UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-25726
SEPRAGEN CORPORATION
(Exact name of small business issuer as specified in its charter)
California 68-0073366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identifica-
tion No.)
30689 Huntwood Drive, Hayward, California 94544
(Address of principal executive offices)
(Issuer's telephone number (including area code): (510) 476-0650
Former name, former address and former fiscal year if changed since last
report:
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
State the number of shares outstanding of each of the registrant's
classes of Common equity, as of the latest practicable date:
August 11, 1996
Class A Common Stock 2,070,000
Class B Common Stock 786,431
Class E Common Stock 1,209,894
THIS REPORT INCLUDES A TOTAL OF 20 PAGES. THE EXHIBIT INDEX IS ON
PAGE 12.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SEPRAGEN CORPORATION
CONDENSED BALANCE SHEETS
ASSETS
December 31,
June 30, 1996
1995
(unaudited)
Current Assets:
Cash and cash equivalents ... $ 1,321,924 $ 23,364
Marketable securities ........ 257,442 3,586,145
Accounts receivable, less allowance for
doubtful accounts of $18,782 and
$30,459 as of June 30, 1996 and
December 31, 1995, respectively .. 444,254 278,688
Inventories ............. 619,862 777,620
Prepaid expenses and other .... 14,470 57,130
Total current assets ...... 2,657,952 4,722,947
Furniture and equipment, net .... 438,048 252,150
Intangible assets ......... 111,709 111,709
$3,207,709 $5,086,806
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......... $ 210,938 $ 230,799
Accrued liabilities .......... 28,960 174,395
Accrued payroll and benefits ...... 89,465 80,633
Interest payable .............. -- 4,285
Total current liabilities ..... 329,363 490,112
Class E common stock, no par value - 1,600,000
shares authorized; 1,209,894 shares
issued and outstanding at June 30, 1996
and December 31, 1995; redeemable at
$.01 per share ............... -- --
Shareholders' equity:
Preferred stock, no par value - 5,000,000
shares authorized; none issued or
outstanding at June 30, 1996 and
December 31, 1995 ............ -- --
Class A common stock, no par value -
20,000,000 shares authorized; 2,070,000
shares issued and outstanding at June
30, 1996 and December 31, 1995 .. 8,353,737 8,353,737
Class B common stock, no par value -
2,600,000 shares authorized;
786,431 shares issued and outstanding
at June 30, 1996 and December
31, 1995 ............. 4,559,956 4,559,956
Unrealized loss on available-for-sale
securities ............. (73,553) (14,462)
Accumulated deficit ....... (9,961,794) (8,302,537)
Total shareholders' equity ..... 2,878,346 4,596,694
$3,207,709 $5,086,806
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Revenues:
Net Sales ....... $227,203 $332,812 $862,781 $797,932
Costs and expenses:
Cost of goods sold ... 186,292 184,802 637,930 408,223
Selling, general and
administrative ..... 587,499 538,323 1,225,350 869,604
Research and development 366,472 306,285 729,310 460,406
Total costs and expenses . 1,140,263 1,029,410 2,592,590 1,738,233
Loss from operations ... (913,060) (696,598)(1,729,809) (940,301)
Interest income (expense), net
32,551 82,310 70,551 (59,511)
Net loss ....... $ (880,509) $(614,288) $(1,659,258) $(999,812)
Net loss per common and common
equivalent share ...... $(.31) $(.23) $(.53) $(.55)
Weighted average shares
outstanding ..... 2,856,431 2,728,352 2,856,431 1,811,473
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
SEPRAGEN CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1996
1995
Cash flows from operating activities:
Net Loss ............ $ (1,659,258)$ (999,812)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation ............. 41,813 10,952
Changes in assets and liabilities:
Accounts receivable ...... (165,566) (156,319)
Inventories .......... 157,758 (315,415)
Prepaid expenses and other .. 42,660 81,809
Accounts payable ....... (19,861) (211,595)
Accrued liabilities ......... (145,435) (128,971)
Accrued payroll and benefits .. 8,832 (23,750)
Interest payable ........ (4,285) (18,667)
Customer deposits ......... --
20,580
Net cash used in operating
activities ..... (1,743,342) (1,741,188)
Cash flows from investing activities:
Acquisition of furniture and equipment (227,711) (31,846)
Acquisitions of marketable securities (140,000) --
Proceeds from sale of marketable
securities ............ 3,409,613
--
Net cash provided by (used in) investing
activities ............. 3,041,902 (31,846)
Cash flows from financing activities:
Proceeds from issuance of common stock ... -- 8,832,231
Repayment of bridge notes payable ..... -- (1,550,000)
Repayment of notes payable .......... -- (25,000)
Repayment of convertible note payable
to shareholder .............. -- (25,000)
Repayment of convertible note ....... -- (65,000)
Net cash provided by
financing activities ........ -- 7,167,231
Net increase in cash .... 1,298,560 5,394,197
Cash and cash equivalents at the beginning
of the period ............. 23,364 240,472
Cash and cash equivalents at the end of
the period ........... $ 1,321,924 $ 5,634,669
Supplemental disclosure of non-cash financing activities:
Conversion of note payable to shareholder
and related interest to common stock ... -- $ 794,909
Deferred costs of securities registration
offset against proceeds
from issuance of common stock ...... -- $ 478,494
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
SEPRAGEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 1996
(Unaudited)
Note 1 - Interim Financial Reporting.
