome. Genomics is the term used for the study of the
genome. A gene is a specific segment of DNA that is used as a template to
produce a particular protein; in scientific terminology, a gene is said to
express its encoded protein. It is estimated that genes make up only 3% of the
human genome; the function of the remaining DNA is not well understood but is
believed to regulate the amount and timing of the protein expression from the
genes. The entire spectrum of proteins expressed by an organism is called its
proteome. Functional genomics, or proteomics, is the study of the function of
genes, including how expression of a particular gene is regulated and the
function of the protein that the gene encodes.
The DNA molecule is comprised of two linear sequences, or strands, of four
nucleotide bases, commonly known as C, G, A and T. It is estimated that there
are three billion nucleotide base pairs in the human genome. The individual DNA
strands are held together by chemical bonds between the nucleotide bases on each
strand. Only certain pairs of nucleotide bases can form these bonds: C always
pairs with G, and A always pairs with T. Such paired strands are said to be
complementary. When two DNA strands are complementary, they can bind together to
form a double helix in a process called hybridization. DNA itself does not
produce proteins. Instead, the double strand of the DNA helix unwinds and
complementary nucleotide bases are attracted to the separated strands of DNA,
forming
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messenger ribonucleic acid, or mRNA. The mRNA molecules typically move to a
different area of the cell where they are used as templates for protein
synthesis, or expression.
Proteins and their interactions are responsible for all of the biochemical
and physical properties of a cell, as well as the variations among different
types of cells. Proteins take various forms including, enzymes, hormones,
antibodies and receptors. As noted above, genes code for proteins. By studying
the proteins that genes express, researchers can study topics such as the way a
particular gene and the protein it encodes impact an organism's susceptibility
or resistance to disease. Virtually all drugs on the market today interact with
about 500 specific protein targets. As the functions of additional proteins
become better understood, hundreds or thousands more such targets may be
identified, creating new opportunities for drug development by pharmaceutical
companies.
Molecular biology techniques are used to study how a cell uses its genetic
information to direct the production of its proteins and regulate its biological
activities. Researchers use molecular biology techniques to identify the
functions and interactions of proteins and to develop new drugs, diagnostic
techniques, therapies for disease and useful variations of species, including
crops and livestock. As a result, molecular biology has emerged as a key
scientific discipline and is used by a wide variety of researchers at
pharmaceutical, biotechnology and agricultural companies, as well as at
government and academic research institutions.
Five frequently used molecular biology techniques are DNA sequencing, gene
identification, gene cloning, gene expression and gene analysis. DNA sequencing
is used to determine the linear order of nucleotide bases in a DNA fragment. The
other techniques listed above are used to analyze the data obtained by DNA
sequencing and to determine the role and function of proteins encoded and
regulated by the sequence data. Each of the five techniques generates data and
results that are used by the subsequent technique in the above list. Ultimately,
gene analysis provides information about additional genetic material that should
be sequenced and studied. Gel electrophoresis is utilized at some stage in each
of these techniques to visualize the results of experiments. These techniques
and their applications are illustrated and described below:
CHART
Diagram illustrates in a clockwise circle a sequence of steps performed for
molecular biological research, including DNA sequencing, gene identification,
gene cloning, gene expression and gene analysis. A box illustrating the
'sequence' step contains a graphic depiction of a cell and chromosomes. Text in
it reads 'The total genetic information carried by an organism is called its
genome, which is a linear sequence of nucleotide bases. An illustration of
arrows in a circle is labelled 'Discovery Cycle.' A box illustrating the
'Identify' step contains a graphic depiction of a chromosome and a DNA sequence.
Text in it reads 'A gene is a specific functional unit of nucleotide bases that
code for a particular protein.' A box illustrating the 'clone' step contains a
graphic depiction of an expression vector including a cloned gene. Text in it
reads 'Genes are cloned into vectors so they can be replicated in cells and used
in other studies, such as gene expression.' A box illustrating the 'express'
step contains a graphic depiction of DNA and protein. Text in it reads 'cloned
genes are used to express proteins in a variety of host organisms.' A box
illustrating the 'analyze' step contains a graphic depiction of a sequencing gel
and a family tree. Text in it reads 'Expressed proteins are studied to determine
their function. This analysis provides information about other genes that need
to be cloned and expressed to understand cellular functions.'
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- DNA SEQUENCING. DNA sequencing is the technique used by researchers to
determine the linear order of nucleotide bases (i.e. the order of C's,
G's, A's and T's) in a DNA fragment. Sequencing is performed because it
provides researchers with the core information they need to identify,
clone, express and analyze specific genes and their encoded proteins. The
first step in sequencing involves isolating DNA from a sample (such as
cells, tissue, blood, hair or the leaf of a plant). Next, the isolated
DNA is used in four different reactions that occur in buffers containing
salts, a mixture of the four nucleotide bases, a nucleotide primer and an
enzyme. Each of the four reactions also contains one of the four
nucleotide bases that has been specifically modified for use in
sequencing. The nucleotide primer is a short, single strand of DNA with a
known sequence that is complementary to the strand to be sequenced. After
the isolated DNA is placed in the buffer, it is heated to separate the
DNA strands, then cooled rapidly. Rapid cooling forces the DNA to
hybridize, or bind, to the primer rather than to its opposite DNA strand.
The enzyme in the buffer then elongates the complementary strand, one
base at a time, starting from the primer. When the modified sequencing
nucleotide in the buffer incorporates into the growing strand, the
elongation process stops. Running the four different reactions side by
side on a sequencing gel then creates a visual layout that the researcher
uses to determine the actual nucleotide sequence of the DNA.
High-throughput automated DNA sequencing is a recent innovation that has
made it possible to sequence all of the DNA in a genome. The United
States government is funding the sequencing of the human genome to
provide researchers with the building blocks to be used for further
medical and pharmaceutical research. Similarly, governments and major
corporations have begun agricultural genome projects to study and improve
crops like rice, corn, soybeans and tomatoes. Genomes of organisms like
fruit flies, mice, flatworms and yeast are also being sequenced for the
indirect understanding that comparisons among organisms provide.
- GENE IDENTIFICATION. Gene identification is the process of determining
the specific nucleotide sequence of the protein-encoding region of a
gene. It is required because, while DNA sequencing provides researchers
with the entire linear nucleotide sequence of a DNA molecule, it does not
provide any information about which portions of a sequence are genes or
which part of these genes code for proteins. Because many researchers are
interested in determining how proteins exert their influence, gene
identification techniques are used to determine the coding sequences that
lie within the genomic sequence.
One method for gene identification involves mRNA isolation and
complementary DNA ("cDNA") synthesis. Genes use mRNA as an intermediary
that is translated into protein. Thus, an mRNA molecule indicates a DNA
sequence that codes for a protein. But mRNA degrades very quickly and
cannot be replicated for further studies. Because of this, researchers
have developed a method to synthesize cDNA from isolated mRNA. cDNA can
then be used in various experiments like gene identification, gene
cloning and gene expression.
Another method used to perform gene identification, called
bioinformatics, utilizes computer programs that attempt to predict which
DNA sequences are genes that code for proteins. Entire genomic sequences
are entered into databases and sophisticated algorithms search for
specific DNA sequences that are usually found at the beginning and end of
a gene. When these are found, there is a high probability that a gene has
been identified.
- GENE CLONING. Gene Cloning is a process used to move a selected gene or
other piece of DNA into a cloning vector for use in other techniques. A
cloning vector is a circular DNA molecule used to capture foreign DNA and
carry it into other organisms, usually bacteria, where it can replicate.
Cloning gives scientists the ability to produce sufficient quantities of
a
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specific DNA fragment for use in further studies, like gene expression
and gene analysis. Using cloned DNA can simplify research because the
host organisms and conditions in which a clone can replicate are far
simpler to work with than those in which the cloned DNA normally resides.
The ability to perform gene expression and analysis studies under these
controlled, simplified conditions increases the ability of researchers to
determine how genes and their encoded proteins function.
There are several methods used for cloning. Researchers choose among
methods depending upon how the piece of DNA to be cloned was generated
and what information is known about it. When a researcher does not know
the sequence of the DNA to be cloned, two frequently used methods are
genomic library and cDNA library construction. In genomic library
construction, the entire DNA of a cell is isolated and broken into
smaller pieces using a technique called shearing. These pieces are then
cloned into vectors and either sequenced or screened to find DNA
fragments that have some property that the researcher wishes to study.
cDNA library construction is similar; however, the researcher first
isolates mRNA from the cells, then reverse transcribes it into cDNA prior
to cloning. Genomic libraries contain all of the DNA in a genome, whereas
cDNA libraries only contain genes that encode proteins. Various screening
methods enable researchers to identify specific genes from among the many
in the library.
When researchers have some information about the sequence of a DNA
fragment that they wish to clone, they can use a type of protein called a
restriction enzyme. Restriction enzymes recognize specific DNA sequences,
called restriction sites, and cut the DNA strands in a manner that leaves
nucleotide overhangs, or "sticky ends." When some of the sequence of the
DNA fragment to be cloned is known, researchers can choose a restriction
enzyme that cuts isolated DNA at known restriction sites, then use the
generated sticky ends to hybridize the specific, cleaved DNA fragment
into a cloning vector.
Blunt-ended cloning is a technique that is used when the DNA fragment to
be cloned does not contain sticky overhangs, which is termed as being
blunt. Some restriction enzymes leave blunt ends when they cut. Cloning
blunt-ended DNA fragments is a very inefficient process because there are
no exposed nucleotide bases with which to form base pairs. Blunt ends,
however, have a slight affinity for one another, which makes it possible
for researchers to clone these fragments into blunt-ended cloning
vectors.
PCR cloning is another method that can be used to clone a DNA fragment
when some information about its sequence is known. PCR, or polymerase
chain reaction, is one of the most popular techniques used in molecular
biology because it quickly generates large amounts of specific DNA
fragments. Researchers use restriction enzymes, blunt-ended cloning, TA
cloning or other methods to clone these PCR-produced fragments.
- GENE EXPRESSION. Gene expression is a collection of techniques that is
used to produce proteins from genes that have been cloned into expression
vectors and introduced into various host organisms. Most expression
studies involve expressing the cloned gene in a variety of hosts,
including bacteria, fungi, insects and mammalian cells, under various
growth conditions. The protein that a DNA sequence expresses can vary
slightly depending upon the host in which it is expressed and the growth
conditions used. By compiling the results of multiple experiments,
researchers develop an understanding of how a gene and its encoded
protein function are regulated in the context of an entire organism.
Generally, gene expression experiments fall into two categories: those in
which the goal is to produce a large amount of protein that will be
purified for use in other studies and those in which the goal is to
monitor the host for physiological changes caused by expression of the
foreign protein. Specific hosts and expression vector elements provide
functions for these
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different experiment types. Complete expression systems can facilitate
each type of experiment.
Gene expression relies on expression vectors, which, like cloning
vectors, are circular DNA molecules. Expression vectors contain various
elements of DNA that, at a minimum, enable the vector to replicate in the
host and cause the cloned gene to express its encoded protein. Usually,
expression vectors also contain antibiotic resistance genes to facilitate
selection. Each particular host organism requires expression vectors with
specific elements that function in that host, as well as methods for
introducing the vector into the host, and detecting and purifying the
expressed protein. Other gene expression techniques involve specifically
mutating DNA sequences that code for protein, using only portions of a
DNA sequence, or creating gene fusions that use more than one DNA
sequence.
Gene expression analysis is used to identify which genes cause a
difference between two cell types, for example the differences in genes
being expressed in a healthy cell as opposed to those in a diseased cell.
One relatively new technique involves placing thousands of partial gene
sequences, or tags, onto different glass slides, or chips. mRNA isolated
from different cell types is then applied to identical chips. Comparison
of the chips reveals that many tags, sometimes hundreds, bind mRNA on one
chip but not the other. These indicate genes that were being expressed in
one cell type but not the other. The sequences of these tags are then
used to identify, clone, express and analyze full-length genes to
determine which are responsible for the observed differences in the cell
types. Thus, the availability of chip technology both expands the need
for gene identification, cloning, expression and analysis tools and
ultimately provides targets that can be used for drug discovery.
- GENE ANALYSIS. Gene analysis techniques are used to discover the identity
of an expressed protein, to determine its function or role and to
establish if it interacts with other proteins or nucleic acids. Because
most cellular processes are mediated through pathways that involve many
proteins and nucleic acids, determining which proteins or nucleic acid
molecules can interact with a given protein is one of the keys to
understanding its function in the context of the entire cell.
Electrophoresis is a technique that is central to gene analysis as it is
used to analyze the proteins encoded by the genes.
Molecular interaction studies is one method that can be used to determine
protein function. A given protein is expressed from an expression vector
that can indicate whether the expressed protein binds to other proteins
that are expressed from a second vector. Both expression vectors contain
specific elements that enable detection of interactions. Researchers can
express one gene or an entire library of genes from the second vector.
When an interaction is indicated, researchers then isolate the gene in
the second vector and begin to study the two genes and their proteins to
determine exactly how they bind to one another, if other proteins are
involved in the binding and the events that precede and follow this
molecular interaction. With an estimated 100,000 genes in a human cell,
each capable of producing several different mRNA molecules and proteins
due to differential splicing, there are billions of potential protein and
nucleic acid interactions. For this reason, gene analysis studies to date
have been more of a starting than an ending point in understanding a
protein's function. The information provided by these studies indicates
which additional genes must be identified, cloned, expressed and analyzed
before the function of the entire pathway is understood.
The most commonly used method for characterizing the protein products of
both gene expression and gene analysis experiments is slab gel
electrophoresis. Gel electrophoresis is a process by which a complex
mixture of proteins can be quickly separated on the basis of size or
charge. A porous gel slab is used as a "sieve." An electrical charge is
used to propel the mixture of protein molecules through the sieve. As the
proteins move through the gel, smaller
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molecules travel further through the gel than larger molecules. Depending
on their size, the molecules are trapped at different levels in the gel
to form a series of discrete bands. By controlling the porosity of the
gel, the researcher can optimize the separation for a particular set of
proteins.
Gel electrophoresis is used to visualize the results of molecular biology
experiments and functional genomics studies. For example, electrophoresis
enables a researcher to verify that the desired protein is indeed being
produced during a gene expression experiment. It is also used to identify
and characterize proteins, for example when an unknown protein binds to a
known protein in a molecular interaction study, electrophoresis is used
to establish its identity. With the speed, effectiveness and convenience
of pre-cast electrophoresis products, it is commonplace for scientists to
use electrophoresis to check their work at several points during an
extended experiment involving protein or nucleic acid manipulation. It is
a flexible technique that does not require a significant investment in
hardware, requires little or no method development, and is reliable and
robust under widely diverse sample conditions. A simple apparatus is used
to hold one or two gels in place. A unique advantage of electrophoresis
is that, after the proteins have been separated, they can easily be
recovered from the gel for use in subsequent experiments. This is not the
case with most instrumental separation methods.
There are several different types of electrophoresis as well as related
techniques. These include protein electrophoresis, 2D electrophoresis,
gel visualization, western blotting and nucleic acid electrophoresis.
These techniques are described below:
- PROTEIN ELECTROPHORESIS. Protein electrophoresis is typically
conducted using sodium dodecyl sulfate (SDS) polyacrylamide gel
electrophoresis (SDS-PAGE). SDS is a negatively charged compound that
binds tightly to, and imparts a uniform negative charge to all
proteins. This charge provides the force that drives the proteins
through the gel and ensures a separation based only on size. A
molecular weight standard, which is a mixture of proteins of known
molecular weight, is run in a lane on the same gel as the unknown
sample. By comparing the migration distances, one can determine the
approximate molecular weight of the unknown protein.
- 2D ELECTROPHORESIS. 2D electrophoresis is used to separate proteins of
the same molecular weight, which would migrate together and not be
resolved by SDS-PAGE. Proteins are made up of amino acids, some of
which contain positively or negatively charged functional groups. As a
result of its unique amino acid composition, each protein has a
natural isoelectric point, the pH at which it carries a neutral
charge. In order to separate two proteins with the same molecular
weight, isoelectric focusing (IEF) is first used to separate the
proteins on the basis of charge. The proteins are then separated again
on the basis of molecular weight. This is known as two-dimensional, or
2D, electrophoresis and is commonly used in proteomics research.
In IEF, a mixture of compounds carrying a spectrum of charges known
as ampholytes is either added to the gel matrix or immobilized within
the gel matrix. When an electrical charge is applied, the proteins
organize themselves linearly within the gel according to their
relative charge. Proteins with higher isoelectric points will form
bands on one end of the gel and proteins with lower isoelectric
points will form bands at the other end of the gel.
- GEL VISUALIZATION. After electrophoresis, the gel containing the
separated or "resolved" proteins must be stained to visualize the
proteins. This allows the researcher to determine the molecular weight
and purity of the sample. Various stains are used that have different
levels of sensitivity and specificity. The gel can then be dried and
saved as a permanent
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record of the experiment, or a gel documentation system can be used to
photograph the results and store them in digital form for analysis.
- WESTERN BLOTTING. Alternatively, the proteins can be transferred from
the gel to a membrane in a process called western blotting. The
proteins on the membrane are then exposed to antibodies specific to
the protein of interest or to a specific "tag" that has been
intentionally incorporated into an expressed protein. This allows the
scientist to identify the presence of a specific protein from within a
highly complex mixture. In addition, the separated proteins can be
recovered from the gel or the membrane for further analysis such as
protein sequencing or mass spectrophotometry.
- NUCLEIC ACID ELECTROPHORESIS. Nucleic acid electrophoresis may also be
conducted using a polyacrylamide gel matrix. In DNA sequencing
(described above), polyacrylamide gels ranging in lengths up to 40cm
long are used to separate the results of a DNA sequencing reaction.
Small format (10cm X 10cm or 10cm X 12cm) polyacrylamide gels are also
used for nucleic acid analysis. These gels are used when accurate,
sensitive visualization of small DNA or RNA fragments is required, for
example, when analyzing PCR products.
Nucleic acid electrophoresis is more commonly performed using agarose
as the gel matrix. Agarose has lower resolving power than
polyacrylamide and is typically used for separating large DNA
fragments. Examples include analysis of plasmid preparations and
restriction digestions. DNA fragments can be recovered from the gel
for subsequent cloning into a vector. Agarose gels are easier to make
than polyacrylamide gels, however the stains are hazardous and
require special handling.
MARKET OVERVIEW
Based on independent market studies, in 1998 over $1.4 billion was spent on
molecular biology products and supplies such as chemicals, reagents, enzymes and
kits. The market for these products and for related services consists of the
academic market, comprised of universities and government institutions, and the
commercial market, comprised of pharmaceutical, biotechnology and agricultural
companies. It is estimated that there are over 300,000 scientists worldwide
engaged in molecular biology research. A substantial number of scientists
perform their research using the conventional methods they were taught during
their training, assembling their own reagents and developing their own
protocols. Because not all scientists replace their familiar methods rapidly,
even with improved methods, a large number of scientists using molecular biology
techniques are not currently using kits.
Gene cloning, expression and analysis kits and pre-cast gel electrophoresis
products represent a rapidly emerging segment of the overall molecular biology
product and supply market. Based on independent market studies, we project that
the market for gene cloning, expression and analysis kits will grow
approximately 21% in 1999, compared to approximately 14% for the overall
molecular biology product and supply market. Several factors are driving market
growth and the need for gene cloning, expression and analysis kits, products and
services:
- INCREASING GOVERNMENT FUNDING. The National Institutes of Health is the
largest purchaser of research products and services in the world. In
October 1998, the U.S. Congress approved a 14.6% increase in NIH funding,
raising its 1999 budget to $15.6 billion. The U.S. Congress has stated
its intention to double the NIH budget in the next five to ten years.
Other governments are similarly increasing funding for biomedical
research. In the past, funding increases of this nature have resulted in
a corresponding increase in the purchase of molecular biology research
products and services.
- HIGH-THROUGHPUT SEQUENCING ENABLES GENOME SEQUENCING & PROTEOMICS
PROJECTS. High-throughput automated DNA sequencing is a recent innovation
that has made it
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both technically possible and economically feasible to sequence all of
the DNA in a genome. The U.S. government launched the Human Genome
Project in 1990 to determine the DNA sequence of the estimated 3 billion
nucleotide base pairs contained in the human genome and to identify its
estimated 100,000 genes. Through the end of 1998, $1.9 billion had been
spent, and as of September 1999 approximately 12% of the genome had been
fully sequenced. An ambitious schedule has been set to complete the full
sequence by the end of 2003, two years ahead of previous projections.
Similarly, governments and major corporations worldwide have begun
agricultural genome sequencing projects to study and improve crops like
rice, corn, soybeans and tomatoes. We believe that the markets for gene
cloning, gene expression, gene analysis and electrophoresis technologies
will continue to expand as researchers begin proteomics projects designed
to determine the function of the many genes for which sequence data is
becoming available.
- PROLIFERATION OF HIGH-THROUGHPUT MOLECULAR BIOLOGY TECHNIQUES. The advent
of high-throughput technologies for DNA sequencing and gene expression
analysis has exponentially increased the number of genes that need to be
analyzed. In addition, these technologies have enabled research to be
performed on a much larger scale. For example, while researchers used to
study genes one or two at a time, the emergence of chip technologies
provides information on tens or hundreds of genes that might need to be
cloned and studied to accurately determine the cause of a
genetically-based disease. For increasing numbers of research
organizations, especially those that wish to use personnel with limited
training in molecular biology techniques, the availability of easy-to-use
molecular biology methods, or kits, enables research to be performed more
efficiently, conveniently and cost-effectively than conventional
techniques. We believe that the increased numbers of researchers using
molecular biology techniques and the increased number of experiments
being performed will accelerate the tendency of researchers to convert
from conventional techniques to easy-to-use kits.
- ACCELERATED INVESTMENT IN COMMERCIAL RESEARCH. As more genes of the human
and other genomes are sequenced, we believe that the focus of research
will shift toward discovering the specific functions of each gene,
especially of those implicated in disease states. Companies wishing to
develop economically viable therapeutic and diagnostic products based on
such discoveries hope to rapidly establish and protect intellectual
property rights by obtaining patents or licenses covering these
full-length genes and their encoded proteins. These companies are
competing with one another to be the first to identify, clone and express
the finite number of genes thought to be of commercial importance. The
desire to secure proprietary positions increasingly leads companies to
seek a competitive advantage by adopting methods that can accelerate
their research, including outsourcing of research tasks to companies with
demonstrated expertise.
TECHNOLOGY AND CAPABILITIES
We believe that many of the conventional molecular biology research methods
described above are time consuming, require the use of hard-to-obtain or
hazardous materials or require considerable scientific training and experience
to generate accurate, reproducible results. We have developed a diverse line of
kits and services that address these limitations and make molecular biology
research techniques faster, easier and more cost-effective. In addition, our
offerings make these techniques available to a broader range of researchers with
varying skill levels. For example, the conventional PCR cloning method requires
researchers to perform several steps between the PCR and ligation reactions to
prepare the PCR products for cloning. Our TOPO TA Cloning Kit enables
researchers to clone the PCR products directly, bypassing all intermediate
steps, which both saves time and improves the cloning efficiency. Whereas the
conventional method requires three to five days and generates a 50-60% cloning
efficiency, the TOPO TA Cloning Kit requires only one day and increases the
cloning efficiency
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to over 90%. Our FastTrack Kit is another example of a product that provides
researchers with significant advantages over conventional research methods.
Whereas mRNA isolation methods typically took two days to complete and required
the use of hazardous reagents, our method is completed in only three hours and
does not involve the use of any hazardous materials. Our broad portfolio of gene
expression vectors and systems also provide scientific as well as ease-of-use
advantages to researchers. Specifically, we offer complete protocols with our
expression vectors, which enable researchers to perform their experiments more
easily.
Making and running polyacrylamide gels in a research laboratory is time
consuming, requires the use of hazardous materials and requires significant
expertise to produce high quality, reliable gels. Gradient gels and isoelectric
focusing gels are particularly difficult to make consistently. For example, the
conventional method requires researchers to first assemble two glass plates
together with spacers and tape. Then, a mixture of acrylamide and cross-linker
is made, catalysts are added and the solution is carefully poured between the
glass plates, making sure it is poured evenly and does not leak through the
tape. The gel must then be left to polymerize for up to two hours before it is
ready for use. Our pre-cast gels eliminate the time required to make gels in the
laboratory, resulting in savings of 1-2 hours every time a gel is purchased from
us rather than made by a researcher. We have developed a complete line of
pre-cast gels that eliminates this entire gel casting procedure. Other of our
products such as the SeeBlue ready-to-use standards, and the WesternBreeze
pre-optimized western blotting kits make other electrophoresis-related processes
faster and easier, while providing better performance than products that
researchers can make on their own.
We have developed significant expertise in identifying molecular biology
techniques that could be simplified and improved by their development as
research kits. We have a consistent track record of identifying new
technologies, licensing or applying for the necessary patents and rapidly
introducing new or enhanced products based on those technologies to the market.
Our corporate development group has significant molecular biology research
expertise. In addition, our sales and technical service representatives are
experienced molecular biologists who work with our customers to identify
emerging molecular biology techniques or potential new product and service
opportunities. Specifically, our corporate development, sales and technical
service groups have identified and obtained rights to over 200 patents to date.
Since the beginning of 1997, our new product development teams have introduced
over 50 new or enhanced research kits to the market, and two major new
electrophoresis product lines: WesternBreeze western blotting kits specific for
rabbit and mouse antibodies and QuickPoint gels for the fast growing nucleic
acid analysis market.
BUSINESS STRATEGY
Our business strategy is to develop and market a comprehensive portfolio of
products and services based on our expertise in gene cloning, expression and
analysis technologies. Our business strategy includes the following key
elements:
- MAINTAIN AND ENHANCE LEADERSHIP POSITIONS. Based on our market shares, we
believe we are a worldwide leader in gene cloning, gene expression and
pre-cast gel electrophoresis technologies. We believe that the
competitive advantages offered by our innovative products and
technologies and the comprehensive nature of our product line will
provide an opportunity to increase our market share. We seek to enhance
our position by investing additional resources in research and
development and in-licensing efforts to continually introduce novel
products and expand our product line. In addition, we are actively
expanding our direct worldwide sales force to increase market penetration
of our products.
- DEVELOP NEW PRODUCTS AND MARKETS BASED UPON CORE EXPERTISE. We will
continue to develop and launch novel product lines related to gene
cloning, expression and analysis. For example, we have utilized our
capabilities in cloning and expression to launch our GeneStorm product
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line, which facilitates functional genomics studies. Similarly, our NOVEX
subsidiary developed the WesternBreeze complete western blotting kits,
which are used by electrophoresis users. By introducing new,
complementary products we believe we can enhance our position in our
current core markets while targeting additional high-growth market
segments.
- CAPTURE ADDITIONAL VALUE THROUGH SERVICES AND OUT-LICENSING. We believe
our technologies in gene cloning and expression provide opportunities to
develop high margin services and out-licensing arrangements. Through
Invitrogenomics, we intend to use our high-throughput gene cloning and
expression technology to develop a proprietary library of full-length
genes, which can be licensed and sold to corporate partners for drug
discovery and other commercial development activities. In addition, we
plan to utilize our high-throughput capabilities to rapidly clone and
expression-test thousands of genes for drug development and agriculture.
We seek to carry out our business strategies by identifying and
in-licensing, or by developing on our own, promising technologies that can be
rapidly commercialized as products or services. We also intend to continue
out-licensing our technologies to customers wishing to use them in other fields
of use, as well as to combine our own research and development expertise with
the technologies of corporate partners to participate in processes such as drug
discovery. In addition, we will continue to consider acquisitions of
complementary companies or technologies.
PRODUCTS AND SERVICES
We currently offer approximately 700 gene identification, cloning,
expression, and analysis products and services. The following table describes
our top selling products, as well as the leading product lines in our key areas
of focus:
<TABLE>
<CAPTION>
<S> <C>
GENE IDENTIFICATION PRODUCTS
FastTrack 2.0 Kit This kit simplifies isolation of pure, full-length mRNA directly
from cells or tissue in three hours, as opposed to the two days
required for conventional methods.
Micro-FastTrack Kit This kit is a modified version of the FastTrack Kit, optimized
for improved results when isolating mRNA from small sample sizes.
Discovery Line Northern Territory mRNA and total RNA blots, Gene Pool cDNA and
Discovery Line mRNA, total RNA and premade cDNA libraries have
been created from a variety of hard-to-obtain human normal, fetal
and tumor tissue sources and are sold ready-to-use, enabling
researchers not trained in these gene identification techniques
to begin their studies with high quality materials.
GENE CLONING PRODUCTS
TA Cloning Kit This kit enables fast, efficient cloning of PCR products
generated using TAQ polymerase, which is used by the majority of
researchers, by eliminating intermediate steps required by
conventional PCR cloning methods, like special PCR primers,
modifying enzymes, DNA purification and restriction digestion.
TOPO TA Cloning Kit This improved version of the TA Cloning Kit utilizes
topoisomerase in the ligation reaction, reducing the time
required for this step from 12 hours to only 5 minutes.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
TOPO TA Cloning Kit-- The cloning vector in this version of the TOPO TA Cloning Kit
Dual Promoter contains promoters in opposite orientations, enabling researchers
to generate both sense and anti-sense transcripts of their cloned
PCR product.
Zero Blunt PCR Cloning This kit enables researchers to efficiently clone blunt-ended PCR
Kit products by employing a lethal gene that prevents bacterial
growth unless the cloning reaction was successful.
GENE EXPRESSION PRODUCTS
Expression Vectors These kits comprise the world's largest collection of expression
vectors for bacterial, yeast, insect and mammalian cells. Choices
in each host type include various promoters, selectable markers,
epitope tags and targeting sequences.
MaxBac Baculovirus This complete kit provides researchers with all required
Expression System components to perform gene expression in insect cells (including
vectors, cell lines, viral stocks, growth media, transfection
reagents and protocols).
Ecdysone-Inducible This system provides tightly controlled, inducible expression in
Mammalian Expression mammalian cells, allowing researchers to study the effects of a
System particular protein by turning on and off its expression as
desired.
GENE ANALYSIS PRODUCTS
GeneStorm Expression- Researchers can purchase the gene they wish to study, cloned into
Ready Clones a quality vector and tested to verify that it expresses protein.
Hybrid Hunter Systems These systems are complete kits for the IN VIVO detection of
protein-protein and protein-RNA interactions and have been
designed to help reduce false positives.
Pre-Cast NuPAGE Gels NuPAGE gels can be used in place of Tris Glycine gels for protein
electrophoresis. These patented gels provide superior resolution,
run in half the time of conventional gels and have a one-year
shelf life. In addition, NuPAGE gel stability allows ambient
temperature shipping and room temperature storage.
Pre-Cast Tris Glycine TG gels are available in 12 different percentages. These
Gels traditional Laemmli-type gels are used for SDS-PAGE. TG gels have
a refrigerated shelf life of 3-4 months.
Pre-Cast Isoelectric NOVEX supplies pH 3-7 and pH 3-10 pre-cast IEF gels in the
Focusing Gels standard vertical 10x10 cm format, as well as in a horizontal
format, which allows up to 43 samples to be run simultaneously.
Pre-Cast TBE Tris borate EDTA (TBE) gels are used to provide high-resolution
Polyacrylamide Gels separation of double-stranded DNA fragments such as PCR products.
They are also widely used to conduct single-stranded
conformational polymorphism (SSCP) studies to detect single point
DNA mutations and gel mobility shift assays to characterize
DNA-protein interactions.
QuickPoint These ultra thin, polyacrylamide gels are used for the rapid
separation of single-stranded DNA for sequencing. They run in
only 15 minutes, compared to three hours for conventional
sequencing gels. QuickPoint gels are useful for analyzing the
results of RNase Protection Assay experiments and for running
short DNA sequences from site-directed mutagenesis and
differential display experiments.
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WesternBreeze This complete kit provides all of the components required for
western blotting. Kit components have been optimized to provide
low background and high sensitivity.
XCell II Mini-Cell and This apparatus holds the gels and buffers during electrophoresis
Blotting Apparatus and western blotting.
Pre-Made Protein We make three protein standards used during electrophoresis to
Standards determine the approximate molecular weights of proteins in a
sample. Mark12 is a ready-to-use protein standard that does not
require dilution or pretreatment. SeeBlue is a broad range
pre-mixed and pre-stained standard. Multi-Mark is a multi-colored
standard that is particularly useful for western blotting. In
addition, we make a liquid mix pI 3-10 IEF marker for determining
the isoelectric point of proteins.
SUPPORT PRODUCTS
One Shot INVALPHAF', These three different bacterial strains are sold ready-to-use for
TOP10F'and TOP10 cloning and expression experiments to transfer vectors into
Competent E. COLI bacteria. They are packaged in convenient, single-use aliquots to
prevent loss of efficiency caused by freeze-thaw cycles.
Zeocin Antibiotic This antibiotic quickly and completely kills mammalian, yeast and
bacterial cell lines, enabling researchers to eliminate all cells
that do not contain vectors with the SH BLE antibiotic resistance
gene.
RESEARCH SERVICES
Invitrogenomics Invitrogenomics services include a variety of functional genomics
and molecular biological services, such as high-throughput gene
cloning and gene expression.
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GENE IDENTIFICATION PRODUCTS
FASTTRACK 2.0 AND MICRO-FASTTRACK KITS. These kits provide researchers with
all of the reagents needed to quickly isolate mRNA directly from cells, tissue
or total RNA samples. The two products differ from one another in that the
protocol and materials configuration of the Micro-FastTrack Kit have been
optimized for isolation from small sample sizes. These kits contain all required
buffers, oligo(dT) cellulose resin and spin columns.
For each product, the researcher begins by placing the sample in lysis
buffer to break open the cells. The inside material, or cell lysate, is applied
to an oligo(dT) cellulose resin, which binds the mRNA. This resin is transferred
to a spin column, then wash buffer is added and spun through the resin with a
microcentrifuge to remove materials other than the mRNA. An elution buffer is
then spun through the resin to remove the mRNA and complete the procedure.
These products were the first to enable researchers to isolate mRNA directly
from cells and tissue, eliminating the need to first isolate total RNA, which
has reduced the time required from two days to three hours. The kits have also
eliminated the use of hazardous chemicals like guanidinium isothiocyanate and
the need for expensive equipment like ultracentrifuges.
DISCOVERY LINE. One of the first steps for researchers performing gene
identification studies is to isolate mRNA from a chosen sample. However, if the
sample is of poor quality or the mRNA isolation done improperly, downstream
experiments that rely on undegraded mRNA will not provide accurate results. We
have recognized the absolute necessity for using quality materials and responded
by providing researchers with Discovery Line mRNA and total RNA, Northern
Territory mRNA and total RNA
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blots, Gene Pool cDNA and Discovery Line pre-made cDNA libraries. Isolations of
mRNA and total RNA are performed from hard-to-obtain human normal, fetal and
tumor tissue samples. The mRNA and total RNA is then sold ready-to-use or used
to create ready-to-use Northern blots, cDNA for PCR and cDNA libraries. This
enables researchers to use high quality materials and to study the similarities
and differences between normal, fetal and cancerous tissues. These products save
researchers time and effort because the upstream experiments required to prepare
these materials as well as the failures caused by working with inferior
materials are eliminated.
GENE CLONING PRODUCTS
TA CLONING KIT. This kit enables researchers to clone TAQ
polymerase-generated PCR products quickly and efficiently. The kit contains
prepared cloning vector, competent cells for transferring the vector into after
the cloning reaction and all required buffers and enzyme for cloning.
To clone with the TA Cloning Kit, researchers perform a normal PCR reaction,
add a portion of it to a tube that contains TA Cloning vector and T4 DNA ligase
in a ligation buffer, then incubate this ligation reaction for 10-12 hours, or
overnight. This reaction is then added to a tube of competent bacteria, which
are then plated onto an agar plate. The plates are incubated for a day to allow
colonies to form. Colonies are then picked based on a color selection
method-positive colonies, or those that have incorporated PCR product, are
white, while negatives are blue. DNA is then isolated from positive colonies to
verify that the cloning was successful and to determine the orientation of the
PCR product that inserted into the vector.
The TA Cloning Kit is faster and more efficient than conventional PCR
cloning techniques because it takes advantage of the single base A overhangs
that are added automatically to PCR products by TAQ polymerase, the polymerase
most frequently used for PCR, rather than relying on additional steps to remove
these overhangs or to add sticky overhangs. Among these steps are the addition
of extra bases to the PCR primers to add restriction sites, which makes these
primers more expensive and less specific than normal primers, purification of
the PCR products after they are generated, restriction digestion of the PCR
products and inactivation of the restriction enzyme. Moreover, the restriction
method requires that the entire sequence of PCR products be known prior to
cloning. The TA Cloning Kit offers a better cloning efficiency than the
restriction method, as well as providing blue/white color to indicate positive
clones. Quality Control specifications for the TA Cloning Kit require that each
manufactured lot achieve a minimum cloning efficiency of 90%, whereas the
restriction method typically yields only 50-60%.
We are the sole owner by assignment of U.S. and foreign patents on the TA
Cloning method and materials.
TOPO TA CLONING AND TOPO TA CLONING-DUAL PROMOTER KITS. These two kits are
improved versions of the TA Cloning Kit. They both contain prepared cloning
vector, competent cells for transferring the vector into after the cloning
reaction and all required buffers for cloning.
Both of these kits use and take advantage of the TA Cloning method described
above, but also utilize a technology called TOPO Cloning. This method uses an
enzyme called topoisomerase to mediate the ligation of PCR products into the
cloning vector, rather than T4 DNA ligase. This reduces the ligation step to
only five minutes, as opposed to a 12 hour or overnight ligation. TOPO Cloning,
therefore, saves researchers a full day as they are able perform their ligation
reaction and transform it into bacteria on the same day. The TOPO Cloning-Dual
Promoter Kit has a vector that contains transcriptional promoters in both
orientations, which enables researchers to make both sense and anti-sense RNA
transcripts from the same cloned insert. In other vectors, to achieve this the
insert would need to be cloned twice, once in each direction, a less efficient
and lower yield process.
We are the exclusive worldwide licensee to all rights in all fields to a
patent granted to Sloan-Kettering Institute for Cancer Research for the TOPO
Cloning method.
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ZERO BLUNT PCR CLONING KIT. When DNA fragments do not contain sticky
overhangs, which is termed as being blunt, they do not have exposed nucleotide
bases with which to form base pairs with a cloning vector. This makes
blunt-ended cloning a very inefficient process. Invitrogen has solved this
problem through the use of the lethal CCDB gene, or control of cell death, which
prevents colonies from growing unless they have successfully incorporated a DNA
fragment. Incorporation occurs in the middle of the lethal gene, so these clones
can grow because they have disrupted expression of the lethal gene. While the
actual cloning efficiency remains low, because the negative colonies cannot
grow, the effective efficiency is very high. The Zero Blunt PCR Cloning Kit
enables researchers to clone blunt-ended PCR products, which are generated by
thermostable polymerases like PFU. It contains a prepared cloning vector,
competent cells for transferring the vector into after the cloning reaction and
all required buffers.
Using the Zero Blunt PCR Cloning Kit is much like using the TOPO TA Cloning
Kits. Researchers perform PCR as normal, add the PCR products to the prepared
cloning vector, wait five minutes, transform the competent bacteria, then plate
out the bacteria and wait overnight for colony growth. Because of the lethal
gene, nearly all colonies that grow contain an insert. DNA is then isolated from
the colonies to verify that the cloning was successful. The advantage of the
Zero Blunt PCR Cloning Kit is that it improves the effective cloning efficiency
of blunt-ended cloning and prevents researchers from having to use other, more
difficult techniques.
GENE EXPRESSION PRODUCTS
EXPRESSION VECTORS. We provide researchers with an extensive collection of
gene expression vectors and complete expression systems, enabling researchers to
express genes in a variety of host organisms, as well as IN VITRO. Because of
their differing posttranslational modification characteristics, different hosts
produce a slightly different variant of the same protein. By combining results
obtained from experiments performed in different hosts, researchers can slowly
piece together how a gene's expression is regulated and what functions its
protein performs in the context of the entire organism. The kit contains an
expression vector, another expression vector with a cloned reporter gene that
serves as a positive control, a vial of bacteria, complete protocols and the
entire vector sequence.
Depending on their purpose, expression vectors can contain many different
elements, each of which provides a specific function. Various combinations of
the individual elements are used to create vectors with unique functions. We
offer a broad line of expression vectors, providing researchers with the ability
to perform various types of experiments in different hosts to reach a
conclusion. In addition, several of our vectors contain elements that are
available exclusively from Invitrogen.
MAXBAC BACULOVIRUS EXPRESSION SYSTEM. This kit is a complete system that
provides researchers with all of the reagents needed to express protein in
insect cells using recombinant baculovirus. This includes expression vectors,
insect cell lines, baculovirus stocks, growth media, transfection reagents and
complete protocols.
Insect cells are chosen as a host organism because they produce high-levels
of protein and are simple and inexpensive to grow. Also, the posttranslational
modifications performed by insect cells are well understood and are similar to
those of mammalian cells. This enables researchers to study proteins using a
system that is similar to, but simpler and cheaper to use, than mammalian cells.
ECDYSONE-INDUCIBLE MAMMALIAN EXPRESSION SYSTEM. This system provides
tightly controlled, inducible expression in mammalian cells, allowing
researchers to study the effects of a particular protein by turning on and off
its expression whenever desired. The kits contain an expression vector, a
control vector, sequencing primers, a supply of Zeocin antibiotic, an inducing
agent and a complete protocol. The system utilizes a promoter that has an
extremely low basal level of expression until an inducing agent is added to the
media. Protein expression then increases over 200-fold.
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The advantage of inducible expression is that it enables researchers to
study the effects of the expression of a particular protein. Most promoters used
in expression vectors cause protein to be expressed constitutively, or all the
time. Inducible promoters allow researchers to study the physiological effects
caused by the recombinant protein by turning expression on and off and observing
how the cells respond.
GENE ANALYSIS PRODUCTS
GENESTORM EXPRESSION-READY CLONES. We have created a large collection of
cloned yeast and human genes with our high-throughput gene cloning and
expression technology. The entire yeast genome, over 6,000 genes, has been
cloned into both yeast and mammalian expression vectors. These vectors are then
tested for protein expression. We are currently cloning human gene families that
are likely to be of importance in various disease states, like kinase genes
involved in cell signaling pathways. To date we have assembled a collection of
over 2,300 full-length cloned human genes that express their encoded proteins.
GeneStorm Clones enable researchers to purchase the exact gene they wish to
study and go directly to expression studies, bypassing the laborious procedures
required to clone and test the gene for expression. The genes are cloned into
the same high quality, multi-functional expression vectors sold to Invitrogen's
customers and used in Invitrogenomics research.
HYBRID HUNTER SYSTEMS. Molecular interaction is a technique used to
determine if various molecules are able to bind to, or interact with one
another. Because most cellular processes are mediated through pathways of many
proteins, determining if a given protein interacts with other proteins or
nucleic acid molecules is one of the keys to understanding its function. We
offer products for determining both protein-protein and protein-RNA
interactions. These studies are performed in yeast because its cells are similar
to, but far simpler than, mammalian cells. The kits contain "bait" and "prey"
expression vectors, yeast strains, positive and negative control vectors,
sequencing primers, a supply of Zeocin antibiotic and complete protocols.
Molecular interaction systems work by using reporter genes that are
expressed only if an interaction occurs. The gene for the protein being studied
is cloned into a "bait" vector that also contains the reporter gene. A second
gene, or an entire library of genes, is cloned into a second vector, called a
"prey" vector. The prey vector contains a transcriptional activator. If the
proteins expressed from the bait and prey vectors interact with one another, the
transcriptional activator is brought into close proximity of the reporter gene.
This causes the reporter gene to express its protein. Cells that express the
reporter gene indicate that they contain a prey vector that is interacting with
the bait. The gene in the prey vector is then isolated and used for further
expression and molecular interaction studies.
With an estimated 100,000 genes in a human cell, each capable of producing
several different mRNA molecules and proteins due to differential splicing,
there are billions of potential nucleic acid and protein interactions. Designing
methods that are sensitive enough to detect actual interactions, yet that do not
signal false interactions, has challenged suppliers of gene analysis systems.
Because the study of each interaction is extremely time consuming, researchers
need assays which are highly sensitive yet extremely accurate, or they will
waste their time, money and efforts trying to study interactions that do not
actually exist. Our Hybrid Hunter Systems have been designed using technologies
that help prevent the occurrence of false interactions.
PRE-CAST GEL SYSTEM. There are three key advantages to our pre-cast gel
electrophoresis system: ease-of-use, versatility and performance.
- The core of our pre-cast gel system is the XCell II Mini-Cell apparatus
and the polyacrylamide gels that are pre-cast in easy-to-handle 10 X 10cm
plastic cassettes. The gels are individually pouched and ready-to-use. The
researcher simply opens the storage pouch, places two gels in the
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Mini-Cell, adds buffer and loads the samples into the sample wells. An
electrical charge is applied to the Mini-Cell for about one hour to
complete the electrophoresis process. After electrophoresis is complete,
the plastic cassette is opened and the slab gel containing the separated
proteins is released for staining or western blotting.
- We offer over 180 pre-cast gels to meet researchers' diverse needs. These
gels incorporate ten different gel chemistries, each optimized for a
particular application, as well as 37 different gel percentages
(porosities) for optimizing the separation of different kinds of samples.
Gradient gels such as the 4-20% Tris-Glycine gel are used to separate a
broad range of proteins on a single gel. Our pre-cast IEF gels contain
compounds called ampholytes that enable the separation of proteins based
on their native electrical charge rather than their size. A variety of
sample well formats and thicknesses allows the user to select the
appropriate gel for their application.
- Important research decisions are made based upon the results of
electrophoresis experiments, so reliable, high quality gel performance is
essential. It is difficult for a researcher making gels on an occasional
basis to ensure the quality of the gel prior to use, in particular,
gradient gels or IEF gels. We use proprietary and patented technology to
produce highly reproducible gels with superior qualities such as gel
straightness, and crisp, sharp separation of bands (resolution).
These products include:
PRE-CAST NUPAGE GELS. NuPAGE is a unique, patented, long-shelf life
(one year) family of gels for SDS-PAGE protein electrophoresis. NuPAGE is
used in place of the traditional Tris-Glycine gels when faster run time (as
little as 40 minutes), improved resolution, and long-shelf life is desired.
The long shelf life aspect allows the product to be stored and shipped at
ambient temperature and reduces the number of unused expired gels, leading
to reduced costs for the end-user.
PRE-CAST TRIS-GLYCINE GELS. These are the traditional gels used for
SDS-PAGE analysis of proteins. We offer 12 different Tris-Glycine gel
percentages. Tris-Glycine gels have a refrigerated shelf life of three to
four months.
PRE-CAST IEF GELS. We offer pre-cast IEF gels in the 10 X 10cm
vertical format. This gel allows the researcher to separate proteins based
on native charge rather than size.
PRE-CAST TBE GELS. TBE (Tris Borate EDTA) gels are used to separate
double stranded DNA fragments while TBE-Urea gels are used to separate
single stranded RNA and DNA. These gels are used in gel mobility shift
assays, a common technique for identifying and characterizing DNA:protein
interactions. After the run, the DNA:protein complex can be extracted from
the gel for further study.
QUICKPOINT. These ultra-thin 10 X 12cm pre-cast polyacrylamide gels
are used for rapid separation of short DNA sequences and analysis of double
stranded DNA fragments. The 15-minute run time is a significant improvement
over the three hours it takes to run standard manual sequencing gels.
Typically, researchers would have to make a large (30 X 40cm) standard DNA
sequencing gel in order to analyze even short DNA sequences. Now researchers
have the option of using pre-made, easy-to-handle gels with significantly
shorter run times, while still getting the single base resolution needed to
read the DNA sequence.
WESTERNBREEZE. This is a complete western blotting reagent kit that
has been optimized to generate blots with clean backgrounds and high
sensitivity. Western blotting is typically a time-consuming, complex process
with many steps, several different reagents and multiple formulas from which
to choose. Researchers typically use reagents from different vendors and
spend a great deal of time working out satisfactory blotting conditions. The
WesternBreeze kit is optimized to
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work the first time, providing a significant time savings. All of the
solutions are packaged as pre-mixed solutions for maximum ease-of-use.
XCELL II MINI-CELL AND BLOTTING APPARATUS. This apparatus is
specifically designed to run our pre-cast gels. A simple wedge design
eliminates buffer leakage, a common problem found in traditional
electrophoresis apparatus that can result in interruption of the run and
sample loss. Our blotting apparatus fits inside the XCell II Mini-Cell,
saving space, reducing buffer volume and reducing transfer time.
PRE-MADE PROTEIN STANDARDS. Protein standards for electrophoresis
are a mixture of proteins with known molecular weights. Standards are run on
a gel with unknown samples in order to help determine the molecular weight
of the samples. The NOVEX Mark12 protein standard is a wide range standard
that is stable in liquid form and is ready to load onto the gel. NOVEX
SeeBlue pre-stained, wide-range standard has exceptionally sharp bands for
more accurate molecular weight determination. NOVEX MultiMark is a
ready-to-use multi-colored pre-stained marker used primarily for western
blotting. NOVEX ready-to-use IEF markers are used for determining the
isoelectric point of proteins separated in isoelectric focusing gels.
SUPPORT PRODUCTS
ONE SHOT INVALPHAF', TOP10F' and TOP10 Competent E. coli. Nearly all
molecular biology techniques, including gene cloning and gene expression,
require that researchers be able to propagate vector in E. COLI bacteria. We
sell many different bacterial strains, each with different characteristics used
by researchers depending on the experiment to be performed. Our best-selling
bacteria are competent, meaning that they have been processed in a manner that
makes them able to bring vector in from outside their cell walls.
Placing a vector into bacteria is termed transformation. The most common
method to do this is to make cells chemically competent by growing them in a
series of buffers. After this procedure, competent cells can be frozen and
stored for later use. Competent cells can take up vector from outside their cell
walls. All that researchers need to do to transform competent bacteria is to
thaw them and combine the vector and the competent bacteria in a test tube.
Vectors usually contain an antibiotic resistance gene, so an antibiotic is then
used to kill the cells that did not take up vector.
Our One Shot Competent E. COLI are sold ready-to-use and are packaged in
convenient, single-use aliquots. Researchers thaw the bacteria and add vector
directly to the tube, using the tube's entire contents. This prevents the
researcher from having to aliquot competent cells into tubes and refreezing the
unused cells. Aliquoting and freeze-thaw cycling greatly reduce the competency
of bacteria, so this convenient packaging not only saves time, it ensures better
results. Because of this, One Shot Competent E. COLI are included in all of our
PCR Cloning Kits. The popularity of One Shot products stems in great part from
researchers first using One Shot cells in our PCR Cloning Kits, then buying the
One Shot products separately for all of their transformation procedures.
ZEOCIN ANTIBIOTIC. This antibiotic quickly and completely kills mammalian,
yeast and bacterial cell lines. Researchers buy it to use for selection of the
many different expression vectors we sell that contain the SH BLE antibiotic
resistance gene. We also sell cassette vectors that enable researchers to easily
move the SH BLE gene into other vectors.
After transformation or transfection, which is transformation of
non-bacterial cells, researchers add Zeocin to the media to kill cells that have
not taken up vector with a SH BLE gene. The cells that grow are homogeneous in
that they all contain vector. Having a homogeneous population is important when
performing expression experiments because cells without vector will have
different characteristics than those that do, causing inaccurate results.
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The Zeocin antibiotic offers researchers advantages over other antibiotics.
Its selection is relatively fast, enabling the researcher to begin expression
studies with a homogeneous, or stable, cell line sooner. Because the antibiotic
and the gene of interest may be causing physiological effects during selection,
it is advantageous for it to occur as quickly as possible. Secondly, Zeocin and
the SH BLE gene function in bacteria as well as yeast and mammalian cells. Most
antibiotics function in only one host type. This forces the construction of
vectors that contain one resistance gene for bacteria and another for the other
host, which increases the size of the vector. Increased vector size makes nearly
everything that is done with vectors (including propagation, cloning,
transformation and transfection) less efficient. Finally, Zeocin uses a
different mode of action than other commonly used antibiotics, like G418 and
hygromycin B. This enables researchers to select more than one vector at the
same time.
RESEARCH SERVICES
INVITROGENOMICS. We have developed a high-throughput gene cloning and
expression technology by scaling up our proprietary TOPO TA Cloning technology.
We believe this technology can provide significant opportunities to develop new
licenses, services and products, which we are marketing under the name
Invitrogenomics. We are using our Invitrogenomics high-throughput capabilities
to rapidly clone and expression-test thousands of genes for corporate customers
in drug development and agriculture. To date, we have assembled libraries of
over 2,300 full-length cloned human genes that express their encoded proteins.
We plan to continue to develop a proprietary library of full-length genes, which
can be sold and licensed to corporate partners for drug discovery and other
commercial development activities.
We intend to focus the Invitrogenomics activities and technology on two
important business opportunities. First, as genome sequencing efforts
accelerate, pharmaceutical, biotechnology and agricultural firms will wish to
analyze large amounts of data to isolate relevant gene targets as quickly as
possible. To do so, these companies will need to conduct cloning and
expression-testing on a large scale. We are using our high-throughput technology
and personnel to provide gene cloning and expression services for corporate
partners on a contract basis. Second, as we build upon our library of patented
cloned full-length genes and expression vectors for use in drug and agricultural
biotechnology discovery efforts, we expect licensing and research kit revenue
opportunities to increase.
Our Invitrogenomics effort is currently staffed with 24 personnel, primarily
in research and development, manufacturing and marketing. Business development
activities are conducted primarily by our senior management.
TECHNOLOGY AND PRODUCT DEVELOPMENT
We are focusing our technology and product development on expanding our
existing product lines and developing innovative new products in areas where we
have expertise and have identified substantial unmet market needs. We seek to
introduce products that can be manufactured and marketed profitably by
continuing to develop products that are not regulated by government agencies
such as the Food and Drug Administration. In addition to our internal technology
and product development programs, we aggressively in-license and acquire
technology and intellectual property. Research institutions seeking to license
their technologies are attracted to our ability to package innovations as
convenient and cost-effective research kits and to rapidly introduce those kits
to the market. Our employees also actively stay abreast of industry developments
to identify and acquire innovative technologies from researchers and research
institutions throughout the world.
On a pro forma combined basis we spent $8.6 million, $5.9 million and $3.9
million on research and development activities in 1998, 1997 and 1996,
respectively. No material portion of this investment in research and development
was sponsored by our customers.
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SALES AND MARKETING
We currently market our products in over 30 countries throughout the world.
We sell our products directly to customers in the United States, Germany,
Switzerland, the United Kingdom and 16 other countries. In addition, we utilize
specialized distributors to market our products exclusively in more than 13
other countries as well as in some of the countries in which we sell directly.
These independent distributors may also market research products for other
companies, including some products that are competitive with our offerings. For
more information regarding foreign sales and revenues, see Note 1 to Invitrogen
Consolidated Financial Statements. As of August 31, 1999 we employed 98 people
in our sales and marketing department worldwide to market our products and
provide customer support and service.
Our sales strategy has been to employ scientists to work as our technical
sales representatives. Most technical sales representatives have an extensive
background in biology. A thorough knowledge of biological techniques and an
understanding of the research process allows our sales representatives to become
advisors, acting in a consultative role with our customers. Our use of technical
sales representatives also enables us to better identify unmet market needs and
new technologies that we can license and develop into new products.
Our marketing departments in our U.S. and European headquarters combine
various types of media and methods to inform customers of new product
developments and enhancements to existing products. We advertise in prominent
scientific journals, publish a yearly catalog, a bi-monthly newsletter and
conduct direct mail campaigns to researchers in the U.S. and Europe. We also
reach a broad range of scientists by hosting an annual symposium, presenting at
scientific seminars and exhibiting at scientific meetings. Invitrogen's website
allows researchers to view an on-line catalog, download technical manuals and
vector sequences, read our newsletter and participate in interactive forums and
discussion groups. The website for our NOVEX subsidiary allows researchers to
view an on-line catalog and download NOVEX technical manuals and application
notes.
MANUFACTURING
The U.S. manufacturing facilities for Invitrogen products occupy
approximately 15,000 square feet of our Carlsbad, California facility. Seven
manufacturing cells are responsible for the complete production, quality testing
and process improvements of Invitrogen's various product lines. The plant
engineering department supports the manufacturing department with equipment
maintenance and repair. The manufacturing processes include quality control
testing of all products to ensure that every product meets or exceeds its
minimum specifications and quality assurance testing of purchased materials that
will be used in products.
Our U.S. manufacturing facilities for NOVEX products are located in San
Diego, California. NOVEX's manufacturing department is responsible for
production, quality testing, process improvements, customer service and
shipping. The engineering department supports the manufacturing department with
development of proprietary manufacturing automation, equipment maintenance and
repair. The manufacturing processes include quality control testing of all
products to ensure that every product meets or exceeds its minimum
specifications and quality assurance testing of purchased materials that will be
used in products. NOVEX obtained ISO 9001 certification in 1997.
NOVEX also assembles pre-cast gels and buffers in Frankfurt, Germany and has
a manufacturing facility in Heidelberg, Germany for formulating and packaging
fine chemicals.
TECHNOLOGY LICENSING
Many of our products are manufactured or sold under the terms of license
agreements which require us to pay royalties to the licensor based upon a
percentage of the sales of products containing
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the licensed materials or technology. Although we have increasingly emphasized
our own research and development in recent periods, we believe our ability to
in-license new technologies from third parties is and will continue to be
critical to our ability to offer new products. Our ability to compete as an
innovator in the development of molecular biology research products and services
depends in part on our ability to convince inventors that we can successfully
bring our new technologies to market. Our significant licenses or exclusivity
rights expire at various times during the next fifteen years. These licenses
include:
TA CLONING. The patents on this cloning method were formerly co-owned by
Invitrogen and Molecular Biology Resources. We had an exclusive license from
Molecular Biology Resources for cloning purposes. In June 1999 we purchased all
of Molecular Biology Resources' rights in the TA Cloning patents and are now the
sole owner of those patents. The patents on this cloning method have been issued
in the United States, the United Kingdom, the Netherlands, France and Germany.
TOPO CLONING. This patented technology significantly accelerates gene
cloning and is an enhancement to our TA Cloning products, among others. The
technology was invented by Dr. Stewart Shuman working at the Sloan-Kettering
Institute for Cancer Research (SKI), which owns the patent. In 1997, we obtained
exclusive worldwide rights to commercialize this technology for all purposes for
the life of the underlying patent. We paid certain initial fees to SKI, and
continue to pay royalties on sales of products designed to use this enhanced
cloning method. These royalties depend in part on the type of product sold and
the level of annual sales. We have also committed to minimum yearly royalty
payments to SKI. Sublicenses may be granted to third parties upon approval by
SKI with a portion of the sublicense income payable to SKI. SKI retains rights
to use and practice the technology for any purpose. Additionally, we have
reimbursed SKI for costs of patent prosecution, and have agreed to pay for
future patent prosecution in exchange for the right to prepare and control the
ongoing patent applications.
ZEOCIN AND ZEOCIN RESISTANCE. In 1994, we obtained from CAYLA of Toulouse,
France, exclusive worldwide rights to use a patented gene that confers
resistance to certain antibiotics including Zeocin. We paid an up-front fee to
CAYLA, and pay royalties on sales of kits and vectors containing this gene. We
also make minimum royalty commitments to CAYLA, which grow at a fixed rate from
year to year, in exchange for exclusive rights. In addition, we have
historically purchased the Zeocin and certain additional antibiotics exclusively
from CAYLA at a price set each year. We have agreed that our purchases will grow
each year, in order to obtain most-favored pricing terms.
ZERO BACKGROUND. We licensed the CCDB or Zero Background gene, used for
selection of successful clones, from the Universite Libre de Bruxelles in 1995
for a ten-year period, unless otherwise terminated under the provisions of the
license. This license grants us exclusive rights to use this patented "lethal
gene" technology for commercial purposes in all fields worldwide. We paid an
initial license fee and reimbursed certain patent costs of the University and
pay a royalty on sales of products containing the lethal gene. In order to
maintain the exclusive rights, we pay minimum royalties each year. We are also
responsible for reimbursing the University's patent prosecution costs for this
technology, up to a fixed cap.
TAQ AND PCR. Probably the most pervasive and essential tool in molecular
biology today, the Polymerase Chain Reaction (PCR) enables researchers to target
and amplify, or copy in large numbers, certain portions of DNA. This technique,
and certain aspects of TAQ polymerase, which is an essential reagent in PCR, are
patented and now owned by F. Hoffmann-La Roche, Ltd. of Basel, Switzerland. We
have a non-exclusive license to use TAQ polymerase and PCR in our research
efforts as well as non-exclusive rights to make and sell TAQ to the research
community for the life of patents underlying the technology. We paid an initial
license fee for these rights and also pay royalties, which are calculated using
both sales of TAQ-based products and the use or sale of TAQ. We granted F.
Hoffmann-La Roche the right to negotiate for a license to make and sell any
competing enzyme we may develop in
47
<PAGE>
the future. If F. Hoffmann-La Roche does not exercise its right to negotiate the
foregoing license, we have agreed that F. Hoffmann-La Roche shall nonetheless be
entitled to a license to make, use and sell any such competing enzyme under the
same terms and conditions as the most favorable nonexclusive license granted by
us. Prior to obtaining this license, we purchased TAQ from authorized sources in
order to have the rights to use PCR for our research.
Royalties in 1998 related to the licenses described above were less than 10%
of our 1998 pro forma combined cost of revenues. In 1998 the royalty amounts,
and in the case of the Zeocin license, the combined royalty and purchase
amounts, related to the five licenses described above were approximately
$309,000, $67,500, $950,000, $38,000 and $8,800, respectively.
In addition to these licenses, we maintain a portfolio of exclusive,
co-exclusive and non-exclusive rights to make, use and/or sell many of the
various technologies underlying our products and services. Depending upon
factors including the scope of rights granted, the usefulness and commercial
potential of the technology and whether the rights are exclusive, we provide
various financial and other considerations to the patent holder or the holder of
senior license rights. Typically, our other licenses include an initial license
fee and continuing royalties. Some licenses also include payments at certain
milestones, e.g., at the first commercial sale of a product. Many licenses,
especially exclusive licenses, call for certain minimum royalty payments each
year. A license will often contain other undertakings by us, such as a
commitment to diligently pursue development and marketing of commercial products
utilizing the licensed technology.
There can be no assurance that we will be able to continue to successfully
identify new technologies developed by others. Even if we are able to identify
new technologies of interest, we may not be able to negotiate a license on
favorable terms, or at all. Some of our licenses do not run for the length of
the underlying patent. We may not be able to renew our existing licenses on
favorable terms, or at all. If we lose the rights to patented technology, we may
need to discontinue selling certain of our products, redesign our products, and
we may lose a competitive advantage. Potential competitors could in-license
technologies that we fail to license and potentially erode our market share for
certain products.
Our licenses typically subject us to various commercialization, sublicensing
and other obligations. If we fail to comply with these requirements we could
lose important rights under a license, such as the right to exclusivity in a
certain market. In some cases, we could also lose all rights under a license. In
addition, certain rights granted under the license could be lost for reasons out
of our control. For example, the licensor could lose patent protection for a
number of reasons, including invalidity of the licensed patent. We do not
receive significant indemnification from a licensor against third party claims
of intellectual property infringement.
PATENTS AND PROPRIETARY TECHNOLOGIES
We consider the protection of our proprietary technologies and products for
molecular and cellular biology research to be important to the success of our
business. We rely on a combination of patents, licenses and trademarks to
establish and protect our proprietary rights to our technologies and products.
We currently own nine issued patents in the United States and two issued patent
families in five other major industrialized nations, and, in total, own or
control 28 issued and pending patents and applications. Generally, U.S. patents
have a term of 17 years from the date of issue for patents issued from
applications submitted prior to June 8, 1995 and 20 years from the date of
filing of the application in the case of patents issued from applications
submitted on or after June 8, 1995. Patents in most other countries have a term
of 20 years from the date of filing the patent application. Our nine issued
United States patents will expire between 2012 and 2019 and our five foreign
patents will expire between 2011 and 2015.
48
<PAGE>
Our success depends to a significant degree upon our ability to develop
proprietary products and technologies. It is critically important to our success
that we adequately protect the intellectual property associated with these
products and technologies. We intend to continue to file patent applications as
we develop new products and technologies. Patents provide some degree of
protection for our intellectual property. However, the assertion of patent
protection involves complex legal and factual determinations and is therefore
uncertain. In addition, the laws governing the scope of patent coverage and the
periods of enforceability of patent protection continue to evolve, particularly
in the areas of molecular biology of interest to Invitrogen.
Patent applications in the United States are maintained in secrecy until
patents issue. Also, publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries by at least several months. As
a result, there can be no assurance that patents will issue from any of our
patent applications or from applications licensed to us. The scope of any of our
issued patents may not be sufficiently broad to offer meaningful protection. In
addition, our issued patents or patents licensed to us could be successfully
challenged, invalidated or circumvented so that our patent rights would not
create an effective competitive barrier. Our intellectual property positions
involve complex legal and factual questions and may be uncertain.
We rely in part on trade secret protection of our intellectual property. We
attempt to protect our trade secrets by entering into confidentiality agreements
with third parties, employees and consultants. Employees and consultants also
sign agreements to assign to Invitrogen their interests in patents and
copyrights arising from their work for us. Employees also agree not to compete
unfairly with us after their employment by using confidential information,
soliciting employees or soliciting customers. However, these agreements can be
breached and, if they were, there may not be an adequate remedy available to us.
Also, a third party may learn our trade secrets through means other than by
breach of our confidentiality agreements, or they could be independently
developed by our competitors.
COMPETITION
The markets for our products are very competitive and price sensitive. We
expect the intensity of competition to increase. Currently, we compete primarily
with other life sciences research product suppliers. Many of our competitors
have greater financial, operational, sales and marketing resources, and more
experience in research and development than us. These competitors and other
companies may have developed or could in the future develop new technologies
that compete with our products or which could render our products obsolete.
Competitors offer a broad range of equipment, laboratory supplies and other
products, including research products that compete with ours. We believe that
customers in our markets display a significant amount of loyalty to their
initial supplier of a particular product. Therefore, we may experience
difficulties in generating sales to customers who initially purchased products
from competitors. Similarly, we believe that there is a significant competitive
advantage in being the first to introduce a new product to market. Accordingly,
we believe that to compete effectively, we will need to consistently be first to
market with important new research products and services. To the extent that we
are unable to be the first to develop and supply new products, our competitive
position may suffer. See "Risk Factors--Competition in the Life Sciences
Research Market."
GOVERNMENT REGULATION
We are not subject to direct governmental regulation other than the laws and
regulations generally applicable to businesses in the jurisdictions in which we
operate, including those governing the handling and disposal of hazardous wastes
and other environmental matters. Our research and development activities involve
the controlled use of small amounts of hazardous materials, chemicals and
radioactive compounds. Although we believe that our safety procedures for
handling and disposing of such materials comply with applicable regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, we could be held liable
for resulting damages; such liability could have a material adverse effect on
us.
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<PAGE>
EMPLOYEES
As of August 31, 1999, we employed 426 persons, of whom 44 hold Ph.D. or
M.D. degrees and 30 hold other advanced degrees. Approximately 78 employees are
engaged in research and development, 98 in sales and marketing, 189 in
manufacturing and 61 in supporting corporate development, intellectual property,
finance and other administrative functions.
Our success will depend in large part upon our ability to attract and retain
employees. We face competition in this regard from other companies, research and
academic institutions, government entities and other organizations. We believe
that we maintain good relations with our employees.
FACILITIES
We lease an approximately 60,000 square foot facility in Carlsbad,
California for our headquarters, as well as for marketing and product support
operations, research and development and manufacturing activities. We presently
pay rent of approximately $40,000 per month with predetermined cost-of-living
rent increases at annual intervals. The lease expires in February 2007. We
believe that adequate facilities will be available upon the conclusion of our
lease. We are currently in negotiation to lease additional space in Carlsbad. We
also own an approximately 17,000 square foot facility in the Netherlands to
support sales and distribution in Europe.
Our NOVEX subsidiary leases two buildings comprising a total of
approximately 41,000 square feet at its San Diego, California location, which is
used for manufacturing as well as for marketing and product support operations,
and research and development. We presently pay rent of approximately $30,000 per
month plus $11,000 per month for tenant improvements. The lease expires in 2000
and we hold options to extend the lease for another two years. We believe that
adequate facilities will be available upon the conclusion of this lease. NOVEX
also leases approximately 12,000 square feet in Frankfurt, Germany and 18,000
square feet in Heidelberg, Germany, which leases run through 2002 and 2001
respectively. Payments under these leases total approximately $22,000 per month
and include all utilities for the Frankfurt facilities.
LEGAL PROCEEDINGS
From time to time we have been and expect to be involved in legal
proceedings arising from our ordinary business operations. In early 1999, our
NOVEX subsidiary received a letter outlining a $1.1 million claim from a
distributor in Austria. The letter stated that the claim arose from the
termination of NOVEX's relationship with the distributor. No formal legal action
has been taken. None of the proceedings that are currently pending are expected
to have a material adverse effect on our financial condition and business
operations.
Three former employees of Invitrogen, including David E. McCarty, former
President and Chief Executive Officer of NOVEX, former Executive Vice President
of Invitrogen and a current director of Invitrogen and a selling stockholder in
this offering, have retained counsel and threatened to take legal action against
us arising out of the termination of their employment. These former employees
allege fraud and wrongful termination in connection with the termination of
their employment following the merger between Invitrogen and NOVEX and the
reduction of our U.S. workforce. These former employees have indicated that
their damages would include lost earnings and the value of unvested stock
options which they lost as a result of the termination of their employment.
Although no formal legal proceedings have been filed and no specific demands
have been made, actions may be filed against us in the future. Additionally,
other former employees could assert similar or other claims arising out of the
termination of their employment. We are currently evaluating all such claims and
no assurances can be given as to the outcome of any resulting litigation.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning directors and executive
officers of Invitrogen as of September 24, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Lyle C. Turner............................ 46 President, Chief Executive Officer and Chairman of the Board
of Directors
James R. Glynn............................ 52 Executive Vice President, Corporate Development, Chief
Financial Officer and Director
Donald W. Grimm........................... 57 Director
Kurt R. Jaggers(1)(2)..................... 40 Director
Bradley G. Lorimier....................... 54 Director
David E. McCarty.......................... 57 Director
Jay M. Short, Ph.D.(2).................... 41 Director
Lewis J. Shuster(1)....................... 44 Director
</TABLE>
- ------------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
LYLE C. TURNER, a founder of Invitrogen, has served as President, Chief
Executive Officer and Director since February 1988. Previously, Mr. Turner
served as Director of Sales and Marketing at Stratagene, a life science research
company, from January 1987 through February 1988, and as Technical Sales
Specialist at Boehringer Mannheim Corp., a pharmaceutical company, from June
1985 to January 1987. From September 1981 through May 1985, Mr. Turner worked at
Syntro Corporation, an animal health company, at which his final position was
Manager of Business Development. Mr. Turner received his B.A. in Chemistry from
the University of California, San Diego.
JAMES R. GLYNN became a Senior Vice President, Corporate Development, Chief
Financial Officer and Director of Invitrogen in June 1998 and previously served
as Director in 1995. In September 1999, Mr. Glynn became an Executive Vice
President of Invitrogen. From July 1995 to May 1997 he served as Senior Vice
President and Chief Financial Officer and from May 1997 to July 1998 as Chief
Operating Officer, Chief Financial Officer and Director of Matrix
Pharmaceutical, Inc., a company focusing on the treatment of cancer. Mr. Glynn
served as Executive Vice President, Chief Financial Officer and Director of
Mycogen Corporation, an agribusiness and biotechnology company, from April 1987
to February 1995. From 1982 to 1987 Mr. Glynn was Vice President, Finance and
Treasurer of Lubrizol Enterprises, Inc., a venture development company. He is
currently a Director of Matrix Pharmaceutical, Inc. in addition to his positions
with Invitrogen. Mr. Glynn received his B.B.A. in Accounting from Cleveland
State University.
DONALD W. GRIMM has served as a Director of Invitrogen since June 1998. From
September 1995 to March 1998 Mr. Grimm was Managing Director, West Coast for
Copenhagen Capacity, a Danish trade group focused on biotechnology and medical
devices. Since June 1995 he has served as Chairman of the Board and President of
Strategic Design, a strategic planning and consulting company. He was a Director
of MedNet M.P.C. Corp., a medical services company from November 1997 to
December 1997. Mr. Grimm retired from Eli Lilly & Company, a research-based
pharmaceutical company, in 1993 after 23 years of service. Mr. Grimm held
positions at Eli Lilly as Director of Worldwide Pharmaceutical Pricing, Director
of Pharmaceutical Market Research, and Director of Sales. From September 1987 to
December 1993, Mr. Grimm served as President, CEO and Chairman of Hybritech,
Inc., a company involved in physical and biological research. For the six month
period between June 1994 and
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December 1994, Mr. Grimm served as President, CEO and Director of Telios
Pharmaceuticals, a pharmaceutical and medical device company. Telios and MedNet
filed petitions for bankruptcy after Mr. Grimm's resignation from those
companies. Mr. Grimm received his B.S. in Pharmacy and M.B.A. from the
University of Pittsburgh. Mr. Grimm is currently a Director of several private
companies and non-profit organizations.
KURT R. JAGGERS has served as a Director of Invitrogen since June 1997. Mr.
Jaggers has served as a Managing Director of TA Associates, Inc., an equity
investment firm, since January 1997. He has also served as a Principal for TA
Associates from 1993 to 1996, and as Vice President of that firm from 1990 to
1992. Mr. Jaggers attended Stanford University, receiving B.S. and M.S. degrees
in Electrical Engineering, and an M.B.A. He is currently a Director of several
private companies.
BRADLEY G. LORIMIER has served as a Director of Invitrogen since November
1998. Mr. Lorimier has been retired since July 1997. From March 1994 to June
1997 Mr. Lorimier served as Senior Vice President, Business Development and
Director of Human Genome Sciences, Inc., a biotechnology company. From July 1991
to March 1994 Mr. Lorimier served as Vice President, Corporate Development of
Ortho-McNeil Pharmaceutical, Inc., a subsidiary of Johnson & Johnson, a
pharmaceutical manufacturing company. He is also currently a Director of Matrix
Pharmaceutical, Inc. as well as several private companies.
DAVID E. MCCARTY has served as a Director of Invitrogen since August 1999.
From August to September 1999 he served as Senior Vice President and in
September 1999 he served as Executive Vice President of Invitrogen. Previously,
Mr. McCarty served as President and Chief Executive Officer of NOVEX, a position
he held from August 1997 through September 1999. Prior to joining NOVEX, Mr.
McCarty was President and CEO of Alexon Biomedical, an immunoassay diagnostic
company which he joined in 1990. Mr. McCarty also serves as a director of a
privately held company. Mr. McCarty holds a B.S. in Chemistry from California
State University at Northridge and an M.B.A. from California State University at
Long Beach.
JAY M. SHORT has served as a Director of Invitrogen since February 1995.
From September 1994 to the present Dr. Short has served as Chief Executive
Officer, President, Chief Technology Officer and Director of Diversa
Corporation, a biotechnology research company. From September 1985 to September
1994 Dr. Short held various positions at Stratagene including Vice President,
Research and Development & Operations and Senior Staff Scientist. Previously, he
was President of Stratacyte Inc., a molecular biology company. Dr. Short
received his Ph.D. in Biochemistry from Case Western Reserve University. Dr.
