e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MKuxviL1ZlTf7FO/NeRw2vtxn+PELV1aj3Ww4Y+US9c1LPgd/MzXCA3D02pUaolU PZbgoF7wlqcxg76109Q9Aw== 0000950153-02-001397.txt : 20020813 0000950153-02-001397.hdr.sgml : 20020813 20020813163242 ACCESSION NUMBER: 0000950153-02-001397 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIPID SCIENCES INC/ CENTRAL INDEX KEY: 0000071478 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 430433090 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00497 FILM NUMBER: 02730112 BUSINESS ADDRESS: STREET 1: 7068 KOLL CENTER PARKWAY STREET 2: SUITE 401 CITY: PLEASANTON STATE: CA ZIP: 94566 BUSINESS PHONE: 925-249-4000 MAIL ADDRESS: STREET 1: 7068 KOLL CENTER PARKWAY STREET 2: SUITE 401 CITY: PLEASANTON STATE: CA ZIP: 94566 FORMER COMPANY: FORMER CONFORMED NAME: NEW MEXICO & ARIZONA LAND CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NZ CORP DATE OF NAME CHANGE: 20000810 10-Q 1 p66877e10vq.htm 10-Q e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q


		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2002.


		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______________ to ______________

Commission File Number: 0-497

Lipid Sciences, Inc.
(Exact name of registrant as specified in its charter)


Delaware		43-0433090

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


7068 Koll Center Parkway, Suite 401, Pleasanton, California		94566




(Address of Principal Executive Offices)		(Zip Code)

(925) 249-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) had been subject to such filing requirements for the past 90 days. Yes (XBOX) No (BOX)

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock, $0.001 par value Class		21,141,455 shares outstanding at August 9, 2002

TABLE OF CONTENTS


	Condensed Consolidated Balance Sheet
	Condensed Consolidated Statements of Operations (Unaudited)
	Condensed Consolidated Statements of Cash Flow (Unaudited)
	Notes to Condensed Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II.
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EX-3.1
EX-3.2
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-99.1
EX-99.2

LIPID SCIENCES, INC.

FORM 10-Q

For the Period Ended June 30, 2002

Table of Contents


		Page No.

PART I




ITEM 1.	FINANCIAL STATEMENTS		3




	Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001		3




	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001, and cumulative period from Inception (May 21, 1999) to June 30, 2002		4




	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 and cumulative period from Inception (May 21, 1999) to June 30, 2002		5




	Notes to Condensed Consolidated Financial Statements		7




ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		14




ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		25




PART II




ITEM 1.	LEGAL PROCEEDINGS		26




ITEM 2.	CHANGES IN SECURITIES		26




ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		26




ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		26




ITEM 5.	OTHER INFORMATION		27




ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K		27




SIGNATURES			28




INDEX TO EXHIBITS FOR FORM 10-Q			29

PART I

ITEM 1. FINANCIAL STATEMENTS

Lipid Sciences, Inc.
(A Development Stage Company)
Condensed Consolidated Balance Sheet

(In thousands, except share amounts)


			June 30,			December 31,
			2002			2001⁽¹⁾
ASSETS
Current assets:			(unaudited)
	Cash and cash equivalents		$	25,324		$	12,811




	Prepaid expenses and other current assets			294			111




	Income tax receivable			—			516




	Current deferred tax asset			497			497




	Current assets of discontinued operations			15,080			19,810

		Total current assets		41,195			33,745




Property and equipment				877			786




Restricted cash				420			527




Non-current deferred tax asset				573			1,544




Non-current assets of discontinued operations				9,927			42,630

Total assets			$	52,992		$	79,232

LIABILITIES AND STOCKHOLDERS’ EQUITY




Current liabilities:




	Accounts payable and accrued liabilities		$	1,878		$	1,783




	Related party payables			1,701			2,000




	Accrued royalties			500			250




	Accrued compensation			409			235




	Income taxes payable			4,105			—




	Current liabilities of discontinued operations			238			1,089

		Total current liabilities		8,831			5,357




Deferred rent				30			25




Long-term liabilities of discontinued operations				—			22,573

		Total long-term liabilities		30			22,598




Commitments and contingencies (Notes 6, 7, 8, 10)




Stockholders’ equity:




	Preferred stock, $0.001 par value; 10,000,000 shares authorized and issuable; no shares outstanding			—			—




	Common stock, $0.001 par value; 75,000,000 shares authorized; 21,141,455 and 21,246,222 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively			67,059			67,947




	Deficit accumulated in the development stage			(22,928	)		(16,670	)

		Total stockholders’ equity		44,131			51,277

Total liabilities and stockholders’ equity			$	52,992		$	79,232

(1) Derived from the consolidated audited financial statements as of December 31, 2001

See accompanying notes to condensed consolidated financial statements

Lipid Sciences, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)


																Period
																from
																Inception
																(May 21,
				Three Months Ended						Six Months Ended						1999) to
				June 30,						June 30,						June 30,
				2002			2001			2002			2001			2002

Net revenue				$	—		$	—		$	—		$	—		$	—




Operating expenses:




	Research and development				3,894			2,137			6,913			5,274			20,924




	Selling, general and administrative				1,868			878			2,835			1,555			8,428

			Total operating expenses		5,762			3,015			9,748			6,829			29,352

Operating loss					(5,762	)		(3,015	)		(9,748	)		(6,829	)		(29,352	)




Interest and other income					34			140			48			257			811

Loss from continuing operations					(5,728	)		(2,875	)		(9,700	)		(6,572	)		(28,541	)




Income tax benefit					1,757			—			2,865			—			5,022

Net loss from continuing operations					(3,971	)		(2,875	)		(6,835	)		(6,572	)		(23,519	)




Net income from discontinued operations (including gain on disposal of $867 and $1,043, for the three and six month periods ended June 30, 2002, respectively)					269			—			577			—			591

Net loss				$	(3,702	)	$	(2,875	)	$	(6,258	)	$	(6,572	)	$	(22,928	)

Earnings/(loss) per share – basic and diluted:




		Net (loss) per share continuing operations		$	(0.19	)	$	(0.18	)	$	(0.32	)	$	(0.43	)




		Earnings per share discontinued operations		$	0.01		$	—		$	0.03		$	—




		Net loss		$	(0.18	)	$	(0.18	)	$	(0.29	)	$	(0.43	)




Weighted average number of common shares outstanding – basic and diluted					21,141			15,839			21,163			15,254

See accompanying notes to condensed consolidated financial statements

Lipid Sciences, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flow (Unaudited)

(In thousands)


										Period
										from
										Inception
										(May 21,
				Six Months Ended						1999) to
				June 30,						June 30,
				2002			2001			2002

Cash flows used in operating activities:




Net loss from continuing operations					($6,835	)		($6,572	)		($23,519	)




Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:




	Depreciation and amortization				116			18			173




	Accretion of discount on short-term investments				—			(80	)		(80	)




	Issuance of common stock to consultants and advisors				(399	)		1,140			3,772




	Issuance of warrants to consultants				—			848			1,044




	Deferred income taxes				971			—			(1,070	)




	Changes in operating assets and liabilities:




		Receivables			—			(20	)		(20	)




		Prepaid expenses and other current assets			(183	)		284			(272	)




		Restricted cash			107			(13	)		(420	)




		Income taxes			4,621			—			4,105




		Accounts payable and other current liabilities			(204	)		(145	)		1,528




		Accrued royalties			250			604			500




		Accrued compensation			174			105			408




		Deferred rent			5			10			30

			Net cash used in operating activities		(1,377	)		(3,821	)		(13,821	)




Cash flows used in investing activities:




	Capital expenditures				(207	)		(273	)		(1,050	)




Cash flows (used in)/provided by financing activities:




	Acquisition of NZ Corporation – cash acquired				—			—			20,666




	Payment of acquisition costs				—			—			(1,615	)




	Payment to repurchase stock				(470	)		—			(12,513	)




	Maturities and sales of short-term investments				—			8,125			8,125




	Purchases of short-term investments				—			—			(8,045	)




	Proceeds from sale of common stock, net of issuance costs				(19	)		6,175			17,429




	Proceeds from issuance of warrants				—			20			40

		Net cash (used in)/provided by financing activities			(489	)		14,320			24,087




Net (decrease)/increase in cash and cash equivalents from continuing operations					(2,073	)	$	10,226			9,216




Net cash provided by discontinued operations					14,586			—			16,108




Cash and cash equivalents at beginning of period					12,811			1,125			—

Cash and cash equivalents at end of period				$	25,324		$	11,351		$	25,324

(In thousands)


							Period
							from
							Inception
							(May 21,
			Six Months Ended				1999) to
			June 30,				June 30,
			2002		2001		2002

SUPPLEMENTAL DISCLOSURES OF CASH FLOW




	INFORMATION Cash paid during the year for:




	Interest (net of amount capitalized)		$	739	$	—	$	839




SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS Acquisition of NZ Corporation:




	Current assets (other than cash)						$	1,040




	Property and equipment							30,193




	Commercial real estate loans							16,335




	Notes and receivables							15,166




	Investments in joint ventures							2,343




	Current liabilities assumed							(1,947	)




	Long-term debt assumed							(14,908	)




	Deferred taxes associated with the acquisition							(7,936	)

		Fair value of assets acquired					$	40,286




SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING TRANSACTIONS Accrued acquisition costs							$	2,050

See accompanying notes to condensed consolidated financial statements

Lipid Sciences, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

On November 29, 2001, Lipid Sciences, Inc., a privately-held corporation, merged with and into NZ Corporation. NZ Corporation survived the merger and changed its name to Lipid Sciences, Inc. In this report, unless the context otherwise requires, the current company, Lipid Sciences, Inc., is referred to as “we,” “the Company” or “Lipid Sciences” with respect to periods of time from the effective date of the merger to the date of this report; the merged company, Lipid Sciences, Inc., a privately-held corporation, is referred to as “we” or “Pre-Merger Lipid” with respect to periods prior to the effective date of the merger; and NZ Corporation is referred to as “NZ,” with respect to periods prior to the effective date of the merger.

The condensed consolidated results of operations presented herein include the financial results of Lipid Sciences and NZ for the three and six month periods ended June 30, 2002 and the financial results of Pre-Merger Lipid for the three and six month periods ended June 30, 2001. All significant intercompany transactions have been eliminated in consolidation.

The Company is engaged in the research and development of products that can treat major medical indications by regulating plasma lipid levels. Primary activities since incorporation have been establishing offices, recruiting personnel, conducting research and development, performing business and financial planning, and raising capital. Accordingly, the Company is considered to be in the development stage.

In the course of its research and development activities, the Company has sustained continued operating losses and expects those losses to continue for the foreseeable future as we continue to invest in research and development and begin to allocate significant and increasing resources for clinical testing and related activities. The Company continues to expend significant cash resources in pursuit of our primary objectives, and at June 30, 2002, the remaining available cash and investments balance and accumulated deficit is approximately $25.3 million and $22.9 million, respectively. We intend to finance our operations through the orderly disposition of NZ’s assets acquired in the merger (see Note 10 of the condensed consolidated financial statements), and through new collaborations, the receipt of research and development grants or private or public equity or debt financings and, in the longer term, revenues from product sales and technology licenses. If adequate funds are not available to satisfy our requirements we may have to substantially reduce, or eliminate, certain areas of our product development activities, significantly limit our operations, or otherwise modify our business strategy.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated.

The condensed consolidated financial statements presented are unaudited and in the opinion of management reflect all adjustments (consisting only of normal recurring adjustments), which the Company considers necessary for a fair presentation of the financial condition and results of operations as of and for the interim periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s 2001 Annual Report on Form 10-K.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates and assumptions.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. Such reclassifications had no material effect on the Company’s previously reported consolidated financial position, results of operations or cash flows.

NOTE 2: ACQUISITION

On November 29, 2001, Lipid Sciences, Inc., a privately-held corporation, merged with and into NZ Corporation. NZ Corporation survived the merger and changed its name to Lipid Sciences, Inc. Pre-Merger Lipid ceased to exist as a separate corporation, and the stockholders of Pre-Merger Lipid became stockholders of the Company. In connection with the merger, Pre-Merger Lipid stockholders received 1.55902 shares of our common stock for each share of Pre-Merger Lipid common stock they held at the time the merger was completed. After the transaction, the Pre-Merger Lipid stockholders owned approximately 75% of the then outstanding stock of the Company and the NZ stockholders owned the remaining shares of the Company’s common stock.

The merger was accounted for under the purchase method of accounting and was treated as a reverse acquisition because the stockholders of Pre-Merger Lipid owned the majority of the Company’s common stock after the merger. Pre-Merger Lipid was considered the acquiror for accounting and financial reporting purposes. The results of operations from NZ have been included only from November 29, 2001, the date of acquisition. The historical financial statements prior to November 29, 2001 are those of Pre-Merger Lipid.

Pre-Merger Lipid acquired NZ for the aggregate purchase price of $60,952,000. The aggregate purchase price equals the fair value of NZ’s net assets. The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition:


(In thousands)




	Current assets		$	21,706




	Property and equipment			30,193




	Commercial real estate loans			16,335




	Notes and receivables			15,166




	Investments in joint ventures			2,343

		Total assets acquired		85,743

	Current liabilities			1,947




	Long-term debt			14,908




	Long-term deferred taxes			7,936

		Total liabilities assumed		24,791

		Net assets acquired	$	60,952

In connection with the merger, the Company is obligated to issue additional shares of common stock to those individuals and entities who were stockholders of NZ on the day prior to the completion of the merger and who perfected their stock rights, unless during the 24-month period immediately following the merger, the closing price per share of the Company’s common stock equals or exceeds $12.00 per share throughout any period of 20 consecutive trading days, in which the aggregate volume of shares traded equals or exceeds 1,500,000 shares. Each perfected right entitles the holder to receive up to one additional share of the Company’s common stock. Stockholders had until April 30, 2002 to perfect their rights and must continue to hold their shares in direct registered form through November 28, 2003 to continue to qualify the right. Transfer of shares before November 29, 2003 will disqualify the right attached to the transferred shares. If additional shares are issued pursuant to the rights, the issuance of additional shares of common stock will have the effect of diluting the ownership of stockholders not holding rights and increasing the proportionate ownership of the stockholders holding rights. The number of outstanding shares of common stock would increase, having the effect of diluting earnings per share. If all of the holders of NZ shares outstanding on November 28, 2001 perfected their rights and remain qualified to receive additional shares on November 28, 2003, up to 5,311,534 additional shares could be issued to such holders. This issuance will dilute stockholders by up to 19.8%, based on 21,141,455 shares outstanding as of June 30, 2002.

The unaudited condensed consolidated results of operations from continuing operations on a pro forma basis as if the merger had occurred as of the beginning of the periods presented would be consistent with the results of continuing operations presented in the condensed consolidated statement of operations. The results of operations of NZ have been reclassified to discontinued operations for all periods presented.

NOTE 3: EARNINGS / (LOSS) PER SHARE

The merger between the Company and Pre-Merger Lipid was accounted for under the purchase method of accounting and was treated as a reverse acquisition because the stockholders of Pre-Merger Lipid owned the majority of the Company’s common stock after the merger. Pre-Merger Lipid was considered the acquiror for accounting and financial reporting purposes. The weighted average number of common shares has been adjusted for all periods to reflect the exchange ratio of 1.55902 to 1.

The Company computes its net loss per share under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three month period ended June 30, 2002 and 2001, the Company has excluded options and warrants to purchase 1,902,359 and 1,689,910 shares of common stock, respectively, from the computation of basic and diluted earnings per share because all such securities are anti-dilutive for all periods presented.

NOTE 4: RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that amortization of goodwill will cease, and instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Lipid Sciences adopted SFAS No. 142 on January 1, 2002. Adoption of this statement did not have an impact on Lipid Sciences’ financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supercedes SFAS No. 121 and retains the fundamental provisions of SFAS No. 121 for (i) recognition and measurement of the impairment of long-lived assets to be held and used; and (ii) measurement of the impairment of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Lipid Sciences adopted SFAS No. 144 on January 1, 2002. Adoption of this statement did not have a significant impact on Lipid Sciences’ financial position or results of operations.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt the provisions of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.

NOTE 5: PROPERTY AND EQUIPMENT

Property and equipment are carried at cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives, generally three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the remaining term of the lease. Depreciation expense includes amortization of leasehold improvements.

Property and equipment consist of the following (in thousands):


		June 30,			December 31,
		2002			2001

Equipment		$	814		$	612




Leasehold improvements			237			232

			1,051			844




Less accumulated depreciation and amortization			(174	)		(58	)

	Total property and equipment, net	$	877		$	786

NOTE 6: DEVELOPMENT AGREEMENT

In October 2000, we entered into a Development Agreement with SRI International, a California nonprofit public benefit corporation, pursuant to which SRI provides us with various consulting and development services. SRI will assign to us all intellectual property developed during the term of the Development Agreement. The Development Agreement calls for SRI to complete two development phases (as defined in the Development Agreement) during which time SRI will work to develop a medical device to enable us to further develop and commercialize our lipid removal technology. In addition, we have entered into a number of amendments with SRI to address work being performed by SRI, which is outside of the scope of work of Phase II development. Certain of the amendments have been in support of product development and certain of the amendments relate to supplemental testing and analysis being performed by SRI.