The accompanying unaudited interim financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-
QSB. Accordingly, certain information and footnotes required by
generally accepted accounting principles have been condensed or omitted.
These interim statements should be read in conjunction with the
financial statements and the notes thereto, included in the Sepragen
Corporation's (the "Company's") Annual Report on Form 10-KSB for the
year ended December 31, 1995.
The December 31, 1995 balance sheet was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles. The unaudited interim
condensed financial statements have been prepared on the same basis as
the audited annual financial statements, and in the opinion of
management, contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting
principles. The Company's quarterly results may be subject to
fluctuations. As a result, the Company believes its results of
operations for the interim period are not necessarily indicative of the
results expected for any future period.
The Company will be required to conduct significant research,
development and testing activities which, together with expenses to be
incurred for manufacturing, the establishment of a large marketing and
distribution presence and other general and administrative expenses, are
expected to result in operating losses for the next few years.
Accordingly, there can be no assurance that the Company will ever
achieve profitable operations. The Company expects to have sufficient
working capital to support its operating needs for up to an twelve month
period from June 30, 1996. There is no assurance, however, that
sufficient revenues will be generated in this and future periods to fund
the Company's operations, which would result in the Company needing to
raise additional financing in the near future.
Note 2 - Initial Public Offering.
The Company's initial public offering was declared effective by the
Securities and Exchange Commission on March 23, 1995. The offering of
1,800,000 Units, each consisting of one share of Class A common stock,
one redeemable five year Class A warrant and one redeemable five year
Class B warrant, provided net proceeds of $7,242,351 to the Company. On
the effective date of the offering, the Company issued 57,224 shares of
Class B common stock and 88,039 shares of Class E common stock in
exchange for the cancellation of a note payable to a shareholder of
$727,000 and related accrued interest of $67,909. In May, 1995 the
underwriter exercised its overallotment option for 270,000 Units,
generating an additional $1,181,386 of net proceeds to the Company.
Note 3 - Net Loss Per Share.
Net loss per common and common equivalent share is computed using the
weighted average number of common shares and common equivalent shares
outstanding during each period. Restricted shares issued as Class E
common shares and contingent options are considered contingently
issuable and, accordingly, are excluded from the weighted average number
of common and common equivalent shares outstanding. For the periods
ended June 30, 1996 and 1995 common equivalent shares relating to
options have been excluded as they are anti-dilutive.
SEPRAGEN CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 1996
(Unaudited)
Note 4 - Inventory.
Inventories consist of the following:
6/30/96 12/31/95
Raw Materials $367,582 $459,474
Finished Goods 252,280 318,146
$619,862 $777,620
Note 5 - Stock Option Plan
Effective June 28, 1996, the Company adopted a new 1996 Stock Option
Plan which reserves an additional 250,000 shares of Class A common stock
for future grant. The terms of this plan are similar to the 1994 Stock
Option Plan.
Item 2. Management's Discussion and Analysis.
First six months of 1996 compared to first six months of 1995
Net sales increased by $65,000 or 8% from the first half of 1995.
This increase in sales is due primarily to the shipment of two large
QuantaSeps, a computer controlled liquid chromatography system.
Gross Margin decreased by $165,000 or 42% from the first half of
the prior year, and as a percent of sales, decreased by 23% from 49% to
26%. This decrease was attributable to higher material cost and
development of software for the large QuantaSeps, and booking of a
reserve for obsolescence and slow moving inventory.
Selling, general and administrative expenses increased by $352,000
from $870,000 in the first half of 1995 to $1,222,000 in the first half
of 1996. The increase was primarily due to: the hiring of additional
personnel in sales and marketing, corporate development and
administration; and additional expenses related to training, advertising
and promotion, public relations, product evaluation and demonstration.
Research and development expenses increased by $269,000 or 58% from
$460,000 in the first half of 1995 to $729,000 in the first half of
1996. The increase was attributable to expenditures related to the
development of a process for dairy whey fractionation, expenditures
related to the development of a special absorbent media and further
development of QuantaSep products and other related products.
Interest income, net for the first half of 1996 reflects interest
income earned on the proceeds of the initial public offering; and
interest expense, net for the first half of 1995 mainly reflects
interest expense relating to bridge financing preceding the initial
public offering.
Second quarter 1996 compared to second quarter 1995.
Net sales decreased by $106,000 or 32% from the second quarter of
1995. The decrease in sales was due to decreased orders of the QuantaSep
System.
Gross margin decreased by $107,000 or 72% from the second quarter
of 1995, and as a percent of sales, decreased by 26% from 44% to 18%.
Gross Margin decreased due to product mix and booking of a reserve for
obsolescence and slow moving inventory.
Selling, general and administrative increased by $49,000 from
$538,000 in the second quarter of 1995 to $587,000. The increase was
mainly due to the preparation of the proxy statement and the annual
report to shareholders for the shareholders meeting which was held on
June 28, 1996.
Inflation
The Company believes that the impact of inflation on its operations
since its inception has not been material.
Volatility of Sales
In the last several years, the Company has experienced a relative
increase in customer equipment orders in the third and fourth quarters
and a relative decrease in orders in the first and second quarters. The
Company believes this fluctuation relates to capital appropriations and
spending cycles in the biopharmaceutical business.