Short is currently a Director of StressGen Biotechnologies Corporation, a
biopharmaceutical company.
LEWIS J. SHUSTER has served as a Director of Invitrogen since June 1998. Mr.
Shuster is presently President and Chief Operating Officer of Pharmacopeia
Laboratories, an operating unit of Pharmacopeia, Inc., a pharmaceutical and
biotechnical research company, a position he has held since February 1999. From
November 1994 to February 1999 Mr. Shuster served as Executive Vice President
and Chief Financial Officer of Pharmacopia, Inc. From September 1992 to November
1994 Mr. Shuster served as Executive Vice President, Operations and Finance of
Human Genome Sciences, Inc., a pharmaceutical company. Mr. Shuster received his
M.B.A. from Stanford University Graduate School of Business and his B.A. from
Swarthmore College. He is currently a Director of US Biomaterials Corporation, a
private biomedical company.
Invitrogen currently has authorized between five and nine directors with the
current number set at eight. Invitrogen's certificate of incorporation provides
for three classes of directors. The terms of Class I, Class II and Class III
directors expire at the annual meeting of stockholders held in 2000, 2001 and
2002, respectively, or at special meetings held instead of such annual meetings.
At each annual meeting of stockholders after the initial classification, or
special meetings held instead, the successors to directors whose terms will then
expire will be elected to serve until the third annual meeting following their
election. Any additional directorships resulting from an increase in the number
of
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<PAGE>
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Invitrogen.
BOARD COMMITTEES
The board of directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, which consists of Mr. Jaggers and Mr. Shuster,
reviews the results and scope of the annual audit and meets with our independent
auditors to review our internal accounting policies and procedures. The
Compensation Committee, which consists of Mr. Jaggers and Dr. Short, makes
recommendations to the board of directors with respect to our general and
specific compensation policies and practices and administers our 1995 and 1997
Stock Option Plans and the 1996 and 1998 NOVEX Stock Option Plans we assumed in
connection with our merger.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In March 1997 Invitrogen made an initial investment of $500,000 to acquire
shares of preferred stock and a warrant to purchase shares of preferred stock of
MorphaGen, Inc., a start-up company engaged in the business of researching and
developing Morphatides, a special type of nucleic acid. The President of
MorphaGen, Heidi Short, is the spouse of Dr. Short, a member of the board of
directors of Invitrogen. During 1997, Invitrogen performed research services for
MorphaGen for which it was paid approximately $81,000. In November 1998,
Invitrogen acquired all of the outstanding shares of MorphaGen not already owned
by Invitrogen in exchange for a grant of an option to purchase 50,000 shares of
Invitrogen common stock, at an exercise price of $8.50 per share, to Heidi
Short, payment of royalties contingent upon certain milestones, the assumption
of outstanding options of MorphaGen employees and the assumption of certain
liabilities. MorphaGen was dissolved as a separate corporate entity in 1999. Dr.
Short's father, Roy Short, receives royalties of approximately $100,000 per year
from sales relating to Invitrogen's DNA DipStick product line and
electroporation cuvettes. There were no other interlocks or other relationships
among Invitrogen's executive officers and directors that are required to be
disclosed under applicable executive compensation disclosure requirements.
COMPENSATION OF DIRECTORS
Invitrogen does not currently provide cash compensation to directors for
services as directors, other than to Dr. Short, who receives up to $1,500 per
meeting and Mr. Grimm who receives up to $750 per meeting, both pursuant to
preexisting agreements. Directors may be reimbursed for certain expenses in
connection with attendance at Board of Directors and committee meetings. Since
November 19, 1998, directors who are not employees of Invitrogen receive annual
grants of options to purchase 10,000 shares of common stock in accordance with
the 1997 Stock Option Plan. Options to purchase 30,000 shares of common stock
were granted to non-employee directors of Invitrogen during Invitrogen's fiscal
year ended December 31, 1998.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our certificate of incorporation, permitted by
Delaware General Corporation Law, which provide that directors of Invitrogen
shall not be personally liable for monetary damages to Invitrogen or its
stockholders for a violation of the directors' duty to act with care and in the
best interests of the shareholders, except for liability:
- For acts or omissions that are not in good faith, are deliberately
improper or are known to be illegal;
- Under Section 174 of the Delaware Law relating to improper dividends or
distributions; and
- For any transaction from which the director obtained an improper personal
benefit.
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<PAGE>
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws authorize us to indemnify our officers, directors, employees and
agents to the extent permitted by the Delaware Law. Section 145 of the Delaware
Law empowers us to enter into indemnification agreements with our officers,
directors, employees and agents. We have entered into separate indemnification
agreements with our directors and executive officers which may, in some cases be
broader than the specific indemnification provisions contained in the Delaware
Law. The indemnification agreements may require us, among other things, to
indemnify such executive officers and directors against liabilities that may
arise by reason of status or service as directors or executive officers and to
advance expenses they spend as a result of any proceeding against them as to
which they could be indemnified.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of Invitrogen where indemnification will be
required or permitted, and we are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
EXECUTIVE COMPENSATION
The following table summarizes, for the periods indicated, the compensation
paid to or earned by our Chief Executive Officer and our other current executive
officer whose aggregate compensation during the fiscal year ended December 31,
1998 exceeded $100,000. Mr. Glynn joined Invitrogen on July 1, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------
SHARES OF
COMMON STOCK
ISSUABLE UPON
EXERCISE OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS($) OPTIONS COMPENSATION
<S> <C> <C> <C> <C> <C>
Lyle C. Turner .............................. 1998 $ 285,601 $ 270,998 -- --
President and Chief Executive Officer...... 1997 258,405 640,690
James R. Glynn .............................. 1998 136,146 123,125 250,000 --
Executive Vice President Corporate 1997 -- -- --
Development and Chief Financial Officer
</TABLE>
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<PAGE>
1998 OPTION GRANTS
The following table contains information about the stock option grants in
1998 to the executive officers described in the first sentence of "Executive
Compensation." The table is based on an aggregate of 1,233,500 options granted
by Invitrogen during 1998 to employees of and consultants to Invitrogen. The
exercise price per share of each option was equal to the fair market value of
the common stock on the date of grant as determined by the board of directors.
OPTION GRANTS IN FISCAL YEAR 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS GRANTED APPRECIATION FOR OPTION
UNDERLYING TO EXERCISE OR TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
James R. Glynn................ 250,000 20.3 $ 5.60 7/01/08 $ 880,000 $ 2,230,000
</TABLE>
- ------------------------------
(1) Options are granted under Invitrogen's 1995 and 1997 Stock Option Plans.
Such options expire ten years from the date of grant, or earlier upon
termination of employment.
Amounts reported in the Potential Realizable Value column above represent
hypothetical values that may be realized upon exercise of the options
immediately prior to the expiration of their term, assuming that the stock price
on the date of grant appreciates at the specified annual rates of appreciation,
compounded annually over the term of the options. These numbers are calculated
based on rules promulgated by the Securities and Exchange Commission. Actual
gains, if any, on stock option exercises and common stock holdings are dependent
on the time of such exercise and the future performance of Invitrogen's common
stock.
YEAR-END VALUES
The table below provides information about the number and value of options
held by the executive officers described above at December 31, 1998. Since there
was no public trading market for Invitrogen common stock as of December 31,
1998, the values of in-the-money options have been calculated on the basis of
$15.00 per share, the Invitrogen board's good faith determination of the fair
market value of a share of Invitrogen's common stock as of that date, less the
applicable exercise price.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, OPTIONS AT DECEMBER 31,
1998 1998
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
James R. Glynn...................................... 70,833 179,167 $ 665,830 $ 1,684,170
</TABLE>
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
On March 31, 1999 we entered into severance agreements with two of our
former executive officers, Joseph M. Fernandez and Theodore J. DeFrank, pursuant
to their resignations. Under those agreements, each former officer receives
monthly severance pay at their regular salary rate on the date of the
agreements; Mr. DeFrank for six months, Mr. Fernandez for twelve months. Each
former officer additionally entered into consulting agreements with Invitrogen,
for nine months and twelve months respectively. As part of its merger with
NOVEX, in August 1999 Invitrogen assumed an employment agreement with David E.
McCarty, former President and Chief Executive Officer of NOVEX. Under
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<PAGE>
that agreement Mr. McCarty will receive severance pay totaling $240,000 paid
monthly during the twelve month period ending September 2000.
STOCK OPTION PLANS
We have adopted a 1995 Stock Option Plan and a 1997 Stock Option Plan, as
amended November 20, 1998. The 1995 Plan originally provided for the grant of
options to purchase up to 500,000 shares, but specified that the number would be
adjusted due to stock splits. Due to a seven-for-one split, the shares available
for future option grants under the 1995 Plan were increased to 3,500,000. In May
1997, we adopted the 1997 Plan and discontinued granting options under the 1995
Plan. The 1997 Plan carried forward 3,125,794 shares available for issuance or
subject to outstanding options under the 1995 Plan and added 609,685 shares,
resulting in 3,735,479 shares available for future option grants under the 1997
Plan.
As of the adoption of the 1997 Plan, options to purchase 89,313 shares
granted under the 1995 Plan had been exercised. We have been granting all
options under the 1997 Plan since its adoption. The 1997 Plan was subsequently
amended on two occasions to provide for the issuance of options to purchase an
additional 750,000 shares and 1,000,000 shares of common stock. With those
amendments, the 1997 Plan allows for the issuance of options to purchase up to
5,485,479 shares of common stock.
Under the 1997 Plan, all employees of Invitrogen or any subsidiary, all
directors who are not employees of Invitrogen or any subsidiary and any
independent contractor or advisor who performs services for Invitrogen or a
subsidiary are eligible to receive Nonstatutory Stock Options. Employees are
also eligible to receive Incentive Stock Options intended to qualify under
Section 422A of the Internal Revenue Code of 1986. The 1997 Plan is administered
by a committee of the Board of Directors of Invitrogen, which selects the
persons who will receive options, determines the number of shares in each
option, and prescribes other terms and conditions, including the type of
consideration to be paid to Invitrogen upon exercise and vesting schedules, in
connection with each option. The committee's recommendations are forwarded to
the full board of directors for approval. The 1995 Plan and the NOVEX plans
(discussed below) similarly make employees, officers, directors and consultants
eligible for NSOs and provides that employees are eligible for ISOs. The 1995
Plan may be administered by the board of directors or a committee.
Under the 1997 Plan, after November 19, 1998, outside directors receive an
initial NSO to purchase 10,000 shares when they are first appointed or elected
to the board of directors. In addition, our outside directors, including outside
directors that were formerly employees of Invitrogen, will automatically receive
an option to purchase 10,000 shares of common stock at each annual meeting of
stockholders after their election, provided such director has served at least
six months. The first such grants were in January 1999. The exercise price of
the options in all cases will be equal to the fair market value of the common
stock on the date of grant. Options received by outside directors generally vest
over three years and must be exercised within ten years.
With respect to NSOs granted under the 1997 Plan at the discretion of the
board of directors upon committee recommendation, the exercise price must be at
least 85% of the fair market value of the common stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair market value of
the common stock on the date of grant and, in the case of ISOs given to holders
of more than 10% of the voting power of Invitrogen, not less than 110% of such
fair market value. The term of an option cannot exceed ten years, and the term
of an ISO given to a holder of more than 10% of the voting power of Invitrogen
cannot exceed five years. Options generally expire not later than 90 days
following a termination of employment, 12 months following the optionee's
disability, or not later than 12 months following the optionee's death. The
terms for options granted under the 1995 Plan are substantially similar to those
granted under the 1997 Plan.
Effective August 17, 1999, Invitrogen assumed NOVEX's 1996 and 1998 Stock
Option/Stock Issuance Plans in connection with the merger of Invitrogen and
NOVEX. Pursuant to the terms of the merger, each outstanding NOVEX common stock
option was assumed and converted into an option to
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<PAGE>
acquire the number of shares of Invitrogen common stock obtained by multiplying
the number of shares of NOVEX common stock subject to the option by the exchange
ratio used in the merger. The terms of NOVEX's 1996 and 1998 Stock Option/Stock
Issuance Plans are substantially similar to Invitrogen's 1995 Plan and 1997
Plan. All options granted to NOVEX employees after the merger have been and will
be granted under Invitrogen's 1997 Plan.
As of August 31, 1999, there were outstanding options to purchase an
aggregate of 4,125,525 shares of common stock at exercise prices ranging from
$.8357 to $28.125 per share, or a weighted average exercise price per share of
$9.23 under the 1995 Plan and the 1997 Plan and the NOVEX plans. Options to
acquire 574,659 shares have been exercised. As of August 31, 1999 a total of
1,351,801 shares of common stock were available for future option grants under
the 1995 Plan and the 1997 Plan, and none were available for future option
grants under the NOVEX plans. If any option granted under the 1997 Plan expires,
terminates or is canceled for any reason, or if shares of stock issued subject
to a right of repurchase are repurchased by Invitrogen, the shares allocable to
the unexercised option or the repurchased shares will become available for
additional option grants under the 1997 Plan. The 1995 Plan similarly allows the
shares allocable to expired or terminated options to be made available for
additional option grants, but does not explicitly discuss the acquisition by
Invitrogen of shares subject to repurchase.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1989 we adopted the Invitrogen Corporation Employee Stock Ownership Plan
(ESOP), as amended January 1, 1993, amended and restated January 1, 1996 and as
amended August 31, 1997 and November 24, 1998. The ESOP's purpose was to reward
eligible employees for service to Invitrogen by providing them with retirement
benefits. The ESOP was a qualified retirement plan designed to comply with
provisions of sections 4975(e)(7) and 401(a) of the Internal Revenue Code, the
Employment Retirement Income Security Act of 1974 and applicable regulations.
We terminated contributions to the ESOP Trust as of December 31, 1998, which
accelerated vesting of all ESOP participants. Contributions historically were
made in the form of common stock, as valued by an independent valuation firm.
Contributions were allocated based on the participants' compensation and
employees were eligible to participate in the ESOP after one year of service.
Distributions from the ESOP Trust to vested employees occur upon their
retirement, death, total and permanent disability or termination. The ESOP has
been submitted to the Internal Revenue Service for a determination letter in
connection with its termination. When the determination letter is received, the
ESOP will be fully terminated and distributions of all plan assets will be made
from the ESOP as directed by its participants. An employee may elect to receive
distributions in the form of cash or Invitrogen stock and may elect to receive
the distribution in a lump sum or in installments over a period not to exceed
the shorter of (1) his/her life expectancy or the combined life expectancy of
the participant and his/her beneficiary or (2) a period between five and ten
years, depending upon the value of the participant's ESOP account balance.
Invitrogen stock distributed to beneficiaries is subject to a right of first
refusal by Invitrogen and the ESOP Trust before any sale to a third party.
The ESOP trustees are Lyle C. Turner and Lisa G. McCurdy. The trustees vote
all Invitrogen stock held by the ESOP Trust, except that individual
beneficiaries may direct the voting of stock allocated to their accounts. The
ESOP may be amended or terminated by us at any time, subject to certain
restrictions, the Internal Revenue Code and ERISA.
As of August 31, 1999 the ESOP Trust held 1,203,499 shares of Invitrogen
stock as well as approximately $460,000 invested in various mutual and
money-market funds.
NOVEX has also established a 401(k)/ESOP Plan. The NOVEX Plan was originally
established in April 1995 only as an ESOP which allowed employees to acquire
shares of NOVEX stock and thus participate in the growth of the company. Between
its inception and April 1997, the NOVEX Plan was funded through contributions by
the company. In April 1997 the NOVEX Plan was amended to add a
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<PAGE>
401(k) feature which allows employees to contribute salary deductions on a
pretax basis. We contribute to the NOVEX Plan by matching employees' salary
deductions.
NOVEX employees who complete 1,000 hours or more in a twelve-month period
are eligible to participate in the NOVEX Plan. These employees vest in the
amounts contributed by NOVEX over a six-year period at 20% per year beginning
with their second year of service. Distributions from the NOVEX Plan are made
under substantially the same conditions and restrictions as outlined for the
Invitrogen Plan above, except that no right of first refusal exists on the
Invitrogen common stock held by the NOVEX Plan Trust.
The NOVEX Plan is administered by a Committee appointed by the board of
directors. Union Bank of California is the NOVEX Plan's trustee. The Committee
votes the NOVEX Plan's stock except with respect to matters as listed above in
the description of Invitrogen's Plan. The NOVEX Plan may be amended or
terminated at any time, subject to the same restrictions as Invitrogen's Plan.
As of the closing of the merger with Invitrogen, the NOVEX Plan held 628,005
shares of NOVEX common stock, which were converted into 145,622 shares of
Invitrogen common stock. The NOVEX Plan also has cash assets invested in various
mutual and money-market funds as directed by participants.
Invitrogen intends to terminate the NOVEX Plan, to distribute its assets to
the participants or roll those assets into the Invitrogen 401(k) Plan or other
qualified retirement plans designated by the participants, and to enroll the
NOVEX Plan participants who wish to do so in the Invitrogen Section 401(k) Plan
(see below) as of January 1, 2000.
1998 EMPLOYEE STOCK PURCHASE PLAN
A total of 250,000 shares of Invitrogen common stock have been reserved for
issuance under our 1998 Employee Stock Purchase Plan. Of those, 17,454 have been
issued as of August 31, 1999. The employee stock purchase plan permits eligible
employees to purchase common stock at a discount through payroll deductions,
during 24-month offering periods. Unless the board of directors establishes
different periods, each offering period will be divided into eight consecutive
three-month purchase periods. Unless the board of directors establishes a higher
purchase price, the price at which stock is purchased under the employee stock
purchase plan shall be equal to 85% of the fair market value of the common stock
on the first day of the offering period or the last day of the purchase period,
whichever is lower.
SECTION 401(k) PLAN
Effective June 1, 1994, Invitrogen adopted a 401(k) tax-deferred savings
plan for the benefit of its employees. The 401(k) Plan is intended to be a
qualified retirement plan under section 401(a) of the Internal Revenue Code. Our
employees are eligible to make salary deferral contributions to the 401(k) Plan
upon the completion of three months of employment and to participate in employer
non-elective and matching contributions to the 401(k) Plan upon the completion
of 1,000 hours of service. We may, but are not required to, make matching
contributions to the 401(k) Plan based on the participants' salary deferral
contributions. Our contributions are subject to a graduated vesting schedule
based upon an employee's years of service with Invitrogen. All contributions to
the 401(k) Plan are held in a trust which is intended to be exempt from income
tax under Section 501(a) of the Internal Revenue Code. The 401(k) Plan's
trustees are Lyle C. Turner and James R. Glynn. Participants may direct the
investment of their contributions among specified Salomon Smith Barney
investment funds. The 401(k) Plan may be amended or terminated by us at any
time, subject to certain restrictions imposed by the Internal Revenue Code and
ERISA.
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CERTAIN TRANSACTIONS
In June 1997, we sold a total of 2,202,942 shares of convertible preferred
stock at $6.8091 per share, for an aggregate purchase price of approximately $15
million, to three accredited investors, each of which are affiliates of TA
Associates. Kurt R. Jaggers, a director of Invitrogen, is a Managing Director of
TA Associates. Concurrently with the sale of the convertible preferred stock, we
repurchased and retired 1,101,471 shares of common stock at $6.8091 per share,
for an aggregate purchase price of approximately $7.5 million, from Lyle C.
Turner, Joseph M. Fernandez, Anh Nguyen and Malcolm Finlayson, executive
officers and former executive officers of Invitrogen. In this transaction, the
TA Associates affiliates acquired registration rights with respect to the common
stock issued or issuable upon conversion of the convertible preferred stock.
At the closing of our initial public offering, the convertible preferred
stock was converted into an equal number of shares of common stock and
redeemable preferred stock, and such redeemable preferred stock was redeemed out
of proceeds of that offering at a cost of approximately $13.5 million.
Additionally, holders of the convertible preferred stock received accumulated
dividends of approximately $1.5 million.
In December 1998, Invitrogen received a promissory note from Mr. Turner in
the amount of $150,000. The note is secured by a pledge of common stock, is due
in December 1999 and bears interest of 6.5%.
During 1997 and 1998, Invitrogen leased an airplane from Turner Aviation, a
company controlled by Mr. Turner, for $7,200 per month. Invitrogen had also
advanced $150,000 to Turner Aviation to assist in the acquisition of the plane.
The lease agreement terminated in February 1999, upon the closing of
Invitrogen's initial public offering. The advance was repaid through the
December 1998 promissory note described above.
In connection with our acquisition of MorphaGen, Inc., in November 1998 we
issued an option to purchase 50,000 shares of our common stock to the spouse of
Dr. Short, one of our directors. See "Management-Compensation Committee
Interlocks and Insider Participation."
Dr. Short's father, Roy Short, receives royalties of approximately $100,000
per year from sales relating to Invitrogen's DNA DipStick product line and
electroporation cuvettes.
Invitrogen has entered into indemnification agreements with each of its
officers and directors containing provisions which may require us, among other
things, to indemnify its officers and directors against liabilities that may
arise by reasons of their status or service as officers or directors and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. Invitrogen also intends to execute such
agreements with its future directors and executive officers.
On August 17, 1999 Invitrogen issued to David E. McCarty, a former executive
officer and a current director of Invitrogen, an option to purchase 110,000
shares of our common stock at an exercise price of $28.125 per share, in
connection with his employment by Invitrogen following the merger with NOVEX.
His employment terminated on September 20, 1999. In connection with the
acquisition of NOVEX, Invitrogen also assumed NOVEX's obligations under an
employment agreement with Mr. McCarty and options held by Mr. McCarty to
purchase NOVEX common stock, which were converted into options to purchase
139,128 shares of Invitrogen common stock at an exercise price of $4.14 per
share. See "Management--Employment and Severance Arrangements."
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of the shares of our common stock as of August 31, 1999, by:
- Each person Invitrogen knows to be the beneficial owner of 5% or more of
the outstanding shares of common stock, together with the affiliates of
such person;
- Each executive officer listed in the Summary Compensation Table;
- Each director of Invitrogen, who, where applicable, is listed under the
name of the principal stockholder with which he is affiliated; and
- All executive officers and directors of Invitrogen as a group.
Except in cases where community property laws apply or as indicated in the
footnotes to this table, Invitrogen believes that each stockholder identified in
the table possesses sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by such stockholder. Unless
otherwise noted, the address of the individuals and the Invitrogen ESOP Trust
listed below is c/o Invitrogen Corporation, 1600 Faraday Avenue, Carlsbad,
California 92008.
<TABLE>
<CAPTION>
SHARES THAT MAY
BE ACQUIRED
SHARES SHARES BENEFICIALLY WITHIN 60 DAYS
SHARES BENEFICIALLY BEING OWNED AFTER THE OF AUGUST 31,
OWNED OFFERED OFFERING 1999(2)
------------------------ ----------- ---------------------- ---------------
NUMBER PERCENT(1) NUMBER PERCENT
<S> <C> <C> <C> <C> <C> <C>
Lyle C. Turner(3)........................ 5,718,996 35.7% 800,000 4,918,996 27.6% --
Joseph M. Fernandez(4)................... 1,888,369 11.7 300,000 1,588,369 8.8 159,607
TA Associates(5)......................... 1,702,942 10.6 770,000 932,942 5.2 --
Kurt R. Jaggers
TA Associates, Inc.
125 High Street Tower, Suite 2500
Boston, Massachusetts 02110
ESOP Trust Fund
Lyle C. Turner and Lisa G. McCurdy, co-
trustees(6)............................ 1,203,499 7.5 0 1,203,499 6.7 --
Sheldon C. Englehorn(7).................. 983,686 6.1 500,000 483,686 2.7 --
Ampersand Ventures(8).................... 973,901 6.1 750,000 223,901 1.3 --
55 William Street, Suite 240
Wellesly, MA 02181
Essex Investment Management, LLC......... 905,960 5.7 0 905,960 5.1 --
125 High Street, 29(th) floor
Boston, MA 02110
Charlie B. McAtee(9)..................... 269,134 1.7 80,000 189,134 1.1 212,000
William F. Alpenfels(10)................. 212,976 1.3 50,000 162,976 * 18,347
Ann M. McCormick(11)..................... 180,183 1.1 30,000 150,183 * 153,250
Glenn E. Davies(12)...................... 176,394 1.1 30,000 146,394 * 153,300
Wilfred S. Paul(13)...................... 167,700 1.0 50,000 117,700 * 166,000
Jay M. Short(14)......................... 152,000 * 90,000 62,000 * 127,000
James R. Glynn........................... 112,947 * 0 112,947 * 112,498
David E. McCarty(15)..................... 83,192 * 50,000 33,192 * 83,124
Donald W. Grimm.......................... 23,000 * 0 23,000 * 20,000
Lewis J. Shuster......................... 15,000 * 0 16,250 * 15,000
Bradley G. Lorimier...................... 7,500 * 0 7,500 * 7,500
All Directors and Executive Officers as a
group (8 persons)(16).................. 7,815,577 47.7 6,105,577 33.8
</TABLE>
- ------------------------------
* Less than 1%.
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(1) Percentage of ownership is based on: 16,006,506 shares of common stock
outstanding as of August 31, 1999. Shares of common stock that an individual
or group has the right to acquire within 60 days of August 31, 1999,
pursuant to the exercise of options are deemed to be outstanding for the
purposes of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table.
(2) Includes 330,000 shares of common stock subject to options which we
anticipate selling stockholders will exercise and sell in connection with
this offering.
(3) Mr. Turner is President, Chief Executive Officer, and Chairman of the board
of directors of Invitrogen. As co-trustee of the Invitrogen ESOP Trust, Mr.
Turner has certain voting and investment power with respect to the 1,203,499
shares held of record by the Invitrogen ESOP Trust. These shares are also
included for Ms. McCurdy, the other co-trustee, and are included once for
the category, "All Directors and Executive Officers as a Group." Mr. Turner
disclaims beneficial ownership of such shares, except with respect to the
162,645 shares in the Invitrogen ESOP Trust as to which Mr. Turner holds a
pecuniary interest.
(4) Includes 113,421 shares held of record by the Invitrogen ESOP Trust as to
which Mr. Fernandez holds a pecuniary interest.
(5) Includes 1,410,304 shares held by TA/Advent VIII, L.P., 264,432 shares held
by Advent Atlantic and Pacific III, L.P., and 28,206 shares held by TA
Venture Investors L.P. TA/Advent VIII, L.P., Advent Atlantic and Pacific
III, L.P. and TA Venture Investors L.P. are part of an affiliated group of
investment partnerships referred to collectively as TA Associates Group. The
general partner of TA/Advent VIII, L.P. is TA Associates VIII LLC. The
general partner of Advent Atlantic and Pacific III, L.P. is TA Associates
AAP III Partners. The general partner of each of TA Associates VIII LLC. and
TA Associates AAP III Partners is TA Associates, Inc. In such capacity, TA
Associates, Inc. exercises sole voting and investment power with respect to
all of the shares held of record by the named investment partnerships, with
the exception of those shares held by TA Venture Investors, L.P.;
individually, no stockholder, director or officer of TA Associates, Inc., is
deemed to have or share such voting or investment power. Principals and
employees of TA Associates, Inc., including Mr. Jaggers, a director,
comprise the general partners of TA Venture Investors, L.P. In such
capacity, Mr. Jaggers may be deemed to share voting and investment power
with respect to the 28,206 shares held of record by TA Venture Investors,
L.P. Mr. Jaggers disclaims beneficial ownership of such shares.
(6) As co-trustee of the Invitrogen ESOP Trust, Ms. McCurdy has certain voting
and investment power with respect to the 1,203,499 shares held of record by
the Invitrogen ESOP Trust. These shares are also included for Mr. Turner,
the other co-trustee, and are included once for the category, "All Directors
and Executive Officers as a Group." Ms. McCurdy disclaims beneficial
ownership of such shares.
(7) Includes 9,783 shares held by NOVEX's ESOP Trust Fund as to which Mr.
Englehorn holds a pecuniary interest.
(8) Includes 182,606 shares held by Laboratory Partners I Limited Partnership,
60,868 held by Laboratory Partners Companion Fund Limited Partnership, and
730,427 shares held by Ampersand Specialty Materials and Chemicals II
Limited Partnership. Laboratory Partners I Limited Partnership, Laboratory
Partners Companion Fund Limited Partnership, and Ampersand Specialty
Materials and Chemicals II Limited Partnership are part of an affiliated
group of investment partnerships referred to collectively as Ampersand
Ventures. Ampersand Lab Partners MCLP LLP is the general partner of
Ampersand Lab Partners Management Company Limited Partnership, which is the
general partner of Laboratory Partners I Limited Partnership and Laboratory
Partners Companion Fund Limited Partnership, which exercises sole voting and
investment power with respect to all of the shares held of record by
Laboratory Partners I Limited Partnership and Laboratory Partners Companion
Fund Limited Partnership. ASMC-II MCLP LLP is the general partner of ASMC-II
Management Company Limited Partnership, which is the general partner of
Ampersand Specialty Materials and Chemicals II Limited Partnership, which
exercises sole voting and investment power with respect to all of the shares
held of record by Ampersand Specialty Materials and Chemicals II Limited
Partnership.
(9) Includes 47,102 shares held of record by the Invitrogen ESOP Trust as to
which Mr. McAtee holds a pecuniary interest.
(10) Includes 9,124 shares held of record by NOVEX's ESOP Trust Fund as to which
Mr. Alpenfels holds a pecuniary interest.
(11) Includes 26,144 shares held of record by the Invitrogen ESOP Trust as to
which Ms. McCormick holds a pecuniary interest.
(12) Includes 22,394 shares held of record by the Invitrogen ESOP Trust as to
which Mr. Davies holds a pecuniary interest.
(13) Includes 960 shares held of record by the Invitrogen ESOP Trust as to which
Mr. Paul holds a pecuniary interest.
(14) Includes options to purchase 5,000 shares held of record by Dr. Short's
spouse.
(15) Includes 68 shares held of record by NOVEX's ESOP Trust Fund as to which
Mr. McCarty holds a pecuniary interest.
(16) Includes 1,203,499 shares held by the Invitrogen ESOP Trust as to which Mr.
Turner owns a beneficial interest. Includes 68 shares held of record by
NOVEX's ESOP Trust Fund as to which Mr. McCarty holds a pecuniary interest.
Includes options to purchase 5,000 shares held of record by Dr. Short's
spouse.
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DESCRIPTION OF CAPITAL STOCK
The information set forth below is a general summary of the capital stock
structure of Invitrogen. As a summary, this section is qualified and not a
substitute for the provisions of Invitrogen's certificate of incorporation, as
amended and Invitrogen's bylaws, as amended, both of which are on file with the
SEC.
AUTHORIZED CAPITAL STOCK
Invitrogen's authorized capital stock consists of 50,000,000 shares of
common stock, par value $0.01 per share, and 6,405,884 shares of preferred
stock, par value $0.01 per share.
COMMON STOCK
As of August 31, 1999, 16,006,506 shares of Invitrogen common stock were
outstanding. In addition, 5,859,872 shares of Invitrogen common stock were
reserved and available for issuance pursuant to Invitrogen's employee benefit
plans, including 467,001 shares reserved for issuance upon exercise of the NOVEX
options assumed in the recent merger.
The holders of Invitrogen common stock are entitled to receive ratably, from
funds legally available for the payment thereof, dividends when and as declared
by resolution of the board of directors, subject to any preferential dividend
rights which may be granted to holders of any preferred stock authorized and
issued by the board of directors. Traditionally, Invitrogen has not declared and
paid dividends. In the event of liquidation, each share of Invitrogen common
stock is entitled to share pro rata in any distribution of Invitrogen's assets
after payment or providing for the payment of liabilities and any liquidation
preference of any preferred stock authorized and issued by the board of
directors. Each holder of Invitrogen common stock is entitled to one vote for
each share of Invitrogen common stock held of record on the applicable record
date on all matters submitted to a vote of shareholders, including the election
of directors.
Holders of Invitrogen common stock have no cumulative voting rights or
preemptive rights to purchase or subscribe for any stock or other securities,
and there are no conversion rights or redemption rights or sinking fund
provisions with respect to Invitrogen common stock. All outstanding shares of
Invitrogen common stock are duly authorized, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
As of August 31, 1999, no shares of preferred stock were outstanding.
The board of directors has the authority, without further action by the
stockholders, to issue from time to time the preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers, and
relative, participating, optional or other special rights and the qualifications
or restrictions thereof. The preferences, powers, rights and restrictions of
different series of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and other matters. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock, and
may have the effect of delaying, deferring or preventing a change in control of
Invitrogen.
REGISTRATION RIGHTS
Under a Stock Purchase and Stockholders' Agreement dated June 20, 1997,
after this offering the holders of approximately 932,942 shares of Invitrogen
common stock, or persons to whom such holders transfer the common stock, have
registration rights with respect to such shares. If Invitrogen proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders, holders of shares entitled
to registration rights are entitled to notice of such
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<PAGE>
registration and are entitled to include their shares in such registration, at
Invitrogen's expense. However, the underwriters of any such offering have the
right to limit the number of shares included in such registration. In addition,
holders of at least 50% of the shares entitled to registration rights
outstanding may require Invitrogen to prepare and file a registration statement
under the Securities Act, at Invitrogen's expense, covering such shares, and
Invitrogen is generally required to use its best efforts to effect such
registration. Invitrogen is not obligated to effect more than two of these
stockholder-initiated registrations. Further, holders of shares entitled to
registration rights generally may require Invitrogen to file additional
registration statements on Form S-3.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
We are required to follow Section 203 of the Delaware Law, an anti-takeover
law. In general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. A "business combination" includes a merger, asset or stock
sale or other transaction resulting in financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's outstanding voting stock. This provision may have the effect of
delaying, deterring or preventing a change of control of Invitrogen without
further actions by the stockholders.
Invitrogen's certificate of incorporation provides that any action permitted
to be taken by stockholders of Invitrogen must be effected at a duly-called
annual or special meeting of stockholders and will not be able to be effected by
a consent in writing. The board of directors is composed of a classified board
where only one-third of the directors are eligible for election in any given
year. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain control
of Invitrogen and may maintain incumbents on the board of directors, as it
generally makes it more difficult for stockholders to replace a majority of the
directors. Our certificate of incorporation also requires the approval of at
least two-thirds of the total number of authorized directors in order to adopt,
amend or repeal our bylaws. In addition, our certificate of incorporation
similarly permits the stockholders to adopt, amend or repeal our bylaws only
upon the affirmative vote of the holders of at least two-thirds of the voting
power of all then outstanding shares of stock entitled to vote. Also, a director
is removable by stockholders only for cause. Vacancies on the board of directors
resulting from death, resignation, removal or other reason may be filled by a
majority of the directors or a majority of the shares entitled to vote. In
general, other vacancies are to be filled by a majority of the directors.
Lastly, the provisions in the certificate of incorporation described above and
other provisions pertaining to the limitation of liability and indemnification
of directors may be amended or repealed only with the affirmative vote of the
holders of at least two-thirds of the voting power of all then outstanding
shares of stock entitled to vote. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of
Invitrogen, which could have an adverse effect on the market price of the our
common stock.
Invitrogen's bylaws also contain many of the above provisions found in
Invitrogen's certificate of incorporation. Our bylaws do not permit stockholders
to call a special meeting. In addition, our bylaws provide an advance notice
procedure with regard to matters to be brought before an annual or special
meeting of stockholders of Invitrogen, including the election of directors.
Business permitted to be conducted in any annual meeting or special meeting of
stockholders is limited to business properly brought before the meeting.
TRANSFER AGENT AND REGISTRAR
Boston EquiServe L.P., is the transfer agent and registrar for the
Invitrogen stock.
STOCK EXCHANGE LISTING
Invitrogen's stock is quoted on the Nasdaq National Market under the symbol
"IVGN."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
could adversely affect market prices prevailing from time to time. As described
below, only a limited number of shares will be available for sale shortly after
this offering due to certain contractual and legal restrictions on resale.
Nevertheless, sales of substantial amounts of our common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price at such time and the ability of Invitrogen to raise equity capital in the
future.
- Upon the closing of this offering, we will have outstanding an aggregate
of approximately 17,836,506 shares of common stock based on the number of
shares of common stock outstanding as August 31, 1999, and assuming no
exercise of the underwriters' over-allotment option.
- Of these shares, approximately 6,770,231 shares previously registered and
the 5,000,000 shares of common stock to be sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless such shares are held by "affiliates" of Invitrogen
as such term is defined in Rule 144 of the Securities Act. However, some
of these shares will be subject to lock-up agreements, as described below.
- All remaining shares held by our existing stockholders were issued and
sold by Invitrogen in private transactions and are eligible for public
sale if registered under the Securities Act or sold in accordance with
Rule 144 and Rule 701 thereunder, which are summarized below.
Invitrogen's directors, executive officers and the selling stockholders will
together hold an aggregate of approximately 7,223,938 shares of common stock
after the offering. These stockholders have signed lock-up agreements which
prevent them from selling any common stock owned by them for a period of 90 days
from the date of this prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. When determining whether or not to
release shares from the lock-up agreements, DLJ will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time. After giving effect to lock-up agreements with DLJ and the provisions of
Rule 144 and Rule 701, approximately 10,612,568 of the outstanding common shares
will be freely tradable on the date of this prospectus, subject to the
applicable volume limitations. Upon expiration of the lock-up period, all of our
outstanding shares will be freely tradable, subject to the same volume
limitations.
In general, under Rule 144 as currently in effect, a person or persons whose
shares are aggregated, including an "affiliate", who has beneficially owned
shares for at least one year is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of either 1% of the then
outstanding shares of common stock or the average weekly trading volume of the
common stock on the Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to such sale. One
percent of the outstanding shares of common stock would be 178,365 shares
immediately after the offering. Sales under Rule 144 are also subject to
prescribed requirements regarding the manner of sale, notice and availability of
current public information about Invitrogen. Under Rule 144(k), a person who is
not deemed to have been an "affiliate" of Invitrogen at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, would be entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice requirements described above. Therefore, unless otherwise restricted,
"144(k) shares" may be sold immediately following completion of the offering
without limitations as to volume.
In general, under Rule 701 of the Securities Act as currently in effect, any
employee, consultant or advisor of Invitrogen, except for "affiliates," who
purchased shares from us in connection with a compensatory stock or option plan
or written employment agreement is eligible to resell such shares 90 days after
the effective date of our initial public offering in reliance on Rule 144, by
complying with the
64
<PAGE>
applicable requirements of Rule 144 other than the holding period, volume,
current public information and the filing of a Form 144 requirements.
Invitrogen has filed registration statements under the Securities Act
covering shares of common stock reserved for issuance under stock option,
employee stock purchase and 401(k) plans. After the closing of this offering,
such registration statements will cover approximately 5,529,872 reserved but
unissued shares. These shares will, subject to Rule 144 volume limitations
applicable to affiliates, be available for immediate sale in the public market
upon issuance, unless such shares are subject to lock up agreements described
above.
Holders of approximately 932,942 shares of common stock issued in February
1999 upon the conversion of the convertible preferred stock have the right to
cause Invitrogen to register the sale of such shares under the Securities Act.
Registration of such shares under the Securities Act would generally result in
such shares becoming freely tradable without restriction under the Securities
Act immediately upon the effectiveness of such registration. However, shares
purchased by affiliates of Invitrogen would not be freely tradable. See "Risk
Factors--Future Sales of Shares," "Management-- Stock Option Plans,"
"Management--Employee Stock Ownership Plan," "Management--1998 Employee Stock
Purchase Plan," and "Description of Capital Stock--Registration Rights."
65
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC, U.S.
Bancorp Piper Jaffray, and Dain Rauscher Wessels have each agreed to purchase
from Invitrogen and the selling stockholders the respective number of shares of
common stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............................
Hambrecht & Quist LLC...........................................................
U.S. Bancorp Piper Jaffray......................................................
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.................
------------
Total.......................................................................
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the underwriters
to purchase and accept delivery of the shares of common stock offered by this
prospectus are subject to conditions set forth in the Underwriting Agreement.
Except for shares covered by the over-allotment option described below, the
underwriters are obligated to purchase and accept delivery of all the shares of
common stock offered by this prospectus if any are purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers, including the
underwriters, at such price less a concession not in excess of CENTS per
share. The underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of CENTS per share. After the initial
offering of the common stock, the public offering price and other selling terms
may be changed by the representatives of the underwriters at any time without
notice. The underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in this offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJDIRECT Inc. for sale to its
brokerage account holders.
The underwriters have an option, exercisable within 30 days after the date
of this prospectus, to purchase up to an aggregate of 750,000 additional shares
of common stock at the public offering price less underwriting discounts and
commissions. The underwriters may exercise such option solely to cover
overallotments, if any, made in connection with the offering. To the extent that
the underwriters exercise such option, each underwriter will become obligated,
subject to certain conditions, to purchase
66
<PAGE>
its pro rata portion of such additional shares based on such underwriter's
percentage underwriting commitment as indicated in the preceding table.
Invitrogen and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the underwriters may be
required to make in respect thereof.
Each of Invitrogen, its executive officers and directors and certain
stockholders of Invitrogen has agreed, subject to certain exceptions, not to:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into
or exercisable or exchangeable for common stock or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock for a period of 90 days after the date of this prospectus without
the prior written consent of DLJ.
In addition, during such period, we have also agreed not to file any
registration statement with respect to any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
without DLJ's prior written consent. Each of our executive officers, directors
and particular stockholders have agreed not to make any demand for, or exercise
any right with respect to, the registration of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
without DLJ's prior written consent.
Other than in the United States, no action has been taken by Invitrogen, the
selling stockholders or the underwriters that would permit a public offering of
the shares of common stock offered by this prospectus in any jurisdiction where
action for that purpose is required. The shares of common stock offered by this
prospectus may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisements in connection with
the offer and sale of any such shares of common stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the offering of the
common stock and the distribution of this prospectus. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any shares of
common stock offered hereby in any jurisdiction in which such an offer or a
solicitation is unlawful.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may overallot the offering, which would involve
syndicate sales in excess of the offering size, creating a syndicate short
position. The underwriters may bid for and purchase shares of common stock in
the open market to cover such syndicate short position or to stabilize the price
of the common stock. In addition, the underwriting syndicate may reclaim selling
concessions from syndicate members if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. These activities may stabilize or maintain the market
price of the common stock above independent market levels. These transactions
may be effected on the Nasdaq National Market or otherwise and, if commenced,
may be discontinued any time.
67
<PAGE>
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for Invitrogen by Gray Cary Ware & Freidenrich LLP, San Diego, California.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Latham & Watkins, San Diego, California.
EXPERTS
The consolidated financial statements of Invitrogen Corporation as of
December 31, 1997 and 1998 and for the three years in the period ended December
31, 1998 included in this prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The financial statements of NOVEX included in this prospectus and
registration statement for the fiscal years ended March 31, 1999, 1998 and 1997
have been audited by Ernst & Young LLP, independent auditors, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, of which
this prospectus is a part, under the Securities Act with respect to the shares
of common stock offered hereby. This prospectus does not contain all of the
information contained in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
us and our common stock, we refer you to the registration statement and the
exhibits and schedules filed as part of the registration statement. Statements
in this prospectus concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been filed as an
exhibit to the registration statement, we refer you to that exhibit. Each
statement in this prospectus relating to a contract or document filed as an
exhibit to the registration statement is qualified by the filed exhibits.
IN ADDITION, WE FILE REPORTS, PROXY STATEMENTS AND OTHER INFORMATION WITH
THE SEC. YOU MAY READ AND COPY ANY DOCUMENT WE FILE AT THE SEC'S PUBLIC
REFERENCE ROOMS IN WASHINGTON, D.C., NEW YORK, NEW YORK AND CHICAGO, ILLINOIS.
PLEASE CALL THE SEC AT 1-800-SEC-0330 FOR FURTHER INFORMATION ON THE PUBLIC
REFERENCE ROOMS. OUR SEC FILINGS ARE ALSO AVAILABLE TO THE PUBLIC ON THE SEC'S
WEBSITE AT HTTP://WWW.SEC.GOV.
68
<PAGE>
INVITROGEN CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVITROGEN CORPORATION
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998........................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1996, 1997
and 1998............................................................................................. F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997
and 1998............................................................................................. F-7
Notes to Consolidated Financial Statements............................................................. F-9
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Interim Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.......................... F-25
Interim Consolidated Statements of Income for the Three Months and Six Months ended June 30, 1999 and
1998.................................................................................................. F-27
Interim Consolidated Statement of Stockholders' Equity for the Six Months ended
June 30, 1999........................................................................................ F-28
Interim Consolidated Statements of Cash Flows for the Six Months ended
June 30, 1999 and 1998............................................................................... F-29
Notes to Interim Consolidated Financial Statements..................................................... F-31
NOVEX
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors......................................................................... F-34
Consolidated Balance Sheets as of March 31, 1999 and 1998.............................................. F-35
Consolidated Statements of Income for the years ended March 31, 1999, 1998 and 1997.................... F-36
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1999, 1998 and 1997...... F-37
Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998
and 1997............................................................................................. F-38
Notes to Consolidated Financial Statements............................................................. F-39
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Interim Condensed Consolidated Balance Sheets as of June 30, 1999 and March 31, 1999................... F-51
Interim Consolidated Statements of Income for the Three Months ended June 30, 1999
and 1998............................................................................................. F-52
Interim Consolidated Statement of Shareholders' Equity for the Three Months ended June 30, 1999........ F-53
Interim Consolidated Statements of Cash Flows for the Three Months ended June 30, 1999 and 1998........ F-54
Notes to Interim Consolidated Financial Statements..................................................... F-55
INVITROGEN CORPORATION AND NOVEX
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Balance Sheet as of June 30, 1999......................................... F-58
Unaudited Pro Forma Combined Statements of Income for the Six Months ended June 30, 1999 and 1998 and
for the years ended December 31, 1998, 1997 and 1996.................................................. F-59
Notes to Unaudited Pro Forma Combined Financial Statements............................................. F-64
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Invitrogen Corporation:
We have audited the accompanying consolidated balance sheets of Invitrogen
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998 and the related consolidated statements of income, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Invitrogen Corporation and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
January 15, 1999,
(except with respect to the matter
discussed in Note 17, as to which the
date is August 17, 1999)
F-2
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $ 5,375 $ 1,797
Short-term investments............................................................. 3,777 4,214
Accounts receivable, net of allowance for doubtful accounts of $124................ 2,255 3,189
Note receivable officer............................................................ -- 150
Inventories........................................................................ 1,914 2,848
Deferred income taxes.............................................................. 740 611
Prepaid expenses and other current assets.......................................... 413 1,194
------------ ------------
Total current assets............................................................. 14,474 14,003
Property and Equipment, net.......................................................... 2,459 7,090
Intangible Assets, net............................................................... 770 1,319
Other Assets......................................................................... 353 403
------------ ------------
Total assets..................................................................... $ 18,056 $ 22,815
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Line of credit............................................................................ $ -- $ --
Current portion of obligations under capital leases....................................... 121 54
Accounts payable.......................................................................... 1,275 2,257
Accrued expenses.......................................................................... 1,334 1,378
Income taxes payable...................................................................... 499 718
--------- ---------
Total current liabilities............................................................... 3,229 4,407
--------- ---------
Obligations Under Capital Leases, Less Current Portion...................................... 143 83
--------- ---------
Commitments and Contingencies
Non-voting Redeemable Common Stock of Invitrogen B.V.:
Subsidiary common stock: authorized and issued--18,000 shares.
Full liquidation value of $1,676 (NLG 3,150)............................................ 1,295 1,599
--------- ---------
Convertible Redeemable Preferred Stock:
Preferred stock; $0.01 par value; 4,202,942 shares authorized; 2,202,942 issued and
outstanding in 1997 and 1998, 6% redeemable convertible, liquidation value of
$16,375,000............................................................................. 15,242 16,141
--------- ---------
Redeemable Preferred Stock, $0.01 par value per share: 2,202,942 shares authorized; no
shares issued or outstanding.............................................................. -- --
--------- ---------
Stockholders' Equity (Deficit):
Common stock; $0.01 par value, 20,000,000 and 50,000,000 shares authorized; in 1997 and
1998, respectively, 7,426,702 and 7,421,268 shares issued and outstanding in 1997 and
1998, respectively...................................................................... 74 74
Additional paid-in-capital................................................................ 664 1,598
Deferred compensation..................................................................... (495) (962)
Value of common stock designated pursuant to Employee Stock Ownership Plan................ 100 100
Foreign currency translation adjustment................................................... (130) (33)
Retained deficit.......................................................................... (2,066) (192)
--------- ---------
Total stockholders' equity (deficit).................................................... (1,853) 585
--------- ---------
Total liabilities and stockholders' equity (deficit).................................... $ 18,056 $ 22,815
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Revenues................................................................ $ 19,121 $ 24,965 $ 31,414
Cost of Revenues........................................................ 5,818 7,989 8,642
------------ ------------ ------------
Gross margin........................................................ 13,303 16,976 22,772
------------ ------------ ------------
Operating Expenses:
Sales and marketing................................................... 4,236 4,959 6,976
General and administrative............................................ 3,880 3,932 4,428
Research and development.............................................. 2,659 4,416 7,209
------------ ------------ ------------
Total operating expenses............................................ 10,775 13,307 18,613
------------ ------------ ------------
Income from operations............................................ 2,528 3,669 4,159
------------ ------------ ------------
Other Income (Expense):
Gain on foreign currency transactions................................. 172 145 61
Interest expense...................................................... (87) (88) (35)
Interest and other income............................................. 70 211 431
------------ ------------ ------------
155 268 457
------------ ------------ ------------
Income before provision for income taxes.......................... 2,683 3,937 4,616
Provision for Income Taxes.............................................. 939 1,413 1,638
------------ ------------ ------------
Net income........................................................ $ 1,744 $ 2,524 $ 2,978
Less: Preferred stock dividends................................... -- (475) (900)
Accretion of non-voting redeemable common stock.............. (171) (175) (204)
Accretion of beneficial conversion feature related to
convertible preferred stock.................................. -- (15,000) --
------------ ------------ ------------
Income available to common stockholders........................... $ 1,573 $ (13,126) $ 1,874
------------ ------------ ------------
------------ ------------ ------------
Basic earnings per share................................................ $ 0.19 $ (1.47) $ 0.19
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings per share.............................................. $ 0.16 $ (1.47) $ 0.17
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares used in basic earnings per share calculation.... 8,356,270 8,938,719 9,626,333
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares used in diluted earnings per share
calculation........................................................... 10,079,755 8,938,719 11,208,016
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------
COMMON STOCK SERIES A SERIES B
----------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995........................ -- $ -- 7,142,758 $ -- 1,188,040 $ --
Issuance of common stock
pursuant to Employee Stock
Ownership Plan.............. -- -- 111,552 -- -- --
Value of common stock
designated pursuant to
Employee Stock Ownership
Plan........................ -- -- -- -- -- --
Exercise of stock options..... -- -- 70,000 -- -- --
Repurchase of common stock.... -- -- (97,937) -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- --
Accretion of redemption value
over stated value on
subsidiary common stock
issued to NOM............... -- -- -- -- -- --
Net income.................... -- -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
1996........................ -- -- 7,226,373 -- 1,188,040 --
Recapitalization of stock..... 8,414,413 84 (7,226,373) -- (1,188,040) --
Issuance of common stock
pursuant to Employee Stock
Ownership Plan.............. 22,939 -- -- -- -- --
Value of common stock
designated pursuant to
Employee Stock Ownership
Plan........................ -- -- -- -- -- --
Deferred compensation......... -- -- -- -- -- --
Amortization of deferred
compensation expense........ -- -- -- -- -- --
Exercise of stock options..... 178,955 2 -- -- -- --
Repurchase of common stock.... (88,134) (1) -- -- -- --
Repurchase of common stock
relating to stock Purchase
agreement................... (1,101,471) (11) -- -- -- --
Beneficial conversion feature
related to convertible
preferred stock............. -- -- -- -- -- --
Accretion of beneficial
conversion feature related
to convertible preferred
stock....................... -- -- -- -- -- --
Preferred stock dividends
declared and accretion of
redemption value over stated
value on subsidiary common
stock issued to NOM......... -- -- -- -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- --
Net income.................... -- -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
1997........................ 7,426,702 74 -- -- -- --
Issuance of common stock
pursuant to Employee Stock
Ownership Plan.............. 12,920 -- -- -- -- --
Value of common stock
designated pursuant to
Employee Stock Ownership
Plan........................ -- -- -- -- -- --
Deferred compensation......... -- -- -- -- -- --
Amortization of deferred
compensation expense........ -- -- -- -- -- --
Exercise of stock options..... 16,050 -- -- -- -- --
Tax effect of exercise of
stock options............... -- -- -- -- -- --
Repurchase of common stock.... (34,404) -- -- -- -- --
Issuance of stock options to
acquire
MorphaGen, Inc.............. -- -- -- -- -- --
Preferred stock dividends
declared and accretion of
redemption value over stated
value on subsidiary common
stock issued to NOM......... -- -- -- -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- --
Net income.................... -- -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
1998........................ 7,421,268 $ 74 -- $ -- -- $ --
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
ADDITIONAL OWNERSHIP FOREIGN RETAINED STOCKHOLDERS'
PAID-IN- DEFERRED PLAN CURRENCY EARNINGS EQUITY COMPREHENSIVE
CAPITAL COMPENSATION CONTRIBUTION TRANSLATION (DEFICIT) (DEFICIT) INCOME
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995........................ $1,170 $ $199 $ 57 $ 872 $2,298 $ --
Issuance of common stock
pursuant to Employee Stock
Ownership Plan.............. 199 -- (199) -- -- -- --
Value of common stock
designated pursuant to
Employee Stock Ownership
Plan........................ -- -- 100 -- -- 100 --
Exercise of stock options..... 68 -- -- -- -- 68 --
Repurchase of common stock.... (174) -- -- -- -- (174) --
Foreign currency translation
adjustment.................. -- -- -- (86) -- (86) (86)
Accretion of redemption value
over stated value on
subsidiary common stock
issued to NOM............... -- -- -- -- (171) (171) --
Net income.................... -- -- -- -- 1,744 1,744 1,744
---------- ------------ --- --- -------- ------------- ------
Balance at December 31,
1996........................ 1,263 -- 100 (29) 2,445 3,779 1,658
------
------
Recapitalization of stock..... (84) -- -- -- -- -- --
Issuance of common stock
pursuant to Employee Stock
Ownership Plan.............. 100 -- (100) -- -- -- --
Value of common stock
designated pursuant to
Employee Stock Ownership
Plan........................ -- -- 100 -- -- 100 --
Deferred compensation......... 664 (664) -- -- -- -- --
Amortization of deferred
compensation expense........ -- 169 -- -- -- 169 --
Exercise of stock options..... 158 -- -- -- -- 160 --
Repurchase of common stock.... (333) -- -- -- -- (334) --
Repurchase of common stock
relating to stock Purchase
agreement................... (1,104) -- -- -- (6,385) (7,500) --
Beneficial conversion feature
related to convertible
preferred stock............. 15,000 -- -- -- -- 15,000 --
Accretion of beneficial
conversion feature related
to convertible preferred
stock....................... (15,000) -- -- -- -- (15,000) --
Preferred stock dividends
declared and accretion of
redemption value over stated
value on subsidiary common
stock issued to NOM......... -- -- -- -- (650) (650) --
Foreign currency translation
adjustment.................. -- -- -- (101) -- (101) (101)
Net income.................... -- -- -- -- 2,524 2,524 2,524
---------- ------------ --- --- -------- ------------- ------
Balance at December 31,
1997........................ 664 (495) 100 (130) (2,066) (1,853) 2,423
------
------
Issuance of common stock
pursuant to Employee Stock
Ownership Plan.............. 100 -- (100) -- -- -- --
Value of common stock
designated pursuant to
Employee Stock Ownership
Plan........................ -- -- 100 -- -- 100 --
Deferred compensation......... 683 (683) -- -- -- -- --
Amortization of deferred
compensation expense........ -- 216 -- -- -- 216 --
Exercise of stock options..... 16 -- -- -- -- 16 --
Tax effect of exercise of
stock options............... 138 -- -- -- -- 138 --
Repurchase of common stock.... (150) -- -- -- -- (150) --
Issuance of stock options to
acquire
MorphaGen, Inc.............. 147 -- -- -- -- 147 --
Preferred stock dividends
declared and accretion of
redemption value over stated
value on subsidiary common
stock issued to NOM......... -- -- -- -- (1,104) (1,104) --
Foreign currency translation
adjustment.................. -- -- -- 97 -- 97 97
Net income.................... -- -- -- -- 2,978 2,978 2,978
---------- ------------ --- --- -------- ------------- ------
Balance at December 31,
1998........................ $1,598 $ (962) $100 $(33) $ (192) $ 585 $3,075
---------- ------------ --- --- -------- ------------- ------
---------- ------------ --- --- -------- ------------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 1,744 $ 2,524 $ 2,978
Adjustments to reconcile net income to net cash provided by operating
activities, net of businesses acquired:
Depreciation and amortization................................................. 737 732 1,052
Amortization of deferred compensation......................................... -- 169 216
Loss on disposal of property and equipment.................................... -- 11 --
Non-cash write-off of investments............................................. -- 330 --
Employee stock ownership plan contribution.................................... 100 100 100
Foreign currency translation adjustment....................................... (86) (101) 96
Deferred income taxes......................................................... (63) (543) 129
Deferred rent expense......................................................... (13) -- --
Changes in operating assets and liabilities:
Accounts receivable......................................................... (284) (452) (1,276)
Inventories................................................................. (722) (13) (592)
Prepaid expenses and other current assets................................... (185) (77) (781)
Other assets................................................................ 42 (302) (50)
Accounts payable............................................................ 280 459 982
Accrued expenses............................................................ 592 204 55
Income taxes payable........................................................ 396 (117) 219
--------- --------- ---------
Net cash provided by operating activities................................. 2,538 2,924 3,128
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (742) (1,642) (5,553)
Proceeds from sale of property and equipment.................................... -- 25 --
Payments for intangible assets.................................................. (381) (186) (542)
Purchase of short term investments.............................................. -- (3,777) (438)
Advances made on notes receivable from officers................................. (150) -- --
Principal payments received on notes receivable from officers................... 125 415 --
Investment in related party..................................................... -- (500) --
--------- --------- ---------
Net cash used in investing activities..................................... (1,148) (5,665) (6,533)
</TABLE>
F-7
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock........................................... -- 14,766 --
Principal payments on capital lease obligations................................. (432) (157) (127)
Repurchase of common stock...................................................... (174) (7,834) (150)
Proceeds from exercise of stock options......................................... 68 160 16
Principal payments on line of credit, net....................................... (50) (190) --
--------- --------- ---------
Net cash provided by (used in) financing activities....................... (588) 6,745 (261)
--------- --------- ---------
Effect of exchange rate changes on cash........................................... (8) (10) 88
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 794 3,994 (3,578)
Cash and cash equivalents, beginning of year...................................... 587 1,381 5,375
--------- --------- ---------
Cash and cash equivalents, end of year............................................ $ 1,381 $ 5,375 $ 1,797
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................................... $ 85 $ 88 $ 35
--------- --------- ---------
--------- --------- ---------
Cash paid for income taxes...................................................... $ 117 $ 1,266 $ 920
--------- --------- ---------
--------- --------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Preferred dividends declared.................................................... $ -- $ 475 $ 900
--------- --------- ---------
--------- --------- ---------
Accretion of redemption value for redeemable common stock....................... $ 171 $ 175 $ 204
--------- --------- ---------
--------- --------- ---------
Accretion of beneficial conversion feature of convertible preferred stock....... $ -- $ 15,000 $ --
--------- --------- ---------
--------- --------- ---------
Converted deposit to note receivable--officer................................... $ -- $ -- $ 150
--------- --------- ---------
--------- --------- ---------
Net assets acquired through purchase of MorphaGen, Inc.......................... $ -- $ -- $ 147
--------- --------- ---------
--------- --------- ---------
Deferred compensation........................................................... $ -- $ 664 $ 683
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996, 1997 AND 1998
1. BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Invitrogen Corporation (the "Company") was incorporated in the state of
California on September 29, 1989. The Company operates in one business segment
which develops, manufactures and sells products designed to facilitate molecular
biology research. The Company sells its products to researchers at universities,
corporations, and research institutions throughout North America, the Pacific
Rim and Europe. In 1997, the Company changed its state of incorporation to
Delaware. In connection with the Company's recapitalization, all of the Series A
common stock and Series B common stock of the former California Corporation were
converted to the common stock of the new Delaware corporation; accordingly,
Series A common stock and Series B common stock ceased to exist (see Note 2).
Invitrogen B.V., a 100% controlled subsidiary of the Company, commenced
operations in The Netherlands in April 1993. It sells and distributes the
Company's products to the European markets.
Invitrogen Export Company, Ltd., a wholly-owned subsidiary of the Company,
was incorporated in 1996 and is a foreign sales corporation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its 100% controlled subsidiaries, Invitrogen B.V. and Invitrogen Export
Company, Ltd. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CONCENTRATIONS OF RISKS
REVENUES (EXCLUSIVE OF GRANTS AND ROYALTIES)
Revenues for each of the three years ended December 31, 1998, were earned
from sales to customers in the following geographic regions (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
North America................................................ $ 12,496 $ 15,751 $ 19,105
Europe....................................................... 4,620 6,286 8,453
Pacific Rim.................................................. 1,570 2,257 2,632
--------- --------- ---------
Total revenue................................................ $ 18,686 $ 24,294 $ 30,190
--------- --------- ---------
--------- --------- ---------
</TABLE>
Certain countries in the Pacific Rim have recently been experiencing
significant volatility in their currencies. While the Company sells principally
in U.S. dollars to customers in these countries, the volatility in the
countries' currencies may have an adverse impact on the Company's revenue and
profit in the future. The Company did not have any material accounts receivable
from customers in this region in any of the years presented.
CUSTOMERS
Approximately $6,800,000, $8,300,000 and $10,193,000, or 36%, 34% and 34% of
the Company's revenues during the years ended December 31, 1996, 1997, and 1998,
respectively, were derived from
F-9
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
1. BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
university and research institutions which management believes are, to some
degree, directly or indirectly supported by the U.S. Government. A change in
current research fundings, particularly with respect to the National Institute
of Health, may have an adverse impact on the Company's future results of
operations.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment to the customer.
The Company does not receive material upfront fees; those that are received are
deferred and recognized upon shipment to the customers. Grant revenue is
recorded as earned, as defined within the specific agreements and is not
refundable. Grant revenue was $435,000, $671,000 and $649,000 in 1996, 1997 and
1998, respectively. Cost of grant revenue is included in research and
development.
Royalty revenue is recognized when earned, generally upon the receipt of
cash, and is not refundable.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents at
December 31, 1997 and 1998 consist primarily of commercial paper. All other
investments are classified as held to maturity short-term investments and
consist of commercial paper and mature through June 1, 1999. Short term
investments are carried at cost.
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out method) or
market. The Company reviews the components of its inventory on a quarterly basis
for excess, obsolete and impaired inventory and makes appropriate dispositions
as obsolete stock is identified.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets (3 to 39 years) using the straight-line method.
Amortization of leasehold improvements is computed on the straight-line method
over the shorter of the lease term or the estimated useful lives of the assets.
Maintenance and repairs are charged to operations as incurred. When assets are
sold, or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any gain or loss is included in operations.
INTANGIBLE ASSETS
Intangible assets, representing primarily patents and license agreements,
are recorded at cost and amortized on a straight-line basis over estimated
useful lives of 5 to 17 years.
F-10
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
1. BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets". The statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. The Company periodically re-evaluates the original assumptions and
rationale utilized in the establishment of the carrying value and estimated
lives of its long-lived assets. The criteria used for these evaluations include
management's estimate of the asset's continuing ability to generate income from
operations and positive cash flow in future periods as well as the strategic
significance of any intangible asset in the Company's business objectives.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Statement Accounting Standards No. 109,
"Accounting for Income Taxes". Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes,
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION
The functional currency for Invitrogen B.V. is the Netherlands Guilder
(NLG), the applicable foreign currency. The translation from the applicable
foreign currency to the U.S. dollar is translated for balance sheet accounts
using the current exchange rate in effect at the balance sheet date and for
revenue and expense accounts using an average exchange rate during the period.
The effects of translation are recorded as a separate component of stockholders'
equity. Exchange gains and losses arising from transactions denominated in
foreign currencies are recorded using the actual exchange differences on the
date of the transaction.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of all financial instruments such as foreign cash
accounts, accounts receivable, accounts payable and accrued expenses are
reasonable estimates of their fair value because of the short maturity of these
items. The Company believes the carrying amounts of the Company's notes
receivable from officers, line of credit and obligations under capital leases
approximate fair value because the interest rates on these instruments are
subject to change with, or approximate, market interest rates.
F-11
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
1. BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTATION OF EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share." SFAS No. 128 requires
companies to compute basic and diluted per share data for all periods for which
an income statement is presented. Basic earnings per share was computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential dilution
that could occur if the income were divided by the weighted-average number of
common shares and potential common shares from outstanding stock options.
Potential common shares were calculated using the treasury stock method and
represent incremental shares issuable upon exercise of the Company's outstanding
options. Diluted earnings per share does not consider the impact of the
conversion of outstanding redeemable convertible preferred stock as its
inclusion would be anti-dilutive for all periods presented. Potentially dilutive
securities are not considered in the calculation of net loss per share as their
impact would be antidilutive.
COMPREHENSIVE INCOME
The Company has implemented Statement of Financial Accounting Standards No.
130 "Comprehensive Income". This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Accordingly, in addition to
reporting net income under the current rules, the Company is required to display
the impact of any fluctuations in its foreign currency translation adjustments
as a component of comprehensive income and to display an amount representing
total comprehensive income for each period presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). This statement provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and identifies characteristics of internal use software as well
as assists in determining when computer software is for internal use. SOP 98-1
is effective for fiscal years beginning after December 15, 1998, with earlier
application permitted. The Company has not determined the impact of the adoption
of SOP 98-1 as this is highly dependent upon the nature, timing and extent of
future internal use software development.
In March 1998, the Accounting Standards Executive Committee issued AICPA
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities."
This Statement of Position provides guidance
F-12
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
1. BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on the financial reporting of start-up costs and organization costs. It requires
that the cost of start-up activities and organization costs be expensed as
incurred. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The company does not expect adoption of this
SOP to have a material impact on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement changes the previous
accounting definition of derivative--which focused on freestanding contracts
such as options and forwards (including futures and swaps)--expanding it to
include embedded derivatives and many commodity contracts. Under the Statement,
every derivative is recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Earlier application is allowed as of the
beginning of any quarter beginning after issuance. The Company does not
anticipate that the adoption of SFAS 133 will have a material impact on its
financial position or results of operations.
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" and, as
explained above, has determined that it operates in one business segment
dedicated to molecular biology research.
2. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE--OFFICER
The Company holds a note receivable of $150,000 from an officer of the
Company. The promissory note originated in December 1998, is collateralized by
16,000 shares of common stock of the Company, bears annual interest of 6.5
percent and is due in full on December 31, 1999.
INVESTMENT IN MORPHAGEN, INC.
In February 1997, the Company entered into an agreement with MorphaGen,
Inc., a start-up company, for an initial investment of $500,000 in exchange for
109,850 shares of Series A Preferred Stock of MorphaGen, Inc. The president of
MorphaGen, Inc. is the spouse of a member of the board of directors of the
Company. On November 3, 1998, the Company acquired all of the outstanding common
stock of MorphaGen, Inc. which the Company did not already own for 50,000
options to purchase company stock at $8.50 per share. In connection with this
acquisition, the Company recorded $147,000 as additional paid-in capital
representing the estimated fair value of the options issued.
COMMON STOCK
In connection with the Company's recapitalization, all of the Series A
common stock and Series B common stock of the former California Corporation were
converted to the common stock of the new Delaware corporation; accordingly,
Series A common stock and Series B common stock ceased to exist.
SERIES A. All outstanding shares of Series A common stock have been issued
to founders, directors, employees or consultants of the Company pursuant to
agreements which entitles the Company to repurchase the shares at the current
market value in the event of termination of employment.
F-13
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
2. RELATED PARTY TRANSACTIONS (CONTINUED)
SERIES B. All outstanding shares of Series B common stock have been issued
to the president and majority stockholder of the Company. The Series B common
stock has the same rights, preferences, privileges and restrictions of Series A
common stock except the Series B shares may not vote in the election of
directors of the Company. In 1997, the Company converted all the outstanding
Series B common stock to Series A common stock on a one to one basis.
3. INVENTORIES
Inventories include material, labor and overhead costs and consist of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Raw materials and components............................................... $ 291 $ 574
Work in process............................................................ 503 636
Finished goods............................................................. 1,120 1,638
--------- ---------
$ 1,914 $ 2,848
--------- ---------
--------- ---------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Land..................................................................... $ -- $ 216
Building................................................................. -- 1,629
Machinery and equipment.................................................. 4,823 8,330
Leasehold improvements................................................... 223 538
Construction in process.................................................. 221 119
--------- ---------
5,267 10,832
Accumulated depreciation and amortization................................ (2,808) (3,742)
--------- ---------
$ 2,459 $ 7,090
--------- ---------
--------- ---------
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Licensing agreements (see Note 7)........................................... $ 574 $ 984
Patents and trademarks...................................................... 362 569
Other....................................................................... 10 49
--------- ---------
946 1,602
Accumulated amortization.................................................... (176) (283)
--------- ---------
$ 770 $ 1,319
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Accrued purchases.......................................................... $ 240 $ 530
Accrued payroll and related................................................ 741 491
Accrued other.............................................................. 353 357
--------- ---------
$ 1,334 $ 1,378
--------- ---------
--------- ---------
</TABLE>
7. LICENSING AGREEMENTS
The Company manufactures and sells certain products under several licensing
agreements. The agreements require royalty payments based upon various
percentages of sales or profits from the products. Terms of the agreements range
from five to ten years and initial costs are amortized over their terms using
the straight-line method. Total royalties paid under the agreements were
approximately $444,000, $815,000, and $996,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
Certain of the licensing agreements require guaranteed minimum annual
royalty payments, to maintain exclusively. Future minimum guaranteed royalties
at December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1999............................................................................. $ 877
2000............................................................................. 1,174
2001............................................................................. 1,501
2002............................................................................. 1,391
2003............................................................................. 1,520
---------
$ 6,463
---------
---------
</TABLE>
The Company has a minimum purchase commitment with a vendor, which requires
annual purchases of approximately $1 million to maintain preferential pricing.
8. LINE OF CREDIT
As of September 30, 1998, the Company amended the line of credit to increase
the maximum available commitment to $10,000,000, which bears interest at the
bank's Libor rate (5.75% at December 31, 1998) plus 2% or the bank's prime rate.
The line of credit expires on September 30, 1999. The line of credit agreement
contains various normal and customary financial covenants, which the Company was
in compliance with for all periods presented.
F-15
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
9. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Deferred tax assets:
Various accruals............................................................ $ 617 $ 525
Net operating loss carryforwards............................................ 33 --
State taxes................................................................. 115 96
Other....................................................................... -- 135
--------- ---------
Total deferred tax assets..................................................... 765 756
Deferred tax liabilities:
Depreciation and amortization............................................... (25) (145)
--------- ---------
Net deferred tax assets....................................................... $ 740 $ 611
--------- ---------
--------- ---------
</TABLE>
Income before income taxes includes the following components:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
United States.................................................... $ 1,212 $ 2,983 $ 3,859
Foreign.......................................................... 1,471 954 757
--------- --------- ---------
$ 2,683 $ 3,937 $ 4,616
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Current:
Federal......................................................... $ 510 $ 1,343 $ 1,042
State........................................................... 30 339 267
Foreign......................................................... 462 334 276
--------- --------- ---------
Total current provision........................................... 1,002 2,016 1,585
Deferred:
Federal......................................................... (27) (453) 34
State........................................................... (36) (150) 19
Foreign......................................................... -- -- --
--------- --------- ---------
Total deferred provision.......................................... (63) (603) 53
--------- --------- ---------
Total provision................................................... $ 939 $ 1,413 $ 1,638
--------- --------- ---------
--------- --------- ---------
</TABLE>
The difference between the provision for income taxes and the amounts that
would be obtained by applying the Federal statutory rate to income before income
taxes relates primarily to the utilization of certain tax credit and net
operating loss carryforwards.
F-16
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
9. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the federal statutory rate to the Company's income before provision for income
taxes as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Federal tax provision at statutory rate........................... 34.0% 34.0% 34.0%
State tax, net of federal benefit................................. 4.0% 6.0% 6.0%
Foreign Sales Corporation Benefit................................. -- (1.0)% (1.6)%
Research and development and other credits........................ -- (5.0)% (7.0)%
Other............................................................. (3.0)% 1.9% 4.1%
--- --- ---
Provision for income taxes........................................ 35.0% 35.9% 35.5%
--- --- ---
--- --- ---
</TABLE>
The tax benefit associated with the disqualifying dispositions by employees
of shares issued in the Company's stock options plans reduced taxes payable by
$138,000 for 1998. This benefit has been reflected as additional paid-in capital
in the accompanying statement of stockholders' equity.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment under capital leases which are
personally guaranteed by the Company's principal stockholders, are due in
aggregate monthly installments of $32,000 and mature at various dates through
November 2001. Property and equipment at December 31, 1997 and 1998, include
approximately $595,000 and $498,000, respectively, of equipment under capital
leases which have been capitalized. Accumulated depreciation for such equipment
was approximately $347,000 and $100,000 at December 31, 1997 and 1998,
respectively.
Future minimum lease commitments at December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
<S> <C> <C>
1999................................................................. $ 463 $ 65
2000................................................................. 482 48
2001................................................................. 501 44
2002................................................................. 521 --
2003................................................................. 542 --
Thereafter........................................................... 1,759 --
----------- -----
Total minimum lease payments....................................... $ 4,268 157
-----------
-----------
Less: amount representing interest................................. (20)
-----
137
Less: current portion.............................................. (54)
-----
$ 83
-----
-----
</TABLE>
F-17
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases its office and manufacturing facility in Carlsbad,
California under an operating lease which expires February 2007. Rent expense
under all operating leases was approximately $318,000, $480,000 and $588,000 for
the years ended December 31, 1996, 1997 and 1998, respectively.
LITIGATION
The Company and its subsidiaries are subject to claims and from time to time
are named as defendants in legal proceedings. In the opinion of management, the
amount of ultimate liability, if any, with respect to those actions will not
materially affect the financial position or results of operations of the
Company.
HEDGING
At December 31, 1998 the Company had outstanding put options to sell 1.2
million pounds sterling at $1.63 per pound. Additionally, the Company had
outstanding call options to purchase 1.2 million pounds sterling at $1.675 per
pound. These contracts expire monthly through December 1999. The above contracts
had no net value at December 31, 1998.