Phase I was completed on March 28, 2001. Fees for services performed by SRI for Phase I totaled $1,517,000, of which $972,967 was charged to operations in the three month period ended March 31, 2001.

Phase II was initiated upon completion of Phase I. Fees for Phase II of the development program are limited to $6,300,000. Approximately $1,643,723 and $904,657 for the three month periods ended June 30, 2002 and June 30, 2001, respectively, and $3,234,717 and $904,957 for the six month periods ended June 30, 2002 and June 30, 2001, for fees related to Phase II, other product development, supplemental testing and analysis, respectively, were charged to operations, of which $110,671 is included in accounts payable at June 30, 2002.

We also issued SRI warrants to purchase 779,510 shares of common stock at an exercise price of $3.21 per share. The warrants vested with respect to 233,853 shares upon completion of Phase I, with the remaining 545,657 shares vesting upon completion of Phase II. On May 12, 2001, the Development Agreement was amended with respect to the warrants to purchase 545,657 shares of common stock related to Phase II. This amendment splits Phase II into two development milestones with warrants to purchase 272,829 shares vesting at the completion of each milestone. If either development milestone is discontinued at the option of Lipid Sciences, all 545,657 warrants will vest at the completion of the remaining milestone.

The March 28, 2001 completion of Phase I resulted in warrants to purchase 233,853 shares of common stock becoming fully vested. On this date, we recognized an expense of $847,500, based upon the fair market value of the warrants on the date of vesting, using the Black-Scholes method with the following assumptions: a volatility of 80%, a dividend yield of 0%, a risk-free interest rate of 6%, and a life of seven years.

As of June 30, 2002, neither milestone related to Phase II was complete and no value has been assigned to these warrants which have a life of seven years. These warrants will be valued using the Black-Scholes method and will be charged to expense as they vest.

NOTE 7: RELATED PARTY TRANSACTIONS

In December 1999, we entered into an Intellectual Property License Agreement to obtain the exclusive worldwide rights to certain patents, trademarks, and technology with Aruba International Pty. Ltd., an Australian company, controlled by Bill E. Cham, Ph.D., a founding stockholder of Pre-Merger Lipid and one of our directors. As consideration for the license, we issued Aruba 4,677,060 shares of our common stock valued at $250,000. Under this agreement, we are also obligated to pay Aruba a continuing royalty on revenue under the agreement in future years, subject to a minimum annual royalty amount of $500,000. For the three month periods ended June 30, 2002 and 2001 we have accrued an additional $125,000 and $479,167, respectively, related to this agreement. Amounts for both 2002 and 2001 were charged to research and development expense.

We are also required to pay Aruba 10% of any External Research Funding received by us to further this technology, as defined in the agreement. We were required to pay Aruba $250,000 upon commencement of our initial human clinical trial utilizing the technology under the patents. Our initial human clinical trial commenced during the three month period ended June 30, 2002. The payment to Aruba of $250,000 is included in related party payables at June 30, 2002 and was charged to research and development expense during this same period.

Additionally, in the normal course of business, we have consulted with Dr. Cham, and companies with which he is affiliated, regarding various matters relating to research and development. In November 2001, we entered into a Service Agreement with Karuba International Pty. Ltd., a company controlled by Dr. Cham, in order to consolidate such consulting services. We are required to pay approximately $191,000 a year for Karuba’s consulting services, as well as out-of-pocket expenses incurred in the performance of such services. Under the terms of the agreement, the annual obligation to Karuba increased to approximately $198,000 per year in May 2002. For the three and six month periods ended June 30, 2002 approximately $73,303 and $115,361, respectively, was expensed to research and development for consulting services under this agreement. Approximately $22,448 and $3,486 for the three month periods ended June 30, 2002 and June 30, 2001, respectively, and $22,448 and $19,605 for the six month periods ended June 30, 2002 and June 30, 2001, respectively, were expensed and included in the results of operations related to reimbursement of expenses.

We have also paid approximately $13,195 and $49,950 for the three and six month periods ended June 30, 2001, respectively, to MDB Capital Group, LLC, related primarily to services performed and reimbursement of expenses incurred by MDB Capital Group on our behalf. No payments were made to MDB Capital Group, LLC, during the three and six month periods ended June 30, 2002. Christopher A. Marlett, the Chairman of our Board of Directors, is a manager and majority owner of MDB Capital Group.

In March 2001, we closed a private placement of 1,375,282 shares of common stock at $4.49 per share for gross proceeds of $6,175,000. In connection with the private placement, we paid a commission to MDB Capital Group, LLC of approximately 7% of the gross proceeds, payable in shares of common stock, for services rendered in the private placement. Accordingly, 95,491 shares of common stock at $4.49 per share were issued as commission for the transaction.

In June 2001, Pre-Merger Lipid engaged MDB Capital Group, LLC as its financial advisor in the merger between NZ and Pre-Merger Lipid. The engagement letter commits the Company to pay MDB Capital Group an advisory fee. In December 2001, we paid MDB Capital Group approximately $446,000, which represents a portion of the advisory fee and is based on 5% of the cash and cash equivalents of the Company immediately after the merger, as compared to Pre-Merger Lipid’s cash and cash equivalents immediately prior to the merger. The remainder of the advisory fee is based on 5% of the gross sales of the Company’s pre-merger assets during the two-year period after the closing of the merger, the Company’s assets on the two-year anniversary of the merger and the net operating income of the Company derived from the Company’s pre-merger assets during the two-year period after the closing of the merger. We anticipate the remainder of the advisory fee to be approximately $1,451,000. Approximately

$549,000 of the advisory fee has been paid during the six months ended June 30, 2002. Our adoption of a formalized plan to dispose of all Real Estate segment assets by March 31, 2003 will likely result in the payment of substantially all MDB Capital Group advisory fees by April 2003.

NOTE 8: RESTRUCTURING

As of June 30, 2002, we have not utilized any of the accruals set up for restructuring purposes.

We expect the accrued amounts to be paid and the restructuring to be complete by early 2003.

NOTE 9: COMMON STOCK

Pursuant to the merger of the Company and Pre-Merger Lipid, we notified all stockholders who either did not vote or did not vote in favor of the merger of their option of becoming a holder of “dissenting shares” as defined in Chapter 13 (“Chapter 13”) of the California Corporations Code. We determined that in accordance with Section 1300(a) of Chapter 13, the fair market value of a dissenting Pre-Merger Lipid share as of the day before the first announcement of the terms of the merger was $7.00. In order to pursue dissenters’ rights and receive cash for each dissenting share, the dissenting stockholder was required to make a written demand for purchase of the shares in cash, and the demand must have been received by the President of the Company within 30 days of the mailing of the notice. If the Company and the dissenting stockholder agreed upon the price of the shares, then the Company was required to pay the stockholder the agreed price for the dissenting shares. The dissenting stockholder was also required to surrender their stock certificate in order to receive payment of the price.

Through June 30, 2002, pursuant to two such notices from dissenting stockholders, we paid approximately $470,400 to repurchase 67,200 shares of Pre-Merger Lipid common stock, the equivalent of 104,767 shares of our common stock. All repurchased shares were retired.

On June 26, 2002, the Company changed its state of incorporation from Arizona to Delaware. The reincorporation was accomplished through a statutory merger of Lipid Sciences, Inc., an Arizona corporation (“Lipid Arizona”), into a newly formed Delaware corporation of the same name (“Lipid Delaware”). As a result of the merger, each outstanding share of Lipid Arizona Common Stock, no par value, was automatically converted into one share of Lipid Delaware Common Stock, par value $0.001. This change in the Company’s state of incorporation was approved by the holders of a majority of the Company’s outstanding shares of Common Stock at the Company’s annual meeting of stockholders on June 18, 2002. There was no impact on the Company’s financial condition or results of operations as a result of the reincorporation.

NOTE 10: DISCONTINUED OPERATIONS

As a result of the merger between Pre-Merger Lipid and NZ on November 29, 2001, certain real estate assets, including commercial real estate loans were acquired. As part of the merger we announced our intent to conduct an orderly disposition of those assets to fund the ongoing operations of Lipid Sciences biotechnology business. On March 22, 2002, we formalized a plan to discontinue the operations of our real estate business, including commercial real estate loans. All of those assets were included in the Real Estate segment. The plan identified the major assets to be disposed of, the method of disposal, and the period required for completion of the disposal. We plan to complete the sale of the Real Estate segment assets by the end of the first quarter, 2003. As a result, we have reclassified the results of operations and the assets and liabilities of the discontinued operations for all periods presented. The carrying amounts of the major classes of assets and liabilities included as part of the disposal group as of June 30, 2002, are as follows:


(In thousands)




	Current assets		$	159




	Property and equipment			3,200




	Commercial real estate loans			11,733




	Notes and receivables			7,661




	Current deferred tax asset			244




	Investments in joint ventures			2,010

		Total assets held for disposal		25,007

	Current liabilities			238

		Net assets held for disposal	$	24,769

The accompanying statements of operations reflect revenues from discontinued operations of $938,000 and none for the three month period ended June 30, 2002 and 2001, respectively, and $4,304,000 and none for the six month period ended June 30, 2002 and 2001, respectively. Revenues of discontinued operations of the Real Estate segment include a gain of $867,000 and $1,043,000 for the three and six month periods ended June 30, 2002 on the disposal of assets.

NOTE 11: INCOME TAXES

The Company’s effective tax benefit rate was 29.54% in the second quarter of 2002 and 13.72% in 2001. The effective tax benefit rate was calculated using an estimate of our expected annual pretax income for 2002. The effective tax benefit rate for 2002 differed from the statutory federal income tax rate primarily due to additional valuation allowances provided.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. We established a valuation allowance at June 30, 2002 due to the uncertainty of realizing future tax benefits from certain of our net operating loss carryforwards and credits.

The income tax receivable of $516,000 and income tax payable of $4,105,000 as of December 31, 2001 and June 30, 2002, respectively, reflect a combined income tax receivable/payable of both the continuing and discontinued operations. The income tax receivable as of December 31, 2001 represents the income tax refund applied for by the discontinued operation resulting from the carry back of net operating losses. The income tax payable as of June 30, 2002 represents the net payable of the consolidated group, resulting from gains on the sale of real estate assets of the discontinued operation.

NOTE 12: SEGMENTS

The Company was previously organized into two segments, Biotechnology and Real Estate, as the result of the merger between Pre-Merger Lipid and NZ. The Biotechnology segment is primarily engaged in the research and development of products focused on treating major medical indications in which a lipid, or fat, component plays a key role. As part of the merger we announced our intent to conduct an orderly disposition of the real estate assets, including commercial real estate loans, acquired to fund the ongoing operations of Lipid Sciences. On March 22, 2002, we approved a plan to dispose of the Real Estate segment and intend to focus on Biotechnology in the future. Substantially all of the assets and liabilities of the Real Estate segment are included in the discontinued operations plan formalized by the Company on March 22, 2002 (see Note 10 of the condensed consolidated financial statements).

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements in this report that relate to future plans, events or performance are forward-looking statements, which involve risks and uncertainties. We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements include, but are not necessarily limited to, those relating to:

• our ability to obtain regulatory approval of our products in the United States and internationally;

• the other competing therapies that may be available in the future;

• our plans to develop and market our products;

• our ability to improve our financial performance; and

• effects of the merger between the Company and Pre-Merger Lipid.

These factors, and others, are discussed more fully in our annual report on Form 10-K for 2001 filed with the Securities and Exchange Commission on March 29, 2002. Actual results, events or performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be needed to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We are a development-stage biotechnology company researching and developing products to treat major medical conditions, such as cardiovascular disease and HIV infection, in which lipids, or fat, plays a key role. Our technologies are based on a patented process that selectively removes lipids from proteins in human blood without disrupting protein function. This process of lipid removal, known as plasma delipidation, potentially reverses the condition while enhancing the body’s natural ability to heal itself.

This unique delipidation process promises far-reaching implications for human health across multiple billion-dollar markets. It may reverse cardio- and cerebrovascular disease, as well as provide an effective therapeutic effect on many infectious agents, including the viruses that cause AIDS, Hepatitis B, Hepatitis C, and Herpes.

We are developing our technology along two technology platforms. The first platform, Vascular Lipid Removal (VLR™) is focused on treating atherosclerosis, which results from an overabundance of lipids in the vascular system. The VLR platform is targeted at treating conditions such as heart disease, stroke and peripheral vascular disease. The second platform, Viral Pathogen Inactivation (VPI™) relates to the removal of lipid coatings from viruses, bacteria and other lipid-containing infectious agents. Examples of viruses with lipid coatings that may be treatable by the VPI system include, HIV, Hepatitis C, and Hepatitis B, and Herpes Virus.

Primary activities since incorporation have been establishing offices, recruiting personnel, conducting research and development, performing business and financial planning, and raising capital. Accordingly, the Company is considered to be in the development stage.

On November 29, 2001, Lipid Sciences, Inc., a privately-held corporation, merged with and into NZ Corporation. NZ Corporation survived the merger and changed its name to Lipid Sciences, Inc. As a result of the merger, the Company was renamed Lipid Sciences, Inc. Pre-Merger Lipid ceased to exist as a separate corporation, and the stockholders of Pre-Merger Lipid became stockholders of the Company. In connection with the merger, Pre-Merger

Lipid stockholders received 1.55902 shares of our common stock for each share of Pre-Merger Lipid common stock they held at the time the merger was completed. After the transaction, the Pre-Merger Lipid stockholders owned approximately 75% of the then outstanding stock of the Company and NZ stockholders owned the remaining shares of the Company’s common stock.

The merger with NZ was accounted for under the purchase method of accounting and was treated as a reverse acquisition because the stockholders of Pre-Merger Lipid owned the majority of our common stock immediately after the merger. Pre-Merger Lipid was considered the acquiror for accounting and financial reporting purposes. Accordingly, all financial information prior to 2001 included in this report reflects Pre-Merger Lipid results.

In the course of our research and development activities, we have sustained continued operating losses and we expect these losses to continue for the foreseeable future as we continue to invest in research and development and begin to allocate significant and increasing resources to clinical testing and other activities related to seeking approval to market our products. We approved a discontinued operations plan on March 22, 2002, to dispose of substantially all of the real estate and other assets held by the Company before the merger (see Note 10 of the condensed consolidated financial statements). We will use the proceeds from the disposition of these assets for our ongoing operations. We intend to finance our operations through the disposition of these assets, through issuances of equity securities, and the pursuit of research and development grants. In the longer term, we expect to additionally finance our operations through revenues from product sales and licenses upon receiving all relevant approvals. If adequate funds are not available to satisfy our requirements we may have to substantially reduce, or eliminate, certain areas of our product development activities, significantly limit our operations, or otherwise modify our business strategy.

Our business was organized into two segments: Biotechnology and Real Estate. Our Biotechnology segment is focused on research and development of products for the treatment of major medical conditions in which a lipid, or fat, component plays a key role. As a result of the merger with NZ on November 29, 2001, certain real estate assets, including commercial real estate loans were acquired. As part of the merger we announced our intent to conduct an orderly disposition of these assets and on March 22, 2002, we formalized a plan to discontinue the operations of our Real Estate segment. The plan identified the major assets to be disposed of, the expected method of disposal, and the period expected to be required for completion of the disposal.

As of December 31, 2001, we recorded restructuring charges of approximately $885,000, which were charged to general and administrative expense. Our recent restructuring initiatives involved strategic decisions to exit the real estate market through the orderly disposition of substantially all of NZ’s assets. As of June 30, 2002, we have not utilized any of the accruals set up for restructuring purposes. We expect the accrued amounts to be paid and the restructuring to be complete by early 2003 (see Note 8 of the condensed consolidated financial statements).

Critical Accounting Policies

In December 2001, the SEC requested that all registrants list their “critical accounting policies” in MD&A. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. We believe that our following accounting policies fit this definition:

Property Sales, Cost of Property Sales and Deferred Revenue
The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 66, “Accounting for Sales of Real Estate.” SFAS No. 66 stipulates certain conditions which must be met to recognize profit from the sale of real estate using the full accrual method. These conditions include minimum down payments and annual investments by the buyer, and reasonable assurance that the related receivable is collectible. We recognize revenue from the sale of properties using the full accrual method when the required conditions are met.

Profits from retail land sales are recognized on the installment basis provided minimum down payments are received. Deferred revenue consists principally of retail land sales made after the merger, and rents collected in advance.

The Company capitalizes construction and development costs as required by SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” Cost of sales for the recreational lots are determined by allocating development costs pro-rata by acre. Costs associated with financing or leasing projects are capitalized and amortized over the period benefited by those expenditures.