Liquidity and Capital Resources.
The Company had working capital of $2,329,000 on June 30, 1996 and
$4,233,000 on December 31, 1995. The decrease in the working capital of
$1,904,000 reflects the use of net cash in operating activities and
leasehold improvements.
Since the IPO, the Company has funded its working capital
requirements substantially from the net cash proceeds from the IPO.
Prior to the IPO, the Company had funded its activities primarily
through sales of its SuperfloR columns and QuantaSepR systems, loans
from its principal shareholders, and private placements of securities.
The IPO generated net proceeds of $7,242,000 and the exercise by the
underwriter of its over-allotment option generated additional net
proceeds of $1,111,000.
From its inception in 1985 until the IPO, the Company's
expenditures have exceeded its revenues. Prior to the IPO, the Company
financed its operations primarily through private equity placements in
an aggregate amount of approximately $3,971,000, a substantial portion
of which was purchased by H. Michael Schneider, the secretary and a
director of the Company until October 1, 1995, and his affiliates,
including Romic Environmental Technologies Corporation ("Romic"), an
entity controlled by Mr. Schneider. In addition, the Company has
historically relied on customers to provide purchase price advances for
development and scale-up of its radial flow chromatography columns. As
of June 30, 1996, the Company had shareholders' equity of approximately
$2,878,000.
As of June 30, 1996, the Company had a working capital balance of
approximately $2,329,000. For the first half of 1996, net cash used in
operating activities was $1,743,000. This negative cash out flow of
working capital from operations must be reversed and working capital
increased significantly in order for the Company to fund the level of
manufacturing and marketing required to meet the anticipated growth in
demand for its products from the pharmaceutical and biotechnology
industries during the next two years. Moreover, the Company requires
additional funds to extend the use of its technology to new applications
within the pharmaceutical and biotechnology industries as well as to
applications within the food and dairy and environmental industries and
to attract the interest of strategic partners in one or more of these
markets.
The decrease of $158,000 in inventory from December 31, 1995 to
June 30, 1996 was due primarily to the shipment of two large QuantaSep
Systems.
As of June 30, 1996, the Company had no borrowings. During fiscal
year 1996, the Company is committed to pay approximately $245,000 as
compensation for its current executive officers. The Company expects to
hire additional executive officers as the need arises.
The Company's financing requirements may vary materially from those
now planned because of results and changes in the focus and direction of
research and development programs, relationships with strategic
partners, competitive advances, technological change, changes in the
Company's marketing strategy and other factors, many of which will be
beyond the Company's control. Based on the Company's current operating
plan, the Company believes that the net proceeds of the 1995 IPO,
together with trade credit arrangements and cash flow generated from
operations, will be sufficient to fund the Company's operations for the
twelve month period following June 30, 1996. There is no assurance,
however, that sufficient revenues will be generated in this and future
periods to fund the Company's operations, which would result in the
Company needing to raise additional financing in the near future.
Company's cash requirements may vary materially from those planned
because of factors such as the timing of significant product orders,
commercial acceptance of new products, patent developments and the
introduction of competitive products. The Company currently has no
credit facility with a bank or other financial institution.
Historically, the Company and certain of its customers have jointly
borne a substantial portion of developmental expenses on projects with
such customers. There can be no assurance that such sharing of expenses
will continue. The Company continues its efforts to increase sales of
its existing products and to complete development and initiate marketing
of its products and processes now under development.
The Company is seeking to enter into strategic alliances with
corporate partners in the industries comprising its primary target
markets (biopharmaceutical, food, dairy and environmental management).
The Company hopes to enter into alliances that will provide funding to
the Company for the development of new applications of its radial flow
chromatography technology in return for royalty bearing licenses to the
developed applications. No assurance can be given, however, that the
terms of any such alliance will be successfully negotiated or that any
such alliance will be successful.
The Company's Class A Common Stock, Class A Warrants, Class B
Warrants and Units are quoted on the NASDAQ SmallCap Market and are
listed on the Pacific Stock Exchange (Tier II).
The Company entered into a lease for new facilities in Hayward,
California with annual rent of $76,900 and relocated its facilities in
February 1996.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings. Not Applicable.
Item 2. Changes in Securities Not Applicable.
Item 3. Defaults Upon Senior Securities Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 28, 1996, the registrant held its annual meeting of
shareholders and Vinit Saxena (8,397,310 votes FOR and no votes
withheld), Armin Ramel (8,334,385 votes FOR and 62,925 votes withheld),
Werner Nielsen (8,334,385 votes FOR and 62,925 votes withheld), and
Robert Leach (8,334,385 votes FOR and 62,925 votes withheld) were
elected as directors for the next fiscal year. In addition, the
registrant's 1996 Stock Option plan and grant of options officers and
directors pursuant to the plan was approved (8,320,035 votes FOR, 9,350
votes AGAINST and 67,925 votes ABSTAINED); and Coopers & Lybrand, L.L.P.
was approved (8,333,385 votes FOR, 1,000 votes AGAINST, and 62,925 votes
ABSTAINED) as the registrant's independent accountants for the December
31, 1996 fiscal year.