11. REDEEMABLE COMMON STOCK OF INVITROGEN B.V.
Effective February 26, 1993, Invitrogen B.V. entered into a money loan
agreement with N.V. Noordelijke Ontwikkelingsmaatschappij, Investment and
Development Company for the Northern Netherlands ("NOM"). As of December 31,
1994, the due date of the Loan, the Company had borrowed $618,000, at a 15%
effective interest rate, under the agreement which had provisions by which NOM
could convert its loan balance to Invitrogen B.V. common stock. On April 7,
1995, the Company, Invitrogen B.V. and NOM entered into a Shareholders'
Agreement. As a result, Invitrogen B.V. issued 18,000 shares of non-voting
redeemable common stock to NOM in exchange for a NLG 1.8 million. The proceeds
from the issuance of the non-voting redeemable common stock were utilized to
retire the outstanding debt of $618,000 (NLG 1.2 million). NOM may require the
Company and/or its subsidiary to redeem these shares in the amount of NLG
3,150,000 (redemption amount) if certain events occur. The Company and/or its
subsidiary are required to redeem all the shares on April 7, 1999 for the
redemption amount of NLG 3,150,000 (USD $1,676,000 at December 31, 1998). At any
time, the Company and/or its subsidiary may redeem all of the subsidiary shares
issued to NOM for the redemption price.
The excess of the redemption value over the issue price is being accredited
by periodic charges to equity over the life of the issue (through April 7,
1999).
F-18
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
12. PREFERRED STOCK
The Company has authorized 6,405,884 shares of preferred stock, designated
as follows:
<TABLE>
<CAPTION>
SHARES
<S> <C>
Series A cumulative convertible redeemable preferred stock....................... 2,202,942
Series A redeemable preferred stock.............................................. 2,202,942
Undesignated preferred stock..................................................... 2,000,000
----------
Total preferred shares........................................................... 6,405,884
----------
----------
</TABLE>
On June 20, 1997, the Company entered into a stock purchase agreement with a
group of three investors (Investors). The Company sold 2,202,942 shares of
Series A Cumulative Convertible Redeemable Preferred Stock ("Convertible
Preferred Stock") at $6.8091 per share to the Investors in exchange for
$14,766,000, net of issuance costs. Additionally, the Company repurchased and
retired 1,101,471 shares of the Company's common stock at $6.8091 per share,
representing the fair value of these shares, from certain stockholders of the
Company in exchange for $7.5 million. The Convertible Preferred Stock accrues
dividends at a rate of 6% per annum and has a liquidation preference of $6.8091
per share plus accrued and unpaid dividends. Additionally, the Convertible
Preferred Stock entitles the holder thereof to one vote per outstanding share in
the election of one director of the Company, voting together as one separate
class. The holders of the Convertible Preferred Stock vote separately as a class
on significant transactions including acquisitions, redemption of shares,
declaration of dividends, creation of any senior securities, or securities on
par with the Convertible Preferred Stock, increases in the size of the Board of
Directors, and payment of executive bonuses. Holders of the Convertible
Preferred Stock also elect one director. The Convertible Preferred Stock is
automatically converted into shares of common stock and redeemable preferred
stock as of the filing of an initial public offering or a qualified event
(including a sale, merger or purchase of substantially all of the assets of the
Company). The rate at which the Convertible Preferred Stock converts to common
stock is automatically adjusted in the event of most future issuances of equity
securities by the Company below the original purchase price of the Convertible
Preferred Stock, resulting in an increase in the percentage of the Company owned
by the holders on a fully diluted basis. The Convertible Preferred Stock may
also be voluntarily converted upon the election of holders of not less than
66.67% of the voting power of this stock. After June 18, 2003, the holders of
the Convertible Preferred Stock have the right to require the Company to redeem
their shares for the original purchase price plus accrued dividends.
The redeemable preferred stock accrues dividends at 3% per annum and
entitles the holder thereof to one vote per outstanding share in the election of
one director of the Company, voting together as a separate class. The redeemable
preferred stock is redeemable upon the occurrence of a qualified public offering
or sale or other qualified event. Upon liquidation, the redeemable preferred
stock is entitled to be paid out of the assets of the Company at the redeemable
base liquidation amount (original issue price of $6.8091 per share plus accrued
dividends) per share (determined at the measurement date). There are no shares
of redeemable preferred stock outstanding at December 31, 1998.
Upon the closing of an IPO or other qualified event, the outstanding
Convertible Preferred Stock will automatically convert into 2,202,942 shares of
Common Stock and 2,202,942 shares of Redeemable Preferred Stock, (RPS). The RPS
is immediately redeemable at the closing of an IPO at a Sliding Scale Redemption
Price of between $0 and $15 million. This is a function of the qualified
offering or
F-19
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
12. PREFERRED STOCK (CONTINUED)
transaction price. This formula provides for a minimum return to the Convertible
Preferred Stockholders of $15 million. The resulting premium to holders of
Convertible Preferred Stock will be between $0 to $15 million, depending upon
the amount, date and type of the qualified event. In accordance with EITF D-60,
the maximum possible premium to holders of convertible preferred stock ($15
million) was recognized as a beneficial conversion feature through a charge to
equity on June 20, 1997, the date the Convertible Preferred first became
convertible. This $15 million charge has been recognized as a reduction to
earnings available to common stockholders in 1997.
13. COMMON STOCK
AUTHORIZED SHARES
In November 1998, the Company amended its bylaws to reflect an increase of
authorized shares of common stock from 20,000,000 to 50,000,000.
STOCK SPLIT
On June 20, 1997, the Company approved a recapitalization which authorized
20,000,000 shares of common stock and a stock split that converted each share of
Class A and Class B stock into seven shares of common stock of the Company. All
prior period share amounts have been restated to reflect the stock split.
14. EARNINGS PER SHARE
Earnings per share is calculated as follows (in thousands, except share and
per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders.................................. $ 1,874 9,626,333 $ 0.19
-----
-----
Stock options............................................................ -- 1,581,683
------ -------------
Diluted EPS:
Income available to common stockholders plus assumed conversions......... $ 1,874 11,208,016 $ 0.17
------ ------------- -----
------ ------------- -----
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic and Diluted EPS:
Income available to common stockholders.................................. $ (13,126) 8,938,719 $ (1.47)
------------ ------------- -----------
------------ ------------- -----------
</TABLE>
F-20
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
14. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders.................................. $ 1,573 8,356,270 $ 0.19
-----
-----
Stock options............................................................ -- 1,723,485
------ -------------
Diluted EPS:
Income available to common stockholders plus assumed conversions......... $ 1,573 10,079,755 $ 0.16
------ ------------- -----
------ ------------- -----
</TABLE>
In accordance with SAB Topic 4D, the Company considers any common stock
issuable upon the occurrence of an IPO for little or no consideration as a
nominal issuance. In accordance with the above bulletin, the Company has
considered 2,202,942 common shares issuable in connection with the conversion of
convertible preferred stock to be a nominal issuance and outstanding for all
periods since the original issuance of the underlying security.
15. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan ("ESOP") covering all
employees who have completed one year of continuous service or have completed
1,000 hours of service in a twelve-month period prior to entry date.
Contributions to the ESOP are made at the discretion of the Board of Directors.
Contributions of approximately $100,000 were designated for the ESOP for the
years ended December 31, 1996, 1997 and 1998.
SECTION 401(K) PROFIT SHARING PLAN
The Company has a profit sharing plan which allows each eligible employee to
voluntarily make pre-tax deferred salary contributions. The Company may make
matching contributions in amounts as determined by the board of directors. The
Company made matching contributions of approximately $111,000, $134,000 and
$179,000, for the years ended December 31, 1996, 1997 and 1998, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In November 1998, the Company's Board of Directors approved an employee
stock purchase plan to become effective upon the filing of the Company's
proposed initial public offering. An aggregate of 250,000 shares of the
Company's common stock will be reserved for issuance under this plan.
16. STOCK OPTION PLANS
The Company has two stock option plans, the 1997 Invitrogen Corporation
Stock Option Plan and the 1995 Invitrogen Corporation Stock Option Plan. Under
both plans, incentive stock options are granted to eligible employees to
purchase shares of the Company's common stock at an exercise price equal to no
less than the estimated fair market value of such stock as determined by the
Board of
F-21
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
16. STOCK OPTION PLANS (CONTINUED)
Directors on the date of grant; nonqualified stock options are granted at an
exercise price of no less than 85% of the fair market value of the common stock
on the date of grant. The Company recognizes as compensation expense the
difference between the exercise price and the fair market value of the common
stock on the date of grant. Stock based compensation expense is deferred and
recognized over the vesting period of the stock option. During the years ended
December 31, 1997 and 1998 the Company recognized approximately $169,000 and
$216,000, respectively, in stock based compensation expense.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
fixed stock option or stock purchase plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
SFAS 123, the Company's results of operations would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C> <C>
Income available to common stockholders: As reported......... $ 1,573 $ (13,126) $ 1,874
Pro forma........... 1,493 (13,175) 1,429
EPS: As reported......... $ 0.19 $ (1.47) $ 0.19
Pro forma........... 0.18 (1.47) 0.15
DEPS: As reported......... $ 0.16 $ (1.47) $ 0.17
Pro forma........... 0.15 (1.47) 0.13
</TABLE>
Under these two Plans, the Company may grant up to 4,485,479 options, of
which 3,182,402 are outstanding and 1,127,385 are available for issue at
December 31, 1998. Options vest immediately or over a period of time ranging up
to five years, are exercisable in whole or in installments, and expire ten years
from date of grant.
A summary of the status of the Company's stock option plans at December 31,
1996, 1997 and 1998 and changes during the periods then ended is presented in
the tables below:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ------------------------ -----------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year....................... 2,956,107 $ 0.85 3,467,107 $ 0.91 1,970,152 $ 1.30
Granted...................... 581,000 $ 1.21 222,000 $ 3.80 1,233,500 $ 8.29
Exercised.................... (70,000) $ 0.98 (178,955) $ 0.90 (16,050) $ 1.02
Forfeited/expired............ -- -- (1,540,000) $ 0.84 (5,200) $ 1.40
---------- ----- ----------- ----- ---------- -----
Outstanding, end of year..... 3,467,107 $ 0.91 1,970,152 $ 1.30 3,182,402 $ 4.13
Exercisable, end of year..... 1,331,686 $ 0.89 1,297,152 $ 1.09 1,602,918 $ 1.44
Weighted average fair value
of options granted......... $ 0.35 $ 0.96 $ 2.30
</TABLE>
F-22
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
16. STOCK OPTION PLANS (CONTINUED)
At December 31, 1998:
<TABLE>
<CAPTION>
WTD. AVG.
REMAINING
OPTIONS OPTIONS EXERCISE CONTRACTUAL
OUTSTANDING EXERCISABLE PRICE LIFE IN YEARS
<S> <C> <C> <C> <C>
1,498,402 1,311,502 $ 0.84- $ 1.20 6.8
230,000 91,400 $ 1.20- $ 2.40 7.2
220,500 88,500 $ 3.60- $ 4.80 8.8
466,000 83,333 $ 4.80- $ 6.00 9.5
171,500 23,051 $ 6.00- $ 7.20 9.7
63,000 5,000 $ 8.40- $ 9.60 9.8
533,000 132 $ 10.80- $ 12.00 9.9
- ----------- ----------
3,182,402 1,602,918 $4.13 8.1
- ----------- ----------
- ----------- ----------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the present value pricing method as described in SFAS No. 123. The underlying
assumptions used to estimate the fair values for the 1996, 1997 and 1998 grants
are weighted average risk-free interest rates of 6.02%, 5.81% and 5.4%,
respectively, with an expected life of 5, 9.2 and 9.3 years in 1996, 1997 and
1998, respectively. No dividend yield or stock price volatility was used in
these calculations.
F-23
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1996, 1997 AND 1998
17. SUBSEQUENT EVENT
On August 17, 1999, the Company consummated a merger with NOVEX, in a
stock-for-stock transaction. NOVEX manufactures protein and nucleic acid
electrophoresis gels and related equipment, solutions, standards, and fine
chemicals, primarily for use in research laboratories.
Invitrogen issued approximately 2.5 million shares of common stock in
exchange for all the outstanding shares of NOVEX stock based on an exchange
ratio of approximately .23188 shares of Invitrogen common stock for each share
of NOVEX common stock. Invitrogen also assumed and exchanged all options to
purchase NOVEX common stock for options to purchase approximately .5 million
shares of Invitrogen common stock. The merger is intended to qualify as a
tax-free reorganization and will be accounted for as a pooling of interests.
Costs incurred as a result of the merger are expected to be $4.4 million and are
subject to change. These costs were expensed in August 1999, after the merger
was completed. The supplemental combined financial information excludes expenses
related to the merger as they are nonrecurring in nature.
Prior to the merger, NOVEX used a fiscal year ending March 31. In order to
report the combined results on a consistent basis, NOVEX's fiscal years have
been recast to a twelve-month period ended December 31, for all periods
presented. These recast results have been combined with the corresponding fiscal
years ended December 31, 1996, 1997 and 1998, of Invitrogen to arrive at the
supplemental combined financial information. The supplemental combined financial
information is presented to show the combined results of operations of
Invitrogen and NOVEX as if the merger had occurred at the beginning of the
periods presented.
<TABLE>
<CAPTION>
SUPPLEMENTAL SUPPLEMENTAL SUPPLEMENTAL
COMBINED FINANCIAL COMBINED FINANCIAL COMBINED FINANCIAL
INFORMATION INFORMATION INFORMATION
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenues........................ $ 32,556 $ 41,182 $ 53,660
Net Income...................... 2,336 2,435 4,230
Earnings (loss) per share--
basic......................... $ 0.20 $ (1.15)(a) $ 0.26
Earnings (loss) per share--
diluted....................... $ 0.17 $ (1.15)(a) $ 0.23
</TABLE>
- ------------------------
(a) 1997 reflects a $15 million adjustment to beneficial conversion feature
related to conversion of preferred stock.
F-24
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................... $ 36,094 $ 1,797
Short-term investments.............................................................. 2,439 4,214
Accounts receivable, net of allowance for doubtful accounts of $122 and $124........ 3,966 3,189
Note receivable officer............................................................. 150 150
Inventories......................................................................... 2,823 2,848
Deferred income taxes............................................................... 595 611
Prepaid expenses and other current assets........................................... 1,539 1,194
----------- ------------
Total current assets.............................................................. 47,606 14,003
Property and Equipment, net........................................................... 7,182 7,090
Intangible Assets, net................................................................ 3,192 1,319
Other Assets.......................................................................... 171 403
----------- ------------
Total assets...................................................................... $ 58,151 $ 22,815
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-25
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (AUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long term obligations............................................ $ 438 $ 54
Accounts payable.................................................................... 1,742 2,257
Accrued expenses.................................................................... 1,697 1,378
Income taxes payable................................................................ 631 718
----------- ------------
Total current liabilities......................................................... 4,508 4,407
----------- ------------
Obligations under capital leases, less current portion................................ 64 83
----------- ------------
Note payable.......................................................................... 600 --
----------- ------------
Non-voting Redeemable Common Stock of Invitrogen B.V; Subsidiary common stock, 18,000
shares authorized; no shares issued or outstanding on June 30, 1999 and 18,000
shares issued and outstanding on
December 31, 1998................................................................... -- 1,599
----------- ------------
Convertible Redeemable Preferred stock, $0.01 par value; 4,202,942 shares authorized;
no shares issued or outstanding on June 30, 1999 and 2,202,942 shares issued and
outstanding on December 31, 1998.................................................... -- 16,141
----------- ------------
Stockholders' Equity:
Common stock; $0.01 par value, 50,000,000 shares authorized; 13,430,650 and
7,421,268 shares issued and outstanding at June 30, 1999 and December 31, 1998,
respectively...................................................................... 134 74
Additional paid-in-capital............................................................ 51,081 1,598
Deferred compensation................................................................. (766) (962)
Value of common stock designated pursuant to Employee Stock Ownership Plan............ -- 100
Foreign currency translation adjustment............................................... (191) (33)
Retained earnings (deficit)........................................................... 2,721 (192)
----------- ------------
Total stockholders' equity........................................................ 52,979 585
----------- ------------
Total liabilities and stockholders' equity........................................ $ 58,151 $ 22,815
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-26
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................................... $ 10,287 $ 7,719 $ 19,888 $ 14,873
Cost of Revenues....................................................... 2,547 2,164 5,087 4,065
--------- --------- --------- ---------
Gross margin......................................................... 7,740 5,555 14,801 10,808
Operating Expenses:
Sales and marketing.................................................. 1,905 1,820 3,878 3,438
General and administrative........................................... 1,212 982 2,498 2,098
Research and development............................................. 2,055 1,851 3,963 3,306
--------- --------- --------- ---------
Total operating expenses........................................... 5,172 4,653 10,339 8,842
--------- --------- --------- ---------
Income from operations........................................... 2,568 902 4,462 1,966
--------- --------- --------- ---------
Other Income (Expense):
Gain (loss) on foreign currency transactions......................... (149) (52) (206) 3
Interest and other expense........................................... (5) (8) (13) (18)
Interest and other income............................................ 407 63 602 184
--------- --------- --------- ---------
253 3 383 169
--------- --------- --------- ---------
Income before provision for income taxes............................... 2,821 905 4,845 2,135
Provision for income taxes............................................. 984 322 1,696 761
--------- --------- --------- ---------
Net income........................................................... 1,837 583 3,149 1,374
Less: Preferred stock dividends...................................... -- (225) (163) (450)
Accretion of non-voting redeemable common stock.................. (18) (50) (74) (98)
Adjustment to beneficial conversion feature related to
convertible preferred stock.................................... -- -- 985 --
--------- --------- --------- ---------
Income available to common stockholders.............................. $ 1,819 $ 308 $ 3,897 $ 826
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share:
Basic................................................................ $ 0.14 $ 0.03 $ 0.32 $ 0.09
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted.............................................................. $ 0.12 $ 0.03 $ 0.27 $ 0.08
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares used in per share calculation:
Basic................................................................ 13,333 9,635 12,116 9,632
Diluted.............................................................. 15,596 11,074 14,230 10,996
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL EMPLOYEE FOREIGN RETAINED
------------------------ PAID-IN- DEFERRED OWNERSHIP PLAN CURRENCY EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION CONTRIBUTION TRANSLATION (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998.................. 7,421 $ 74 $ 1,598 $ (962) $ 100 $ (33) $ (192)
Adjustment to beneficial
conversion feature
related to convertible
preferred stock....... -- -- 985 -- -- -- --
Accretion of beneficial
conversion feature
related to convertible
preferred stock....... -- -- (985) -- -- -- --
Conversion of redeemable
preferred stock....... 2,203 22 729 -- -- -- --
Initial Public Offering,
net of offering
costs................. 3,525 35 48,127 -- -- -- --
Issuance of common stock
pursuant to Employee
Stock Ownership
Plan.................. 8 -- 100 -- (100) -- --
Amortization of deferred
compensation expense.. -- -- (5) 196 -- -- --
Exercise of stock
options............... 266 3 426 -- -- -- --
Employee Stock Purchase
Plan.................. 8 -- 106 -- -- -- --
Preferred stock
dividends declared and
accretion of
redemption value over
stated value on
subsidiary common
stock issued to NOM... -- -- -- -- -- -- (236)
Foreign currency
translation
adjustment............ -- -- -- -- -- (158) --
Net income.............. -- -- -- -- -- -- 3,149
----------- ----- ----------- ------ ----- ------ -----------
Balance at June 30,
1999.................. 13,431 $ 134 $ 51,081 $ (766) $ -- $ (191) $ 2,721
----------- ----- ----------- ------ ----- ------ -----------
----------- ----- ----------- ------ ----- ------ -----------
<CAPTION>
STOCKHOLDERS'
EQUITY
<S> <C>
Balance at December 31,
1998.................. $ 585
Adjustment to beneficial
conversion feature
related to convertible
preferred stock....... 985
Accretion of beneficial
conversion feature
related to convertible
preferred stock....... (985)
Conversion of redeemable
preferred stock....... 751
Initial Public Offering,
net of offering
costs................. 48,162
Issuance of common stock
pursuant to Employee
Stock Ownership
Plan.................. --
Amortization of deferred
compensation expense.. 191
Exercise of stock
options............... 429
Employee Stock Purchase
Plan.................. 106
Preferred stock
dividends declared and
accretion of
redemption value over
stated value on
subsidiary common
stock issued to NOM... (236)
Foreign currency
translation
adjustment............ (158)
Net income.............. 3,149
-------------
Balance at June 30,
1999.................. $ 52,979
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1999 1998
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 3,149 $ 1,374
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................... 754 415
Amortization of deferred compensation................................................... 202 108
Employee stock ownership plan contribution.............................................. -- 50
Deferred income taxes................................................................... 11 (151)
Changes in operating assets and liabilities:
Accounts receivable................................................................... (936) (865)
Inventories........................................................................... (44) (285)
Prepaid expenses and other current assets............................................. (429) (908)
Other assets.......................................................................... 16 (43)
Accounts payable...................................................................... (440) 1,230
Accrued expenses...................................................................... 359 (3)
Income taxes payable.................................................................. (67) 233
---------- ---------
Net cash provided by operating activities........................................... 2,575 1,155
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short term investments.......................................................... 1,776 (658)
Purchases of property and equipment....................................................... (1,042) (3,231)
Payments for intangible assets............................................................ (974) (260)
---------- ---------
Net cash used in investing activities............................................... (240) (4,149)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from line of credit, net......................................................... -- 76
Principal payments on capital lease obligations........................................... (36) (64)
Redemption of preferred and common stock and payment of accrued dividends................. (17,060) --
Proceeds from sale of common stock........................................................ 48,902 2
---------- ---------
Net cash provided by financing activities........................................... 31,806 14
Effect of exchange rate changes on cash................................................... 156 (13)
---------- ---------
Net increase (decrease) in cash and cash equivalents...................................... 34,297 (2,993)
Cash and cash equivalents, beginning of period............................................ 1,797 5,375
---------- ---------
Cash and cash equivalents, end of period.................................................. $ 36,094 $ 2,382
---------- ---------
---------- ---------
</TABLE>
F-29
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1999 1998
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes................................................................ $ 907 $ 630
---------- ---------
---------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Convertible Redeemable Preferred Stock into Redeemable Preferred Stock...... $ 14,015 $ --
---------- ---------
---------- ---------
Conversion of Redeemable Preferred Stock into Common Stock................................ $ 751 $ --
---------- ---------
---------- ---------
Adjustment to beneficial conversion feature related to Convertible Redeemable Preferred
Stock................................................................................... $ 985 $ --
---------- ---------
---------- ---------
Note issued for patent rights............................................................. $ 1,000 $ --
---------- ---------
---------- ---------
Preferred dividends declared.............................................................. $ 163 $ 450
---------- ---------
---------- ---------
Contribution of common stock to ESOP...................................................... $ 100 $ --
---------- ---------
---------- ---------
Accretion of redemption value for Redeemable Common Stock................................. $ 74 $ 98
---------- ---------
---------- ---------
Deferred compensation..................................................................... $ -- $ 563
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GENERAL
The unaudited interim consolidated financial statements include the accounts
of Invitrogen Corporation and its 100% controlled subsidiaries, Invitrogen B.V.
and Invitrogen Export Company, Ltd. All significant intercompany accounts and
transactions have been eliminated in consolidation. The accompanying unaudited
interim financial statements have been prepared by Invitrogen, without audit,
according to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited interim
financial statements contain all adjustments, which include only normal
recurring adjustments, necessary to state fairly the financial position, results
of operations and cash flows as of and for the periods indicated.
It is suggested that these financial statements be read in conjunction with
the audited financial statements of Invitrogen Corporation and the notes thereto
included elsewhere in this prospectus.
1. INVENTORIES
Inventories include material, labor and overhead costs and consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) JUNE 30, 1998
1999
(UNAUDITED)
<S> <C> <C>
Raw materials and components...................................... $ 544 $ 574
Work in process................................................... 573 636
Finished goods.................................................... 1,706 1,638
----------- ------
$ 2,823 $ 2,848
----------- ------
----------- ------
</TABLE>
2. ACCUMULATED DEPRECIATION AND AMORTIZATION
Accumulated depreciation and amortization of property, plant and equipment
was $4.3 million and $3.7 million at June 30, 1999 and December 31, 1998,
respectively. Accumulated amortization of intangible assets was $.4 million and
$.3 million at June 30, 1999 and December 31, 1998, respectively.
3. INITIAL PUBLIC OFFERING, CONVERSION AND REDEMPTION OF PREFERRED STOCK
In February 1999, the Company completed its initial public offering and
issued 3,525,000 newly issued shares of its Common Stock at a price of $15.00
per share. The Company received $48.2 million in cash, net of underwriting
discounts, commissions and other offering costs.
Simultaneously with the closing of the initial public offering, each of the
2,202,942 outstanding shares of Series A Cumulative Convertible Preferred Stock
was automatically converted into 2,202,942 shares of Common Stock and 2,202,942
shares of Series A Redeemable Preferred Stock (RPS). At the closing of the IPO,
the RPS was redeemed for $14,015,000 and accumulated dividends on the Series A
Cumulative Convertible Preferred Stock of $1,538,000 were paid. In 1997, when
the stock was issued, a charge to equity of $15 million was recorded to reflect
the beneficial conversion feature of the convertible preferred stock. Upon
determination of the final redemption price of $14,015,000 at the IPO a credit
to equity of $985,000 was recorded which has been reported as an adjustment to
Income Available to Common Stockholders in the income statement for the quarter
ended March 31, 1999.
F-31
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. EARNINGS PER SHARE
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------
INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders.................................. $ 1,819 13,333 $ 0.14
Stock options............................................................ -- 2,263 --
------ ------ -----
Diluted EPS:
Income available to common stockholders plus assumed conversions......... $ 1,819 15,596 $ 0.12
------ ------ -----
------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
-------------------------------------------
INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders.................................. $308 9,635 $ 0.03
Stock options............................................................ -- 1,439 --
------ ------ -----
Diluted EPS:
Income available to common stockholders plus assumed conversions......... $308 11,074 $ 0.03
------ ------ -----
------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------
INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders.................................. $ 3,897 12,116 $ 0.32
Stock options............................................................ -- 2,114 --
------ ------ -----
Diluted EPS:
Income available to common stockholders plus assumed conversions......... $ 3,897 14,230 $ 0.27
------ ------ -----
------ ------ -----
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------------
INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders.................................. $826 9,632 $ 0.09
Stock options............................................................ -- 1,364 --
------ ------ -----
Diluted EPS:
Income available to common stockholders plus assumed conversions......... $826 10,996 $ 0.08
------ ------ -----
------ ------ -----
</TABLE>
F-32
<PAGE>
INVITROGEN CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. EARNINGS PER SHARE (CONTINUED)
In accordance with SAB Topic 4D, the Company considers any common stock
issuable upon the occurrence of an IPO for little or no consideration as a
nominal issuance. In accordance with the above bulletin, the Company has
considered 2,202,942 common shares issuable in connection with the conversion of
convertible preferred stock to be a nominal issuance and outstanding for all
periods since the original issuance of the underlying security until the
conversion into common stock upon the IPO in February 1999.
5. COMPREHENSIVE INCOME
Total comprehensive income is determined as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
(IN THOUSANDS) 1999 1998 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income................................................................... $ 1,837 $ 583 $ 3,149 $ 1,374
Foreign currency translation adjustments..................................... 48 97 (158) 67
--------- --------- --------- ---------
Total comprehensive income............................................... $ 1,885 $ 680 $ 2,991 $ 1,441
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. SUBSEQUENT EVENT
On August 17, 1999, the Company consummated a merger with NOVEX, in a
stock-for-stock transaction. NOVEX manufactures protein and nucleic acid
electrophoresis gels and related equipment, solutions, standards, and fine
chemicals, primarily for use in research laboratories.
Invitrogen issued approximately 2.5 million shares of common stock in
exchange for all the outstanding shares of NOVEX common stock based on an
exchange ratio of approximately .23188 shares of Invitrogen common stock for
each share of NOVEX common stock. Invitrogen also assumed and exchanged all
options to purchase NOVEX common stock for options to purchase approximately 0.5
million shares of Invitrogen common stock. The merger is intended to qualify as
a tax-free reorganization and will be accounted for as a pooling of interests.
Costs incurred as a result of the merger are expected to be $4.4 million and are
subject to change. These costs were expensed in August 1999 after the merger was
completed.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Novex
We have audited the accompanying consolidated balance sheets of Novex (the
"Company") as of March 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended March 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Novex at March
31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended March 31, 1999 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
May 28, 1999,
except for Note 11, as to which the date is
August 17, 1999
F-34
<PAGE>
NOVEX
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................ $ 306,048 $ 187,901
Accounts receivable, net of allowance for uncollectible accounts of $252,128 and
$124,626 at March 31, 1999 and 1998, respectively................................. 3,339,111 2,017,157
Inventories......................................................................... 2,563,264 1,016,289
Deferred income taxes............................................................... 201,000 156,000
Other current assets................................................................ 105,372 240,697
------------ ------------
Total current assets.................................................................. 6,514,795 3,618,044
Equipment and leasehold improvements, net............................................. 2,599,271 2,244,608
Intangible assets, net................................................................ 434,526 371,218
Other assets.......................................................................... 13,620 48,719
Deferred income taxes................................................................. 117,000 106,000
------------ ------------
Total assets.......................................................................... $ 9,679,212 $ 6,388,589
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank............................................................... $ 522,008 $ 875,448
Accounts payable.................................................................... 1,341,205 503,499
Accrued liabilities................................................................. 1,149,750 784,298
Income taxes payable................................................................ 184,813 105,404
Current portion of long-term debt................................................... 910,493 369,555
------------ ------------
Total current liabilities............................................................. 4,108,269 2,638,204
Long-term debt, less current maturities............................................... 974,765 406,984
Deferred rent......................................................................... 51,782 71,297
Commitments
Redeemable convertible preferred stock, no par value; 42,000 shares authorized, 42,000
shares issued and outstanding at March 31, 1999 and 1998, liquidation preference of
$2,924,380 and $2,769,400 at March 31, 1999 and 1998, respectively.................. 2,899,781 2,744,801
Stockholders' equity:
Common stock, no par value; 13,200,000 shares authorized, 6,707,324 and 6,678,505
shares issued and outstanding at March 31, 1999 and 1998, respectively............ 582,453 560,551
Cumulative comprehensive loss....................................................... (14,682) (41,208)
Retained earnings................................................................... 1,076,844 7,960
------------ ------------
Total stockholders' equity............................................................ 1,644,615 527,303
------------ ------------
Total liabilities and stockholders' equity............................................ $ 9,679,212 $ 6,388,589
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-35
<PAGE>
NOVEX
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................................................ $ 24,478,191 $ 17,133,551 $ 14,154,565
Cost of revenues.................................................... 11,941,602 8,189,306 6,384,976
------------- ------------- -------------
Gross margin........................................................ 12,536,589 8,944,245 7,769,589
Operating expenses:
Sales and marketing............................................... 5,166,022 3,259,949 2,682,963
General and administrative........................................ 3,604,213 3,468,827 2,660,467
Research and development.......................................... 1,554,476 1,500,184 1,292,987
------------- ------------- -------------
Total operating expenses............................................ 10,324,711 8,228,960 6,636,417
------------- ------------- -------------
Income from operations.............................................. 2,211,878 715,285 1,133,172
Other income (expense):
Interest expense.................................................. (226,784) (147,019) (121,145)
Interest income................................................... 657 2,981 5,562
Other expense..................................................... (17,796) (49,936) (2,504)
------------- ------------- -------------
(243,923) (193,974) (118,087)
------------- ------------- -------------
Income before provision for income taxes............................ 1,967,955 521,311 1,015,085
Provision for income taxes.......................................... 744,091 202,000 459,190
------------- ------------- -------------
Net income.......................................................... 1,223,864 319,311 555,895
Preferred stock dividend accrued.................................... (154,980) (154,980) (31,421)
------------- ------------- -------------
Net income available to common stockholders......................... $ 1,068,884 $ 164,331 $ 524,474
------------- ------------- -------------
------------- ------------- -------------
Net income per share:
Basic............................................................. $ 0.16 $ 0.02 $ 0.08
------------- ------------- -------------
------------- ------------- -------------
Diluted........................................................... $ 0.11 $ 0.02 $ 0.05
------------- ------------- -------------
------------- ------------- -------------
Weighted-average shares:
Basic............................................................. 6,691,771 6,678,254 6,521,841
------------- ------------- -------------
------------- ------------- -------------
Diluted........................................................... 11,305,780 6,775,792 10,721,841
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-36
<PAGE>
NOVEX
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ACCUMULATED EARNINGS
---------------------- COMPREHENSIVE (ACCUMULATED
SHARES AMOUNT INCOME (LOSS) DEFICIT) TOTAL
---------- ---------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1996................ 6,428,005 $ 370,171 $ -- $ (680,845) $ (310,674)
Issuance of common stock to acquire
subsidiary.......................... 250,000 190,000 -- -- 190,000
Accrual for dividends on preferred
stock............................... -- -- -- (31,421) (31,421)
Net income............................ -- -- -- 555,895 555,895
Foreign currency translation
adjustment.......................... -- -- 5,903 -- 5,903
------------
Comprehensive income.................... 561,798
---------- ---------- ------------- ---------------- ------------
Balance at March 31, 1997............... 6,678,005 560,171 5,903 (156,371) 409,703
Exercise of stock options to purchase
common stock for cash............... 500 380 -- -- 380
Accrual for dividends on preferred
stock............................... -- -- -- (154,980) (154,980)
Net income............................ -- -- -- 319,311 319,311
Foreign currency translation
adjustment.......................... -- -- (47,111) -- (47,111)
------------
Comprehensive income.................... 272,200
---------- ---------- ------------- ---------------- ------------
Balance at March 31, 1998............... 6,678,505 560,551 (41,208) 7,960 527,303
Exercise of stock options to purchase
common stock for cash............... 28,819 21,902 -- -- 21,902
Accrual for dividends on preferred
stock............................... -- -- -- (154,980) (154,980)
Net income............................ -- -- -- 1,223,864 1,223,864
Foreign currency translation
adjustment.......................... -- -- 26,526 -- 26,526
------------
Comprehensive income.................... 1,250,390
---------- ---------- ------------- ---------------- ------------
Balance at March 31, 1999............... 6,707,324 $ 582,453 $ (14,682) $ 1,076,844 $ 1,644,615
---------- ---------- ------------- ---------------- ------------
---------- ---------- ------------- ---------------- ------------
</TABLE>
See accompanying notes.
F-37
<PAGE>
NOVEX
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 1,223,864 $ 319,311 $ 555,895
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for uncollectible accounts................................ 127,502 61,651 48,164
Depreciation and amortization....................................... 767,947 686,694 540,786
Deferred income taxes............................................... (56,000) (6,450) (39,550)
Deferred rent....................................................... (19,515) (11,154) 16,787
Loss on sale and abandonment of equipment and leasehold
improvements...................................................... 22,354 125,652 8,805
Changes in assets and liabilities:
Accounts receivable............................................... (1,449,456) (379,161) (153,709)
Inventories....................................................... (1,114,975) (77,579) (144,320)
Other current assets.............................................. 135,325 (143,398) 132,997
Accounts payable.................................................. 837,706 33,730 (155,472)
Accrued liabilities............................................... 365,452 152,271 135,757
Income taxes payable.............................................. 79,409 (144,931) 164,335
------------- ------------- ------------
Net cash provided by operating activities............................. 919,613 616,636 1,110,475
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements..................... (1,027,812) (1,075,325) (872,251)
Investments in intangible assets...................................... (112,460) (43,475) (40,618)
Other assets.......................................................... 35,099 59,804 13,863
------------- ------------- ------------
Net cash used in investing activities................................. (1,105,173) (1,058,996) (899,006)
FINANCING ACTIVITIES
Borrowings on notes payable to bank, net.............................. (353,440) 704,779 166,461
Additions to long-term debt........................................... 1,300,000 360,833 --
Payments on long-term debt............................................ (691,281) (453,768) (356,576)
Proceeds from issuance of common stock................................ 21,902 380 --
------------- ------------- ------------
Net cash provided by (used in) financing activities................... 277,181 612,224 (190,115)
Effect of exchange rate on cash....................................... 26,526 (47,111) 5,903
------------- ------------- ------------
Net increase in cash.................................................. 118,147 122,753 27,257
Cash at beginning of year............................................. 187,901 65,148 37,891
------------- ------------- ------------
Cash at end of year................................................... $ 306,048 $ 187,901 $ 65,148
------------- ------------- ------------
------------- ------------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid....................................................... $ 226,784 $ 147,781 $ 126,622
------------- ------------- ------------
------------- ------------- ------------
Income taxes paid................................................... $ 709,341 $ 354,000 $ 334,000
------------- ------------- ------------
------------- ------------- ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired with long-term debt (Note 2)........................ $ 500,000 $ -- $ --
------------- ------------- ------------
------------- ------------- ------------
Common stock issued to acquire subsidiary........................... $ -- $ -- $ 190,000
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See accompanying notes.
F-38
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Novex (the "Company"), formerly known as Novel Experimental Technology, a
California corporation, was incorporated on April 5, 1989. The Company
manufactures protein and nucleic acid electrophoresis gels and related
equipment, solutions, standards, and fine chemicals, primarily for use in
research laboratories. The Company sells these products to customers throughout
the United States, Canada, Europe, Australia, and Asia.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries: Novex Electrophoresis GmbH
(formerly known as Anamed GmbH), incorporated in December 1992, Serva GmbH,
incorporated in May 1998, and Novex International Sales Corporation (also known
as "NISC"), incorporated in February 1997. Significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly-liquid debt securities with
remaining maturities of three months or less when acquired to be cash
equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
credit risk consist principally of accounts receivable. Credit is extended to
customers based on an evaluation of the customer's financial condition and
collateral is generally not required. The Company's customers are located
throughout the world. Credit losses have traditionally been minimal and within
management's expectations.
INVENTORIES
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization are calculated using the straight-line method over the lesser of an
estimated useful life ranging from three to seven years or the lease term (in
the case of leasehold improvements).
INTANGIBLE ASSETS
The Company capitalizes the costs of obtaining trademarks and patents. These
costs are amortized over the estimated economic life of 15 years beginning with
the issuance of such trademarks and patents. Periodically, management assesses
whether there has been a permanent impairment in the value of intangible assets
and the amount of such impairment is determined by comparing anticipated
undiscounted future cash flows from operating activities with the carrying value
of the intangible assets.
F-39
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The excess cost over the fair value of the net tangible assets purchased
(goodwill) arose from the Company's acquisition of its wholly-owned subsidiary,
Novex Electrophoresis GmbH, and is being amortized over ten years.
NET INCOME PER SHARE
Earnings per share are computed in accordance with FASB Statement No. 128,
EARNINGS PER SHARE. Basic earnings per share are computed using the weighted
average number of common shares outstanding during each period. Diluted earnings
per share include the dilutive effect of common shares potentially issuable upon
the exercise of stock options.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------
1999 1998 1997
------------ ---------- ------------
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings per share--income available to common
stockholders......................................................... $ 1,068,884 $ 164,331 $ 524,474
Effect of dilutive preferred dividend accrued.......................... 154,980 -- 31,421
------------ ---------- ------------
Numerator for diluted earnings per share............................... $ 1,223,864 $ 164,331 555,895
------------ ---------- ------------
------------ ---------- ------------
Denominator:
Denominator for basic earnings per share--weighted-average shares
outstanding.......................................................... 6,691,771 6,678,254 6,521,841
Effect of convertible preferred stock.................................. 4,200,000 -- 4,200,000
Effect of dilutive options............................................. 414,009 97,538 --
------------ ---------- ------------
Denominator for diluted earnings per share--adjusted weighted-average
shares and assumed conversions....................................... 11,305,780 6,775,792 10,721,841
------------ ---------- ------------
------------ ---------- ------------
Basic earnings per share................................................. $ 0.16 $ 0.02 $ 0.08
------------ ---------- ------------
------------ ---------- ------------
Diluted earnings per share............................................... $ 0.11 $ 0.02 $ 0.05
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported revenues and expenses during the reporting
period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, the Company regularly
F-40
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
evaluates its long-lived assets for indicators of possible impairment. To date,
no such indicators have been identified.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, the balance sheet accounts of the Company's
foreign operations are translated from foreign currencies into U.S. dollars at
year-end historical rates, while income and expenses are translated at the
weighted average exchange rates for the year. Translation gains or losses are
shown as a component of comprehensive income. Gains and losses resulting from
foreign currency transactions (transactions denominated in a currency other than
the entity's functional currency) are included in the results of operations.
Such foreign currency transaction gains and losses were not significant in 1999,
1998 and 1997.
REVENUES
Revenues from product sales are recognized when goods are shipped.
STOCK OPTIONS
As permitted by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related Interpretations
in accounting for its employee stock options. Under APB 25, if the exercise
price of the Company's employee stock options equals or exceeds the deemed fair
value of the underlying stock on the date of grant, no compensation expense is
recognized. Options issued to non-employees are recorded at their fair value and
recognized over the related service period.
RECENTLY ISSUED ACCOUNTING STANDARD
Effective April 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. This standard requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including unrealized gains and losses on investments and
foreign currency translation adjustments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. The Company has included
foreign currency translation adjustments in comprehensive income, in its
statement of stockholders' equity.
LONG-TERM OBLIGATIONS
The carrying amount of the Company's long-term obligations approximate fair
value.
2. ACQUISITIONS
In May 1998, the Company purchased the assets of the Serva product line from
Boehringer Ingelheim Bioproducts Partnership ("Boehringer Ingelheim") in
Heidelberg, Germany. The purchase price was $1,543,000 comprised of $799,000 in
cash, acquisition costs of $244,000, and a promissory note for $500,000 at 8%
interest per year due in December 1999. The promissory note is supported by
F-41
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
2. ACQUISITIONS (CONTINUED)
a stand-by letter of credit with the Company's bank. The assets acquired include
inventory and property with an estimated fair value of $1,475,000 and $68,000,
respectively.
3. GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates in one business segment: the manufacture of protein and
nucleic acid electrophoresis gels and related equipment, solutions, standards
and fine chemicals. United States export sales, principally to Europe,
aggregated $3.2 million, $1.7 million and $2.4 million for the years ended March
31, 1999, 1998 and 1997, respectively.
Information with respect to the Company's operations by significant
geographic area is set forth below. All transactions denominated in foreign
currency have been translated at the average exchange rate during the period.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1999
------------------------------------------
CONSOLIDATED
UNITED STATES GERMANY TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Sales to unaffiliated customers.................. $ 15,568,681 $ 8,909,510 $ 24,478,191
------------- ------------ -------------
------------- ------------ -------------
Long-lived assets................................ $ 2,306,213 $ 741,204 $ 3,047,417
------------- ------------ -------------
------------- ------------ -------------
<CAPTION>
YEAR ENDED MARCH 31, 1998
------------------------------------------
CONSOLIDATED
UNITED STATES GERMANY TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Sales to unaffiliated customers.................. $ 13,407,787 $ 3,725,764 $ 17,133,551
------------- ------------ -------------
------------- ------------ -------------
Long-lived assets................................ $ 2,032,353 $ 632,192 $ 2,664,545
------------- ------------ -------------
------------- ------------ -------------
<CAPTION>
YEAR ENDED MARCH 31, 1997
------------------------------------------
CONSOLIDATED
UNITED STATES GERMANY TOTAL
------------- ------------ -------------
<S> <C> <C> <C>
Sales to unaffiliated customers.................. $ 11,740,855 $ 2,413,710 $ 14,154,565
------------- ------------ -------------
------------- ------------ -------------
Long-lived assets................................ $ 2,208,566 $ 150,479 $ 2,359,045
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
4. FINANCIAL STATEMENT INFORMATION
INVENTORIES
The Company's inventories consist of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 1,051,663 $ 434,054
Work-in-process................................................... 489,223 258,893
Finished goods.................................................... 1,022,378 323,342
------------ ------------
$ 2,563,264 $ 1,016,289
------------ ------------
------------ ------------
</TABLE>
F-42
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
4. FINANCIAL STATEMENT INFORMATION (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Manufacturing equipment......................................... $ 2,151,889 $ 1,241,153
Office and marketing equipment.................................. 1,204,096 1,130,366
Leasehold improvements.......................................... 1,044,914 891,035
Research and development equipment.............................. 286,204 184,724
------------- -------------
4,687,103 3,447,278
Less accumulated depreciation and amortization.................. (2,118,716) (1,399,921)
------------- -------------
2,568,387 2,047,357
Construction in progress........................................ 30,884 197,251
------------- -------------
$ 2,599,271 $ 2,244,608
------------- -------------
------------- -------------
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Goodwill, net of accumulated amortization of $36,321 in 1999, $15,567
in 1998............................................................. $ 119,347 $ 140,101
Trademarks and patents, net of accumulated amortization of $42,144 in
1999, $13,746 in 1998............................................... 149,653 130,463
Costs incurred on pending trademarks and patents...................... 165,526 100,654
---------- ----------
$ 434,526 $ 371,218
---------- ----------
---------- ----------
</TABLE>
ACCRUED LIABILITIES
Accrued expenses consist of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
ESOP contribution................................................... $ 238,774 $ 136,179
Payroll and payroll taxes........................................... 245,943 172,907
Commissions......................................................... 87,033 34,592
Accrued vacations................................................... 235,019 122,677
Accrued relocation expenses......................................... -- 60,000
Value added taxes................................................... 146,818 37,573
Accrued warranty expenses........................................... 22,685 52,685
Other............................................................... 173,478 167,685
------------ ----------
$ 1,149,750 $ 784,298
------------ ----------
------------ ----------
</TABLE>
F-43
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
5. FINANCING ARRANGEMENTS
At March 31 1999, the Company has available a credit facility from a bank,
which provides a revolving line of credit for advances up to $1,200,000 and
bears interest at the bank's prime lending rate (7.75% at March 31, 1999) plus
1.0%. At March 31, 1999, $677,992 was available for advances and a balance of
$522,008 was outstanding on this revolving line of credit. The credit facility
will expire on August 10, 1999.
The financing arrangements are collateralized by substantially all of the
assets of the Company.
6. LONG-TERM DEBT
Long-term debt consists of the following at March 31:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Note payable to bank, payable in 60 installments of $21,667 plus interest through May
11, 2003, with interest at prime (7.75% at March 31, 1999) plus 1.75%, collateralized
by accounts receivable, inventories, equipment and intangibles....................... $ 1,082,722 $ --
Note payable to Boehringer Ingelheim, payable $500,000 plus interest on December 31,
1999, with interest at 8%, supported by a stand-by letter of credit with the bank.... 500,000 --
Notes payable to German bank, payable in monthly installments of $4,618 through October
2001, collateralized by certain assets of the Company with a net book value totaling
$124,000 at March 31, 1999........................................................... 72,575 102,426
Note payable to the Company's landlord, bearing interest at 12% due in monthly
installments of $10,586 through October 1, 2000...................................... 182,350 280,969
Note payable to bank, payable in 48 installments of $6,250 plus interest through August
15, 1999, with interest at prime plus 2.00%, collateralized by accounts receivable,
inventories, equipment and intangibles, outstanding balance prepaid during 1999 at
the election of the Company.......................................................... -- 106,250
Note payable to bank, payable in 48 installment of $4,706 plus interest through August
15, 2001, with interest at prime plus 1.00%, collateralized by accounts receivable,
inventories, equipment and intangibles, outstanding balance pre-paid during 1999 at
the election of the Company.......................................................... -- 192,962
Unsecured note payable to a former stockholder, payable in 12 equal quarterly
installments of $25,000 each through January 19, 1999, at an imputed interest rate of
10.25%, personally guaranteed by the Company's major stockholder..................... -- 93,932
Other.................................................................................. 47,611 --
------------ -----------
1,885,258 776,539
Less current maturities................................................................ (910,493) (369,555)
------------ -----------
$ 974,765 $ 406,984
------------ -----------
------------ -----------
</TABLE>
F-44
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
6. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt consist of the following at March 31, 1999:
<TABLE>
<S> <C>
2000.............................................. $ 910,493
2001.............................................. 416,066
2002.............................................. 255,366
2003.............................................. 260,000
2004.............................................. 43,333
-------------
$ 1,885,258
-------------
-------------
</TABLE>
7. COMMITMENTS
The Company leases certain equipment and its facilities under operating
leases which expire through July 2002.
Annual future minimum lease obligations as of March 31, 1999 are as follows:
<TABLE>
<S> <C>
2000.............................................. $ 649,766
2001.............................................. 511,383
2002.............................................. 165,488
-------------
$ 1,326,637
-------------
-------------
</TABLE>
Three facility leases provide for specific escalating rental payments. Total
rent expense, which is recognized on a straight-line basis over the term of the
lease, including rent expense for equipment rentals was $755,229, $477,113 and
$281,000 during the years ended March 31, 1999, 1998 and 1997, respectively.
8. EMPLOYEE STOCK OWNERSHIP PLAN
The Company amended its Employee Stock Ownership Plan (ESOP), adding 401(k)
provisions allowing employees to contribute pretax salary deferrals to their
accounts, effective April 1, 1997. The Company had previously converted its
defined contribution profit sharing plan into an Employee Stock Ownership Plan
(ESOP) effective April 1, 1995. The purpose of the 401(k)/ESOP is to enable
employees who have completed 1,000 or more hours of service within a
twelve-month period to acquire stock ownership in the Company and share in its
growth, as well as defer taxes on wages earned. For the years ended March 31,
1999, 1998 and 1997, the Company accrued contributions of approximately
$238,774, $136,179 and $382,600, respectively, to the ESOP, which is included in
compensation expense. Contributions to the Plan are based upon a Company match
of employee 401(k) salary deferrals, as well as a discretionary percentage of
eligible participants' total compensation. During the year ended March 31, 1996,
the ESOP purchased 628,005 shares of the Company's stock with the 1995
contribution, all of which have been allocated to Plan participants. During the
years ended March 31, 1999 and 1998, the ESOP did not purchase any shares of
stock from the Company. The contributions for the years ended March 31, 1999 and
1998 have been funded through cash payments.
F-45
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
8. EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
In the event that a participant leaves the Plan through termination, death,
retirement, or permanent disability and the participant desires to sell his or
her shares of the Company's stock, the Company may be required to purchase the
shares from the participant at their fair value. Depending on the circumstances
of the participant leaving the Plan, the Company may have up to five years to
purchase the stock.
9. STOCKHOLDERS' EQUITY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 1996, the Company repurchased 4,200,000 shares of common stock
for $2,220,000 from one of the Company's former major stockholders/officers. In
conjunction with the repurchase of the common stock, the Company sold 42,000
shares of Series A preferred stock at a purchase price of $61.50 per share, net
of issuance costs of $24,599. The proceeds from the sale of preferred shares
were used to pay for the repurchase of the shares of common stock of the
Company.
Concurrent with the repurchase of the common stock in January 1996, the
Company executed a release and settlement agreement with the Company's former
major stockholder/officer for alleged breach of contract and wrongful
termination claim. As consideration for execution of the agreement, the former
stockholder/officer received $75,000 for legal fees incurred and a $300,000
non-interest bearing promissory note. The note was due in twelve quarterly
installments of $25,000 each commencing April 1996. The note is fully amortized
and no liability remains on the accompanying 1999 balance sheet. At March 31,
1998, the note is recorded in the accompanying balance sheets at its discounted
value of $93,932, using a 10.25% imputed rate of interest.
Each share of Series A preferred stock is convertible at the option of the
holder at any time into one hundred shares of common stock ($.6150 per share, or
as adjusted for any dilution). Each share of Series A preferred stock shall
automatically be converted into shares of common stock at the then effective
conversion price in the event the Company completes an initial public offering
which meets certain minimum requirements.
Commencing January 17, 1997, dividends began to accrue on each share of
Series A preferred stock, whether or not earned or declared. Cash dividends
accrue at an annual rate of $3.69 per share. Series A accrued dividends totalled
$154,980, $154,980 and $31,421 for the years ended March 31, 1999, 1998 and
1997, respectively. In addition, on January 17th in 2001, 2002 and 2003, each
holder of Series A preferred stock shall have the right to require the Company
to redeem up to 33.3%, 50% and 100%, respectively, of the shares of Series A
preferred stock held by such holder on such date, at a redemption rate of $61.50
per share (or as adjusted for any dilution), plus any accrued but unpaid
dividends.
Each share of Series A preferred stock has voting rights equal the number of
shares of common stock which would be issued upon conversion. The holders of
Series A preferred stock shall be entitled to elect two out of the six members
of the Company's board of directors.
F-46
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
9. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
In April 1996, the Company adopted the 1996 Stock Option Plan (the "Stock
Plan"), which was amended in fiscal 1999 to issue additional shares. In
addition, the 1998 Stock Option Plan was adopted in fiscal 1999 to issue
additional shares. The Stock Plans provide for the grant of incentive stock
options to employees and nonstatutory stock options to employees, directors and
consultants. The Company has reserved 290,462 shares for future contribution to
the Stock Plans and the Employee Stock Ownership Plan and any compensation
agreement as contemplated by the Company.
All options granted under the Stock Plans expire not later than ten years
from the date of grant and vest and become fully exercisable after not more than
five years of continued employment or engagement. Options generally vest
one-fifth on the first anniversary and the remainder vest ratably over the next
four years. The exercise price of stock options must be equal to or greater than
the fair market value on the date of grant.
The following table summarizes stock option activity under the Stock Plans:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balance at April 1, 1996...................................... -- $ --
Granted..................................................... 752,000 $ 0.76
Cancelled................................................... (36,000) $ 0.76
-----------
Balance at March 31, 1997..................................... 716,000 $ 0.76
Granted..................................................... 1,097,500 $ 0.96
Exercised................................................... (500) $ 0.76
Forfeited................................................... (159,297) $ 0.76
-----------
Balance at March 31, 1998..................................... 1,653,703 $ 0.89
Granted..................................................... 453,000 $ 1.10
Exercised................................................... (28,819) $ 0.76
Forfeited................................................... (75,670) $ 0.90
-----------
Balance at March 31, 1999..................................... 2,002,214 $ 0.94
-----------
-----------
</TABLE>
At March 31, 1999, options to purchase 599,396 shares of common stock were
exercisable. The weighted-average remaining contractual life of the options
outstanding at March 31, 1999 was 8.4 years.
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method under the Statement. The fair value of these options
was estimated at the date of grant using the minimum value method with the
following weighted average assumptions for fiscal years 1999, 1998 and
1997:risk-free interest rate of 6.00%; no annual dividends; and an expected
option life of five years. The weighted-average fair value of options granted
during 1999, 1998 and 1997 was $0.27, $0.25 and $0.20, respectively. The effect
of applying the minimum value method of SFAS 123 to options granted in fiscal
year 1999, 1998 and 1997 did not result in a pro forma net income amount that is
materially different from the amount reported. Accordingly, such pro forma
information is not presented herein. The pro forma
F-47
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
9. STOCKHOLDERS' EQUITY (CONTINUED)
effect determined in fiscal year 1999 may not be representative of the pro forma
effect to be reported in future years.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
Common stock reserved for future issuance is as follows:
<TABLE>
<CAPTION>
MARCH 31,
1999
----------
<S> <C>
Conversion of Series A convertible preferred stock................................................... 4,200,000
Stock options outstanding under the Stock Plan....................................................... 2,002,214
Common stock reserved for future contributions to the Stock Plan, ESOP and compensation agreements... 290,462
----------
6,492,676
----------
----------
</TABLE>
10. INCOME TAXES
Net deferred tax assets consist of the following as of March 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves............................................... $ 164,000 $ 111,000
Depreciation........................................................ 117,000 86,000
Other, net.......................................................... 37,000 145,000
---------- ----------
Total deferred tax assets............................................. 318,000 342,000
Valuation allowance................................................... -- (80,000)
---------- ----------
Net deferred tax assets............................................... $ 318,000 $ 262,000
---------- ----------
---------- ----------
</TABLE>
A valuation allowance of $80,000 at March 31, 1998, was provided against the
deferred tax asset related to the foreign tax loss carryforwards since that time
realization was uncertain. The foreign tax losses may be carried forward
indefinitely.
F-48
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
10. INCOME TAXES (CONTINUED)
The income tax expense (benefit) consists of the following for the years
ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal................................................ $ 589,000 $ 185,000 $ 432,190
State.................................................. 145,000 24,000 66,000
Foreign................................................ 66,091 -- --
---------- ---------- ----------
800,091 209,000 498,190
Deferred
Federal................................................ (51,000) (3,000) (40,000)
State.................................................. (5,000) (4,000) 1,000
Foreign................................................ -- -- --
---------- ---------- ----------
(56,000) (7,000) (39,000)
---------- ---------- ----------
$ 744,091 $ 202,000 $ 459,190
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The reconciliation of income taxes computed at the U.S. federal statutory
rates to income tax expense is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Tax U.S. statutory rates................ 34.0% 34.0% 34.0%
State income taxes, net of federal tax
benefit............................... 3.8% 2.5% 4.1%
Permanent differences................... 1.1% 2.9% 2.9%
Other, net.............................. (1.1)% (0.7)% 4.2%
------ ------ ------
37.8% 38.7% 45.2%
------ ------ ------
------ ------ ------
</TABLE>
F-49
<PAGE>
NOVEX
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
11. SUBSEQUENT EVENT
On August 17, 1999, under an agreement and plan of merger with Invitrogen,
all of NOVEX's issued and outstanding shares, including the redeemable
convertible preferred stock, were acquired for 2.5 million shares of
Invitrogen's common stock. All of the outstanding stock options of NOVEX were
assumed by Invitrogen and converted into options to purchase .5 million shares
of Invitrogen common stock. The transaction will be accounted for as a pooling
of interests and is intended to qualify as a tax-free exchange. Costs incurred
as a result of the merger are expected to be $.2 million and are subject to
change. These costs were expensed in August 1999 after the merger was completed.
Based on the fair value of the Invitrogen shares, management has concluded
that the exercise price of the Company's options to purchase common stock
granted subsequent to March 31, 1999 is less than the fair value of the
Company's common stock. Accordingly, the Company recorded deferred compensation
of $163,817 in April 1999 for the difference between the fair market value and
the exercise price of the options to purchase the common stock granted
subsequent to March 31, 1999. The deferred compensation will be amortized over
the vesting period of the related options.
F-50
<PAGE>
NOVEX
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................ $ 111 $ 306
Accounts and notes receivable.................................................... 3,481 3,339
Inventories...................................................................... 2,845 2,563
Deferred income taxes............................................................ 201 201
Prepaid expenses and other current assets........................................ 167 106
------------- ------
Total current assets........................................................... 6,805 6,515
Property and equipment, net........................................................ 2,643 2,599
Intangible assets, net............................................................. 436 434
Other assets....................................................................... 186 131
------------- ------
Total Assets....................................................................... $ 10,070 $ 9,679
------------- ------
------------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank............................................................. $ 570 $ 522
Current portion of long-term debt................................................ 1,031 910
Accounts payable................................................................. 1,334 1,341
Accrued expenses................................................................. 1,076 1,150
Income taxes payable............................................................. 355 185
------------- ------
Total current liabilities...................................................... 4,366 4,108
------------- ------
Long-term debt, less current maturities............................................ 825 1,026
Redeemable convertible preferred stock............................................. 2,939 2,900
Stockholders' Equity:
Common stock, par value.......................................................... 750 583
Other stockholders' equity....................................................... 1,190 1,062
------------- ------
Total stockholders' equity..................................................... 1,940 1,645
------------- ------
Total Liabilities and Stockholders' Equity..................................... $ 10,070 $ 9,679
------------- ------
------------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE>
NOVEX
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1999 1998
(UNAUDITED)
<S> <C> <C>
Revenues.................................................................................... $ 6,936 $ 5,081
Cost of Revenues............................................................................ 3,178 2,284
--------- ---------
Gross margin............................................................................ 3,758 2,797
Operating Expenses:
Sales and marketing....................................................................... 1,616 1,151
General and administrative................................................................ 1,053 904
Research and development.................................................................. 486 412
--------- ---------
Total operating expenses................................................................ 3,155 2,467
--------- ---------
Income from operations................................................................ 603 330
--------- ---------
Other Income (Expense):
Gain (loss) on foreign currency transactions.............................................. 4 (5)
Interest and other expense................................................................ (50) (43)
--------- ---------
Net income................................................................................ (46) (48)
--------- ---------
Income before provision for income taxes.............................................. 557 282
Provision for income taxes.................................................................. 212 106
--------- ---------
Net income............................................................................ 345 176
Less: Preferred stock dividends....................................................... (39) (39)
--------- ---------
Income available to common stockholders............................................... $ 306 $ 137
--------- ---------
--------- ---------
Earnings per share:
Basic..................................................................................... $ 0.05 $ 0.02
--------- ---------
--------- ---------
Diluted................................................................................... $ 0.03 $ 0.01
--------- ---------
--------- ---------
Weighted average shares used in per share calculation:
Basic..................................................................................... 6,710 6,687
Diluted................................................................................... 12,205 10,985
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
<PAGE>
NOVEX
INTERIM CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
------------------------ DEFERRED CURRENCY RETAINED
SHARES AMOUNT COMPENSATION TRANSLATION EARNINGS
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1999............................ 6,707 $ 583 $ -- $ (15) $ 1,077
Exercise of stock options............................ 4 3 -- -- --
Deferred compensation................................ -- 164 (164) -- --
Amortization of deferred compensation................ -- -- 8 -- --
Preferred stock dividends............................ -- -- -- -- (39)
Foreign currency translation adjustment.............. -- -- -- (22) --
Net income........................................... -- -- -- -- 345
----- ----- ------ ----- -----------
Balance at June 30, 1999............................. 6,711 $ 750 $ (156) $ (37) $ 1,383
----- ----- ------ ----- -----------
----- ----- ------ ----- -----------
<CAPTION>
STOCKHOLDERS'
EQUITY
<S> <C>
Balance at March 31, 1999............................ $ 1,645
Exercise of stock options............................ 3
Deferred compensation................................ --
Amortization of deferred compensation................ 8
Preferred stock dividends............................ (39)
Foreign currency translation adjustment.............. (22)
Net income........................................... 345
------
Balance at June 30, 1999............................. $ 1,940
------
------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
<PAGE>
NOVEX
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1999 1998
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................................................... $ 345 $ 176
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.............................................................. 213 161
Deferred income taxes...................................................................... -- 19
Provision for uncollectible accounts....................................................... -- 5
Changes in operating assets and liabilities:
Accounts receivable...................................................................... (142) (413)
Inventories.............................................................................. (280) (737)
Prepaid expenses and other current assets................................................ (62) (74)
Account payable.......................................................................... (7) 132
Accrued expenses......................................................................... (127) 172
Income taxes payable..................................................................... 170 1
--------- ---------
Net cash provided (used) by operating activities....................................... 110 (558)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................................... (256) (338)
Payments for intangible assets............................................................... (2) (2)
Other assets................................................................................. (56) --
--------- ---------
Net cash used by investing activities.................................................. (314) (340)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable to bank, net..................................................... 19 50
Additions to long-term debt.................................................................. -- 921
Payments on long-term debt................................................................... -- (22)
Proceeds from sale of common stock........................................................... 12 --
--------- ---------
Net cash provided by financing activities.............................................. 31 949
--------- ---------
Effect of exchange rate changes on cash........................................................ (22) (1)
--------- ---------
Net increase (decrease) in cash and cash equivalents................................... (195) 50
Cash and cash equivalents, beginning of period................................................. 306 188
--------- ---------
Cash and cash equivalents, end of period....................................................... $ 111 $ 238
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................................................... $ 35 $ 48
--------- ---------
Cash paid for income taxes..................................................................... $ 60 $ 91
--------- ---------
--------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired with long-term debt.......................................................... $ -- $ 500
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-54
<PAGE>
NOVEX
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GENERAL
The consolidated financial statements include the accounts of NOVEX and its
100% controlled subsidiaries, Novex Electrophoresis GmbH, Serva GmbH and Novex
International Sales Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation. The interim financial
statements have been prepared by NOVEX, without audit, according to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the accompanying unaudited financial statements contain all adjustments, which
include only normal recurring adjustments, necessary to state fairly the
financial position, results of operations and cash flows as of and for the
periods indicated.
It is suggested that these financial statements be read in conjunction with
the audited financial statements of NOVEX and the notes thereto included
elsewhere in this prospectus.
1. INVENTORIES
Inventories include material, labor and overhead costs and consist of the
following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
(IN THOUSANDS) 1999 1999
<S> <C> <C>
Raw materials and components............................................ $ 1,468 $ 1,052
Work in process......................................................... 307 489
Finished goods.......................................................... 1,070 1,022
----------- -----------
$ 2,845 $ 2,563
----------- -----------
----------- -----------
</TABLE>
2. ACCUMULATED DEPRECIATION AND AMORTIZATION
Accumulated depreciation and amortization of property, plant and equipment
was $2.3 million and $2.1 million at June 30, 1999 and March 31, 1999,
respectively. Accumulated amortization of intangible assets $0.1 million at June
30, 1999 and March 31, 1999.
F-55
<PAGE>
NOVEX
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. EARNINGS PER SHARE
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
---------------------------------------------
INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders.............. $ 306 6,710 $ 0.05
Preferred stock dividend............................. 39 4,200
Stock options........................................ -- 1,295
----- ------ -----
Diluted EPS:
Income available to common stockholders plus assumed
conversions........................................ $ 345 12,205 $ 0.03
----- ------ -----
----- ------ -----
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
---------------------------------------------
INCOME SHARES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders.............. $ 137 6,687 $ 0.02
Preferred stock dividend............................. 39 4,200
Stock options........................................ -- 98
----- ------ -----
Diluted EPS:
Income available to common stockholders plus assumed
conversions........................................ $ 176 10,985 $ 0.02
----- ------ -----
----- ------ -----
</TABLE>
5. COMPREHENSIVE INCOME
Total comprehensive income for the three months ended June 30, 1999 and 1998
was $323,000 and $177,000, respectively. The adjustments to net income to arrive
at total comprehensive income represent a foreign currency translation loss of
$22,000 for the three months ended June 30, 1999 and a foreign currency
translation gain of $1,000 for the same period in 1998.
6. SUBSEQUENT EVENTS
On August 17, 1999, under an agreement and plan of merger with Invitrogen,
all of NOVEX's issued and outstanding shares, including the redeemable
convertible preferred stock, were acquired for 2.5 million shares of
Invitrogen's common stock. All of the outstanding stock options of NOVEX were
assumed by Invitrogen and converted into options to purchase 0.5 million shares
of Invitrogen's common stock. The transaction will be accounted for as a pooling
of interests and is intended to qualify as a tax -free exchange. Costs incurred
as a result of the merger are expected to be $0.2 million and are subject to
change. These costs were expensed in August 1999 after the merger was completed.
Based on the fair value of the Invitrogen shares, management has concluded
that the exercise price of the Company's options to purchase common stock
granted subsequent to March 31, 1999 is less than the fair value of the
Company's common stock. Accordingly, the Company recorded deferred compensation
of $163,817 in April 1999 for the difference between the fair value and the
exercise price for the options to purchase common stock granted subsequent to
March 31, 1999. The deferred compensation will be amortized over the vesting
period of the related options.
In August 1999, the Company extended its bank credit facility which provides
a revolving line of credit for advances up to $1.2 million to August 2000.
F-56
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined balance sheet as of June 30,
1999, illustrates the effect of the merger as if it had occurred on June 30,
1999. The following unaudited pro forma combined statements of income for the
six months ended June 30, 1999 and 1998 and for the three years ended December
31, 1998, illustrate the effect of the merger as if it had occurred on January
1, 1996. There were no material differences between the accounting policies of
Invitrogen and NOVEX and, therefore, no conforming of accounting policy
adjustments have been made to the unaudited pro forma financial statements. The
unaudited pro forma combined statements of income for the three years ended
December 31, 1998 include both Invitrogen's and NOVEX's financial data for these
same periods.
The unaudited pro forma combined financial statements are presented for
comparative purposes only and are not necessarily indicative of the combined
financial position or results of operations of future periods or the results
that actually would have been realized had Invitrogen and NOVEX been a single
entity during the periods presented.
Pursuant to the terms of the merger, each share of NOVEX stock was converted
into the right to receive .23188 of a share of Invitrogen. The unaudited pro
forma combined financial statements have been derived from the respective
historical audited and unaudited consolidated financial statements of Invitrogen
and NOVEX and should be read in conjunction with such financial statements and
the notes thereto included elsewhere in this prospectus.
F-57
<PAGE>
INVITROGEN CORPORATION AND NOVEX
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
INVITROGEN NOVEX ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 36,094 $ 111 $ -- $ 36,205
Short-term investments................................... 2,439 -- -- 2,439
Accounts and notes receivable............................ 4,116 3,481 (3)(2) 7,594
Inventories.............................................. 2,823 2,845 -- 5,668
Deferred income taxes.................................... 595 201 -- 796
Prepaid expenses and other current assets................ 1,539 167 692(4) 2,398
----------- ----------- ----------- -----------
Total current assets................................... 47,606 6,805 689 55,100
Property and equipment, net................................ 7,182 2,643 9,825
Intangible assets, net..................................... 3,192 436 -- 3,628
Other assets............................................... 171 186 -- 357
----------- ----------- ----------- -----------
Total Assets........................................... $ 58,151 $ 10,070 $ 689 $ 68,910
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank..................................... $ -- $ 570 $ -- $ 570
Current portion of long-term obligations................. 438 1,031 -- 1,469
Accounts payable......................................... 1,742 1,334 (3)(2) 3,073
Accrued expenses......................................... 1,697 1,076 4,442(4) 7,215
Income taxes payable..................................... 631 355 (663)(4) 323
----------- ----------- ----------- -----------
Total current liabilities.............................. 4,508 4,366 3,776 12,650
----------- ----------- ----------- -----------
Long-term obligations, less current maturities............. 664 825 -- 1,489
Redeemable convertible preferred stock..................... -- 2,939 (2,939)(3) --
Stockholders' Equity:
Common stock, par value.................................. 134 750 (724)(3) 160
Other stockholders' equity............................... 52,845 1,190 576 )(4 54,611
----------- ----------- ----------- -----------
Total stockholders' equity................................. 52,979 1,940 (148) 54,771
----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity................. $ 58,151 $ 10,070 $ 689 $ 68,910
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-58
<PAGE>
INVITROGEN CORPORATION AND NOVEX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
INVITROGEN NOVEX ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues...................................................... $ 19,888 $ 13,897 $ (19)(2) $ 33,766
Cost of Revenues.............................................. 5,087 6,496 (5)(2) 11,578
----------- ----------- --- -----------
Gross margin.............................................. 14,801 7,401 (14) 22,188
----------- ----------- --- -----------
Operating Expenses:
Sales and marketing......................................... 3,878 3,128 -- 7,006
General and administrative.................................. 2,498 1,900 -- 4,398
Research and development.................................... 3,963 961 (14)(2) 4,910
----------- ----------- --- -----------
Total operating expenses.................................. 10,339 5,989 (14) 16,314
----------- ----------- --- -----------
Income from operations.................................. 4,462 1,412 -- 5,874
----------- ----------- --- -----------
Other Income (Expense):
Gain (loss) on foreign currency transactions................ (206) -- -- (206)
Interest and other expense.................................. (13) (126) -- (139)
Interest and other income................................... 602 1 -- 603
----------- ----------- --- -----------
383 (125) -- 258
----------- ----------- --- -----------
Income before provision for income taxes................ 4,845 1,287 -- 6,132
Provision for income taxes.................................... 1,696 488 -- 2,184
----------- ----------- --- -----------
Net Income.............................................. 3,149 799 -- 3,948
Less: Preferred stock dividends......................... (163) (78) 78(3) (163)
Accretion of non-voting redeemable common stock.... (74) -- -- (74)
Adjustment to beneficial conversion feature related
to convertible preferred stock..................... 985 -- -- 985
----------- ----------- --- -----------
Income available to common stockholders................. $ 3,897 $ 721 $ 78 $ 4,696
----------- ----------- --- -----------
----------- ----------- --- -----------
Earnings per share:
Basic....................................................... $ 0.32 $ 0.11 $ 0.32
----------- ----------- -----------
----------- ----------- -----------
Diluted..................................................... $ 0.27 $ 0.07 $ 0.27
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares used in per share calculation:
Basic....................................................... 12,116 6,706 14,645(3)
Diluted..................................................... 14,230 11,810 17,101(3)
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-59
<PAGE>
INVITROGEN CORPORATION AND NOVEX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
INVITROGEN NOVEX ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues...................................................... $ 14,873 $ 9,857 $ (25)(2) $ 24,705
Cost of Revenues.............................................. 4,065 4,221 (6)(2) 8,280
----------- ----------- --- -----------
Gross margin.............................................. 10,808 5,636 (19) 16,425
----------- ----------- --- -----------
Operating Expenses:
Sales and marketing......................................... 3,438 1,873 -- 5,311
General and administrative.................................. 2,098 1,811 -- 3,909
Research and development.................................... 3,306 762 (19)(2) 4,049
----------- ----------- --- -----------
Total operating expenses.................................. 8,842 4,446 (19) 13,269
----------- ----------- --- -----------
Income from operations.................................. 1,966 1,190 -- 3,156
----------- ----------- --- -----------
Other Income (Expense):
Gain (loss) on foreign currency transactions................ 3 (9) -- (6)
Interest and other expense.................................. (18) (116) -- (134)
Interest and other income................................... 184 3 -- 187
----------- ----------- --- -----------
169 (122) -- 47
----------- ----------- --- -----------
Income before provision for income taxes................ 2,135 1,068 -- 3,203
Provision for income taxes.................................... 761 410 -- 1,171
----------- ----------- --- -----------
Net income.............................................. 1,374 658 -- 2,032
Less: Preferred stock dividends......................... (450) (77) 77(3) (450)
Accretion of non-voting redeemable common stock.... (98) -- -- (98)
----------- ----------- --- -----------
Income available to common stockholders................. $ 826 $ 581 $ 77 $ 1,484
----------- ----------- --- -----------
----------- ----------- --- -----------
Earnings per share:
Basic....................................................... $ 0.09 $ 0.09 $ 0.12
----------- ----------- -----------
----------- ----------- -----------
Diluted..................................................... $ 0.08 $ 0.05 $ 0.11
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares used in per share calculation:
Basic....................................................... 9,632 6,687 12,157(3)
Diluted..................................................... 10,996 10,985 13,581(3)
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-60
<PAGE>
INVITROGEN CORPORATION AND NOVEX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
INVITROGEN NOVEX ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues...................................................... $ 31,414 $ 22,293 $ (47)(2) $ 53,660
Cost of Revenues.............................................. 8,642 10,560 (11)(2) 19,191
----------- ----------- ----- -----------
Gross margin.............................................. 22,772 11,733 (36) 34,469
----------- ----------- ----- -----------
Operating Expenses:
Sales and marketing......................................... 6,976 4,376 -- 11,352
General and administrative.................................. 4,428 3,663 -- 8,091
Research and development.................................... 7,209 1,430 (36)(2) 8,603
----------- ----------- ----- -----------
Total operating expenses.................................. 18,613 9,469 (36) 28,046
----------- ----------- ----- -----------
Income from operations.................................. 4,159 2,264 -- 6,423
----------- ----------- ----- -----------
Other Income (Expense):
Gain (loss) on foreign currency transactions................ 61 (36) -- 25
Interest and other expense.................................. (35) (214) -- (249)
Interest and other income................................... 431 10 -- 441
----------- ----------- ----- -----------
457 (240) -- 217
----------- ----------- ----- -----------
Income before provision for income taxes................ 4,616 2,024 -- 6,640
Provision for income taxes.................................... 1,638 772 -- 2,410
----------- ----------- ----- -----------
Net income.............................................. 2,978 1,252 -- 4,230
Less: Preferred stock dividends......................... (900) (155) 155(3) (900)
Accretion of non-voting redeemable common stock.... (204) -- -- (204)
----------- ----------- ----- -----------
Income available to common stockholders................. $ 1,874 $ 1,097 $ 155 $ 3,126
----------- ----------- ----- -----------
----------- ----------- ----- -----------
Earnings per share:
Basic....................................................... $ 0.19 $ 0.16 $ 0.26
----------- ----------- -----------
----------- ----------- -----------
Diluted..................................................... $ 0.17 $ 0.11 $ 0.23
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares used in per share calculation:
Basic....................................................... 9,626 6,691 12,152(3)
Diluted..................................................... 11,208 11,195 13,883(3)
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-61
<PAGE>
INVITROGEN CORPORATION AND NOVEX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
INVITROGEN NOVEX ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues...................................................... $ 24,965 $ 16,240 $ (23)(2) $ 41,182
Cost of Revenues.............................................. 7,989 7,976 (7)(2) 15,958
---------- ----------- ----- -----------
Gross margin.............................................. 16,976 8,264 (16) 25,224
---------- ----------- ----- -----------
Operating Expenses:
Sales and marketing......................................... 4,959 3,346 -- 8,305
General and administrative.................................. 3,932 3,380 -- 7,312
Research and development.................................... 4,416 1,518 (16)(2) 5,918
---------- ----------- ----- -----------
Total operating expenses.................................. 13,307 8,244 (16) 21,535
---------- ----------- ----- -----------
Income from operations.................................. 3,669 20 -- 3,689
---------- ----------- ----- -----------
Other Income (Expense):
Gain (loss) on foreign currency transactions................ 145 -- -- 145
Interest and other expense.................................. (88) (154) -- (242)
Interest and other income................................... 211 3 -- 214
---------- ----------- ----- -----------
268 (151) -- 117
---------- ----------- ----- -----------
Income before provision for income taxes................ 3,937 (131) -- 3,806
Provision for income taxes.................................... 1,413 (42) -- 1,371
---------- ----------- ----- -----------
Net income.............................................. 2,524 (89) -- 2,435
Less: Preferred stock dividends......................... (475) (147) 147(3) (475)
Accretion of non-voting redeemable common stock.... (175) -- -- (175)
Adjustment to beneficial conversion feature related
to convertible preferred stock..................... (15,000) -- -- (15,000)
---------- ----------- ----- -----------
Income available to common stockholders................. $ (13,126) $ (236) $ 147 $ (13,215)
---------- ----------- ----- -----------
---------- ----------- ----- -----------
Earnings per share:
Basic....................................................... $ (1.47) $ (0.04) $ (1.15)
---------- ----------- -----------
---------- ----------- -----------
Diluted..................................................... $ (1.47) $ (0.04) $ (1.15)
---------- ----------- -----------
---------- ----------- -----------
Weighted average shares used in per share calculation:
Basic....................................................... 8,939 6,679 11,461(3)
Diluted..................................................... 8,939 6,679 11,461(3)
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-62
<PAGE>
INVITROGEN CORPORATION AND NOVEX
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
INVITROGEN NOVEX ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues...................................................... $ 19,121 $ 13,450 $ (15)(2) $ 32,556
Cost of Revenues.............................................. 5,818 6,280 (4)(2) 12,094
----------- ----------- --- -----------
Gross margin.............................................. 13,303 7,170 (11) 20,462
----------- ----------- --- -----------
Operating Expenses:
Sales and marketing......................................... 4,236 2,327 -- 6,563
General and administrative.................................. 3,880 2,411 -- 6,291
Research and development.................................... 2,659 1,234 (11)(2) 3,882
----------- ----------- --- -----------
Total operating expenses.................................. 10,775 5,972 (11) 16,736
----------- ----------- --- -----------
Income from operations.................................. 2,528 1,198 -- 3,726
----------- ----------- --- -----------
Other Income (Expense):
Gain (loss) on foreign currency transactions................ 172 -- -- 172
Interest and other expense.................................. (87) (131) -- (218)
Interest and other income................................... 70 4 -- 74
----------- ----------- --- -----------
155 (127) -- 28
----------- ----------- --- -----------
Income before provision for income taxes................ 2,683 1,071 -- 3,754
Provision for income taxes.................................... 939 479 -- 1,418
----------- ----------- --- -----------
Net income.............................................. 1,744 592 -- 2,336
Less: Accretion of non-voting redeemable common stock... (171) -- -- (171)
----------- ----------- --- -----------
Income available to common stockholders................. $ 1,573 $ 592 $ -- $ 2,165
----------- ----------- --- -----------
----------- ----------- --- -----------
Earnings per share:
Basic....................................................... $ 0.19 $ 0.09 $ 0.20
----------- ----------- -----------
----------- ----------- -----------
Diluted..................................................... $ 0.16 $ 0.06 $ 0.17
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares used in per share calculation:
Basic....................................................... 8,356 6,679 10,831(3)
Diluted..................................................... 10,080 10,672 12,554(3)
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-63
<PAGE>
INVITROGEN CORPORATION AND NOVEX
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Merger will be accounted for as a pooling of interests. Under this
method of accounting the unaudited pro forma combined statements of income
combine the historical statements of income for Invitrogen for the six months
ended June 30, 1999 and 1998 and three years ended December 31, 1998 with the
historical statements of income for NOVEX for the same periods. All unaudited
pro forma combined income statements assume consummation of the Merger on
January 1, 1996.