Property and Equipment
Property includes real estate assets owned by the Company before the merger. Real estate properties are stated at the lower of cost or estimated fair value. All properties are held for sale and are written down to estimated fair value when the Company determines the carrying cost exceeds the estimated selling price, less costs to sell. Management makes this evaluation on a property-by-property basis. The evaluation of fair value and future cash flows from individual properties requires significant judgment. Our estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. It is reasonably possible that a change in economic or market conditions could result in a change in management’s estimate of fair value.

Loans and Notes Receivable
Loans and notes receivable include commercial real estate loans and other notes receivable owned by the Company before the merger of NZ and Pre-Merger Lipid. All loans and notes receivable are held for sale and are written down to estimated fair value when the Company determines that the loan is impaired. Among the factors used to determine whether a loan is impaired are creditworthiness of the borrower, whether or not the loan is performing, the value of any collateral for the loan, collectibility of the loan, and general and economic market conditions. The determination of whether a loan is impaired requires significant judgment. Our estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. Our conclusions are based on factors that are inherently uncertain. It is reasonably possible that a change in economic or market conditions could result in a change in management’s estimate of fair value.

Income Taxes
The Company follows SFAS No.109, “Accounting for Income Taxes.” Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Our significant accounting policies are more fully described in our audited consolidated financial statements and notes thereto for the year ended December 31, 2001, which appear in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2002.

Recently Issued Accounting Standards

Results of Continuing Operations – Three Months Ended June 30, 2002 and 2001

Net Revenue. We had no revenues from continuing operations from Inception (May 21, 1999) through June 30, 2002. Future revenues will depend on our ability to develop and commercialize our two primary platforms for the treatment of cardiovascular disease (Vascular Lipid Removal System) and lipid-enveloped viruses (Viral Pathogen Inactivation System).

Research and Development Expenses. Research and development expenses include research, product development, clinical testing, and regulatory expenses. Research and development expenses increased approximately $1,757,000, or 82%, to $3,894,000 in the second quarter of 2002 from $2,137,000 for the same period in 2001. The increase is due primarily to staff additions in research and development and clinical areas, the commencement of our Australian clinical trial, and expenses related to the on-going development of the device component of our delipidation systems, including $730,000 additional expense related to the development agreement with SRI International.

Our first clinical trials commenced during the second quarter of 2002. The goal of this human trial is to determine the safety of our plasma delipidation process. In addition, the trial will provide information about how quickly delipidated plasma recombines with cholesterol in the body. Healthy volunteers have been referred to the principal investigator for inclusion in the 10-subject study. The clinical trials, which are being conducted in Australia, are expected to be completed by the end of this year, with results presented in the first quarter of 2003. We anticipate that our research and development expenses will continue to increase for the foreseeable future as we conduct this study, and other clinical trials necessary for us to apply for regulatory approval to market our products.

In December 1999, we entered into an Intellectual Property License Agreement to obtain the exclusive worldwide rights to certain patents, trademarks, and technology with Aruba International Pty. Ltd., an Australian company, controlled by Bill E. Cham, Ph.D., a founding stockholder of Pre-Merger Lipid and one of our directors (see Note 7 of the condensed consolidated financial statements). As partial consideration for the license, we were required to make a payment of $250,000 upon commencement of our initial human clinical trial utilizing the technology under the patents received by us, as defined in the agreement. Our initial human clinical trial commenced during the three month period ended June 30, 2002, thus $250,000 was charged to research and development expense during this period.

While we allocate and track resources when required pursuant to the terms of development arrangements, our research team typically works on different products concurrently, and our equipment and intellectual property resources often are deployed over a range of products with a view to maximize the benefit of our investment. Accordingly, we have not, and do not intend to, separately track the costs for each of our research projects on a product-by-product basis. For the three months ended June 30, 2002, however, we estimate that the majority of our research and development expense was associated with our two primary platforms for the treatment of cardiovascular disease (Vascular Lipid Removal System) and lipid-enveloped viruses (Viral Pathogen Inactivation System).

Selling, General and Administrative Expenses. General and administrative expenses increased approximately $990,000, or 113%, to $1,868,000 in the second quarter of 2002 from $878,000 for the same period in 2001. The increase is due primarily to expenses to establish administrative management (including recruitment fees), Director fees and accounting, legal, stockholder and filing fees associated with public company requirements.

Interest and Other Income. Interest and other income for the second quarter of 2002 decreased 78% to $34,000 from $140,000 for the same period in 2001. The decrease is due primarily to lower short-term investment balances in the three month period ended June 30, 2002 compared to the same period in 2001.

Results of Continuing Operations – Six Months Ended June 30, 2002 and 2001

Net Revenue. We had no revenues from continuing operations from Inception (May 21, 1999) through June 30, 2002.

Research and Development Expenses. Research and development expenses increased approximately $1,639,000, or 31%, to $6,913,000 for the six month period ended June 30, 2002 from $5,274,000 for the same period in 2001. The increase is due primarily to staff additions in research and development and clinical areas, the commencement of our Australian clinical trial, and expenses related to the on-going development of the device component of our delipidation systems. Research and development expenses account for approximately 71% of total operating expenses for the six months ended June 30, 2002.

Selling, General and Administrative Expenses. General and administrative expenses for 2002 increased approximately $1,280,000, or 82%, to $2,835,000 for the six month period ended June 30, 2002 from $1,555,000 for the same period in 2001. The increase is due primarily to expenses to establish administrative management, Director fees and accounting, legal, stockholder and filing fees associated with public company requirements. General and administrative expenses account for approximately 29% of total operating expenses for the six months ended June 30, 2002.

Interest and Other Income. Interest and other income for the six month period ended June 30, 2002 decreased 81% to $48,000 from $257,000 for the same period in 2001. The decrease is due primarily to lower short-term investment balances in the three month period ended June 30, 2002 compared to the same period in 2001.

Results of Discontinued Operations – Three and Six Months Ended June 30, 2002

During the three months ended June 30, 2002, we disposed of real estate assets, in multiple transactions, for an aggregate sales price of approximately $23,300,000. The real estate assets sold include all of the Company’s industrial buildings in Arizona and certain residential lots in New Mexico. In these transactions, we received cash of approximately $7,700,000, net of commissions, title fees, closing costs and pro-rations of property taxes and interest. Additionally, mortgage debt of approximately $14,700,000 was assumed by the buyer of the industrial buildings. Also during the three months ended June 30, 2002, approximately $9,200,000 was collected in principal payments from commercial real estate notes and other notes receivable. This amount includes repayment of the $7,258,000 note receivable we received in the first quarter from the sale of real estate assets.

During the six months ended June 30, 2002, the disposal of real estate assets generated cash of approximately $11,600,000. Additionally, we collected approximately $14,200,000 in principal payments from commercial real estate notes and other notes receivable.

As of June 30, 2002, the remaining assets in the disposal group were primarily commercial real estate loans and other notes receivable, mineral rights, vacant industrial land in New Mexico, and residential lots in New Mexico.

Liquidity and Capital Resources

Pre-Merger Lipid financed its operations principally through the sale of common stock to one of its founders and two private placements of equity securities, which have yielded net proceeds of approximately $16,900,000. The merger with NZ resulted in the acquisition of net assets of approximately $45,200,000, net of repurchase of stock and acquisition costs, through June 30, 2002.

The net cash used in continuing operating activities was approximately $1,377,000, $3,821,000 and $13,821,000 for the six months ended June 30, 2002, June 30, 2001 and the period from Inception (May 21, 1999) to June 30, 2002, respectively, resulting primarily from operating losses incurred as adjusted for income taxes and non-cash stock compensation charges. The net cash used in investing activities was approximately $207,000, $273,000 and $1,050,000 for the six months ended June 30, 2002, June 30, 2001 and for the period from Inception (May 21, 1999) to June 30, 2002, respectively, primarily attributable to the purchase of capital equipment. Net cash used in financing activities of approximately $489,000 for the six months ended June 30, 2002 was primarily attributable to the repurchase of common stock from dissenting stockholders. Net cash provided by financing activities of approximately $14,320,000 and $24,087,000 for the six months ended June 30, 2001 and for the period from Inception (May 21, 1999) to June 30, 2002 was primarily due to the maturities and sales of short-term investments, the acquisition of NZ Corporation and the sale of equity securities in private placement transactions. Net cash provided by discontinued operations of approximately $14,586,000 and $16,108,000 for the six months ended June 30, 2002 and the period from Inception (May 21, 1999) to June 30, 2002, respectively, was primarily due to the sale of real estate assets.

In December 1999, we entered into an Intellectual Property License Agreement to obtain the exclusive worldwide rights to certain patents, trademarks, and technology with Aruba International Pty. Ltd., an Australian company, controlled by Bill E. Cham, Ph.D., a founding stockholder of Pre-Merger Lipid and one of our directors. As consideration for the license, we issued Aruba 4,677,060 shares of our common stock valued at $250,000. Under this agreement, we are also obligated to pay Aruba a continuing royalty on revenue under the agreement in future years, subject to a minimum annual royalty amount of $500,000. For the three month period ended June 30, 2002 and 2001 we have incurred an additional $125,000 and $479,167, respectively, related to this agreement. Amounts for both 2002 and 2001 were charged to research and development expense. We are also required to pay Aruba 10% of any External Research Funding received by us to further this technology, as defined in the agreement. We were required to pay Aruba $250,000 upon commencement of our initial human clinical trial utilizing the technology under the

patents. Our initial human clinical trial commenced during the three month period ended June 30, 2002, thus $250,000 was charged to research and development expense during this period.

In May 2000, we sold a total of 4,925,300 shares of common stock at $2.25 per share in a private placement to accredited investors. Net cash proceeds, after expenses of the placement, were approximately $11,000,000.

Phase I was completed on March 28, 2001. Fees for services performed by SRI for Phase I totaled $1,517,000, of which $972,967 was charged to operations in the three month period ended March 31, 2001.

We also issued SRI warrants to purchase 779,510 shares of common stock at an exercise price of $3.21 per share. The warrants vested with respect to 233,853 shares upon completion of Phase I, with the remaining 545,657 shares vesting upon completion of Phase II. On May 12, 2001, the Development Agreement was amended with respect to the warrants to purchase 545,657 shares of common stock related to Phase II. This amendment splits Phase II into two development milestones with warrants to purchase 272,829 shares vesting at the completion of each milestone. If either development milestone is discontinued at the option of the Company, all 545,657 warrants will vest at the completion of the remaining milestone.

Phase II was initiated upon completion of Phase I. Fees for Phase II of the development program are limited to $6,300,000. For the three and six months ended June 30, 2002, $1,643,723 and $3,234,717, for fees related to Phase II, other product development, supplemental testing and analysis, respectively, was charged to operations, of which $110,671 is included in accounts payable at June 30, 2002. As of June 30, 2002, neither milestone related to Phase II was completed, consequently no value has been assigned to those warrants which have a life of seven years. These warrants will be valued using the Black-Scholes method and will be charged to expense as they vest.

plan to dispose of all Real Estate segment assets by March 31, 2003 will likely result in the payment of substantially all MDB Capital Group advisory fees by April 2003.

In the normal course of business, we have consulted with Dr. Cham, and companies with which he is affiliated, regarding various matters relating to research and development. In November 2001, we entered into a Service Agreement with Karuba International Pty. Ltd., a company controlled by Dr. Cham, in order to consolidate such consulting services. We are required to pay approximately $191,000 a year for Karuba’s consulting services, as well as out-of-pocket expenses incurred in the performance of such services. Under the terms of the agreement, the annual obligation to Karuba increased to approximately $198,000 per year in May 2002. For the three and six month periods ended June 30, 2002 approximately $73,303 and $115,361, respectively, was expensed to research and development for consulting services under this agreement. Approximately $22,448 and $3,486 for the three month periods ended June 30, 2002 and June 30, 2001, respectively, and $22,448 and $19,605 for the six month periods ended June 30, 2002 and June 30, 2001, respectively, were expensed and included in the results of operations related to reimbursement of expenses.

In the course of its research and development activities, the Company has sustained continued operating losses and expects those losses to continue for the foreseeable future as we continue to invest in research and development and begin to allocate significant and increasing resources for clinical testing and related activities. As of June 30, 2002, we had cash and cash equivalents equal to approximately $25.3 million. We anticipate that these assets and the cash raised from the disposal of assets included in the discontinued operations plan will provide sufficient working capital for our research and development activities for at least the next year. We expect additional capital will be required in the future. We intend to seek capital needed to fund our operations through new collaborations, such as licensing or other arrangements, the receipt of research and development grants or through public or private equity or debt financings.

Factors That May Affect Future Results and Financial Condition

If we are unable to obtain adequate funds, we may not be able to develop and market our products.

For the six months ended June 30, 2002, we incurred a net loss of approximately $6.3 million and since Inception through June 30, 2002, we have incurred an accumulated deficit of approximately $22.9 million. We expect to continue to incur losses for the foreseeable future as we increase funding for development, clinical testing, and other activities related to seeking approval to market our products. For example, the fees for the second development phase under our agreement with SRI International increased to $6,300,000 from approximately $1,500,000 spent for the first phase. In addition, our first human safety study of our technology commenced in the second quarter of 2002. Conducting this study and the other clinical trials necessary to apply for regulatory approval to sell our products will take a number of years and will require significant amounts of capital.

As of June 30, 2002, we had cash and cash equivalents equal to approximately $25.3 million. We anticipate that these assets and the cash raised from the disposal of assets included in the discontinued operations plan will provide sufficient working capital for our research and development activities for the next year. After the period of disposition of real estate assets, additional capital will be required in amounts that cannot be quantified, but are expected to be significant. If the discontinued operations plan does not yield sufficient capital, we intend to seek capital needed to fund our operations through new collaborations, the receipt of research and development grants or through public or private equity or debt financings. If we are unable to obtain financing, our ability to continue our business as planned will be harmed.

Our technology is only in the clinical development stage and may never receive regulatory approval, which would significantly harm our business prospects.

Before obtaining required regulatory approvals for the commercial sale of any of our products, we must demonstrate through pre-clinical studies and clinical trials that our technology is safe and effective for use in at least one medical indication. These studies and clinical trials are expected to take a number of years and may fail to show that our technology is sufficiently safe and effective, in which case our technology will not receive regulatory approval, and we will not be able to successfully develop and commercialize our products. Our product pipeline at present is

limited to address two medical applications, the treatment of cardiovascular disease and the removal of lipids from lipid-enveloped viruses, such as HIV, Hepatitis C, Hepatitis B, Herpes, and other lipid-containing infectious agents. Accordingly, failure to receive regulatory approval for our potential products would significantly harm our business prospects and possibly cause us to cease operations.

Our clinical studies may be delayed or unsuccessful.

Our future success depends in large part upon the results of clinical trials designed to assess the safety and efficacy of our potential product. The ultimate results of clinical studies cannot be predicted with accuracy and can be impacted by many variables. We cannot be sure whether planned clinical trials will begin on time or will be completed on schedule or at all. Delay or failure to complete clinical studies would prevent us from bringing products to market, which would materially harm our business. For example, any of our future clinical studies might be delayed in their initiation or performance, or even halted after initiation because:

• extensive and time-consuming pre-clinical animal studies are required of the Company by the regulatory authorities to demonstrate the safety of the process technology;

• the data generated by the pre-clinical animal studies does not indicate to the regulatory authorities that there is a sufficient margin of safety and/or the potential clinical benefit from the delipidation cannot be demonstrated in the animal experiments;

• the relevant regulatory requirements for initiating and maintaining an investigational new drug / investigational device exemption application for a clinical study cannot be met;

• the product is not effective, or physicians perceive that the product is not effective;

• patients experience severe side effects during treatment;

• patients die during a clinical study because their disease is too advanced or because they experience medical problems that are not related to the product being studied;

• patients do not enroll in the studies at the rate we expect; or

• the discovery by the sponsor, during the study, of deficiencies in the way the study is being conducted by the study investigators that raises questions as to whether the study is being conducted in conformity with the relevant regulatory authorities’ regulations or Good Clinical Practice.

If we experience any significant delays in testing or approvals, or if we need to redo or perform more or larger clinical trials than planned, our product development costs will increase and our ability to file, and/or the time line to filing, of a pre-market approval application or other marketing application could be materially and negatively impacted. In addition, if results are not positive or are equivocal, we may need to conduct additional studies which would increase the total cost of developing these products for commercial marketing and our ability to file. Moreover, the time line to filing of a pre-market approval application or other marketing application could be materially and negatively impacted by such complications, shortfalls and difficulties.

We intend to rely on collaborations in order to further develop our products. If these collaborations are unsuccessful, the development of our products could be adversely affected and we may incur significant unexpected costs.