Item 5. Other Information. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibits are filed as part of this Report:
<PAGE>
3.1(1) Restated Articles of Incorporation of the
Company, as amended to date
3.2(2) Restated Bylaws, as amended to date
4.1(1) Form of Warrant Agreement among the Company,
the Underwriter and American Stock Transfer
Company, including Forms of Class A Warrant
Certificates and Class B Warrant Certificates
4.2(1) Form of Unit Option Agreement between the
Company and the Underwriter
4.3(1) Form of Specimen Class A Common Stock
Certificate
4.4(1) Form of Specimen Class B Common Stock
Certificate
4.5(1) Form of Specimen Class E Common Stock
Certificate
4.6(1) Bridge Warrant Agreement, including forms of
Bridge Warrant Certificate
10.1(2) Lease dated July 3, 1995 between Hayward
Business Park, Inc. and the Company
10.2(1) Employment Agreement between the Company and
Vinit Saxena effective September 1, 1994
10.3(1) Employment Agreement between the Company and
Q. R. Miranda effective September 1, 1994
10.4(1) Form of Indemnification Agreement between the
Company and each director and officer of the
Company
10.5(1) Convertible Promissory Notes and Warrants
10.6(1) 1994 Stock Option Plan
10.7(3) Master Purchasing Agreement with Thermax
Limited dated April 23, 1996
10.6 1996 Stock Option Plan
(1) These exhibits which are incorporated herein by
reference were previously filed by the Company
as exhibits to its Registration Statement on
Form SB-2 and Amendments Nos. 1, 2, 3, 4 and 5
and Post Effective No. 1 (File No. 33-86888).
(2) These exhibits which are incorporated herein by
reference were previously filed by the Company
as exhibits to its Quarterly Report on Form 10-
QSB for the quarter ended September 30, 1995.
(3) This exhibit which is incorporated herein by
reference was previously filed by the Company as
an exhibit to its Quarterly Report on Form 10-
QSB for the quarter ended March 31, 1996.
Exhibits not listed above have been omitted because
they are inapplicable or because the required
information is given in the financial statements or
notes thereto.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for
which this report is filed.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act,
the Registrant caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SEPRAGEN CORPORATION
Date: August 15, 1996 By: /s/Vinit Saxena
Vinit Saxena
Chief Executive Officer, President
and Principal Financial and Chief
Accounting Officer
EXHIBIT LIST
Description Page
10.8 1996 Stock Option Plan 13
EXHIBIT A
SEPRAGEN CORPORATION
1996 STOCK OPTION PLAN
1. Purpose.
The purpose of this plan (the "Plan") is to secure for
Sepragen Corporation (the "Company") and its shareholders the
benefits arising from capital stock ownership by employees,
officers and directors of, and consultants or advisors to, the
Company and its subsidiary corporations who are expected to
contribute to the Company's future growth and success. Except
where the context otherwise requires, the term "Company" shall
include all present and future subsidiaries of the Company as
defined in Sections 424(e) and 424(f) of the Internal Revenue
Code of 1986, as amended or replaced from time to time (the
"Code"). Those provisions of the Plan which make express
reference to Section 422 shall apply only to Incentive Stock
Options (as that term is defined in the Plan).
2. Type of Options and Administration.
a. Types of Options. Options granted pursuant to the
Plan shall be authorized by action of the Board of Directors of
the Company (or a Committee designated by the Board of Directors)
and may be either incentive stock options ("Incentive Stock
Options") meeting the requirements of Section 422 of the Code or
non-statutory options which are not intended to meet the
requirements of Section 422 of the Code.
b. Administration. The Plan will be administered by
a committee (the "Committee") appointed by the Board of Directors
of the Company, whose construction and interpretation of the
terms and provisions of the Plan shall be final and conclusive.
The delegation of powers to the Committee shall be consistent
with applicable laws or regulations (including, without
limitation, applicable state law and Rule 16b-3 promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act"), or any
successor rule ("Rule 16b-3")). The Committee may in its sole
discretion grant options to purchase shares of the Company's
Class A Common Stock ("Common Stock") and issue shares upon
exercise of such options as provided in the Plan. The Committee
shall have authority, subject to the express provisions of the
Plan, to construe the respective option agreements and the Plan,
to prescribe, amend and rescind rules and regulations relating to
the Plan, to determine the terms and provisions of the respective
option agreements, which need not be identical, and to make all
other determinations in the judgment of the Committee necessary
or desirable for the administration of the Plan. The Committee
may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any option agreement in the
manner and to the extent it shall deem expedient to carry the
Plan into effect and it shall be the sole and final judge of such
expediency. No director or person acting pursuant to authority
delegated by the Board of Directors shall be liable for any
action or determination under the Plan made in good faith.
c. Applicability of Rule 16b-3. Those provisions of
the Plan which make express reference to Rule 16b-3 shall apply
to the Company only at such time as the Company's Common Stock is
registered under the Exchange Act, subject to the last sentence
of Section 3(b), and then only to such persons as are required to
file reports under Section 16(a) of the Exchange Act (a
"Reporting Person").