The unaudited pro forma combined balance sheet combines the historical
balance sheets of Invitrogen and NOVEX at June 30, 1999 and assumes consummation
of the Merger on June 30, 1999.
2. INTERCOMPANY TRANSACTIONS
All significant intercompany sales and balances have been eliminated in the
combination.
3. MERGER TRANSACTION
The unaudited pro forma combined financial statements reflects the
conversion of NOVEX redeemable convertible preferred stock into NOVEX common
stock and the subsequent issuance of 2.5 million shares of Invitrogen common
stock for all of the outstanding common stock for NOVEX at an exchange ratio of
0.23188. The unaudited pro forma combined net income (loss) per share also
reflects the assumption of all outstanding NOVEX stock options by Invitrogen at
the same exchange ratio.
4. MERGER COSTS
Costs incurred as a result of the Merger are expected to be $4.4 million and
are subject to change. These costs were expensed in August 1999 after the Merger
was completed. The unaudited pro forma combined statements of income exclude
expenses related to the Merger as they are nonrecurring in nature.
F-64
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO]-Registered Trademark-
5,000,000 SHARES OF COMMON STOCK
-----------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
----------------------------------
DLJDIRECT, INC.
------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY
HAVE NOT CHANGED SINCE THE DATE HEREOF.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. The Company is paying all of the expenses
incurred on behalf of the Selling Stockholders (other than underwriting
discounts and commissions). All amounts shown are estimates except for the
registration fee, the NASD filing fee and the Nasdaq National Market fee.
<TABLE>
<S> <C>
Registration fee.................................................. 39,763
NASD filing fee................................................... 14,803
Nasdaq National Market fee........................................ 17,000
Blue sky qualification fees and expenses.......................... 10,000
Printing and engraving expenses................................... 175,000
Legal fees and expenses........................................... 250,000
Accounting fees and expenses...................................... 100,000
Transfer agent and registrar fees................................. 20,000
Fee for Custodian for Selling Stockholders........................ 20,000
Miscellaneous..................................................... 53,434
---------
Total......................................................... $ 700,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by Section 102(b)(7) of the General Corporation Law of the
State of Delaware (the "Delaware Law"), the Registrant's Certificate of
Incorporation includes a provision that eliminates the personal liability of a
director to the Registrant or its stockholders for monetary damages arising out
of the director's breach of his or her fiduciary duty of care, except as
follows. A director remains potentially liable for monetary damages (unless
otherwise permitted by applicable law) for (a) breach of the director's duty of
loyalty to the Registrant or its stockholders, (b) acts or omissions not in good
faith or which involve misconduct or a knowing violation of law, (c) an improper
payment of a dividend or an improper redemption or repurchase of the
Registrant's stock (as provided in Section 174 of the Delaware Law) or (d) any
transaction from which a director derives an improper personal benefit. Any
repeal or modification of this provision will not affect any right or protection
of a director that exists at the time of such repeal or modification.
Section 145 of the Delaware Law empowers a Delaware corporation to indemnify
any persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation) by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer,
director, employee or agent acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the corporation's best interests,
and, for criminal proceedings, had no reasonable cause to believe his or her
conduct was unlawful. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the
II-1
<PAGE>
corporation must indemnify him or her against the expenses which such officer or
director actually and reasonably incurred.
Article VII of the By-Laws of the Registrant provides in terms similar to
those of Section 145 of the Delaware Law that the Registrant shall have power
and shall be required to indemnify its directors and officers in accordance with
the Delaware Law.
Under the terms of various Directors and Officers Liability and Corporation
Reimbursement Liability Policies, the directors and officers of the Registrant
are insured, subject to applicable policy exclusions, limits and deductibles,
against any loss incurred in connection with any claim made against them or any
of them for any actual or alleged breach of duty, neglect, error, misstatement,
misleading statement, omission or other act done or wrongfully attempted, or any
matter not excluded by the terms and conditions of the policy, claimed against
them solely by reason of their being directors or officers of the Registrant.
The foregoing statements are subject to the detailed provisions of such
Policies.
The Registrant has entered into indemnification agreements with each of its
directors and officers. Such indemnification agreements provide that the
Registrant will pay certain amounts incurred by a director or officer in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, and specifically
including actions by or in the name of the Registrant (referred to as derivative
suits), where the individual's involvement is by reason of the fact that he or
she is or was a director or officer. Such amounts include, to the maximum extent
permitted by law, attorneys' fees, judgments, civil or criminal fines,
settlement amounts, and other expenses customarily incurred in connection with
legal proceedings. Under each indemnification agreement, a director or officer
will not be indemnified if he or she is found not to have acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Registrant. Each indemnification agreement provides a
number of procedures and presumptions used in the determination of the right to
indemnification, as well as a requirement that in order to receive an
advancement of expenses, the director or officer must submit an undertaking to
repay any expenses advanced on his or her behalf with respect to which it is
later determined the director or officer was not entitled to receive. Each
indemnification agreement is effective for actions arising out of acts or
omissions which may have occurred before or after the execution of such
indemnification agreement. The foregoing statements are subject to the detailed
provisions of such indemnification agreements.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since December 31, 1995, the Registrant has sold and issued the following
unregistered securities:
(a) Issuances of Shares of Common Stock.
In August 1996, the Registrant issued an aggregate of 15,936 shares (111,552
after the seven-for-one split discussed below) to the Registrant's ESOP as a
contribution. In May 1997, the Registrant issued an aggregate of 22,939 shares
to the Registrant's ESOP as a contribution. In July 1998, the Registrant issued
12,920 shares to the Registrant's ESOP as a contribution.
In June 1997, the Registrant reincorporated in Delaware and each outstanding
share of Common Stock of its California predecessor was converted into seven
shares of Common Stock of the Registrant.
(b) Issuances of Shares of Preferred Stock.
On June 20, 1997, the Registrant issued a total of 2,202,942 shares of
Convertible Preferred Stock to three venture capital funds, each of which was an
accredited investor, for an aggregate offering price of $15 million.
(c) Option Issuances to, and Exercises by, Employees and Directors.
II-2
<PAGE>
From December 31, 1995 to December 31, 1998, the Registrant issued options
to approximately 65 employees to purchase a total of 2,036,500 shares of common
stock at a weighted average exercise price of $7.02 per share. No consideration
was paid to the Registrant by any recipient of any of the foregoing options for
the grant of any such options. From December 31, 1995 through December 31, 1998,
13 employees had exercised options for an aggregate of 265,005 shares of Common
Stock. Certain of these shares were subsequently repurchased by the Company.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances described in Items 15(a) and 15(b) were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. In
addition, the issuances described in Item 15(c) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions. All recipients either received adequate information
about the Registrant or had access, through employment or other relationships,
to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
(1)1.1 Form of Underwriting Agreement
*3.1 Restated Certificate of Incorporation of the Company, as amended
*3.2 Amended and Restated Bylaws of the Company
*4.1 Specimen Common Stock Certificate
(1)5.1 Opinion of Gray Cary Ware & Freidenrich LLP
*10.1 Form of Indemnification Agreement for directors and executive officers
*10.2 1995 Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement thereunder
*10.3 1997 Stock Option Plan, as amended, and forms of Incentive Stock Option Agreement and
Nonstatutory Stock Option Agreement thereunder
*10.4 1998 Employee Stock Purchase Plan and form of subscription agreement thereunder
*10.5 Patent License Agreement, effective as of July 1, 1998, among F. Hoffmann-La Roche Ltd, Roche
Molecular Systems, Inc. and Invitrogen Corporation
*10.6 License Agreement, dated May 10, 1990, between Molecular Chimerics Corporation and Invitrogen
Corporation
*10.7 Purchase Agreement, effective July 1, 1994, between Cayla and Invitrogen, as amended
*10.8 License Agreement, dated January 22, 1997, between Sloan-Kettering Institute for Cancer Research
and Invitrogen
*10.9 Lease, dated November 1, 1995, as amended, between CRC and Invitrogen
*10.10 Stock Purchase and Stockholders Agreement dated June 20, 1997 among Invitrogen, Lyle C. Turner,
Joseph Fernandez, TA/Advent VIII L.P., Advent Atlantic and Pacific III, L.P. and TA Venture
Investors L.P.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
*10.11 Stock Purchase Agreement dated November 3, 1998, between MorphaGen, Inc., Heidi Short and
Invitrogen Corporation
*10.12 Employment Agreement between Theodore De Frank and Invitrogen dated September 28, 1995
**10.13 Assignment of Intellectual Property Conditional on Payment Dated as of May 31, 1999, by and
between Molecular Biology Resources and Invitrogen Corporation.
**10.14 Agreement and Plan of Merger, dated as of June 14, 1999, among Invitrogen Corporation, INVO
Merger Corporation and NOVEX.
(2)10.15 1996 NOVEX Stock Option/Stock Issuance Plan and forms of Incentive Stock Option Agreement and
Nonstatutory Stock Option Agreement thereunder.
(2)10.16 1998 NOVEX Stock Option/Stock Issuance Plan and forms of Incentive Stock Option Agreement and
Nonstatutory Stock Option Agreement thereunder.
(2)10.17 Employment Agreement between NOVEX and David E. McCarty dated July 22, 1997, assumed by
Invitrogen on August 17, 1999.
10.18 Promissory Note from Lyle C. Turner dated December 1998.
10.19 Novel Experimental Technology 401(k) Employee Ownership Plan and Trust Agreement, dated April 1,
1997, as amended.
10.20 Invitrogen Corporation Employee Stock Ownership Plan, dated January 1, 1996.
(2)21.1 List of Subsidiaries
(2)23.1.1 Consent of Arthur Andersen LLP, Independent Public Accountants
(2)23.1.2 Consent of Ernst & Young LLP, Independent Auditors
(1)23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
(2)24.1 Power of Attorney (see page II-4)
</TABLE>
- ------------------------
* Incorporated by reference to the Registrant's Registration Statement on
Forms S-1 (File No. 333-68665).
** Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (File No. 333-82593).
(1) To be filed by amendment.
(2) Previously filed.
(b) Financial Statement Schedules.
No schedules have been filed because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
II-4
<PAGE>
or paid by a director, officer, employee or agent of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, employee or agent in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Carlsbad, County of San
Diego, State of California, on the 1st day of October, 1999.
<TABLE>
<S> <C> <C>
INVITROGEN CORPORATION
By: *
-----------------------------------------
James R. Glynn
Executive Vice President, Chief Financial
Officer and Director
</TABLE>
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
President, Chief Executive
* Officer and Chairman of
- ------------------------------ the Board of Directors October 1, 1999
Lyle C. Turner (PRINCIPAL EXECUTIVE
OFFICER)
Executive Vice President,
* Chief Financial Officer
- ------------------------------ and Director October 1, 1999
James R. Glynn (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
*
- ------------------------------ Executive Vice President October 1, 1999
David E. McCarty and Director
*
- ------------------------------ Director October 1, 1999
Bradley G. Lorimier
*
- ------------------------------ Director October 1, 1999
Donald W. Grimm
*
- ------------------------------ Director October 1, 1999
Kurt R. Jaggers
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
*
- ------------------------------ Director October 1, 1999
Jay M. Short
*
- ------------------------------ Director October 1, 1999
Lewis J. Shuster
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ WARNER R. BROADDUS
-------------------------
Warner R. Broaddus October 1, 1999
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INVITROGEN, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
(1)1.1 Form of Underwriting Agreement
*3.1 Restated Certificate of Incorporation of the Company, as amended
*3.2 Amended and Restated Bylaws of the Company
*4.1 Specimen Common Stock Certificate
(1)5.1 Opinion of Gray Cary Ware & Freidenrich LLP
*10.1 Form of Indemnification Agreement for directors and executive officers
*10.2 1995 Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement thereunder
*10.3 1997 Stock Option Plan, as amended, and forms of Incentive Stock Option Agreement and
Nonstatutory Stock Option Agreement thereunder
*10.4 1998 Employee Stock Purchase Plan and form of subscription agreement thereunder
*10.5 Patent License Agreement, effective as of July 1, 1998, among F. Hoffmann-La Roche Ltd, Roche
Molecular Systems, Inc. and Invitrogen Corporation
*10.6 License Agreement, dated May 10, 1990, between Molecular Chimerics Corporation and Invitrogen
Corporation
*10.7 Purchase Agreement, effective July 1, 1994, between Cayla and Invitrogen, as amended
*10.8 License Agreement, dated January 22, 1997, between Sloan-Kettering Institute for Cancer Research
and Invitrogen
*10.9 Lease, dated November 1, 1995, as amended, between CRC and Invitrogen
*10.10 Stock Purchase and Stockholders Agreement dated June 20, 1997 among Invitrogen, Lyle C. Turner,
Joseph Fernandez, TA/Advent VIII L.P., Advent Atlantic and Pacific III, L.P. and TA Venture
Investors L.P.
*10.11 Stock Purchase Agreement dated November 3, 1998, between MorphaGen, Inc., Heidi Short and
Invitrogen Corporation
*10.12 Employment Agreement between Theodore De Frank and Invitrogen dated September 28, 1995
**10.13 Assignment of Intellectual Property Conditional on Payment Dated as of May 31, 1999, by and
between Molecular Biology Resources and Invitrogen Corporation.
**10.14 Agreement and Plan of Merger, dated as of June 14, 1999, among Invitrogen Corporation, INVO
Merger Corporation and NOVEX.
(2)10.15 1996 NOVEX Stock Option/Stock Issuance Plan and forms of Incentive Stock Option Agreement and
Nonstatutory Stock Option Agreement thereunder.
(2)10.16 1998 NOVEX Stock Option/Stock Issuance Plan and forms of Incentive Stock Option Agreement and
Nonstatutory Stock Option Agreement thereunder.
(2)10.17 Employment Agreement between NOVEX and David E. McCarty dated July 22, 1997, assumed by
Invitrogen on August 17, 1999.
10.18 Promissory Note from Lyle C. Turner dated December 1998.
10.19 Novel Experimental Technology 401(k) Employee Ownership Plan and Trust Agreement, dated April 1,
1997, as amended.
10.20 Invitrogen Corporation Employee Stock Ownership Plan, dated January 1, 1996.
(2)21.1 List of Subsidiaries
(2)23.1.1 Consent of Arthur Andersen LLP, Independent Public Accountants
(2)23.1.2 Consent of Ernst & Young LLP, Independent Auditors
(1)23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
(2)24.1 Power of Attorney (see page II-6)
</TABLE>
- ------------------------
* Incorporated by reference to the Registrant's Registration Statement on
Forms S-1 (File No. 333-68665).
** Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (File No. 333-82593).
(1) To be filed by amendment.
(2) Previously filed.
<PAGE>
EXHIBIT 10.18
PROMISSORY NOTE
1. FOR VALUE RECEIVED, the undersigned LYLE C. TURNER promises to pay
to the order of INVITROGEN CORPORATION, (hereinafter referred to as "Payee";
Payee together with any subsequent holder hereof or any interest herein being
hereinafter referred to as "Holder") in Carlsbad, California, or at such
other place as the Holder may from time to time designate in writing, without
grace, except as may be otherwise expressly provided for herein, the
principal sum One Hundred and Fifty Thousand Dollars ($150,000), together
with interest from the date said principal sum is transferred to the
undersigned, at a rate of six and a half percent (6.5%) per annum on the
unpaid principal balance from time to time outstanding in accordance with the
following provisions:
The undersigned shall repay the principal and all interest accrued on
December 31, 1999.
2. This Note is to be governed, interpreted and construed by, through
and under the laws of the State of California. This Note may be prepaid in
whole or in part at any time without penalty or premium. If this Note
provides for installment payments of principal, prepayment of principal
payments shall be applied in the inverse order such installment payments are
due, applying first to the last principal installment due hereunder.
3. The undersigned agrees to assign to Holder 16,000 shares of common
stock of Invitrogen, (the "Shares"), upon the occurrence of any Event of
Default hereunder. The undersigned hereby appoints the officers of
Invitrogen, or any of them, his attorney in fact to effect a transfer of the
assigned Shares on the books of Invitrogen with full power of substitution in
the promises, upon the occurrence of any Event of Default. The undersigned
agrees to execute any document(s) reasonably requested by Holder or its
counsel to perfect said assignment. Upon any Event of Default, Holder shall
have the option, without prejudice to any other remedy, to liquidate the
interests assigned herein to satisfy any principal and/or interest then due
under such indebtedness. Holder agrees to apply any and all money received
from such liquidation to the satisfaction of such indebtedness, and to pay to
the undersigned, his legal representatives, heirs, or assigns, any balance
remaining after payment of the indebtedness existing at the time of such
payment.
4. In the event that any payment of principal and/or interest is not
made within thirty (30) days that same is due, which event shall constitute
an "Event of Default" hereunder the undersigned shall pay, during the period
of such default, interest on the unpaid balance of the indebtedness evidenced
by this Note at 10% per year.
5. The Holder shall have the option to declare the amount of the total
unpaid balance hereof to be due and forthwith payable in advance of the
maturity date of any sum due or installment, as fixed herein, upon the
failure of the undersigned to pay, when due and after thirty (30) days that
same is due, any of the installments of interest and/or principal, or upon
the occurrence of any Event of Default or failure to perform in accordance with
any of the terms and conditions in any security document executed and/or
delivered in the future relevant to this Note. Upon exercise of this option
by the Holder, the entire unpaid principal shall bear interest at 10% per
year. Forbearance in exercising this option with respect to any failure or
breach of the undersigned shall not constitute a waiver of the rights to any
continuing failure or breach or any subsequent failure or breach. "Event of
Default" shall
<PAGE>
further include, without limitation, as to each of the undersigned: (1) any
breach, misrepresentation or other default by the undersigned or any entity
providing security for this note under this Note; (2) insolvency or the
failure to pay its general debts as such debts become due; (3) commencement
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or
debtor relief; (4) assignment for the benefit or creditors; (5) appointment
of a receiver, trustee, custodian or similar official for all or
substantially all of any of its property; (6) filing or recording of any
levy, notice to withhold or other legal process for taxes other than property
taxes; (7) failure to comply with any order, judgment, decree, writ or demand
of any court or government agency.
6. In no event shall the amount of interest due or payments in the
nature of interest payable hereunder exceed the maximum rate of interest
allowed by applicable law, as amended from time to time, and in the event any
such payment is paid by the undersigned or received by the Holder, then such
excess sum shall be credited as a payment of principal, unless the undersigned
shall notify the Holder, in writing, that the undersigned elects to have such
excess sum returned to it forthwith.
7. Time is of the essence hereunder and, in case this Note is collected
by law or through an attorney-at-law, the undersigned agrees to pay all costs
of collection including reasonable attorneys' fees. Reasonable attorneys'
fees are defined to include, but not be limited to, all fees incurred in all
matters of collection and enforcement, construction and interpretation,
before, during and after suit, trial, proceedings and appeals. Attorneys'
fees shall also include hourly charges for paralegals, law clerks and other
staff members operating under the supervision of an attorney.
8. The remedies of the Holder, as provided herein shall be cumulative
and concurrent, and may be pursued singularly, successively or together, at
the sole discretion of the Holder, and may be exercised as often as occasion
therefor shall arise. Neither the remedies nor the security recited herein
shall be construed to limit any other remedy Holder may have at law or in
equity. No act of omission or commission of the Holder, including
specifically any failure to exercise any right, remedy or recourse, shall be
deemed to be a waiver or release of the same, such waiver or release to be
affected only through a written document executed by the Holder and then only
to the extent specifically recited therein. A waiver or release with
reference to any one event shall not be construed as continuing, as a bar to,
or as a waiver or release of any subsequent right, remedy or recourse as to a
subsequent event.
9. Any notice to be given or to be served upon any party hereto, in
connection with this Note, must be writing, and may be given by certified or
registered mail and shall be deemed to have been given when delivered to and
received by the party to whom it is addressed.
10. All persons or corporations or other entities now or at any time
liable, whether primarily or secondarily, for the payment of the indebtedness
hereby evidenced, for themselves, their heirs, legal representatives,
successors and assigns respectively, hereby (a) expressly waive presentment,
demand for payment, notice of dishonor, protest, notice of non-payment or
protest, and diligence in collection except as may be otherwise expressly
provided; (b) consent that the time of all payments or any part thereof may
be extended, rearranged, renewed or postponed by the Holder hereof and
further consent that the collateral security or any part thereof may be
released, exchanged, added to or substituted for by Holder hereof, without in
anywise modifying, altering, releasing, affecting or limiting their
2
<PAGE>
respective liability or the lien of any security instrument; (c) agree that
the Holder, in order to enforce payment of this Note, shall not be required
first to institute any suit or to exhaust any of its remedies against the
undersigned or any other person or party to become liable hereunder.
11. In this Note, whenever the context so requires, the neuter gender
includes the feminine and/or masculine, as the case may be, and the singular
number includes the plural.
12. All references herein to interest at the "maximum rate" shall mean
"maximum legal contract rate".
13. This Note constitutes the entire understanding between the parties
regarding the subject matter hereof and supersede and extinguish any prior
agreements, discussions or understandings, whether oral or written. No
amendment to this Note or the Assignment shall be enforceable unless reduced
to writing and signed by the parties.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
as of December 8, 1998.
/s/ LYLE C. TURNER
-------------------
LYLE C. TURNER
CONSENT OF SPOUSE
I acknowledge that I have read the above Note dated as of December 8, 1998,
to which this Consent is attached and that I know its contents. I understand
and agree that any community property interest I may have in the Shares shall
be bound by the Note. I understand that my spouse has fixed the value of the
Shares, including my community property interest therein. I acknowledge that
I have been provided ample time to seek the counsel of an independent attorney
not associated with the Purchase Agreement or the parties thereto.
/s/ MARY E. KEADLE
-------------------
MARY E. KEADLE
<PAGE>
EXHIBIT 10.19
FIRST AMENDMENT
TO
NOVEL EXPERIMENTAL TECHNOLOGY
401(k) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT
THIS AMENDMENT is executed by NOVEL EXPERIMENTAL TECHNOLOGY, a corporation
organized and existing under the laws of the state of California (the
"Employer"), and UNION BANK OF CALIFORNIA (the "Trustee").
WHEREAS, the Employer adopted the NOVEL EXPERIMENTAL TECHNOLOGY 401(k)
EMPLOYEE STOCK OWNERSHIP PLAN (the "Plan") for the benefit of its employees,
effective as of April 1, 1997; and
WHEREAS, Article X of the Plan provides the Employer may amend the Plan at
any time; and
WHEREAS, the Employer desires to amend the Plan;
NOW THEREFORE, the Plan is amended as follows:
1. Section 4.6 is deleted and replaced as follows:
"4.6 UNCLAIMED BENEFITS. If benefits remain unpaid for two years after
they would normally have been paid because of the Participant's or Beneficiary's
failure to provide required information, and the committee cannot locate the
information, or the committee cannot locate the participant or Beneficiary by
mailing notices to the last known addresses in the employer's records, the
unpaid benefit shall be forfeited.
<PAGE>
The unpaid benefit will be reinstated without interest or allocations of
earnings if the Participant or Beneficiary later makes a claim for a benefit."
2. The following sentence is added to Section 17.6:
"For purposes of this paragraph, elective deferrals under the 401(k)
portion of the Plan are considered mandatory contributions."
IN WITNESS WHEREOF, the Employer and the Trustee have caused this
instrument to be executed as of the date shown opposite their names.
DATED: "Employer"
-----------------
NOVEL EXPERIMENTAL
TECHNOLOGY
By:
-----------------------
DATED:
----------------- "Trustee"
UNION BANK OF CALIFORNIA
By:
-----------------------
By:
-----------------------
-2-
<PAGE>
SECOND AMENDMENT
TO
NOVEL EXPERIMENTAL TECHNOLOGY
401(k) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT
THIS AMENDMENT is executed by NOVEL EXPERIMENTAL TECHNOLOGY, a corporation
organized and existing under the laws of the state of California (the
"Employer"), and UNION BANK OF CALIFORNIA (the "Trustee").
WHEREAS, the Employer adopted the NOVEL EXPERIMENTAL TECHNOLOGY 401(k)
EMPLOYEE STOCK OWNERSHIP PLAN (the "Plan") for the benefit of its employees,
effective as of April 1, 1997; and
WHEREAS, Article X of the Plan provides the Employer may amend the Plan at
any time; and
WHEREAS, the Employer desires to amend the Plan;
NOW THEREFORE, the Plan is amended by deleting the dollar figure "$3,500"
from sections 4.3 A, 4.3 D, 4.3 F, 6.5 A (3), 6.5 B (5) and 6.5 F and replacing
it with the dollar figure "$5,000".
<PAGE>
THIS AMENDMENT shall be effective as of April 1, 1998, and may not reduce
the Account Balance of any Participant as of the latter of April 1, 1998 or the
date of adoption of this Amendment.
IN WITNESS WHEREOF, the Employer and the Trustee have caused this
instrument to be executed as of the date shown opposite their names.
DATED:_______________ "Employer"
NOVEL EXPERIMENTAL
TECHNOLOGY
By:
---------------------------------
DATED:_______________ "Trustee"
UNION BANK OF CALIFORNIA
By:
---------------------------------
By:
---------------------------------
<PAGE>
FOURTH AMENDMENT
TO
NOVEL EXPERIMENTAL TECHNOLOGY
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT
THIS AMENDMENT is executed by NOVEL EXPERIMENTAL TECHNOLOGY, a
corporation organized and existing under the laws of the state of California
(the "Employer"), and UNION BANK OF CALIFORNIA (the "Trustee").
WHEREAS, the Employer adopted the NOVEL EXPERIMENTAL TECHNOLOGY EMPLOYEE
STOCK OWNERSHIP PLAN (the "Plan") for the benefit of its employees, effective as
of April 1, 1995; and
WHEREAS, Article X of the Plan provides the Employer may amend the Plan
at any time; and
WHEREAS, the Employer desires to amend and restate the Plan to add a
401(k) Plan component;
NOW THEREFORE, the Plan is amended and restated by deleting it in its
entirety and replacing it with the following:
<PAGE>
NOVEL EXPERIMENTAL TECHNOLOGY
401(k) EMPLOYEE STOCK OWNERSHIP PLAN
AND TRUST AGREEMENT
<PAGE>
TABLE OF CONTENTS
PAGE
I. INTRODUCTION AND GENERAL PROVISIONS . . . . . . . . . . . . . . . . . 1
II. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
A. "Employer". . . . . . . . . . . . . . . . . . . . . . . 5
B. "Trustee" . . . . . . . . . . . . . . . . . . . . . . . 5
C. "Plan". . . . . . . . . . . . . . . . . . . . . . . . . 5
D. "Trust" . . . . . . . . . . . . . . . . . . . . . . . . 5
E. "Effective Date". . . . . . . . . . . . . . . . . . . . 5
F. "Committee" . . . . . . . . . . . . . . . . . . . . . . 5
G. "Employee". . . . . . . . . . . . . . . . . . . . . . . 6
H. "Participant" . . . . . . . . . . . . . . . . . . . . . 7
I. "Former Participant". . . . . . . . . . . . . . . . . . 7
J. "Plan Year" or "Year" . . . . . . . . . . . . . . . . . 7
K. "Age" . . . . . . . . . . . . . . . . . . . . . . . . . 7
L. "ERISA" . . . . . . . . . . . . . . . . . . . . . . . . 7
M. "Fiduciaries" . . . . . . . . . . . . . . . . . . . . . 7
O. "Fair Market Value of Qualifying Employer Securities" . 9
P. "Independent Appraiser" . . . . . . . . . . . . . . . 10
Q. "Income". . . . . . . . . . . . . . . . . . . . . . . 10
R. "Normal Retirement Age" . . . . . . . . . . . . . . . 10
S. "Disability". . . . . . . . . . . . . . . . . . . . . 10
T. "Beneficiary" . . . . . . . . . . . . . . . . . . . . 10
U. "Compensation". . . . . . . . . . . . . . . . . . . . 10
V. "Vested Percentage" . . . . . . . . . . . . . . . . . 13
W. "Forfeitures" . . . . . . . . . . . . . . . . . . . . 14
X. "Entry Date" and "401(k) Entry Date". . . . . . . . . 14
Y. "Employer Contribution Account" . . . . . . . . . . . 14
Z. "Authorized Leave of Absence" . . . . . . . . . . . . 14
AA. "Hour of Service" . . . . . . . . . . . . . . . . . . 14
BB. "Year of Service" . . . . . . . . . . . . . . . . . . 16
CC. "Break in Service". . . . . . . . . . . . . . . . . . 16
DD. "Qualifying Employer Securities". . . . . . . . . . . 16
EE. "Employment Commencement Date". . . . . . . . . . . . 17
FF. "Maximum Contribution Limit". . . . . . . . . . . . . 17
GG. "Combined Fraction" . . . . . . . . . . . . . . . . . 17
HH. "Defined Benefit Fraction". . . . . . . . . . . . . . 17
II. "Defined Contribution Fraction" . . . . . . . . . . . 18
JJ. "Annual Additions". . . . . . . . . . . . . . . . . . 20
KK. "Qualified Domestic Relations Order". . . . . . . . . 20
LL. "Qualified Joint and Survivor Annuity". . . . . . . . 20
MM. "Qualified Pre Retirement Survivor Annuity" . . . . . 21
NN. "Applicable Election Period". . . . . . . . . . . . . 21
OO. "Annuity Starting Date" . . . . . . . . . . . . . . . 21
PP. "Qualified Election". . . . . . . . . . . . . . . . . 22
QQ. "Highly Compensated Employee" . . . . . . . . . . . . 23
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TABLE OF CONTENTS
(CONTINUED)
III. PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
IV. EMPLOYER CONTRIBUTIONS AND PARTICIPANT FORFEITURES. . . . . . . . . 31
V. ALLOCATIONS TO PARTICIPANTS' ACCOUNTS . . . . . . . . . . . . . . . 49
VI. BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
VII. TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
VIII. ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 85
IX. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
X. AMENDMENTS AND ACTION BY EMPLOYER . . . . . . . . . . . . . . . . . 97
XI. SUCCESSOR EMPLOYER AND MERGER OR CONSOLIDATION OF PLANS . . . . . . 98
XII. PLAN TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 99
XIII. TRUST AND TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . 102
XIV. OPTION TO PARTICIPANTS AND BENEFICIARIES WHO HOLD CERTAIN
QUALIFYING EMPLOYER SECURITIES. . . . . . . . . . . . . . . . . . . 114
XV. RIGHT OF FIRST REFUSAL. . . . . . . . . . . . . . . . . . . . . . . 118
XVI. VESTED ROLLOVER ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . 122
XVII. TOP HEAVY PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . 124
XVIII. LIFE INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . 130
XIX. AFFILIATION AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 133
XX. INVESTMENT DIRECTIONS . . . . . . . . . . . . . . . . . . . . . . . 137
XXI. LOANS TO PARTICIPANTS. . . . . . . . . . . . . . . . . . . . . . . . 140
XXII. DIRECT ROLLOVERS. . . . . . . . . . . . . . . . . . . . . . . . . . 143
XXIII. SECTION 401(a)(17) ADJUSTMENTS . . . . . . . . . . . . . . . . . . 145
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NOVEL EXPERIMENTAL TECHNOLOGY
401(k) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT
I. INTRODUCTION AND GENERAL PROVISIONS
1.1 Parties: THIS AGREEMENT is made between the following Employer,
NOVEL EXPERIMENTAL TECHNOLOGY, having a principal place of business at
San Diego, California, hereinafter referred to as the "Employer," and UNION BANK
OF CALIFORNIA, N.A., hereinafter referred to as the "Trustee."
1.2 Effective Date: The original effective date of the Employee Stock
Ownership Plan was April 1, 1995. This amendment and restatement shall be
effective as of April 1, 1997.
1.3 Purpose: The purpose of the 401(k) Employee Stock Ownership Plan
is to establish an employee benefit program with three separate components, as
follows:
A. SECTION 401(K) COMPONENT. This portion of the Plan allows
Participants to enter into a salary reduction agreement with the Employer and
contribute, on a tax-deferred basis, a portion of their salary to the Plan.
This amount then would be allocated on the Plan's records for the benefit of the
Participant.
B. MATCHING CONTRIBUTIONS COMPONENT. The Employer could, at
its discretion, match Participants' contributions under the Section 401(k)
component with up to $.50 for every dollar contributed by Participants under
salary reduction agreements subject to the limitations contained in Paragraph C
of Section 4.1.
C. ESOP COMPONENT. This portion of the Plan allows the
Employer to contribute to the Plan on a tax-deductible basis a discretionary
amount. Amounts
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contributed under this portion of the Plan would be allocated
in proportion to Compensation.
The amounts contributed to the ESOP contribution portion of
the Plan would be invested by the Trustee primarily in Qualifying Employer
Securities. Amounts, if any, contributed under the Matching Contribution
portion of the Plan may be invested by the Trustee in Qualifying Employer
Securities. Amounts contributed by Participants under the Section 401(k)
component will be invested at the Participant's direction in other funds
established by the Committee unless an investment option in Qualifying Employer
Securities is made available to Participants under the Plan.
1.4 COMPLIANCE WITH INTERNAL REVENUE CODE. The Plan and Trust are
intended to meet the requirements of Sections 401(a) and 501(a) of the Internal
Revenue Code of 1986. The Plan also contains an Employee Stock Ownership Plan
component under Section 4975(e)(7) of the Code and 407(d)(6) of ERISA.
1.5 GENERAL PROVISIONS:
A. The Plan shall be binding upon and inure to the benefit of
the parties, and their respective heirs, legatees, legal representatives,
successors and assigns.
B. The parties hereto shall execute any instruments in writing
which will be necessary or appropriate to carry out the provisions or intent of
the Plan.
C. The failure of any party to enforce at any time any of the
provisions of the Plan, or any rights had in respect thereto, or to exercise any
right herein provided, shall in no way be considered to be a waiver of such
provisions or rights or in any way to affect the validity of the Plan. The
exercise by any party hereto of such party's rights herein, shall
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not precludeor prejudice such party from exercising the same or any other right
under the Plan.
D. The language in all parts of the Plan shall be in all cases
construed simply according to its fair meaning, and not strictly for or against
any of the parties hereto.
E. All notices, demands, consents, requests, or elections
which may be given to any party shall be in writing. All notices, demands,
consents, requests or elections given by the parties hereto may be delivered
personally, or may be sent by United States certified mail, postage prepaid,
addressed to the respective parties. Notices, demands, consents, requests, or
elections served by mail as hereinabove described shall be deemed sufficiently
served or given at the time of mailing thereof.
F. Should any portion of the Plan be declared invalid and
unenforceable, then such portion shall be deemed to be severable from the Plan
and shall not affect the remainder thereof.
G. It is expressly understood that the Plan contains all
terms, covenants, conditions and agreements between the parties hereto relating
to the subject matter of the Plan, and that no prior agreements or
understandings, either oral or written, pertaining to the same shall be valid or
of any force or effect.
H. In interpreting the Plan, the masculine includes the
feminine, the plural includes the singular, and the singular includes the plural
as the context may require.
I. The word "persons" wherever used shall include individuals,
firms, associations, partnerships and limited partnerships, and corporations.
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J. The Plan may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original, but
such counterparts together shall constitute but one Plan.
K. All exhibits to which reference is made are deemed
incorporated in full in the Plan, whether or not actually attached.
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II. DEFINITIONS
2.1 Whenever used herein, unless the context clearly indicates
otherwise, the following words and terms shall have the following meanings:
A. The word "Employer" means NOVEL EXPERIMENTAL TECHNOLOGY, a
corporation organized and existing under the laws of the state of California,
and any successor to all or major portions of its property or business.
B. The word "Trustee" means UNION BANK OF CALIFORNIA, N.A. and
any duly appointed successor trustee or trustees.
C. The word "Plan" means the 401(k) Employee Stock Ownership
Plan and Trust Agreement for Participants as set forth herein, together with any
and all amendments and supplements hereto.
D. The word "Trust" means the trust and the trust fund to be
established under the Plan. The Trust shall contain for recordkeeping purposes
Subtrust A and Subtrust B. Subtrust A shall be solely allocated Qualifying
Employer Securities either acquired by purchase, or contributed by the Employer
to the Plan, plus such amounts of liquid investments as the Committee from time
to time shall direct to be allocated and retained in Subtrust A. Subtrust B
shall hold all other assets including each Participant's SelectBenefit Daily
Valuation Account.
E. The "Effective Date" of the Plan as amended and restated is
April 1, 1997.
F. The word "Committee" means the committee appointed to
direct the Plan and Trust activities as described in Article VIII of the Plan.
The Board of Directors of the Employer may also appoint a separate Sub-Committee
to administer the 401(k) portion
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of the Plan and a separate Sub-Committee to administer the Employee Stock
Ownership Plan portion of the Plan. Any Sub-Committee so appointed shall
report to the Committee which shall make final decisions with respect to all
matters delegated to the Committee under the Plan and shall instruct the
Trustee accordingly.
G. The word "Employee" means any person employed by the
Employer, any portion of whose compensation is subject to the withholding of
income tax and/or for whom social security contributions are made by the
Employer (excluding Independent Contractors). Any leased Employee shall also be
treated as an Employee of the Employer in accordance with Section 414(n) of the
Internal Revenue Code. However, contributions or benefits, if any, provided by
the leasing organization which are attributable to services performed for the
recipient Employer shall be treated as provided by the recipient Employer. For
purposes of this Plan, the term "leased Employee" means any person who, pursuant
to an agreement between the recipient Employer and any other person ("leasing
organization") performs services for the recipient Employer (or for the
recipient Employer and related persons determined in accordance with
Section 414(n)(6) of the Internal Revenue Code) on a substantially full-time
basis for a period of at least one year, and such services are of a type
historically performed by Employees in the business field of the recipient
Employer.
Notwithstanding the above, a leased Employee shall not be
considered an Employee of the recipient Employer if: (i) such leased Employee
is covered by a Money Purchase Pension Plan providing: (1) a nonintegrated
Employer contribution rate of at least 10 percent of compensation, as defined in
Section 415(c)(3) of the Code, but including amounts contributed by the Employer
pursuant to a Salary Reduction
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Agreement which are excludable from the leased Employee's gross income under
Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code,
(2) immediate participation, and (3) full and immediate vesting; and (ii)
leased Employees do not constitute more than 20 percent of the recipient
Employer's nonhighly compensated workforce.
H. The word "Participant" means an Employee participating in
the Plan in accordance with the provisions of Article III.
I. The term "Former Participant" means a Participant whose
participation in the Plan has terminated but who has a vested account balance
under the Plan which has not been paid in full.
J. The terms "Plan Year" or "Year" mean the fiscal period used
by the Employer for the purpose of maintaining its financial accounting records,
as set forth in Exhibit B.
K. The word "Age" means the Participant's age.
L. The term "ERISA" means Public Law No. 93-406, the Employee
Retirement Income Security Act of 1974, as amended from time to time.
M. The word "Fiduciaries" means the Employer, the Committee
and the Trustee, but only with respect to the specific responsibilities of each
for Plan and Trust administration.
N. 1. The term "Subtrust A Valuation Date" means the last
day of each Plan Year. The Trustee, upon the direction of the Committee, shall
make a special valuation of Subtrust A.
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2. The term "Subtrust B Valuation Date" means each
business day that both the Trustee and the New York Stock Exchange are open for
business. On each Subtrust B Valuation Date all Subtrust B accounts of each
Participant shall be charged or credited as appropriate with the net earnings,
gains, losses, and expenses, as well as any appreciation or depreciation in
market value of each Investment Option using publicly listed fair market values
when appropriate. The Trustee shall update the values of the Investment Options
of each account based on the units held by the account in the Investment Option.
3. To the extent that there are Trust assets, the value
of which is not readily determinable on an established market, any earnings,
gains, or losses shall be allocated in a manner consistent with subsection 6
below. In the event such assets are accounted for as pooled assets, the
allocation of earnings, gains, and losses shall consider each Participant's
entire account balance and shall be based upon the earnings, gains, and losses
of the entire pool of such assets. In the event such assets are accounted for
as part of a Participant's segregated account, the allocation of earnings,
gains, and losses from such assets shall be made on a separate and distinct
basis.
4. If, with respect to any Plan Year, any account of a
Participant is credited with an incorrect amount of contributions or earnings to
which such Participant is entitled under the Plan, or if an error is made with
respect to the investment of the assets of the account, which error results in
an incorrect amount being credited to the account of the Participant, remedial
actions may be taken in accordance with this paragraph. In such event, the Plan
may adjust such account balances to the extent necessary to reflect the account
balances which would have existed if the error had not been made. Any account
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adjustments or additional contributions made under this section of the Plan
shall be made on a uniform and nondiscriminatory basis.
5. In determining the fair market value of securities
held in the Trust Fund which are listed on a registered stock exchange, the
Committee shall direct the Trustee to value the same at the prices they were
last traded on such exchange preceding the close of business on the latest
Subtrust B Valuation Date. If such securities were not traded on that
Subtrust B Valuation Date, or if the exchange on which they were traded was not
open for business on that Subtrust B Valuation Date, then the securities shall
be valued at the prices at which they were last traded prior to the latest
Subtrust B Valuation Date. Any unlisted security held in Subtrust B shall be
valued at its bid price next preceding the close of business on the latest
Subtrust B Valuation Date, which bid price shall be obtained from a registered
broker or an investment banker.
6. Notwithstanding anything herein to the contrary,
in the event there are Trust assets, the value of which are not readily
determinable on an established market, the Committee shall have sole
responsibility for determining the value of such assets and the Trustee shall
not incur any liability for inaccurate valuations based on the Trustee's good
faith reliance on valuation information provided by the Committee or the
Committee's agent. The Committee shall provide the Trustee with an annual
updated valuation on each Subtrust A Valuation Date of all such Trust assets,
the value of which is not readily determinable on an established market and
no Participant or Beneficiary shall have any right to a more current
valuation of such assets, regardless of whether such assets are held in a
segregated account or a pooled account.
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O. The term "Fair Market Value of Qualifying Employer
Securities" means the value of Qualifying Employer Securities, as determined by
the Committee for all purposes under the Plan based upon a valuation by an
Independent Appraiser or the price listed on an established securities exchange.
P. The term "Independent Appraiser" means any appraiser
meeting requirements similar to the requirements set forth in the regulations
under Section 170(a)(1) of the Internal Revenue Code.
Q. The term "Income" means the gain or loss of the Trust from
investments, as reflected by interest payments, dividends, realized and
unrealized gains and losses on securities, other investments transactions and
expenses paid from the Trust. In determining the income of the Trust for any
period, assets shall be valued on the basis of their fair market value.
R. The term "Normal Retirement Age" is set forth in Exhibit B.
S. The word "Disability" means a physical or mental condition
which, in the judgment of the Committee, based upon medical reports and other
evidence satisfactory to the Committee, presumably permanently prevents an
Employee from satisfactorily performing his usual duties for the Employer or the
duties of such other position or job which the Employer makes available to him
and for which such Employee is qualified by reason of his training, education or
experience.
T. The word "Beneficiary" means any person or persons
designated by a Participant to receive any benefits payable under the Plan in
the event of the Participant's death.
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U. The word "Compensation" means the total compensation
received by the Employee for the Plan Year (including accrued compensation if
the Employer uses the accrual method of accounting but only for plan years
beginning before January 1, 1992) from the Employer, including commissions,
bonus and overtime and excluding Employer contributions (other than Salary
Reduction Contributions) under the Plan or any other qualified plan of deferred
compensation or employee welfare plan maintained by the Employer.
"Compensation" shall not include amounts received by a Participant in the form
of uniform allowances, automobile allowances, expense accounts, other noncash
taxable fringe benefits, any amount designated as severance pay, or compensation
in settlement of all claims upon termination of employment. The amount by which
a Participant reduces his compensation to fund benefits under a Cafeteria Plan
under Section 125 of the Internal Revenue Code, or to contribute on a salary
reduction basis to a 401(k) plan, shall be considered compensation for purposes
of this paragraph (but such amounts are not considered compensation for purposes
of limits under Section 5.4 of the Plan). The word "Compensation" shall be
deemed to include the Employee's Earned Income if he is a sole proprietor or
partner of the Employer. The term "Earned Income" for this purpose means net
earnings from self-employment, after taking into account contributions for
Employees, including the sole proprietor and partners, made under the Plan for
the Plan Year for which earned income is being determined, for services actually
rendered to the trade or business for which the Plan is established, in which
trade or business personal services of a proprietor or a partner are a material
income-producing factor. Earned Income of such trade or business shall also
include gains (other than gains from the sale of a capital asset, as defined in
the Internal Revenue Code) and net earnings derived from the sale or other
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disposition of, the transfer of any interest in, or the licensing of the use of,
property (other than goodwill) by an individual whose personal efforts created
such property. Net earnings shall be determined with regard to the deduction
allowed to the Employer by Section 164(f) of the Internal Revenue Code for
taxable years beginning after December 31, 1989. For any Plan Year beginning
after 1988, any amount of Compensation for a Participant in excess of $200,000
(as adjusted for increases in the cost of living pursuant to Section 401(a)(17)
of the Internal Revenue Code) shall be excluded. In determining the
compensation of a Participant for purposes of this limitation, the rules of
Section 414(q)(6) of the Internal Revenue Code shall apply, except in applying
such rules the term "Family" shall include only the spouse of the Participant
and any lineal descendants of the Participant who have not attained age 19
before the close of the Plan Year. If the $200,000 Compensation limitation, as
adjusted, applies to the combined Compensation of the Employee and one or more
Family Members, the contribution and allocation provisions of the Plan (except
for purposes of determining the portion of compensation up to the integration
level if the Plan provides for permitted disparity will be applied by prorating
the $200,000 limitation, as adjusted, among the Employee and his Family Members
in proportion that each such individual's Compensation determined prior to the
application of this limitation bears to the total Compensation of all such
individuals determined prior to the application of this limitation. For
purposes of applying the $200,000 limit on Compensation the family unit of an
Employee who either is a 5 percent owner or is both a Highly Compensated
Employee and one of the ten most Highly Compensated Employees will be treated as
a single Employee with one compensation, and, except for the purpose of
determining compensation below the Plan's integration level, if applicable,
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the $200,000 limit will be allocated among the members of the family unit in
proportion to each such individual's compensation prior to the application of
this limitation. For this purpose, a family unit is the employee who is a 5
percent owner or one of the ten most Highly Compensated Employees, the
employee's spouse, and the employee's lineal descendants who have not
attained age 19 before the close of the year. Compensation includes
Compensation paid by the Employer to an Employee through another person under
the common paymaster provisions of Internal Revenue Code Section 3121(s) and
3306(p). The term "Compensation" does not include:
1. Employer contributions to a plan of non-qualified
deferred compensation to the extent the contributions are not included in the
gross income of the Employee for the taxable year in which contributed, on
behalf of an Employee to a Simplified Employee Pension Plan to the extent such
contributions are excludable from the Employee's gross income, and any
distributions from a plan of deferred compensation, regardless of whether such
amounts are includable in the gross income of the Employee when distributed.
2. Amounts realized from the exercise of a
non-qualified stock option, or when restricted stock (or property) held by an
Employee either becomes freely transferable or is no longer subject to a
substantial risk of forfeiture.
3. Amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option.
4. Other amounts which receive special tax benefits,
such as premiums for group term life insurance (but only to the extent that the
premiums are not includable in the gross income of the Employee), or
contributions made by an Employer
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(other than amounts contributed under a salary reduction agreement) towards
the purchase of an annuity contract described in Internal Revenue Code
Section 403(b) (whether or not the contributions are excludable from the
gross income of the Employee).
V. The term "Vested Percentage" means the nonforfeitable
percentage of a Participant's Employer Contribution Account(s) to which he is
entitled upon termination of employment as set forth in Exhibit A to the Plan.
W. The word "Forfeitures" means the amount of a Participant's
Employer Contribution Account(s) which is nonvested due to a Break in Service,
the timing of which shall be determined in accordance with Section 4.2 of the
Plan.
X. The terms "Entry Date" and "401(k) Entry Date" are defined
in Exhibit B.
Y. The term "Employer Contribution Account" means the account
or accounts maintained for a Participant to record his share of the
contributions of the Employer and adjustments relating thereto.
Z. The term "Authorized Leave of Absence" means any absence
authorized by the Employer under the Employer's standard personnel practices,
provided that all persons under similar circumstances must be treated alike in
the granting of such Authorized Leaves of Absence and, provided further, that
the Participant returns within the period of authorized absence. An absence due
to service in the Armed Forces of the United States shall be considered an
Authorized Leave of Absence, provided that the absence is caused by war or other
emergency, or provided that the Employee is required to serve under the laws of
conscription in time of peace, and, further provided, that the Employee returns
to employment with the Employer within the period provided by law.
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AA. The term "Hour of Service" means each hour for which an
Employee is:
(1) Paid, or entitled to payment, for the performance of
duties for the Employer. These hours shall be counted in the computation period
in which the duties are performed; or
(2) Paid, or entitled to payment, by the Employer on
account of a period of time during which no duties are performed (irrespective
of whether the employment relationship has terminated) due to vacation, holiday,
illness, incapacity (including Disability), layoff, jury duty, military duty, or
Authorized Leave of Absence. Notwithstanding the preceding sentence, no more
than 501 Hours of Service are required to be credited under this subparagraph to
an Employee on account of any single continuous period during which the Employee
performs no duties. These hours shall be counted in the computation period or
periods in which the period during which no duties are performed occurs; or
(3) Awarded back pay, or such back pay is agreed to by
the Employer, irrespective of mitigation of damages. These hours must be
credited in the computation period or periods to which the award or agreement
pertains rather than the computation period or periods in which the payment,
award or agreement was made. Hours of Service credited under Subparagraphs (1)
and (2) above shall not be credited under this subparagraph. No more than 501
Hours of Service are required to be credited to an Employee for payments of back
pay to the extent such back pay is agreed to or awarded for a period during
which an Employee did not or would not have performed duties.
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(4) The rules set forth in Department of Labor
Regulation Section 2530.200b-2(b) and (c), for determining Hours of Service for
periods during which an Employee performs no duties, and computation periods,
are hereby incorporated by reference.
(5) Construction of Hours of Service: Should the
definition of Hours of Service cause any ambiguities, such ambiguities shall be
resolved in favor of crediting Employees with Hours of Service.
(6) Solely for purposes of determining whether a Break
in Service (as defined in Paragraph CC of Section 2.1) for participation and
vesting purposes has occurred in a computation period, a former Employee who is
absent from work for maternity or paternity reasons shall receive credit for the
Hours of Service which would otherwise have been credited to such former
Employee but for such absence, or in any case in which such Hours cannot be
determined, 8 Hours of Service per day of such absence. For purposes of this
Paragraph, an absence from work for maternity or paternity reasons means an
absence by reason of the pregnancy of the former Employee, by reason of a birth
of a child of the former Employee, by reason of the placement of a child with
the former Employee in connection with the adoption of such child by such former
Employee, or for purposes of caring for such child for a period beginning
immediately following such birth or placement. The Hours of Service credited
under this Paragraph shall be credited in the computation period in which the
absence begins if the crediting is necessary to prevent a Break in Service in
that period, or in all other cases, in the following computation period. No
more than 501 Hours of Service are required to be credited in a computation
period to a former Employee under this subparagraph.
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BB. The term "Year of Service" means a Plan Year during which
the Employee has rendered to the Employer at least 1,000 Hours of Service.
Service for any predecessor of the Employer shall be treated as service for the
Employer.
CC. The term "Break in Service" means a Plan Year during which
the Employee has rendered to the Employer 500 or less Hours of Service.
DD. The term "Qualifying Employer Securities" means (1) common
stock issued by the Employer (or by another corporation which is a member of the
same "controlled group of corporations" as such term is defined in Section
409(1)(4) of the Internal Revenue Code) having a combination of voting power and
dividend rights at least equal to the class of common stock of the Employer (or
of any other such corporation) having the greatest voting power and the class of
common stock of the Employer (or of any other such corporation) having the
greatest dividend rights, and (2) noncallable preferred stock which is
convertible at any time into common stock which meets the requirements of
subparagraph (1), and if such conversion is at a conversion price which (as of
the date of the acquisition by the Plan) is reasonable.
EE. The term "Employment Commencement Date" means the date upon
which the Employee performs his first Hour of Service for the Employer.
FF. The term "Maximum Contribution Limit" is defined as
follows:
(1) The "Maximum Contribution Limit" is $30,000 or, if
greater, one-fourth of the dollar limitation in effect under Section
415(b)(1)(A) of the Internal Revenue Code.
(2) The $30,000 limitation specified in this Paragraph
shall be adjusted in accordance with releases issued by the Commissioner of
Internal Revenue.
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Any adjustment in the dollar limitation by the Commissioner of Internal
Revenue effective during a Plan Year shall apply retroactively to the
beginning of such Plan Year.
GG. The term "Combined Fraction" means the sum of the
Participant's Defined Benefit Fraction and his Defined Contribution Fraction.
HH. The term "Defined Benefit Fraction" means a fraction
determined for any given Plan Year:
(1) The numerator of which is the projected annual
benefit of the Participant derived from the Employer's contributions under the
Plan (determined as of the close of the Plan Year) and
(2) The denominator of which is the lesser of:
(a) The product of 1.25, multiplied by the dollar
limitation in effect under Section 415(b) (1)(A) of the Internal Revenue Code
for such Plan Year or
(b) The product of:
(i) 1.4 multiplied by
(ii) 100 percent of the Participant's
average compensation for his high 3 Plan Years of compensation.
II. The term "Defined Contribution Fraction" means a fraction
determined for any given Plan Year:
(1) The numerator of which is the sum of the Annual
Additions to the Participant's account as of the last day of the Plan Year; and
(2) The denominator of which is the sum of the lesser of
the following amounts determined for such Plan Year and for each prior Plan Year
with the
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Employer (assuming for this purpose that Section 415 of the Internal Revenue
Code had been in effect during such prior Plan Years):
(a) The product of 1.25, multiplied by the dollar
limitation in effect under Paragraph FF for such Plan Year or
(b) The product of
(i) 1.4 multiplied by
(ii) The amount which may be taken into
account under Section 415(c)(1)(B) of the Internal Revenue Code (or Section
415(c)(7), if applicable) with respect to such Participant for such Plan Year.
The amount taken into account under subparagraph (2) of this
Paragraph II with respect to a Participant for all Plan Years ending before
January 1, 1983 shall, at the Committee's election, be an amount equal to the
product of:
(3) The amount determined under subparagraph (2) of this
Paragraph II (as in effect for the Plan Year ending in 1982), multiplied by
(4) the "transition fraction."
The "transition fraction" means a fraction:
(5) The numerator of which is the lesser of:
(a) $51,875; or
(b) 1.4, multiplied by 25 percent of the
Participant's compensation for the Plan Year ending in 1981 and
(6) The denominator of which is the lesser of:
(a) $41,500, or
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(b) 25 percent of the Participant's compensation
for the Plan Year ending in 1981.
The defined contribution fraction may also be limited,
at the Committee's election under regulations issued by the Secretary of the
Treasury (as required under Section 235(g)(3) of the Tax Equity and Fiscal
Responsibility Act of 1982), under which an amount is subtracted from the
numerator of the defined contribution fraction so the sum of the defined
benefit plan fraction and the defined contribution fraction computed under
Section 415(e)(1) of the Internal Revenue Code does not exceed 1.0 for the
last Plan Year beginning before January 1, 1983.
JJ. The term "Annual Additions" means the sum for any Plan Year
of:
(1) Employer contributions;
(2) Employee contributions (determined without regard to
any rollover contributions as defined in Sections 402(a)(5), 403(a)(4),
403(b)(8) and 403(d)(3) and without regard to Employee contributions to a
simplified employee pension plan which are excludable from gross income under
Section 408(k)(6) of the Code;
(3) Forfeitures;
(4) Amounts allocated after March 31, 1984, to an
individual medical account, as defined in Section 415(1)(1) of the Internal
Revenue Code, which are part of a defined benefit plan maintained by the
Employer; and
(5) Amounts derived from contributions paid or accrued
after December 31, 1985, in taxable years ending after such date, which are
attributable to post-retirement medical benefits allocated to the separate
account of a key Employee, as
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defined in Section 419A(d)(3) of the Internal Revenue Code, under a welfare
benefit fund, as defined in Section 419(e) of the Internal Revenue Code,
maintained by the Employer.
KK. The term "Qualified Domestic Relations Order" means a
domestic relations order (as defined in Section 414(p) of the Internal Revenue
Code) which has been determined, in accordance with procedures specified in the
Plan, to be a "qualified domestic relations order" (as defined in Section 414(p)
of the Internal Revenue Code).
LL. The term "Qualified Joint and Survivor Annuity" means an
immediate annuity for the life of the Participant, with a survivor annuity for
the life of the spouse which is neither less than one-half nor greater than the
amount of the annuity payable during the joint lives of the Participant and his
spouse. A Qualified Joint and Survivor Annuity must be at least the actuarial
equivalent of a single annuity for the life of the Participant, or, if greater,
any optional form of benefit.
MM. The term "Qualified Pre-Retirement Survivor Annuity" means
an annuity for the life of a Participant's surviving spouse, the actuarial
equivalent of which is not less than 50 percent of the Participant's account
balance as of the date of his death.
NN. The term "Applicable Election Period" means, in the case
of an election to waive the Qualified Pre-retirement Survivor Annuity, the
period which begins on the first day of the Plan Year in which the
Participant attains age 35 and ends on the date of the Participant's death.
If a Participant separates from employment prior to the first day of the Plan
Year in which age 35 is attained, with respect to his account balance as of
the date of termination of employment, the election period begins on the date
of separation. The term "Applicable Election Period" means, in the case of an
election to waive the
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Qualified Joint and Survivor Annuity form of benefit, the 90 day period
ending on the Annuity Starting Date.
OO. The term "Annuity Starting Date" means (i) the first day of
the first period for which an amount is payable as an annuity, or (ii) in the
case of a benefit not payable in the form of an annuity, the first day on which
all events have occurred which entitle the Participant to such benefit. In the
event of a distribution due to disability, the first day of the first period for
which a benefit is to be received by reason of disability shall be treated as
the "annuity starting date" only if such benefit is not an auxiliary benefit.
PP. The term "Qualified Election" means a waiver of a
Qualified Joint and Survivor Annuity or a Qualified Pre-retirement Survivor
Annuity. Any waiver of a Qualified Joint and Survivor Annuity or a Qualified
Pre-retirement Survivor Annuity shall not be effective unless: (a) the
Participant's spouse consents in writing to the election; (b) the election
designates a specific alternate beneficiary, including any class of
beneficiaries or any contingent beneficiaries, which may not be changed
without spousal consent (or the spouse expressly permits designations by the
Participant without any further spousal consent; (c) the spouse's consent
acknowledges the effect of the election; and (d) the spouse's consent is
witnessed by a plan representative or notary public. Additionally, a
Participant's waiver of the Qualified Joint and Survivor Annuity will not be
effective unless the election designates a form of benefit payment which may
not be changed without spousal consent (or the spouse expressly permits
designations by the Participant without any further spousal consent). If it
is established to the satisfaction of a plan representative that such written
consent may not be obtained because there is no spouse or the spouse cannot
be located, a waiver will be deemed a Qualified Election.
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Any consent by a spouse obtained under this provision (or
establishment that the consent of a spouse may not be obtained) shall be
effective only with respect to such spouse. A consent that permits designations
by the Participant without any requirement of further consent by such spouse
must acknowledge that the spouse has the right to limit consent to a specific
beneficiary, and a specific form of benefit where applicable, and that the
spouse voluntarily elects to relinquish either or both of such rights. A
revocation of a prior waiver may be made by a Participant without the consent of
the spouse at any time prior to the commencement of benefits. The number of
revocations shall not be limited. No consent obtained under this provision
shall be valid unless the Participant has received notice as provided in
Paragraphs G and J of Section 6.5 of the plan.
QQ. The term "Highly Compensated Employee" includes highly
compensated active Employees and highly compensated former Employees.
A highly compensated active Employee includes any Employee who
performs service for the Employer during the determination year and who, during
the look-back year: (i) received compensation from the Employer in excess of
$75,000 (as adjusted pursuant to Section 415(d) of the Code); (ii) received
compensation from the Employer in excess of $50,000 (as adjusted pursuant to
Section 415(d) of the Code) and was a member of the top-paid group for such
year; or (iii) was an officer of the Employer and received compensation during
such year that is greater than 50 percent of the dollar limitation in effect
under Section 415(b)(1)(A) of the Code. The term Highly Compensated Employee
also includes: (i) Employees who are both described in the preceding sentence
if the term "determination year" is substituted for the term "look-back year"
and the Employee is one of the 100 Employees who received the most Compensation
from the Employer during the
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determination year; and (ii) Employees who are 5 percent owners at any time
during the look-back year or determination year.
If no officer has satisfied the Compensation requirement of (iii)
above during either a determination year or look-back year, the highest paid
officer for such year shall be treated as a Highly Compensated Employee.
For this purpose, the determination year shall be the Plan Year.
The look-back year shall be the twelve-month period immediately preceding the
determination year.
A highly compensated former Employee includes any Employee who
separated from service (or was deemed to have separated) prior to the
determination year, performs no service for the Employer during the
determination year, and was a highly compensated active Employee for either the
separation year or any determination year ending on or after the Employee's 55th
birthday.
If an Employee is, during a determination year or look-back year,
a family member of either a 5 percent owner who is an active or former Employee
or a Highly Compensated Employee who is one of the 10 most Highly Compensated
Employees ranked on the basis of compensation paid by the Employer during such
year, then the family member and the 5 percent owner or top-ten Highly
Compensated Employee shall be aggregated. In such case, the family member and
the 5 percent owner or top-ten Highly Compensated Employee shall be treated as a
single Employee receiving compensation and plan contributions or benefits equal
to the sum of such compensation and contributions or benefits of the family
member and 5 percent owner or top-ten Highly Compensated Employee. For purposes
of this section, family member includes the
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spouse, lineal ascendants and descendants of the Employee or former Employee
and the spouses of such lineal ascendants and descendants.
The determination of who is a Highly Compensated Employee,
including the determination of the number and identity of Employees in the
top-paid group, the top 100 Employees, the number of Employees treated as
officers and the Compensation that is considered, will be made in accordance
with Section 414(q) of the Code and the regulations thereunder. For purposes of
determining who is a Highly Compensated Employee, all Employers aggregated under
Internal Revenue Code Section 414(b), 414(c), 414(m) and 414(o) shall be treated
as a single Employer."
2.2 OPERATION OF PLAN CONSISTENT WITH SECTION 414. The Plan must be
operated consistent with the requirements of Section 414 of the Internal Revenue
Code and any regulations promulgated thereunder. Thus, notwithstanding anything
in the Plan to the contrary, an Employee's "hours of service," or "years of
service" with any other employer which is a member of an affiliated service
group under Section 414(m) of the Internal Revenue Code or a controlled group
under Section 414(b) or Section 414(c) of the Internal Revenue Code with the
Employer (if applicable) or performed by a leased Employee (as defined under
Paragraph G of Section 2.1 of the Plan) considered an Employee under this Plan
for purposes of Section 414(n) shall count as "Hours of Service" and "Years of
Service" and shall count toward the eligibility requirements of Article III for
purposes of the Plan.
Notwithstanding the above, or any other provision of the Plan,
Employees of NOVEX INTERNATIONAL SALES CORPORATION, a California corporation,
and NOVEX
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EUROPE GmbH, a German corporation, both 100% owned subsidiaries of the
Employer, shall not be eligible to participate in the Plan.
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III. PARTICIPATION
3.1 PARTICIPATION. An Employee shall commence participation in
the ESOP component of the Plan as of the earliest Entry Date as of which he
had attained age 21 and completed not less than 1,000 Hours of Service in a
12 consecutive month period beginning on his Employment Commencement Date and
ending prior to said Entry Date, provided said Employee is not included in a
unit of Employees covered by a collective bargaining agreement between
Employee representatives and the Employer, if there is evidence that
retirement benefits were the subject of good faith bargaining between such
Employee representatives and the Employer.
An Employee shall commence participation in the 401(k) and Matching
Contribution component of the Plan as of the earliest 401(k) Entry Date as of
which he had completed a six (6) consecutive month period beginning on his
Employment Commencement Date and ending prior to such 401(k) Entry Date,
provided said Employee is not included in a unit of Employees covered by a
collective bargaining agreement between Employee representatives and the
Employer, if there is evidence that retirement benefits were the subject of
good faith bargaining between such Employee representatives and the Employer.
A. In the event an otherwise eligible Employee does not
complete 1,000 Hours of Service in the 12 consecutive month period beginning
on his Employment Commencement Date, the Employee shall become a Participant
on the earliest Entry Date subsequent to completing a Year of Service. Thus,
said Employee will become a Participant if he completes 1,000 Hours of
Service in the Plan Year which includes the first anniversary of his
Employment Commencement Date.
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B. An Employee who, for eligibility purposes, has completed
not less than 1,000 Hours of Service in the 12 consecutive month period
beginning on his Employment Commencement Date shall be credited with a Year
of Service for Paragraph A, above, and for his prior Years of Service under
Section 3.3, Paragraph B(3). Thus, if the Employee also completes 1,000
Hours of Service in the Plan Year which includes the first anniversary of his
Employment Commencement Date, he will be credited with two (2) Years of
Service for purposes of Section 3.3, Paragraph B(3).
3.2 BREAK IN SERVICE. Participation in the Plan shall cease after
a Break in Service.
3.3 PARTICIPATION AND YEARS OF SERVICE UPON RE-EMPLOYMENT. Upon
the re-employment of any person after the Effective Date who had previously
been employed by the Employer, the following rules shall apply in determining
his participation in the Plan and his Years of Service (all Years of Service
with the Employer will be counted for vesting purposes except as set forth
herein).
A. Participation of a Re-Employed Employee:
(1) If the re-employed Employee was not a Participant
in the Plan during his prior period of employment, he must meet the
requirements of Section 3.1 for participation in the Plan as if he were a new
Employee.
(2) If a re-employed Employee was not a Participant
in the Plan during his prior period of employment, had terminated employment
after having met the requirements of Section 3.1 but prior to the next Entry
Date, and had not incurred a Break in Service prior to his re-employment,
then the Employee must commence participation immediately upon his return.
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(3) If the re-employed Employee was a Participant in
the Plan during his prior period of employment and he has incurred a Break in
Service, the re-employed Employee shall not be entitled to re-participate in
the Plan until he again meets the requirements of Section 3.1.
(4) If the re-employed Employee was a Participant in
the Plan during his prior period of employment and he has not incurred a
Break in Service prior to his re-employment, then, the Employee shall again
become a Participant as of the date of his re-employment.
B. Service of a Re-Employed Employee:
(1) If the re-employed Employee was a Participant in
the Plan during his prior period of employment and he has incurred a Break in
Service, service prior to such Break in Service shall be reinstated in
accordance with subparagraphs B(2) and B(3), below, only if the re-employed
Employee completes 1,000 Hours of Service in (a) the 12 consecutive month
period beginning on the date of his re-employment; or (b) the Plan Year which
includes the first anniversary of the date of re-employment; or if necessary,
succeeding Plan Years.
(2) In the case of a Participant whose prior
employment terminated with entitlement to a distribution from the Plan,
subject to subparagraph B(1), above, any service attributable to his prior
period of employment shall be reinstated in determining both his or her pre
and post separation account balance(s) as of the date of his re-employment.
If a Participant who was less than 100 percent vested received a
distribution, Service attributable to his prior period of employment shall be
reinstated only if the
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Participant repays the full amount of such prior distribution (exclusive of
Salary Reduction Contributions) within the 5-year period from the date of
re-employment.
(3) In the case of a Participant whose prior
employment terminated without entitlement to a distribution of Employer
funded benefits from the Plan, subject to subparagraph B(1), above, any
service attributable to his prior period of employment will be reinstated in
determining both his or her pre and post separation account balance(s) if the
number of consecutive Plan Years of Break in Service was equal to or less
than the greater of 5 or the aggregate number of Years of Service prior to
his Break in Service. Notwithstanding the foregoing, if an Employee's
termination of employment with the Employer is due to maternity or paternity
leave, the number "5" in the preceding sentence shall be changed to "6"
solely for purposes of determining the re-employed Employee's eligibility to
participate in the Plan.
(4) Years of Service with the Employer before a
Participant entered the Plan, including Years of Service in non-covered
employment, will be counted for vesting purposes except as otherwise provided
in this Section 3.3 to the contrary.
3.4 ELIGIBILITY AND SERVICE OF EMPLOYEES FORMERLY INCLUDED IN A
COLLECTIVE BARGAINING UNIT. All Years of Service of an Employee who has
previously, but no longer is, included in a unit of Employees covered by a
collective bargaining agreement between Employee representatives and the
Employer shall be counted for purposes of eligibility and vesting except for
Years of Service not reinstated to a re-employed Employee under the
provisions of Paragraph B of Section 3.3. An Employee shall participate in
the Plan
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immediately upon his exclusion from such a unit of Employees covered by a
collective bargaining agreement if he has satisfied all other requirements
for participation in the Plan.
3.5 ELECTION NOT TO PARTICIPATE. Notwithstanding anything else in
the Plan to the contrary, an Employee may, subject to the approval of the
Employer, elect voluntarily not to participate in the Plan. The election not
to participate must be communicated to the Employer in writing at least
thirty (30) days before the beginning of a Plan Year.
3.6 EXCLUSION OF EMPLOYEES. Notwithstanding anything herein to the
contrary, if the Trustee purchases "Qualifying Employer Securities" in a
transaction in which the seller makes a nonrecognition of gain election under
Section 1042 of the Internal Revenue Code, the seller, any person who is a
member of the family of the seller (within the meaning of Section 267(c)(4)
of the Internal Revenue Code) or any other person who owns (after application
of Section 318(a) of the Internal Revenue Code) more than 25 percent in value
of any class of outstanding Employer securities (within the meaning of
Section 409(1) of the Internal Revenue Code) shall not be eligible to
participate in the Plan during the ten year period following the purchase.
Such exclusion shall commence as of the first day of the Plan Year in which
such transaction occurs.
3.7 MILITARY SERVICE. Notwithstanding any provision of this Plan
to the contrary, effective on or after December 12, 1994, contributions,
benefits, and service credit with respect to qualified military service will
be provided in accordance with Section 414(u) of the Internal Revenue Code.