We intend to enter into collaborations with strategic partners, licensors, licensees and others. For example, we have entered into a relationship with SRI International to provide the development of multiple production prototypes, including hardware, software and disposables, based on our technology. We may be unable to maintain or expand our existing collaborations or establish additional collaborations or licensing arrangements necessary to develop our technology or on favorable terms. Any current or future collaborations or licensing arrangements may not be successful. In addition, these parties may develop products that compete with ours, and we cannot be certain that they will perform their contractual obligations or that any revenues will be derived from such arrangements. If one or more of our strategic partners fails to achieve product development objectives, this failure could harm our ability to fund related programs and develop products.

Our industry is intensely competitive.

The biotechnology industry is intensely competitive and we may not be able to produce or acquire rights to new products with commercial potential. We compete with biotechnology and pharmaceutical companies that have been established longer than we have, have a greater number of products on the market, have greater financial and other resources and have other technological or competitive advantages. We also compete in the development of technologies and processes and in acquiring personnel and technology from academic institutions, government agencies, and other private and public research organizations. We cannot be certain that one or more of our competitors will not receive patent protection that dominates, blocks or adversely affects our clinical studies, product development or business; will benefit from significantly greater sales and marketing capabilities; or will not develop products that are accepted more widely than ours.

If we fail to secure and then enforce patents and other intellectual property rights underlying our technologies, we may be unable to compete effectively.

Our future success will depend in part on our ability to obtain patent protection, defend patents once obtained, maintain trade secrets and operate without infringing upon the patents and proprietary rights of others, and if needed, obtain appropriate licenses to patents or proprietary rights held by third-parties with respect to its technology, both in the United States and in foreign countries. We currently have an exclusive license from Aruba International Pty. Ltd. with respect to six issued patents and eight pending patent applications. The issued patents will expire in July 2005, July 2014 and December 2014. There are an additional six pending applications assigned to us. Each of the patents and pending applications relates to a method and/or apparatus for removing lipids from biological fluids and/or biological components. However, these patent applications may not be approved and, even if approved, our patent rights may not be upheld in a court of law or may be narrowed if challenged. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Our patent rights may not provide competitive advantages for our products and may be challenged, infringed upon or circumvented by our competitors.

In addition to patents, we rely on trade secrets, know-how, continuing technological innovations, and licensing opportunities to develop and maintain our competitive position. It is our policy to require our employees, certain contractors, consultants, members of the scientific advisory board and parties to collaborative agreements to execute confidentiality agreements upon the commencement of a business relationship with us. We cannot assure you that these agreements will not be breached, that they will provide meaningful protection of our trade secrets or know-how or adequate remedies if there is unauthorized use or disclosure of this information or that our trade secrets or know-how will not otherwise become known or be independently discovered by our competitors.

If it were ultimately determined that our claimed intellectual property rights are unenforceable, or that our use of our technology infringes on the rights of others, we may be required or may desire to obtain licenses to patents and other intellectual property held by third parties to develop, manufacture and market products using our technology. We may not be able to obtain these licenses on commercially reasonable terms, if at all, and any licensed patents or intellectual property that we may obtain may not be valid or enforceable. In addition, the scope of intellectual property protection is subject to scrutiny and challenge by courts and other governmental bodies. Litigation and other proceedings concerning patents and proprietary technologies can be protracted, expensive and distracting to management and companies may sue competitors as a way of delaying the introduction of competitors’ products. Any litigation, including any interference proceedings to determine priority of inventions, oppositions to patents in foreign countries or litigation against our partners, may be costly and time consuming and could harm our business.

Because of the large number of patent filings in the biopharmaceutical field, our competitors may have filed applications or been issued patents and may obtain additional patents and proprietary rights relating to products or processes competitive with or similar to ours. We cannot be certain that U.S. or foreign patents do not exist or will be issued that would harm our ability to commercialize our products and product candidates.

If we use biological and hazardous materials in a manner that causes injury, we may be liable for damages.

Our research and development activities involve the controlled use of potentially harmful biological materials, such as certain blood products as well as certain organic solvents that may be hazardous materials. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant.

We depend on our license agreement with Aruba International Pty. Ltd. which would, if terminated, significantly harm our business.

We have entered into an agreement for an exclusive license to patents, know-how and other intellectual property relating to our foundation technology for removal of lipids from proteins and our continued operations at present are completely dependent upon such license. The licensor is Aruba International Pty. Ltd., a company controlled by Dr. Bill E. Cham, who is a director of the Company. Dr. Cham also controls KAI International, LLC, our largest stockholder. The technology licensed from Aruba currently represents an essential part of the technology owned or licensed by us. Aruba may terminate the license agreement if we fail to perform our obligations under the agreement, including our obligations to make royalty payments, or if we cease, without intention to resume, all efforts to commercialize the subject matter of the licensed intellectual property. If our license with Aruba terminates, our business would be significantly harmed and may cause us to cease operations.

Our business exposes us to product liability claims.

Our design, testing, development, manufacture and marketing of products involve an inherent risk of exposure to product liability claims and related adverse publicity. Insurance coverage is expensive and difficult to obtain, and we may be unable to obtain coverage in the future on acceptable terms, if at all. Although we currently maintain product liability insurance for our products in the amounts we believe to be commercially reasonable, we cannot be certain that the coverage limits of our insurance policies or those of our strategic partners will be adequate. If we are unable to obtain sufficient insurance at an acceptable cost or if a successful product liability claim is made again us, whether fully covered by insurance or not, our business could be harmed.

An economic downturn in the real estate market could adversely affect our ability to complete the disposal of assets included in the discontinued operations plan and generate funds for our continuing operations.

The assets identified in the discontinued operations plan include real estate and loans secured by real estate, particularly in Arizona, New Mexico, California and Utah. We expect to use a significant portion of the net proceeds from our dispositions of these assets to fund our continuing operations. While the real estate markets are generally healthy, there is no assurance that the markets will continue to be favorable over the disposal period of these assets. A downturn in the real estate market could have an adverse impact on our ability to sell these real estate assets. Additionally, a downturn in the real estate market could adversely affect the ability of our borrowers to repay their loans according to the terms of the loans and/or could adversely affect the value of the collateral for those loans. Either of these outcomes would impair our ability to generate funds for our continuing operations, which would significantly harm our business.

Our stock price may be volatile.

There can be no assurance that there will be an active trading market for our common stock or that the market price of the common stock will not decline below its present market price. The market prices for securities of biotechnology companies have been, and are likely to continue to be, highly volatile. Factors that have had, and are expected to continue to have, a significant impact on the market price of our common stock include:

• material public announcements;

• actual or potential clinical results with respect to our products under development or those of our competitors;

• the announcement and timing of new product introductions by us or others;

• technical innovations or product development by us or our competitors;

• regulatory approvals or regulatory issues;

• developments relating to patents, proprietary rights and orphan drug status;

• political developments or proposed legislation in the pharmaceutical or healthcare industry;

• economic and other external factors, disaster or crisis;

• period-to-period fluctuations in our financial results or results which do not meet or exceed analyst expectations; and

• market trends relating to or affecting stock prices throughout our industry, whether or not related to results or news regarding us or our competitors.

We depend on key personnel and will need to hire additional key personnel in the future.

Our ability to operate successfully depends in significant part upon the experience, abilities and continued service of certain key scientific, technical, clinical, regulatory and managerial personnel. If we lose the services of any of these personnel, our business could be harmed. Our future success also will depend upon our ability to attract and retain additional highly qualified personnel in these areas and our ability to develop and maintain relationships with qualified clinical researchers. Competition for such personnel and relationships is intense, especially in the San Francisco Bay Area. There can be no assurance that we can retain such personnel or that we can attract or retain other highly qualified scientific, technical, clinical, regulatory and managerial personnel or develop and maintain relationships with clinical researchers in the future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since we have fixed-rate mortgage debt and have no short-term investments as of June 30, 2002, we do not have any material quantitative or qualitative disclosures about interest rate risk. The operating expenses, assets and liabilities of our Australian subsidiary are denominated in a foreign currency, thereby creating exposures to changes in exchange rates. However, the risks related to foreign currency exchange rates are not material to our consolidated financial position or results of operations.

PART II.

ITEM 1. LEGAL PROCEEDINGS

We are from time to time a party to legal proceedings. All of the legal proceedings we are currently involved in are ordinary and routine. The outcomes of the legal proceedings are uncertain until they are completed. We believe that the results of the current proceedings will not have a material adverse effect on our business or financial condition or results of operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 18, 2002, the Company held its annual meeting of stockholders. The following items were submitted to a vote of the stockholders:

(a) To elect three Class B members currently serving on the Board of Directors to three-year terms.


Election of Directors	Votes For		Votes Withheld

Bill E. Cham, Ph.D.		15,570,130		2,522,146




Frank M. Placenti		15,555,005		2,537,271




Gary S. Roubin M.D., Ph.D.		15,567,011		2,525,265

As a result, Messrs. Cham, Placenti and Roubin were elected as Directors of the Company. The following incumbent members continue to serve on the Board of Directors: Christopher A. Marlett, William A. Pope and Phil Radlick.

(b) To approve the Company’s reincorporation in Delaware.


Votes For	Votes Against		Abstentions

16,171,087		1,276,510		4,792

The reincorporation was approved.

(c) To ratify the appointment of Deloitte & Touche, LLP as the Company’s independent accountants for the year ended December 31, 2001.


Votes For	Votes Against		Abstentions

18,082,378		3,626		8,072

The appointment was approved.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits — See Index to Exhibits.

(b) Reports on Form 8-K

(i) Report on Form 8-K filed July 11, 2002 with respect to Lipid Sciences, Inc.’s change in state of incorporation.

(ii) Report on Form 8-K filed July 12, 2002 containing Lipid Sciences, Inc.’s news release dated July 10, 2002 with respect to the election of S. Lewis Meyer, Ph.D. to Lipid Sciences, Inc.’s Board of Directors.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Lipid Sciences, Inc.


Dated: August 12, 2002	By:	/s/ Barry D. Michaels

		Barry D. Michaels Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

EXHIBIT INDEX


Exhibit Number		Description






3.1		Certificate of Incorporation









3.2		Bylaws









10.1		Real Property Purchase Agreement between NZ Properties, Inc., and Bambifeathers LLC, dated April 19, 2002, as amended









10.2		2001 Performance Equity Plan, as amended









10.3*		Amendment No. Four to the Development Agreement between SRI International and Lipid Sciences, Inc. dated as of May 13, 2001









10.4*		Amendment No. Five to the Development Agreement between SRI International and Lipid Sciences, Inc. dated as of May 13, 2001









10.5*		Amendment No. Six to the Development Agreement between SRI International and Lipid Sciences, Inc. dated as of December 5, 2001









10.6		Amendment No. Seven to the Development Agreement between SRI International and Lipid Sciences, Inc. dated as of October 6, 2000









10.7*		Amendment No. Eight to the Development Agreement between SRI International and Lipid Sciences, Inc. dated as of February 13, 2002









10.8*		Amendment No. Nine to the Development Agreement between SRI International and Lipid Sciences, Inc. dated as of April 15, 2002









10.9		Amendment No. Ten to the Development Agreement between SRI International and Lipid Sciences, Inc. dated as of April 16, 2002














99.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.









99.2		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.