3. Eligibility.
i. General. Options may be granted to persons
who are, at the time of grant, employees, officers or directors
of, or consultants or advisors to, the Company provided, that
Incentive Stock Options may only be granted to individuals who
are employees of the Company (within the meaning of Section
3401(c) of the Code). A person who has been granted an option
may, if he or she is otherwise eligible, be granted additional
options if the Board of Directors shall so determine.
a. Grant of Options to Reporting Persons. From and
after the registration of the Common Stock of the Company under
the Exchange Act, the selection of a director or an officer who
is a Reporting Person (as the terms "director" and "officer" are
defined for purposes of Rule 16b-3) as a recipient of an option,
the timing of the option grant, the exercise price of the option
and the number of shares subject to the option shall be
determined either (i) by the Board of Directors, of which all
members shall be "disinterested persons" (as hereinafter
defined), (ii) by a committee consisting of two or more directors
having full authority to act in the matter, each of whom shall be
a "disinterested persons or (iii) pursuant to provisions for
automatic grants set forth in Section 3(c) below. For the
purposes of the Plan, a director shall be deemed to be a
"disinterested person" only if such person qualifies as a
"disinterested person" within the meaning of Rule 16b-3, as such
term is interpreted from time to time. If at least two of the
members of the Board of Directors do not qualify as a
"disinterested person" within the meaning of Rule 16b-3, as such
term is interpreted from time to time, then the granting of
options to officers and directors who are Reporting Persons under
the Plan shall not be determined in accordance with this Section
3(b) but shall be determined in accordance with the other
provisions of the Plan.
b. Officer's and Director's Options. A maximum of
100,000 option shares may be granted to directors or executive
officers under this plan.
4. Stock Subject to Plan.
The stock subject to options granted under the Plan shall
be shares of authorized but unissued Class A Common Stock.
Subject to adjustment as provided in Section 15 below, the
maximum number of shares of Class A Common Stock of the Company
which may be issued and sold under the Plan is 250,000 shares.
If an option granted under the Plan shall expire, terminate or is
cancelled for any reason without having been exercised in full,
the unpurchased shares subject to such option shall again be
available for subsequent option grants under the Plan.
5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan,
each recipient of an option shall execute an option agreement in
such form not inconsistent with the Plan as may be approved by
the Board of Directors. Such option agreements may differ among
recipients.
6. Purchase Price.
a. General. The purchase price per share of stock
deliverable upon the exercise of an option shall be determined by
the Board of Directors at the time of grant of such option;
provided, however, that in the case of an Incentive Stock Option,
the exercise price shall not be less than 100% of the Fair Market
Value (as hereinafter defined) of such stock, at the time of
grant of such option, or less than 110% of such Fair Market Value
in the case of options described in Section 11(b). "Fair Market
Value" of a share of Common Stock of the Company as of a
specified date for the purposes of the Plan shall mean the
closing price of a share of the Common Stock on the principal
securities exchange on which such shares are traded on the day
immediately preceding the date as of which Fair Market Value is
being determined, or on the next preceding date on which such
shares are traded if no shares were traded on such immediately
preceding day, or if the shares are not traded on a securities
exchange, Fair Market Value shall be deemed to be the average of
the high bid and low asked prices of the shares in the
over-the-counter market on the day immediately preceding the date
as of which Fair Market Value is being determined or on the next
preceding date on which such high bid and low asked prices were
recorded. If the shares are not publicly traded, Fair Market
Value of a share of Common Stock (including, in the case of any
repurchase of shares, any distributions with respect thereto
which would be repurchased with the shares) shall be determined
in good faith by the Board of Directors. In no case shall Fair
Market Value be determined with regard to restrictions other than
restrictions which, by their terms, will never lapse.
b. Payment of Purchase Price. Options granted under
the Plan may provide for the payment of the exercise price by
delivery of cash or a check to the order of the Company in an
amount equal to the exercise price of such options, or, to the
extent provided in the applicable option agreement, (i) by
delivery to the Company of shares of Common Stock of the Company
having a Fair Market Value on the date of exercise equal in
amount to the exercise price of the options being exercised, (ii)
by any other means which the Board of Directors determines are
consistent with the purpose of the Plan and with applicable laws
and regulations (including, without limitation, the provisions of
Rule 16b-3 and Regulation T promulgated by the Federal Reserve
Board) or (iii) by any combination of such methods of payment.
7. Option Period.
Subject to earlier termination as provided in the Plan,
each option and all rights thereunder shall expire on such date
as determined by the Board of Directors and set forth in the
applicable option agreement, provided, that such date shall not
be later than (10) ten years after the date on which the option
is granted.
8. Exercise of Options.
Each option granted under the Plan shall be exercisable
either in full or in installments at such time or times and
during such period as shall be set forth in the option agreement
evidencing such option, subject to the provisions of the Plan.
No option granted to a Reporting Person for purposes of the
Exchange Act, however, shall be exercisable during the first six
months after the date of grant. Subject to the requirements in
the immediately preceding sentence, if an option is not at the
time of grant immediately exercisable, the Board of Directors may
(i) in the agreement evidencing such option, provide for the
acceleration of the exercise date or dates of the subject option
upon the occurrence of specified events, and/or (ii) at any time
prior to the complete termination of an option, accelerate the
exercise date or dates of such option.
9. Non-transferability of Option.
No option granted under this Plan shall be assignable or
otherwise transferable by the optionee except by will or by the
laws of descent and distribution or pursuant to a qualified
domestic relations order as defined in the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder.