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IV. EMPLOYER CONTRIBUTIONS AND PARTICIPANT FORFEITURES
4.1 Employer Contributions:
A. SALARY REDUCTION CONTRIBUTIONS. The Employer shall
contribute an amount equal to the total amount of contributions agreed to be
made by it pursuant to salary reduction agreements under Section 4.2 entered
into between the Employer and Participants for such Plan Year. Contributions
made by the Employer for a given Plan Year pursuant to salary reduction
agreements under Section 4.2 shall be deposited in the Trust no later than
the earlier of (a) 90 days following the date on which such amounts would
otherwise have been payable to the Participant in cash, or (b) the date the
Employer files its federal income tax return for such Plan Year. The
contribution under this Paragraph A shall be referred to as the "Salary
Reduction Contribution."
B. MATCHING CONTRIBUTIONS. The Employer may, on a
discretionary basis, contribute (subject to reductions by Forfeitures in
Matching Contributions Accounts) and allocate to a Participant's Matching
Contributions Account as of the last day of the Plan Year (or earlier at the
Employer's discretion) up to $.50 for every $1.00 it contributed to the
Participant's Salary Reduction Contribution Account for the Plan Year,
provided however that no matching allocation will be made for Salary
Reduction Contributions in excess of 6 percent of a Participant's
Compensation. This contribution shall be referred to as the "Matching
Contribution."
C. ESOP CONTRIBUTIONS. The Employer may make an additional
contribution to the Plan for each Plan Year in an amount determined by the
Board of Directors of the Employer, subject to applicable limits on amounts
deductible under the
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Internal Revenue Code or allocable to Participants' accounts. The
contribution under this Paragraph C shall be referred to as the "ESOP
Contribution."
D. The Employer shall make full payment of its
contributions other than Salary Reduction Contributions for each Plan Year
directly to the Trustees not later than the time prescribed by the Internal
Revenue Code for such contribution to be deductible on the Employer's tax
return for the Plan Year to which the contribution applies. The Salary
Reduction Contribution must be made not later than the earlier of 90 days
following the date on which such amounts would otherwise have been payable to
the Participant in cash or the time prescribed by law for filing the federal
income tax return of the Employer, including extensions which have been
granted for the filing of such tax return. Neither the Trustee nor the
Committee shall be under any duty to inquire into the correctness of the
amount contributed and paid over to the Trustee hereunder, nor shall either
the Trustee or the Committee be under any duty to enforce payment of any
contribution to be made hereunder by the Employer. With respect to payments
made after the close of the Plan Year but before the filing of the Employer's
federal income tax return, the Employer shall designate in writing to the
Trustee the taxable year of the Employer to which the payment relates.
E. The ESOP Contributions and Matching Contributions made
to the Plan may be made in cash, Qualifying Employer Securities, or other
property at the discretion of Employer; however, any contribution in the form
of Qualifying Employer Securities shall be allocated solely to Subtrust A,
unless such Qualifying Employer Securities are registered and traded on an
established national securities exchange.
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4.2 PARTICIPANT SALARY REDUCTION. Each Plan Year, a Participant
may elect to enter into a written salary reduction agreement with the
Employer which will be applicable to all payroll periods within such Plan
Year. The terms of any salary reduction agreement shall provide that the
Participant agrees to accept a reduction in salary from the Employer equal to
any whole percentage of his Compensation per payroll period in increments of
1 percent, not to exceed the lesser of 15 percent of such Compensation or
$9,500 per calendar year (with such dollar limit beginning on January 1,
1997, and adjusted annually thereafter in accordance with releases issued by
the Commissioner of Internal Revenue). In consideration of such agreement,
the Employer will make a salary reduction contribution to the Participant's
Salary Reduction Contribution Account on behalf of the Participant for such
Plan Year in an amount equal to the total amount by which the Participant's
Compensation from the Employer was reduced during the Plan Year pursuant to
the salary reduction agreement. Amounts credited to a Participant's Salary
Reduction Contribution Account shall be 100 percent vested and
non-forfeitable at all times. If a Participant enters into a salary
reduction agreement with the Employer for a given Plan Year his Compensation
for such Plan Year for all other purposes of the Plan shall be equal to his
Compensation before application of the salary reduction agreement. Salary
Reduction contributions shall be allocated solely to Subtrust B.
Salary reduction agreements shall be governed by the following
rules:
A. A salary reduction agreement shall apply to each payroll
period during which an effective salary reduction agreement is on file with
the Employer.
B. A salary reduction agreement may be amended by a
Participant only during the three (3) week period preceding May 1, August 1,
November 1 or February 1
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of each Plan Year by written notice to the Committee on its prescribed form
if the purpose of the amendment is to decrease the amount of such
Participant's Compensation which is subject to salary reduction during the
remainder of such Plan Year. The Participant may elect, upon 14 days advance
written notice to the Committee, on its prescribed form, to discontinue
deferrals during the remainder of such Plan Year.
C. A salary reduction agreement may be amended by a
Participant only during the three (3) week period preceding May 1, August 1,
November 1 or February 1 of each Plan Year if the purpose of the amendment is
to increase the amount of such Participant's Compensation which is subject to
salary reduction during the remainder of the Plan Year.
D. Salary reduction agreements and amendments to salary
reduction agreements shall be effective as of, and shall not apply to any
payroll period preceding, the payroll period next following the 10th day
after the salary reduction agreement or amendment to the salary reduction
agreement is executed by the Participant and the Employer.
E. The Employer may amend or revoke its salary reduction
agreement with any Participant at any time, if the Employer determines that
such revocation or amendment is necessary to insure that a Participant's
Annual Additions for any Plan Year will not exceed the limitations of Section
5.4 or to insure that the discrimination tests of Sections 401(k) and 401(m)
of the Internal Revenue Code are met for such Plan Year.
F. Amounts contributed to the Plan under a salary reduction
agreement by a "highly compensated Participant" (as defined in Section 414(q)
of the Internal Revenue Code) shall be returned to such Participants in a pro
rata reduction (or as
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otherwise agreed to in a nondiscriminatory manner) to the extent necessary to
insure that the discrimination tests of Sections 401(k) and 401(m) of the
Internal Revenue Code are met for such Plan Year.
G. The Committee shall distribute any "excess deferrals" to
a Participant not later than the first April 15th following the close of the
calendar year. An "excess deferral" is any amount contributed to the Plan
under a salary reduction agreement for the benefit of a Participant for a
calendar year in excess of $9,500 (as annually adjusted under Section 4.2) or
amounts less than $9,500 to the extent the Participant has entered into
salary reduction agreements with other employers and notified the Committee
that a portion of the amounts contributed for the Plan Year under a salary
reduction agreement is an excess deferral under Section 402(g) of the
Internal Revenue Code. Any income allocable to an excess deferral shall be
distributed to the Participant with the return of the excess deferral.
H. The Employer may revoke its salary reduction agreements
with all Participants or amend its salary reduction agreements with all
Participants on a uniform basis, if it determines that it will not have
sufficient current or accumulated profits to make the contributions to the
Plan required by the salary reduction agreements.
I. Except as provided above, a salary reduction agreement
applicable to any given Plan Year, once made, may not be revoked or amended by
the Participant or the Employer without the consent of the Plan Committee.
4.3 PARTICIPANT FORFEITURES:
A. If a Participant terminates service for the Employer,
and the value of the Participant's vested account balance derived from
Employer contributions is not greater
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than $3,500, distribution of the value of the entire vested portion of such
account balance will cause the nonvested portion of such account balance to
be treated as a Forfeiture.
B. If a Participant terminates service for the Employer,
and consents and elects (with his spouse's consent) to the receipt of the
value of his vested account balance derived from Employer contributions, the
nonvested portion will be treated as a Forfeiture. If the Participant
consents and elects to the distribution of less than the entire vested
portion of his account balance derived from Employer contributions, the part
of the nonvested portion that will be treated as a Forfeiture is the total
nonvested portion multiplied by a fraction, the numerator of which is the
amount of the distribution and the denominator of which is the total value of
the vested Employer derived account balance.
C. If a Participant receives a distribution pursuant to
this section which is less than the value of the Participant's account
balance derived from Employer contributions, and resumes employment covered
under the Plan, the Participant's account will be restored to the amount on
the date of distribution only if the Participant repays to the Plan the full
amount of the distribution on or before the earlier of the date the
Participant (1) incurs 5 consecutive one-year Breaks in Service following the
date of distribution or (2) 5 years after the first date on which the
Participant is subsequently re-employed by the Employer. In the case of a
distribution which is less than the value of the Participant's account
balance(s) derived from Employer contributions made for purposes other than
separation from Service by the Participant, the Participant's account will be
restored to the amount on the date of distribution only if the Participant
repays to the Plan the full amount of the distribution within 5 years of the
date of the distribution.
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D. If the value of the Participant's account balance
derived from Employer contributions exceeds $3,500, the Participant must
consent to any distribution from such account in accordance with Paragraph F
of Section 6.5.
E. The nonvested portion of a Participant's account balance
derived from Employer contributions remaining in such account as of the last
day of the Plan Year during which the Participant incurs 5 consecutive 1-year
Breaks in Service shall be forfeited and treated as a Forfeiture.
F. For distribution rules applicable to account balances
which exceed $3,500, if the present value of a Participant's account
balance(s) at the time of a distribution to the Participant exceeds $3,500,
then the present value of such Participant's account(s) at any subsequent
time shall be deemed to exceed $3,500.
4.4 REQUIRED PARTICIPANT CONTRIBUTIONS. Participants shall not be
required to contribute to the Trust.
4.5 FORFEITURES OF QUALIFYING EMPLOYER SECURITIES. If a portion of
a Participant's account(s) are forfeited, assets in the Participant's Other
Investment Account must be forfeited before assets in his Employer Stock
Account are forfeited and Qualifying Employer Securities allocated to his
Employer Stock Account which were acquired with the proceeds of a loan
exempted from the excise tax imposed under Section 4975(a) of the Internal
Revenue Code by Section 4975(d)(3) of the Internal Revenue Code can be
forfeited only after Qualifying Employer Securities in the Participant's
Employer Stock Account which were not so acquired have been forfeited. If
more than one class of Qualifying Employer Securities with equal priority
upon forfeiture has been allocated to a
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Participant's Employer Stock Account, the Participant must be treated as
forfeiting the same proportion of each class.
4.6 UNCLAIMED BENEFITS. If benefits remain unpaid for two years
after they would normally have been paid because of the Participant's or
Beneficiary's failure to provide required information, and the Committee
cannot locate the information, or the Committee cannot locate the Participant
or Beneficiary by mailing notices to the last known addresses in the
Employer's records, the unpaid benefit shall be forfeited.
The unpaid benefit will be reinstated without interest or allocations
of earnings if the Participant or Beneficiary later makes a claim for a
benefit prior to the date the Plan is terminated and all its assets
distributed to Participants or Beneficiaries.
4.7 MAXIMUM EMPLOYEE ELECTIVE DEFERRAL. The maximum amount of
Employee Elective Deferral for any Participant for any Plan Year shall be
$9,500, or such other amount determined by the Secretary of the Treasury
under Internal Revenue Code Section 402(g)(5) (cost-of-living adjustments).
This limit shall be applicable by aggregating all plans and arrangements
maintained by the Employer and all Affiliates that provide for elective
deferrals (as defined in Section 402(g) of the Internal Revenue Code).
If this limit would be exceeded by Employee Elective Deferral
to the Plan for any Participant for any Plan Year, the excess amount
(adjusted to reflect any income or losses attributable to such excess to the
date of distribution) shall be distributed to such Participant.
If, for any Plan Year, a Participant's Employee Elective
Deferral under this Plan, when combined with elective deferrals made to a
plan of another employer, would exceed $9,500 (or such other amount
determined by the Secretary of the Treasury under
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Internal Revenue Code Section 402(g)(5)), the Committee shall distribute the
amount of such excess (adjusted to reflect any income or loss attributable to
such excess to the date of distribution) to the Participant if the
Participant provides the Committee with written claim requesting a refund of
the excess. Such written request must be made no later than March 1 of the
following Plan Year. Such request shall be accompanied by the Participant's
written statement that if such excess amounts are not distributed, such
amounts, when added to amounts deferred under other plans or arrangements
described under Internal Revenue Code Section 401(k), 408(k) or 403(b), will
exceed the applicable limit for such Participant. The Committee may require
additional proof regarding the existence of excess elective amounts.
Distribution of excess amounts (adjusted to reflect any income
or losses attributable to such excess to the date of distribution) shall be
made no later than April 15 of the calendar year following the calendar year
in which such excess amount was made. Such distributions shall be charged
against a participant's Employee Elective Deferral Account.
A Participant may assign to this Plan any Excess Elective
Deferrals made during a taxable year of the Participant by notifying the Plan
Administrator on or before April 15 of the amount of the Excess Elective
Deferrals to be assigned to the Plan. A Participant is deemed to notify the
Plan Administrator of any Excess Elective Deferrals that arise by taking into
account only those Elective Deferrals made to this Plan and any other Plans
of this Employer.
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4.8 LIMITATION ON EMPLOYEE ELECTIVE DEFERRAL. In each Plan Year
the actual deferral percentage of Employee Elective Deferral for the group of
Highly Compensated Employees eligible to participate in the Plan may not
exceed the greater of:
A. one and one-quarter times the actual deferral percentage
of the group of all other eligible Employees; or
B. the lesser of (1) two times the actual deferral
percentage of the group of all other eligible Employees or (2) the actual
deferral percentage of the group of all other eligible Employees plus two
percentage points.
The "actual deferral percentage" for each such group of
eligible Employees for a Plan Year is the average of the ratios, calculated
separately for each Employee in each such group, of the amount of Employee
Elective Deferral made on behalf of each eligible Employee for such Plan Year
to the Employee's Compensation for such Plan Year. In the case of a Highly
Compensated Employee who is eligible to participate in more than one cash or
deferred arrangement maintained by the Employer or an Affiliate, the ratio of
the amount of Employee Elective Deferral made on behalf of such Highly
Compensated Employee for such Plan Year to the Highly Compensated Employee's
Compensation for such Plan Year shall be calculated by treating all the cash
or deferred arrangements in which the Highly Compensated Employee is eligible
to participate as one arrangement.
4.9 ADJUSTMENT OF EMPLOYEE ELECTIVE DEFERRAL DURING PLAN YEAR.
Notwithstanding anything in Section 4.8 to the contrary, if the Committee
determines that the nondiscrimination test set forth in Section 4.8 otherwise
might not be met for the Plan Year, the Committee may reduce the maximum
percentage of Compensation at which Highly Compensated Employees may elect to
have Employee Elective Deferral made on their
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behalf to such percentage, if any, as the Committee determines appropriate to
ensure that such test will be met for such Plan Year. Such a reduction may
be imposed for the entire Plan Year or any part thereof.
4.10 EXCESS EMPLOYEE ELECTIVE DEFERRAL AFTER PLAN YEAR:
A. CORRECTION OF EXCESS DEFERRAL CONTRIBUTION AFTER PLAN
YEAR. If the Committee determines after the end of the Plan Year that the
nondiscrimination test set forth in Section 4.8 has not been met, Employee
Elective Deferral (adjusted to reflect any income or losses allocable to such
excess to the date of distribution) of the Highly Compensated Employee shall
be distributed to such Highly Compensated Employee to eliminate such excess
Employee Elective Deferral.
B. DETERMINATION OF AMOUNT OF EXCESS EMPLOYEE ELECTIVE
DEFERRAL. The amount of excess Employee Elective Deferral for a Highly
Compensated Employee for a Plan Year is to be determined by the following
leveling method, under which the actual deferral percentage of the Highly
Compensated Employee with the highest actual deferral percentage is reduced
to the extent necessary to:
1. enable the Plan to satisfy the actual deferral
percentage limitation; or
2. cause such Highly Compensated Employee's actual
deferral percentage to equal the percentage of the Highly Compensated Employee
with the next highest actual deferral percentage.
This process must be repeated until the Plan satisfies the
contribution percentage limitation.
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C. RETURN TO EXCESS EMPLOYEE ELECTIVE DEFERRAL. Excess
Employee Elective Deferral which are returned to Highly Compensated Employees
pursuant to this Section 4.10 shall be distributed to such Employees as soon
as practicable, without regard to any limitation otherwise imposed by law or
by the provisions of the Plan.
4.11 LIMITATION ON MATCHING CONTRIBUTIONS. In each Plan Year the
contribution percentage of Matching Contribution for the group of Highly
Compensated Employees eligible to participate in the Plan may not exceed the
greater of:
A. one and one-quarter times the contributions percentage
of the group of all other eligible Employees; or
B. the lesser of (1) two times the contribution percentage
of the group of all other eligible Employees or (2) the contribution
percentage of the group of all other eligible Employees plus two percentage
points.
The "contribution percentage" for each such group of eligible
Employees for a Plan Year is the average of the ratios, calculated separately
for each Employee in each such group, of Matching Contributions made on
behalf of each eligible Employee for such Plan Year to the Employee's
Compensation for such Plan Year. To the extent permitted by applicable
regulations, the Committee may elect to take Employee Elective Deferral into
account in determining the contribution percentage. In the case of a Highly
Compensated Employee who is eligible to participate in more than one plan
maintained by the Company or an Affiliate to which Matching Contributions are
made, the ratio of Matching Contributions made on behalf of such Highly
Compensated Employee for such Plan Year to the Highly Compensated Employee's
Compensation for such Plan Year shall be
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calculated by treating all the plans in which the Highly Compensated Employee
is eligible to participate as one Plan.
4.12 EXCESS MATCHING CONTRIBUTIONS AFTER PLAN YEAR. If the
Committee determines after the end of the plan Year that the
nondiscrimination limitation in Section 4.11 has not been met, Matching
Contributions (adjusted to reflect any income or losses allocable to such
excess to the date of distribution) of the Highly Compensated Employees shall
be treated as a forfeiture under Section 4.3 to eliminate such excess
Matching Contributions.
The amount of excess Matching Contributions for a Highly
Compensated Employee for a Plan Year is to be determined by the following
leveling method, under which the contribution percentage of a Highly
Compensated Employee with the highest contribution percentage is reduced to
the extent required to:
A. enable the Plan to satisfy the contribution percentage
limitation; or
B. cause such Highly Compensated Employee's contribution
percentage to equal the percentage of the Highly Compensated Employee with
the next highest contribution percentage.
This process must be repeated until the Plan satisfies the
contribution percentage limitation.
4.13 APPLICATION OF GENERAL NONDISCRIMINATION REQUIREMENTS. In the
event that all or a portion of the Employee Elective Deferral of a
Participant who is a Highly Compensated Employee is distributed to such
Participant under Sections 4.7 or 4.10, the Matching Contribution generated
by such Deferral Contribution under Paragraph B of Section 4.1 (adjusted to
reflect any income or loss allocable thereto) shall be treated as a
forfeiture under Section 4.3.
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4.14 RESTRICTION ON MULTIPLE USE OF ALTERNATIVE LIMIT:
A. General Rule. If the discrimination limits set forth in
Sections 4.8 and 4.11 would otherwise be satisfied only by use of the
alternative limitation set forth in subsection (b) of Section 4.8 and 4.11 of
the Plan, the "contribution percentage" (as defined in Section 4.11) of
Highly Compensated Employees shall be reduced in the manner described in
Section 4.12 until the "Aggregate Limit" (as defined in (b), below) is
satisfied.
B. Aggregate Limit. For purposes of this Section 4.14 the
"Aggregate Limit" means the sum of:
1. One and one-quarter times the greater of the
actual deferral percentage or contribution percentage of the group of all
eligible Employees who are not Highly Compensated Employees, and
2. the lesser of:
a. two times the lesser of the actual
deferral percentage or contribution percentage of the group of all eligible
Employees who are not Highly Compensated Employees, or
b. the sum of two percentage points and the
lesser of the actual deferral percentage or contribution percentage of the
group of all eligible Employees who are not Highly Compensated Employees.
C. Special Transitional Rule. Notwithstanding the foregoing,
for Plan Years beginning before the later of January 1, 1992 or the date that is
60 days after the publication of final regulations under Internal Revenue Code
Sections 401(k) and 401(m),
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the "Aggregate Limit" is increased to the greater of the limit contained in
Section 4.14(b) above or the sum of:
1. 125 percent of the lesser of (a) the actual
deferral percentage of the group of non-Highly Compensated Employees eligible
under the arrangement subject to Section 401(k) for the Plan Year, or (b) the
actual contribution percentage of the group of non-Highly Compensated
Employees eligible under the Plan subject to Section 401(m) of the Internal
Revenue Code for the Plan Year beginning with or within the Plan Year of the
arrangement subject to Section 401(k) of the Internal Revenue Code, and
2. Two plus the greater of (a) or (b) above. In no
event, however, shall this amount exceed 200 percent of the greater of (a) or
(b) above.
4.15 In calculating the actual contribution percentage (ACP) test of
Section 401(m) for a Plan Year, contributions will be taken into account if
it is paid to the trust during the Plan Year or paid to an agent of the Plan
and transmitted to the trust within a reasonable period after the end of the
Plan Year. An excess contribution to a cash or deferred arrangement that is
recharacterized is to be taken into account in the Plan Year in which the
contribution would have been received in cash by the Employee had the
Employee not elected to defer the amounts. A matching contribution taken
into account for a Plan Year only if it is (1) made on account of the
Employee's elective or employee contributions for the Plan Year, (2)
allocated to the Employee's account as of a date within that year, and (3)
paid to the trust by the end of the 12th month following the close of that
year. Qualified matching contributions which are used to meet the
requirements of Section 401(k)(3)(A) are not to be taken into account for
purposes of the ACP test of Section 401(m).
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4.16 For purposes of determining whether a Plan satisfies the actual
contribution percentage test of Section 401(m), all Employee and matching
contributions that are made under two or more plans that are aggregated for
purposes of Section 401(a)(4) and 410(b) (other than Section
410(b)(2)(A)(ii)) are to be treated as made under a single plan and that if
two or more plans are permissively aggregated for purposes of Section 401(m),
the aggregated plans must also satisfy Section 401(a)(4) and 410(b) as though
they were a single plan.
4.17 In the case of a Highly Compensated Employee who is either a 5
percent owner or one of the ten most Highly Compensated Employees and is
thereby subject to the family aggregation rules of Section 414(q)(6), the
actual contribution ratio (ACR) for the family group (which is treated as one
Highly Compensated Employee) is the ACR determined by combining the
contributions and compensation of all eligible family members. Except to the
extent taken into account in the preceding sentence, the contributions and
compensation of all family members are disregarded in determining the actual
contribution percentages for the groups of Highly Compensated Employees and
non-Highly Compensated Employees.
4.18 In the case of a Highly Compensated Employee whose actual
contribution ratio (ACR) is determined under the family aggregation rules,
the determination of the amount of excess aggregated contributions shall be
made as follows: the ACR is reduced in accordance with the "leveling" method
described in Section 1.401(m)-1(e)(2) of the regulations and the excess
aggregate contributions are allocated among the family members in proportion
to the contributions of each family member that have been combined.
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4.19 The distribution (or forfeiture, if applicable) of excess
aggregate contributions shall be made on the basis of the respective portions
of such amounts attributable to each Highly Compensated Employee.
4.20 For purposes of the requirements of Section 401(m), a Highly
Compensated Employee who is either a 5 percent owner or one of the ten most
Highly Compensated Employees is subject to the family aggregation rules of
Section 414(q)(6). For this purpose a family member shall be defined as the
spouse and the lineal ascendants and descendants (and spouses of such
ascendants and descendants) of any employee or former employee.
4.21 An elective contribution will be taken into account under the
actual deferral percentage test of Section 401(k)(3)(A) of the Code for a
Plan Year only if it relates to compensation that either would have been
received by the Employee in the Plan Year (but for the deferral election) or
is attributable to services performed by the Employee in the Plan Year and
would have been Received by the Employee within 2 1/2 months after the close
of the Plan Year (but for the deferral election).
4.22 For purposes of determining whether a Plan satisfies the actual
deferral percentage test of Section 401(k), all elective contributions that
are made under two or more plans that are aggregated for purposes of Section
401(a)(4) or 410(b) (other than Section 410(b)(2)(A)(ii)) are to be treated
as made under a single plan and that if two or more plans are permissively
aggregated for purposes of Section 401(k), the aggregated plans must also
satisfy Section 401(a)(4) and 410(b) as though they were a single plan.
4.23 In the case of a Highly Compensated Employee who is either a 5
percent owner or one of the ten most Highly Compensated Employees and is
thereby subject to
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the family aggregation rules of Section 414(q)(6), the actual deferral ratio
(ADR) for the family group (which is treated as one Highly Compensated
Employee) is the ADR determined by combining the elective contributions,
compensation and the amounts treated as elective contributions of all
eligible family members. Except to the extent taken into account in the
preceding sentence, the elective contributions, compensation, and amounts
treated as elective contributions of all family members are disregarded in
determining the actual deferral percentages for the groups of Highly
Compensated Employees and non-highly compensated employees.
4.24 In the case of a Highly Compensated Employee whose actual
deferral ratio (ADR) is determined under the family aggregation rules, the
determination of the amount of excess contributions shall be made as follows:
The ADR is reduced in accordance with the "leveling" method described in
Section 1.401(k)-1(f)(2) of the regulations and the excess contributions are
allocated among the family members in proportion to the contributions of each
family member that have been combined.
4.25 The amount of excess contributions to be distributed or
recharacterized shall be reduced by excess deferrals previously distributed
for the taxable year ending in the same Plan Year and excess deferrals to be
distributed for a taxable year will be reduced by excess contributions
previously distributed or recharacterized for the Plan beginning in such
taxable year.
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V. ALLOCATIONS TO PARTICIPANTS' ACCOUNTS
5.1 INDIVIDUAL ACCOUNTS. The Committee shall create and maintain
adequate records to disclose the interest in the Trust of each Participant,
Former Participant and Beneficiary. Such records shall be in the form of
individual accounts, and credits and charges shall be made to such accounts in
the manner herein described. The Committee shall also maintain adequate records
to reflect the portion of a Participant's Employer Stock Account which consists
of Qualifying Employer Securities acquired with the proceeds of a loan exempted
from the excise tax imposed under Section 4975(a) of the Internal Revenue Code
by Section 4975(d)(3) of the Internal Revenue Code. The maintenance of
individual accounts is only for accounting purposes, and a segregation of the
assets of the Trust to each account shall not be required except as provided in
Section 7.2. Distributions and withdrawals made from an account shall be
charged to the account as of the date paid. The Committee shall, if applicable,
maintain the following accounts for each Participant (accounts described in
Paragraphs B and C, inclusive, are sometimes collectively referred to in the
Plan as "Employer Contribution Accounts").
A. SALARY REDUCTION CONTRIBUTION ACCOUNT. This account will
reflect amounts contributed by the Employer to Subtrust B pursuant to salary
reduction agreements under Section 4.2 (and Income thereon).
B. MATCHING CONTRIBUTION ACCOUNTS. This account will reflect
Matching Contributions (and Income thereon).
C. ESOP ACCOUNT. This account will reflect discretionary
Employer ESOP Contributions (and Income thereon) and amounts accumulated in the
Plan prior to April 1, 1995.
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D. VESTED ROLLOVER ACCOUNT. This account will reflect any
rollovers by Participants under Article XVI (and Income thereon).
E. SELECTBENEFIT DAILY VALUATION ACCOUNT. This master account
will reflect all amounts allocated to Participant's accounts defined under
Paragraphs A, B, C, and D of this Section 5.1 except to the extent such assets
are allocated to Subtrust A, as defined and provided for in Section 2.1,
paragraph D.
The maintenance of individual accounts is for accounting
purposes. Segregation of the assets of the Trust to each account shall not be
required except as provided in other portions of the Plan. Distributions and
withdrawals made from an account shall be charged to the account as of the
date paid.
5.2 DIVISION INTO QUALIFYING EMPLOYER SECURITIES ACCOUNT AND OTHER
INVESTMENTS ACCOUNT. Each Participant's interests in the accounts described in
Paragraphs B and C of Section 5.1 shall be divided into two accounts for
purposes of allocating the Income of the Plan as follows:
A. Qualifying Employer Securities Account; and
B. Other Investments Account.
The Qualifying Employer Securities Account shall consist of the
portion of Participants' accounts invested in Qualifying Employer Securities.
The Qualifying Employer Securities Account shall be credited at least once each
Plan Year with the allocable share of Qualifying Employer Securities purchased
and paid for by the Trust or contributed in kind by the Employer, with
Forfeitures of Qualifying Employer Securities, if applicable, and with stock
dividends on Qualifying Employer Securities.
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The Other Investments Account shall consist of all assets of
the Participant's accounts other than Qualifying Employer Securities. Income
shall be allocated as of the last day of the Plan Year in proportion to the
balance in such accounts as of the beginning of the Plan Year (the Committee
may in its discretion use average account balances during the Plan Year), but
after reducing each such account balance by any distributions from the
account during the Plan Year, including the purchase of Qualifying Employer
Securities transferred to the Qualifying Employer Securities Account. The
Committee may, in its discretion, allocate Income at more frequent intervals
to reflect additions to and distributions from the account(s) during the Plan
Year.
5.3 ALLOCATIONS OF THE EMPLOYER'S CONTRIBUTIONS. Contributions shall
be allocated as follows:
A. SALARY REDUCTION CONTRIBUTIONS.
Contributions made pursuant to salary reduction agreements with a Participant
shall be allocated to the Participant's Salary Reduction Contributions Account
no later than the last day of the Plan Year for which the contribution was made,
but may, in the Committee's discretion, be allocated at specified intervals
during the Plan Year.
B. ESOP CONTRIBUTIONS. As of the end of each Plan Year, the
Employer's ESOP Contributions for the Plan Year shall be allocated to the
Employer Contribution Accounts (ESOP Accounts) of Participants who completed a
Year of Service during the Plan Year and who either are Employees at such Plan
Year end, or retired, died or incurred Disability during such Plan Year in
proportion to their Compensation for the Plan Year.
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C. COMPANY MATCHING CONTRIBUTIONS.
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Contributions made by the Employer to match Salary Reduction Contributions, if
any, shall be allocated as of the last day of the Plan Year to the accounts of
Participants who have completed one Year of Service with the Employer and have a
Salary Reduction Contribution Account in accordance with Section 4.1.
D. ALLOCATION OF FORFEITURES. As of the end of each Plan
Year, Forfeitures which have become available for reallocation during such Plan
Year which are attributable to Employer contributions made under Paragraph C of
Section 4.1 shall be credited to the Employer Contribution Accounts of all
Participants who are entitled to share in the Employer's contribution for the
Plan Year, and such amounts shall be allocated according to the ratio that each
such Participant's Compensation for the Plan Year bears to the aggregate
Compensation of all such Participants for the Plan Year. Forfeitures
attributable to Matching Contribution Accounts must be used to reduce the
Employer's Matching Contributions allocated under the Plan.
E. UNALLOCATED EMPLOYER STOCK ACCOUNT. The Committee shall
also establish an Unallocated Employer Stock Account which will be credited
initially with any Qualifying Employer Securities under Subtrust A purchased
by the Trust under an installment payment contract or with borrowed funds.
When Qualifying Employer Securities are purchased under an installment
payment contract or with funds borrowed by the Trust, a certain number of the
Qualifying Employer Securities shall be transferred as of the last day of
each Plan Year from the Unallocated Employer Stock Account to the Employer
Stock Account of the Participants according to the ratio that each eligible
Participant's Compensation (as defined in paragraph U of Section 2.1) for the
Plan Year bears to the aggregate Compensation (as defined in paragraph U of
Section 2.1) of all
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eligible Participants for the Plan Year. The number of Qualifying Employer
Securities to be transferred in non-monetary units to Employer Stock Accounts
of Participants shall be determined by one of the following methods:
(1) The number of the Qualifying Employer Securities to
be transferred as of the last day of each Plan Year from the Unallocated
Employer Stock Account to the ESOP Accounts of the Participants shall be equal
to the number of Qualifying Employer Securities purchased under the installment
payment contract or with borrowed funds multiplied by a fraction the numerator
of which is the total amount of the installment paid under the installment
payment contract or the loan agreement (inclusive of principal and interest)
subsequent to the date of the last allocation and the denominator of which is
the total number of all installments to be paid under the installment payment
contract (inclusive of principal and interest through the final payment) or the
loan agreement (inclusive of principal and interest to maturity); or,
(2) The number of Qualifying Employer Securities to be
transferred as of the last day of each Plan Year from the Unallocated Employer
Stock Account to the ESOP Accounts of Participants shall be determined solely
with reference to payments of principal on an installment payment contract or
loan agreement. This method cannot be used, however, unless:
(a) The installment payment contract or loan
agreement provides for annual payments of principal and interest at a cumulative
rate that is not less rapid at anytime than level annual payments of such
amounts for 10 years;
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(b) Interest included in any payment is
disregarded only to the extent that it would be determined to be interest under
standard loan amortization tables; and
(c) The duration of any installment payment
contract or loan agreement, including renewals, extensions or refinancing does
not exceed 10 years.
5.4 MAXIMUM ANNUAL ADDITIONS. The maximum Annual Additions to a
Participant's accounts shall be determined as follows:
A. The total Annual Additions made to the accounts of a
Participant for a Plan Year (taking into consideration all Defined Contribution
Plans of the Employer as defined in Section 415(e) of the Internal Revenue Code)
may not exceed the lesser of the Maximum Contribution Limit or 25 percent of the
Participant's Compensation (as defined below) for the Plan Year. For purposes
of this paragraph, Compensation is defined to include a Participant's earned
income, wages, salaries, and fees for professional services and other amounts
received for personal services actually rendered in the course of employment
with the Employer, including, but not limited to, commissions paid salesmen,
compensation for services on the basis of a percentage of profits, commissions
on insurance premiums, tips and bonuses, and excluding the following:
(1) Employer contributions to a plan of deferred compensation
which are not includable in the Employee's gross income for the taxable year in
which contributed, or Employer contributions under a simplified Employee pension
plan to the extent such contributions are deductible by the Employee, or any
distributions from a plan of deferred compensation;
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(2) Amounts realized from the exercise of a non-qualified
stock option, or when restricted stock (or property) held by the Employee
either becomes freely transferable or is no longer subject to a substantial
risk of forfeiture;
(3) Amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option; and
(4) Other amounts which received special tax benefits, or
contributions made by the Employer (whether or not under a salary reduction
agreement) towards the purchase of an annuity contract described in Section
403(b) of the Internal Revenue Code (whether or not the amounts are actually
excludable from the gross income of the Employee).
For purposes of applying the limitations of this paragraph,
Compensation for a Plan Year is the Compensation either actually paid or made
available during such Plan Year, or in the case of Plan Years beginning before
January 1, 1992, accrued during such Plan Year if the Employer is on an accrual
method of accounting.
B. Notwithstanding the foregoing, the otherwise permissible
annual retirement income for any Participant under the Plan shall be further
reduced to the extent necessary, as determined by the Committee, to prevent
disqualification of the Plan under Section 415 of the Internal Revenue Code,
which imposes additional limitations on benefits payable to Participants who
also may be participating in another plan maintained by the Employer or any
members of a "controlled" or "affiliated" group of corporations or businesses of
which the Employer may be a part. If an individual is a Participant at any time
in both a defined benefit plan(s) and a defined contribution plan(s) required to
be aggregated for purposes of Section 415 of the Internal Revenue Code the
Combined
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Fraction may not exceed 1.0. For purposes of this limitation, all defined
benefit plans required to be aggregated for purposes of Section 415 of the
Internal Revenue Code whether or not terminated, are to be treated as one
defined benefit plan and all defined contribution plans required to be
aggregated for purposes of Section 415 of the Internal Revenue Code, whether
or not terminated, are to be treated as one defined contribution plan. The
Committee shall determine whether a Participant's benefits are to be limited
under this Paragraph. If limitation of benefits is required, the plan under
which benefits are to be limited shall not be the Plan (with the intention
that the benefits will be limited under the defined benefit plan). The
Committee shall advise affected Participants of any additional limitation
required by this Paragraph.
5.5 SUSPENSE ACCOUNT. A suspense account shall be established to
hold amounts which may not currently be allocated to Participants' accounts
under Section 5.6 or Section 5.7. Such suspense account shall not share in
the investment losses, gains or income of the remaining assets of the Trust.
In the event of the termination of the Plan, the suspense account shall
revert to the Employer to the extent it may not then be allocated to any
Employer Contribution Account.
5.6 EXCESS ANNUAL ADDITIONS. If Annual Additions to the accounts
of a Participant exceed the limitations described in Section 5.4,
contributions made by the Employer under salary reduction agreements for the
Plan Year which cause the excess, if any, shall be returned to the
Participant. If, after returning such contributions to the Participant, an
excess still exists, such excess shall be treated as a Forfeiture. This
Forfeiture shall be reallocated to the ESOP Accounts of other Participants
under Paragraph D of Section 5.3. To the extent reallocation of the
Forfeiture cannot occur because of the limits of
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Section 5.4, such Forfeiture shall be allocated to the suspense account
established under Section 5.5 and held in it until the next succeeding date
on which Forfeitures could be applied under the Plan.
5.7 LIMIT ON EMPLOYER CONTRIBUTIONS. Except in the circumstance of a
good faith mistake, the Employer shall not contribute any amount to the Plan
that would cause an allocation to the suspense account established under Section
5.5 or an allocation to any Participant in excess of the limitations contained
in Paragraph F of Section 5.3 as of the date the contribution is allocated. If
the contribution is made prior to the date as of which it is to be allocated,
then such contribution shall not exceed an amount that would cause an allocation
to such suspense account or an allocation to any Participant in excess of the
limitations contained in Paragraph F of Section 5.3 if the date of contribution
were an allocation date.
5.8 INVESTMENTS OF OTHER INVESTMENT ACCOUNTS. All Employer
contributions to the ESOP Account in cash and any other cash received by ESOP
Accounts under the Plan (including cash dividends attributable to Qualifying
Employer Securities) will be first used to pay outstanding obligations, other
than benefits payable to Participants, of the Trust, and any excess will be
used to buy Qualifying Employer Securities, if available, from holders of
outstanding Qualifying Employer Securities or Qualifying Employer Securities
from the Employer or an affiliate of the Employer. All purchases of
Qualifying Employer Securities shall be made at a price equal to their Fair
Market Value. If no current obligations of the Trust are outstanding and
unpaid and the Trustee determines that there are no Qualifying Employer
Securities available for purchase, the Trustee may invest funds allocated to
ESOP Accounts in accordance with Article XIII, all in a manner consistent
with its obligation
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hereunder to purchase Qualifying Employer Securities and may pass-through
dividends to Participants in accordance with Section 5.9.
5.9 DIVIDEND PASS-THROUGH. The Committee may adopt written
procedures, which may be changed from time to time, under which cash dividends
received by the Trust which are attributable to Qualifying Employer Securities
allocated to a Participant's ESOP Account may be paid currently (or within 90
days after the end of the Plan Year in which the dividends are paid to the
Trust) in cash by the Trustee to such Participants (or their Beneficiaries) on a
nondiscriminatory basis, or the Employer may pay such dividends directly to
Participants (or Beneficiaries). Such distribution (if any) of cash dividends
may be limited to Participants who are still Employees, may be limited to
dividends on shares of Qualifying Employer Securities which are then vested or
may be applicable to cash dividends on all shares allocated to Participants'
ESOP Accounts.
5.10 ALLOCATION OF QUALIFYING EMPLOYER SECURITIES OWNED BY THE TRUST TO
ESOP ACCOUNTS. Notwithstanding anything in the Plan to the contrary, Qualifying
Employer Securities shall be allocated to Participants' ESOP Accounts and, to
the extent the Committee permits the investment of Participants' Matching
Contribution Accounts in Qualifying Employer Securities, Matching Contribution
Accounts under a "general allocation method." The "general allocation method"
shall allocate the shares of Qualifying Employer Securities, and any other
securities of the Employer held by the Trust, to ESOP Accounts and Matching
Contribution Accounts at the end of each Plan Year in proportion to
Participants' account balances. The value of ESOP Accounts and Matching
Contribution Accounts as of the end of each Plan Year shall be determined by
allocating Employer contributions and Forfeitures for the Plan Year to
Participants in accordance with Section
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5.3 as of the last day of the Plan Year and allocating Income among accounts
in proportion to ESOP Account balances and Matching Contribution Accounts as
of the beginning of the Plan Year (with appropriate adjustments for
distributions to Participants occurring during the Plan Year). Under the
"general allocation method" the number of shares allocated to a Participant's
ESOP Account and Matching Contribution Accounts may vary from Plan Year to
Plan Year depending on factors such as the number of Participants, the number
of shares held by the Trust and Forfeitures. The number of shares held in a
Participant's ESOP Account and Matching Contribution Accounts typically will
decrease during each Plan Year in which the number of Participants increases
and the Trust does not acquire additional Qualifying Employer Securities.
5.11 SEGREGATION OF CERTAIN EMPLOYER CONTRIBUTION
ACCOUNTS. Notwithstanding anything in the Plan to the contrary, if a
Participant is excluded from further participation in accordance with
Section 3.5 of the Plan, the investments of the Employer Contribution Accounts
of such Participant shall be segregated from the other assets of the Trust in a
separate account. Such account shall not be allocated any Employer
contributions or Forfeitures derived from Employer contributions made for the
Plan Year such exclusion from participation commences and each Plan Year
thereafter. Notwithstanding anything in this Section 5.11 to the contrary, a
Participant's segregated Employer Contribution Account shall continue to share
in allocations of Income of the Trust attributable solely to such segregated
account. No Qualifying Employer Securities purchased by the Trust in a
transaction in which the seller makes a nonrecognition of gain election under
Section 1042 of the Internal Revenue Code (or any dividends or other income
attributable thereto) may be transferred or allocated to such segregated account
under any
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circumstances during the ten year period following the purchase by the trust
of such Qualifying Employer Securities.
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VI. BENEFITS
6.1 RETIREMENT OR DISABILITY. If a Participant's employment with the
Employer is terminated at or after he attains his Normal Retirement Age, or, if
a Participant attains his Normal Retirement Age before incurring a Forfeiture in
accordance with Section 4.3 of the Plan, or if his employment is terminated at
an earlier age because of Disability, his Vested Percentage shall be 100 percent
and he is entitled to receive the entire amount then in each of his accounts in
accordance with Section 6.4 and Paragraph E of Section 6.5 (including the
Employer's contributions on his behalf made after retirement or Disability, if
any). Notwithstanding the above, amounts held in the Participant's Vested
Rollover Account which are otherwise subject to the forms of distribution set
forth in Paragraphs A and B of Section 6.5, shall be distributed in accordance
with the requirements of Paragraphs A and B of Section 6.5 unless a proper
election to receive such amount in accordance with Paragraph E of Section 6.5 is
made by the Participant (with spousal consent if required).
6.2 DEATH. In the event that the termination of employment of a
Participant is caused by his death, his Vested Percentage shall be 100 percent
and the entire amount then in each of his accounts shall be paid to his estate
(or spouse to the extent benefits are required to be paid as a Qualified
Pre-retirement Survivor Annuity) in accordance with Section 6.4 and Paragraph E
of Section 6.5 after receipt by the Committee of acceptable proof of death
(including the Employer's contributions on his behalf made after his death, if
any).
Notwithstanding the above, amounts held in the Participant's Vested
Rollover Account which are otherwise subject to the forms of distribution set
forth in Paragraphs A
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and B of Section 6.5, shall be distributed in accordance with the
requirements of Paragraphs A and B of Section 6.5 unless a proper election to
receive such amount in accordance with Paragraph E of Section 6.5 is made by
the Participant (with spousal consent if required).
6.3 TERMINATION FOR OTHER REASONS. If a Participant's employment with
the Employer is terminated before his Normal Retirement Age for any reason other
than Disability or death, the Participant is entitled to an amount equal to his
Salary Reduction Contribution Account and the Vested Percentage of his Employer
Contribution Account balances including the Participant's SelectBenefit Daily
Valuation Account (including the Employer's contributions on his behalf made
after his termination, if any) plus his Vested Rollover Account in accordance
with Section 6.4 and Paragraph E of Section 6.5. Notwithstanding the above,
amounts held in the Participant's Vested Rollover Account which are otherwise
subject to the forms of distribution set forth in Paragraphs A and B of Section
6.5, shall be distributed in accordance with the requirements of Paragraphs A
and B of Section 6.5 unless a proper election to receive such amount in
accordance with Paragraph E of Section 6.5 is made by the Participant (with
spousal consent if required).
6.4 COMMITTEE DISCRETION. The Committee, in its discretion, subject
to Sections 6.5, 6.6, 6.8, 6.11 and 6.12, shall determine when payment of a
Participant's benefit is to commence, and, except for benefits required under
Section 6.5 to be paid in the form of a Qualified Joint and Survivor Annuity or
Qualified Pre-retirement Survivor Annuity, the method by which his benefits are
to be paid, and direct the Trustee accordingly. The Committee shall follow the
written instructions of a Participant, or if applicable, a Participant's spouse
with a community property interest in the Participant's
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Plan benefits, if any, as to the method by which his benefits (or community
property interest), if any, payable in a form other than a Qualified
Pre-retirement Survivor Annuity will be paid to the Beneficiary of such
benefits after his death. Subject to limitations on the Committee's
discretion contained in Article VI, the Committee reserves the power to amend
or change its previous determination as to the method of payment. The
Committee thus, in its discretion, may accelerate the payment of installment
benefits under Section 6.5, Paragraph E, in such amounts as it, from time to
time, may deem advisable. The Committee may also allow a Participant who has
attained his Normal Retirement Age but still in active employment to begin
receiving his Salary Reduction Contribution Account and ESOP Account balance
as long as such discretion is exercised in a nondiscriminatory manner.
6.5 PAYMENT OF BENEFITS. Except as provided in Sections 6.1, 6.2, 6.3
and Paragraph M of this Section, benefits shall be distributed as follows:
A. A Participant entitled to benefits for reasons other than
death under the Plan shall receive his benefit in the form of a Qualified Joint
and Survivor Annuity, unless:
(1) He is single, widowed or divorced; or
(2) He has not been married throughout the one year
period prior to the earlier of the participant's Annuity Starting Date or the
date of the Participant's death; or
(3) The Participant's nonforfeitable account balance(s)
is $3,500 or less as of the date of distribution, but only if paid in full prior
to the Participant's Annuity Starting Date; or
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(4) The Participant elects to waive the Qualified Joint
and Survivor Annuity form of benefit pursuant to a Qualified Election during the
Applicable Election Period.
B. Benefits paid on account of a Participant's death prior to
the commencement of his benefits shall be paid in the form of a Qualified
Pre-retirement Survivor Annuity within a reasonable time after the Participant's
death upon the direction of the surviving spouse unless:
(1) The Participant was single, widowed or divorced; or
(2) The Participant was not married throughout the one
year period prior to the earlier of the Participant's Annuity Starting Date or
the date of the Participant's death; or
(3) The Participant elected to waive the Qualified
Pre-retirement Survivor Annuity form of benefit pursuant to a Qualified Election
during the Applicable Election Period;
(4) The Participant's spouse elects in writing to waive
a Qualified Pre-retirement Survivor Annuity in favor of a form of benefit
provided under Paragraph E of this Section 6.5;
(5) The Participant's nonforfeitable account balance(s)
is $3,500 or less as of the date of distribution; or
(6) The Participant did not complete an Hour of Service
after August 22, 1984 nor is eligible to elect a Qualified Pre-retirement
Survivor Annuity.
C. For purposes of Paragraphs A and B of this Section 6.5, if
a Participant marries within one year before his Annuity Starting Date and the
Participant and
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the Participant's spouse in such marriage have been married for at least a
one year period ending on or before the date of the Participant's death, such
Participant and such spouse shall be treated as having been married
throughout the one year period ending on the Participant's Annuity Starting
Date.
D. The benefits of a Participant who is not eligible for a
Qualified Joint and Survivor Annuity under Subparagraphs (1) or (2) of Paragraph
A of Section 6.5 shall automatically be paid in the form of a Life Annuity
unless (1) the Participant elects to waive the Life Annuity form of benefit
pursuant to a Qualified Election during the Applicable Election Period or (2)
the conditions of Subparagraph (3) of Paragraph A of Section 6.5 are met.
E. The Committee may, after consulting with the Participant
(or Beneficiary) as to the preferred method of payment (which shall not be
binding upon the Committee), direct the Trustee to distribute the benefits of a
Participant who has waived a Life Annuity, a Qualified Joint and Survivor
Annuity or Qualified Pre-retirement Survivor Annuity or who is not eligible for
such annuities under Sections 6.1, 6.2, 6.3 and Paragraphs A, B and D of this
Section 6.5 in any one or more of the methods set forth in subparagraphs (1)
through (2) below. The payment methods are as follows:
(1) A lump sum;
(2) Periodic payments of substantially equal amounts for
a specified period, subject to the limits of Section 6.8, in which event the
Committee shall direct the Trustee to (a) deposit the unpaid balance in an
interest-bearing savings account or accounts, in one or more banks (including
the Trustee, if applicable), trust companies, or savings and loan associations,
or (b) place the unpaid balance in a segregated account
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to be invested in such manner as the Committee deems appropriate. Income
from such account(s) shall be payable to the Participant annually, in a lump
sum, or a combination thereof at the discretion of the Committee. Periodic
payments must be at least annually (they may be paid at more frequent
intervals than annually).
F. The Committee may not, subject to Sections 6.6 and 6.8,
distribute benefits to any Participant or the surviving spouse of the
Participant whose nonforfeitable account balance is or at any time was more than
$3,500 (determined as provided in Paragraph A(3) of this Section 6.5) without
the consent of both the Participant and if applicable, the Participant's spouse
or surviving spouse. Further, the Plan shall not permit an immediate
distribution of a Participant's nonforfeitable account balance until the later
of the Participant having attained age 62 or Normal Retirement Age under the
Plan, except with the consent of the Participant, and if applicable, the
Participant's spouse or surviving spouse.
G. The Committee shall provide each Participant with a Vested
Rollover Account which is subject to the distribution requirements of Paragraphs
A or D of Section 6.5, within a reasonable period prior to the commencement of
his benefits, a written explanation of: (1) the terms and conditions of a Life
Annuity or a Qualified Joint and Survivor Annuity (whichever is applicable);
(2) the Participant's right to make and the effect of an election to waive the
Life Annuity or Qualified Joint and Survivor Annuity form of benefit; (3) the
rights of a Participant's spouse; and (4) the right to make and the effect of a
revocation of the Life Annuity or Qualified Joint and Survivor Annuity.
Effective for the first Plan Year beginning on or after
December 12, 1994, and notwithstanding any provision of the Plan to the
contrary, to the extent any
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optional form of benefit under the Plan permits a distribution prior to the
Employee's retirement, death, disability, or severance from employment, and
prior to Plan termination, the optional form of benefit is not available with
respect to benefits attributable to assets (including the post-transfer
earnings thereon) and liabilities that are transferred, within the meaning of
Section 414(l) of the Internal Revenue Code, to the Plan from a money
purchase pension plan qualified under Section 401(a) of the Internal Revenue
Code (other than any portion of those assets and liabilities attributable to
voluntary employee contributions).
H. A former spouse of a Participant will be treated as a
spouse or surviving spouse of a Participant to the extent required under a
Qualified Domestic Relations Order.
I. The Committee shall provide each recipient receiving
payment of a benefit under the Plan with an officially approved notice supplied
by the Secretary of the Treasury which specifies certain information regarding
the federal income tax treatment of certain Plan benefits.
J. The Committee shall provide each Participant with a Vested
Rollover Account which is subject to the distribution requirements of Paragraphs
A or D of Section 6.5, within the period beginning with the first day of the
Plan Year in which the participant attains age 32 and ending with the close of
the Plan Year preceding the Plan Year in which the Participant attains age 35, a
written explanation of: (1) the terms and conditions of a Qualified
Pre-retirement Survivor Annuity; (2) the Participant's right to make and the
effect of an election to waive the Qualified Pre-retirement Survivor Annuity
form of benefit; (3) the rights of a Participant's spouse; and (4) the right
to make and the effect
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of a revocation of a previous election to waive the Qualified Pre-retirement
Survivor Annuity. The above notice must be provided within one year from the
date a Participant separates from service if such separation from service
occurs prior to attaining age 32. In the event the Participant becomes a
Participant after attaining age 32 the above notice must be provided by the
end of the three-year period commencing with the first day of the Plan Year
Participation begins.
K. Benefits payable from a Participant's Employer Contribution
Account(s) under either Sections 6.1, 6.2 or 6.3 may, in the discretion of the
Committee, be distributed in the form of cash or in Qualifying Employer
Securities; provided, however, that, subject to Section 6.13, a Participant
shall have the right to demand that his benefits be distributed in the form of
Qualifying Employer Securities. If the Employer Securities are not readily
tradeable on an established market, a Participant shall have the right to
require that the Employer repurchase Employer Securities under a fair valuation
formula.
L. If there is more than one class of Qualifying Employer
Securities acquired with the proceeds of a loan exempted from the excise tax
imposed under Section 4975(a) of the Internal Revenue Code by Section 4975(d)(3)
of the Internal Revenue Code available for distribution to Participants, each
Participant receiving a distribution of Qualifying Employer Securities from the
Plan must receive substantially the same proportion of each such class, unless
he elects otherwise.
M. This Paragraph provides special rules which may apply to
the Plan if the following two conditions are met: (1) the Participant cannot or
does not elect payments in the form of a life annuity, and (2) on the death of
the Participant, the Participant's vested account balance(s) will be paid to the
Participant's surviving spouse, but if there is no
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surviving spouse or, if the surviving spouse has already consented in a
manner conforming to a Qualified Election, then to a Participant's designated
Beneficiary. This Paragraph shall not apply with respect to the Participant
if it is determined the Plan is a direct or indirect transferee of a defined
benefit plan, money purchase pension plan (including a target benefit plan),
stock bonus, or profit sharing plan which would otherwise provide for a life
annuity form of payment to the participant. If the conditions of the
preceding sentences of this Paragraph are met, Paragraphs A, B and D of this
Section are inapplicable to that portion of the Participant's account
balances to which the requirements of Section 409(h) of the Internal Revenue
Code apply, and a Participant's or Beneficiary's benefits, subject to the
requirements of Section 409(h) of the internal Revenue Code, will be paid in
accordance with Paragraph E of this Section 6.5.
6.6 COMMENCEMENT OF BENEFITS. Unless the Participant elects a later
commencement date, payment of benefits under the Plan due to a Participant must
commence within 60 days after the Plan Year in which the LAST OF the following
occur:
A. The date on which the Participant attains his Normal
Retirement Age;
B. The Participant terminates his service with the Employer;
or
C. The 10th anniversary of the date the Participant commenced
participation in the Plan.
Notwithstanding the above, the distribution of the portion of the
Participant's Employer Stock Account attributable to Qualifying Employer
Securities purchased after 1986 shall commence no later than one (1) year
following the Plan Year in which the Participant terminates employment due to
death, disability or attainment of his Normal Retirement Age and no later than
five (5) years following the Plan Year in which the
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Participant terminates employment for any other reason (except that this
provision shall not apply if the Participant is re-employed by the Employer
before distribution is required to begin under this provision). For purposes
of this paragraph, the Employer Stock Account attributable to Qualifying
Employer Securities purchased after 1986 shall not include any Qualifying
Employer Securities acquired with the proceeds of a loan described in Section
404(a)(9) of the Code until the close of the Plan Year in which such loan is
repaid in full. The portion of the Participant's Employer Stock Account
subject to the requirements of this paragraph shall be distributed subject to
one of the following modes of distribution selected by the Committee (after
considering the available liquid assets of the Employer and Trust):
(1) A lump sum;
(2) Substantially equal annual installments over a period not
exceeding five (5) years (provided that the period over which installments may
be distributed shall be extended an additional year (up to an additional five
years) for each $100,000 or fraction thereof by which the Participant's Employer
Stock Account subject to this paragraph exceeds $500,000; or
(3) Any combination of the above.
6.7 ELECTION TO POSTPONE BENEFITS. Any election to defer benefits
beyond the applicable date under Section 6.6 must be written, describe the
desired method of payment, and designate the date on which payment shall
commence. Notwithstanding the above, a Participant's election to defer
commencement of benefits must comply with Section 6.8 (unless Section 6.12
applies). An election to defer benefits also may not create a death benefit for
his Beneficiary that is more than incidental to the Plan's primary purpose of
distributing accumulated funds to the Participant. This later requirement is
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deemed satisfied if more than 50 percent of the Participant's Employer funded
benefits are expected to be paid to him during his life expectancy.
6.8 LIMIT ON DEFERRAL OF BENEFITS. All distributions required under
this Article VI shall be determined and made in accordance with the proposed
regulations under Section 401(a)(9) of the Internal Revenue Code, including the
minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of
the Proposed Regulations. The following limits apply to the periods for which
benefits may be deferred under Section 6.7 and the maximum period for periodic
payments under Section 6.5; unless Section 6.12 applies:
A. For distributions commencing during a Participant's
lifetime, the Participant's entire interest in the Plan (his Employer
Contribution Account plus other accounts, if any) must be totally distributed,
or commence to be distributed, not later than the "required beginning date."
Benefit payments other than lump sum distributions which commence on or before
such required beginning date must be distributed, in accordance with regulations
issued by the Secretary of the Treasury, over a period not exceeding the longer
of (1) the life expectancy of the Participant or (2) the life expectancy of the
Participant and a "designated beneficiary." The payment period must, however,
be intended to distribute more than 50 percent of the Participant's benefits to
him during a period equal to his life expectancy.
B. The "required beginning date" means April 1 of the calendar
year following the calendar year in which the Participant attains age 70 1/2.
The term "designated beneficiary," for purposes of this Section 6.8, means any
individual designated as a Beneficiary by the Participant.
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C. The life expectancy of a Participant and his spouse (other
than in the case of a life annuity, if applicable) may be re-determined not more
frequently than annually.
D. For distributions occurring after the death of the
Participant, the entire interest of the Participant (or the remaining interest
if distribution already commenced) must be distributed within 5 years after the
death of the Participant (or the death of his surviving spouse). The preceding
sentence shall be inapplicable if distribution of the Participant's benefit
commenced prior to his death and periodic payments were being made to the
Participant (and subsequently to his Beneficiary) over a period allowed under
Paragraph A of this Section 6.8. The first sentence of this Paragraph D shall
also be inapplicable if (1) any portion of the Participant's interest is payable
to (or for the benefit of) a "designated beneficiary," (2) such portion will be
distributed (in accordance with regulations) over the life of such designated
beneficiary (or over a period not extending beyond the life expectancy of such
designated beneficiary), and (3) such distributions begin not later than 1 year
after the date of the Participant's death or such later date as the Secretary of
the Treasury by regulations prescribes. If the designated beneficiary referred
to in the preceding sentence is the surviving spouse of the Participant, the
date on which the distributions are required to begin under clause (3) of such
sentence shall not be earlier than the date on which the Participant would have
attained age 70 1/2 and if the surviving spouse dies before the distributions to
such spouse begin, this sentence shall be applied as if the surviving spouse
were the Participant.
E. Under regulations prescribed by the Secretary of the
Treasury, for purposes of this Section 6.8, any amount paid to a child shall be
treated as if it had been
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paid to the surviving spouse if such amount will become payable to the
surviving spouse upon such child reaching majority (or other designated event
permitted under regulations).
F. For distributions occurring after the death of the
Participant, the entire interest of the Participant (or the remaining interest
if distribution already commenced) must be distributed by December 31 of the
calendar year containing the fifth anniversary of the death of the Participant
(or the death of his surviving spouse). The preceding sentence shall be
inapplicable if distribution of the Participant's benefit commenced prior to his
death and periodic payments were being made to the Participant (and subsequently
to his Beneficiary) over a period allowed under Paragraph A of this Section 6.8.
In such case the remaining portion of the Participant's benefits must be
distributed at least as rapidly as under the method of distribution being used
prior to the Participant's death. The first sentence of this Paragraph F shall
also be inapplicable if (1) any portion of the Participant's interest is payable
to (or for the benefit of) a "designated beneficiary," (2) such portion will be
distributed (in accordance with regulations) over the life of such designated
beneficiary (or over a period not extending beyond the life expectancy of such
designated beneficiary), and (3) such distributions begin not later than
December 31 of the calendar year immediately following the calendar year in
which the Participant died. If the designated beneficiary referred to in the
preceding sentence is the surviving spouse of the Participant, the date on which
the distributions are required to begin under clause (3) of such sentence shall
not be earlier than the later of December 31 of the calendar year immediately
following the calendar year in which the Participant died or December 31 of the
calendar year immediately following the calendar year in which the Participant
would have attained age 70 1/2 and if the surviving spouse dies before the
distributions to such
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spouse begin, this sentence shall be applied as if the surviving spouse were
the Participant. If the Participant has not made an election pursuant to
this Section by the time of his or her death, the Participant's designated
beneficiary must elect the method of distribution no later than the earlier
of (1) December 31 of the calendar year in which distributions would be
required to begin under this Section, or (2) December 31 of the calendar year
which contains the fifth anniversary of the date of death of the Participant.
If the Participant has no designated beneficiary, or if the designated
beneficiary does not elect a method of distribution, distribution of the
Participant's entire interest must be completed by December 31 of the
calendar year containing the fifth anniversary of the Participant's death.
6.9 VALUE OF BENEFIT. Benefits distributed in a form other than cash
(i.e., Qualifying Employer Securities) must be equivalent in value to a cash
distribution.
6.10 DESIGNATION OF BENEFICIARIES.
A. Each Participant, subject to Section 6.11 shall have the
right at any time to give written instructions to the Committee designating
primary and contingent Beneficiaries to receive any benefit provided by the Plan
or changing a Beneficiary designation. The Participant may also give written
instructions as to the method of payment of benefits to his Beneficiary (such
instructions will be followed to the extent Sections 6.5, 6.6 and 6.8 are not
violated).
Upon receipt of such written instructions from the Participant,
the Committee shall take steps necessary to effectuate such designation or
change of Beneficiary. A Participant's Beneficiary designation shall not be
effective over the Participant's spouse's
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community property interest in the Plan unless the Participant's spouse
consents or consented to such designation.
B. Notwithstanding the foregoing, a Participant's Beneficiary
must be his surviving spouse unless the spouse consents in writing to the
selection of another person as Beneficiary. The consent must acknowledge the
effect of such election and be witnessed by a Plan representative or a notary
public. The Participant may designate a person other than his spouse as
Beneficiary without such written consent only if he establishes to the
satisfaction of a Plan representative that the consent may not be obtained
because there is no spouse, the spouse cannot be located or such other
circumstances as the Secretary of the Treasury may prescribe.
C. If any Participant does not designate a Beneficiary, or if
a designated Beneficiary or all designated Beneficiaries predecease the
Participant, the Participant's Beneficiary shall be his spouse. If the
Participant leaves no surviving spouse, the Committee is empowered to designate
a Beneficiary or Beneficiaries on his behalf to whom payment pursuant to Section
6.2 will be made in the event of the Participant's death; provided, however,
that such designation by the Committee may only be made from among the
following: the (1) any inter vivos or testamentary trusts of which the children
of the Participant are beneficiaries; (2) children; (3) parents; (4) brothers
and sisters; (5) grandchildren; (6) nephews and nieces; and (7) the
Participant's estate.
D. Failure to complete and file a Beneficiary designation does
not prevent an Employee from being a Participant.
E. A Participant may, subject to Paragraph B above and Section
6.11, designate separate Beneficiaries for his community property interest in
the Plan and his
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spouse's community property interest in the Plan. A designation affecting
the Participant's spouse's community property which was consented to by such
spouse becomes irrevocable upon the spouse's death (the converse is that it
is not irrevocable if the spouse did not consent and thus is subject to
disposition under State law). A Participant may, subject to his spouse(s)'
community property interest, designate separate Beneficiaries for each of the
components of his benefit such as (1) ESOP Account, (2) Salary Reduction
Contribution Accounts, (3) Matching Contribution Accounts and (4) Vested
Rollover Accounts.
F. The Committee is instructed to comply with the provisions
of State law governing community property interests of a Participant's spouse(s)
in the event (1) the spouse(s) has not designated a separate Beneficiary under
Section 6.11, (2) a designation by the Participant under Paragraphs A or E above
was not consented to by the spouse, or (3) the Participant designated no
Beneficiary.
6.11 SPOUSES COMMUNITY PROPERTY INTEREST. A Participant's spouse shall
have the right to designate a separate Beneficiary or Beneficiaries for the
portion of the Participant's benefit which is the spouse's community property
interest in the Plan. The spouse may also give written instructions as to the
method of payment of such interest to his or her Beneficiary. The Committee
must follow the Beneficiary designation and the method designated for payment in
the following situations:
A. Distributions following the Participant's death;
B. Distributions of benefits to the Participant after the
death of the spouse;
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C. Distributions to the Participant after a divorce or
separation of the Participant and such spouse to the extent such distribution
does not cause the Plan to violate the other provisions of this Article
governing Plan distributions or cause the Plan to violate the provisions of
the Internal Revenue Code. If a Participant's spouse designates no separate
Beneficiary for his or her community property interest the Committee shall
follow the provisions of Section 6.10. All designations by a spouse are
irrevocable upon the death of the spouse to the extent they do not cause the
Plan to violate the Internal Revenue Code.
6.12 GRANDFATHERED PAYMENT METHODS. The requirements of Section 6.8
do not apply to a distribution to a Participant or his Beneficiary under a
method which does not meet the requirements of Section 6.8 but which would
not have disqualified the Plan under the provisions of Section 401(a)(9) in
effect prior to the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"), so long as such distribution is made in accordance with a written
designation made prior to January 1, 1984. All such designations must comply
with regulations issued by the Secretary of the Treasury on the content, form
and timing of such designations. The Committee must follow the method of
distribution designated by a Participant under this Section to the extent
such distribution method does not cause the Plan to violate the provisions of
the Internal Revenue Code and does not distribute the community property
interests of the Participant's spouse in violation of such spouse's community
property rights under State law.
6.13 FORM OF BENEFIT IN CIRCUMSTANCE OF EMPLOYEE STOCK RESTRICTION.
Notwithstanding Section 12.4 and Paragraph E of Section 6.5, if the
Employer's Articles of Incorporation or By-Laws restrict the ownership of
"substantially all"
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(as defined in Treasury regulations issued pursuant to Section 409(h) of the
Internal Revenue Code) Qualifying Employer Securities to Employees or the
Plan, a Participant shall not have the right to demand that his benefits be
distributed in the form of Qualifying Employer Securities. A Participant or
his Beneficiary shall receive his benefits in the form of cash if the
foregoing restrictions apply and the Employer's Articles of Incorporation
contained such restriction on the date the Plan was adopted.
6.14 DIVERSIFICATION OF EMPLOYER STOCK ACCOUNT. A Participant who
has attained age 55 and completed at least ten (10) years of participation in
the Plan shall be notified of his right to elect to withdraw a portion of his
Employer Stock Accounts attributable to Qualifying Employer Securities
purchased by the Trust after 1986. An election to withdraw must be made on
the prescribed form and be filed with the Committee within the 90-day period
immediately following the close of a Plan Year in the Election Period. For
purposes of this Section 6.14, the "Election Period" means the period of six
consecutive Plan Years beginning with the Plan Year in which the Participant
first becomes eligible to make a withdrawal.
For each of the first five Plan Years in the Election Period,
the Participant may elect to withdraw an amount which does not exceed 25
percent of his Employer Stock Accounts attributable to Qualifying Employer
Securities purchased by the Trust after 1986, less all amounts previously
withdrawn under this Section 6.14. In the case of the last Plan Year in the
Election Period, the Participant may elect to withdraw an amount which does
not exceed 50 percent of his Employer Stock Accounts attributable to
Qualifying Employer Securities purchased by the Trust after 1986, less all
amounts previously withdrawn. Any withdrawal under this Section 6.14 shall
be distributed within 90 days after the 90-day
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period in which the election may be made. A withdrawal shall be treated as a
distribution which is subject to the applicable provisions of Article VI.
6.15 DISABILITY BENEFITS. Notwithstanding any other provisions in
the Plan, if a Participant terminates employment and in the opinion of one
(1) or more qualifying physicians selected by the Committee (1) is blind or
(2) has incurred a permanent loss or loss of use (either full or partial) of
a member or function of his body, or the permanent disfigurement of his body,
he shall receive a Disability benefit in one of the distribution methods
under Section 6.5. Such Participant shall be considered to have incurred a
"Disability" under the Plan. The Committee shall compute the value of the
Disability benefit solely with reference to the nature of the Participant's
injury and without regard to the period the participant is absent from work.
Disability benefits shall be computed by the Committee according to the
schedule of payments which shall be established by the Committee and updated
on a periodic basis.
Notwithstanding anything else in this Plan to the contrary, the amount
of a Participant's Disability distribution shall not exceed his account
balance(s) as of the date of distribution.
6.16 WITHDRAWALS. Subject to the requirements of Section 6.14, a
Participant shall not be permitted to withdraw amounts in his ESOP Account.
Such account(s) will be distributed in accordance with Section 6.4. A
Participant who has either attained age 59 1/2 or is able to demonstrate
financial hardship may elect to withdraw from his Salary Reduction
Contribution Account, if any, up to an amount equal to the amount of
contributions allocated to said account (unadjusted for earnings). A
withdrawal prior to the date the Participant attains age 59 1/2 will require
the consent of the Committee.
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Such consent shall be given only if, under uniform rules and regulations, the
Committee determines that the purpose of the withdrawal is on account of one
of the following or any other items permitted by the Internal Revenue Service:
A. Medical expenses described in Code Section 213(d)
incurred by, or necessary to obtain medical care for, the Participant, his
spouse, or any of his dependents (as defined in Code Section 152);
B. The purchase (excluding mortgage payments) of a
principal residence for the Participant;
C. Payment of tuition and related educational fees for the
next 12 months of post-secondary education for the Participant, his spouse,
children, or dependents; or
D. The need to prevent the eviction of the Participant from
his principal residence or foreclosure on the mortgage of the Participant's
principal residence.
6.17 WITHDRAWAL CONDITIONS. No distribution shall be made pursuant
to Section 6.16 unless the Committee, based upon the Participant's
representation and such other facts as are known to the Committee, determines
that all of the following conditions are satisfied:
A. The distribution is not in excess of the amount of the
immediate and heavy financial need of the Participant. The amount of the
immediate and heavy financial need may include any amounts necessary to pay
any federal, state or local income taxes or penalties reasonably anticipated
to result from the distribution;
B. The Participant has obtained all distributions, other
than hardship distributions, and all nontaxable loans currently available
under all plans maintained by the Employer;
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C. The Plan, and all other plans maintained by the
Employer, provide that the Participant's elective deferrals and voluntary
Employee contributions will be suspended for at least twelve (12) months
after receipt of the hardship distribution; and
D. The Plan, and all other plans maintained by the
Employer, provide that the Participant may not make elective deferrals for
the Participant's taxable year immediately following the taxable year of the
hardship distribution in excess of the applicable limit under Code Section
402(g) for such next taxable year less the amount of such Participant's
elective deferrals for the taxable year of the hardship distribution.
Any distribution elections made pursuant to this Section shall
be made by the Participant on written forms supplied by the Committee and
made in a manner which is consistent with and satisfies the provisions of
Section 6.5, including, but not limited to, all notice and consent
requirements of Code Sections 411(a)(11) and 417 and the Regulations
thereunder.
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VII. TRUST
7.1 CONTRIBUTIONS FOR EXCLUSIVE BENEFIT OF PARTICIPANTS. All
contributions under the Plan shall be paid to the Trustee and deposited in
the Trust. All assets of the Trust, including investment income, shall be
retained for the exclusive benefit of Participants, Former Participants, and
Beneficiaries and shall be used to pay benefits to such persons or to pay
administrative expenses of the Plan and Trust to the extent not paid by the
Employer and shall not revert to or inure to the benefit of the Employer.
7.2 INVESTMENT OF TRUST IN QUALIFYING EMPLOYER SECURITIES.
A. As is more particularly described in the Plan, the
Trustee, as directed by the Committee, may invest any portion of the Trust
other than Vested Rollover Accounts and Salary Reduction Contribution
Accounts in Qualifying Employer Securities. All purchases of Qualifying
Employer Securities by the Trustee shall be made only at prices which do not
exceed Fair Market Value of such Qualifying Employer Security and shall be
immediately allocated to Subtrust A. Employer Contribution Accounts
segregated in accordance with Section 5.11 of the Plan, may not invest in or
be allocated Qualifying Employer Securities obtained in a transaction in
which the seller made a nonrecognition of gain election under Section 1042 of
the Internal Revenue Code, during the ten (10) year period following the
purchase by the Trust of such Qualifying Employer Securities.
B. The Trustee may invest up to, but no more than, 50
percent of the segment of the Trust which is attributable to Vested Rollover
Accounts and Employer Contributions made for Plan Years beginning before
April 1, 1994 in Qualifying Employer Securities.
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7.3 EMPLOYER SECURITIES. The Committee rather than the Trustee,
shall be responsible for the funding policy, for overall diversification of
Trust assets, and for overall compliance of the Trust with statutory
limitations on the amount of the Trust's investment in securities or real
property of the Employer or its affiliated companies ("Employer Securities"
or "Employer Real Property").
The Committee shall not direct the investment of Trust funds in
Employer Securities unless the Committee is satisfied that the Employer
Securities are exempt from registration under the Federal Securities Act of
1933, as amended, and are exempt from qualification under the California
Corporate Securities Law of 1968, as amended, and of any other applicable
blue sky law, or in the alternative that the Employer Securities have been so
registered and/or qualified. The Committee shall also specify what
restrictive legend on transfer, if any, is required to be set forth on the
certificates for the Employer Securities and the procedures to be followed by
the Trustee to effectuate a resale of such Employer Securities. The
Committee shall not direct the investment in "Employer Securities" or
"Employer Real Property," as those terms are used in ERISA, if such
investment would be prohibited by ERISA. The Committee shall only direct the
investment of funds into Employer Securities (i) if those securities are
traded on an exchange permitting a readily ascertainable fair market value,
or (ii) if the Committee shall have obtained a current valuation by an
independent appraiser, and periodically supplies updated valuations while the
Employer Securities remain in the Trust. In determining the value of
Employer Securities on a periodic basis, the Trustee may conclusively rely on
the certified appraisal or other form of valuation submitted to it by the
Committee, the Employer or the Investment Manager, if any.
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The Trustee shall vote Employer Securities or sell pursuant to
a tender offer as directed by written instructions of the Committee, the
Independent Investment Manager with authority over those assets, if any, or
by the Participants if the Plan provides for pass through voting of Employer
Security proxies to the Participants, it being understood that the person
with investment discretion over the Trust Assets has exclusive authority and
responsibility to vote proxies unless pass through voting to Participants is
mandated by the Plan or by law. If the vote is to be passed through to the
Participants, the Committee shall provide any information requested by the
Trustee that is necessary or convenient to obtain and preserve the
confidentiality of the Participants' directions. Any conflicting
instructions shall be resolved by the Committee, who shall advise the Trustee
on the voting of Employer Securities or tendering the securities in response
to a tender offer. Proxies of Employer Securities which are un-allocated to
a Participant's account, or for which any votes are not cast, shall be voted
or tendered by the Trustee in the same manner directed by the Committee or
Investment Manager, unless the Trustee is required by law to vote the proxies
or tender the Employer Securities exercising the Trustee's discretion. The
Employer shall indemnify and hold harmless the Trustee with respect to any
action taken or refrained from with regard to voting or tendering Employer
Securities, it being expressly understood that the Trustee shall have no
discretion with respect to such action unless required by law.