*		Confidential Treatment Requested

29 EX-3.1 3 p66877exv3w1.txt EX-3.1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF LIPID SCIENCES, INC. FIRST. The name of the corporation is Lipid Sciences, Inc. SECOND. The address of the registered office of the corporation in the State of Delaware is 2711 Centerville Road, Ste. 400, Wilmington, Delaware 19808, County of New Castle. The name of its registered agent at such address is Corporation Service Company. THIRD. The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. A. CAPITALIZATION. The total number of shares of all classes of capital stock which the corporation shall have authority to issue is 85,000,000 shares, comprised of 75,000,000 shares of Common Stock with a par value of $0.001 per share (the "Common Stock") and 10,000,000 shares of Preferred Stock with a par value of $0.001 per share (the "Preferred Stock"). A description of the respective classes of stock and a statement of the designations, preferences, voting powers (or no voting powers), relative, participating, optional or other special rights and privileges and the qualifications, limitations and restrictions of the Preferred Stock and Common Stock are as follows: B. VOTING RIGHTS. Except as otherwise required by law or this Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held by such holder of record on the books of the corporation for the election of directors and on all matters submitted to a vote of stockholders of the corporation; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designations relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation (including any certificate of designations relating to any series of Preferred Stock). C. PREFERRED STOCK. The Preferred Stock may be issued in one or more series at such time or times and for such consideration or considerations as the board of directors may determine. Each series shall be so designated as to distinguish the shares thereof from the shares of all other series. The board of directors is expressly authorized, subject to the limitations prescribed by law and the provisions of this Certificate of Incorporation, to provide for the issuance of all or any shares of the Preferred Stock, in one or more series, each with such designations, preferences, voting powers (or no voting powers), relative, participating, optional or other special rights and privileges and such qualifications, limitations or restrictions thereof as shall be stated in the resolution or resolutions adopted by the board of directors to create such series, and a certificate of designations setting forth a copy of said resolution or resolutions shall be filed in accordance with the General Corporation Law of the State of Delaware. The authority of the board of directors with respect to each such series shall include without limitation of the foregoing the right to specify the number of shares of each such series and to authorize an increase or decrease in such number of shares and the right to provide that the shares of each such series may be: (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (iii) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the corporation; (iv) convertible into, or exchangeable for, shares of any other class or classes of stock, or of any other series of the same or any other class or classes of stock of the corporation at such price or prices or at such rates of exchange and with such adjustments, if any; (v) entitled to the benefit of such limitations, if any, on the issuance of additional shares of such series or shares of any other series of Preferred Stock; or (vi) entitled to such other preferences, powers, qualifications, rights and privileges, all as the board of directors may deem advisable and as are not inconsistent with law and the provisions of this Certificate of Incorporation. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of such holder is required pursuant to the terms of any Preferred Stock designation. FIFTH. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware: A. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors which shall constitute the board of directors of the corporation shall be determined by resolution of a majority of directors then in office. The board of directors shall be divided into three classes. Each director shall serve for a term ending on the third annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided, however, that the directors first elected to Class I shall serve for a term ending at the annual meeting of stockholders to be held in 2003, the directors first elected to Class II shall serve for a term ending at the annual meeting of stockholders to be held in 2004, and directors first elected to Class III shall serve for a term ending at the annual meeting of stockholders to be held in 2005. At each annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed. In the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, resignation or removal. The directors shall be elected at each annual meeting of the stockholders, but if any annual meeting is not held, or the directors are not elected thereat, the directors may be elected at any special meeting of the stockholders held for that purpose. All directors shall hold office until the expiration of the term for which elected, and until their respective successors are elected, except in the case of death, resignation, or removal of any director. B. Advance notice of nominations for the election of directors, other than by the board of directors or a committee thereof, shall be given in the manner provided by the Bylaws. Notwithstanding the foregoing, so long as Sun NZ, L.L.C., an Arizona limited liability company ("Sun NZ"), beneficially owns 500,000 shares of common stock (as adjusted for stock splits, stock dividends, stock recombinations and similar events relating to the corporation's common stock) of the corporation (or its successor), Sun NZ shall have the right to nominate two persons for election as directors of the corporation (or its successor) if the entire board of directors consists of eight (8) or fewer persons, and if the board of directors consists of nine (9) or more persons, then Sun NZ shall have the right to nominate that number of persons representing one-third of the total number of directors serving on the board of directors of the corporation. If the foregoing computation results in Sun NZ having the right to nominate a fractional number of persons for election as directors of the corporation, the number of persons that Sun NZ shall be entitled to nominate shall be rounded down if the calculation results in a fraction of .50 or less, and rounded up if the calculation results in a fraction of .51 or more. Notwithstanding the foregoing, if Sun NZ owns less than 500,000 shares of common stock of the corporation but 250,000 or more shares of common stock of the corporation, adjusted as provided above, then Sun NZ will have the right to nominate one person for election as a director of the corporation (or its successor). The corporation will use its commercially reasonable efforts to take all such action to confirm the nomination and present the persons nominated by Sun NZ for election by the shareholders of the corporation (or its successor) by means of a vote of the shareholders at a meeting called for that purpose or consent of the 2 shareholders in any solicitation on behalf of the corporation (or its successor) or of the then management of the corporation (or its successor). C. Except as required by law or provided for by resolution of the board of directors, newly created directorships resulting from any increase in the number of directors and any vacancies on the board of directors resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors, by a sole remaining director and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor has been elected and qualified. No decrease in the number of directors constituting the board of directors may shorten the term of any incumbent director. D. The board of directors of the corporation is expressly empowered to adopt, amend or repeal the Bylaws of the corporation. Any adoption, amendment or repeal of the Bylaws of the corporation by the board of shall require the approval of a majority of the total number of directors which the corporation would have if there were no vacancies; provided, however, that the affirmative vote of not less than two-thirds of the total number of directors which the corporation would have if there were no vacancies shall be required to repeal, alter or amend any Bylaw provision relating to (i) the calling of a special meeting of the stockholders or a special meeting of the board of directors, (ii) stockholder nominations or proposals, (iii) the number, classification or election of directors or (iv) supermajority approval or quorum requirements of the board, or any committee thereof, or to adopt any Bylaw provision inconsistent therewith. Notwithstanding the foregoing, the affirmative vote of not less than two-thirds of the total number of directors which the corporation would have if there were no vacancies shall be required to alter, amend or adopt any Bylaw provision inconsistent with or repeal Article IX of the Bylaws relating to amendments thereof. The stockholders shall also have the power to adopt, amend or repeal the Bylaws of the corporation; provided, however, that notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the corporation required by law this Certificate of Incorporation or any preferred stock, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to adopt, amend or repeal any provision of the Bylaws of the corporation. E. Elections of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. F. The books of the corporation may be kept at such place within or without the State of Delaware as the Bylaws of the corporation may provide or as may be designated from time to time by the board of directors of the corporation. SIXTH. Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or classes of creditors, and/or of the stockholders or classes of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be 3 binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. SEVENTH. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended hereafter to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of repeal or modification. EIGHTH. A. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than such law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section C of this Article EIGHTH with respect to proceedings to enforce rights to indemnification, the corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. B. RIGHT TO ADVANCEMENT OF EXPENSES. In addition to the right to indemnification conferred in Section A of this Article EIGHTH, an indemnitee shall also have the right to be paid by the corporation the expenses (including attorney's fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section B or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article EIGHTH shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. 4 C. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section A or B of this Article EIGHTH is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article EIGHTH or otherwise shall be on the corporation. D. NON EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this Article EIGHTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the corporation's Certificate of Incorporation, bylaws, agreement, vote of stockholders or directors or otherwise. E. INSURANCE. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. F. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The corporation may, to the extent authorized from time to time by the board of directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the corporation to the fullest extent of the provisions of this Article EIGHTH with respect to the indemnification and advancement of expenses of directors and officers of the corporation. G. NATURE OF RIGHTS. The rights conferred upon indemnitees in this Article EIGHTH shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer or trustee and shall inure to the benefit of the indemnitee's heirs, executors and administrators. Any amendment, alteration or repeal of this Article EIGHTH that adversely affects any right of an indemnitee or its successors shall be prospective only and shall not limit or eliminate any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment or repeal. 5 NINTH. The Corporation shall not be governed by Section 203 of the Delaware General Corporation Law. TENTH. The corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation. ELEVENTH. No action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Special meetings of the stockholders of this corporation may be called only by the Chairman of the Board or the President or by the board of directors pursuant to a resolution approved by a majority of the total number of directors which the corporation would have if there were no vacancies. TWELFTH. The name and address of the incorporator are as follows: David A. Charapp 4350 La Jolla Village Drive 7th Floor San Diego, California 92122 6 EX-3.2 4 p66877exv3w2.txt EX-3.2 EXHIBIT 3.2 LIPID SCIENCES, INC. BYLAWS ARTICLE I. STOCKHOLDERS SECTION 1. ANNUAL MEETING. (1) An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, if any, on such date, and at such time as the Board of Directors shall each year fix. (2) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this bylaw, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this bylaw. (3) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (2) of this Section 1, (a) the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, (b) such business must be a proper matter for stockholder action under the Delaware General Corporation Law, (c) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the Corporation with a Solicitation Notice, as that term is defined in subclause (z)(iii) of this paragraph (3), such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the Corporation's voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the Corporation's voting shares reasonably believed by such stockholder or beneficial holder to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice and (d) if no Solicitation Notice relating thereto has been timely provided pursuant to this section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this section. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than 45 nor more than 75 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, or if no meeting was held in the prior year, notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to such annual meeting and not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (x) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person as would be required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (y) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (z) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of a proposal, at least the percentage of the Corporation's voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the Corporation's voting shares to elect such nominee or nominees (an affirmative statement of such intent, a "Solicitation Notice"). (4) Notwithstanding anything in the second sentence of paragraph (3) of this Section 1 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 55 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting, a stockholder's notice required by this bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (5) Only such persons who are nominated in accordance with the procedures set forth in this Section 1 shall be eligible to serve as directors and only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in these bylaws and, if any proposed nomination or business is not in compliance with these bylaws, to declare that such defective proposed business or nomination shall be disregarded. (6) For purposes of these bylaws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (7) Notwithstanding the foregoing provisions of this Section 1, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 1. Nothing in this Section 1 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. SECTION 2. SPECIAL MEETINGS: NOTICE. (1) Special meetings of the stockholders, other than those required by statute, may be called at any time by the Chairman of the Board or the President or by the Board of Directors pursuant to a resolution approved by a majority of the total number of directors which the Corporation would have if there were no vacancies. Notice of every special meeting, stating the time, place, if any, and purpose, shall be given by mailing, postage prepaid, at least 10 but not more than 60 days before each such meeting, a copy of such notice addressed to each stockholder of the Corporation at his post office address as recorded on the books of the Corporation. The Board of Directors may postpone or reschedule any previously scheduled special meeting. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. (2) Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of record of the Corporation who is a stockholder of record at the time of giving of notice provided for in this paragraph, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in Section 1 of this Article I. Nominations by stockholders of persons for election 2 to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice required by the third paragraph of Section 1 of this Article I shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. SECTION 3. NOTICE OF MEETINGS. Written notice of the place, if any, date, and time of all meetings of the stockholders, and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, shall be given, not less than 10 nor more than 60 days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, if any, date or time, written notice need not be given of the adjourned meeting if the place, if any, date and time thereof, and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than 30 days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, if any, date, and time of the adjourned meeting, and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. SECTION 4. QUORUM. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares of such class or classes present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, if any, date, or time. SECTION 5. ORGANIZATION. Such person as the Board of Directors may have designated or, in the absence of such a person, the Chairman of the Board or, in his or her absence, the Chief Executive Officer of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints. SECTION 6. CONDUCT OF BUSINESS. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The chairman shall have the power to adjourn the meeting to another place, if any, date and time. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. 3 SECTION 7. PROXIES AND VOTING. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. The Corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Every vote taken by ballots shall be counted by a duly appointed inspector or inspectors. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, rule or regulation, all other matters shall be determined by a majority of the votes cast affirmatively or negatively. SECTION 8. STOCK LIST. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least 10 days prior to the meeting in the manner provided by law. The stock list shall also be open to the examination of any stockholder during the whole time of the meeting as provided by law. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE II. BOARD OF DIRECTORS SECTION 1. NUMBER, ELECTION AND TERM OF DIRECTORS. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the number of directors which shall constitute the Board of Directors of the Corporation shall be determined by resolution of a majority of directors then in office. The Board of Directors shall be divided into three classes. Each director shall serve for a term ending on the third annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided, however, that the directors first elected to Class I shall serve for a term ending at the annual meeting of stockholders to be held in 2003, the directors first elected to Class II shall serve for a term ending at the annual meeting of stockholders to be held in 2004, and directors first elected to Class III shall serve for a term ending at the annual meeting of stockholders to be held in 2005. At each annual election, the directors chosen to succeed those whose terms then expire shall be of the same class as the directors they succeed. In the event of any change in the authorized number of directors, each director then continuing to serve as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term, or his or her prior death, resignation or removal. The directors shall be elected at each annual meeting of the stockholders, but if any annual meeting is not held, or the directors are not elected thereat, the directors may be elected at any special meeting of the stockholders held for that purpose. All directors shall 4 hold office until the expiration of the term for which elected, and until their respective successors are elected, except in the case of death, resignation, or removal of any director. SECTION 2. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Except as required by law or provided for by resolution of the Board of Directors, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, by a sole remaining director and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor has been elected and qualified. No decrease in the number of directors constituting the Board of Directors may shorten the term of any incumbent director. SECTION 3. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places, if any, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or by the Board of Directors pursuant to a resolution approved by a majority of the total number of directors which the Corporation would have if there were no vacancies, and shall be held at such place, if any, on such date, and at such time as they or he or she shall fix. Notice of the place, if any, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not less than five days before the meeting or by telephone or by telegraphing or telexing or by facsimile or electronic transmission of the same not less than 24 hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. SECTION 5. QUORUM. At any meeting of the Board of Directors, a majority of the total number of the whole Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, if any, date, or time, without further notice or waiver thereof. SECTION 6. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. SECTION 7. CONDUCT OF BUSINESS. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the affirmative vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmissions are filed with the minutes of proceedings of the Board of Directors. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. 5 SECTION 8. POWERS. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and, (8) To adopt from time to time regulations, not inconsistent with these bylaws, for the management of the Corporation's business and affairs. SECTION 9. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the certificate of incorporation, the Board of Directors shall have the authority to fix the compensation of the directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at the meeting of the Board of Directors or paid a stated salary or paid other compensation as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE III. COMMITTEES SECTION 1. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. 6 SECTION 2. CONDUCT OF BUSINESS. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; a majority of the members shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. ARTICLE IV. OFFICERS SECTION 1. GENERALLY. The officers of the corporation shall consist of a President, one or more Vice Presidents, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any number of offices may be held by the same person. The salaries of officers elected by the Board of Directors shall be fixed from time to time by the Board of Directors or by such officers as may be designated by resolution of the Board. SECTION 2. PRESIDENT. The President shall be the Chief Executive Officer of the Corporation. Subject to the provisions of these bylaws and to the direction of the Board of Directors, he or she shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers, employees and agents of the Corporation. SECTION 3. VICE PRESIDENT. Each Vice President shall have such powers and duties as may be delegated to him or her by the Board of Directors. One Vice President shall be designated by the Board to perform the duties and exercise the powers of the President in the event of the President's absence or disability. SECTION 4. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have the responsibility for maintaining the financial records of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Chief Financial Officer shall also perform such other duties as the Board of Directors may from time to time prescribe. SECTION 5. SECRETARY. The Secretary shall issue all authorized notices for, and shall keep minutes of, all meetings of the stockholders and the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. 7 SECTION 6. DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. SECTION 7. REMOVAL. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. SECTION 8. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other Corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other Corporation. ARTICLE V. STOCK SECTION 1. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, if any, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile. SECTION 2. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. SECTION 3. RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may, except as otherwise required by law, fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than 60 nor less than 10 days before the date of any meeting of stockholders, nor more than 60 days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 8 SECTION 4. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. SECTION 5. REGULATIONS. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI. NOTICES SECTION 1. NOTICES. If mailed, notice to stockholders shall be deemed given when deposited in the mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in Section 232 of the Delaware General Corporation Law. SECTION 2. WAIVERS. A written waiver of any notice, signed by a stockholder or director, or waiver by electronic transmission by such person, whether given before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such person. Neither the business nor the purpose of any meeting need be specified in such a waiver. Attendance at any meeting shall constitute waiver of notice except attendance for the sole purpose of objecting to the timeliness of notice. ARTICLE VII. MISCELLANEOUS SECTION 1. FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. SECTION 2. CORPORATE SEAL. The Board of Directors may provide a suitable seal containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. SECTION 3. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such director or committee member 9 reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. SECTION 4. FISCAL YEAR. The fiscal year of the Corporation shall be as fixed by the Board of Directors. SECTION 5. TIME PERIODS. In applying any provision of these bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII. INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 3 of this ARTICLE VIII with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. SECTION 2. RIGHT TO ADVANCEMENT OF EXPENSES. In addition to the right to indemnification conferred in Section 1 of this ARTICLE VIII, an indemnitee shall also have the right to be paid by the Corporation the expenses (including attorney's fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 2 or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections 1 and 2 of this ARTICLE VIII shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. 10 SECTION 3. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 1 or 2 of this ARTICLE VIII is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this ARTICLE VIII or otherwise shall be on the Corporation. SECTION 4. NON EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this ARTICLE VIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, bylaws, agreement, vote of stockholders or directors or otherwise. SECTION 5. INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. SECTION 6. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article VIII with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. SECTION 7. NATURE OF RIGHTS. The rights conferred upon indemnitees in this Article VIII shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer or trustee and shall inure to the benefit of the indemnitee's heirs, executors and administrators. Any amendment, alteration or repeal of this Article VIII that adversely affects any right of an indemnitee or its successors shall be prospective only and shall not limit or eliminate any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment or repeal. 11 ARTICLE IX. AMENDMENTS In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized to adopt, alter, amend and repeal these Bylaws subject to the power of the holders of capital stock of the Corporation to alter, amend or repeal the Bylaws. Any adoption, amendment or repeal of these Bylaws by the Board of Directors shall require the approval of a majority of the total number of directors which the Corporation would have if there were no vacancies; provided, however, that the affirmative vote of not less than two-thirds of the total number of directors which the Corporation would have if there were no vacancies shall be required to repeal, alter or amend any Bylaw provision relating to (i) the calling of a special meeting of the stockholders or a special meeting of the Board of Directors, (ii) stockholder nominations or proposals, (iii) the number, classification or election of directors or (iv) supermajority approval or quorum requirements of the Board, or any committee thereof, or to adopt any Bylaw provision inconsistent therewith. Notwithstanding the foregoing, the affirmative vote of not less than two-thirds of the total number of directors which the Corporation would have if there were no vacancies shall be required to alter, amend or adopt any Bylaw provision inconsistent with or repeal this Article IX. With respect to the powers of holders of capital stock to make, alter, amend and repeal Bylaws of the Corporation, notwithstanding any other provision of these Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law, these Bylaws or any preferred stock, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares entitled to vote generally in the election of directors, voting together as a single class, shall be required to make, alter, amend or repeal any provision of these Bylaws. 12 EX-10.1 5 p66877exv10w1.txt EX-10.1 Exhibit 10.1 REAL ESTATE PURCHASE AGREEMENT Seller: NZ Properties, Inc., an Arizona corporation Buyer: Bambifeathers LLC, a Delaware limited liability company Escrow Agent: Transnation Title Insurance Co. Escrow No.: 308628 Date: April 19, 2002