An option may be exercised during the lifetime of the optionee
only by the optionee. In the event an optionee dies during his
employment by the Company or any of its subsidiaries, or during
the three-month period following the date of termination of such
employment, his option shall thereafter be exercisable, during
the period specified in the option agreement, by his executors or
administrators to the full extent to which such option was
exercisable by the optionee at the time of his death during the
periods set forth in Section 10 or 11(d).
10. Effect of Termination of Employment or Other
Relationship
Except as provided in Section 11(d) with respect to
Incentive Stock Options, and subject to the provisions of the
Plan, an optionee may exercise an option at any time within three
(3) months following the termination of the optionee's employment
or other relationship with the Company or within one (1) year if
such termination was due to the death or disability of the
optionee, but, except in the case of the optionee's death, in no
event later than the expiration date of the Option. If the
termination of the optionee's employment is for cause or is
otherwise attributable to a breach by the optionee of an
employment or confidentiality or non-disclosure agreement, the
option shall expire immediately upon such termination. The Board
of Directors shall have the power to determine what constitutes a
termination for cause or a breach of an employment or
confidentiality or non-disclosure agreement, whether an optionee
has been terminated for cause or has breached such an agreement,
and the date upon which such termination for cause or breach
occurs. Any such determinations shall be final and conclusive
and binding upon the optionee.
11. Incentive Stock Option.
Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following
additional terms and conditions:
a. Express Designation. All Incentive Stock Options
granted under the Plan shall, at the time of grant, be
specifically designated as such in the option agreement covering
such Incentive Stock Options.
b. 10% Shareholder. If any employee to whom an
Incentive Stock Option is to be granted under the Plan is, at the
time of the grant of such option, the owner of stock possessing
more than 10% of the total combined voting power of all classes
of stock of the Company (after taking into account the
attribution of stock ownership rules of Section 424(d) of the
Code), then the following special provisions shall be applicable
to the Incentive Stock Option granted to such individual:
i. The purchase price per share of the Common
Stock subject to such Incentive Stock Option shall not be less
than 110% of the Fair Market Value of one share of Common Stock
at the time of grant; and
ii. the option exercise period shall not exceed
five years from the date of grant.
c. Dollar Limitation. For so long as the Code shall
so provide, options granted to any employee under the Plan (and
any other incentive stock option plans of the Company) which are
intended to constitute Incentive Stock Options shall not
constitute Incentive Stock Options to the extent that such
options, in the aggregate, become exercisable for the first time
in any one calendar year for shares of Common Stock with an
aggregate Fair Market Value, as of the respective date or dates
of grant, of more than $100,000.
d. Termination of Employment. Death or Disability.
No Incentive Stock Option may be exercised unless, at the time of
such exercise, the optionee is, and has been continuously since
the date of grant of his or her option, employed by the Company,
except that:
i. an Incentive Stock Option may be exercised
within the period of three months after the date the optionee
ceases to be an employee of the Company (or within such lesser
period as may be specified in the applicable option agreement),
provided, that the agreement with respect to such option may
designate a longer exercise period and that the exercise after
such three-month period shall be treated as the exercise of a
non-statutory option under the Plan;
ii. if the optionee dies while in the employ of
the Company, or within three months after the optionee ceases to
be such an employee, the Incentive Stock Option may be exercised
by the person to whom it is transferred by will or the laws of
descent and distribution within the period of one year after the
date of death (or within such lesser period as may be specified
in the applicable option agreement); and
iii. if the optionee becomes disabled (within the
meaning of Section 22(e)(3) of the Code or any successor
provisions thereto) while in the employ of the Company, the
Incentive Stock Option may be exercised within the period of one
year after the date the optionee ceases to be such an employee
because of such disability (or within such lesser period as may
be specified in the applicable option agreement).
For all purposes of the Plan and any option granted
hereunder, "Unemployment" shall be defined in accordance with the
provisions of Section 1.421-7(h) of the Income Tax Regulations
(or any successor regulations). Notwithstanding the foregoing
provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions.
a. Additional Option Provisions. The Board of
Directors may, in its sole discretion, include additional
provisions in option agreements covering options granted under
the Plan, including without limitation restrictions on transfer,
repurchase rights, rights of first refusal, commitments to pay
cash bonuses, to make, arrange for or guarantee loans or to
transfer other property to options upon exercise of options, or
such other provisions as shall be determined by the Board of
Directors; provided, that such additional provisions shall not be
inconsistent with any other term or condition of the Plan and
such additional provisions shall not cause any Incentive Stock
Option granted under the Plan to fail to qualify as an Incentive
Stock Option within the meaning of Section 422 of the Code.
b. Acceleration, Extension, Etc. The Board of
Directors may, in its sole discretion, (i) accelerate the date or
dates on which all or any particular option or options granted
under the Plan may be exercised or (ii) extend the dates during
which all, or any particular, option or options granted under the
Plan may be exercised; provided, however, that no such extension
shall be permitted if it would cause the Plan to fail to comply
with Section 422 of the Code or with Rule 16b-3 (if applicable).