The Trustee shall not be liable under the Plan or the Trust for
any investment in, retention or sale of Employer Securities or Employer Real
Property held as Trust assets, whether retention is due to instructions to
retain, or inability to sell due to any Federal or State securities law
restrictions, or the unmarketable or illiquid nature of the investment.
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The investment in, retention or sale of, valuation and all other issues with
respect to Employer Securities or Employer Real Property shall be the sole
responsibility of the Committee.
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VIII. ADMINISTRATION
8.1 ALLOCATION OF RESPONSIBILITY AMONG FIDUCIARIES FOR PLAN AND
TRUST ADMINISTRATION. Responsibility shall be allocated among Fiduciaries as
follows:
A. The Fiduciaries shall have only those specific powers,
duties, responsibilities and obligations as are specifically given them under
the Plan.
B. In general, the Employer shall have the sole
responsibility for making the contributions provided for under Section 4.1,
and shall have the sole authority to appoint and remove the Trustee, members
of the Committee and any Investment Manager which may be appointed to manage
the Trust, and to amend or terminate, in whole or in part, the Plan.
C. The Committee shall have the sole responsibility for the
administration of the Plan, which responsibility is specifically described in
the Plan.
D. The Trustee shall have the sole responsibility for the
administration of the Trust assets (subject to the provisions of Section 7.3,
13.6 and the Participant direction pursuant to 13.6A), held under the Trust,
all as specifically provided in the Plan.
E. The Committee warrants that any directions given,
information furnished, or action taken by it shall be in accordance with the
provisions of the Plan, as the case may be, authorizing or providing for such
direction, information or action. The Trustee will administer the Trust in
conformance with the Plan and Trust agreement, and as directed by the
Employer or Committee.
F. Furthermore, each Fiduciary may rely upon any such
direction, information or action of another Fiduciary as being proper under
the Plan and need not inquire into the propriety of any such direction,
information or action.
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G. It is intended under the Plan that each Fiduciary shall
be responsible for the proper exercise of its own powers, duties,
responsibilities and obligations under the Plan and, unless otherwise
provided by the Plan, shall not be responsible for the acts or omissions of
any other Fiduciary or person except as provided by Section 405(a) of ERISA.
H. No Fiduciary guarantees the Trust in any manner against
investment loss or depreciation in asset value.
8.2 APPOINTMENT OF COMMITTEE. The Plan shall be administered by a
Committee consisting of one or more persons who shall be appointed by and
serve at the pleasure of the Board of Directors of the Employer. All usual
and reasonable expenses of the Committee will be paid in whole by the
Employer. Any members of the Committee who are Employees shall not receive
compensation with respect to their services for the Committee.
8.3 RECORDS AND REPORTS. The Committee shall exercise such
authority and responsibility as it deems appropriate in order to comply with
ERISA and governmental regulations issued thereunder relating to records of
Participant's service, account balances and the percentage of such account
balances which are nonforfeitable under the Plan; notifications to
Participants; annual registration with the Internal Revenue Service; and
annual reports to the Department of Labor.
8.4 OTHER COMMITTEE POWERS AND DUTIES. The Committee shall have
such duties and powers as may be necessary to discharge its duties hereunder,
including, but not by way of limitation, the following:
A. To construe and interpret the Plan, decide all questions
of eligibility and determine the amount, manner and time of payment of any
benefits hereunder;
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B. To prescribe procedures to be followed by Participants
or Beneficiaries filing applications for benefits;
C. To prepare and distribute, in such manner as the
Committee determines to be appropriate, information explaining the Plan;
D. To receive from the Employer and from Participants such
information as shall be necessary for the proper administration of the Plan;
E. To furnish the Employer, upon request, such annual
reports with respect to the administration of the Plan as are reasonable and
appropriate;
F. To receive, review and keep on file (as it deems
convenient or proper) reports of the financial condition, and of the receipts
and disbursements, of the Trust from the Trustee; and,
G. To appoint or employ individuals to assist in the
administration of the Plan and any other agents it deems advisable, including
legal and actuarial counsel.
8.5 LIMITATION ON COMMITTEE POWERS AND DUTIES. The Committee shall
have no power to add to, subtract from or modify any of the terms of the
Plan, or to change or add to any benefits provided by the Plan, or to waive
or fail to apply any requirements of eligibility for a benefit under the Plan.
8.6 RULES AND DECISIONS. The Committee may adopt such rules and
actuarial tables it deems necessary, desirable, or appropriate. All rules
and decisions of the Committee shall be uniformly and consistently applied to
all Participants in similar circumstances. When making a determination or
calculation, the Committee shall be entitled to rely upon information
furnished by a Participant, Beneficiary, the Employer, the legal counsel of
the Employer, or the Trustee.
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8.7 COMMITTEE PROCEDURES. The Committee may act at a meeting or in
writing without a meeting. The Committee shall elect one of its members as
chairman, appoint a secretary, who may or may not be a Committee member, and
advise the Trustee of such actions in writing. The secretary shall keep a
record of all meetings and forward all necessary communications to the
Employer or the Trustee. The Committee may adopt such by-laws and
regulations as it deems desirable for the conduct of its affairs. All
decisions of the Committee shall be made by the vote of the majority
including actions in writing taken without a meeting. A dissenting Committee
member who, within a reasonable time after he has knowledge of any action or
failure to act by the majority, registers his dissent in writing delivered to
the other Committee members, the Employer and the Trustee, shall not be
responsible for any such action or failure to act.
8.8 AUTHORIZATION OF BENEFIT PAYMENTS:
A. The Committee shall issue directions to the Trustee
concerning all benefits which are to be paid from the Trust pursuant to the
provisions of the Plan, and warrants that all such directions are in
accordance with the Plan.
B. The Trustee shall not be liable to any person with
respect to any distribution or discontinuance of distributions by it which is
directed by the Committee.
C. The Trustee shall have no duty to make inquiry as to
whether any distributions or discontinuance of distributions directed by the
Committee is made in accordance with the provisions of the Plan.
D. The Trustee shall not be required to determine or make
inquiry to determine the identity or mailing address of any person entitled
to benefits under the Plan.
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E. The Trustee shall not be responsible for the adequacy of
the Trust to meet and discharge any and all payments and liabilities under the
Plan.
8.9 FACILITY OF PAYMENT. Whenever, in the Committee's opinion, a
person entitled to receive any payment of a benefit or installment thereof
hereunder is under a legal disability or is incapacitated in any way so as to be
unable to manage his financial affairs, the Committee may direct the Trustee to
make payments to such person or to his legal representative. Any payment of a
benefit or installment thereof in accordance with the provisions of this Section
shall be a complete discharge of any liability for the making of such payment
under the provisions of the Plan.
8.10 RESPONSIBILITY OF ENFORCEMENT OF EMPLOYER CONTRIBUTIONS. The
Trustee shall be responsible only for money or assets actually received by it.
The Trustee shall have no duty to compute amounts to be paid to it by the
Employer or to enforce collection of any contribution due from the Employer.
8.11 CLAIMS PROCEDURE. If a Participant in the Plan or his Beneficiary
(hereinafter referred to as the "Claimant," which term includes the authorized
representative, if any, of such Participant or Beneficiary) does not receive the
benefits which he believes he is entitled to receive under the Plan, the
Claimant may file a claim for benefits in the manner set forth below.
A. CLAIM FOR BENEFITS. All claims for benefits under the
Plan shall be made in writing and shall be signed by the Claimant. Claims
shall be submitted to the Committee. Each claim shall be granted or denied
by the Committee within 90 days after receipt of the claim, unless the
Committee requires additional time because of special circumstances to
consider the claim. If additional time is required, the Committee shall
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notify the Claimant in writing before the expiration of 90 days from the
receipt of the claim and shall indicate the reason additional time is needed
and the date by which the Claimant may expect a decision with respect to his
claim. In no event shall the time for reaching a decision with respect to a
claim be extended beyond 180 days after receipt of the claim.
In the event the Committee denies a claim for benefits in
whole or in part, the Committee shall notify the Claimant in writing. Such
notice shall set forth, in a manner calculated to be understood by the Claimant,
the specific reasons for the denial, the specific Plan provisions on which the
denial is based, a description of any additional material or information
necessary to perfect the claim, with an explanation of why such material or
information is necessary, and an explanation of the Plan's claim review
procedure.
If no action is taken by the Committee on a claim within 90
days after its receipt, or, if the period for considering the claim has been
extended, within 180 days after receipt of the claim, the claim shall be deemed
to be denied for purposes of the following review procedure.
B. REVIEW PROCEDURE. If a claim is denied in whole or in
part, the Claimant may request the Committee to review its decision. This
request must be made in writing within 60 days after the claim has been denied
and must set forth all of the grounds upon which the request is based, any facts
in support of the request and any issues or comments which the Claimant
considers relevant to the review. In preparing his request for review, a
Claimant shall be entitled to review any documents which the Committee agrees
are pertinent to his claim, at the office of the Committee or the Employer
during regular business hours.
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The Committee shall act upon each request for review within
60 days after receipt of the request, unless additional time is required because
of special circumstances to process the review. If additional time is required,
the Committee shall notify the Claimant before the expiration of 60 days from
the receipt of the request for review. A decision shall then be delivered by
the Committee as soon as possible but not later than 120 days after the request
for review is received by the Committee.
The Committee shall make an independent determination
concerning the claim for benefits under the Plan and shall give written notice
of its decision to the Claimant. This notice shall set forth, in a manner
calculated to be understood by the Claimant, the specific reasons for the
decision and shall make specific reference to the pertinent Plan provisions on
which the decision was based. The decision of the Committee on any claim shall
be final except as otherwise provided by law.
If the Committee fails to reach a decision within 60 days
after receipt of the request for review, or, if the period for processing the
review has been extended within 120 days after receipt of the request, the claim
shall be deemed denied on review.
8.12 VOTING OF QUALIFYING EMPLOYER SECURITIES: The Committee shall
direct the Trustee as to the manner in which voting rights of Qualifying
Employer Securities are to be exercised, except that if more than 10 percent of
the assets of the Trust are invested in Qualifying Employer Securities each
Participant and beneficiary shall be entitled to direct the Trustee as to the
exercise of voting rights on Qualifying Employer Securities allocated to his
Employer Stock Account with respect to a corporate action which involves the
voting of such shares with respect to the approval or disapproval of any
corporate merger, consolidation, recapitalization, reclassification,
liquidation, dissolution, sale of substantially
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all assets of a trade or business or a similar transaction specified in
regulations under Section 409(e)(3) of the Code. In that event, any
allocated Qualifying Employer Securities with respect to which voting
directions are not given shall not be voted, and shares of Qualifying
Employer Securities held by the Trust which are not then allocated to
Participant's Employer Stock Accounts shall be voted in the manner determined
by the Committee. Notwithstanding anything else in this Section 8.12 or the
Plan to the contrary, the Committee shall vote proxies of Employer Securities
as the investment manager of those assets, unless pursuant to the Plan the
vote is to be passed through to participants, in which case the vote shall be
passed through to participants. If the Employer has a registration-type
class of securities, each Participant or beneficiary in the Plan is entitled
to direct the Plan as to the manner in which securities of the Employer which
are entitled to vote and which are allocated to the account of such
Participant or beneficiary are to be voted.
8.13 PROCEDURES UPON RECEIPT OF DOMESTIC RELATIONS ORDER. In case
the Plan receives a domestic relations order, the Committee shall promptly
notify the Participant and any other alternate payee of the receipt of such
order and the Plan's procedures for determining the qualified status of
domestic relations orders, and, within a reasonable period after receipt of
such order, the Committee shall determine whether such order is a Qualified
Domestic Relations Order and notify the Participant and each alternate payee
of such determination. The Committee shall establish reasonable procedures
(which need not be part of the Plan) to determine the qualified status of
domestic relations orders and to administer distributions under such
qualified orders. The term "alternate payee" for Sections 8.13 and 8.14
means any spouse, former spouse, child or other dependent of a
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Participant who is recognized by a domestic relations order as having a right
to receive all or a portion of the Participant's benefits payable under the
Plan.
8.14 PROCEDURES FOR PERIOD DURING WHICH QUALIFIED DOMESTIC RELATIONS
ORDER DETERMINATION IS BEING MADE. During any period in which the issue of
whether a domestic relations order is a Qualified Domestic Relations Order is
being determined (by the Committee, by a court of competent jurisdiction, or
otherwise), the Committee shall segregate in a separate account in the Plan
or in an escrow account the amounts which would have been payable to the
alternate payee during such period if the order had been determined to be a
Qualified Domestic Relations Order. If within 18 months the order (or
modification thereof) is determined to be a Qualified Domestic Relations
Order, the Committee shall pay the segregated amounts (plus any interest
thereon) to the person or persons entitled thereto. If within 18 months it
is determined that the order is not a Qualified Domestic Relations Order, or
the issue as to whether such order is a Qualified Domestic Relations Order is
not resolved, the Committee shall pay the segregated amounts (plus any
interest thereon) to the person or persons who would have been entitled to
such amounts if there had been no order. Any determination that an order is a
Qualified Domestic Relations Order which is made after the close of the
18-month period shall be applied prospectively only.
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IX. MISCELLANEOUS
9.1 NON-GUARANTEE OF EMPLOYMENT. Nothing contained in the Plan shall
be construed as a contract of employment between the Employer and any Employee,
or as a right of any Employee to be continued in the employment of the Employer,
or as a limitation of the right of the Employer to discharge any of its
Employees, with or without cause.
9.2 RIGHTS TO TRUST ASSETS. No Employee or Beneficiary shall have
any right to, or interest in, any assets of the Trust upon termination of his
employment or otherwise, except as provided from time to time under the Plan,
and then only to the extent of the benefits payable under the Plan to such
Employee out of the assets of the Trust. All payments of benefits as
provided for in the Plan shall be made solely out of the assets of the Trust
and none of the Fiduciaries shall be liable therefor in any manner.
9.3 EXERCISE OF DISCRETION. Any discretion exercisable by the
Employer, Committee, or Trustee under the Plan shall be exercised in a
non-discriminatory manner as between Participants.
9.4 ALIENATION. Except as provided in Sections 9.5, 9.6 and 9.7, the
benefits, rights, or privileges, payments, proceeds, claims or other interests
of any Participant or his Beneficiaries under the Plan shall not be transferable
nor subject to assignment, alienation, commutation, anticipation, or encumbrance
by such Participant or his Beneficiaries, nor, to the extent allowed by law,
will such interests be subject to debts, contracts or engagements of such
Participant or his Beneficiaries.
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9.5 LIMITED ALIENATION FOR PARTICIPANTS IN PAY STATUS. Notwithstanding
Section 9.4, a Participant who is receiving benefits under the Plan may assign
or alienate the right to future payments; provided, however, that:
A. Such assignment or alienation is voluntary and revocable;
B. Such assignment or alienation does not, with respect to a
particular benefit payment, exceed 10 percent of such payment; and
C. The assignment or alienation is not for the purpose, nor
has the effect, of defraying plan administration costs.
9.6 ASSIGNMENT OF INTERESTS TO SECURE LOANS TO PARTICIPANTS OR
BENEFICIARIES. Section 9.4 shall not apply to any Participant's or
Beneficiary's assignment of all or part of his interest in the Plan to the
Trustee for the purpose of securing a loan from the Plan to such Participant
or Beneficiary.
9.7 SPECIAL RULES FOR DOMESTIC RELATIONS ORDER. Section 9.4 shall
apply to the creation, assignment, or recognition of a right to any benefit
payable with respect to a Participant under a domestic relations order except
that Section 9.4 shall not apply if the order is determined to be a Qualified
Domestic Relations Order.
9.8 RESTRICTIONS UNDER STATE LAW. If the law of the State whose law
governs the validity of the Trust restrict its duration or provide that
interests under the Trust must be completely vested within a designated period,
the Trust shall not last longer than the period permitted by such law.
9.9 AGENT FOR SERVICE OF PROCESS. The Committee is hereby designated
as agent for service of process for all disputes arising from the Plan.
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9.10 LIMITATION ON PUT, CALL OR OTHER OPTIONS, ETC. Except as
provided in Articles VI, XIV and XV, or as otherwise required by applicable
law, no Qualifying Employer Securities acquired by the Trust with proceeds of
a loan exempted from the excise tax imposed under Section 4975(a) of the
Internal Revenue Code by Section 4975(d)(3) of the Internal Revenue Code may
be subject to a put, call or other option or buy-sell or similar arrangement
while held or distributed by the Trust, nor shall any of the rights and
protections set forth in Paragraph K of Section 6.5 or Article XIV of the
Plan be terminable whether or not the Plan is then an Employee Stock
Ownership Plan, as defined in Section 4975(e)(7) of the Internal Revenue
Code, or whether or not such exempted loan is repaid.
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X. AMENDMENTS AND ACTION BY EMPLOYER
10.1 AMENDMENTS. The Employer reserves the right to make from time to
time any amendment or amendments to the Plan which do not cause any part of the
Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of Participants, Former Participants or their Beneficiaries, provided,
however, that the Employer may make any amendment it determines necessary or
desirable, with or without retroactive effect, to comply with ERISA. The
Employer may not amend the Plan in any manner to reduce Participants' account
balances or eliminate an optional form of distribution of benefits. Any
amendment affecting the responsibilities of the Trustee shall only be effective
upon the Trustee's written acceptance.
10.2 AMENDMENT TO VESTING SCHEDULE. If any amendment changes the
vesting schedule, any Participant with 3 or more Years of Service may, by filing
a written request thereto with the Employer, during the "election period," elect
to have his Vested Percentage computed under the vesting schedule in effect
prior to the amendment. The "election period" begins on the date the amendment
was adopted and ends on the later of 60 days after the later of:
A. The day the amendment is adopted;
B. The day the amendment becomes effective; or
C. The day the Participant is issued written notice of the
amendment by the Employer or the Committee.
10.3 ACTION BY EMPLOYER. Any action by the Employer under the Plan may
be by resolution of its Board of Directors, or by any person or persons duly
authorized by resolution of said Board to take such action.
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XI. SUCCESSOR EMPLOYER AND MERGER OR CONSOLIDATION OF PLANS
11.1 SUCCESSOR EMPLOYER. In the event of the dissolution, merger,
consolidation or reorganization of the Employer, provision may be made by which
the Plan will be continued by the successor; and, in that event, such successor
shall be substituted for the Employer under the Plan. The substitution of the
successor shall constitute an assumption of Plan liabilities by the successor
and the successor shall have all of the powers, duties and responsibilities of
the Employer under the Plan.
11.2 PLAN ASSETS. In the event of any merger or consolidation of the
Plan with, or transfer in whole or in part of the assets and liabilities of the
Trust to another trust fund held under any other plan of deferred compensation
maintained or to be established for the benefit of all or some of the
Participants of the Plan, the assets of the Trust applicable to such
Participants shall be transferred to the other trust fund only if:
A. Each Participant would (if either the Plan or the other
plan then terminated) receive a benefit immediately after the merger,
consolidation or transfer which is equal to or greater than the benefit he would
have been entitled to receive immediately before the merger, consolidation or
transfer (if the Plan had then terminated);
B. Resolutions of the Board of Directors of the Employer under
the Plan, or of any new or successor Employer of the affected Participants,
shall authorize such transfer of assets; and in the case of the new or successor
Employer of the affected Participants, its resolutions shall include an
assumption of liabilities with respect to such Participants' inclusion in the
new Employer's plan; and,
C. Such other plan and trust are qualified under Sections
401(a) and 501(a), respectively, of the Internal Revenue Code.
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XII. PLAN TERMINATION
12.1 RIGHT TO TERMINATE. In accordance with the procedures set forth
in this Article, the Employer may terminate the Plan at any time. In the event
of the dissolution, merger, consolidation or reorganization of the Employer, the
Plan shall terminate and the Trust shall be liquidated unless the Plan is
continued by a successor to the Employer in accordance with Section 11.1.
12.2 PARTIAL TERMINATION. Upon termination of the Plan, with
respect to a group of Participants which constitutes a partial termination of
the Plan, the Trustee shall, in accordance with the directions of the
Committee, allocate and segregate for the benefit of the Employees then or
theretofore employed by the Employer with respect to which the Plan is being
terminated the proportionate interest of such Participants in the Trust. The
funds so allocated and segregated shall be used by the Trustee to pay
benefits to or on behalf of the Participants in accordance with Section 12.3.
12.3 DISTRIBUTION OF THE TRUST. Upon termination or partial
termination of the Plan or in the event of a complete discontinuance of
contributions to the Plan by the Employer, the accounts of all Participants
affected thereby shall become fully vested. The Committee may, in its
discretion:
A. Direct the Trustee to distribute the benefits of affected
Participants remaining in the Trust, after payment of any expenses properly
chargeable thereto, to such Participants, Former Participants and Beneficiaries
in proportion to their respective account balances;
B. Direct the Trustee to distribute the benefits of affected
Participants to any other qualified plan which accepts rollover contributions;
or
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C. Subject to Section 12.1, continue the Trust and pay
benefits when due in accordance with the Plan.
Notwithstanding the foregoing, Salary Reduction Accounts may
not be distributed or transferred under Paragraphs A or B above unless the
Participant is over age 59 1/2, has separated from service, died, incurred a
disability, the Plan has been terminated without establishment of a successor
plan, the Participant is entitled to a distribution for hardship under
Section 6.16 of the Plan, or the Employer has sold substantially all its
assets and the Participant continues employment with the corporation
acquiring such assets.
12.4 MANNER OF DISTRIBUTION. Any distributions from Employer
Contribution Accounts after termination of the Plan may be made in whole or in
part, in Qualifying Employer Securities or in cash, as the Committee (in its
discretion) may determine, provided, however, that subject to Section 6.13, a
Participant shall have the right to demand that his benefits be distributed in
the form of Qualifying Employer Securities. All non-cash distributions shall be
valued at Fair Market Value at the date of distribution.
12.5 LIMITATION ON PERMITTED REVERSIONS. Except as otherwise provided
herein, the assets of the Plan shall not inure to the benefit of the Employer
and shall be held for the exclusive purposes of providing benefits to
Participants and Beneficiaries and defraying reasonable expenses of
administering the Plan. Notwithstanding the foregoing sentence:
A. If a contribution is made by the Employer under a mistake
of fact, such contribution may be returned, at the discretion of the Employer,
within one year after payment of such contribution.
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B. All contributions to the Plan are conditioned on
qualification of the Plan under Section 401 of the Internal Revenue Code. In
the event that the Commissioner of Internal Revenue determines that the Plan
is not initially qualified under the Internal Revenue Code, any contribution
made incident to that initial qualification by the Employer must be returned
to the Employer within one year after the date the initial qualification is
denied, but only if the application for the qualification is made by the time
prescribed by law for filing the Employer's return for the taxable year in
which the Plan is adopted, or such date as the Secretary of the Treasury may
prescribe.
C. All contributions to the Plan are conditioned upon the
deductibility thereof, for Federal income tax purposes, under Section 404 of the
Internal Revenue Code. If and to the extent that such deduction is disallowed,
the Employer's contribution (to the extent disallowed) may be returned, at the
discretion of the Employer, within one year after the disallowance of the
deduction.
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XIII. TRUST AND TRUSTEE
13. TRUST AND TRUSTEE.
13.1 RIGHTS, POWER, PRIVILEGES, AND DUTIES OF TRUSTEE: In the
investment and reinvestment of the Trust, the Trustee, subject to the provisions
of this Article and Section 7.3, 13.6, and 13.6A of the Plan, shall be vested
with all rights, powers and privileges as could be exercised lawfully by any
person owning similar property in his own right.
A. To sell and exchange any and all assets from time to time
comprising the Trust;
B. To the extent available, and subject to the provisions of
Articles VII and XX, funds may be invested by the Trustee by purchasing
Qualifying Employer Securities in the open market. These purchases may also be
made from the Employer or an affiliate of the Employer if it shall have made
shares available for this purpose, in which event the purchase price shall be
the market value, as it shall be determined by the Committee, on the last
trading date next preceding the purchase from the Employer or an affiliate of
the Employer. Brokerage commissions, transfer taxes and other charges and
expenses in connection with the purchase of stock shall be added to its cost;
C. To invest and re-invest all or any part of the Trust,
including, but not limited to, mortgage pools, common funds, savings accounts of
savings and loan associations and banks (including the Trustee, if applicable),
mutual funds, common stocks, bonds, notes, securities, or obligations of any
kind, real property wherever situated and such other property and investments as
the Committee directs; and to reserve from investment and keep unproductive of
income any part of the Trust which from time to time
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the Committee deems advisable. Upon the direction of the Committee the
Trustee shall have the power to invest in life insurance contracts on the
lives of key Employees or stockholders of the Employer, payable on death to
the Trust as beneficiary. Such insurance shall be vested exclusively in the
Trustee for the benefit of the Trust as a whole.
To invest in one or more mutual funds and/or commingled investment funds
maintained by or made available by the Trustee and to receive compensation from
the sponsor of such funds for services rendered, separate and apart from any
trustees fees herein. Trustee or Trustee's affiliate may also be compensated
for providing investment advisory services to any mutual funds or commingled
investment funds.
To retain all or any portion of the trust in cash temporarily awaiting
investment or for the purpose of making distributions or other payments, without
liability for interest thereon, notwithstanding Trustee's receipt of "float"
from such uninvested cash.
D. To vote by proxy and otherwise to represent securities, at
the direction of the Committee, and in that connection to delegate such of its
discretionary powers as it deems best; to consent as stockholders to any
corporate acts it deems proper; to participate in any plans or arrangements for
the protection or promotion of the interests of security holders; to pay such
sums of money as it deems expedient for the protection of its interests as
security holder; and to retain assets received in lieu of or because of any
securities held;
E. To extend the time for payment of or hold past due any
obligation held or any installment thereof; to consent to the modification
thereof or waive any defaults thereunder; to compromise, arbitrate or otherwise
adjust claims in favor of or against the Trust; to foreclose upon any security
in such manner as it deems proper; to pay such sums
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of money as it deems expedient for the insurance, protection, maintenance and
repair of property, or to redeem property for non-payment of taxes, or any
liens; and to lease for such time as the Committee directs, whether within or
beyond the termination of the Trust and without regard to any statutory
restrictions on leasing by a Trustee;
F. To cause investments to be registered in its name as
Trustee or in that of its nominee, or it may retain investments unregistered and
in form permitting transfer by delivery;
G. To consult with or employ legal counsel of its own
selection (who may, but need not be, counsel to Employer or the Trustee),
actuaries, consultants, or other expert assistants, and agents or independent
contractors (to whom it may delegate such ministerial and limited discretionary
duties as it sees fit); and
H. To borrow money for any Trust purpose from itself or
others, upon such terms and conditions as it deems proper, and to obligate the
Trust for repayment, and to encumber the Trust or any of its property, subject,
however, to any restrictions or requirements of Paragraph I, below.
I. Notwithstanding Paragraph H, above, a loan to the Trust
which is exempted from the excise tax imposed under Section 4975(a) of the
Internal Revenue Code or by Section 4975(d)(3) of the Internal Revenue Code
shall meet the following requirements:
(1) The proceeds of an exempt loan must be used within a
reasonable time after their receipt by the Plan only to (a) acquire Qualifying
Employer Securities, (b) repay such loan or (c) repay a prior exempt loan;
(2) The loan must be at a reasonable rate of interest;
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(3) The terms of the loan must, at the time the loan is
made, be at least as favorable to the Plan as the terms of a comparable loan
resulting from arm's-length negotiations between independent parties;
(4) The loan must be primarily for the benefit of
Participants and their Beneficiaries;
(5) The loan must be without recourse against the Trust;
(6) The only assets of the Trust that may be given as
collateral on the loan are Qualifying Employer Securities acquired with the
proceeds of the loan and those used as collateral on a prior exempt loan. No
person entitled to payment under the exempt loan shall have any right to assets
of the Trust other than:
(a) Collateral given for the loan;
(b) Contributions (other than contributions of
Qualifying Employer Securities) made to the Trust to meet its obligations under
the loan; and
(c) Earnings attributable to such collateral and
investment of contributions;
(7) The loan must be for a specific term;
(8) In the event of default on the loan, the value of
Trust assets transferred in satisfaction of the loan must not exceed the amount
of default. If the creditor is a disqualified person (under Section 4975(e)(2)
of the Internal Revenue Code), the loan must provide for a transfer of Trust
assets upon default only upon and to the extent of the failure of the Trust to
meet the payment schedule of the loan; and
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(9) Qualifying Employer Securities given as collateral
for the loan shall be released from encumbrance in accordance with one of the
methods allowed under Paragraph E of Section 5.3.
J. The cost of administering the Plan shall be borne by the
Employer or the Trust as agreed upon in writing by the Employer and the Trustee.
In addition, the Trustee shall be reimbursed for reasonable counsel fees
incurred in the administration of the Trust.
K. All taxes of any and all kinds whatsoever, that may be
levied or assessed under existing or future laws, upon, or in respect of, the
Trust or the income thereof, shall be paid from the Trust.
L. The Employer agrees to indemnify and save harmless the
Trustee from any liabilities and claims (including reasonable attorneys' fees
and expenses in defending against such liabilities and claims) it may incur in
the lawful performance of its duties, excepting liabilities or claims arising
out of the Trustee's willful misconduct or gross negligence.
M. The Employer also agrees to indemnify and save harmless the
Trustee from any liabilities and claims (including reasonable attorneys' fees
and expenses in defending against such liabilities and claims) against the
Trustee as a result of any breach of fiduciary responsibility by a person other
than the Trustee unless the Trustee participates knowingly in such breach,
knowingly undertakes to conceal such breach, has actual knowledge of such
breach, or, through its negligence in performing its own specific fiduciary
responsibilities, has enabled such other person to commit a breach of the
latter's fiduciary responsibilities.
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13.2 PERSONS DEALING WITH TRUSTEE. All persons dealing with the
Trustee are released from inquiring into the decisions and authorities of the
Trustee and from seeing to the application of any funds paid to the Trustee.
The Trustee shall be protected in acting upon any instruments, certificates, or
papers it believes to be genuine and shall not be liable in any event for
mistakes of judgment or for the exercise of discretion when acting in good
faith.
13.3 STATEMENT OF ACCOUNTS AND PROCEEDINGS. The Trustee shall file
with the Employer annually within sixty (60) days of the close of the Plan Year,
commencing with the first Plan Year, a statement of its account and proceedings
as Trustee during the preceding twelve (12) months period or for any other
period requested by the Committee. In the absence of any exception thereto
filed in writing with the Trustee within sixty (60) days of the filing the
Trustee's statement by any person having an interest in the Trust, such
statement shall constitute a final accounting by and discharge of the Trustee
with respect to the matters disclosed in such statement and shall be binding and
conclusive upon the Employer and all persons interested in the Trust. No
Employer or other person having an interest in the Trust shall have the right to
demand or be entitled to any further or different accounting by the Trustee.
13.4 NECESSARY PARTIES. In any application to the Courts, only the
Employer, the Committee, and the Trustee shall be necessary parties and no
Employee or other person having an interest in the Trust shall be entitled to
any notice or process. Any judgment entered in such an action or proceeding
shall be conclusive upon all persons claiming under the Plan; provided, however,
that nothing herein is intended to preclude an Employee from seeking or from
enforcing any of his legal rights.
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13.5 REMOVAL OR RESIGNATION OF THE TRUSTEE. The Trustee may be removed
by the Committee or the Employer at any time upon thirty (30) days written
notice to the Trustee. The Trustee reserves the right to resign at any time
upon thirty (30) days written notice to the Committee in the event it does not
concur with the investment policy of the Committee and may resign for any reason
upon thirty (30) days written notice to the Employer, in which event the Board
of Directors of the Employer shall be successor trustee until a successor
trustee is appointed. The Trustee shall be under no obligation to execute any
directions during such thirty (30) days notice period. At any time, the
Employer by written designation may appoint one or more additional trustees and
may appoint any successor trustee. On any removal or resignation of the Trustee
or any successor, the Trustee or successor trustee, as the case may require,
shall convey and pay over to its successor the assets then constituting the
Trust hereunder.
Notwithstanding the above, the Trustee reserves the right to
resign immediately as Trustee at any time upon written notice to the Committee,
in which event the Board of Directors of the employer shall be successor trustee
until a successor trustee is appointed. The Trustee shall be under no
obligation to execute any directions after giving such notice. At any time, the
employer by written designation may appoint one or more additional trustees.
13.6 DIRECTION OF THE ADMINISTRATION OF THE PLAN AND MANAGEMENT OF
INVESTMENT AND RE-INVESTMENT OF TRUST: The Committee shall have the sole duty
and responsibility to direct the administration of the Plan, and except as to
Subtrust B, to manage and direct the investment and re-investment of the Trust.
The Trustee shall follow the written directions of the Committee. As to
Subtrust B, the Trustee shall follow all investment directions of
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Participants as to each Participants' account, as more clearly identified in
Section 13.6A below. The Committee warrants and represents that all
directions given to Trustee shall be pursuant to resolutions regularly
adopted by the Committee in accordance with the provisions of the Plan.
Trustee may accept Committee directions without an independent duty or
responsibility for determining that the Committee has appropriate authority
to act, and may follow such Committee directions as received, and rely
thereon without liability. The Trustee shall be under no duty or
responsibility to inquire into the acts or omissions of the Committee, nor
shall the Trustee have any liability therefor. The Trustee may rely on the
certification of the membership of the Committee and of the member or person
designated by the Committee for the purpose of transmitting such decisions,
instructions, or directions. Should it be necessary to perform some act
hereunder and there is neither direction in the Plan nor direction of the
Committee on file with the Trustee, and no direction can be obtained after
reasonable inquiry, the Trustee shall have full power and discretion to act;
and in so acting or in following any direction, the Trustee shall be fully
protected and shall be absolved from all liability, except for fraud or gross
negligence. At such time as the Employer may desire, it may, by written
notice delivered to the Trustee and to the Committee, relieve the Committee
of the authority and duty to direct the investments of the Trust and may vest
such duty and responsibility in an investment manager. During such period as
the Committee shall direct the investment of the Trust and also after
relinquishing such duty and responsibility, the Committee shall not be
responsible for any losses incurred by the Trust except where willful gross
misconduct or gross negligence of the Committee may be shown.
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13.7 PARTICIPANT DIRECTION OF SUBTRUST B. If permissible under the
Plan, and subject to further limitations contained in Article XX, Participants
and/or Beneficiaries may have investment power over their accounts allocated to
Subtrust B. Participants or Beneficiaries who have that power shall give
directions to the Committee with respect to investments and changes of
investments of their respective accounts. Once the Committee has determined
that the directions are proper under the Plan, it shall promptly transmit those
directions to the Trustee. As provided under ERISA Section 404(c), the Trustee
shall not be liable for any loss, or by reason of any breach, which results from
such Participant's or Beneficiary's exercise of control. In the absence of
directions from a Participant or Beneficiary, the Committee shall direct the
investment of Subtrust B accounts. The Trustee shall have no duty or
responsibility to review or make recommendations regarding investments made at
the direction of the Committee.
13.8 LIMITATIONS ON THE TRUSTEE'S OBLIGATIONS. Notwithstanding any
other provisions contained in the Plan to the contrary, the Trustee shall have
no obligation to determine the existence of any conversion, redemption,
exchange, subscription or other right relating to any securities purchased of
which notice was given prior to the purchase of such securities and shall have
no obligation to exercise any such right unless the Trustee is advised in
writing by the Committee both of the existence of the right and the desired
exercise thereof within a reasonable time prior to the expiration of the right
to exercise.
13.9 PURCHASE OF SECURITIES OF FOREIGN GOVERNMENT, AGENCY OR
CORPORATION. Notwithstanding any other provisions contained in the Plan, in the
event that the Trustee is directed to purchase securities issued by any foreign
government or agency
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thereof, or by any corporation domiciled outside of the continental limits of
the United States or its territories, it shall be the responsibility of the
Committee to advise the Trustee in writing with respect to any laws or
regulations of any such foreign countries which shall apply, in any manner
whatsoever, to the security, including but not limited to, receipt of
dividends or interest by the Trustee from such securities; and the Employer
does hereby agree to forever hold the Trustee harmless and indemnify the
Trustee against any losses which may occur with respect to the Trust which
are occasioned by the failure to give such written notification to the
Trustee.
13.10 RESPONSIBILITY TO PAY BENEFITS: The Trustee shall be under no
duty or responsibility to pay retirement, Disability, or death benefits provided
by the Plan unless upon written direction of the Committee.
13.11 INVESTMENTS IN POOLED FUND. Notwithstanding any other provision
of the Plan, all or any part of the assets may be invested in any collective
investment trust established by the Trustee or others which then provides for
the pooling of the assets of plans described in Section 401(a) of the Internal
Revenue Code of 1986 and exempt from taxation under Section 501(a) of the
Internal Revenue Code of 1986 (whether or not such collective investment trust
provides for the pooling of assets of other tax-exempt trusts) provided that
such collective investment trust is exempt from tax under the Internal Revenue
Code of 1986 or regulations or rulings issued by the Internal Revenue Service.
The provisions of the document governing any such investment therein shall be
considered a part of the Plan.
13.12 FEES AND EXPENSES FROM THE TRUST: The Employer, or at its option,
the Trust, shall quarterly pay the Trustee its expenses in administering the
Trust and reasonable
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compensation for its services as Trustee at a rate to be agreed upon by the
parties to this agreement, based upon the Trustee's published fee schedule in
effect from time to time. However, the trustee reserves the right to alter
this rate of compensation at any time by providing the employer with notice
of such change at least thirty (30) days prior to its effective date.
Reasonable compensation shall include compensation for any extraordinary
services or computations required, such as determination of valuation of
assets (except Employer Securities or Insurance Policies) when current market
values are not published and interest on funds to cover overdrafts. The
trustee shall have a lien on the trust for compensation and for any
reasonable expenses including reasonable counsel, appraisal or accounting
fees, and these may be withdrawn from the Trust unless paid by the Employer
within thirty (30) days after mailing of the written billing by the Trustee.
13.13 TRUSTEE RELIANCE ON LEGAL COUNSEL. The Trustee may secure and act
upon the advice of legal counsel and shall be relieved of all responsibilities
for anything done or not done on the advice of such counsel.
13.14 VALUATION OF TRUST ASSETS.
A. Notwithstanding any other provisions of this Article, and
consistent with paragraph N(2) of Section 2.1, if the Trustee shall determine
that the Trust consists in whole or in part of property not traded freely on a
recognized market, or that information necessary to ascertain the Fair Market
Value thereof is not readily available to the Trustee, the Trustee may request
the Committee to require an appraisal to be made by an independent appraiser
satisfactory to the Committee and the Trustee. The value placed upon such
property by the appraiser engaged by the Committee shall be conclusive and
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binding on all parties with an interest herein, provided, however, that the
Committee shall provide all valuations of Employer Securities by an independent
appraiser.
B. If the Committee shall fail or refuse to engage an
independent appraiser within a reasonable time after receipt of the Trustee's
request to do so, the Trustee may engage a competent appraiser to fix the fair
market value of such property for all purposes hereunder. The determination of
any such appraiser as to the fair market value of such property shall be
conclusive on all interested parties and the Trustee shall have no liability in
connection therewith.
C. The reasonable fees and expenses incurred for any such
appraisal shall be paid by the Trustee out of the Trust, or at the option of the
Employer, by the Employer.
13.15 ARBITRATION CLAUSE: If a dispute arises out of or relates to the
Trust portions of this Agreement, or the performance or breach thereof, the
parties agree first to try in good faith to settle the dispute by mediation
under the Commercial Mediation Rules of the American Arbitration Association.
Thereafter, any remaining unresolved controversy or claim arising out of or
relating to the Trust portion of this Agreement, or the performance or breach
thereof, shall be decided by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and Title 9
of California Code of Civil Procedure Sections 1280 et seq. The sole arbitrator
shall be a retired or former Judge or other qualified panelist associated with
the American Arbitration Association, preferably with ERISA related experience.
Judgment upon any award rendered by the arbitrator shall be final and may be
entered in any court having jurisdiction. Each party shall bear its own costs,
attorney's fees and its share of arbitration fees.
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XIV. OPTION TO PARTICIPANTS AND BENEFICIARIES WHO HOLD CERTAIN QUALIFYING
EMPLOYER SECURITIES
14.1 OPTION TO PARTICIPANTS AND BENEFICIARIES. A Participant or
Beneficiary who has been distributed Qualifying Employer Securities shall
have an option, subject to any restrictions set forth in this Article, to
have the Employer purchase such Qualifying Employer Securities, whether or
not the Plan continues to be an Employee Stock Ownership Plan, as defined in
Section 4975(e)(7) of the Internal Revenue Code, and whether or not any loans
to acquire such Qualifying Employer Securities which were exempted from the
excise tax imposed under Section 4975(a) of the Internal Revenue Code by
Section 4975(d)(3) of the Internal Revenue Code are repaid, if:
A. The Qualifying Employer Security is not publicly traded
when distributed. A Qualifying Employer Security is publicly traded if it is
listed on a national securities exchange registered under Section 6 of the
Securities Exchange Act of 1934, or is quoted on a system sponsored by a
national securities association registered under Section 15A(b) of the
Securities Exchange Act of 1934; or
B. The Qualifying Employer Security is subject to a trading
limitation when distributed. A trading limitation is a restriction under any
Federal or state securities law, any regulation thereunder, or an agreement
affecting the security which would make the security not as freely tradable
as one not subject to such restriction.
14.2 PURCHASE BY TRUSTEE OF QUALIFYING EMPLOYER SECURITIES HELD BY
PARTICIPANTS AND BENEFICIARIES: The Trustee, upon direction of the
Committee, shall assume the rights and obligations of the Employer to
purchase Qualifying Employer Securities tendered to the Employer under the
put option described in this Article.
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14.3 EFFECT OF FEDERAL OR STATE LAW. If at a time the put option is
exercised, Federal or state law will be violated by the Employer honoring the
put option described in Section 14.1, such Qualifying Employer Securities may
be put to a third party, designated by the Employer, that has substantial net
worth at the time the loan is made and whose net worth is expected to remain
substantial.
14.4 DURATION OF OPTION. The put option described in Section 14.1
shall be exercisable only during the 60 day period which begins on the date
the Qualifying Employer Securities are distributed to the Participant or
Beneficiary and during an additional 60 day period beginning after the new
determination of Fair Market Value (and notice to the Participant thereof) in
the following Plan Year; (in no event shall such periods overlap so as to
afford less than a 120 days total option period - the second 60 day option
period shall, if applicable, be extended to allow a full 120-day option
period) provided, however, that if a Participant or Beneficiary is unable to
exercise the put option due to applicable Federal or state law during such
periods, the put option may be exercisable during the 60 day period beginning
on the date such Federal or state law restrictions become inapplicable.
14.5 SPECIAL RULE ON DURATION OF OPTION. In the event a Qualifying
Employer Security is publicly traded without restriction when distributed,
but ceases to be so traded before the expiration of either of the option
periods set forth in Section 14.4, the Employer must notify each Participant
and Beneficiary holding Qualifying Employer Securities on or before the 10th
day after the date the securities cease to be publicly traded that the
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Qualifying Employer Securities are subject to a put option during such
periods. The number of days between such 10th day and the date when notice
is actually given, if later, must be added to the duration of the put option
period during which notice was due if the Participant or Beneficiary could
have exercised the put option during one of the option periods if notice had
been given within such 10-day period.
14.6 PROCEDURE FOR EXERCISING OPTION. The option described in
Section 14.1 shall be exercised in the following manner:
A. The Participant or Beneficiary shall give written notice
to the Employer stating his name, the number (and types) of Qualifying
Employer Securities he desires to sell;
B. The Employer shall promptly notify the Committee and the
Trustee of the proposed sale;
C. Within ten days of notifying the Employer the Participant
or Beneficiary shall deliver such Qualifying Employer Securities, duly
assigned in blank, to the Employer. Upon receipt of notice from the
Employer, the Committee shall determine, in its sole discretion, whether it
will exercise the option described in Section 14.2. The Committee will
advise the Participant or Beneficiary and the Employer in writing whether it
will direct the Trustee to purchase such Qualifying Employer Securities at
their Fair Market Value as of the most recent valuation to date of receipt of
the notice of exercise of the option (but in no event shall such appraisal be
dated more than six months prior to the date of exercise of the option). A
copy of such advice shall be immediately delivered to the Trustee.
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D. If the Committee decides not to direct the Trustee to
purchase the Qualifying Employer Securities, the Employer must purchase such
Qualifying Employer Securities at their Fair Market Value as of the most
recent valuation of the securities to the date of receipt of the written
notice of the Participant's intent to exercise the option.
14.7 PAYMENT OF PURCHASE PRICE. Payment shall be made in the sole
discretion of the purchaser of the Qualifying Employer Securities by one of
the following methods:
A. In a lump sum;
B. In periodic payments of substantially equal amounts,
beginning within 30 days after the put option is exercised, for a specified
number of years not in excess of 5, with a reasonable interest rate and
adequate security provided for any credit extended. Such periodic payments
shall be made not less frequently than annually; or
C. In any combination of the above.
14.8 RIGHTS UPON EXERCISE OF OPTION. No Participant or Beneficiary
who has exercised his option shall be entitled to receive any dividends or
have any voting rights with regard to the Qualifying Employer Securities
referred to in his notice of exercise.
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XV. RIGHT OF FIRST REFUSAL
15.1 RIGHT OF FIRST REFUSAL. A Participant or Beneficiary desiring
to sell any or all of the Qualifying Employer Securities distributed to such
Participant or Beneficiary from the Plan must give the Employer and the
Trustee an option to acquire such Qualifying Employer Securities in
accordance with this Article.
15.2 LIMITATION ON RIGHT OF FIRST REFUSAL. Notwithstanding Section
15.1, the right of first refusal described in this Article shall not be
exercised if the affected Qualifying Employer Securities are publicly traded
at the time the right of first refusal could otherwise be exercised. A
Qualifying Employer Security is publicly traded if it is listed on a national
securities exchange registered under Section 6 of the Securities Exchange Act
of 1934 or is quoted on a system sponsored by a national securities
association registered under Section 15A(b) of the Securities Exchange Act of
1934.
15.3 WRITTEN NOTICE TO EMPLOYER, TRUSTEE AND COMMITTEE OF OFFER TO
PURCHASE. A Participant or Beneficiary shall notify the Secretary of the
Employer, the Trustee and the Committee, in writing, if such Participant or
Beneficiary desires to sell, transfer, assign, hypothecate or otherwise
alienate all or any part of the Qualifying Employer Securities such
Participant or Beneficiary has been distributed from the Plan. The written
notice should describe all the terms and conditions of the proposed sale or
transfer, and the identity of the proposed purchaser or transferee.
15.4 OPTION OF EMPLOYER TO PURCHASE.
A. Upon receipt of the notice described in Section 15.3, by
the Secretary of the Employer, the Employer shall have an option to purchase
all or any part of the
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Qualifying Employer Securities described in said notice. Said option shall
lapse no later than 7 days after the Secretary of the Employer receives the
notice;
B. The Employer shall inform the selling Participant or
Beneficiary, in writing, within said 7 day option period as to the number of
Qualifying Employer Securities the Employer will purchase, if any; and
C. If the Employer fails to give written notice of its
election to purchase Qualifying Employer Securities within said 7 day period,
it shall be considered as an election by the Employer not to purchase said
securities.
15.5 OPTION OF TRUSTEE TO PURCHASE.
A. In the event the Employer does not exercise its right to
purchase all of the Qualifying Employer Securities within the option period
described in Section 15.4, for any reason whatsoever, the Trustee, on
direction of the Committee, shall have the option to purchase all of the
remaining Qualifying Employer Securities described in the notice required by
Section 15.3. Said option shall lapse no later than 14 days after the
Secretary of the Employer receives the notice required by Section 15.3;
B. The Trustee shall inform the selling Participant or
Beneficiary, in writing, within said option period, as to the number of
Qualifying Employer Securities the Trustee will purchase, if any; and
C. If the Trustee fails to give written notice of its
election to purchase Qualifying Employer Securities within said option
period, it shall be considered an election by the Trustee not to purchase
said securities.
15.6 PARTIAL PURCHASE OF SHARES. If all of the Qualifying Employer
Securities described in the notice required under Section 15.3 are not
purchased by the Employer or
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Trustee, the selling Participant or Beneficiary may rescind the entire sale
or series of sales, or he may sell or transfer any remaining unaccepted
Qualifying Employer Securities to the person designated as the proposed
purchaser or transferee in the notice required under Section 15.3 but only at
the price and terms described in the notice required under Section 15.3. If
said remaining securities are to be sold or transferred for a different price
or terms or to a person not designated as the proposed purchaser or
transferee than as described in said notice, the provisions of this right of
first refusal shall again come into full force and effect, as if such
Participant or Beneficiary were giving notice of his desire to sell,
transfer, assign, hypothecate or alienate his Qualifying Employer Securities.
15.7 PURCHASE PRICE AND OTHER TERMS. The selling price and other
terms in connection with the purchase of Qualifying Employer Securities by
the Employer or the Trustee, in accordance with this Article, shall be the
greater of:
A. The Fair Market Value of the Qualifying Employer
Securities to be purchased by the Employer or the Trustee as of the most
recent Valuation Date; or
B. The purchase price and other terms offered by the third
party making the offer described in the notice required by Section 15.3,
provided said offer is made in good faith.
15.8 LEGEND ON SECURITY. Each Qualifying Employer Security
distributed from the Plan shall be endorsed with the following:
"Any sale or transfer of this security is subject to a right
of first refusal as provided in the NOVEL EXPERIMENTAL
TECHNOLOGY 401(k) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
AGREEMENT."
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15.9 VALIDITY OF SALE. No sale or transfer of Qualifying Employer
Securities by a Participant or Beneficiary who has received such securities
from the Plan shall be valid unless such sale or transfer complies with this
Article.
15.10 BINDING ON SUCCESSORS. The right of first refusal described in
this Article shall be binding on the heirs, legatees, legal representatives,
successors and assigns of Participants or Beneficiaries.
15.11 EXECUTION OF STOCK TRANSFER RESTRICTION AGREEMENT. The
Employer and/or the Trustee may require that a Participant or Beneficiary
entitled to a distribution of Qualifying Employer Securities execute an
appropriate Stock Transfer Restriction Agreement (evidencing the right of
first refusal) prior to receiving a certificate representing Qualifying
Employer Securities.
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XVI. VESTED ROLLOVER ACCOUNTS
16.1 TRANSFER OF DISTRIBUTIONS FROM OTHER QUALIFIED EMPLOYEE BENEFIT
PLANS. An Employee eligible to participate in the Plan, regardless of
whether he has satisfied the service and/or age requirements of Section 3.1,
who, as a result of a termination of employment, disability, retirement, or
termination of the Other Plan, has had distributed to him his entire interest
in a plan which meets the requirements of Section 401(a) of the Internal
Revenue Code (the "Other Plan") may, in accordance with procedures approved
by the Committee, transfer all or a portion of the distribution received from
the Other Plan to the Trustee provided the following conditions are met:
A. The transfer occurs on or before the 60th day following
his receipt of the distribution from the Other Plan, or if such distribution
has been previously deposited in an Individual Retirement Account (as defined
in Section 408 of the Internal Revenue Code), the transfer occurs on or
before the 60th day following receipt of such distribution from the
Individual Retirement Account; and
B. The distribution from the Other Plan is a "qualified
total distribution" as defined in Section 402(a) (5)(E) of the Internal
Revenue Code.
16.2 ESTABLISHMENT OF A VESTED ROLLOVER ACCOUNT. The Committee
shall develop such procedures, and may require such information from an
Employee desiring to make such a transfer, as it deems necessary or desirable
to determine that the proposed transfer will meet the requirements of this
Article. Upon approval by the Committee the amount transferred shall be
deposited in a Vested Rollover Account. Such account is 100 percent vested
in the Employee, but does not share in the Employer's contributions.
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16.3 TRANSFER BY EMPLOYEE WHO HAS NOT MET ELIGIBILITY REQUIREMENTS.
Upon such a transfer by an Employee who is otherwise eligible to participate,
but who has not yet completed the age and/or service requirements of the
Plan, his Vested Rollover Account shall represent his sole interest in the
Plan until he becomes a Participant.
16.4 RIGHT TO WITHDRAW AMOUNTS. A Participant (or Employee), or his
Beneficiary, shall, upon written election filed with the Committee and
subject to the restrictions on methods of distribution of benefits contained
in Article VI, have the right to withdraw all or a portion of his Vested
Rollover Account.
16.5 TRANSFER DIRECTLY FROM THE OTHER PLAN. Notwithstanding anything
herein to the contrary, the Committee may accept direct transfers from the
Other Plan of all or part of an Employee's interest in such plan.
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XVII. TOP HEAVY PLANS
17.1 TOP HEAVY REQUIREMENTS. The vesting provisions, minimum
contribution provisions, maximum benefit provisions and compensation limit
provisions shall apply to the Plan for any Plan Year commencing after
December 31, 1983 in which the Plan is a "top heavy plan" (the Plan will not
be "top heavy" for purposes of this Article prior to the first Plan Year
commencing after 1983), and supersede any provisions in the other Articles of
the Plan to the extent they apply.
17.2 TOP HEAVY PLAN DEFINED. The Plan is a top heavy plan if, as of
the last day of the preceding Plan Year (or in the case of the first Plan
Year, the last day of such Plan Year) (the "determination date"), the
cumulative account balances for "key-Employees" (as defined below in Section
17.3) exceed 60 percent of the cumulative account balances for all Employees.
All defined contribution plans of the Employer (including any additional
plans required to be aggregated with the Plan under Sections 414 or 416 of
the Internal Revenue Code) shall be aggregated for purposes of this
determination. Each plan maintained by the Employer required to be included
in an "aggregation group" (as defined below) shall be treated as a top heavy
plan if such group is a "top heavy group" (as defined below). "Aggregation
group" means (1) each plan of the Employer in which a "key-Employee" (as
defined below) is a Participant and (2) each other plan of the Employer which
enables any plan described in clause (1) of this sentence to meet the
requirements of Section 401(a)(4) or 410 of the Internal Revenue Code. The
term "top heavy group" means any "aggregation group" if: (1) the sum (as of
the determination date) of (i) the present value of the cumulative accrued
benefits for key-Employees under all defined benefit plans included in such
group and (ii) the aggregate of the account balances of
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key-Employees under all defined contribution plans included in such group,
(2) exceeds 60 percent of a similar sum determined for all Employees.
Section 17.4 contains special rules on the determination of account balances
for the determination.
17.3 KEY-EMPLOYEE DEFINED. The term "key-Employee" means any
Employee or former Employee who at any time during the relevant Plan Year or
any of the 4 preceding Plan Years is:
A. An Officer of the Employer having an Annual Compensation
in excess of 50 percent of the maximum dollar limit specified under Section
415(b)(1)(A) of the Internal Revenue Code for such Plan Year. No more than
50 Employees or, if lesser, the Greater of 3 or 10 percent of Employees, may
be treated as officers under this provision (all Employers required to be
aggregated under Section 414(b), (c), (m) or (o) of the Internal Revenue Code
are aggregated in making this determination). The limit required under the
preceding sentence will be implemented by designating Employees who are
officers as "officers for key-Employee purposes" in order of their
compensation (beginning with the highest compensation level). An Employee
will generally not be considered an officer unless he is an administrative
executive in regular and continued service.
B. 1 of the 10 Employees owning the largest interests in
the Employer. Employees earning less than the maximum dollar limit specified
under Section 415(c)(1)(A) of the Internal Revenue Code may not be counted as
owners under this provision. An Employee who has some ownership interest is
(subject to the preceding sentence) considered to be one of the top 10 owners
unless at least 10 other Employees own a greater interest than such Employee.
If certain Employees own equal interests in the Employer, causing a "tie" in
the top 10 owners, the "tie" shall be broken by ranking the
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Employee(s) in order of Compensation for the relevant Plan Year. An Employee
owning a 1/2 percent interest or less in the Employer shall not be considered
a "key-Employee" for purposes of this Paragraph B;
C. 5 percent owner of the Employer; or
D. 1 percent owner of the Employer having an annual
compensation from the Employer (or other businesses required to be aggregated
with the Employer under Section 414(b), (c), (m) or (o) of the Internal
Revenue Code) of more than $150,000.
The rules of Section 318 of the Internal Revenue Code (as
modified by Section 416(i)(B) and (C) of the Internal Revenue Code) apply to
determine ownership under this Section. The rules of subsections (b), (c),
(m) and (o) of Section 414 of the Internal Revenue Code do not apply in
determining ownership in the Employer. The Beneficiary(ies) of a
"key-Employee" is/are treated as a "key-Employee."
17.4 SPECIAL RULES FOR DETERMINING ACCOUNT BALANCES. The following
special rules apply to the determination of account balances in Section 17.2:
A. Except to the extent provided in regulations under
Section 416 of the Internal Revenue Code issued by the Secretary of Treasury,
any rollover contribution initiated by a Participant and made after December
31, 1983 to the Plan is not taken into account unless the transferror plan
and the Plan are "related" (as defined in the regulations);
B. The account balance of any Participant who was a
key-Employee in prior Plan Years but no longer is a key-Employee is excluded
from the determination;
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C. Distributions to Participants made during the 5-year
period ending on the date on which the Plan's "top heavy" status is being
determined are counted in the determination;
D. The account balance of any individual who has not
rendered services to the Employer, at any time during the 5-year period
ending on the determination date shall not be taken into account in the
determination of top heavy status; and
E. The account balances will be determined as of a
"valuation date" (defined below) within the 12 month period prior to the date
a top heavy determination is made. Account balances are calculated by
reference to the Participant's account balance if he terminated employment on
the "valuation date" plus an adjustment for required Employer contributions
due as of the relevant determination date (but not actually contributed until
later), or if the Plan is not subject to the minimum funding requirements of
Section 412 of the Internal Revenue Code, the amount of the Employer's
contributions, if any, made after the "valuation date" but on or before the
relevant determination date. The "valuation date" is the last day of each
Plan Year.
17.5 VESTING REQUIREMENTS. The vesting schedule in Exhibit A must
provide a minimum Vested Percentage to Participants during any period the
Plan is "top heavy" in accordance with the following vesting schedule:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTED PERCENTAGE
---------------- -----------------
<S> <C>
2 20%
3 40%
4 60%
5 80%
6 100%
</TABLE>
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The vesting schedule in Exhibit A is invalid only to the extent it is less
favorable than the above vesting schedule. The foregoing minimum vesting
requirements do not apply to any Participant who does not complete 1 Hour of
Service after the Plan becomes "top heavy." In the event the Plan ceases to
be "top heavy," a Participant's Vested Percentage in later Plan Years may not
be less than his Vested Percentage on the last date the Plan was "top heavy."
The Participant's ability to continue having his Vested Percentage
determined under the minimum vesting schedule set forth in this Section will
be determined under Section 10.2.
17.6 MINIMUM CONTRIBUTIONS FOR NON-KEY-EMPLOYEES. The Employer must,
if the Plan is "top heavy," and subject to the last paragraph of this Section
17.6, make a minimum contribution to the Plan each Plan Year for the benefit
of each Participant who is not a "key-Employee" and who was employed by the
Employer on the last day of the Plan Year (with no minimum required Hours of
Service during the Plan Year and without regard to the level of compensation)
equal to the lesser of the following:
A. An amount equal to 3 percent of the Participant's
Compensation (as defined in Paragraph A of Section 5.3) for the Plan Year; or
B. An amount equal to the Participant's "Compensation" (as
defined in Paragraph A of Section 5.3) multiplied by the highest percentage
of "Compensation" contribution made by the Employer for the Plan Year on
behalf of a "key-Employee."
The Employer's contributions attributable to a "salary
reduction" or similar arrangement (a "salary reduction" arrangement under
Section 401(k) of the Internal Revenue Code) are taken into account in
determining the minimum contribution on behalf of "key-Employees" only.
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The Employer's contributions to another defined contribution
plan on behalf of a Participant shall be credited against the minimum
contributions for non-"key-Employees" required under this Section 17.6. For
example, if the Employer contributes an amount equal to 3 percent or more of
a Participant's Compensation to another defined contribution plan for the
relevant Plan Year, no additional contribution for that Participant is
required under this Section 17.6.
17.7 MAXIMUM BENEFIT LIMITS. The number "1.25" in Paragraphs FF and
GG of Section 2.1 is changed to "1.0" if the Plan is "top heavy" unless the
Plan meets the following additional requirements:
A. The benefits for key-Employees do not exceed 90 percent
of the Plan's total benefits. This determination is made after substituting
"90 percent" for "60 percent" in the provisions of Section 17.2; and
B. The minimum contribution for each Plan Year beginning
after 1983 is "4 percent" instead of "3 percent" (as described in Section
17.6). The Plan does not, as of the Effective Date, provide this additional
minimum contribution.
17.8 INTERPRETATION OF TOP HEAVY PLAN RULES. The provisions of this
Article are intended to be consistent with Section 416 of the Internal
Revenue Code and regulations under such section. The provisions of Section
416 and regulations shall govern in the event any inconsistency exists with
the Plan.
17.9 NON-KEY EMPLOYEE DEFINED. The term "non-key Employee" means
any Participant who is not a "key-Employee" as defined in Section 17.3 of the
Plan.
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XVIII. LIFE INSURANCE
18.1 AUTHORIZATION TO PURCHASE: The Committee may direct the Trustee
to purchase life insurance policies for the benefit of Participants to be
held exclusively in Subtrust A. Investments in ordinary life insurance
contracts shall be in accordance with a non-discriminatory formula applying
to all participants.
As provided above, the Committee may direct the Trustee in
writing to invest assets of Subtrust A in group or individual insurance
contracts of all kinds authorized under the Plan, provided such contracts are
issued by an insurance company or companies qualified to do business in more
than one state, and the Committee shall have the sole responsibility and
shall direct the Trustee with respect to such insurance. The administration
of these insurance contracts shall be the sole responsibility of the
Committee, and the Trustee shall follow the directions of the Committee with
respect to the administration of any such contracts.
18.2 LIMITATION ON AMOUNTS. The amount of life insurance held by
the Trustee on the life of any Participant shall be limited. In no event,
and at no time, may the aggregate premiums for insurance of the whole life
type exceed 49 percent of the aggregate of the Employer's contributions
allocated to a Participant's Employer Contribution Account, and in no event
may premiums for term life insurance when added to 1/2 of the whole life
premiums exceed 25 percent of such allocations.
18.3 PAYMENT OF PREMIUMS. Whenever possible, the Committee shall
arrange that all life insurance contracts have a common premium due date.
The contracts shall be issued by a legal reserve life insurance company
authorized to do business in the State of California and may or may not have
increasing cash values. The Committee shall
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normally direct the Trustee to convert the entire value, if any, of any life
insurance contract at or before retirement into cash. No portion of any such
value may be used to continue life insurance protection beyond a
Participant's actual retirement date. If insurance contracts are distributed
to the Participant, the modes of settlement under the contract shall be
limited to those provided by the Plan. The Trustee shall hold the contract
in whatever form elected until converted or distributed to the Participant.
The Trustee's distribution of any insurance contract to a Participant or his
Beneficiary shall relieve the Trustee of any and all responsibility it may
have with regard to such contract or contracts.
18.4 APPLICATION FOR POLICIES. Any such policies shall be purchased
upon application by the Trustee to the insurer, and shall be obtained at the
direction of the Committee by submitting a completed insurance application to
the Trustee for submission to the insurer. All contracts shall be issued to
the Trustee as legal owner and shall be physically delivered to the Trustee,
and dividends payable on insurance contracts shall be applied to reduce the
premiums unless the Committee elects any other dividend election allowed by
the insurer under the terms of its contract. The discontinuance of premium
payments under any insurance contract prior to maturity shall cause such
contract to be placed on a reduced paid-up basis unless an automatic premium
loan option is selected by the Committee.
18.5 INSURER RESPONSIBILITY. The insurer shall not be deemed to be
a party to the Plan for any purpose nor to be responsible for the validity of
the Plan nor shall it be responsible to see that any action of the Employer
or the Trustee is authorized by the Plan. The obligations of the insurer
shall be measured and determined solely by the terms of its contracts and of
any other written agreements entered into by the insurer with the Trustee.
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18.6 INSURER LIABILITY. The insurer shall act only upon the written
direction of the Trustee, may rely upon the signature of any Trustee and
shall be fully discharged from any and all liability for any amount paid to
the Trustee or for any change made or action taken upon such direction; and
the insurer shall not be obligated to see that any money paid by it to the
Trustee or to any other person shall be properly distributed or applied.
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XIX. AFFILIATION AGREEMENT
19.1 AFFILIATE. For the purposes hereof, an "Affiliate" shall include
any corporation which is partly or wholly under the ownership of NOVEL
EXPERIMENTAL TECHNOLOGY or is a member of a controlled group of corporations or
an affiliated service group with the Employer as defined under Section 414 of
the Internal Revenue Code.
19.2 ADOPTION OF PLAN AFFILIATE. From time to time the Employer may
advise the Trustee that an Affiliate wishes to adopt the Plan and that the
Employer has consented to such adoption. In any such case, the Employer, the
Affiliate and the Trustee shall execute a supplementary agreement hereto, which
shall evidence the acceptance by the Affiliate of the terms and provisions of
the Plan and which may also contain such other provisions as may be agreeable to
the parties thereto including variations, if any, from the Plan which may be
peculiar to the Affiliate. Upon execution of such agreement, the Affiliate
shall become and be known as a "Participating Employer."
19.3 MAINTENANCE OF SEPARATE TRUSTS. Upon the adoption of this Plan by
a Participating Employer, the Committee shall direct the Trustee to establish a
separate trust or subaccount within the Trust to which contributions by the
Participating Employer are credited and maintain the account balances of
Participants who are Employees or former Employees of the Participating
Employer. The assets for the trusts or subaccounts established for Employees of
the Employer and the Employees of each of the Participating Employers shall be
maintained separately and each shall not share in the investment gains or losses
of each other.
19.4 EMPLOYER DEEMED TO INCLUDE PARTICIPATING EMPLOYER. Subject to
Sections 19.5 through 19.10 and to the extent context allows, the term
"Employer" herein
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shall also be deemed to refer, in the alternate, to Participating Employers.
Thus, an Employee of a Participating Employer shall be deemed to be an
"Employee" for purposes of the Plan, such an Employee's service with a
Participating Employer shall be counted in determining "Hours of Service" and
"Years of Service" hereunder, and the total compensation received by a
Participant for the Plan Year from a Participating Employer, including basic
salary or wages, commissions, bonus and overtime (excluding contributions
under the Plan or any other plan) shall be considered to be "Compensation"
for purposes of the Plan.
19.5 CONTRIBUTIONS BY PARTICIPATING EMPLOYER. Contributions to the
Plan by each Participating Employer and the Employer shall be determined
independently by their respective Boards of Directors. Any such determinations
shall be made consistent with the requirements of nondiscriminatory coverage of
the Employees of a "controlled group of corporations" or "affiliated service
group" under Section 414 of the Internal Revenue Code.
19.6 ALLOCATION OF CONTRIBUTIONS. All contributions to the Plan made
by the Employer shall be allocated under Article V only to Participants who are
its Employees, and all contributions to the Plan made by each Participating
Employer shall be allocated under Article V only to Participants who are its
Employees.
19.7 ALLOCATION OF FORFEITURES. Forfeitures of Participants who are
Employees of the Employer shall not be allocated to the accounts of Participants
who are Employees of a Participating Employer and Forfeitures of Participants
who are Employees of a Participating Employer shall not be allocated to the
accounts of Participants who are Employees of the Employer or another
Participating Employer.
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19.8 ADMINISTRATION OF PLAN. The Committee shall continue to be
selected solely by the Board of Directors of the Employer. By adoption of the
Plan, each Participating Employer designates to the Committee the sole
responsibility for the administration of the Plan.
19.9 AMENDMENT OF THE PLAN. The Employer shall continue to have the
sole right to make from time to time any amendments to the Plan in accordance
with Section 10.1 hereof; provided, however, that the consent of a Participating
Employer shall be required to any amendment which affects its obligations and
rights hereunder in any material respect. The Employer may, however, make any
amendment it determines necessary to comply with ERISA without the consent of
Participating Employers.
19.10 AUTHORITY TO MAKING BINDING RULES. The Committee shall have
authority to make any and all necessary rules or regulations binding upon all
Participating Employers to effectuate the purposes of this Article.
19.11 DISCONTINUANCE OF PARTICIPATION.
Any Participating Employer shall be permitted to discontinue or revoke its
participation in the Plan. At the time of any such discontinuation or
revocation, satisfactory evidence thereof and of any applicable conditions
imposed shall be delivered to the Committee. The Trustee shall, when directed
by the Committee thereafter, transfer, deliver and assign insurance company
contracts, if any, and other Trust assets allocable to the participating
Employees of such Participating Employer either (a) to such participating
Employees, free and clear of any conditions or restrictions, (b) to such new
trustee as shall have been designated by such Participating Employer in the
event it has established a completely separate plan for its Employees, or (c)
retain such assets in the Plan to be distributed to
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such Employees in accordance with Article VI hereof. In no event shall any
part of the corpus or income of the Trust as it relates to such Participating
Employer be used for or diverted for purposes other than the exclusive
benefit of the Employees of such Participating Employer.
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XX. INVESTMENT DIRECTIONS
20.1 COMMITTEE DIRECTION OF INVESTMENTS. The Committee shall be
responsible for and has the authority to direct the investment of the following
accounts maintained under the Plan:
A. Qualifying Employer Securities Account and other assets
held in Subtrust A;
ESOP Accounts shall be primarily invested in Qualifying Employer
Securities. Up to 100 percent of ESOP Accounts (subject to Section 7.2 hereof)
and Matching Contribution Accounts may be invested in Qualifying Employer
Securities. To the extent Qualifying Employer Securities become available for
purchase, the Committee may direct the investment of Matching Contribution
Accounts and Other Investment Accounts into Qualifying Employer Securities
notwithstanding section 20.2 of the Plan. Any transfer of assets from
Subtrust B to Subtrust A to permit the Trustee to acquire Qualifying Employer
Securities shall be accomplished by a pro rata liquidation of each investment in
a Participant's SelectBenefit Daily Valuation Account, excluding salary
deferrals and rollover amounts, as directed by the Committee.
20.2 PARTICIPANT DIRECTION OF INVESTMENTS. The Participant shall have
limited discretion (as described in Section 20.3) to direct the investment of
all such Participant's accounts allocated to Subtrust B.
20.3 SCOPE OF PARTICIPANT DISCRETION. The Participant's discretion to
invest certain accounts under Section 20.2 is limited to directing the
investment of the accounts among the investment funds established by the
Committee from time to time.
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<PAGE>
20.4 COMMITTEE DIRECTION OF FUNDS. The Committee is responsible for
the selection of the investment funds established under Section 20.3. The
Participant's discretion under Section 20.3 is limited to allocating the
investment of certain accounts among the investment funds established under
Section 20.3.
20.5 WRITTEN DIRECTIONS. A Participant should periodically instruct
the Committee in writing concerning the allocation of accounts under his limited
direction between the investment funds established under Section 20.3. A change
in the allocation of the account(s) investment among the investment funds may be
made by written notice to the Committee on its prescribed form only during the
three (3) week period preceding April 1 and October 1 of each Plan Year or at
such other times as may be set by the Committee. All changes in allocation of
investment funds made shall be effective as no later than three (3) business day
following the receipt of such notice by the Trustee. The Participant shall also
have the right to designate among the investment funds to which current
contributions by the Employer allocated to Subtrust B into the SelectBenefit
Daily Valuation Account on his behalf are to be allocated. Current
contributions allocated to a Participant's SelectBenefit Daily Valuation Account
shall be allocated among the investment choices in the same proportion as his
existing account balances are allocated to such choices in the absence of
written direction to do otherwise.
20.6 ABSENCE OF DIRECTION. A Participant's SelectBenefit Daily
Valuation Account will be invested at the discretion of the Committee if the
Participant has not provided written investment direction to the Committee.
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<PAGE>
20.7 PROPORTION OF FUNDS. The Committee may, in its discretion,
specify a minimum on the percentage of the aggregate value of a Participant's
SelectBenefit Daily Valuation Account which can be invested in one of the
investment funds.
20.8 NO LIABILITY IN TRUSTEE OR COMMITTEE. The Trustee, the Committee,
the Employer and the accounts of other Participants shall not be liable for
losses incurred by a Participant relative to his choices on the allocation of
his accounts among investments. Union Bank of California, as Trustee, shall
have no liability for errors caused by Participants in utilizing a telephone
response system if written confirmations are sent to Participants and no
corrections are requested within 30 days of mailing of such written
confirmation. As directed, the Trustee is empowered and authorized to act upon
proper written directions of the Committee and Participant or any other named
fiduciary including directions given by photostatic tele-transmission using
facsimile signature.
-142-
<PAGE>
XXI. LOANS TO PARTICIPANTS
21.1 COMMITTEE DISCRETION. The Committee may establish procedures for
loans from the SelectBenefit Daily Valuation Account portion of Subtrust B to
Participants and Former Participants. A loan may not be made for less than
$1,000, nor shall the aggregate amount of loans to a Participant or Former
Participant exceed the lesser of 50 percent of the Participant's vested account
balances in Subtrust B or $50,000, except as provided in Section 21.4. All
loans are subject to the approval of the Committee. The Committee shall
thoroughly investigate each application for a loan.
21.2 TERMS AND CONDITIONS OF LOANS. In addition to such rules and
regulations as the Committee may adopt, all loans shall comply with the
following terms and conditions:
A. An application for a loan shall be made in writing to
the Committee, whose action thereon shall be final.
B. The period of repayment for any loan shall be arrived at by
mutual agreement between the Committee and the borrower. The period for
repayment may not exceed 5 years unless the loan proceeds are used to acquire
any dwelling which, within a reasonable time, is to be used as the principal
residence of the Participant. The period for repayment must in any event end
before the borrower's Normal Retirement Age.
C. Each loan shall be made against collateral being (1) the
assignment of the borrower's entire right, title and interest in and to his
accounts under Subtrust B, supported by the borrower's collateral promissory
note for the amount of the loan, including interest, payable to the order of
the Trustee.
-143-
<PAGE>
D. Each loan shall bear a reasonable rate of interest to be
fixed by the Committee and, in determining the interest rate, the Committee
shall take into consideration interest rates currently being charged.
E. Any loan made by the Plan to Participants or Former
Participants must be:
(1) available to all such Participants or Former
Participants on a reasonably equivalent basis;
(2) not made to Highly Compensated Employees, officers
or stockholders in a proportionally greater amount than the amount made
available to other Employees;
(3) made in accordance with specific provisions
regarding such loans set forth in this Article;
(4) subject to a reasonable rate of interest;
(5) adequately secured; and
(6) made only with the written consent of the
Participant's spouse no earlier than the beginning of the 90-day period that
ends on the date on which the loan is to be so secured in accordance with the
requirements for a "Qualified Election." A new consent shall be required if the
Participant's account balance is used for renegotiation, extension, renewal or
other revision of the loan.
F. Effective on or after December 12, 1994, loan repayments
will be suspended under the Plan as permitted under Section 414(u)(4) of the
Internal Revenue Code.
-144-
<PAGE>
21.3 UNPAID LOANS. No distribution shall be made to any Participant or
Former Participant or to a Beneficiary of any such Participant unless and until
all unpaid loans to him, including accrued interest thereon, have been
liquidated.
21.4 PARTICIPANT LOAN PROGRAM. Any loans granted or renewed on or
after December 31, 1989 shall be made pursuant to a Participant loan program.