1. COMPLETE AGREEMENT. This Real Estate Purchase Agreement shall constitute an agreement ("Agreement") on the part of the Seller to sell and on the part of the Buyer to purchase the five separate industrial buildings known to the parties as Aspen Business Center: 2873, 2877 and 2885 N. Nevada Street, Chandler, AZ (the "ASPEN SITE"); El Dorado Commerce Center: 973 and 1019 N. Colorado Street, Gilbert, AZ; Grove Commons Industrial Park: 1514, and 1522 and 1536 W. Todd Drive and 7151 S. Harl, Tempe, AZ; 12th Place/Neltec Building: 1420 W. 12th Place, Tempe, AZ ("12TH PLACE SITE"); and Watkins Distribution Center: 215 E. Watkins, Phoenix, AZ ("WATKINS SITE"), and legally described on the attached Exhibit "A-1" through "A-5", including the buildings, easements, rights, licenses, warranties, approvals and other appurtenances (collectively, the "PROPERTY") in accordance with the terms and conditions hereof. No other agreements have been made between the parties except as expressly set forth herein. 2. SALES PRICE. The total sales price for the Property is Twenty-Two Million Eight Hundred Fifty-Five Thousand Dollars ($22,855,000.00), payable as follows: (a) With Buyer's execution and acceptance of this Agreement, Buyer shall deposit with Escrow Agent the sum of Two Hundred Twenty-Five Thousand Dollars ($225,000.00), which shall be held as earnest money. (b) Should Buyer desire to extend the Due Diligence Period (as defined below) as permitted by Paragraph 8 below, Buyer shall deposit with Escrow Agent an additional sum of Two Hundred Fifty Thousand Dollars ($250,000.00), which shall be held as earnest money. (c) On or before the Closing Date (as defined below) Buyer shall assume the loans which are existing first liens on each of the parcels comprising the Property (the "LOANS") in the approximate aggregate amount of Fourteen Million Eight Hundred Eighty-Two Thousand Six Hundred Seventy-Four Dollars and 27/100 ($14,882,674.27). (d) On or before the Closing Date, Buyer shall deposit with Escrow Agent the balance of the sales price in the approximate amount of Seven Million Seven Hundred Forty-Seven Thousand Three Hundred Twenty-Five Dollars and 73/100 ($7,747,325.73), being the aggregate purchase price of $22,855,000.00, less the earnest money deposit and the approximate outstanding 1 principal balances of the Loans on the Property as of the Closing Date. The actual amount will be calculated as of the Closing Date based upon the then outstanding principal balances of the Loans. All deposits shall be in cash, wire transfer, or by cashier's check payable to Escrow Agent. Upon the Close of Escrow, all amounts paid according to Paragraphs 2(a), 2(b) and 2(c) of this Agreement, less any closing costs and prorations payable by Seller hereunder shall be disbursed to Seller. 3. OPENING AND CLOSING DATE. Escrow shall be deemed open on the date (the "OPENING DATE") when one (1) fully executed original of this Agreement, together with the earnest money deposit required under Paragraph 2(a) above, has been delivered to Escrow Agent. Escrow Agent shall advise Buyer and Seller in writing of the Opening Date. The settlement of the respective obligations of Seller and Buyer under this Agreement and the closing of the Escrow established hereunder (the "CLOSE OF ESCROW" or "CLOSING") shall occur on the date that is the earlier of (i) three (3) days after the date that all of the contingencies set forth in Paragraph 33 below have been satisfied, or (ii) May 31, 2002 (the "CLOSING DATE"), or such other date as may be mutually agreed upon by Seller and Buyer, unless either Seller or Buyer elects to cancel this Agreement and the Escrow as hereinafter provided. 4. EARNEST MONEY DEPOSIT. Escrow Agent is instructed to deposit all earnest money paid into Escrow (collectively, the "EARNEST MONEY DEPOSIT") in a money market or other similar account, subject to immediate withdrawal, at a federally insured bank or savings and loan institution. The Earnest Money Deposit shall not be released to Seller prior to Close or earlier termination of the Escrow, except as expressly provided for herein. If the Escrow closes, the Earnest Money Deposit, together with all interest thereon shall be paid to Seller and credited against the total sales price to be paid to Seller. If the Earnest Money Deposit is forfeited by Buyer as provided by this Agreement, the Earnest Money Deposit, together with any interest earned thereon, shall be paid immediately to Seller. If Buyer elects to cancel this Agreement pursuant to Paragraph 6, 7 or 8 below, the Earnest Money Deposit and all interest earned thereon shall be returned to Buyer and thereafter neither Seller nor Buyer shall have any further obligation hereunder except as expressly provided herein. Upon the expiration of Buyer's right to cancel this Agreement under said Paragraphs, the Earnest Money Deposit shall be nonrefundable and at Close of or the earlier termination of Escrow, except in the event of Seller's default, shall be paid to Seller, together with all interest earned thereon, in accordance with the terms hereof. 5. REVIEW MATERIALS. If not previously delivered to Buyer, within twenty-four (24) hours following the Opening Date, Seller shall deliver to Buyer true and correct copies of the Tenant Leases ("Tenant Leases") affecting the Property, together with all available review materials in Seller's possession which are identified on Exhibit "B" attached hereto (collectively, the "Review Materials"). At Closing, the Tenant Leases shall be assigned to Buyer, and Buyer shall thereupon be deemed to have assumed all of the covenants, agreements and obligations of Seller under such Tenant Leases which are applicable to the period, and required to be performed, from and after the date of Close of Escrow. The assignment of the Tenant Leases shall include the agreement by Buyer to indemnify Seller against and hold Seller harmless from and against any and all cost, liability, loss, damage or expense, including, without limitation, reasonable attorneys' fees and litigation costs, originating or relating to the period on and after the Closing Date and arising out of Buyer's obligations under the Tenant Leases and the agreement by Seller to indemnify Buyer against and hold Buyer 2 harmless from and against any and all cost, liability, loss, damage or expense, including, without limitation, reasonable attorneys' fees and litigation costs, originating or relating to the period prior to the Closing Date and arising out of the Seller's obligations under the Leases. 6. COMMITMENT FOR OWNER'S POLICY OF TITLE INSURANCE. (a) Buyer acknowledges receipt of an ALTA commitment for title insurance in the amount of the total sales price (the "COMMITMENT") and legible copies of all documents referred to in the Commitment. On or before the Opening Date, Buyer shall provide Seller and Escrow Agent written notice of the title matters which are unacceptable to Buyer, in Buyer's sole discretion, and the suggested remedy or issue. If Escrow Agent issues a supplemental or amended commitment showing additional exceptions to title after the Opening Date, Buyer shall have a period of three (3) days from the date of Buyer's receipt of such supplemental or amended commitment in which to give notice of dissatisfaction to Seller of any such additional exceptions to title. (b) Seller shall have ten (10) days after receipt of Buyer's notice to elect to attempt to cure and/or respond to the objections; however, Seller shall not be obligated to cure any of the objections or to employ any remedies suggested by Buyer to cure the same. In the event Seller delivers written notice to Buyer within such ten (10) days that it will not cure Buyer's objections to Buyer's satisfaction or if Seller fails to respond to Buyer's title objection notice within this ten (10) day period, within seven (7) days after receipt of Seller's notice electing not to cure or seventeen (17) days after Seller's receipt of Buyer's title objection notice if Seller fails to respond to such notice, Buyer's sole remedy shall be to either elect to (i) cancel this Escrow by written notice to Seller and Escrow Agent or (ii) waive its objections and proceed with the transaction contemplated herein. Buyer's failure to timely advise Seller in writing of its election under subsections (i) or (ii) hereinabove shall be deemed an election by Buyer to waive its objections and proceed with the transaction contemplated herein as set forth in subsection (ii) hereinabove. If any amended title reports are issued prior to Close of Escrow which indicate any material change to the Property or the title thereto, the foregoing procedures for objection and notice shall again apply; however, Buyer shall only have five (5) days within which to review and approve or object to any amended title report and, at Buyer's election, to either waive the new matters and close Escrow or to terminate the Escrow in accordance with the terms of the immediately preceding sentence. (c) Buyer's failure to disapprove any exceptions or to specify its objections to the contents of the Commitment during the title review periods set forth above shall be deemed an acceptance of title as described in the Commitment and a waiver of Buyer's right to cancel this Agreement according to this Paragraph; provided, however, that Buyer shall not be required to give Seller and Escrow Agent written notice of Buyer's dissatisfaction with any lien or encumbrance other than the Loans which can be removed by Seller's payment of a liquidated sum at Close of Escrow, and to the extent that the Property is encumbered by any such lien, Seller shall cause such lien to be released from the Property at Close of Escrow. 7. BUYER'S RIGHT TO CANCEL. (a) On or before April 30, 2002 (the "Due Diligence Period"), Buyer shall determine whether the Property and the form and substance of the documents set forth in Paragraph 3 10 are suitable and shall otherwise inspect and investigate the Property to Buyer's satisfaction. During the Due Diligence Period and upon reasonable prior notice to Seller, Buyer may enter upon the Property with Buyer's representatives and agents for the purpose of examining the Property and conducting such tests and studies as Buyer may reasonably require, provided such activities shall not interfere with the activities of Seller or any of the tenants under the Tenant Leases on the Property. Provided Buyer does not cancel this Agreement, Buyer shall have the right to enter upon the Property subsequent to the lapse of the Due Diligence Period provided it complies with the terms and conditions of this Paragraph 7. Buyer agrees to indemnify Seller and hold Seller harmless from any injury, cost, liability or expense to person or property arising out of Buyer's exercise of the rights granted by this Paragraph, and this indemnity shall survive the Close of Escrow or the cancellation of this Agreement. Except for the Phase II environmental testing previously approved by Seller on the Aspen Site, the 12th Place Site and the Watkins Site, Buyer shall not dismantle, destroy, alter or drill into any real property, surface, structure or improvement, without first obtaining Seller's written consent. Buyer shall restore any real property, surface, structure or improvement to the same condition that existed prior to Buyer conducting any test or investigation caused by Buyer or its agents and not caused by the negligence or intentional conduct of Seller's or the tenant's managers, agents or employees. Seller agrees to make reasonable efforts to provide during the Due Diligence Period estoppel certificates from each tenant on the Property in form reasonably satisfactory to the Buyer. If Buyer is not satisfied with the Property for any reason, in Buyer's sole and complete discretion, Buyer may elect to cancel this Agreement and the Escrow by giving Seller and Escrow Agent written notice of cancellation on or before the expiration of such Due Diligence Period. In the event Buyer cancels this Agreement for any reason, Buyer shall return the Review Materials received from Seller and destroy the reports and studies concerning the Property obtained by Buyer. Buyer further agrees that the Review Materials and the reports and studies obtained by Buyer concerning the Property are confidential and proprietary and shall not be disclosed, prior to Closing, to any person, entity, tenant or governmental agency other than Buyer's engineers, employees, attorneys, and agents in connection with the due diligence investigation of the Property and to the lenders and brokers in connection with the assumption of the Loans. Within one (1) business day after cancellation, Buyer shall provide Seller with a certificate stating that Buyer has returned to Seller all copies of the Review Materials and Buyer has not retained any copies thereof or the information contained therein and that Buyer has destroyed the reports and summaries Buyer received in connection with the Property and Buyer has not retained any copies or summaries of such materials. If Buyer does not so elect to cancel this Agreement, Buyer shall be conclusively deemed to have waived its right to cancel this Agreement under this Paragraph and to have released Seller from any and all responsibility and liability regarding the condition, valuation or utility of the Property except as otherwise expressly set forth in this Agreement. Seller agrees that, during the pendency of the Escrow, it shall continue to reasonably operate and maintain the Property in a state of good condition and repair. (b) Notwithstanding the foregoing, with regard to the Watkins Site, Buyer's environmental consultants have recommended that Buyer conduct additional Phase II testing on certain areas of the Watkins Site, but such additional testing may not be completed by the April 30, 2002 Due Diligence Period expiration. As a result, if the Phase II testing has not been completed by April 30, 2002, and Buyer has not otherwise terminated this Agreement in accordance with subsection (a) above, Buyer may extend the Due Diligence Period as to the Watkins Site only until May 7, 2002, and only with regard to the environmental matters pertaining to the Watkins Site. If on or before May 7, 2002, Buyer determines in its sole and complete discretion, that the environmental 4 matters pertaining to the Watkins Site are not satisfactory to Buyer, then Buyer may elect to cancel this Agreement as to the Watkins Site and thereafter continue with the purchase of the remaining parcels in accordance with the terms of this Agreement, but the sales price shall be reduced by the amount of Two Million Five Hundred Thousand Dollars ($2,500,000). The terms of this subsection (b) are in addition to Buyer's right to extend the Due Diligence Period set forth in Section 8 below with regard to the assumption of the existing Loans. 8. BUYER'S OBLIGATION TO ASSUME EXISTING LOANS. Buyer has previously submitted applications as required by the lenders to assume the existing Loans on the Property and obtain a release of the liability of the Seller (i.e.: a novation) of the obligations thereunder arising upon and after the Closing Date to the extent permitted under the Loans. Buyer agrees to pay all costs and fees associated with the assumption of the Loans. Seller agrees to reasonably cooperate, at Buyer's sole cost, in connection with any such applications. Buyer shall make such determination as it desires within the Due Diligence Period concerning the assumability of the Loans. In the event the holders of any such Loans refuse to permit the assumption and novation of the existing Loans or place conditions to such assumption that are unacceptable to Buyer, Buyer may elect to cancel the Agreement by written notice to Seller and Escrow Agent on or before the expiration of the Due Diligence Period, or Buyer may elect to waive such contingency and consummate the transaction contemplated by this Agreement. In the event of such waiver, Buyer shall be obligated to obtain its own financing for the purchase of the portion of the Property which is not assumable and hereby agrees to pay any prepayment or transfer fees imposed by the holder of any such Loans and indemnify and hold Seller harmless therefrom. Seller has arranged for and Buyer has engaged the services of NorthMarq Capital (James Dumars) to facilitate the processing of the assumptions with 4 of the lenders with whom NorthMarq has a relationship. NorthMarq has agreed to provide these services for a fee of $10,000.00 per building, payable by Buyer. Seller represents and warrants that neither Seller nor any of its officers or other affiliates have received or will receive any remuneration from any source for referring Buyer to NorthMarq. Provided Buyer has diligently pursued its application to assume the existing Loans and the lender(s) have not approved the application or are not prepared to record the assumption of the relevant Loan(s) on or before the expiration of the Due Diligence Period, Buyer may elect to extend the Due Diligence Period for an additional thirty (30) days by providing written notice to Seller and depositing the additional Earnest Money Deposit described in Paragraph 2(b). The extension of the Due Diligence Period shall be solely for the purpose of obtaining the consents to the assignment and Seller's novation as described in this Paragraph and Buyer shall be deemed to have waived all of other conditions to the purchase other than those conditions to be satisfied by Seller. In the event that despite Buyer's good faith, reasonable and diligent pursuit of its application for assumption of the Loans one or more of the existing lenders refuses to permit or is not prepared to record such assumption and novation as described in this Paragraph by the last day of the extended Due Diligence Period, this Agreement shall be cancelled whereupon any and all obligations of Buyer and Seller herein shall be terminated and Escrow Agent shall promptly refund the Earnest Money Deposit plus any interest earned thereon to Buyer. In the event Buyer has failed to reasonably, diligently and in good faith pursue such application, said Earnest Money Deposit shall, in the event this Agreement is cancelled in accordance with the preceding paragraph, be nonrefundable to Buyer and forfeited to Seller. 9. CONDITION OF PROPERTY. Except as provided herein, Buyer agrees to purchase the Property in an "as is" physical condition. Buyer expressly acknowledges that Buyer has not relied on 5 any warranties, promises, understandings or representations, express or implied, made by Seller or by any agent of Seller relating to the Property other than such warranties as may be contained in this Agreement. 10. SELLER'S DELIVERIES AT CLOSING. On or before the Closing Date, Seller shall deposit the following documents with Escrow Agent for delivery to Buyer at Close of Escrow: (a) A duly executed and acknowledged special warranty deed, conveying title to the Property to Buyer subject only to those items approved by Buyer. (b) A duly executed bill of sale conveying Seller's interest in all personalty owned by Seller located on the Property. (c) Duly executed tenant estoppel certificates from each of the tenants under the Tenant Leases, verifying that the applicable Tenant Lease is in full force and effect, that Seller is not in default under the terms of such Tenant Lease, and that all work required to be performed by Seller under the applicable Tenant Lease has been substantially completed to such tenant's satisfaction or has otherwise been accepted. In the event Seller fails to obtain an estoppel certificate from a tenant or tenants upon the Property on or before 5:00 p.m. local time three (3) days prior to the expiration of the Due Diligence Period, Seller shall deliver a Seller's estoppel for such tenants, in approximately the form approved by Seller and Buyer during the Due Diligence Period. Such Seller estoppels shall be deposited with Escrow Agent (and copies provided to Buyer) on or before 5:00 p.m. local time on the day preceding the expiration of the Due Diligence Period. (d) A duly executed assignment of the Tenant Leases, together with the original Lease and all amendments thereto. (e) Any and all tenant security deposits shall be transferred or credited to Buyer at Closing. (f) An assignment of Seller's interest in any warranties or contracts relating to the Property. (g) Written notice to all tenants notifying them of the sale. (h) A tax clearance certificate from the Department of Revenue and any other local jurisdictions, if applicable. 11. SELLER'S RIGHT TO EXCHANGE PROPERTY. Buyer acknowledges that Seller may elect to receive other real property (generally "Exchange Property") in exchange for the Property to be conveyed to Buyer hereunder in a like-kind exchange, intended to qualify for income tax deferred treatment under Section 1031 of the Internal Revenue Code. If Seller so elects, Buyer agrees to cooperate with Seller in effectuating such exchange by entering into an amendment to this Agreement, provided, that Buyer's liability and/or cost hereunder shall not be increased thereby and provided further that Buyer shall not be required to incur any personal or corporate liability on any 6 deed conveying such Exchange Property to Seller or with respect to any encumbrance on any such Exchange Property. Seller acknowledges that Buyer may effect the purchase of the Property by completing a like-kind exchange, intended to qualify for income tax deferred treatment under Section 1031 of the Internal Revenue Code. Seller agrees to cooperate with Buyer in effectuating such exchange by entering into an amendment to this Agreement, provided, that Seller's liability and/or cost hereunder shall not be increased thereby and provided further that Seller shall not be required to incur any personal or corporate liability and/or cost on any deed conveying such Exchange Property to Buyer or with respect to any encumbrance on any such Exchange Property. 12. TITLE POLICY. Seller shall provide Buyer with a standard coverage owner's policy of title insurance issued by Escrow Agent in the amount of the total sales price, effective as of the Close of Escrow, insuring Buyer that fee simple title to the Property is vested in Buyer, subject only to the usual printed exceptions contained in such title insurance policies, to the matters shown in the Commitment approved by Buyer and to any other matters approved in writing by Buyer or resulting from the acts of Buyer or Buyer's agents. If Buyer elects, Buyer may obtain an extended form policy of title insurance by paying the additional premium therefor. Seller's obligation to provide the title policy required by this Paragraph shall be satisfied if, at the Close of Escrow, the title insurance company has given a binding commitment to issue the owner's policy in the form required by this Paragraph and if such policy is delivered within a reasonable time following the Close of Escrow. 13. CLOSING COSTS. (a) Upon the Close of Escrow, Seller agrees to pay one-half (1/2) of the escrow charges and the full cost of the standard coverage owner's policy of title insurance described in Paragraph 12 above. (b) Upon the Close of Escrow, Buyer agrees to pay one-half (1/2) of the escrow charges and, if Buyer elects, any additional cost of receiving an ALTA extended form policy of title insurance in lieu of the policy to be provided by Seller. (c) Real estate taxes against the Property shall be prorated in Escrow as of the Close of Escrow, based upon the latest available information. All irrigation assessments, improvement liens, and any other general or special assessments shall be prorated at Close of Escrow. (d) If permitted or requested by the lenders, any tax, insurance, improvement or other impounds held by the lenders under the Loans shall be assigned to Buyer and credited to Seller at the Closing. (e) All rents shall be prorated in Escrow as of the Closing on a per diem basis. If any tenant is entitled to any free rent period, rent abatement or other similar rent concession under the Tenant Leases as of the Close of Escrow, the amount thereof shall be prorated as of the Closing, and the amount thereof allocable to the period following the Close of Escrow shall be an obligation of Buyer as Lessor under the assigned leases. 7 (f) All common area maintenance expenses, common area charges, insurance and other similar expenses shall be prorated in Escrow as of the Closing on a per diem basis. Any other closing costs shall be paid by Buyer and Seller according to the usual and customary practice of Escrow Agent. (g) Seller agrees that all closing costs and commissions payable by Seller shall be deducted from Seller's proceeds at the Close of Escrow and that to the extent such proceeds are not sufficient to pay all such closing costs and commissions in full, Seller shall deposit cash with Escrow Agent in an amount sufficient to pay the deficiency. On or before the Close of Escrow, Buyer agrees to deposit with Escrow Agent cash in an amount sufficient to pay all closing costs payable by Buyer. 14. POSSESSION; INDEMNITY. Possession of the Property shall be delivered to Buyer at Closing in as good a condition as it is as of the date of this Agreement, ordinary wear and tear only excepted, subject only to the rights of tenants in possession under the Tenant Leases. Seller shall maintain all risk property damage insurance until termination or this Agreement or Close of Escrow. 15. BROKERAGE. (a) If, but only if, this transaction closes, Seller agrees to be fully responsible to pay a commission equal to one and one-half percent (1-1/2%) of the total sales price to Johnson and Associates Commercial Real Estate Services, Inc. (Carl K. Johnson) (the "Broker"). No commission shall be earned if this transaction fails to close and in no event shall Broker be entitled to any portion of the Earnest Money Deposit which may be forfeited to Seller. Buyer warrants that Buyer has not dealt with any other broker in connection with this transaction and Seller warrants that Seller has not dealt with any other broker in connection with this transaction. (b) If any other person shall assert a claim to a finder's fee, brokerage commission or other compensation on account of alleged employment as a finder or broker or performance of services as a finder or broker in connection with this transaction, the party under whom the finder or broker is claiming shall indemnify and hold the other party harmless from and against such claim and all costs, expenses and liabilities incurred in connection with such claim or any action or proceeding brought on such claim, including, but not limited to, counsel and witness fees and court costs in defending against such claim. This indemnity shall survive the Close of Escrow or the cancellation of this Agreement. 16. CONDEMNATION. In the event of the condemnation (or sale in lieu thereof) of more than ten percent (10%) of the total square footage of the Property prior to the Close of Escrow, Buyer shall have the right to cancel this Agreement, in which event all of the Earnest Money Deposit shall be returned to Buyer together with any interest earned thereon, and this Agreement and the Escrow shall be canceled. If condemnation (or sale in lieu thereof) of less than ten percent (10%) of the total square footage of the Property occurs prior to the Close of Escrow or if Buyer elects to close the Escrow notwithstanding the taking of more than ten percent (10%) of the Property prior to the close, Buyer shall receive all awards or payments made therefor by the condemning authority to which Seller is entitled and shall proceed to close the Escrow and pay the full sales price provided herein. 8 17. ASSIGNMENT OF BUYER'S INTEREST; BINDING EFFECT. At any time prior to the Close of Escrow, Buyer may assign its rights under this Agreement to one or more assignees of Buyer's choice; provided, however, that Buyer shall not be released from Buyer's obligations and liabilities under this Agreement as a result of such assignment. This Agreement shall be binding upon the assignees, successors and assigns of Buyer and Seller. 18. WAIVERS. No waiver of any of the provisions of this Agreement shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver be a continuing waiver. Except as expressly provided in this Agreement, no waiver shall be binding unless executed in writing by the party making the waiver. Either party may waive any provision of this Agreement intended for its benefit; however, such waiver shall in no way excuse the other party from the performance of any of its other obligations under this Agreement unless otherwise provided herein. 19. GOVERNING LAW. This Agreement shall be construed according to the law of the State of Arizona. 20. TIME. Time is of the essence of this Agreement. 21. NOTICES. Notices shall be in writing and shall be given by personal delivery or by deposit in the United States mail, certified mail, return receipt requested, postage prepaid, addressed to Seller, Buyer or the Escrow Agent, as applicable, at the addresses set forth below, or at such other address as a party may designate in writing: SELLER: NZ Properties, Inc. Attn: Jerome L. Joseph 333 North 44th Street Suite 420 Phoenix, Arizona 85008-6568 Telephone: (602) 952-8836 Fax: (602) 952-8769 WITH COPIES TO: K. Bellamy Brown, Esq. The Cavanagh Law Firm 1850 North Central Suite 2400 Phoenix, Arizona 85004 Telephone: (602) 322-4000 Fax: (602) 322-4105 BUYER: Bambifeathers LLC P.O. Box 4008 Mesa, Arizona 85211 Telephone: (480) 497-7501 Fax: (480) 926-0112