13. General Restrictions.
a. Investment Representations. The Company may
require any person to whom an option is granted, as a condition
of exercising such option, to give written assurances in
substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option
for his or her own account for investment and not with any
present intention of selling or otherwise distributing the same,
and to such other effects as the Company deems necessary or
appropriate in order to comply with federal and applicable state
securities laws, or with covenants or representations made by the
Company in connection with any public offering of its Common
Stock.
b. Compliance With Securities Laws. Each option
shall be subject to the requirement that if, at any time, counsel
to the Company shall determine that the listing, registration or
qualification of the shares subject to such option upon any
securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or
that the disclosure of non-public information or the satisfaction
of any other condition is necessary as a condition of, or in
connection with the issuance or purchase of shares thereunder,
such option may not be exercised, in whole or in part, unless
such listing, registration, qualification, consent or approval,
or satisfaction of such condition shall have been effected or
obtained on conditions acceptable to the Board of Directors.
Nothing herein shall be deemed to require the Company to apply
for or to obtain such listing, registration or qualification, or
to satisfy such condition.
14. Rights as a Shareholder.
The holder of an option shall have no rights as a
shareholder with respect to any shares covered by the option
(including, without limitation, any rights to receive dividends
or non-cash distributions with respect to such shares) until the
date of issue of a stock certificate to him or her for such
shares. No adjustment shall be made for dividends or other
rights for which the record date is prior to the date such stock
certificate is issued.
15. Adjustment Provisions for Recapitalization,
Reorganizations and Related Transactions.
a. Recapitalization and Related Transactions. If,
through or as a result of any recapitalization, reclassification,
stock dividend, stock split, reverse stock split or other similar
transaction, (i) the outstanding shares of Common Stock are
increased, decreased or exchanged for a different number or kind
of shares or other securities of the Company, or (ii) additional
shares or new or different shares or other non-cash assets are
distributed with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment shall be
made in (x) the maximum number and kind of shares reserved for
issuance under the Plan, (y) the number and kind of shares or
other securities subject to any then outstanding options under
the Plan, and (z) the price for each share subject to any then
outstanding options under the Plan, without changing the
aggregate purchase price as to which such options remain
exercisable. Notwithstanding the foregoing, no adjustment shall
be made pursuant to this Section 15 if such adjustment (i) would
cause the Plan to fail to comply with Section 422 of the Code or
with Rule 16b-3 or (ii) would be considered as the adoption of a
new plan requiring stockholder approval.
b. Reorganization, Merger and Related Transactions.
If the Company shall be the surviving corporation in any
reorganization, merger or consolidation of the Company with one
or more other corporations, any then outstanding option granted
pursuant to the Plan shall pertain to and apply to the securities
to which a holder of the number of shares of Common Stock subject
to such options would have been entitled immediately following
such reorganization, merger, or consolidation, with a
corresponding proportionate adjustment of the purchase price as
to which such options may be exercised so that the aggregate
purchase price as to which such options may be exercised shall be
the same as the aggregate purchase price as to which such options
may be exercised for the shares remaining subject to the options
immediately prior to such reorganization, merger, or
consolidation.
c. Board Authority to Make Adjustments. Any
adjustments under this Section 15 will be made by the Board of
Directors, whose determination as to what adjustments, if any,
will be made and the extent thereof will be final, binding and
conclusive. No fractional shares will be issued under the Plan
on account of any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation,
etc.
a. General. In the event of a consolidation or
merger in which the Company is not the surviving corporation, or
sale of all or substantially all of the assets of the Company in
which outstanding shares of Common Stock are exchanged for
securities, cash or other property of any other corporation or
business entity or in the event of a liquidation of the Company
(collectively, a "Corporate Transaction"), the Board of Directors
of the Company, or the board of directors of any corporation
assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding
options: (i) provide that such options shall be assumed, or
equivalent options shall be substituted, by the acquiring or
succeeding corporation (or an affiliate thereof), provided that
any such options substituted for Incentive Stock Options shall
meet the requirements of Section 424(a) of the Code, (ii) upon
written notice to the options, provide that all unexercised
options will terminate immediately prior to the consummation of
such transaction unless exercised by the optionee within a
specified period following the date of such notice, (iii) in the
event of a Corporate Transaction under the terms of which holders
of the Common Stock of the Company will receive upon consummation
thereof a cash payment for each share surrendered in the
Corporate Transaction (the "Transaction Price), make or provide
for a cash payment to the options equal to the difference between
(A) the Transaction Price times the number of shares of Common
Stock subject to such outstanding options (to the extent then
exercisable at prices not in excess of the Transaction Price) and
(B) the aggregate exercise price of all such outstanding options
in exchange for the termination of such options, and (iv) provide
that all or any outstanding options shall become exercisable in
full immediately prior to such event.
b. Substitute Options. The Company may grant options
under the Plan in substitution for options held by employees of
another corporation who become employees of the Company, or a
subsidiary of the Company, as the result of a merger or
consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by
the Company, or one of its subsidiaries, of property or stock of
the employing corporation. The Company may direct that
substitute options be granted on such terms and conditions as the
Board of Directors considers appropriate in the circumstances.
17. No Special Employment Rights.
Nothing contained in the Plan or in any option shall
confer upon any optionee any right with respect to the
continuation of his or her employment by the Company or interfere
in any way with the right of the Company at any time to terminate
such employment or to increase or decrease the compensation of
the optionee.
18. Other Employee Benefits.
Except as to plans which by their terms include such
amounts as compensation, the amount of any compensation deemed to
be received by an employee as a result of the exercise of an
option or the sale of shares received upon such exercise will not
constitute compensation with respect to which any other employee
benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing,
life insurance or salary continuation plan, except as otherwise
specifically determined by the Board of Directors.