Such loan program shall be established in writing and must include, but need not
be limited to, the following:
(1) the identity of the person or positions authorized to
administer the Participant loan program;
(2) a procedure for applying for loans;
(3) the basis on which loans will be approved or denied;
(4) limitations, if any, on the types and amounts of loans
offered;
(5) the procedure under the program for determining a
reasonable rate of interest;
(6) the types of collateral which may secure a Participant
loan; and
(7) the events constituting default and the steps that will be
taken to preserve Plan assets.
Such Participant loan program shall be contained in a separate written
document which, when properly executed, is hereby incorporated by reference and
made a part of the Plan. Furthermore, such Participant loan program may be
modified or amended in writing from time to time without the necessity of
amending this Section.
-145-
<PAGE>
XXII. DIRECT ROLLOVERS
22.1 This Article applies to distributions made on or after January 1,
1993. Notwithstanding any provisions of the Plan to the contrary that would
otherwise limit a distributee's election under this Article, a distributee may
elect, at the time and in the manner prescribed by the Administrative Committee,
to have any portion of an eligible rollover distribution paid directly to an
eligible retirement plan specified by the distributee in a direct rollover.
22.2 ELIGIBLE ROLLOVER DISTRIBUTION. An eligible rollover distribution
is any distribution of all or any portion of the balance to the credit of the
distributee, except that an eligible rollover distribution does not include:
any distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary, or for a
specified period of ten years or more; any distribution to the extent such
distribution is required under Section 401(a)(9) of the Code; and the portion of
any distribution that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to employer
securities).
22.3 ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an
individual retirement account described in Section 408(a) of the Code, an
individual retirement annuity described in Section 408(b) of the Code, an
annuity plan described in Section 403(a) of the Code, or a qualified trust
described in Section 401(a) of the Code, that accepts the distributee's eligible
rollover
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<PAGE>
distribution. However, in the case of an eligible rollover distribution to
the surviving spouse, an eligible retirement plan is an individual retirement
account or individual retirement annuity.
22.4 DISTRIBUTEE. A distributee includes an employee or former
employee. In addition, the employee's or former employee's surviving spouse and
the employee's or former employee's spouse or former spouse who is the alternate
payee under a qualified domestic relations order, as defined in Section 414(p)
of the Code, are distributees with regard to the interest of the spouse or
former spouse.
22.5 DIRECT ROLLOVER. A direct rollover is a payment by the plan to the
eligible retirement plan specified by the distributee.
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<PAGE>
XXIII. SECTION 401(a)(17) ADJUSTMENTS
23.1 In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the Plan to the contrary, and for
Plan Years beginning on or after January 1, 1994, the annual Compensation of
each Employee taken into account under the Plan shall not exceed the OBRA '93
annual compensation limit. The OBRA '93 annual compensation limit is $150,000,
as adjusted by the Commissioner of the Internal Revenue Service for increases in
the cost of living in accordance with Section 401(a)(17)(B) of the Internal
Revenue Code. The cost-of-living adjustment in effect for a calendar year
applies to any period not exceeding 12 months over which Compensation is
determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93 annual
compensation limit will be multiplied by a fraction, the numerator of which is
the number of months in the determination period, the denominator of which is
12.
23.2 For Plan Years beginning on or after January 1, 1994, any
reference in the Plan to the limitation under Section 401(a)(17) of the Internal
Revenue Code shall mean the OBRA '93 annual compensation limit set forth in this
provision.
23.3 If Compensation for any prior determination period is taken into
account in determining an Employee's benefits accruing in the current Plan Year,
the Compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first Plan Year
beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is
$150,000.
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<PAGE>
IN WITNESS WHEREOF, the Employer and the Trustee have caused this
amendment to be executed as of the date shown opposite their names.
NOVEL EXPERIMENTAL TECHNOLOGY
Dated: By:
------------- -------------------------------------
President
"Employer"
UNION BANK OF CALIFORNIA, N.A.
Dated: By:
------------- -------------------------------------
By:
--------------------------------
"TRUSTEE"
Prepared and approved by
Attorneys for the Plan:
Hinchy, Witte, Wood, Anderson & Hodges
A Law Corporation
By:
--------------------------------
Marc S. Schechter
<PAGE>
EXHIBIT A
VESTING SCHEDULE
1. The following vesting schedule shall be used to determine a Participant's
Vested Percentage in his ESOP and Matching Contributions Plan Accounts:
<TABLE>
<CAPTION>
VESTED FORFEITED
YEARS OF SERVICE PERCENTAGE PERCENTAGE
<S> <C> <C>
Less than 2 years 0% 100%
2 years, but less than 3 20% 80%
3 years, but less than 4 40% 60%
4 years, but less than 5 60% 40%
5 years, but less than 6 80% 20%
6 years or more 100% 0%
</TABLE>
2. The Vested Percentage of Participants shall be 100 percent at all
times in Salary Reduction Contribution Accounts and Vested Rollover Accounts.
<PAGE>
EXHIBIT B
PLAN YEAR:
The 12-month period commencing on April 1st and ending on March 31st.
NORMAL RETIREMENT AGE:
The normal Retirement Age is a Participant's 65th birthday or, if later,
the 5th anniversary of the date he began participation in the Plan.
ENTRY DATES:
April 1 and October 1.
401(k) ENTRY DATES:
April 1, July 1, October 1, and January 1.
<PAGE>
INVITROGEN CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
ARTICLE II
ADMINISTRATION
<TABLE>
<S> <C>
2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER. . . . . . . . 15
2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY. . . . . . . . . . 16
2.3 ALLOCATION AND DELEGATION OF RESPONSIBILITIES. . . . . . . 16
2.4 POWERS AND DUTIES OF THE ADMINISTRATOR . . . . . . . . . . 16
2.5 RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . 18
2.6 APPOINTMENT OF ADVISERS. . . . . . . . . . . . . . . . . . 18
2.7 PAYMENT OF EXPENSES. . . . . . . . . . . . . . . . . . . . 18
2.8 CLAIMS PROCEDURE . . . . . . . . . . . . . . . . . . . . . 18
2.9 CLAIMS REVIEW PROCEDURE. . . . . . . . . . . . . . . . . . 19
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY. . . . . . . . . . . . . . . . . 19
3.2 EFFECTIVE DATE OF PARTICIPATION. . . . . . . . . . . . . . 20
3.3 DETERMINATION OF ELIGIBILITY . . . . . . . . . . . . . . . 20
3.4 TERMINATION OF ELIGIBILITY . . . . . . . . . . . . . . . . 20
3.5 OMISSION OF ELIGIBLE EMPLOYEE. . . . . . . . . . . . . . . 20
3.6 INCLUSION OF INELIGIBLE EMPLOYEE . . . . . . . . . . . . . 21
3.7 ELECTION NOT TO PARTICIPATE. . . . . . . . . . . . . . . . 21
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER CONTRIBUTION . . . . . . 21
4.2 TIME OF PAYMENT OF EMPLOYER CONTRIBUTION . . . . . . . . . 22
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND
EARNINGS . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.4 MAXIMUM ANNUAL ADDITIONS . . . . . . . . . . . . . . . . . 25
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS. . . . . . . . . 29
<PAGE>
4.6 TRANSFERS FROM QUALIFIED PLANS . . . . . . . . . . . . . . 30
4.7 DIRECTED INVESTMENT ACCOUNT. . . . . . . . . . . . . . . . 32
ARTICLE V
FUNDING AND INVESTMENT POLICY
5.1 INVESTMENT POLICY. . . . . . . . . . . . . . . . . . . . . 33
ARTICLE VI
VALUATIONS
6.1 VALUATION OF THE TRUST FUND. . . . . . . . . . . . . . . . 34
6.2 METHOD OF VALUATION. . . . . . . . . . . . . . . . . . . . 34
ARTICLE VII
DETERMINATION AND DISTRIBUTION OF BENEFITS
7.1 DETERMINATION OF BENEFITS UPON RETIREMENT. . . . . . . . . 35
7.2 DETERMINATION OF BENEFITS UPON DEATH . . . . . . . . . . . 35
7.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY . . . . . 36
7.4 DETERMINATION OF BENEFITS UPON TERMINATION . . . . . . . . 37
7.5 DISTRIBUTION OF BENEFITS . . . . . . . . . . . . . . . . . 41
7.6 HOW PLAN BENEFIT WILL BE DISTRIBUTED . . . . . . . . . . . 46
7.7 DISTRIBUTION FOR MINOR BENEFICIARY . . . . . . . . . . . . 47
7.8 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN . . . . . . 47
7.9 RIGHT OF FIRST REFUSALS. . . . . . . . . . . . . . . . . . 47
7.10 STOCK CERTIFICATE LEGEND . . . . . . . . . . . . . . . . . 48
7.11 PUT OPTION . . . . . . . . . . . . . . . . . . . . . . . . 48
7.12 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION . . . . . 50
ARTICLE VIII
TRUSTEE
8.1 BASIC RESPONSIBILITIES OF THE TRUSTEE. . . . . . . . . . . 51
8.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE. . . . . . . . 52
8.3 OTHFP POWERS OF THE TRUSTEE. . . . . . . . . . . . . . . . 52
8.4 VOTING COMPANY STOCK . . . . . . . . . . . . . . . . . . . 55
8.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS . . . . . . . . . 56
8.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES. . . . . . . 57
8.7 ANNUAL REPORT OF THE TRUSTEE . . . . . . . . . . . . . . . 57
<PAGE>
8.8 AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE . . . . . . 59
8.10 TRANSFER OF INTEREST . . . . . . . . . . . . . . . . . . . 60
8.11 DIRECT ROLLOVER. . . . . . . . . . . . . . . . . . . . . . 60
ARTICLE IX
AMENDMENT, TERMINATION AND MERGERS
9.1 AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . 61
9.2 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . 62
9.3 MERGER OR CONSOLIDATION. . . . . . . . . . . . . . . . . . 62
ARTICLE X
TOP HEAVY
10.1 TOP HEAVY PLAN REQUIREMENTS. . . . . . . . . . . . . . . . 63
10.2 DETERMINATION OF TOP HEAVY STATUS. . . . . . . . . . . . . 63
ARTICLE XI
MISCELLANEOUS
11.1 PARTICIPANT'S RIGHTS . . . . . . . . . . . . . . . . . . . 67
11.2 ALIENATION . . . . . . . . . . . . . . . . . . . . . . . . 67
11.3 CONSTRUCTION OF PLAN . . . . . . . . . . . . . . . . . . . 67
11.4 GENDER AND NUMBER . . . . . . . . . . . . . . . . . . . . 68
11.5 LEGAL ACTION . . . . . . . . . . . . . . . . . . . . . . . 68
11.6 PROHIBITION AGAINST DIVERSION OF FUNDS . . . . . . . . . . 68
11.7 BONDING. . . . . . . . . . . . . . . . . . . . . . . . . . 68
11.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE . . . . . . . . 69
11.9 INSURER'S PROTECTIVE CLAUSE. . . . . . . . . . . . . . . . 69
11.10 RECEIPT AND RELEASE FOR PAYMENTS . . . . . . . . . . . . . 69
11.11 ACTION BY THE EMPLOYER . . . . . . . . . . . . . . . . . . 70
11.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY . . . . 70
11.13 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . 71
11.14 APPROVAL BY INTERNAL REVENUE SERVICE . . . . . . . . . . . 71
11.15 UNIFORMITY . . . . . . . . . . . . . . . . . . . . . . . . 71
11-16 WAIVER OF FUNDING . . . . . . . . . . . . . . . . . . . . 71
<PAGE>
11-17 SECURITIES AND EXCHANGE COMMISSION APPROVAL. . . . . . . . 72
INVITROGEN CORPORATION
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN
THIS AGREEMENT, hereby made and entered into this _______ day of
________, 19__, by and between Invitrogen Corporation (herein referred to as
the "Employer") and Lyle C. Turner and Joseph M. Fernandez (herein referred
to as the "Trustee").
W I T N E S S E T H:
WHEREAS, the Employer heretofore established an Employee Stock
Ownership Plan and Trust effective November 1, 1989 (hereinafter called the
"Effective Date"), known as Invitrogen Corporation Employee Stock Ownership
Plan (herein referred to as the "Plan") in recognition of the contribution
made to its successful operation by its employees and for the exclusive
benefit of its eligible employees; and
WHEREAS, under the terms of the Plan, the Employer has the ability
to amend the Plan, provided the Trustee joins in such amendment if the
provisions of the Plan affecting the Trustee are amended; and
WHEREAS, contributions to the Plan will be made by the Employer and
such contributions made to the trust will be invested primarily in the
capital stock of the Employer;
NOW, THEREFORE, effective January 1, 1996, except as otherwise
provided, the Employer and the Trustee in accordance with the provisions of
the Plan pertaining to amendments thereof, hereby amend the Plan in its
entirety and restate the Plan to provide as follows:
ARTICLE I
DEFINITIONS
1.1 "Act" means the Employee Retirement Income Security Act of 1974, as
it may be amended from time to time.
1.2 "Administrator" means the Employer unless another person or entity
has been designated by the Employer pursuant to Section 2.2 to administer the
Plan on behalf of the Employer.
1.3 "Affiliated Employer" means any corporation which is a member of a
controlled group of corporations (as defined in Code Section 414(b)) which
includes the Employer; any trade or business (whether or not incorporated)
which is under common control (as defined in Code Section 414(c)) with the
Employer; any organization (whether or not incorporated) which is a member of
an affiliated service group (as defined in Code Section 41 ' 4(m)) which
includes the Employer; and any other entity required to be aggregated with
the Employer pursuant to Regulations under Code Section 414(o).
1.4 "Aggregate Account" means, with respect to each Participant, the
value of all accounts maintained-on behalf of a Participant, whether
attributable to Employer or Employee contributions, subject to the provisions
of Section 10.2.
1.5 "Anniversary Date" means December 31st.
<PAGE>
1.6 "Beneficiary" means the person to whom the share of a deceased
Participant's total account is payable, subject to the restrictions of
Sections 7.2 and 7.5.
1.7 "Code" means the Internal Revenue Code of 1986, as amended or
replaced from time to time.
1.8 "Company Stock" means common stock issued by the Employer (or by a
corporation which is a member of the controlled group of corporations of
which the Employer is a member) which is readily tradeable on an established
securities market. If there is no common stock which meets the foregoing
requirement, the term "Company Stock" means common stock issued by the
Employer (or by a corporation which is a member of the same controlled group)
having a combination of voting power and dividend rights equal to or in
excess of: (A) that class of common stock of the Employer (or of any other
such corporation) having the greatest voting power, and (B) that class of
common stock of the Employer (or of any other such corporation) having the
greatest dividend rights. Noncallable preferred stock shall be deemed to be
"Company Stock" if such stock is convertible at any time into stock which
constitutes "Company Stock" hereunder and if such conversion is at a
conversion price which (as of the date of the acquisition by the Trust) is
reasonable. For purposes of the preceding sentence, pursuant to Regulations,
preferred stock shall be treated as noncallable if after the call there will
be a reasonable opportunity for a conversion which meets the requirements of
the preceding sentence.
1.9 "Company Stock Account" means the account of a Participant which is
credited with the shares of Company Stock purchased and paid for by the Trust
Fund or contributed to the Trust Fund.
A separate accounting shall be maintained with respect to that
portion of the Company Stock Account attributable to the Money Purchase
Pension Plan and the Stock Bonus Plan.
1.10 "Compensation" with respect to any Participant means such
Participant's wages as defined in Code Section 3401(a) and all other payments
of compensation by the Employer (in che course of the Employer's trade or
business) for a Plan Year for which the Employer is required to furnish the
Participant a written statement under Code Sections 6041(d), 6051(a)(3) and
6052. Compensation must be determined without regard to any rules under Code
Section 3401(a) that limit the remuneration included in wages based on the
nature or location of the employment or the services performed (such as the
exception for agricultural labor in Code Section 3401(a)(2)).
For purposes of this Section, the determination of Compensation
shall be made by:
(a) including amounts which are contributed by the Employer pursuant to
a salary reduction agreement and which are not includible in the gross income
of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b)
or 457(b), and Employee contributions described in Code Section 414(h)(2)
that are treated as Employer contributions.
For a Participant's initial year of participation, Compensation
shall be recognized for the entire Plan Year.
Compensation in excess of $150,000 shall be disregarded. Such
amount shall be adjusted for increases in the cost of living in accordance
with Code Section 401(a)(17), except that the dollar
<PAGE>
increase in effect on January 1 of any calendar year shall be effective for
the Plan Year beginning with or within such calendar year. For any short Plan
Year the Compensation limit shall be an amount equal to the Compensation
limit for the calendar year in which the Plan Year begins multiplied by the
ratio obtained by dividing the number of full months in the short Plan Year
by twelve (12). In applying this limitation, the family group of a Highly
Compensated Participant who is subject to the Family Member aggregation rules
of Code Section 414(q)(6) because such Participant is either a "five percent
owner" of the Employer or one of the ten (10) Highly Compensated Employees
paid the greatest "415 Compensation" during the year, shall be treated as a
single Participant, except that for this purpose Family Members shall include
only the affected Participant's spouse and any lineal descendants who have
not attained age nineteen (19) before the close of the year. If, as a result
of the application of such rules the adjusted limitation is exceeded, then
the limitation shall be prorated among the affected Family Members in
proportion to each such Family Member's Compensation prior to the application
of this limitation, or the limitation shall be adjusted in accordance with
any other method permitted by Regulation.
If, as a result of such rules, the maximum "annual addition" limit
of Section 4.4(a) would be exceeded for one or more of the affected Family
Members, the prorated Compensation of all affected Family Members shall be
adjusted to avoid or reduce any excess. The prorated Compensation of any
affected Family Member whose allocation would exceed the limit shall be
adjusted downward to the level needed to provide an allocation equal to such
limit. The prorated Compensation of affected Family Members not affected by
such limit shall then be adjusted upward on a pro rata basis not to exceed
each such affected Family Member's Compensation as determined prior to
application of the Family Member rule. The resulting allocation shall not
exceed such individual's maximum "annual addition" limit. If, after these
adjustments, an "excess amount" still results, such "excess amount" shall be
disposed of in the manner described in Section 4.5(a) pro rata among all
affected Family Members.
If, in connection with the adoption of this amendment and
restatement, the definition of Compensation has been modified, then, for Plan
Years prior to the Plan Year which includes the adoption date of this
amendment and restatement, Compensation means compensation determined
pursuant to the Plan then in effect.
1.11 "Contract" or "Policy" means any life insurance policy, retirement
income or annuity policy, or annuity contract (group or individual) issued
pursuant to the terms of the Plan.
1.12 "Early Retirement Date." This Plan does not provide for a
retirement date prior to Normal Retirement Date.
1.13 "Eligible Employee" means any Employee.
Employees of Affiliated Employers shall not be eligible to
participate in this Plan unless such Affiliated Employers have specifically
adopted this Plan in writing.
1.14 "Employee" means any person who is employed by the Employer or
Affiliated Employer, but excludes any person who is an independent
contractor. Employee shall include Leased Employees within the meaning of
Code Sections 414(n)(2) and 414(o)(2) unless such Leased Employees are
covered by a plan described in Code Section 414(n)(5) and such Leased
Employees do not constitute more than 20% of the recipient's non-highly
compensated work force.
<PAGE>
1.15 "Employer" means Invitrogen Corporation and any successor which
shall maintain this Plan; and any predecessor which has maintained this Plan.
The Employer is a corporation with principal offices in the State of
California.
1.16 "ESOP" means an employee stock ownership plan that meets the
requirements of Code Section 4975(e)(7) and Regulation 54.4975-11.
1.17 "Family Member" means, with respect to an affected Participant,
such Participant's spouse and such Participant's lineal descendants and
ascendants and their spouses, all as described in Code Section 414(q)(6)(B).
1.18 "Fiduciary" means any person who (a) exercises any discretionary
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of
its assets, (b) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any monies or other property of the Plan
or has any authority or responsibility to do so, or (c) has any discretionary
authority or discretionary responsibility in the administration of the Plan,
including, but not limited to, the Trustee, the Employer and its
representative body, and the Administrator.
1.19 "Fiscal Year" means the Employer's accounting year of 12 months
commencing on January 1st of each year and ending the following December 31st.
1.20 "Forfeiture" means that portion of a Participant's Account that is
not Vested, and occurs on the earlier of:
(a) the distribution of the entire Vested portion of a Terminated
Participant's Account, or
(b) the last day of the Plan Year in which the Participant incurs five
(5) consecutive 1-Year Breaks in Service.
Furthermore, for purposes of paragraph (a) above, in the case of a
Terminated Participant whose Vested benefit is zero, such Terminated
Participant shall be deemed to have received a distribution of his Vested
benefit upon his termination of employment. Restoration of such amounts shall
occur pursuant to Section 7.4(g)(2). In addition, the term Forfeiture shall
also include amounts deemed to be Forfeitures pursuant to any other provision
of this Plan.
1.21 "Former Participant" means a person who has been a Participant, but
who has ceased to be a Participant for any reason.
1.22 "415 Compensation" with respect to any Participant means such
Participant's wages as defined in Code Section 3401(a) and all other payments
of compensation by the Employer (in the course of the Employer's trade or
business) for a Plan Year for which the Employer is required to furnish the
Participant a written statement under Code Sections 6041(d), 6051(a)(3) and
6052. "415 Compensation" must be determined without regard to any rules under
Code Section 3401(a) that limit the remuneration included in wages based on
the nature or location of the employment or the services performed (such as
the exception for agricultural labor in Code Section 3401(a)(2)).
If, in connection with the adoption of this amendment and
restatement, the definition of "415 Compensation" h~.ts been modified, then,
for Plan Years prior to the Plan Year wilich includes the
<PAGE>
adoption date of this amendment and restatement, "415 Compensation" means
compensation determined pursuant to the Plan then in effect.
1.23 "Highly Compensated Employee" means an Employee described in Code
Section 414(q) and the Regulations thereunder, and generally means an
Employee who performed services for the Employer during the "determination
year" and is in one or more of the following groups:
(a) Employees who at any time during the "determination year" or
"look-back year" were "five percent owners" as defined in Section 1.28(c).
(b) Employees who received "415 Compensation" during the "look-back
year" from the Employer in excess of $75,000.
(c) Employees who received "415 Compensation" during the "look-back
year" from the Employer in excess of $50,000 and were in the Top Paid Group
of Employees for the Plan Year.
(d) Employees who during the "look-back year" were officers of the
Employer (as that term is defined within the meaning of the Regulations under
Code Section 416) and received "415 Compensation" during the "look-back year"
from the Employer greater than 50 percent of the limit in effect under Code
Section 415(b)(1)(A) for any such Plan Year. The number of officers shall be
limited to the lesser of (i) 50 employees;*or (ii) the greater of 3 employees
or 10 percent of all employees. For the purpose of determining the number of
officers, Employees described in Section 1.50(a), (b), (c) and (d) shall be
excluded, but such Employees shall still be considered for the purpose of
identifying the particular Employees who are officers. If the Employer does
not have at least one officer whose annual "415 Compensation" is in excess of
50 percent of the Code Section 415(b)(1)(A) limit, then the highest paid
officer of the Employer will be treated as a Highly Compensated Employee.
(e) Employees who are in the group consisting of the 100 Employees paid
the greatest "415 Compensation" during the "determination year" and are also
described in (b), (c) or (d) above when these paragraphs are modified to
substitute "determination year" for "look-back year."
The "determination year" shall be the Plan Year for which testing is
being performed, and the "look-back year" shall be the immediately preceding
twelve-month period.
If an Employee is, during a "determination year" or "look-back year", a
Family Member of either a "five percent owner" (whether active or former) or
a Highly Compensated Employee who is one of the 10 most Highly Compensated
Employees ranked on the basis of "415 Compensation" paid by the Employer
during such year, then the Family Member and the "five percent owner" or
top-ten Highly Compensated Employee shall be aggregated. In such case, the
Family Member and "five percent owner" or top-ten Highly Compensated Employee
shall be treated as a single Employee receiving "415 Compensation" and Plan
contributions or benefits equal to the sum of such "415 Compensation" and
contributions or benefits of the Family Member and "five percent owner" or
top-ten Highly Compensated Employee.
<PAGE>
For purposes of this Section, the determination of "415
Compensation" shall be made by including amounts which are contributed by the
Employer pursuant to a salary reduction agreement and which are not
includible in the gross income of the Participant under Code Sections 125,
402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions
described in Code Section 414(h)(2) that are treated as Employer
contributions. Additionally, the dollar threshold amounts specified in (b)
and (c) above shall be adjusted at such time and in such manner as is
provided in Regulations. In the case of such an adjustment, the dollar limits
which shall be applied are those for the calendar year in which the
"determination year" or "look-back year" begins.
In determining who is a Hi4hly compensated Employee, Employees who
are non-resident aliens and who received no earned income (within the meaning
of Code Section 911(d)(2)) from the Employer constituting United States
source income within the meaning of Code Section 861(a)(3) shall not be
treated as Employees. Additionally, all Affiliated Employers shall be taken
into account as a single employer and Leased Employees within the meaning of
Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless
such Leased Employees are covered by a plan described in Code Section
414(n)(5) and are not covered in any qualified plan maintained by the
Employer. The exclusion of Leased Employees for this purpose shall be applied
on a uniform and consistent basis for all of the Employer's retirement plans.
Highly Compensated Former Employees shall be treated as Highly Compensated
Employees without regard to whether they performed services during the
"determination year."
1.24 "Highly Compensated Former Employee" means a former Employee who
had a separation year prior to the "determination year" and was a Highly
Compensated Employee in the year of separation from service or in any
"determination year" after attaining age 55. Notwithstanding the foregoing,
an Employee who separated from service prior to 1987 will be treated as a
Highly Compensated Former Employee only if during the separation year (or
year preceding the separation year) or any year after the Employee attains
age 55 (or the last year ending before the Employee's 55th birthday), the
Employee either received "415 Compensation" in excess of $50,000 or was a
"five percent owner." For purposes of this Section, "determination year,"
"415 Compensation" and "five percent owner" shall be determined in accordance
with Section 1.23. Highly Compensated Former Employees shall be treated as
Highly Compensated Employees. The method set forth in this Section for
determining who is a "Highly Compensated Former Employee" shall be applied on
a uniform and consistent basis for all purposes for which the Code Section
414(q) definition is applicable.
1.25 "Highly Compensated Participant" means any Highly Compensated
Employee who is eligible to participate in the Plan.
1.26 "Hour of Service" means (1) each hour for which an Employee is
directly or indirectly compensated or entitled to compensation by the
Employer for the performance of duties (these hours will be credited to the
Employee for the computation period in which the duties are performed); (2)
each hour for which an Employee is directly or indirectly compensated or
entitled to compensation by the Employer (irrespective of whether the
employment relationship has terminated) for reasons other than performance of
duties (such as vacation, holidays, sickness, jury duty, disability, lay-off,
military duty or leave of absence) during the applicable computation period
(these hours will be calculated and credited pursuant to Department of Labor
regulation 2530.200b-2 which is incorporated herein by reference); (3) each
hour for which back pay is awarded or agreed to by the Employer
<PAGE>
without regard to mitigation of damages (these hours will be credited to the
Employee for the computation period or periods to which the award or
agreement pertains rather than the computation period in which the award,
agreement or payment is made). The same Hours of Service shall not be
credited both under (1) or (2), as the case may be, and under (3).
Notwithstanding the above, (i) no more than 501 Hours of Service
are required to be credited to an Employee on account of any single
continuous period during which the Employee performs no duties (whether or
not such period occurs in a single computation period); (ii) an hour for
which an Employee is directly or indirectly paid, or entitled to payment, on
account of a period during which no duties are performed is not required to
be credited to the Employee if such payment is made or due under a plan
maintained solely for the purpose of complying with applicable worker's
compensation, or unemployment compensation or disability insurance laws; and
(iii) Hours of Service are not required to be credited for a payment which
solely reimburses an Employee for medical or medically related expenses
incurred by the Employee.
For purposes of this Section, a payment shall be deemed to be made
by or due from the Employer regardless of whether such payment is made by or
due from the Employer directly, or indirectly through, among others, a trust
fund, or insurer, to which the Employer contributes or pays premiums and
regardless of whether contributions made or due to the trust fund, insurer,
or other entity are for the benefit of particular Employees or are on behalf
of a group of Employees in the aggregate.
For purposes of this Section, Hours of Service will be credited for
employment with other Affiliated Employers. The provisions of Department of
Labor regulations 2530.200b-2(b) and (c) are incorporated herein by reference.
1.27 "Investment Manager" means an entity that (a) has the power to
manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary
responsibility to the Plan in writing. Such entity must be a person, firm, or
corporation registered as an investment adviser under the Investment Advisers
Act of 1940, a bank, or an insurance company.
1.28 "Key Employee" means an Employee as defined in Code Section 416(i)
and the Regulations thereunder. Generally, any Employee or former Employee
(as well as each of his Beneficiaries) is considered a Key Employee if he, at
any time during the Plan Year that contains the "Determination Date" or any
of the preceding four (4) Plan Years, has been included in one of the
following categories:
(a) an officer of the Employer (as that term is defined within the
meaning of the Regulations under Code Section 416) having annual "415
Compensation" greater than 50 percent of the amount in effect under Code
Section 415(b)(1)(A) for any such Plan Year.
(b) one of the ten employees having annual "415 Compensation" from the
Employer for a Plan Year greater than the dollar limitation in effect under
Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends
and owning (or considered as owning within the meaning of Code Section 318)
both more than one-half percent interest and the largest interests in the
Employer.
(c) a "five percent owner" of the Employer. "Five percent owner" means
any person who owns (or is considered as owning within the meaning of Code
Section 318) more than five percent (5%) of the
<PAGE>
outstanding stock of the Employer or stock possessing more than five percent
(5%) of the total combined voting power of all stock of the Employer or, in
the case of an unincorporated business, any person who owns more than five
percent (5%) of the capital or profits interest in the Employer. In
determining percentage ownership hereunder, employers that would otherwise be
aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as
separate employers.
(d) a "one percent owner" of the Employer having an annual "415
Compensation" from the Employer of more ,than $150,000. "One percent owner"
means any person who owns (or is considered as owning within the meaning of
Code Section 318) more than one percent (1%) of the outstanding stock of the
Employer or stock possessing more than one percent (1%) of the total combined
voting power of all stock of the Employer or, in the case of an
unincorporated business, any person who owns more than one percent (1%) of
the capital or profits interest in the Employer. In determining percentage
ownership hereunder, employers that would otherwise be aggregated under Code
Sections 414(b), (c), (m) and (o) shall be treated as separate employers.
However, in determining whether an individual has "415 Compensation" of more
than $150,000, "415 Compensation" from each employer required to be
aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken into
account.
For purposes of this Section, the determination of "415
Compensation" shall be made by including amounts which are contributed by the
Employer pursuant to a salary reduction agreement and which are not
includible in the gross income of the Participant under Code Sections 125,
402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions
described in Code Section 414(h)(2) that are treated as Employer
contributions.
1.29 "Late Retirement Date" means the first day of the month coinciding
with or next following a Participant's actual Retirement Date after having
reached his Normal Retirement Date.
1.30 "Leased Employee" means any person (other than an Employee of the
recipient) who pursuant to an agreement between the recipient and any other
person ("leasing organization") has performed services for the recipient (or
for the recipient and related persons determined in accordance with Code
Section 414(n)(6)) on a substantially full time basis for a period of at
least one year, and such services are of a type historically performed by
employees in the business field of the recipient employer. Contributions or
benefits provided a Leased Employee by the leasing organization which are
attributable to services performed for the recipient employer shall be
treated as provided by the recipient employer. A Leased Employee shall not be
considered an Employee of the recipient:
(a) if such employee is covered by a money purchase pension plan
providing:
(1) a non-integrated employer contribution rate of at least 10% of
compensation, as defined in Code Section 415(c)(3), but including amounts
which are contributed by the Employer pursuant to a salary reduction
agreement and which are not includible in the gross income of the Participant
under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and
Employee contributions described in Code Section 414(h)(2) that are treated
as Employer contributions.
(2) immediate participation; and
(3) full and immediate vesting; and
<PAGE>
(b) if Leased Employees do not constitute more than 20% of the
recipient's non-highly compensated work force.
1.31 "Money Purchase Pension Plan" means the portion of the Plan that is
designed to qualify as such pursuant to Code Section 401(a).
1.32 "Non-Highly Compensated Participant" means any Participant who is
neither a Highly Compensated Employee nor a Family Member.
1.33 "Non-Key Employee" means any Employee or former Employee (and his
Beneficiaries) who is not a Key Employee.
1.34 "Normal Retirement Age" means the Participant's 65th birthday. A
Participant shall become fully Vested in his Participant's Account upon
attaining his Normal Retirement Age.
1.35 "Normal Retirement Date" means the first day of the month
coinciding with or next following the Participant's Normal Retirement Age.
1.36 "1-Year Break in Service" means the applicable computation period
during which an Employee has not completed more than 500 Hours of Service
with the Employer. Further, solely for the purpose of determining whether a
Participant has incurred a 1-Year Break in Service, Hours of Service shall be
recognized for "authorized leaves of absence" and "maternity and paternity
leaves of absence." Years of Service and 1-Year Breaks in Service shall be
measured on the same computation period.
"Authorized leave of absence" means an unpaid, temporary cessation
from active employment with the Employer pursuant to an established
nondiscriminatory policy, whether occasioned by illness, military service, or
any other reason.
A "maternity or paternity leave of absence" means, for Plan Years
beginning after December 31, 1984, an absence from work for any period by
reason of the Employee's pregnancy, birth of the Employee's child, placement
of a child with the Employee in connection with the adoption of such child,
or any absence for the purpose of caring for such child for a period
immediately following such birth or placement. For this purpose, Hours of
Service shall be credited for the computation period in which the absence
from work begins, only if credit therefore is necessary to prevent the
Employee from incurring a 1-Year Break in Service, or, in any other case, in
the immediately following computation period. The Hours of Service credited
for a "maternity or paternity leave of absence" shall be those which would
normally have been credited but for such absence, or, in any case in which
the Administrator is unable to determine such hours normally credited, eight
(8) Hours of Service per day. The total Hours of Service required to be
credited for a "maternity or paternity leave of absence" shall not exceed 501.
1.37 "Other Investments Account" means the account of a Participant
which is credited with his share of the net gain (or loss) of the Plan,
Forfeitures and Employer contributions in other than Company Stock and which
is debited with payments made to pay for Company Stock.
A separate accounting shall be maintained with respect to that
portion of the Other Investments Account attributable to the Money Purchase
Pension Plan and the Stock Bonus Plan.
<PAGE>
1.38 "Participant" means any Eligible Employee who participates in the
Plan and has not for any reason become ineligible to participate further in
the Plan.
1.39 "Participant's Account" means the account established and
maintained by the Administrator for each Participant with respect to his
total interest in the Plan and Trust resulting from the Employer
contributions.
1.40 "Plan" means this instrument, including all amendments thereto.
1.41 "Plan Year" means the Plan's accounting year of twelve (12) months
commencing on January 1st of each year and ending the following December 31st.
1.42 "Regulation" means the Income Tax Regulations as promulgated by the
Secretary of the Treasury or his delegate, and as amended from time to time.
1.43 "Retired Participant" means a person who has been a Participant,
but who has become entitled to retirement benefits under the Plan.
1.44 "Retirement Date" means the date as of which a Participant retires
for reasons other than Total and Permanent Disability, whether such
retirement occurs on a Participant's Normal Retirement Date or Late
Retirement Date (see Section 7.1).
1.45 "Stock Bonus Plan" means the portion of the Plan that is designed
to qualify as such pursuant to Code Section 401(a).
1.46 "Super Top Heavy Plan" means a plan described in Section 10. 2 (b) .
1.47 "Terminated Participant" means a person who has been a Participant,
but whose employment has been terminated other than by death, Total and
Permanent Disability or retirement.
1.48 "Top Heavy Plan" means a plan described in Section 10.2(a).
1.49 "Top Heavy Plan Year" means a Plan Year during which the Plan is a
Top Heavy Plan.
1.50 "Top Paid Group" means the top 20 percent of Employees who
performed services for the Employer during the applicable year, ranked
according to the amount of "415 Compensation" (determined for this purpose in
accordance with Section 1.23) received from the Employer during such year.
All Affiliated Employers shall be taken into account as a single employer,
and Leased Employees within the meaning of Code Sections 414(n)(2) and
414(o)(2) shall be considered Employees unless such Leased Employees are
covered by a plan described in Code Section 414(n)(5) and are not covered in
any qualified plan maintained by the Employer. Employees who are non-resident
aliens and who received no earned income (within the meaning of Code Section
911(d)(2)) from the Employer constituting United States source income within
the meaning of Code Section 861(a)(3) shall not be treated as Employees.
Additionally, for the purpose of determining the number of active Employees
in any year, the following additional Employees shall also be excluded;
however, such Employees shall still be considered for the purpose of
identifying the particular Employees in the Top Paid Group:
(a) Employees with less than six (6) months of service; -
<PAGE>
(b) Employees who normally work less than 17 1/2 hours per week;
(c) Employees who normally work less than six (6) months during a year;
and
(d) Employees who have not yet attained age 21.
In addition, if 90 percent or more of the Employees of the Employer
are covered under agreements the Secretary of Labor finds to be collective
bargaining agreements between Employee representatives and the Employer, and
the Plan covers only Employees who are not covered under such agreements,
then Employees covered by such agreements shall be excluded from both the
total number of active Employees as well as from the identification of
particular Employees in the Top Paid Group.
The foregoing exclusions set forth in this Section shall be applied
on a uniform and consistent basis for all purposes for which the Code Section
414(q) definition is applicable.
1.51 "Total and Permanent Disability" means a physical or mental
condition of a Participant resulting from bodily injury, disease, or mental
disorder which renders him incapable of continuing any gainful occupation and
which condition constitutes total disability under the federal Social
Security Acts.
1.52 "Trustee" means the person or entity named as trustee herein or in
any separate trust forming a part of this Plan, and any successors.
1.53 "Trust Fund" means the assets of the Plan and Trust as the same
shall exist from time to time.
1.54 "Valuation Date" means the Anniversary Date and such other date or
dates deemed necessary by the Administrator. The Valuation Date may include
any day during the Plan Year that the Trustee, any transfer agent appointed
by the Trustee or the Employer and any stock exchange used by such agent are
open for business.
1.55 "Vested" means the nonforfeitable portion of any account maintained
on behalf of a Participant.
1.56 "Year of Service" means the computation period of twelve (12)
consecutive months, herein set forth, during which an Employee has at least
1000 Hours of Service.
For purposes of eligibility for participation, the initial
computation period shall begin with the date on which the Employee first
performs an Hour of Service. The participation computation period beginning
after a 1-Year Break in Service shall be measured from the date on which an
Employee again performs an Hour of Service. The participation computation
period shall shift to the Plan Year which includes the anniversary of the
date on which the Employee first performed an Hour of Service. An Employee
who is credited with the required Hours of Service in both the initial
computation period (or the computation period beginning after a 1-Year Break
in Service) and the Plan Year which includes the anniversary of the date on
which the Employee first performed an Hour of Service, shall be credited with
two (2) Years of Service for purposes of eligibility to participate.
For vesting purposes, the computation periods shall be the Plan
Year, including periods prior to the Effective Date of the Plan.
<PAGE>
The computation period shall be the Plan Year if not otherwise set
forth herein.
Notwithstanding the foregoing, for any short Plan Year, the
determination of whether an Employee has completed a Year of Service shall be
made in accordance with Department of Labor regulation 2530.203-2(c).
However, in determining whether an Employee has completed a Year of Service
for benefit accrual purposes in the short Plan Year, the number of the Hours
of Service required shall be proportionately reduced based on the number of
full months in the short Plan Year.
Years of Service with any Affiliated Employer shall be recognized.
ARTICLE II
ADMINISTRATION
2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER
(a) In addition to the general powers and responsibilities otherwise
provided for in this Plan, the Employer shall be empowered to appoint and
remove the Trustee and the Administrator from time to time as it deems
necessary for the proper administration of the Plan to ensure that the Plan
is being operated for the exclusive benefit of the Participants and their
Beneficiaries in accordance with the terms of the Plan, the Code, and the
Act. The Employer may appoint counsel, specialists, advisers, agents
(including any nonfiduciary agent) and other persons as the Employer deems
necessary or desirable in connection with the exercise of its fiduciary
duties under this Plan. The Employer may compensate such agents or advisers
from the assets of the Plan as fiduciary expenses (but not including any
business (settlor) expenses of the Employer), to the extent not paid by the
Employer.
(b) The Employer shall establish a "funding policy and method," i.e.,
it shall determine whether the Plan has a short run need for liquidity (e.g.,
to pay benefits) or whether liquidity is a long run goal and investment
growth (and stability of same) is a more current need, or shall appoint a
qualified person to do so. The Employer or its delegate shall communicate
such needs and goals to the Trustee, who shall coordinate such Plan needs
with its investment policy. The communication of such a "funding policy and
method" shall not, however, constitute a directive to the Trustee as to
investment of the Trust Funds. Such "funding policy and method" shall be
consistent with the objectives of this Plan and with the requirements of
Title I of the Act.
(c) The Employer shall periodically review the performance of any
Fiduciary or other person to whom duties have been delegated or allocated by
it under the provisions of this Plan or pursuant to procedures established
hereunder. This requirement may be satisfied by formal periodic review by the
Employer or by a qualified person specifically designated by the Employer,
through day-to-day conduct and evaluation, or through other appropriate ways.
(d) The Employer will furnish Plan Fiduciaries and Participants with
notices and information statements when voting rights must be exercised
pursuant to Section 8.4.
2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY
<PAGE>
The Employer shall be the Administrator. The Employer may appoint
any person, including, but not limited to, the Employees of the Employer, to
perform the duties of the Administrator. Any person so appointed shall
signify his acceptance by filing written acceptance with the Employer. Upon
the resignation or removal of any individual performing the duties of the
Administrator, the Employer may designate a successor.
2.3 ALLOCATION AND DELEGATION OF RESPONSIBILITIES
If more than one person is appointed as Administrator, the
responsibilities of each Administrator may be specified by the Employer and
accepted in writing by each Administrator. In the event that no such
delegation is made by the Employer, the Administrators may allocate the
responsibilities among themselves, in which event the Administrators shall
notify the Employer and the Trustee in writing of such action and specify the
responsibilities of each Administrator. The Trustee thereafter shall accept
and rely upon any documents executed by the appropriate Administrator until
such time as the Employer or the Administrators file with the Trustee a
written revocation of such designation.
2.4 POWERS AND DUTIES OF THE ADMINISTRATOR
The primary responsibility of the Administrator is to administer
the Plan for the exclusive benefit of the Participants and their
Beneficiaries, subject to the specific terms of the Plan. The Administrator
shall administer the Plan in accordance with its terms and shall have the
power and discretion to construe the terms of the Plan and to determine all
questions arising in connection with the administration, interpretation, and
application of the Plan. Any such determination by the Administrator shall be
conclusive and binding upon all persons. The Administrator may establish
procedures, correct any defect,supply any information, or reconcile any
inconsistency in such manner and to such extent as shall be deemed necessary
or advisable to carry out the purpose of the Plan; provided, however, that
any procedure, discretionary act, interpretation or construction shall be
done in a nondiscriminatory manner based upon uniform principles consistently
applied and shall be consistent with the intent that the Plan shall continue
to be deemed a qualified plan under the terms of Code Section 401(a), and
shall comply with the terms of the Act and all regulations issued pursuant
thereto. The Administrator shall have all powers necessary or appropriate to
accomplish his duties under this Plan.
The Administrator shall be charged with the duties of the general
administration of the Plan, including, but not limited to, the following:
(a) the discretion to determine all questions relating to the
eligibility of Employees to participate or remain a Participant hereunder and
to receive benefits under the Plan;
(b) to compute, certify, and direct the Trustee with respect to the
amount and the kind of benefits to which any Participant shall be entitled
hereunder;
(c) to authorize and direct the Trustee with respect to all
nondiscretionary or otherwise directed disbursements from the Trust;
(d) to maintain all necessary records for the administration of the Plan;
<PAGE>
(e) to interpret the provisions of the Plan and to make and publish
such rules for regulation of the Plan as are consistent with the terms hereof;
(f) to determine the size and type of any Contract to be purchased from
any insurer, and to designate the insurer from which such Contract shall be
purchased;
(g) to compute and certify to the Employer and to the Trustee from time
to time the sums of money necessary or desirable to be contributed to the
Plan;
(h) to consult with the Employer and the Trustee regarding the short
and long-term liquidity needs of the Plan in order that the Trustee can
exercise any investment discretion in a manner designed to accomplish
specific objectives;
(i) to establish and communicate to Participants a procedure for
allowing each Participant to direct the Trustee as to the distribution of his
Company Stock Account pursuant to Section 4.7;
(j) to establish and communicate to Participants a procedure and method
to insure that each Participant will vote Company Stock allocated to such
Participant's Company Stock Account pursuant to Section 8.4;
(k) to assist any Participant regarding his rights, benefits, or
elections available under the Plan.
2.5 RECORDS AND REPORTS
The Administrator shall keep a record of all actions taken and
shall keep all other books of account, records, policies, and other data that
may be necessary for proper administration of the Plan and shall be
responsible for supplying all information and reports to the Internal Revenue
Service, Department of Labor, Participants, Beneficiaries and others as
required by law.
2.6 APPOINTMENT OF ADVISERS
The Administrator, or the Trustee with the consent of the
Administrator, may appoint counsel, specialists, advisers, agents (including
nonfiduciary agents) and other persons as the Administrator or the Trustee
deems necessary or desirable in connection with the administration of this
Plan, including but not limited to agents and advisers to assist with the
administration and management of the Plan, and thereby to provide, among such
other duties as the Administrator may appoint, assistance with maintaining
Plan records and the providing of investment information to the Plan's
investment fiduciaries.
2.7 PAYMENT OF EXPENSES
All expenses of administration may be paid out of the Trust Fund
unless paid by the Employer. Such expenses shall include any expenses
incident to the functioning of the Administrator, or any person or persons
retained or appointed by any Named Fiduciary incident to the exercise of
their duties under the Plan, including, but not limited to, fees of
accountants, counsel, Investment Managers, and other specialists and their
agents, and other costs of administering the Plan. Until paid, the expenses
shall constitute a liability of the Trust Fund.
<PAGE>
2.8 CLAIMS PROCEDURE
Claims for benefits under the Plan may be filed in writing with the
Administrator. Written notice of the disposition of a claim shall be
furnished to the claimant within 90 days after the application is filed. In
the event the claim is denied, the reasons for the denial shall be
specifically set fcrth in the notice in language calculated to be understood
by the claimant, pertinent provisions of the Plan shall be cited, and, where
appropriate, an explanation as to how the cl~imant can perfect the claim will
be provided. In addition, the claimant shall be furnished with an explanation
of the Plan's claims review procedure.
2.9 CLAIMS REVIEW PROCEDURE
Any Employee, former Employee, or Beneficiary of either, who has
been denied a benefit by a decision of the Administrator pursuant to Section
2.8 shall be entitled to request the Administrator to give further
consideration to his claim by filing with the Administrator (on a form which
may be obtained from the Administrator) a request for a hearing. Such
request, together with a written statement of the reasons why the claimant
believes his claim should be allowed, shall be filed with the Administrator
no later than 60 days after receipt of the written notification provided for
in Section 2.8. The Administrator shall then conduct a hearing within the
next 60 days, at which the claimant may be represented by an attorney or any
other representative of his choosing and at which the claimant shall have an
opportunity to submit written and oral evidence and arguments in support of
his claim. At the hearing (or prior thereto upon 5 business days written
notice to the Administrator) the claimant or his representative shall have an
opportunity to review all documents in the possession of the Administrator
which are pertinent to the claim at issue and its disallowance. Either the
claimant or the Administrator may cause a court reporter to attend the
hearing and record the proceedings. In such event, a complete written
transcript of the proceedings shall be furnished to both parties by the court
reporter. The full expense of any such court reporter and such transcripts
shall be borne by the party causing the court reporter to attend the hearing.
A final decision as to the allowance of the claim shall be made by the
Administrator within 60 days of receipt of the appeal (unless there has been
an extension of 60 days due to special circumstances, provided the delay and
the special circumstances occasioning it are communicated to the claimant
within the 60 day period). Such communication shall be written in a manner
calculated to be understood by the claimant and shall include specific
reasons for the decision and specificreferences to the pertinent Plan
provisions on which the decision is based.
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY
Any Eligible Employee who has completed one (1) Year of Service
shall be eligible to participate hereunder as of the date he has satisfied
such requirements. However, any Employee who was a Participant in the Plan
prior to the effective date of this amendment and restatement shall continue
to participate in the Plan.
<PAGE>
3.2 EFFECTIVE DATE OF PARTICIPATION
An Eligible Employee shall become a Participant effective as of the
first day of the month coinciding with or next following the date on which
such Employee met the eligibility requirements of Section 3.1, provided said
Employee was still employed as of such date (or if not employed on such date,
as of the date of rehire if a 1-Year Break in Service has not occurred).
3.3 DETERMINATION OF ELIGIBILITY
The Administrator shall determine the eligibility of each Employee
for participation in the Plan based upon information furnished by the
Employer. Such determination shall be conclusive and binding upon all
persons, as long as the same is made pursuant to the Plan and the Act. Such
determination shall be subject to review per Section 2.9.
3.4 TERMINATION OF ELIGIBILITY
(a) In the event a Participant shall go from a class4-17ication of an
Eligible Employee to an ineligible Employee, such Former Participant shall
continue to vest in his interest in the Plan for each Year of Service
completed while a noneligible Employee, until such time as his Participant's
Account shall be forfeited or distributed pursuant to the terms of the Plan.
Additionally, his interest in the Plan shall continue to share in the
earnings of the Trust Fund.
(b) In the event a Participant is no longer a member of an eligible
class of Employees and becomes ineligible to participate but has not incurred
a 17Year Break in Service, such Employee will participate immediately upon
returning to an eligible class of Employees. If such Participant incurs a
I-Year Break in Service, eligibility will be determined under the break in
service rules of the Plan.
3.5 OMISSION OF ELIGIBLE EMPLOYEE
If, in any Plan Year, any Employee who should be included as a
Participant in the Plan is erroneously omitted and discovery of such omission
is not made until after a contribution by his Employer for the year has been
made, the Employer shall make a subsequent contribution with respect to the
omitted Employee in the amount which the said Employer would have contributed
with respect to him had he not been omitted. Such contribution shall be made
regardless of whether or not it is deductible in whole or in part in any
taxable year under applicable provisions of the Code.
3.6 INCLUSION OF INELIGIBLE EMPLOYEE
If, in any Plan Year, any person who should not have been included
as a Participant in the Plan is erroneously included and discovery of such
incorrect inclusion is not made until after a contribution for the year has
been made, the Employer shall not be entitled to recover the contribution
made with respect to the ineligible person regardless of whether or not a
deduction is allowable with respect to such contribution. In such event, the
amount contributed with respect to the ineligible person shall constitute a
Forfeiture for the Plan Year in which the discovery is made.
<PAGE>
3.7 ELECTION NOT TO PARTICIPATE
An Employee may, subject to the approval of the Employer, elect
voluntarily not to participate in the Plan. The election not to participate
must be communicated to the Employer, in writing, at least thirty (30) days
before the beginning of a Plan Year.
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER CONTRIBUTION
(a) For each Plan Year, the Employer shall contribute to the Stock
Bonus Plan such amount as shall be determined by the Employer.
(b) The Employer shall make contributions to the Money Purchase Pension
Plan over such period of years as the Employer may determine on the following
basis. On behalf of each Participant eligible to share in ' allocations, for
each year of his participation in this Plan, the Employer shall contribute 2%
of his annual Compensation.
Only Participants who have completed a Year of Service during the
Plan Year-and are actively employed on the last day of the Plan Year shall be
eligible to share in the Employer contribution to the Money Purchase Pension
Plan for the year.
(c) The Employer contribution shall not be limited to years in which
the Employer has current or accumulated net profit. Additionally, to the
extent necessary, the Employer shall contribute to the Plan the amount
necessary to provide the top heav-~ minimum contribution. All contributions
by the Employer shall be made in cash or in such property as is acceptable to
the Trustee.
(d) Should the Employer, for any reason, fail to make a contribution to
the Money Purchase Pension Plan as provided for herein, then such deficiency
shall be made up in subsequent years pursuant to Section 11.16.
4.2 TIME OF PAYMENT OF EMPLOYER CONTRIBUTION
Employer contributions will be paid in cash, Company Stock or other
property as the Employer may from time to time determine. Company Stock and
other property will be valued at their then fair market value. The Employer
shall pay to the Trustee its contribution to the Plan for each Plan Year
within the time prescribed by law, including extensions of time, for the
filing of the Employer federal income tax return for the Fiscal Year.
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS
(a) The Administrator shall establish and maintain an account in the
name of each Participant to which the Administrator shall credit as of each
Anniversary Date all amounts allocated to each such Participant as set forth
herein.
(b) The Employer shall provide the Administrator with all information
required by the Administrator to' make a proper allocation of the Employer
Stock Bonus Plan contributions for each Plan Year. Within a reasonable period
of time after the date of receipt by the Administrator of such information,
the Administrator shall allocate such contribution to each Participant's
Account in the same proportion
<PAGE>
that each such Participant's Compensation for the year bears to the total
Compensation of all Participants for such year.
Only Participants who have completed a Year of Service during the
Plan Year and are actively employed on the last day of the Plan Year shall be
eligible to share in the discretionary contribution for the year.
(c) The Employer shall provide the Administrator with all information
required by the Administrator to make a proper allocation of the Employer
Money Purchase Pension Plan contributions for each Plan Year. Within a
reasonable period of time after the date of receipt by the Administrator of
such information, the Administrator shall allocate such contribution to each
eligible Participant's Account in accordance with Section 4.1.
(d) The Company Stock Account of each Participant shall be credited as
of each Anniversary Date with Forfeitures of Company Stock and his allocable
share of Company Stock (including fractional shares) purchased and paid for
by the Plan or contributed in kind by the Employer. Stock dividends on
Company Stock held in his Company Stock Account shall be credited to his
Company Stock Account when paid. Cash dividends on Company Stock held in his
Company Stock Account shall be credited to his other Investments Account when
paid.
(e) As of each Valuation Date, before the current valuation period
allocation of Employer contributions and Forfeitures, any earnings or losses
(net appreciation or net depreciation) of the Trust Fund shall be allocated
in the same proportion that each Participant's and Former Participant's
nonsegregated accounts (other than each Participant's Company Stock Account)
bear to the total of all Participants' and Former Participants' nonsegregated
accounts (other than Participants' Company Stock Accounts) as of such date.
Participants' transfers from other qualified plans deposited in
the general Trust Fund shall share in any earnings and lossei (net
appreciation or net depreciation) of the Trust Fund in the same manner
provided above. Each segregated account maintained on behalf of a Participant
shall be credited or charged with its separate earnings and losses.
(f) As of each Anniversary Date any amounts which became Forfeitures
since the last Anniversary Date shall first be made available to reinstate
previously forfeited account balances of Former Participants, if any, in
accordance with Section 7.4(g)(2). The remaining Forfeitures, if any, shall
be allocated among the Participants' Accounts of Participants otherwise
eligible to share in the allocation of discretionary contributions in the
same proportion that each such Participant's Compensation for the year bears
to the total Compensation of all such Participants for the year.
Provided, however, that in the event the allocation of Forfeitures
provided herein shall cause the "annual addition" (as defined in Section 4.4)
to any Participant's Account to exceed the amount allowable by the Code, the
excess shall be reallocated in accordance with Section 4.5.
(g) For any Top Heavy Plan Year, Employees not otherwise eligible to
share in the allocation of contributions and Forfeitures as provided above,
shall receive the minimum allocation provided for in Section 4-3(i) if
eligible pursuant to the provisions of Section 4.3(k).
<PAGE>
(h) Notwithstanding the foregoing, Participants who are not actively
employed on the last day of the Plan Year due to Retirement (Normal or Late),
Total and Permanent Disability or death shall share in the allocation of
contributions and Forfeitures for that Plan Year.
(i) Minimum Allocations Required for Top Heavy Plan Years:
Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of the
Employer contributions and Forfeitures allocated to the Participant's Account
of each Employee shall be equal to at least three percent (3%) of such
Employee's "415 Compensation" (reduced by contributions and forfeitures, if
any, allocated to each Employee in any defined contribution plan included
with this plan in a Required Aggregation Group). However, if (1) the sum of
the Employer contributions and Forfeitures allocated to the Participant's
Account of each Key Employee for such Top Heavy Plan Year is less than three
percent (3%) of each Key Employee's "415 Compensation" and (2) this Plan is
not required to be included in an Aggregation Group to enable a defined
benefit plan to meet the requirements of Code Section 401(a)(4) or 410, the
sum of the Employer contributions and Forfeitures allocated to the
Participant's Account of each Employee shall be equal to the largest
percentage allocated to the Participant's Account of any Key Employee.
(j) For purposes of the minimum allocations set forth above, the
percentage allocated to the Participant's Account of any Key Employee shall
be equal to the ratio of the sum of the Employer contributions and
Forfeitures allocated on behalf of such Key Employee divided by the "415
Compensation" for such Key Employee.
(k) For any Top heavy Plan Year, the minimum allocations set forth
above shall be allocated to the Participant's Account of all EMPLOYEES WHO
ARE PARTICIPANTS AND WHO ARE EMPLOYED BY THE EMPLOYER ON THE LAST DAY of the
Plan Year, including Employees who have (1) failed to complete a Year of
Service; and (2) declined to make mandatory contributions (if required) to
the Plan.
(1) For the purposes of this Section, "415 Compensation" shall be
limited to $150,000. Such amount shall be adjusted for increases in the cost
of living in accordance with Code Section 401(a)(17), except that the dollar
increase in effect on January I of any calendar year shall be effective for
the Plan Year beginning with or within such calendar year. For any short Plan
Year the "415 Compensation" limit shall be an amount equal to the "415
Compensation" limit for the calendar year in which the Plan Year begins
multiplied by the ratio obtained by dividing the number of full months in the
short Plan Year by twelve (12).
(m) If a Former Participant is reemployed after five (5) consecutive
1-Year Breaks in Service, then separate accounts shall be maintained as
follows:
(1) one account for nonforfeitable benefits
attributable to pre-break service; and
(2) one account representing his status in the
Plan attributable to post-break service.
4.4 MAXIMUM ANNUAL ADDITIONS
(a) Notwithstanding the foregoing, the maximum "annual additions"
credited to a Participant's accounts for any "limitation year" shall equal
the lesser of: (1) $30,000 adjusted annually as provided in Code Section
415(d) pursuant to the Regulations, or (2)
<PAGE>
twenty-five percent (25%) of the Participant's "415 Compensation" for such
"limitation year." For any short "limitation year," the dollar limitation in
(1) above shall be reduced by a fraction, the numerator of which is the
number of full months in the short "limitation year" and the denominator of
which is twelve (12).
(b) For purposes of applying the limitations of Code Section 415, "annual
additions" means the sum credited to a Participant's accounts for any
"limitation year" of (1) Employer contributions, (2) Employee contributions, (3)
forfeitures, (4) amounts allocated, after March 31, 1984, to an individual
medical account, as defined in Code Section 415(l)(2) which is part of a pension
or annuity plan maintained by the Employer and (5) amounts derived from
contributions paid or accrued after December 31, 1985, in taxable years ending
after such date, which are attributable to post-retirement medical benefits
allocated to the separate account of a key employee (as defined in Code Section
419A(d)(3)) under a welfare benefit plan (as defined in Code Section 419(e))
maintained by the Employer. Except, however, the "415 Compensation" percentage
limitation referred to in paragraph (a)(2) above shall not apply to: (1) any
contribution for medical benefits (within the meaning of Code Section
419A(f)(2)) after separation from service which is otherwise treated as an
"annual addition," or (2) any amount otherwise treated as an "annual addition"
under Code Section 415 (1) (1) .
(c) For purposes of applying the limitations of Code Section 415, the
transfer of funds from one qualified plan to another is not an "annual
addition." In addition, the following are not Employee contributions for the
purposes of Section 4.4(b)(2): (1) rollover contributions (as defined in Code
Sections 402(e)(6), 403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans
made to a Participant from the Plan; (3) repayments of distributions received by
an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (4) repayments of
distributions received by an Employee pursuant to Code Section 411(a)(3)(D)
(mandatory contributions); and (5) Employee contributions to a simplified
employee pension excludable from gross income under Code Section 408 W (6) .
(d) For purposes of applying the limitations of Code Section 415, the
"limitation year" shall be the Plan Year.
(e) For the purpose of this Section, all qualified defined benefit plans
(whether terminated or not) ever maintained by the Employer shall be treated as
one defined benefit plan, and all qualified defined contribution plans (whether
terminated or not) ever maintained by the Employer shall be treated as one
defined contribution plan.
(f) For the purpose of this Section, if the Employer is a member of a
controlled group of corporations, trades or businesses under common control (as
defined by Code Section 1563(a) or Code Section 414(b) and (c) as modified by
Code Section 415(h)), is a member of an affiliated service group (as defined by
Code Section 414(m)), or is a member of a group of entities required to be
aggregated pursuant to Regulations under Code Section 414(o), all Employees of
such Employers shall be considered to be employed by a single Employer.
(g) For the purpose of this Section, if this Plan is a Code Section 413(c)
plan, each Employer who maintains this Plan will be considered to be a separate
Employer.
<PAGE>
(h)(1) If a Participant participates in more than one defined
contribution plan maintained by the Employer which have different Anniversary
Dates, the maximum "annual additions" under this Plan shall equal the maximum
"annual additions" for the "limitation year" minus any "annual additions"
previously credited to such Participant's accounts during the "limitation
year."
(2) If a Participant participates in both a defined contribution plan
subject to Code Section 412 and a defined contribution plan not subject to
Code Section 412 maintained by the Employer which have the same Anniversary
Date, "annual additions" will be credited to the Participant's accounts under
the defined contribution plan subject to Code Section 412 prior to crediting
"annual additions" to the Participant's accounts under the defined
contribution plan not subject to Code Section 412.
(3) If a Participant participates in more than one defined contribution
plan not subject to Code Section 412 maintained by the Employer which have
the same Anniversary Date, the maximum "annual additions" under this Stock
Bonus Plan shall equal the product of (A) the maximum "annual additions" for
the "limitation year" minus any "annual additions" previously credited under
subparagraphs (1) or (2) above, multiplied by (B) a fraction (i) the
numerator of which is the "annual additions" which would be credited to such
Participant's accounts under this Stock Bonus Plan without regard to the
limitations of Code Section 415 and (ii) the denominator of which is such
"annual additions" for all plans described in this subparagraph.
(i) If an Employee is (or has been) a Participant in one or more
defined benefit plans and one or more defined contribution plans maintained
by the Employer, the sum of the defined benefit plan fraction and the defined
contribution plan fraction for any "limitation year" may not exceed 1.0.
(j) The defined benefit plan fraction for any "limitation year" is a
fraction, the numerator of which is the sum of the Participant's projected
annual benefits under all the defined benefit plans (whether or not
terminated) maintained by the Employer, and the denominator of which is the
lesser of 125 percent of the dollar limitation determined for the "limitation
year" under Code Sections 415(b) and (d) or 140 percent of the highest
average compensation, including any adjustments under Code Section 415(b).
Notwithstanding the above, if the Participant was a Participant as
of the first day of the first "limitation year" beginning after December 31,
1986, in one or more defined benefit plans maintained by the Employer which
were in existence on May 6, 1986, the denominator of this fraction will not
be less than 125 percent of the sum of the annual benefits under such plans
which the Participant had accrued as of the close of the last "limitation
year" beginning before January 1, 1987, disregarding any changes in the terms
and conditions of the plan after May 5, 1986. The preceding sentence applies
only if the defined benefit plans individually and in the aggregate satisfied
the requirements of Code Section 415 for all "limitation years" beginning
before January 1, 1987.
(k) The defined contribution plan fraction for any "limitation year" is
a fraction, the numerator of which is the sum of the annual additions to the
Participant's Account under all the defined contribution plans (whether or
not terminated) maintained by the Employer for the current and all prior
"limitation years" (including the annual additions attributable to the
Participant's nondeductible Employee contributions to all defined benefit
plans, whether or not
<PAGE>
terminated, maintained by the Employer, and the annual additions attributable
to all welfare benefit funds, as defined in Code Section 419(e), and
individual medical accounts, as defined in Code Section 415(l)(2), maintained
by the Employer), and the denominator of which is the sum.of the maximum
aggregate amounts for the current and all prior "limitation years" of service
with the Employer (regardless of whether a defined contribution plan was
maintained by the Employer). The maximum aggregate amount in any "limitation
year" is the lesser of 125 percent of the dollar limitation determined under
Code Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35
percent of the Participant's Compensation for such year.
If the Employee was a Participant as of the end of the first day
of the first "limitation year" beginning after December 31, 1986, in one or
more defined contribution plans maintained by the Employer which were in
existence on May 6, 1986, the numerator of this fraction will be adjusted if
the sum of this fraction and the defined benefit fraction would otherwise
exceed 1.0 under the terms of this Plan. Under the adjustment, an amount
equal to the product of (1) the excess of the sum of the fractions over 1.0
times (2) the denominator of this fraction, will be permanently subtracted
from the numerator of this fraction. The adjustment is calculated using the
fractions as they would be computed as of the end of the last "limitation
year" beginning before January 1, 1987, and disregarding any changes in the
terms and conditions of the Plan made after May 5, 1986, but using the Code
Section 415 limitation applicable to the first "limitation year" beginning on
or after January 1, 1987. The annual addition for any "limitation year,,
beginning before January 1, 1987 shall not be recomputed to treat all
Employee contributions as annual additions.
(1) Notwithstanding anything contained in this Section to the contrary,
the limitations, adjustments and other requirements prescribed in this
Section shall at all times comply with the provisions of Code Section 415 and
the Regulations thereunder, the terms of which are specifically incorporated
herein by reference.
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS
(a) If, as a result of the allocation of Forfeitures, a reasonable
error in estimating a Participant's Compensation, a reasonable error in
determining the amount of elective deferrals (within the meaning of Code
Section 402(g)(3)) that may be made with respect to any Participant under the
limits of Section 4.4 or other facts and circumstances to which Regulation
1.415-6(b)(6) shall be applicable, the "annual additions" under this Plan
would cause the maximum "annual additions" to be exceeded for any
Participant, the Administrator shall (1) distribute any elective deferrals
(within the meaning of Code Section 402(g)(3)) or return any Employee
contributions (whether voluntary or mandatory), and for the distribution of
gains attributable to those elective deferrals and Employee contributions, to
the extent that the distribution or return would reduce the "excess amount"
in the Participant's accounts (2) hold any "excess amount" remaining after
the return of any elective deferrals or voluntary Employee contributions in a
"Section 415 suspense account" (3) allocate and reallocate the "Section 415
suspense account" in the next "limitation year" (and succeeding "limitation
years" if necessary) to all Participants in the Plan before any Employer or
Employee contributions which would constitute "annual additions" are made to
the Plan for such "limitation year" (4) reduce Employer contributions to the
Plan for such "limitation year" by the amount of the "Section 415 suspense
account" allocated and reallocated during such "limitation year."
<PAGE>
(b) For purposes of this Article, "excess amount" for any Participant
for a "limitation year" shall mean the excess, if any, of (1) the "annual
additions" which would be credited to his account under the terms of the Plan
without regard to the limitations of Code Section 415 over (2) the maximum
"annual additions" determined pursuant to Section 4.4.
(c) For purposes of this Section, "Section 415 suspense account" shall
mean an unallocated account equal to the sum of "excess amounts" for all
Participants in the Plan during the "limitation year." The "Section 415
suspense account" shall not share in any earnings or losses of the Trust Fund.
(d) The Plan may not distribute or return "excess amounts," other than
elective deferrals (within the meaning of Code Section 402(g)(3)) or Employee
contributions (whether voluntary or mandatory) and gains attributable to such
elective deferrals and Employee contributions, to Participants or Former
Participants.
4.6 TRANSFERS FROM QUALIFIED PLANS
(a) With the consent of the Administrator, amounts may be transferred
from other qualified plans by Eligible Employees, provided that the trust
from which such funds are transferred permits the transfer to be made and the
transfer will not jeopardize the tax exempt status of the Plan or Trust or
create adverse tax consequences for the Employer. The amounts transferred
shall be set up in a separate account herein referred to as a "Participant's
Rollover Account." Such account shall be fully Vested at all times and shall
not be subject to Forfeiture for any reason.
(b) Amounts in a Participant's Rollover Account shall be held by the
Trustee pursuant to the provisions of this Plan and may not be withdrawn by,
or distributed to the Participant, in whole or in part, except as provided in
paragraphs (c) and (d) of this Section.
(c) Except as permitted by Regulations (including Regulation
1.411(d)-4), amounts attributable to elective contributions (as defined in
Regulation 1.401(k)-1(g)(3)), including amounts treated as elective
contributions, which are transferred from another qualified plan in a
plan-to-plan transfer shall be subject to the distribution limitations
provided for in Regulation 1.401(k)-l(d).
(d) The Administrator, at the election of the Participant, shall direct
the Trustee to distribute all or a portion of the amount credited to the
Participant's Rollover Account. Any distributions of amounts held in a
Participant's Rollover Account shall be made in a manner which is consistent
with and satisfies the provisions of Section 7.5, including, but not limited
to, all notice and consent requirements of Code Section 411(a)(11) and the
Regulations thereunder. Furthermore, such amounts shall be considered as part
of a Participant's benefit in determining whether an involuntary cash-out of
benefits without Participant consent may be made.
(e) The Administrator may direct that employee transfers made after a
valuation date be segregated into a separate account for each Participant in
a federally insured savings account, certificate of deposit in a bank or
savings and loan association, money market certificate, or other short term
debt security acceptable to the~ Trustee until such time as the allocations
pursuant to this Plan have been made, at which time they may remain
segregated or be invested as part of the general Trust Fund, to be determined
by the Administrator.
<PAGE>
(f) For purposes of this Section, the term "qualified plan" shall mean
any tax qualified plan under Code Section 401(a). The term "amounts
transferred from other qualified plans" shall mean: (i) amounts transferred
to this Plan directly from another qualified plan; (ii) distributions from
another qualified plan which are eligible rollover distributions and which
are either transferred by the Employee to this Plan within sixty (60) days
following his receipt thereof or are transferred pursuant to a direct
rollover; (iii) amounts transferred to this Plan from a conduit individual
retirement account provided that the conduit individual retirement account
has no assets other than assets which (A) were previously distributed to the
Employee by another qualified plan as a lump-sum distribution (B) were
eligible for tax-free rollover to a qualified plan and (C) were deposited in
such conduit individual retirement account within sixty (60) days of receipt
thereof and other than earnings on said assets; and (iv) amounts distributed
to the Employee from a conduit individual retirement account meeting the
requirements of clause (iii) above, and transferred by the Employee to this
Plan within sixty (60) days of his receipt thereof from such conduit
individual retirement account
(g) Prior to accepting any transfers to which this Section applies, the
Administrator may require the Employee to establish that the amounts to be
transferred to this Plan meet the requirements of this Section and may also
require the Employee to provide an opinion of counsel satisfactory to the
Employer that the amounts to be transferred meet the requirements of this
Section.
(h) This Plan shall not accept any direct or indirect transfers (as
that term is defined and interpreted under Code Section 401(a)(11) and the
Regulations thereunder) from a defined benefit plan, money purchase plan
(including a target benefit plan), stock bonus or profit sharing plan which
would otherwise have provided for a life annuity form of payment to the
Participant.
(i) Notwithstanding anything herein to the contrary, a transfer
directly to this Plan from another qualified plan (or a transaction having
the effect of such a transfer) shall only be permitted if it will not result
in the elimination or reduction of any "Section 411(d)(6) protected benefit"
as described in Section 9.1.
4.7 DIRECTED INVESTMENT ACCOUNT
(a) Each "Qualified Participant" may elect within ninety (90) days
after the close of each Plan Year during the "Qualified Election Period" to
direct the Trustee in writing as to the distribution in cash and/or Company
Stock of 25 percent of the total number of shares of Company Stock acquired
by or contributed to the Plan that have ever been allocated to such
"Qualified Participant's" Company Stock Account (reduced by the number of
shares of Company Stock previously distributed in cash and/or Company Stock
pursuant to a prior election). In the case of the election year in which the
Participant can make his last election, the preceding sentence shall be
applied by substituting "50 percent" for "25 percent." If the "Qualified
Participant" elects to direct the Trustee as to the distribution of his
Company Stock Account, such direction shall be effective no later than 180
days after the close of the Plan Year to which such direction applies. Any
such distribution of Company Stock shall be subject to Section 7.11.
Notwithstanding the above, if the fair market value (determined
pursuant to Section 6.1 at the Plan Valuation Date immediately preceding the
first day on which a "Qualified Participant" is eligible to make an election)
of Company Stock acquired by or
<PAGE>
contributed to the Plan and allocated to a "Qualified Participant's" Company
Stock Account is $500 or less, then such Company Stock shall not be subject
to this paragraph. For purposes of determining whether the fair market value
exceeds $500, Company Stock held in accounts of all employee stock ownership
plans (as defined in Code Section 4975(e)(7)) and tax credit employee stock
ownership plans (as defined in Code Section 409(a)) maintained by the
Employer or any Affiliated Employer shall be considered as held by the Plan.
(b) For the purposes of this Section the following definitions shall
apply:
(1) "Qualified Participant" means any Participant or Former Participant who
has completed ten (10) Years of Service as a Participant and has attained age
55.
(2) "Qualified Election Period" means the six (6) Plan Year period beginning
with the later of (i) the first Plan Year in which the Participant first
became a "Qualified Participant," or (ii)the first Plan Year beginning after
December 31, 1986.
ARTICLE V
FUNDING AND INVESTMENT POLICY
5.1 INVESTMENT POLICY
(a) The Plan is designed to invest primarily in Company Stock.
(b) with due regard to subparagraph (a) above, the Administrator may
also direct the Trustee to invest funds under the Plan in other property
described in the Trust or in life insurance policies to the extent permitted
by subparagraph (c) below, or the Trustee may hold such funds in cash or cash
equivalents.
(c) With due regard to subparagraph (a) above, the Administrator may
also direct the Trustee to invest funds under the Plan in insurance policies
on the life of any "keyman" Employee. The proceeds of a "keyman" insurance
policy may not be used for the repayment of any indebtedness owed by the Plan
which is secured by Company Stock. In the event any "keyman" insurance is
purchased by the Trustee, the premiums paid thereon during any Plan Year, net
of any policy dividends and increases in cash surrender values, shall be
treated as the cost of Plan investment and any death benefit or cash
surrender value received shall be treated as proceeds from an investment of
the Plan.
(d) The Plan may not obligate itself to acquire Company Stock from a
particular holder thereof at an indefinite time determined upon the happening
of an event such as the death of the holder.
(e) The Plan may not obligate itself to acquire Company Stock under a
put option binding upon the Plan. However, at the time a put option is
exercised, the Plan may be given an option to assume the rights and
obligations of the Employer under a put option binding upon the Employer.
(f) All purchases of Company Stock shall be made at a price which, in
the judgment of the Administrator, does not exceed the fair market value
thereof. All sales of Company Stock shall be made at a price which, in the
judgment of the Administrator, is not less than the fair market value
thereof. The valuation rules set forth in Article VI shall be applicable.