9 WITH COPIES TO: Jeffrey S. Pitcher, Esq. and J. Barry Shelley, Esq. Fennemore Craig 3003 North Central Suite 2600 Phoenix, Arizona 85012 Telephone: (602) 916-5375 Fax: (602) 916-5575 ESCROW AGENT: Transnation Title Insurance Co. Attn: June Oswalt, Escrow Officer 2850 East Camelback Road, Suite 310 Phoenix, Arizona 85016 Telephone: (602) 956-5568 Fax: (602) 957-2261

Notices shall be deemed effective upon receipt if given by personal delivery requiring signature of responsible party or the date of acceptance if by certified mail return receipt requested. Notice shall also be deemed effective three days after mailing by certified mail return receipt requested if the letter is refused or unaccepted for any reason by the intended recipient. 22. REMEDIES. If this Escrow fails to close by reason of a default by Seller, Buyer, as its exclusive remedies, will be entitled to (a) terminate this Agreement and receive a refund of its Earnest Money Deposit plus Buyer's out of pocket expenses expended for the assumption of the Loans and investigation of the Property, or (b) to pursue all of its rights at law or equity. In the event of any default by Buyer, Seller's sole remedy (except for a breach of the indemnity provisions of Paragraph 7) shall be to terminate this Agreement and receive the Earnest Money Deposit. 23. ATTORNEYS' FEES. If any action is brought by either party in respect to its rights under this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and court costs as determined by the court. 24. FURTHER DOCUMENTATION. Each party agrees in good faith to execute such further or additional documents as may be necessary or appropriate to fully carry out the intent and purpose of this Agreement. 25. SELLER'S WARRANTY. Seller warrants and represents that to the actual knowledge of R. R. Stolworthy, Jerome Joseph and Carolyn Weber, the persons in the Seller's organization most familiar with the Property, that there is no present or threatened litigation or other proceedings affecting the property or affecting the Seller's ability to convey the Property, Seller is not aware of any violation of applicable rules, laws, ordinances affecting the Property or Seller's ability to convey the Property, and to Seller's actual knowledge, all of the representations and warranties set forth in the documents associated with the Loans are true and correct as of the date hereof and shall be true as of the Closing Date. In the event prior to the Closing Date and due to the passage of time or occurrence of subsequent events which renders the above representations untrue, Seller shall promptly notify Buyer of the change of such representations and Buyer may, as its sole remedy, terminate this Agreement whereupon any and all obligations of Buyer and Seller herein shall be terminated and Escrow Agent 10 shall promptly refund the Earnest Money Deposit plus any interest earned thereon to Buyer. The representations and warranties of Seller in this Paragraph shall survive the Closing. In the event that any of the foregoing representations and warranties is found to be materially incorrect or untrue subsequent to the Closing Date, Buyer may seek any and all remedies available to Buyer at law or in equity against Seller. 26. BUYER'S WARRANTIES. Buyer warrants and represents that it is fully authorized to enter into this transaction and no approval or authorizations are required by any third party (other than the lenders holding the Loans) for the consummation of the transaction contemplated by this Agreement. The representations and warranties of Buyer in this Paragraph shall survive the Closing. In the event that any of the foregoing representations and warranties is found to be materially incorrect or untrue subsequent to the Closing Date, Seller may seek any and all remedies available to Seller at law or in equity against Buyer. 27. AUTHORIZATION. (a) On or before the Closing Date, Seller shall provide Escrow Agent with a certified copy of a resolution of the Board of Directors of Seller, or other equivalent document reasonably satisfactory to Buyer if Seller is not a corporation, which resolution shall be in full force and effect, approving this transaction and designating the person or persons authorized to sign documents on behalf of Seller. (b) On or before the Closing Date, Buyer shall provide Escrow Agent with a certified copy of a resolution of the Board of Directors of Buyer, or other equivalent document reasonably satisfactory to Seller if Buyer is not a corporation, which resolution shall be in full force and effect, approving this transaction and designating the person or persons authorized to sign documents on behalf of Buyer. 28. TIME PERIODS. Except as expressly provided for herein, the time for performance of any obligation under this Agreement shall be deemed to expire at 5:00 P.M. (Mountain Standard Time) on the last day of the applicable time period provided for herein. If the time for the giving of any notice or the performance of any obligation permitted or required to be given or performed under this Agreement expires on a Saturday, Sunday or legal holiday, the time for the giving or such notice or the performance of such obligation shall be extended to the next succeeding business day which is not a Saturday, Sunday or legal holiday. 29. HEADINGS AND COUNTERPARTS. The headings of this Agreement are for purposes of reference only and shall not limit or define the meaning of any provision of this Agreement. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which shall constitute one and the same instrument. 30. RISK OF LOSS. Except as expressly otherwise provided herein, the risk of loss or damage to the Property until the Close of Escrow shall be borne by Seller. 31. ACCEPTANCE. This Agreement shall be of no force and effect unless Buyer shall have executed this Agreement and delivered a fully executed original to Escrow Agent, together with the 11 portion of the Earnest Money Deposit described in Paragraph 2(a) above, on or before 4:30 P.M., on April 19, 2002. 32. ENTIRE AGREEMENT. This Agreement, together with all Exhibits described herein, constitutes the entire agreement between the parties pertaining to the subject matter contained in this Agreement. All prior and contemporaneous agreements, representations and understandings of the parties, oral or written, are superseded by and merged in this Agreement. No supplement, modification or amendment of this Agreement shall be binding unless in writing and executed by both Buyer and Seller. 33. CONDITIONS TO CLOSING. The following shall be express conditions precedent to Buyer's obligations under this Agreement: (a) Seller shall have delivered all document set forth in Paragraph 10 above; (b) The lenders holding the Loans shall have approved the assumption of the Loans by Buyer and the novation of Seller as described in Paragraph 8 above and shall have delivered into Escrow all documents necessary to assume all of the Loans and such documents have been executed by Seller and Buyer, as applicable; (c) Escrow Agent is prepared to issue at the Closing or has issued an binding commitment to issue the owner's title policy as described in Paragraph 12 above. In the event that the foregoing contingencies have not been satisfied (or expressly waived in writing by Buyer) on or before the expiration of the Due Diligence Period (as may be extended) through no fault of Buyer (but in no event later than the last day established in Paragraph 3 above as the Closing Date), Buyer may cancel this Escrow by written notice to Seller and Escrow Agent no later than one (1) day after the expiration of the Due Diligence Period, whereupon any and all obligations of Buyer and Seller herein shall be terminated and Escrow Agent shall promptly refund the Earnest Money Deposit plus any interest earned thereon to Buyer. 12 Dated, the day and year first hereinabove written. NZ PROPERTIES, INC., an Arizona corporation By: /s/ Jerome L. Joseph -------------------- Name: Jerome L. Joseph Its: CFO Treasurer "Seller" BAMBIFEATHERS LLC, a Delaware Limited Liability Company By: /s/ Craig M. Berge ------------------ Name: Craig M. Berge Its: Manager "Buyer" 13 EXHIBIT A Order Number: 308628 LEGAL DESCRIPTION Parcel No. 1: The West 231.2 feet of Lot 2 and the East 53.8 feet of Lot 3, Hohokam Industrial Park Unit II, according to Book 174 of Maps, page 33, records of Maricopa County, Arizona. Parcel No. 2: Lots 1 and 2, Arizona Corporate Park Unit Three, according to Book 327 of Maps, page 31, records of Maricopa County, Arizona. Parcel No. 3: Lot 1, El Dorado Business Park - Phase I, according to Book 450 of Maps, page 45, records of Maricopa County, Arizona. Parcel No. 4: A non-exclusive easement for use and enjoyment in and to the Common Areas, as created by Declaration of Covenants, Conditions, Restrictions and Easements for Continental Tech Center, recorded in Document No. 86-419846, records of Maricopa County, Arizona, as amended by instrument recorded in Document No. 89-312262, records of Maricopa County, Arizona. Parcel No. 5: A non-exclusive easement for vehicular and pedestrian ingress and egress, in upon, over and across Landscape Tract 3, as created by Declaration of Covenants, Conditions, Restrictions and Easements for Continental Tech Center, recorded in Document No. 86-419846, records of Maricopa County, Arizona, as amended by instrument recorded in Document No. 89-312262, records of Maricopa County, Arizona. Parcel No. 6: All of Lot 25 and that part of Lot 26, Valley Interstate Industrial Center, according to Book 177 of Maps, page 4, records of Maricopa County, Arizona, described as follows: 14 Beginning at the Northeast corner of said Lot 26, which is a point on a curve from which the radius point lies North 83 degrees 14' 28" East 650.00 feet; Thence Southerly 159.67 feet along the Easterly line of said Lot 26, along the arc of a 650.00 foot radius curve, concave to the East, which has a central angle of 14 degrees 04' 28" to a point on a non-tangent line; Thence South 57 degrees 37' 46" West 299.01 feet to a point on the Southwesterly line of said Lot 26; Then North 45 degrees 03' 58" West 172.38 feet along said Southwesterly line of said Lot 26 to a point which lies south 45 degrees 03' 58" East 66.50 feet from the most Westerly corner of said Lot 26; Thence North 00 degrees 04' 28" West 153.10 feet to the Northwest corner of said Lot 26; Thence North 83 degrees 14' 28" East 339.15 feet along the North line of said Lot 26 to the Point of Beginning. Parcel No. 7: That part of the Southwest quarter of the Southeast quarter of Section 17, Township 1 North, Range 3 East of the Gila and Salt River Base and Meridian, Maricopa County, Arizona, described as follows: Commencing at the most Westerly corner of Lot 26, Valley Interstate Industrial Center, according to Book 177 of Maps, page 4, records of Maricopa County, Arizona; Thence South 45 degrees 03' 58" East 66.50 feet along the Southwesterly line of said Lot 26 to the Point of Beginning; Thence South 45 degrees 03' 58" East 172.38 feet along the Southwesterly line of Lot 26; Thence South 57 degrees 37' 46" West 28.05 feet; Thence North 38 degrees 21' 35" West 122.55 feet to a point of curve; Thence Northwesterly 33.95 feet along the arc of a 367.24 foot radius of curve, concave to the Southwest, which has a central angle of 5 degrees 17' 49" to a point on a non-tangent line; Thence North 00 degrees 04' 28" West 15.06 feet to the Point of Beginning. Parcel No. 8: That portion of Lot 9, Elliott / I-10, Commerce Center, according to Book 223 of Maps, page 36, records of Maricopa County, Arizona; and that portion of Southeast quarter of Section 8, Township 1 15 South, Range 4 East of the Gila and Salt River Base and Meridian, Maricopa County, Arizona, described as follows: Commencing at the Southeast corner of said Section 8; Thence North 00 degrees 02' 58" West, 1329.84 feet along the East line of the Southeast quarter of said Section 8; Thence South 89 degrees 22' 17" West, 719.99 feet along the monument line of Todd Drive; Thence North 00 degrees 02' 58" West, 30.00 feet to the Point of Beginning; Thence continuing North 00 degrees 02' 58" West, 267.58 feet along a line being 720.00 feet West of and parallel to the East line of said Southeast quarter, said line also being the East line of said Elliott / I-10 Commerce Center; Thence South 89 degrees 57' 02" West, 270.00 feet along a line being 48.00 feet North of and parallel to the South line of said Lot 9; Thence North 00 degrees 02' 58" West, 162.00 feet to the Northwest corner of said Lot 9; Thence North 89 degrees 57' 02" East, 270.00 feet along the North line of said Lot 9 to the Northeast corner thereof; Then North 00 degrees 02' 58" West, 210.00 feet along the East line of said Elliott / I-10 Commerce Center; Thence North 89 degrees 19' 32" East, 459.00 feet along a line being 2000.00 feet North of and parallel to the South line of said Section 8, also being common with the south line of Lincoln-Elliott / I-10, a subdivision recorded in Book 223 of Maps, page 38, records of Maricopa County, Arizona; Thence South 00 degrees 02' 58" East, 223.09 feet along a line being 261.00 feet West of and parallel to said East line of the Southeast quarter of said Section 8; Thence South 89 degrees 19' 32" West, 66.25 feet; Thence South 00 degrees 02' 58" East, 416.80 feet along a line 327.2 feet West of and parallel to the East line of the Southeast quarter of Section 8; Thence South 89 degrees 22' 17" West, 392.74 feet along the North right of way line of said Todd Drive, to the Point of Beginning. 16 FIRST AMENDMENT TO REAL ESTATE PURCHASE AGREEMENT THIS FIRST AMENDMENT TO REAL ESTATE PURCHASE AGREEMENT ("AMENDMENT") is made as of the 30th day of April, 2002, by and between NZ PROPERTIES, INC., an Arizona corporation ("SELLER"), and BAMBIFEATHERS LLC, a Delaware limited liability company ("BUYER"). RECITALS A. Seller and Buyer entered into that certain Real Estate Purchase Agreement dated as of April 19, 2002 (the "AGREEMENT") pertaining to the purchase and sale of five industrial properties as more fully described in the Agreement (collectively, the "Property"). B. Seller, as the owner of the Property, has agreed to obtain estoppel certificates from the existing tenants of the Property. Although Seller has delivered the form estoppel certificates to the tenants, Seller has yet to receive a majority of the signed estoppels. Buyer has requested the receipt of the estoppel certificates as a part of its due diligence of the Property. C. The parties by this Amendment desire to amend the Agreement to extend the Due Diligence Period to accommodate Seller obtaining, and Buyer's review of, the estoppel certificates from the tenants of the Property. Buyer, by this Agreement, also hereby elects to extend the Due Diligence Period with regard to the assumption of the Loans and the performance of the environmental testing on the Watkins Site as permitted in the Agreement. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. Except as otherwise set forth herein, the defined terms in this Amendment (denoted by initial capitalization) shall have the meanings ascribed to them in the Agreement. 2. Extension of the Due Diligence Period. The Due Diligence Period is hereby extended as to the following matters only: a. The Due Diligence Period for Seller to deliver the tenant estoppels is hereby extended to May 10, 2002; b. Buyer hereby elects to extend the Due Diligence Period for the environmental matters pertaining to the Watkins Site to May 7, 2002, as contemplated by Paragraph 7(b) of the Agreement; and c. Buyer hereby elects to extend the Due Diligence Period for the assumption of the Loans to May 30, 2002, as contemplated by Paragraph 8 of the Agreement, and Buyer has 17 concurrently deposited with Escrow Agent the additional earnest money in the amount of $250,000.00. 3. Full Force and Effect; Counterparts. The Agreement shall remain in full force and effect in accordance with its terms and provisions except as amended by this Amendment. This Amendment shall be binding on the parties hereto and their respective successors and assigns. This Amendment may be executed in one or more counterparts, all counterparts shall be valid and binding on the party executing them and all counterparts shall together constitute one and the same document for all purposes. This Amendment may be executed and delivered by facsimile signature for execution on the part of one or more parties hereto and upon one party sending via facsimile to another party a facsimile copy of a signature page showing the sending party's execution or signature, the sending party shall be bound by such signature or execution. 