19. Amendment of the Plan.
a. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in any respect, except
that if at any time the approval of the shareholders of the
Company is required under Section 422 of the Code or any
successor provision with respect to Incentive Stock Options, or
under Rule 16b-3, the Board of Directors may not effect such
modification or amendment without such approval.
b. The modification or amendment of the Plan shall
not, without the consent of an optionee, affect his or her rights
under an option previously granted to him or her. With the
consent of the optionee affected, the Board of Directors may
amend outstanding option agreements in a manner not inconsistent
with the Plan. The Board of Directors shall have the right to
amend or modify (i) the terms and provisions of the Plan and of
any outstanding Incentive Stock Options granted under the Plan to
the extent necessary to qualify any or all such options for such
favorable federal income tax treatment (including deferral of
taxation upon exercise) as may be afforded incentive stock
options under Section 422 of the Code and (ii) the terms and
provisions of the Plan and of any outstanding option to the
extent necessary to ensure the qualification of the Plan under
Rule 16b-3.
20. Withholding.
a. The Company shall have the right to deduct from
payments of any kind otherwise due to the optionee any federal,
state or local taxes of any kind required by law to be withheld
with respect to any shares issued upon exercise of options under
the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the
optionee may elect to satisfy such obligations, in whole or in
part, (i) by causing the Company to withhold shares of Common
Stock otherwise issuable pursuant to the exercise of an option or
(ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall
have a Fair Market Value equal to such withholding obligation as
of the date that the amount of tax to be withheld is to be
determined. An optionee who has made an election pursuant to
this Section 20(a) may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to
any repurchase, forfeiture, unfulfilled vesting or other similar
requirements.
b. The acceptance of shares of Common Stock upon
exercise of an Incentive Stock Option shall constitute an
agreement by the optionee (i) to notify the Company if any or all
of such shares are disposed of by the optionee within two years
from the date the option was granted or within one year from the
date the shares were issued to the optionee pursuant to the
exercise of the option, and (ii) if required by law, to remit to
the Company, at the time of and in the case of any such
disposition, an amount sufficient to satisfy the Company's
federal, state and local withholding tax obligations with respect
to such disposition, whether or not, as to both (i) and (ii), the
optionee is in the employ of the Company at the time of such
disposition.
c. Notwithstanding the foregoing, in the case of a
Reporting Person whose options have been granted in accordance
with the provisions of Section 3(b) herein, no election to use
shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of
Rule 16b-3.
21. Cancellation and New Grant of Options, Etc.
The Board of Directors shall have the authority to effect,
at any time and from time to time, with the consent of the
affected options, (i) the cancellation of any or all outstanding
options under the Plan and the grant in substitution there for of
new options under the Plan covering the same or different numbers
of shares of Common Stock and having an option exercise price per
share which may be lower or higher than the exercise price per
share of the cancelled options or (ii) the amendment of the terms
of any and all outstanding options under the Plan to provide an
option exercise price per share which is higher or lower than the
then-current exercise price per share of such outstanding
options.
22. Effective Date and Duration of the Plan.
a. Effective Date. The Plan shall become effective
when adopted by the Board of Directors, but no Incentive Stock
Option granted under the Plan shall become exercisable unless and
until the Plan shall have been approved by the Company's
shareholders. If such shareholder approval is not obtained
within twelve months after the date of the Board's adoption of
the Plan, no options previously granted under the Plan shall be
deemed to be Incentive Stock Options and no Incentive Stock
Options shall be granted thereafter. Amendments to the Plan not
requiring shareholder approval shall become effective when
adopted by the Board of Directors; amendments requiring
shareholder approval (as provided in Section 19) shall become
effective when adopted by the Board of Directors, but no
Incentive Stock Option granted after the date of such amendment
shall become exercisable (to the extent that such amendment to
the Plan was required to enable the Company to grant such
Incentive Stock Option to a particular optionee) unless and until
such amendment shall have been approved by the Company's
shareholders. If such shareholder approval is not obtained
within twelve months of the Board's adoption of such amendment,
any Incentive Stock Options granted on or after the date of such
amendment shall terminate to the extent that such amendment to
the Plan was required to enable the Company to grant such option
to a particular optionee. Subject to this limitation, options
may be granted under the Plan at any time after the effective
date and before the date fixed for termination of the Plan.
b. Termination. Unless sooner terminated in
accordance with Section 16, the Plan shall terminate upon the
earlier of (i) the close of business on the day next preceding
the tenth anniversary of the date of its adoption by the Board of
Directors, or (ii) the date on which all shares available for
issuance under the Plan shall have been issued pursuant to the
exercise or cancellation of options granted under the Plan. If
the date of termination is determined under (i) above, then
options outstanding on such date shall continue to have force and
effect in accordance with the provisions of the instruments
evidencing such options.
23. Provision for Foreign Participants.
The Board of Directors may, without amending the Plan,
modify awards or options granted to participants who are foreign
nationals or employed outside the United States to recognize
differences in laws, rules, regulations or customs of such
foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
24. Governing Law.
The provisions of this Plan shall be governed and
construed in accordance with the laws of the State of California.
Adopted by the Board of Directors on May 15, 1996 and the
Shareholders as of June 28, 1996,