<PAGE>
ARTICLE VI
VALUATIONS
6.1 VALUATION OF THE TRUST FUND
The Administrator shall direct the Trustee, as of each Valuation
Date, to determine the net worth of the assets comprising the Trust Fund as
it exists on the Valuation Date. In determining such net worth, the Trustee
shall value the assets comprising the Trust Fund at their fair market value
as of the Valuation Date and shall deduct all expenses for which the Trustee
has not yet obtained reimbursement from the Employer or the Trust Fund.
6.2 METHOD OF VALUATION
valuations must be made in good faith and based on all relevant
factors for determining the fair market value of securities. In the case of a
transaction between a Plan and a disqualified person, value must be
determined as of the date of the transaction. For all other Plan purposes,
value must be determined as of the most recent Valuation Date under the Plan.
An independent appraisal will not in itself be a good faith determination of
value in the case of a transaction between the Plan and a disqualified
person. However, in other cases a determination of fair market value based on
at least an annual appraisal independently arrived at by a person who
customarily makes such appraisals and who is independent of any party to the
transaction will be deemed to be a good faith determination of value. Company
Stock not readily tradable on an established securities market shall be
valued by an independent appraiser meeting requirements similar to the
requirements of the Regulations prescribed under Code Section 170(a)(1).
ARTICLE VII
DETERMINATION AND DISTRIBUTION OF BENEFITS
7.1 DETERMINATION OF BENEFITS UPON RETIREMENT
Every Participant may terminate his employment with the Employer
and retire for the purposes hereof on his Normal Retirement Date. However, a
Participant may postpone the termination of his employment with the Employer
to a later date, in which event the participation of such Participant in the
Plan, including the right to receive allocations pursuant to Section 4.3,
shall continue until his Late Retirement Date. Upon a Participant's
Retirement Date, or as soon thereafter as is practicable, the Trustee shall,
at the election of the Participant, distribute all amounts credited to such
Participant's Account in accordance with Sections 7.5 and 7.6.
7.2 DETERMINATION OF BENEFITS UPON DEATH
(a) Upon the death of a Participant before his Retirement Date or other
termination of his employment, all amounts credited to such Participant's
Account shall become fully Vested. If elected, distribution of the
Participant's Account shall commence not later than one (1) year after the
close of the Plan Year in which such Participant's death occurs. The
Administrator shall direct the Trustee, in accordance with the provisions of
Sections 7.5 and 7.6, to distribute the value of the deceased Participant's
accounts to the Participant's Beneficiary.
<PAGE>
(b) Upon the death of a Former Participant, the Administrator shall
direct the Trustee, in accordance with the provisions of Sections 7.5 and
7.6, to distribute any remaining Vested amounts credited to the accounts of a
deceased Former Participant to such Former Participant's Beneficiary.
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive payment of the value of the
account of a deceased Participant or Former Participant as the Administrator
may deem desirable. The Administrator's determination of death and of the
right of any person to receive payment shall be conclusive.
(d) The Beneficiary of the death benefit payable pursuant to this
Section shall be the Participant's spouse. Except, however, the Participant
may designate a Beneficiary other than his spouse if:
(1) the spouse has waived the right to be the Participant's Beneficiary, or
(2) the Participant is legally separated or has been abandoned (within the
meaning of local law) and the Participant has a court order to such effect
(and there is no "qualified domestic relations order" as defined in Code
Section 414(p) which provides otherwise), or
(3) the Participant has no spouse, or
(4) the spouse cannot be located.
In such event, the designation of a Beneficiary shall be made on a
form satisfactory to the Administrator. A Participant may at any time revoke
his designation of a Beneficiary or change his Beneficiary by filing written
notice of such revocation or change with the Administrator. However, the
Participant's spouse must again consent in writing to any change in
Beneficiary unless the original consent acknowledged that the spouse had the
right to limit consent only to a specific Beneficiary and that the spouse
voluntarily elected to relinquish such right. In the event no valid
designation of Beneficiary exists at the time of the Participant's death, the
death benefit shall be payable to his estate.
(e) Any consent by the Participant's spouse to waive any rights to the
death benefit must be in writing, must acknowledge the effect of such waiver,
and be witnessed by a Plan representative or a notary public. Further, the
spouse's consent must be irrevocable and must acknowledge the specific
nonspouse Beneficiary.
7.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY
In the event of a Participant's Total and Permanent Disability
prior to his Retirement Date or other termination of his employment, all
amounts credited to such Participant's Account shall become fully Vested. In
the event of a Participant's Total and Permanent Disability, the Trustee, in
accordance with the provisions of Sections 7.5 and 7.6, shall distribute to
such Participant all amounts credited to such Participant's Account as though
he had retired. If such Participant elects, distribution shall commence not
later than one (1) year after the close of the Plan Year in which Total and
Permanent Disability occurs.
<PAGE>
7.4 DETERMINATION OF BENEFITS UPON TERMINATION
(a) If a Participant's employment wi-th the Employer is terminated for
any reason other than death, Total and Permanent Disability or retirement,
such Participant shall be entitled to such benefits as are provided
hereinafter pursuant to this Section 7.4.
If a portion of a Participant's Account is forfeited, Company
Stock allocated to the Participant's Company Stock Account must be forfeited
only after the Participant's Other Investments Account has been depleted. If
interest in more than one class of Company Stock has been allocated to a
Participant's Account, the Participant must be treated as forfeiting the same
proportion of each such class.
Distribution of the funds due to a Terminated Participant shall be
made on the occurrence of an event which would result in the distribution had
the Terminated Participant remained in the employ of the Employer (upon the
Participant's death, Total and Permanent Disability or Normal Retirement).
However, at the election of the Participant, the Administrator shall direct
the Trustee to cause the entire Vested portion of the Terminated
Participant's Account to be payable to such Terminated Participant on or
after the Anniversary Date coinciding with or next following termination of
employment. Any distribution under this paragraph shall be made in a manner
which is consistent with and satisfies the provisions of Sections 7.5 and
7.6, including, but not limited to, all notice and consent requirements of
Code Section 411(a)(11) and the Regulations thereunder.
For purposes of this Section 7.4, if the value of a Terminated
Participant's Vested benefit is zero, the Terminated Participant shall be
deemed to have received a distribution of such Vested benefit.
(b) The Vested portion of any Participant's Account shall be a
percentage of the total amount credited to his Participant's Account
determined on the basis of the Participant's number of Years of Service
according to the following schedule:
Vesting Schedule
<TABLE>
<CAPTION>
Years of Service Percentage
<S> <C>
2 25 %
3 50 %
4 75 %
5 100 %
</TABLE>
(c) Notwithstanding the vesting schedule provided for in paragraph (b)
above, for any Top Heavy Plan Year, the Vested portion of the Participant's
Account of any Participant who has an Hour of Service after the Plan becomes
top heavy shall be a percentage of the total amount credited to his
Participant's Account determined on the basis of the Participant's number of
Years of Service according to the following schedule:
If in any subsequent Plan Year, the Plan ceases to be a Top Heavy
Plan, the Administrator shall revert to the vesting schedule in effect before
this Plan became a Top Heavy Plan. Any such reversion shall be treated as a
Plan amendment pursuant to the terms of the Plan.
(d) Notwithstanding the vesting schedule above, the Vested percentage
of a Participant's Account shall not be less than the
<PAGE>
Vested percentage attained as of the later of the effective date or adoption
date of this amendment and restatement.
(e) Notwithstanding the vesting schedule above, upon the complete
discontinuance of the Employer contributions to the Plan or upon any full or
partial termination of the Plan, all amounts credited to the account of any
affected Participant shall become 100% Vested and shall not thereafter be
subject to Forfeiture.
(f) The computation of a Participant's nonforfeitable percentage of his
interest in the Plan shall not be reduced as the result of any direct or
indirect amendment to this Plan. For this purpose, the Plan shall be treated
as having been amended if the Plan provides for an automatic change in
vesting due to a change in top heavy status. In the event that the Plan is
amended to change or modify any vesting schedule, a Participant with at least
three (3) Years of Service as of the expiration date of the election period
may elect to have his nonforfeitable percentage computed under the Plan
without regard to such amendment. If a Participant fails to make such
election, then such Participant shall be subject to the new vesting schedule.
The Participant's election period shall commence on the adoption date of the
amendment and shall end 60 days after the latest of:
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
(3) the date the Participant receives written notice of the amendment from
the Employer or Administrator.
(g)(1) If any Former Participant shall be reemployed by the Employer
before a 1-Year Break in Service occurs, he shall continue to participate in
the Plan in the same manner as if such termination had not occurred.
(2) If any Former Participant shall be reemployed by the Employer
before five (5) consecutive 1-Year Breaks in Service, and such Former
Participant had received, or was deemed to have received, a distribution of
his entire V3sted interest prior to his reemployment, his forfeited account
shall be reinstated only if he repays the full amourit distributed to him
before the earlier of five (5) years after the first date on which the
Participant is subsequently reemployed by the Employer or the close of the
first period of five (5) consecutive 1-Year Breaks in Service commencing
after the distribution, or in the event of a deemed distribution, upon the
reemployment of such Former Participant. In the event the Former Participant
does repay the full amount distributed to him, or in the event of a deemed
distribution, the undistributed portion of the Participant's Account must be
restored in full, unadjusted by any gains or losses occurring subsequent to
the Valuation Date coinciding with or preceding his termination. The source
for such reinstatement shall first be any Forfeitures occurring during the
year. If such source is insufficient, then the Employer shall contribute an
amount which is sufficient to restore any such forfeited Accounts provided,
however, that if a discretionary contribution is made for such year, such
contribution shall first be applied to restore any such Accounts and the
remainder shall be allocated in accordance with Section 4.3.
(3) If any Former Participant is reemployed after a 1-Year Break in
Service has occurred, Years of Service shall include Years of
<PAGE>
Service prior to his 1-Year Break in Service subject to the following rules:
(i) If a Former Participant has a 1-Year Break in Service, his
pre-break and post-break service shall be used for computing Years of Service
for eligibility and for vesting purposes only after he has been employed for
one (1) Year of Service following the date of his reemployment with the
Employer;
(ii) Any Former Participant who under the Plan does not have a
nonforfeitable right to any interest in the Plan resulting from Employer
contributions shall lose credits otherwise allowable under (i) above if his
consecutive 1-Year Breaks in Service equal or exceed the greater of (A) five
(5) or (B) the aggregate number of his pre-break Years of Service;
(iii) After five (5) consecutive 1-Year Breaks in Service, a Former
Participant's VestedAccount balance attributable to pre-break service shall not
be increased as a result of post-break service;
(iv) If a Former Participant who has not had his Years of Service
before a 1-Year Break in Service disregarded pursuant to (ii) above completes
a Year of Service for eligibility purposes following his reemployment with
the Employer, he shall participate in the Plan retroactively from his date of
reemployment;
(v) If a Former Participant who has not had his Years of Service
before a 1-Year Break in Service disregarded pursuant to (ii) above completes
a Year of Service (a 1-Year Break in Service previously occurred, but
employment had not terminated), he shall participate in the Plan
retroactively from the first day on which he is credited with an Hour of
Service after the first eligibility computation period in which he incurs
a 1-Year Break in Service.
(h) In determining Years of Service for purposes of vesting under the
Plan, Years of Service prior to the vesting computation period in which an
Employee attained his eighteenth birthday shall be excluded.
7.5 DISTRIBUTION OF BENEFITS
(a) The Administrator, pursuant to the election of the Participant (or
if no election has been made prior to the Participant's death, by his
Beneficiary), shall direct the Trustee to distribute to a Participant or his
Beneficiary any amount to which he is entitled under the Plan in one or more
of the following methods:
(1) One lump-sum payment;
(2) Payments over a period certain in monthly, quarterly, semiannual,
or annual installments. The period over which such payment is to be made
shall not extend beyond the earlier of the Participant's life expectancy (or
the life expectancy of the Participant and his designated Beneficiary) or the
limited distribution period provided for in Section 7.5(b).
(b) Unless the Participant elects in writing a longer distribution
period, distributions to a Participant or his Beneficiary attributable to
Company Stock shall be in substantially equal monthly, quarterly, semiannual,
or annual installments over a period not longer than five (5) years. In the
case of a Participant with an account balance attributable to Company Stock
in excess of $500,000, the five
<PAGE>
(5) year period shall be extended one (1) additional year (but not more than
five (5) additional years) for each $100,000 or fraction thereof by which
such balance exceeds $500,000. The dollar limits shall be adjusted at the
same time and in the same manner as provided in Code Section 415(d).
(c) Any distribution to a Participant who has a benefit which exceeds,
or has ever exceeded, $3,500 at the time of any prior distribution shall
require such Participant's consent pursuant to this Section 7.5(c) if such
distribution commences prior to the later of his Normal Retirement Age or age
62. With regard to this required consent:
(1) The Participant must be informed of his right to defer receipt of
the distribution. If a Participant fails to consent, it shall be deemed an
election to defer the commencement of payment of any benefit. However, any
election to defer the receipt of benefits shall not apply with respect to
distributions which are required under Section 7.5(f).
(2) Notice of the rights specified under this paragraph shall be
provided no less than 30 days and no more than 90 days before the date the
distribution commences.
(3) Written consent of the Participant to the distribution must not be
made before the Participant receives the notice and must not be made more
than 90 days before the date the distribution commences.
(4) No consent shall be valid if a significant detriment is imposed
under the Plan on any Participant who does not consent to the distribution.
Any such distribution may commence less than 30 days after the notice
required under Regulation 1.411(a)-11(c) is given, provided that: (1) the
Administrator clearly informs the Participant that the Participant has a
right to a period of at least 30 days after receiving the notice to consider
the decision of whether or not to elect a distribution (and, if applicable, a
particular distribution option), and (2) the Participant, after receiving the
notice, affirmatively elects a distribution.
(d) Notwithstanding anything herein to the contrary, the Administrator,
in his sole discretion, may direct that cash dividends on shares of Company
Stock allocable to Participants' or Former Participants' Company Stock
Accounts be distributed to such Participants or Former Participants within 90
days after the close of the Plan Year in which the dividends are paid.
(e) Any part of a Participant's benefit which is retained in the Plan
after the Anniversary Date on which his participation ends will continue to
be treated as a Company Stock Account or as an Other Investments Account
(subject to Section 7.4(a)) as provided in Article IV. However, neither
account will be credited with any further Employer contributions or
Forfeitures.
(f) Notwithstanding any provision in the Plan to the contrary, the
distribution of a Participant's benefits shall be made in accordance with the
following requirements and shall otherwise comply with Code Section 401(a)(9)
and the Regulations thereunder (including Regulation 1.401(a)(9)-2), the
provisions of which are incorporated herein by reference:
<PAGE>
(1) A Participant's benefits shall be distributed or must begin to be
distributed to him not later than April 1st of the calendar year following
the later of (i) the calendar year in which the Participant attains age
70 1/2 or (ii) the calendar year in which the Participant retires, provided,
however, that this clause (ii) shall not apply in the case of a Participant
who is a "five (5) percent owner" at any time during the five (5) Plan Year
period ending in the calendar year in which he attains age 70 1/2 or, in the
case of a Participant who becomes a "five (5) percent owner" during any
subsequent Plan Year, clause (ii) shall no longer apply and the required
beginning date shall be the April Ist of the calendar year following the
calendar year in which such subsequent Plan Year ends. Such distributions
shall be equal to or greater than any required distribution. Notwithstanding
the foregoing, clause (ii) above shall not apply to any Participant unless
the Participant had attained age 70 1/2 before January 1, 1988 and was not a
"five (5) percent owner" at any time during the Plan Year ending with or
within the calendar year in which the Participant attained age 66 1/2 or any
subsequent Plan Year.
Alternatively, distributions to a Participant must begin no later than
the applicable April 1st as determined under the preceding paragraph and must
be made over a period certain measured by the life expectancy of the
Participant (or the life expectancies of the Participant and his designated
Beneficiary) in accordance with Regulations.
(2) Distributions to a Participant and his Beneficiaries shall only be
made in accordance with the incidental death benefit requirements of Code
Section 401(a)(9)(G) and the Regulations thereunder.
(g) Notwithstanding any provision in the Plan to the contrary,
distributions upon the death of a Participant shall be made in accordance
with the following requirements and shall otherwise comply with Code Section
401(a)(9) and the Regulations thereunder. If it is determined pursuant to
Regulations that the distribution of a Participant's interest has begun and
the Participant dies before his entire interest has been distributed to him,
the remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution selected pursuant to Section 7.5
as of his date of death. If a Participant dies before he has begun to receive
any distributions of his interest under the Plan or before distributions are
deemed to have begun pursuant to Regulations, then his death benefit shall be
distributed to his Beneficiaries by December 31st of the calendar year in
which the fifth anniversary of his date of death occurs.
However, the 5-year distribution requirement of the preceding
paragraph shall not apply to any portion of the deceased Participant's
interest which is payable to or for the benefit of a designated Beneficiary.
In such event, such portion may, at the election of the Participant (or the
Participant's designated Beneficiary), be distributed over a period not
extending beyond the life expectancy of such designated Beneficiary provided
such distribution begins not later than December 31st of the calendar year
immediately following the calendar year in which the Participant died.
However, in the event the Participant's spouse (determined as of the date of
the Participant's death) is his Beneficiary, the requirement that
distributions commence within one year of a Participant's death shall not
apply. In lieu thereof, distributions must commence on or before the later
~,f: (1) December 31st of the calendar year immediately following the
calendar year in which the Participant died; or (2) December 31st of the
calendar year in which the Participant
<PAGE>
would have attained age 70 1/2. If the surviving spouse dies before
distributions to such spouse begin, then the 5-year distribution requirement
of this Section shall apply as if the spouse was the Participant.
(h) For purposes of Section 7.5(g), the election by a designated
Beneficiary to be excepted from the 5-year distribution requirement must be
made no later than December 31st of the calendar year following the calendar
year of the Participant's death. Except, however, with respect to a
designated Beneficiary who is the Participant's surviving spouse, the
election must be made by the earlier of: (1) December 31st of the calendar
year immediately following the calendar year in which the Participant died
or, if later, the calendar year in which the Participant would have attained
age 70 1/2; or (2) December 31st of the calendar year which contains the
fifth anniversary of the date of the Participant's death. An election by a
designated Beneficiary must be in writing and shall be irrevocable as of the
last day of the election period stated herein. In the absence of an election
by the Participant or a designated Beneficiary, the 5-year distribution
requirement shall apply.
(i) For purposes of this Section, the life expectancy of a Participant
and a Participant's spouse may, at the election of the Participant or the
Participant's spouse, be redetermined in accordance with Regulations. The
election, once made, shall be irrevocable. If no election is made by the time
distributions must commence, then the life expectancy of the Participant and
the Participant's spouse shall not be subject to recalculation. Life
expectancy and joint and last survivor expectancy shall be computed using the
return multiples in Tables V and VI of Regulation 1.72-9.
(j) Except as limited by Sections 7.5 and 7.6, whenever the Trustee is
to make a distribution or to commence a series of payments, the distribution
or series of payments may be made or begun as soon as is practicable.
However, unless a Former Participant elects in writing to defer the receipt
of benefits (such election may not result in a death benefit that is more
than incidental), the payment of benefits shall begin not later than the 60th
day after the close of the Plan Year in which the latest of the following
events occurs:
(1) the date on which the Participant attains the earlier of age 65 or
the Normal Retirement Age specified herein;
(2) the 10th anniversary of the year in which the-Participant commenced
participation in the Plan; or
(3) the date the Participant terminates his service with the Employer.
(k) If a distribution is made at a time when'a Participant is not fully
Vested in his Participant's Account and the Participant may increase the
Vested percentage in such account:
(1) a separate account shall be established for the Participant's
interest in the Plan as of the time of the distribution; and
(2) at any relevant time, the Participant's Vested portion of the
separate account shall be equal to an amount ("X") determined by the formula:
X equals P(AB plus (R x D)) - (R x D)
For purposes of applying the formula: P is the Vested percentage at the
relevant time, AB is the account balance at the relevant time, D
<PAGE>
is the amount of distribution, and R is the ratio of the account balance at
the relevant time to the account balance after distribution.
7.6 HOW PLAN BENEFIT WILL BE DISTRIBUTED
(a) Distribution of a Participant's benefit may be made in cash or
Company Stock or both, provided, however, that if a Participant or
Beneficiary so demands, such benefit shall be distributed only in the form of
Company Stock. Prior to making a distribution of benefits, the Administrator
shall advise the Participant or his Beneficiary, in writing, of the right to
demand that benefits be distributed solely in Company Stock.
(b) If a Participant or Beneficiary demands that benefits be
distributed solely in Company Stock, distribution of a Participant's benefit
will be made entirely in whole shares or other units of Company Stock. Any
balance in a Participant's Other Investments Account will be applied to
acquire for distribution the maximum number of whole shares or other units of
Company Stock at the then fair market value. Any fractional unit value
unexpended will be distributed in cash. If Company Stock is not available for
purchase by the Trustee, then the Trustee shall hold such balance until
Company Stock is acquired and then make such distribution, subject to
Sections 7.5(j) and 7.5(f).
(c) The Trustee will make distribution from the Trust only on
instructions from the Administrator.
(d) Notwithstanding anything contained herein to the contrary, if the
Employer charter or by-laws restrict ownership of substantially all shares of
Company Stock to Employees and the Trust Fund, as described in Code Section
409(h)(2), the Administrator shall distribute a Participant's Account
entirely in cash without granting the Participant the right to demand
distribution in shares of Company Stock.
(e) Except as otherwise provided herein, Company Stock distributed by
the Trustee may be restricted as to sale or transfer by the by-laws or
articles of incorporation of the Employer, provided restrictions are
applicable to all Company Stock of the same class. If a Participant is
required to offer the sale of his Company Stock to the Employer before
offering to sell his Company Stock to a third party, in no event may the
Employer pay a price less than that offered to the distributee by another
potential buyer making a bona fide offer and in no event shall the Trustee
pay a price less than the fair market value of the Company Stock.
7.7 DISTRIBUTION FOR MINOR BENEFICIARY
In the event a distribution is to be made to a minor, then the
Administrator may direct that such distribution be paid to the legal
guardian, or if none, to a parent of such Beneficiary or a responsible adult
with whom the Beneficiary maintains his residence, or to the custodian for
such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act,
if such is permitted by the laws of the state in which said Beneficiary
resides. Such a payment to the legal guardian, custodian or parent of a minor
Beneficiary shall fully discharge the Trustee, Employer, and Plan from
further liability on account thereof.
<PAGE>
7.8 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN
In the event that all, or any portion, of the distribution payable
to a Participant or his Beneficiary hereunder shall, at the later of the
Participant's attainment of age 62 or his Normal Retirement Age, remain
unpaid solely by reason of the inability of the Administrator, after sending
a registered letter, return receipt requested, to the last known address, and
after further diligent effort, to ascertain the whereabouts of such
Participant or his Beneficiary, the amount so distributable shall be treated
as a 'Forfeiture pursuant to the Plan. In the event a Participant or
Beneficiary is located subsequent to his benefit being reallocated, such
benefit shall be restored unadjusted for earnings or losses.
7.9 RIGHT OF FIRST REFUSALS
(a) If any Participant, his Beneficiary or any other person to whom
shares of Company Stock are distributed from the Plan (the "Selling
Participant") shall, at any time, desire to sell some or all of such shares
(the "Offered Shares") to a third party (the "Third Party"), the Selling
Participant shall give written notice of such desire to the Employer and the
Administrator, which notice shall contain the number of shares offered for
sale, the proposed terms of the sale and the names and addresses of both the
Selling Participant and Third Party. Both the Trust Fund and the Employer
shall each have the right of first refusal for a period of fourteen (14) days
from the date the Selling Participant gives such written notice to the
Employer and the Administrator (such fourteen (14) day period to run
concurrently against the Trust Fund and the Employer) to acquire the Offered
Shares. As between the Trust Fund and the Employer, the Trust Fund shall have
priority to acquire the shares pursuant to the right of first refusal. The
selling price and terms shall be the same as offered by the Third Party.
(b) If the Trust Fund and the Employer do not exercise their right of
first refusal within the required fourteen (14) day period provided above,
the Selling Participant shall have the right, at any time following the
expiration of such fourteen (14) day period, to dispose of the Offered Shares
to the Third Party; provided, however, that (i) no disposition shall be made
to the Third Party on terms more favorable to the Third Party than those set
forth in the written notice delivered by the Selling Participant above, and
(ii) if such disposition shall not be made to a third party on the terms
offered to the Employer and the Trust Fund, the offered Shares shall again be
subject to the right of first refusal set forth above.
(c) The closing pursuant to the exercise of the right of first refusal
under Section 7.9(a) above shall take place at such place agreed upon between
the Administrator and the Selling Participant, but not later than ten (10)
days after the Employer or the Trust Fund shall have notified the Selling
Participant of the exercise of the right of first refusal. At such closing,
the Selling Participant shall deliver certificates representing the Offered
Shares duly endorsed in blank for transfer, or with stock powers attached
duly executed in blank with all required transfer tax stamps attached or
provided for, and the Employer or the Trust Fund shall deliver the purchase
price, or an appropriate portion thereof, to the Selling Participant.
7.10 STOCK CERTIFICATE LEGEND
Certificates for shares distributed pursuant to the Plan shall
contain the following legend:
<PAGE>
"The shares represented by this certificate are transferable only upon
compliance with the terms of INVITROGEN CORPORATION EMPLOYEE STOCK OWNERSHIP
PLAN effective as of January 1, 1996, which grants to Invitrogen Corporation
a right of first refusal, a copy of said Plan being on file in the office of
the Company."
7.11 PUT OPTION
(a) If Company Stock is distributed to a Participant and such Company
Stock is not readily tradeable on an established securities market, a
Participant has a right to require the Employer to repurchase the Company
Stock distributed to such Participant under a fair valuation formula. Such
Stock shall be subject to the provisions of Section 7.11(b).
(b) The put option must be exercisable only by a Participant, by the
Participant's donees, or by a person (including an estate or its distributee)
to whom the Company Stock passes by reason of a Participant's death. (Under
this paragraph Participant or Former Participant means a Participant or
Former Participant and the beneficiaries of the Participant or Former
Participant under the Plan.) The put option must permit a Participant to put
the Company Stock to the Employer. Under no circumstances may the put option
bind the Plan. However, it shall grant the Plan an option to assume the
rights and obligations of the Employer at the time that the put option is
exercised. If it is known at the time a loan is made that Federal or State
law will be violated by the Employer honoring such put option, the put option
must permit the Company Stock to be put, in a manner consistent with such
law, to a third party (e.g., an affiliate of the Employer or a shareholder
other than the Plan) that has substantial net worth at the time the loan is
made and whose net worth is reasonably expected to remain substantial.
The put option shall commence as of the day following the date the
Company Stock is distributed to the Former Participant and end 60 days
thereafter and if not exercised within such 60-day period, an additional
60-day option shall commence on the first day of the fifth month of the Plan
Year next following the date the stock was distributed to the Former
Participant (or such other 60-day period as provided in Regulations).
However, in the case of Company Stock that is publicly traded without
restrictions when distributed but ceases to be so traded within either of the
60-day periods described herein after distribution, the Employer must notify
each holder of such Company Stock in writing on or before the tenth day after
the date the Company Stock ceases to be so traded that for the remainder of
the applicable 60-day period the Company Stock is subject to the put option.
The number of days between the tenth day and the date on which notice is
actually given, if later than the tenth day, must be added to the duration of
the put option. The notice must inform distributees of the term of the put
options that they are to hold. The terms must satisfy the requirements of
this paragraph.
The put option is exercised by the holder notifying the Employer
in writing that the put option is being exercised; the notice shall state the
name and address of the holder and the number of shares to be sold. The
period during which a put option is exercisable does not include any time
when a distributee is unable to exercise it because the party bound by the
put option is prohibited from honoring it by applicable Federal or State law.
The price at which a put option must be exercisable is the value of the
Company Stock determined in accordance with Section 6.2. Payment under the
put option involving a "Total Distribution" shall be paid in substantially
equal monthly, quarterly, semiannual or annual installments over a period
certain
<PAGE>
beginning not later than thirty (30) days after the exercise of the put
option and not extending beyond (5) years. The deferral of payment is
reasonable if adequate security and a reasonable interest rate on the unpaid
amounts are provided. The amount to be paid under the put option involving
installment distributions must be paid not later than thirty (30) days after
the exercise of the put option. Payment under a put option must not be
restricted by the provisions of a loan or any other arrangement, including
the terms of the Employer articles of incorporation, unless so required by
applicable state law.
For purposes of this Section, "Total Distribution" means a
distribution to a Participant or his Beneficiary within one taxable year of
the entire Vested Participant's Account.
(c) An arrangement involving the Plan that creates a put option must
not provide for the issuance of put options other than as provided under this
Section. The Plan (and the Trust Fund) must not otherwise obligate itself to
acquire Company Stock from a particular holder thereof at an indefinite time
determined upon the happening of an event such as the death of the holder.
7.12 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION
All rights and benefits, including elections, provided to a
Participant in this Plan shall be subject to the rights afforded to any
"alternate payee" under a "qualified domestic relations order." Furthermore,
a distribution to an "alternate payee" shall be permitted if such
distribution is authorized by a "qualified domestic relations order," even if
the affected Participant has not separated from service and has not reached
the "earliest retirement age" under the Plan. For the purposes of this
Section, "alternate payee," "qualified domestic relations order" and
"earliest retirement age" shall have the meaning set forth under Code Section
414(p).
50
ARTICLE VIII
TRUSTEE
8.1 BASIC RESPONSIBILITIES OF THE TRUSTEE
(a) The Trustee shall have the following categories of responsibilities:
(1) Consistent with the "funding policy and method" determined by the
Employer, to invest, manage, and control the Plan assets subject, however, to
the direction of the Employer or an Investment Manager if the Trustee should
appoint such manager as to all or a portion of the assets of the Plan;
(2) At the direction of the Administrator, to pay benefits required
under the Plan to be paid to Participants, or, in the event of their death,
to their Beneficiaries; and
(3) To maintain records of receipts and disbursements and furnish to
the Employer and/or Administrator for each Plan Year a written annual report
per Section 8.7.
(b) In the event that the Trustee shall be directed by the Employer, or
an Investment Manager with respect to the investment of any or all Plan
assets, the Trustee shall have no liability with respect to the investment of
such assets, but shall be responsible only to execute such investment
instructions as so directed.
<PAGE>
(1) The Trustee shall be entitled to rely fully on the written
instructions of the Employer, or any Fiduciary or nonfiduciary agent of the
Employer, in the discharge of such duties, and shall not be liable for any
loss or other liability, resulting from such direction (or lack of direction)
of the investment of any part of the Plan assets.
(2) The Trustee may delegate the duty to execute such instructions to
any nonfiduciary agent, which may be an affiliate of the Trustee or any Plan
representative.
(c) If there shall be more than one Trustee, they shall act by a
majority of their number, but may authorize one or more of them to sign
papers on their behalf.
8.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE
(a) The Trustee shall invest and reinvest the Trust Fund to keep the
Trust Fund invested without distinction between principal and income and in
such securities or property, real or personal, wherever situated, as the
Trustee shall deem advisable, including, but not limited to, stocks, common
or preferred, bonds and other evidences of indebtedness or ownership, and
real estate or any interest therein. The Trustee shall at all times in making
investments of the Trust Fund consider, among other factors, the short and
long-term financial needs of the Plan on the basis of information furnished
by the Employer. In making such investments, the Trustee shall not be
restricted to securities or other property of the character expressly
authorized by the applicable law for trust investments; however, the Trustee
shall give due regard to any limitations imposed by the Code or the Act so
that at all times the Plan may qualify as an Employee Stock Ownership Plan
and Trust.
(b) The Trustee may employ a bank or trust company pursuant to the
terms of its usual and customary bank agency agreement, under which the
duties of such bank or trust company shall be of a custodial', clerical and
record-keeping nature.
(c) In the event the Trustee invests any part of the Trust Fund,
pursuant to the directions of the Administrator, in any shares of stock
issued by the Employer, and the Administrator thereafter directs the Trustee
to dispose of such investment, or any part thereof, under circumstances
which, in the opinion ' of counsel for the Trustee, require registration of
the securities under the Securities Act of 1933 and/or qualification of the
securities under the Blue Sky laws of any state or states, then the Employer
at its own expense, will take or cause to be taken any and all such action as
may be necessary or appropriate to effect such registration and/or
qualification.
8.3 OTHER POWERS OF THE TRUSTEE
The Trustee, in addition to all powers and authorities under common
law, statutory authority, including the Act, and other provisions of the
Plan, shall have the following powers and authorities, t-o be exercised in
the Trustee's sole discretion:
(a) To purchase, or subscribe for, any securities or other property and
to retain the same. In conjunction with the purchase of securities, margin
accounts may be opened and maintained;
(b) To sell, exchange, convey, transfer, grant options to purchase, or
otherwise dispose of any securities or other property
<PAGE>
held by the Trustee, by private contract or at public auction. No person
dealing with the Trustee shall be bound to see to the application of the
purchase money or to inquire into the validity, expediency, or propriety of
any such sale or other disposition, with or without advertisement;
(c) To vote upon any stocks, bonds, or other securities; to give
general or special proxies or powers of attorney with or without power of
substitution; to exercise any conversion privileges, subscription rights or
other options, and to make any payments incidental thereto; to oppose, or to
consent to, or otherwise participate in, corporate reorganizations or other
changes affecting corporate securities, and to delegate discretionary powers,
and to pay any assessments or charges in connection therewith; and generally
to exercise any of the powers of an owner with respect to stocks, bonds,
securities, or other property. However, the Trustee shall not vote proxies
relating to securities for which it has not been assigned full investment
management responsibilities. In those cases where another party has such
investment authority or discretion, the Trustee will deliver all proxies to
said party who will then have full responsibility for voting those proxies;
(d) To cause any securities or other property to be registered in the
Trustee's own name or in the name of one or more of the Trustee's nominees,
and to hold any investments in bearer form, but the books and records of the
Trustee shall at all times show that. all such investments are part of the
Trust Fund;
(e) To borrow or raise money for the purposes of the Plan in such
amount, and upon such terms and conditions, as the Trustee shall deem
advisable; and for any sum so borrowed, to issue a promissory note as
Trustee, and to secure the repayment thereof by
pledging all, or any part, of the Trust Fund; and no person lending money to
the Trustee shall be bound to see to the application of the money lent or to
inquire into the validity, expediency, or propriety of any borrowing;
(f) To keep such portion of the Trust Fund in cash or cash balances as
the Trustee may, from time to time, deem to be in the best interests of the
Plan, without liability for interest thereon;
(g) To accept and retain for such time as the Trustee may deem
advisable any securities or other property received or acquired as Trustee
hereunder, whether or not such securities or other property would normally be
purchased as investments hereunder;
(h) To make, execute, acknowledge, and deliver any and all documents of
transfer and conveyance and any and all other instruments that may be
necessary or appropriate to carry out the powers herein granted;
(i) To settle, compromise, or submit to arbitration any claims, debts,
or damages due or owing to or from the Plan, to commence or defend suits or
legal or administrative proceedings, and to represent the Plan in all suits
and legal and administrative proceedings;
(j) To employ suitable agents and counsel and to pay their reasonable
expenses and compensation, and such agent or counsel may or may not be agent
or counsel for the Employer;
<PAGE>
(k) To apply for and procure from responsible insurance companies, to
be selected by the Administrator, as an investment of the Trust Fund such
annuity, or other Contracts (on the life of any Participant) as the
Administrator shall deem proper; to exercise, at any time or from time to
time, whatever rights and privileges may be granted under such annuity, or
other Contracts; to collect, receive, and settle for the proceeds of all such
annuity or other Contracts as and when entitled to do so under the provisions
thereof;
(1) To invest funds of the Trust in time deposits or savings accounts
bearing a reasonable rate of interest in the Trustee's bank;
(m) To invest in Treasury Bills and other forms of United States
government obligations;
(n) To invest in shares of investment companies registered under the
Investment Company Act of 1940;
(o) To deposit monies in federally insured savings accounts or
certificates of deposit in banks or savings and loan associations;
(p) To vote Company Stock as provided in Section 8.4;
(q) To consent to or otherwise participate in reorganizations,
recapitalizations, consolidations, mergers and similar transactions with
respect to Company Stock or any other securities and to pay any assessments
or charges in connection therewith;
(r) To deposit such Company Stock (but only if such deposit does not
violate the provisions of Section 8.4 hereof) or other securities in any
voting trust, or with any protective or like committee, or with a trustee or
with depositories designated thereby;
(s) To sell or exercise any options, subscription rights and conversion
privileges and to make any payments incidental thereto;
(t) To exercise any of the powers of an owner, with respect to such
Company Stock and other securities or other property comprising the Trust
Fund. The Administrator, with the Trustee's approval, may authorize the
Trustee to act on any administrative matter or class of matters with respect
to which direction or instruction to the Trustee by the Administrator is
called for hereunder without specific direction or other instruction from the
Administrator;
(u) To sell, purchase and acquire put or call options if the options
are traded on and purchased through a national securities exchange registered
under the Securities Exchange Act of 1934, as amended, or, if the options are
not traded on a national securities exchange, are guaranteed by a member firm
of the New York Stock Exchange;
(v) To do all such acts and exercise all such rights and privileges,
although not specifically mentioned herein, as the Trustee may deem necessary
to carry out the purposes of the Plan.
8.4 VOTING COMPANY STOCK
The Trustee shall vote all Company Stock held by it as part of the
Plan assets. Provided, however, that if any agreement entered into by the
Trust provides for voting of any shares of Company Stock pledged as security
for any obligation of the Plan, then such shares of Company Stock shall be
voted in accordance with such agreement. If the Trustee does not timely
receive voting directions from a
<PAGE>
Participant or Beneficiary with respect to any Company Stock allocated to
that Participant's or Beneficiary's Company Stock Account, the Trustee shall
vote such Company Stock.
Notwithstanding the foregoing, if the Employer has a
registration-type class of securities, each Participant or Beneficiary shall
be entitled to direct the Trustee as to the manner in which the Company Stock
which is entitled to vote and which is allocated to the Company Stock Account
of such Participant or Beneficiary is to be voted. If the Employer does not
have a registration-type class of securities, each Participant or Beneficiary
in the Plan shall be entitled to direct the Trustee as to the manner in which
voting rights on shares of Company Stock which are allocated to the Company
Stock Account of such Participant or Beneficiary are to be exercised with
respect to any corporate matter which involves the voting of such shares with
respect to the approval or disapproval of any corporate merger or
consolidation, recapitalization, reclassification, liquidation, dissolution,
sale of substantially all assets of a trade or business, or such similar
transaction as prescribed in Regulations. For purposes of this Section the
term "registration-type class of securities" means: (A) a class of securities
required to be registered under Section 12 of the Securities Exchange Act of
1934; and (B) a class of securities which would be required to be so
registered except for the exemption from registration provided in subsection
(g)(2)(H) of such Section 12.
If the Employer does not have a registration-type class of
securities and the by-laws of the Employer require the Plan to vote an issue
in a manner that reflects a one-man, one-vote philosophy, each Participant or
Beneficiary shall be entitled to cast one vote on an issue and the Trustee
shall vote the shares held by the Plan in proportion to the results of the
votes cast on the issue by the Participants and Beneficiaries.
8.5 DUTIES OF THE.TRUSTEE REGARDING PAYMENTS
(a) The Trustee shall make distributions from the Trust Fund at such
times and in such numbers of shares or other units of Company Stock and
amounts of cash to or for the benefit of the person entitled thereto under
the Plan as the Administrator directs in writing. Any undistributed part of a
Participant's interest in his accounts shall be retained in the Trust Fund
until the Administrator directs its distribution. Where distribution is
directed in Company Stock, the Trustee shall cause an appropriate certificate
to be issued to the person entitled thereto and mailed to the address
furnished it by the Administrator. Any portion of a Participant's Account to
be distributed in cash shall be paid by the Trustee mailing its check to the
same person at the same address. If a dispute arises as to who is entitled to
or should receive any benefit or payment, the Trustee may withhold or cause
to be withheld such payment until the dispute has been resolved.
(b) As directed by the Administrator, the Trustee shall make payments
out of the Trust Fund. Such directions or instructions need not specify the
purpose of the payments so directed and the Trustee shall not be responsible
in any way respecting the purpose or propriety of such payments except as
mandated by the Act.
(c) In the event that any distribution or payment directed by the
Administrator shall be mailed by the Trustee to the person specified in such
direction at the latest address of such person filed with the Administrator,
and shall be returned to the Trustee because such person cannot be located at
such address, the Trustee shall
<PAGE>
promptly notify the Administrator of such return. Upon the expiration of
sixty (60) days after such notification, such direction shall become void and
unless and until a further direction by the Administrator is received by the
Trustee with respect to such distribution or payment, the Trustee shall
thereafter continue to administer the Trust as if such direction had not been
made by the Administrator. The Trustee shall not be obligated to search for
or ascertain the whereabouts of any such person.
8.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES
The Trustee shall be paid such reasonable compensation as shall
from time to time be agreed upon in writing by the Employer and the Trustee.
An individual serving as Trustee who already receives full-time pay from the
Employer shall not receive compensation from the Plan. In addition, the
Trustee shall be reimbursed for any reasonable expenses, including reasonable
counsel fees incurred by it as Trustee. Such compensation and expenses shall
be paid from the Trust Fund unless paid or advanced by the Employer. All
taxes of any kind and all kinds whatsoever that may be levied or assessed
under existing or future laws upon, or in respect of, the Trust Fund or the
income thereof, shall be paid from the Trust Fund.
8.7 ANNUAL REPORT OF THE TRUSTEE
Within a reasonable period of time after the later of the
Anniversary Date or receipt of the Employer contribution for each Plan Year,
the Trustee shall furnish to the Employer and Administrator a written
statement of account with respect to the Plan Year for which such
contribution was made setting forth:
(a) the net income, or loss, of the Trust Fund;
(b) the gains, or losses, realized by the Trust Fund upon sales or
other disposition of the assets;
(c) the increase, or decrease, in the value of the Trust Fund;
(d) all payments and distributions made from the Trust Fund; and
(e) such further information as the Trustee and/or Administrator deems
appropriate. The Employer, forthwith upon its receipt of each such statement
of account, shall acknowledge receipt thereof in writing and advise the
Trustee and/or Administrator of its approval or disapproval thereof. Failure
by the Employer to disapprove any such statement of account within thirty
(30) days after its receipt thereof shall be deemed an approval thereof. The
approval by the Employer of any statement of account shall be binding as to
all matters embraced therein as between the Employer and the Trustee to the
same extent as if the account of the Trustee had been settled by judgment or
decree in an action for a judicial settlement of its account in a court of
competent jurisdiction in which the Trustee, the Employer and all persons
having or claiming an interest in the Plan were parties; provided, however,
that nothing herein contained shall deprive the Trustee of its right to have
its accounts judicially settled if the Trustee so desires.
8.8 AUDIT
(a) If an audit of the Plan's records shall be required by the Act and
the regulations thereunder for any Plan Year, the Administrator shall direct
the Trustee to engage on behalf of all Participants an independent qualified
public accountant for that
<PAGE>
purpose. Such accountant shall, after an audit of the books and records of
the Plan in accordance with generally accepted auditing standards, within a
reasonable period after the close of the Plan Year, furnish to the
Administrator and the Trustee a report of his audit setting forth his opinion
as to whether any statements, schedules or lists that are required by Act
Section 103 or the Secretary of Labor to be filed with the Plan's annual
report, are presented fairly in conformity with generally accepted accounting
principles applied consistently. All auditing and accounting fees shall be an
expense of and may, at the election of the Administrator, be paid from the
Trust Fund.
(b) If some or all of the information necessary to enable the
Administrator to comply with Act Section 103 is maintained by a bank,
insurance company, or similar institution, regulated and supervised and
subject to periodic examination by a state or federal agency, it shall
transmit and certify the accuracy of that information to the Administrator as
provided in Act Section 103(b) within one hundred twenty (120) days after the
end of the Plan Year or by such other date as may be prescribed under
regulations of the Secretary of Labor.
8.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE
(a) The Trustee may resign at any time by delivering to the Employer,
at least thirty (30) days before its effective date, a written notice of his
resignation.
(b) The Employer may remove the Trustee by mailing by registered or
certified mail, addressed to such Trustee at his last known address, at least
thirty (30) days before its effective date, a written notice of his removal.
(c) Upon the death, resignation, incapacity, or removal of any Trustee,
a successor may be appointed by the Employer; and such successor, upon
accepting such appointment in writing and delivering same to the Employer,
shall, without further act, become vested with all the estate, rights,
powers, discretions, and duties of his predecessor with like respect as if he
were originally named as a Trustee herein. Until such a successor is
appointed, the remaining Trustee or Trustees shall have full authority to act
under the terms of the Plan.
(d) The Employer may designate one or more successors prior to the
death, resignation, incapacity, or removal of a Trustee. In the event a
successor is so designated by the Employer and accepts such designation, the
successor shall, without further act, become vested with all the estate,
rights, powers, discretions, and duties of his predecessor with the like
effect as if he were originally named as Trustee herein immediately upon the
death, resignation, incapacity, or removal of his predecessor.
(e) Whenever any Trustee hereunder ceases to serve as such, he shall
furnish to the Employer and Administrator a written statement of account with
respect to the portion of the Plan Year during which he served as Trustee.
This statement shall be either (i) included as part of the annual statement
of account for the Plan Year required under Section 8.7 or (ii) set forth in
a special statement. Any such special statement of account should be rendered
to the Employer no later than the due date of the annual statement of account
for the Plan Year. The procedures set forth in Section 8.7 for the approval
by the Employer of annual statements of account shall apply to any special
statement of account rendered hereunder and approval by the Employer of any
such special statement in the manner provided in Section 8.7 shall have the
<PAGE>
same effect upon the statement as the Employer's approval of an annual
statement of account. No successor to the Trustee shall have any duty or
responsibility to investigate the acts or transactions of any predecessor who
has rendered all statements of account required by Section 8.7 and this
subparagraph.
8.10 TRANSFER OF INTEREST
Notwithstanding any other provision contained in this Plan, the
Trustee at the direction of the Administrator shall transfer the Vested
interest, if any, of such Participant in his account to another trust forming
part of a pension, profit sharing or stock bonus plan maintained by such
Participant's new employer and represented by said employer in writing as
meeting the requirements of Code Section 401(a), provided that the trust to
which such transfers are made permits the transfer to be made.
8.11 DIRECT ROLLOVER
(a) Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this Section, a
distributee may elect, at the time and in the manner prescribed by the
Administrator, to have any portion of an eligible rollover distribution that
is equal to at least $500 paid directly to an eligible retirement plan
specified by the distributee in a direct rollover.
(b) For purposes of this Section the following definitions shall apply:
(1) An eligible rollover distribution is any distribution of all or any
portion of the balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any distribution that is one
of a series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the distributee
or the joint lives (or joint life expectancies) of the distributee and the
distributee's designated beneficiary, or for a specified period of ten years
or more; any distribution to the extent such distribution is required
under Code Section 401(a)(9); the portion of any other distribution that is
not includible in gross income (determined without regard to the exclusion
for net unrealized appreciation with respect to employer securities); and any
other distribution that is reasonably expected to total less than $200
during a year.
(2) An eligible retirement plan is an individual retirement account
described in Code Section 408(a), an individual retirement annuity described
in Code Section 408(b), an annuity plan described in Code Section 403(a), or
a qualified trust described in Code Section 401(a), that accepts the
distributee's eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or individual retirement
annuity.
(3) A distributee includes an Employee or former Employee. In addition,
the Employee's or former Employee's surviving spouse and the Employee's or
former Employee's spouse or former spouse who is the alternate payee under a
qualified domestic relations order, as defined in Code Section 414(p), are
distributees with regard to the interest of the spouse or former spouse.
(4) A direct rollover is a payment by the Plan to the eligible
retirement plan specified by the distributee.
<PAGE>
ARTICLE IX
AMENDMENT, TERMINATION AND MERGERS
9.1 AMENDMENT
(a) The Employer shall have the right at any time to amend the Plan,
subject to the limitations of this Section. However, any amendment which
affects the rights, duties or responsibilities of the Trustee and
Administrator, other than an amendment to remove the Trustee or
Administrator, may only be made with the, Trustee's and Administrator's
written consent. Any such amendment shall become effective as provided
therein upon its execution. The Trustee shall not be required to execute any
such amendment unless the Trust provisions contained herein are a part of the
Plan and the amendment affects the duties of the Trustee hereunder.
(b) No amendment to the Plan shall be effective if it authorizes or
permits any part of the Trust Fund (other than such part as is required to
pay taxes and administration expenses) to be used for or diverted to any
purpose other than for the exclusive benefit of the Participants or their
Beneficiaries or estate; or causes any reduction in the amount credited to
the account of any Participant; or causes or permits any portion of the Trust
Fund to revert to or become property of the Employer.
(c) Except as permitted by Regulations, no Plan amendment or
transaction having the effect of a Plan amendment (such as a merger, plan
transfer or similar transaction) shall be effective to the extent it
eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or
modifies conditions relating to "Section 411(d)(6) protected benefits" the
result of which is a further restriction on such benefit unless such
protected benefits are preserved with respect to benefits accrued as of the
later of the adoption date or effective date of the amendment. "Section
411(d)(6) protected benefits" are benefits described in Code Section
411(d)(6)(A), early retirement benefits and retirement-type subsidies, and
optional forms of benefit.
9.2 TERMINATION
(a) The Employer shall have the right at any time to terminate the Plan
by delivering to the Trustee and Administrator written notice of such
termination. Upon any full or partial termination, all amounts credited to
the affected Participants' Accounts shall become 100% Vested as provided in
Section 7.4 and shall not thereafter be subject to forfeiture, and all
unallocated amounts shall be allocated to the accounts of all Participants in
accordance with the provisions hereof. .
(b) Upon the full termination of the Plan, the Employer shall direct
the distribution of the assets of the Trust Fund to Participants in a manner
which is consistent with and satisfies the provisions of Sections 7.5 and
7.6. Except as permitted by Regulations, the termination of the Plan shall
not result in the reduction of "Section 411(d)(6) protected benefits" in
accordance with Section 9.1(c).
9.3 MERGER OR CONSOLIDATION
This Plan and Trust may be merged or consolidated with, or its
assets and/or liabilities may be transferred to any other plan and trust only
if the benefits which would be received by a Participant of this Plan, in the
event of a termination of the plan immediately after
<PAGE>
such transfer, merger or consolidation, are at least equal to the benefits
the Participant would have received if the Plan had terminated immediately
before the transfer, merger or consolidation, and such transfer, merger or
consolidation does not otherwise result in the elimination or reduction of
any "Section 411(d)(6) protected benefits" in accordance with Section 9.1(c).
ARTICLE X TOP HEAVY
10.1 TOP HEAVY PLAN REQUIREMENTS
For any Top Heavy Plan Year, the Plan shall provide the special
vesting requirements of Code Section 416(b) pursuant to Section 7.4 of the
Plan and the special minimum allocation requirements of Code Section 416(c)
pursuant to Section 4.3 of the Plan.
10.2 DETERMINATION OF TOP HEAVY STATUS
(a) This Plan shall be a Top Heavy Plan for any Plan Year in which, as
of the Determination Date, (1) the Present Value of Accrued Benefits of Key
Employees and (2) the sum of the Aggregate Accounts of Key Employees under
this Plan and all plans of an Aggregation Group, exceeds sixty percent (60%)
of the Present Value of Accrued Benefits and the Aggregate Accounts of all
Key and Non-Key Employees under this Plan and all plans of an Aggregation
Group.
If any Participant is a Non-Key Employee for any Plan Year, but
such Participant was a Key Employee for any prior Plan Year, such
Participant's Present Value of Accrued Benefit and/or Aggregate Account
balance shall not be taken into account for purposes of determining whether
this Plan is a Top Heavy or Super Top Heavy Plan (or whether any Aggregation
Group which includes this Plan is a Top Heavy Group). In addition, if a
Participant or Former Participant has not performed any services for any
Employer maintaining the Plan at any time during the five year period ending
on the Determination Date, any accrued benefit for such Participant or Former
Participant shall not be taken into account for the purposes of determining
whether this Plan is a Top Heavy or Super Top Heavy Plan.
(b) This Plan shall be a Super Top Heavy Plan for any Plan Year in
which, as of the Determination Date, (1) the Present Value of Accrued
Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key
Employees under this Plan and all plans of an Aggregation Group, exceeds
ninety percent (90%) of the Present Value of Accrued Benefits and the
Aggregate Accounts of all Key and Non-Key Employees under this Plan and all
plans of an Aggregation Group.
(c) Aggregate Account: A Participant's Aggregate Account as of the
Determination Date is the sum of:
(1) his Participant's Account balance as of the most recent valuation
occurring within a twelve (12) month period ending on the Determination Date;
(2) an adjustment for any contributions due as of the Determination
Date. Such adjustment shall be the amount of any contributions actually made
after the Valuation Date but due on or before the Determination Date, except
for the first Plan Year when such adjustment shall also reflect the amount of
any contributions made after the Determination Date that are allocated as of
a date in that first Plan Year.
<PAGE>
(3) any Plan distributions made within the Plan Year that includes the
Determination Date or within the four (4) preceding Plan Years. However, in
the case of distributions made after the Valuation Date and prior to the
Determination Date, such distributions are not included as distributions for
top heavy purposes to the extent that such distributions are already included
in the Participant's Aggregate Account balance as of the Valuation Date.
Notwithstanding anything herein to the contrary, all distributions, including
distributions under a terminated plan which if it had not been terminated
would have been required to be included in an Aggregation Group, will be
counted. Further, distributions from the Plan (including the cash value of
life insurance policies) of a Participant's account balance because of death
shall be treated as a distribution for the purposes of this paragraph.
(4) any Employee contributions, whether voluntary or mandatory.
However, amounts attributable to tax deductible qualified voluntary employee
contributions shall not be considered to be a part of the Participant's
Aggregate Account balance.
(5) with respect to unrelated rollovers and plan-to-plan transfers
(ones which are both initiated by the Employee and made from a plan
maintained by one employer to a plan maintained by another employer), if this
Plan provides the rollovers or plan-to-plan transfers, it shall always
consider such rollovers or plan-to-plan transfers as a distribution for the
purposes of this Section. If this Plan is the plan accepting such
rollovers or plan-to-plan transfers, it shall not consider such rollovers or
plan-to-plan transfers as part of the Participant's Aggregate Account balance.
(6) with respect to related rollovers and plan-to-plan transfers (ones
either not initiated by the Employee or made to a plan maintained by the same
employer), if this Plan provides the rollover or plan-to-plan transfer, it
shall not be counted as a distribution for purposes of this Section. if this
Plan is the plan accepting such rollover or plan-to-plan transfer, it shall
consider such rollover or plan-to-plan transfer as part of the Participant's
Aggregate Account balance, irrespective of the date on which such rollover or
plan-to-plan transfer is accepted.
(7) For the purposes of determining whether two employers are to be
treated as the same employer in (5) and (6) above, all employers aggregated
under Code Section 414(b), (c), (m) and (o) are treated as the same employer.
(d) "Aggregation Group" means either a Required Aggregation Group or a
Permissive Aggregation Group as hereinafter determined.
(1) Required Aggregation Group: In determining a Required Aggregation
Group hereunder, each plan of the Employer in which a Key Employee is a
participant in the Plan Year containing the Determination Date or any of the
four preceding Plan Years, and each other plan of the Employer which enables
any plan in which a Key Employee participates to meet the requirements of
Code Sections 401(a)(4) or 410, will be required to be aggregated. Such group
shall be known as a Required Aggregation Group.
In the case of a Required Aggregation Group, each plan in the group will
be considered a Top Heavy Plan if the Required Aggregation Group is a Top
Heavy Group. No plan in the Required Aggregation Group will be considered a
Top Heavy Plan if the Required Aggregation Group is not a Top Heavy Group.
<PAGE>
(2) Permissive Aggregation Group: The Employer may also include any
other plan not required to be included in the Required Aggregation Group,
provided the resulting group, taken as a whole, would continue to satisfy the
provisions of Code Sections 401(a)(4) and 410. Such group shall be known as a
Permissive Aggregation Group.
In the case of a Permissive Aggregation Group, only a plan that is part
of the Required Aggregation Group will be considered a Top Heavy Plan if the
Permissive Aggregation Group is a Top Heavy Group. No plan in the Permissive
Aggregation Group will be considered a Top Heavy Plan if the Permissive
Aggregation Group is not a Top Heavy Group.
(3) Only those plans of the Employer in which the Determination Dates
fall within the same calendar year shall be aggregated in order to determine
whether such plans are Top Heavy Plans.
(4) An Aggregation Group shall include any terminated plan of the
Employer if it was maintained within the last five (5) years ending on the
Determination Date.
(e) "Determination Date" means (a) the last day of the preceding Plan
Year, or (b) in the case of the first Plan Year, the last day of such Plan
Year.
(f) Present Value of Accrued Benefit: In the case of a defined benefit
plan, the Present Value of Accrued Benefit for a Participant other than a Key
Employee, shall be as determined using the single accrual method used for all
plans of the Employer and Affiliated Employers, or if no such single method
exists, using a method which results in benefits accruing not more rapidly
than the slowest accrual rate permitted under Code Section 411(b)(1)(C). The
determination of the Present Value of Accrued Benefit shall be determined as
of the most recent Valuation Date that falls within or ends with the 12-month
period ending on the Determination Date except as provided in Code Section
416 and the Regulations thereunder for the first and second plan years of a
defined benefit plan.
(g) "Top Heavy Group" means an Aggregation Group in which, as of the
Determination Date, the sum of:
(1) the Present Value of Accrued Benefits of Key Employees under all
defined benefit plans included in the group, and
(2) the Aggregate Accounts of Key Employees under all defined
contribution plans included in the group, exceeds sixty percent (60%) of a
similar sum determined for all Participants.
ARTICLE XI
MISCELLANEOUS
11.1 PARTICIPANT'S RIGHTS
This Plan shall not be deemed to constitute a contract between the
Employer and any Participant or to be a consideration or an inducement for
the employment of any Participant or Employee. Nothing contained in this Plan
shall be deemed to give any Participant or Employee the right to be retained
in the service of the Employer or to interfere with the right of the Employer
to discharge any Participant or Employee at any time regardless of the effect
which such discharge shall have upon him as a Participant of this Plan.
<PAGE>
11.2 ALIENATION
(a) subject to the exceptions provided below, no benefit which shall be
payable out of the Trust Fund to any person (including a Participant or his
Beneficiary) shall be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt
to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge
the same shall be void; and no such benefit shall in any manner be liable
for, or subject to, the debts, contracts, liabilities, engagements, or torts
of any such person, nor shall it be subject to attachment or legal process
for or against such person, and the same shall not be recognized by the
Trustee, except to such extent as may be required by law.
(b) This provision shall not apply to a "qualified domestic relations
order" defined in Code Section 414(p), and those other domestic relations
orders permitted to be so treated by the Administrator under the provisions
of the Retirement Equity Act of 1984. The Administrator shall establish a
written procedure to determine the qualified status of domestic relations
orders and to administer distributions under such qualified orders. Further,
to the extent provided under a "qualified domestic relations order," a former
spouse of a Participant shall be treated as the spouse or surviving spouse
for all purposes under the Plan.
11.3 CONSTRUCTION OF PLAN
This Plan and Trust shall be construed and enforced according to the Act
and the laws of the State of California, other than its laws respecting
choice of law, to the extent not preempted by the Act.
11.4 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine or neuter
gender, they shall be construed as though they were also used in another
gender in all cases where they would so apply, and whenever any words are
used herein in the singular or plural form, they shall be construed as though
they were also used-in the other form in all cases where they would so apply.
11.5 LEGAL ACTION
In the event any claim, suit, or proceeding is brought regarding
the Trust and/or Plan established hereunder to which the Trustee, the
Employer or the Administrator may be a party, and such claim, suit, or
proceeding is resolved in favor of the Trustee, the Employer or the
Administrator, they shall be entitled to be reimbursed from the Trust Fund
for any and all costs, attorney's fees, and other expenses pertaining thereto
incurred by them for which they shall have become liable.
11.6 PROHIBITION AGAINST DIVERSION OF FUNDS
(a) Except as provided below and otherwise specifically permitted by
law, it shall be impossible by operation of the Plan or of the Trust, by
termination of either, by power of revocation or amendment, by the happening
of any contingency, by collateral arrangement or by any other means, for any
part of the corpus or income of any trust fund maintained pursuant to the
Plan or any funds contributed thereto to be used for, or diverted to,
purposes other than the exclusive benefit of Participants, Retired
Participants, or their Beneficiaries.
<PAGE>
(b) In the event the Employer shall make an excessive contribution
under a mistake of fact pursuant to Act Section 403(c)(2)(A), the Employer
may demand repayment of such excessive contribution at any time within one
(1) year following the time of payment and the Trustees shall return such
amount to the Employer within the one (1) year period. Earnings of the Plan
attributable to the excess contributions may not be returned to the Employer
but any losses attributable thereto must reduce the amount so returned.
11.7 BONDING
Every Fiduciary, except a bank or an insurance company, unless
exempted by the Act and regulations thereunder, shall be bonded in an amount
not less than 10% of the amount of the funds such Fiduciary handles;
provided, however, that the minimum bond shall be $1,000 and the maximum
bond, $500,000. The amount of funds handled shall be determined at the
beginning of each Plan Year by the amount of funds handled by such person,
group, or class to be covered and their predecessors, if any, during the
preceding Plan Year, or if there is no preceding Plan Year, then by the
amount of the funds to be handled during the then current year. The bond
shall provide protection to the Plan against any loss by reason of acts of
fraud or dishonesty by the Fiduciary alone or in connivance with others. The
surety shall be a corporate surety company (as such term is used in Act
Section 412(a)(2)), and the bond shall be in a form approved by the Secretary
of Labor. Notwithstanding anything in the Plan to the contrary, the cost of
such bonds shall be an expense of and may, at the election of the
Administrator, be paid from the Trust Fund or by the Employer.
11.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE
Neither the Employer, the Administrator, nor the Trustee, nor their
successors shall be responsible for the validity of any Contract issued
hereunder or for the failure on the part of the insurer to make payments
provided by any such Contract, or for the action of any person which may
delay payment or render a Contract null and void or unenforceable in whole or
in part.
11.9 INSURER'S PROTECTIVE CLAUSE
Any insurer who shall issue Contracts hereunder shall not have any
responsibility for the validity of this Plan or for the tax or legal aspects
of this Plan. The insurer shall be protected and held harmless in acting in
accordance with any written direction of the Trustee, and shall have no duty
to see to the application of any funds paid to the Trustee, nor be required
to question any actions directed by the Trustee. Regardless of any provision
of this Plan, the insurer shall not be required to take or permit any action
or allow any benefit or privilege contrary to the terms of any Contract which
it issues hereunder, or the rules of the insurer.
11.10 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative, Beneficiary,
or to any guardian or committee appointed for such Participant or Beneficiary
in accordance with the provisions of the Plan, shall, to the extent thereof,
be in full satisfaction of all claims hereunder against the Trustee and the
Employer, either of whom may require such Participant, legal representative,
Beneficiary, guardian or committee, as a condition precedent to such payment,
to execute a recei-pt and release thereof in such form as shall be determined
by the Trustee or Employer.
<PAGE>
11.11 ACTION BY THE EMPLOYER
Whenever the Employer under the terms of the Plan is permitted or
required to do or perform any act or matter or thing, it shall be done and
performed by a person duly authorized by its legally constituted authority.
11.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY
The "named Fiduciaries" of this Plan are (1) the Employer, (2) the
Administrator and (3) the Trustee. The named Fiduciaries shall have only
those specific powers, duties, responsibilities, and obligations as are
specifically given them under the Plan or as accepted by or assigned to them
pursuant to any procedure provided under the Plan, including but not limited
to any agreement allocating or delegating their responsibilities, the terms
of which are incorporated herein by reference. In general, unless otherwise
indicated herein or pursuant to such agreements, the Employer shall have the
duties specified in Article II hereof, as the same may be allocated or
delegated thereunder, including but not limited to the responsibility for
making the contributions provided for under Section 4.1; and shall have the
authority to appoint and remove the Trustee and the Administrator; to
formulate the Plan's "funding policy and method"; and to amend or terminate,
in whole or in part, the Plan. The Administrator shall have the
responsibility for the administration of the Plan, including but not limited
to the items specified at Article II of the Plan, as the same may be
allocated or delegated thereunder. The Trustee shall have the responsibility
of management and control of the assets held under the Trust, except to the
extent directed pursuant to Article II or with respect to those assets, the
management of which has been assigned to an Investment Manager, who shall be
solely responsible for the management of the assets assigned to it, all as
specifically provided in the Plan and any agreement with the Trustee. Each
named Fiduciary warrants that any directions given, information furnished, or
action taken by it shall be in accordance with the provisions of the Plan,
authorizing or providing for such direction, information or action.
Furthermore, each named Fiduciary may rely upon any such direction,
information or action of another named Fiduciary as being proper under the
Plan, and is not required under the Plan to inquir into the propriety of any
such direction, information or action. It is intended under the Plan that
each named Fiduciary shall be responsible for the proper exercise of its own
powers, duties, responsibilities and obligations under the Plan as specified
or allocated herein. No named Fiduciary shall guarantee the Trust Fund in any
manner against investment loss or depreciation in asset value. Any person or
group may serve in more than one Fiduciary capacity. In the furtherance of
their responsibilities hereunder, the "named Fiduciaries" shall be empowered
to interpret the Plan and Trust and to resolve ambiguities, inconsistencies
and omissions, which findings shall be binding, final and conclusive.
11.13 HEADINGS
The headings and subheadings of this Plan have been inserted for
convenience of reference and are to be ignored in any construction of the
provisions hereof.
11.14 APPROVAL BY INTERNAL REVENUE SERVICE
(a) Notwithstanding anything herein to the contrary, contributions to
this Plan are conditioned upon the initial qualification of the Plan under
Code Section 401. If the Plan receives an adverse determination with respect
to its initial qualification,
<PAGE>
then the Plan may return such contributions to the Employer within one year
after such determination, provided the application for the determination is
made by the time prescribed by law for filing the Employer's return for the
taxable year in which the Plan was adopted, or such later date as the
Secretary of the Treasury may prescribe.
(b) Notwithstanding any provisions to the contrary, except Sections
3.5, 3.6, and 4.1(c), any contribution by the Employqr to the Trust Fund is
conditioned upon the deductibility of the contribution by the Employer under
the Code and, to the extent any such deduction is disallowed, the Employer
may, within one (1) year following the disallowance of the deduction, demand
repayment of such disallowed contribution and the Trustee shall return such
contribution within one (1) year following the disallowance. Earnings of the
Plan attributable to the excess contribution may not be returned to the
Employer, but any losses attributable thereto must reduce the amount so
returned.
11.15 UNIFORMITY
All provisions of this Plan shall be interpreted and applied in a
uniform, nondiscriminatory manner. In the event of any conflict between the
terms of this Plan and any Contract purchased hereunder, the Plan provisions
shall control.
11.16 WAIVER OF FUNDING
(a) In the event that the minimum funding requirement for a particular
Plan Year has been waived in whole or in part, then, an Adjusted Account
Balance shall be established for each Participant which shall reflect the
Account balance the Participant would have had, had the waived amount been
contributed. The Adjusted Account Balance shall remain in effect until such
time as the value of the Participant's Account equals the value of the
Participant's Adjusted Account Balance:
(1) The excess of the value of each Participant's Adjusted Account
Balance over the value of the Participant's Account balance will be credited
with earnings equal to 150 percent of the Federal mid-term rate (as in effect
under Code Section 1274 for the first month of such Plan Year).
(2) The waiver payment to be made by the Employer in the year after the
waiver is granted shall at least equal the amount necessary to amortize over
5 years, at the appropriate interest rate, the excess of the sum of the
Adjusted Account Balances over the total value of the Trust Fund attributable
to Employer contributions. In the next year, the excess for such subsequent
year, if any, is amortized over 4 years. In each succeeding year the
amortization period is reduced by one year. The Employer may, however, make
such larger payments at any time as the Employer shall deem appropriate.
(3) An unallocated Waiver Suspense Account shall be created, to which
shall be made all payments designed to reduce the waived deficiency. If at
the time of a distribution, the nonforfeitable portion of a Participant's
Adjusted Account Balance exceeds that Participant's actual Account balance,
that Participant will receive the larger amount to the extent that there are
then funds in the unallocated Waiver Suspense Account to cover the excess. If
at any time, a Participant may not be able to receive a total distribution of
the entire nonforfeitable portion of his Adjusted Account Balance, such
Participant would receive subsequent distributions derived from future waiver
payments.
<PAGE>
(b) When the total value of the Trust Fund equals the sum of the
Adjusted Account Balances, the Waiver Suspense Account shall be allocated to
the affected Participants so that each Participant's actual Account balance
equals that Participant's Adjusted Account Balance.
11.17 SECURITIES AND EXCHANGE COMMISSION APPROVAL
The Employer may request an interpretative letter from the Securities
and Exchange Commission stating that the transfers of Company Stock
contemplated hereunder do not involve transactions requiring a registration
of such Company Stock under the Securities Act of 1933. In the event that a
favorable interpretative letter is not obtained, the Employer reserves the
right to amend the Plan and Trust retroactively to their Effective Dates in
order to obtain a favorable interpretative letter or to terminate the Plan.
IN WITNESS WHEREOF, this Plan has been executed the day and year
first above written.
Invitrogen Corporation
By /s/Invitrogen
------------------------------
EMPLOYER
/s/Lyle C. Turner
- --------------------------------
TRUSTEE Lyle Turner
/s/Joseph Fernandez
- --------------------------------
TRUSTEE Joseph Fernandez
<PAGE>
AMENDMENT TO INVITROGEN CORPORATION
EMPLOYEE STOCK OWNERSHTP PLAN
This Amendment ("Amendment") to the Invitrogen Corporation Employee
Stock Ownership Plan (the "Plan") is made and entered into as specified
in the Plan.
RECITALS
WHEREAS, Invitrogen Corporation ("Employer") maintains the Plan for
the benefit of its employees; and
WHEREAS, under the terms of the Plan, the Employer has the ability to
amend the Plan, provided the Trustee joins in such Amendment if the Plan
affecting the Trustee is amended; and
WHEREAS, the Board of Directors of Employer has determined that it is
in the best interests of the Employer and its employees to amend the Plan
as provided herein;
NOW THEREFORE, BE IT RESOLVED, that the Plan is amended as follows:
AMENDMENT
1. EFFECTIVE DATE AND DEFINED TERMS: Except as otherwise provided
herein, the effective date of this Amendment shall be August 31, 1997.
Capitalized terms not otherwise defined herein shall have the same meaning
as set forth in the Plan.
2. EXCLUSION OF HIGHLY COMPENSATED EMPLOYEES: Section 1.13 of the
Plan is hereby amended such that the first sentence thereof read as
follows:
"Eligible Employee" means any Employee except those Highly
Compensated Employees described strictly in section 1.23(b).
The following is added at the end of Section 3.1:
No Employee described in section 1.23(b) shall be eligible to
participate in the Plan. Section 3.4 shall govern Eligible
Employees who, through a change in circumstances, subsequently
come under the definition in section 1.23(b).
4. Full Force and Effect. Except as otherwise provided herein, the Plan shall
remain in full force and effect.
Executed this 1st day of August, 1997 to be effective as of the date set
forth above.
INVITROGEN ESOP TRUST FUND
By:
/s/Lyle C. Turner
--------------------------------
Lyle C. Turner, Trustee
/s/Joseph M. Fernandez
--------------------------------
Joseph M. Fernandez, Trustee
<PAGE>
AMENDMENT
TO
INVITROGEN EMPLOYEE STOCK OWNERSHIP PLAN
Pursuant to Section 9.1 of the Invitrogen Employee Stock Ownership Plan
(the "Plan"), said Plan is hereby amended as follows:
1. Section 1.10 of the Plan, relating to the definition of
"Compensation," is amended by adding the following sentence at the end of the
fifth paragraph of said section:
The special Family Member aggregation rules described in the
preceding paragraphs shall not apply in any Plan Year beginning
after December 31, 1996.
2. Section 1.23 of the Plan, relating to the definition of "Highly
Compensated Employee," is amended in its entirety effective for Plan Years
beginning after December 31, 1996 to read as follows:
"Highly Compensated Employee" shall mean any Employee who:
(i) during the current Plan Year or the preceding Plan Year was a
five percent owner of the Employer (as defined in Code Section
416) or (ii) during the preceding Plan Year receive Compensation
in excess of $80,000 (indexed in accordance with the rules under
Code Section 415) and was in the top paid group of employees for
the preceding Plan Year (the top paid group of Employees is the
top twenty percent of Employees ranked on the basis of
Compensation paid for such Plan Year). The determination of
Highly Compensated Employees shall be made in accordance with the
rules under Code Section 414(q).
3. Section 1.24 of the Plan, relating to the definition of "Highly
Compensated Former Employee," shall not apply in any Plan Year beginning after
December 31, 1996.
4. Section 1.26 of the Plan, relating to the definition of "Hours of
Service," is amended by adding the following language at the end of said
section:
Notwithstanding any other provision of this Plan to the contrary,
effective for Plan Years beginning after December 31, 1994,
contributions, benefits and Hours of Service credit with respect
to qualified military service performed by an Employee shall be
determined in accordance with Code Section 414(u).
5. Section 1.30 of the Plan, relating to the definition of "Leased
Employees," is amended to delete the last clause of the first sentence of said
section and to substitute the following language (effective for Plan Years
beginning after December 31, 1996):
. . . and such services are performed under the primary
direction or control of the recipient.
6. Section 1.32 of the Plan, relating to the definition of "Non-Highly
Compensated Participant," is amended to delete the reference to Family Members
effective for Plan Years beginning after December 31, 1996.
<PAGE>
7. Section 4.1(b) of the Plan is amended to provide that no further
contributions shall be made by the Employer under the Plan with respect to
Compensation paid and services provided after December 31, 1998.
8. The first sentence of paragraph (c)(1) of Section 7.5 of the Plan
is amended as follows:
(c) Any distribution to a Participant who has a benefit which
exceeds or has ever exceeded $5,000 ($3,500 for distributions in
Plan Years beginning before 1997) at the time of any prior
distribution shall require such Participant's consent pursuant to
this Section 7.5(c) if such distribution commences prior to the
later of his Normal Retirement Age or age 62.
9. Section 7.5 of the Plan is amended effective January 1, 1998 to add
the following new paragraph (l) to read as follows:
(l) Notwithstanding any other provision of the Plan to the
contrary, upon the termination of the Plan, distribution of
benefits to a Participant shall be made in the form of a lump sum
distribution to the Participant or a direct rollover to an
individual retirement account or other qualified retirement plan
designated by the Participant. No other forms of distribution
shall be permitted upon termination of the Plan.
10. Except as otherwise provided herein, the Plan shall remain in full
force and effect.
Executed this 24th day of November, 1998.
INVITROGEN CORPORATION
By: /s/ Lyle C. Turner
-----------------------------------
TRUSTEES:
/s/ Lyle C. Turner
- --------------------------------------
Lyle C. Turner
/s/ Joseph Fernandez
- --------------------------------------
Joseph M. Fernandez
<PAGE>
EXHIBIT 23.1.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 28, 1999, except for Note 11 as to which the
date is August 17, 1999, with respect to the consolidated financial
statements of NOVEX included in Amendment No. 1 to the Registration Statement
(Form S-1) and Prospectus of Invitrogen Corporation for the registration of
shares of its common stock.
ERNST & YOUNG LLP
San Diego, California
September 27, 1999