18 IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date set forth above. SELLER: NZ PROPERTIES, INC., an Arizona corporation By: /s/ Jerome L. Joseph -------------------- Name: Jerome L. Joseph Title: CFO and Treasurer BUYER: BAMBIFEATHERS LLC, a Delaware limited liability company By: Two Daughters, LLC, an Arizona limited liability company, Its Manager By: /s/ Craig M. Berge ------------------ Name: Craig M. Berge Title: Manager 19 SECOND AMENDMENT TO REAL ESTATE PURCHASE AGREEMENT THIS SECOND AMENDMENT TO REAL ESTATE PURCHASE AGREEMENT ("AMENDMENT") is made as of the 30th day of May, 2002, by and between NZ PROPERTIES, INC., an Arizona corporation ("SELLER"), and BAMBIFEATHERS LLC, a Delaware limited liability company ("BUYER"). RECITALS A. Seller and Buyer entered into that certain Real Estate Purchase Agreement dated as of April 19, 2002, as amended by the First Amendment to Real Estate Purchase Agreement dated April 30, 2002 (as amended, the "AGREEMENT") pertaining to the purchase and sale of five industrial properties as more fully described in the Agreement (collectively, the "Property"). B. The parties by this Amendment desire to amend the Agreement to extend the Closing Date. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Definitions. Except as otherwise set forth herein, the defined terms in this Amendment (denoted by initial capitalization) shall have the meanings ascribed to them in the Agreement. 2. Extension of the Closing Date. Seller and Buyer hereby agree to extend the Closing Date set forth in Paragraph 3 to be on or before June 6, 2002. 3. Full Force and Effect; Counterparts. The Agreement shall remain in full force and effect in accordance with its terms and provisions except as amended by this Amendment. This Amendment shall be binding on the parties hereto and their respective successors and assigns. This Amendment may be executed in one or more counterparts, all counterparts shall be valid and binding on the party executing them and all counterparts shall together constitute one and the same document for all purposes. This Amendment may be executed and delivered by facsimile signature for execution on the part of one or more parties hereto and upon one party sending via facsimile to another party a facsimile copy of a signature page showing the sending party's execution or signature, the sending party shall be bound by such signature or execution. 20 IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date set forth above. SELLER: NZ PROPERTIES, INC., an Arizona corporation By: /s/ R. Randy Stolworthy ----------------------- Name: R. Randy Stolworthy Title: President BUYER: BAMBIFEATHERS LLC, a Delaware limited liability company By: Two Daughters, LLC, an Arizona limited liability company, Its Manager By: /s/ Craig M. Berge ------------------ Name: Craig M. Berge Title: Manager 21 EX-10.2 6 p66877exv10w2.txt EX-10.2 Exhibit 10.2 LIPID SCIENCES, INC. PERFORMANCE EQUITY PLAN (AMENDED AUGUST 5, 2002) SECTION 1. PURPOSE; DEFINITIONS. 1.1. Purpose. The purpose of the Lipid Sciences, Inc. 2001 Performance Equity Plan is to enable the Company to offer to its employees, officers, directors and consultants whose past, present and/ or potential contributions to the Company and its Subsidiaries have been, are or will be important to the success of the Company, an opportunity to acquire a proprietary interest in the Company. The various types of long-term incentive awards that may be provided under the Plan will enable the Company to respond to changes in compensation practices, tax laws, accounting regulations and the size and diversity of its businesses. 1.2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Agreement" means the agreement between the Company and the Holder, or such other document as may be determined by the Committee, setting forth the terms and conditions of an award under the Plan. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (d) "Committee" means the Stock Option Committee of the Board or any other committee of the Board that the Board may designate to administer the Plan or any portion thereof. If no Committee is so designated, then all references in this Plan to "Committee" shall mean the Board. (e) "Common Stock" means the Common Stock of the Company, no par value. (f) "Company" means Lipid Sciences, Inc., a corporation organized under the laws of the State of Delaware. (g) "Deferred Stock" means Common Stock to be received under an award made pursuant to Section 8, below, at the end of a specified deferral period. (h) "Disability" means physical or mental impairment as determined under procedures established by the Committee for purposes of the Plan. (i) "Effective Date" means the date set forth in Section 12.1, below. (j) "Fair Market Value", unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, means, as of any given date: (i) if the Common Stock is listed on a national securities exchange or quoted on the Nasdaq National Market or Nasdaq SmallCap Market, the last sale price of the Common Stock in the principal trading market for the Common Stock on such date, as reported by the exchange or Nasdaq, as the case may be; (ii) if the Common Stock is not listed on a national securities exchange or quoted on the Nasdaq National Market or Nasdaq SmallCap Market, but is traded in the over-the-counter market, the closing bid price for the Common Stock on such date, as reported by the OTC Bulletin Board or the National Quotation Bureau, Incorporated or similar publisher of such quotations; and (iii) if the fair market value of the Common Stock cannot be determined pursuant to clause (i) or (ii) above, such price as the Committee shall determine, in good faith. (k) "Holder" means a person who has received an award under the Plan. (l) "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. (m) "Nonqualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (n) "Other Stock-Based Award" means an award under Section 9, below, that is valued in whole or in part by reference to, or is otherwise based upon, Common Stock. (o) "Parent" means any present or future "parent corporation" of the Company, as such term is defined in Section 424(e) of the Code (without regard to the phrase "at the time of the granting of the option" in such Section). (p) "Plan" means the Lipid Sciences, Inc. 2001 Performance Equity Plan, as hereinafter amended from time to time. (q) "Repurchase Value" shall mean the Fair Market Value in the event the award to be settled under Section 2.2(h) or repurchased under Section 10.2 is comprised of shares of Common Stock and the difference between Fair Market Value and the Exercise Price (if lower than Fair Market Value) in the event the award is a Stock Option or Stock Appreciation Right; in each case, multiplied by the number of shares subject to the award. (r) "Restricted Stock" means Common Stock received under an award made pursuant to Section 7, below, that is subject to restrictions under said Section 7. (s) "SAR Value" means the excess of the Fair Market Value (on the exercise date) over the exercise price that the participant would have otherwise had to pay to exercise the related Stock Option, multiplied by the number of shares for which the Stock Appreciation Right is exercised. 2 (t) "Stock Appreciation Right" means the right to receive from the Company, on surrender of all or part of the related Stock Option, without a cash payment to the Company, a number of shares of Common Stock equal to the SAR Value divided by the Fair Market Value (on the exercise date). (u) "Stock Option" or "Option" means any option to purchase shares of Common Stock which is granted pursuant to the Plan. (v) "Stock Reload Option" means any option granted under Section 5.3 of the Plan. (w) "Subsidiary" means any present or future "subsidiary corporation" of the Company, as such term is defined in Section 424(f) of the Code (without regard to the phrase "at the time of the granting of the option" in such Section). (x) "Termination" means that the Holder has ceased to be an employee or director of, or consultant to, the Company or its Subsidiaries and no longer serves in any such capacity on behalf of the Company or its Subsidiaries. An event that causes a Subsidiary to cease being a Subsidiary shall be treated as a "Termination" of that Subsidiary's employees, directors and consultants. (y) "Vest" means to become exercisable or to otherwise obtain ownership rights in an award. SECTION 2. ADMINISTRATION. 2.1. Committee Membership. The Plan shall be administered by the Board or a Committee, as provided herein. Committee members shall serve for such term as the Board may in each case determine, and shall be subject to removal at any time by the Board. The Committee members shall be "non-employee directors" as defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and "outside directors" within the meaning of Section 162(m) of the Code. 2.2. Powers of Committee. The Committee shall have full authority to award, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, (iv) Deferred Stock, (v) Stock Reload Options and/or (vi) Other Stock-Based Awards (collectively, "Awards"). For purposes of illustration and not of limitation, the Committee shall have the authority (subject to the express provisions of this Plan): (a) to select, from the persons designated as eligible recipients of awards in Section 4.1, the officers, employees, directors and consultants of the Company or any Subsidiary to whom Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Reload Stock Options and/or Other Stock-Based Awards may from time to time be awarded hereunder; 3 (b) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, number of shares, share exercise price or types of consideration paid upon exercise of such options, such as other securities of the Company or other property, any restrictions or limitations, and any vesting, exchange, surrender, cancellation, acceleration, termination, exercise or forfeiture provisions, as the Committee shall determine); (c) to determine any specified performance goals or such other factors or criteria which need to be attained for the vesting of an award granted hereunder; (d) to determine the terms and conditions under which awards granted hereunder are to operate on a tandem basis and/or in conjunction with or apart from other equity awarded under this Plan and cash and non-cash awards made by the Company or any Subsidiary outside of this Plan; (e) to permit a Holder to elect to defer a payment under the Plan under such rules and procedures as the Committee may establish, including the payment or crediting of interest on deferred amounts denominated in cash and of dividend equivalents on deferred amounts denominated in Common Stock; (f) to determine the extent and circumstances under which Common Stock and other amounts payable with respect to an award hereunder shall be deferred that may be either automatic or at the election of the Holder; and (g) to substitute (i) new Stock Options for previously granted Stock Options, which previously granted Stock Options have higher option exercise prices and/or contain other less favorable terms, and (ii) new awards of any other type for previously granted awards of the same type, which previously granted awards are upon less favorable terms; and (h) to make payments and distributions with respect to awards (i.e., to "settle" awards) through cash payments in an amount equal to the Repurchase Value. Notwithstanding anything contained herein to the contrary, the Committee shall not grant to any one Holder in any one calendar year awards for more than 500,000 shares in the aggregate. 2.3. Interpretation of Plan. (a) Committee Authority. Subject to Section 11, below, the Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable to interpret the terms and provisions of the Plan and any award issued under the Plan (and to determine the form and substance of all Agreements relating thereto), and to otherwise supervise the administration of the Plan. Subject to Section 11, below, all decisions made by the 4 Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding upon all persons, including the Company, its Subsidiaries and Holders. (b) Incentive Stock Options. Anything in the Plan to the contrary notwithstanding, no term or provision of the Plan relating to Incentive Stock Options (including but not limited to Stock Reload Options or Stock Appreciation rights granted in conjunction with an Incentive Stock Option) or any Agreement providing for Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Holder(s) affected, to disqualify any Incentive Stock Option under such Section 422. SECTION 3. STOCK SUBJECT TO PLAN. 3.1. Number of Shares. The total number of shares of Common Stock reserved and available for issuance under the Plan shall be 5,000,000 shares; provided that this number of shares shall automatically increase on the January 1, in each of the calendar years 2002, 2003, 2004, 2005 and 2006 by an amount equal to 3% of the shares of Common Stock outstanding on December 31 of the immediately preceding calendar year as reflected on the stock ledger of the Company, if the Plan is then in effect, but in no event shall any annual increase exceed 500,000 shares of Common Stock. Shares of Common Stock under the Plan ("Shares") may consist, in whole or in part, of authorized and unissued shares or treasury shares. If a Stock Option expires or is cancelled without being exercised, the Shares of Common Stock that were subject to such Stock Option shall revert to the Plan and again be available for future issuance under this Plan. Similarly, if a Stock Appreciation Right or Deferred Stock award is cancelled before it is exercised (in the case of a Stock Appreciation Right) or before the end of the Deferral Period (in the case of a Deferred Stock award, and the shares of Common Stock subject to such Stock Appreciation Right or Deferred Stock award are never in fact issued to the Holder thereof, such Shares shall revert to the Plan and again be available for future issuance under this Plan. 3.2. Changes in Capital Structure. In the event of any stock split, reverse stock split, recapitilization, combination or reclassification of stock, stock dividend, spin-off, or similar change to the capital structure of the Company (not including a Fundamental Transaction or Change of Control as defined in Sections 10.1 and 10.2, respectively), the Committee shall make whatever adjustments it concludes are appropriate to: (a) the number and type of Options or other awards that may be granted under this Plan, (b) the number and type of Options or other awards that may be granted to any individual under this Plan, (c) the exercise price and number and class of securities issuable under each outstanding Option or other award, and (d) the repurchase price of any securities or awards granted hereunder subject to a right of repurchase in favor of the Company. The specific adjustments shall be determined by the Board in its sole and absolute discretion. 5 Unless the Board specifies otherwise, any securities issuable as a result of any such adjustment shall be rounded to the next lower whole security. SECTION 4. ELIGIBILITY; LIMITATIONS. 4.1 Eligibility. Awards may be made or granted to employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its Subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Notwithstanding any other provision of this Plan, Incentive Stock Option may be granted to, and only to, persons who are employees of the Company or a Subsidiary at the time of grant. An award other than an Incentive Stock Option may be made or granted to a person in connection with his hiring or retention, or at any time on or after the date he reaches an agreement (oral or written) with the Company with respect to such hiring or retention, even though it may be prior to the date the person first performs services for the Company or its Subsidiaries; provided, however, that no portion of any such award shall vest prior to the date the person first performs such services. If an Incentive Stock Option is awarded to a person in connection with his or her becoming an employee of the Company or a Subsidiary, such Incentive Stock Option shall, for all purposes, be deemed granted no earlier than the day on which such person's employment begins. 4.2 Section 162(m) Limitation. So long as the Company is a "publicly held corporation" within the meaning of Section 162(m) of the Code: (a) no employee of the Company or prospective employee of the Company may be granted one or more awards hereunder within any fiscal year representing more than 250,000 Shares or the right to acquire more than 250,000 Shares, subject to adjustment under Section 3.2, and (b) Options may be granted to an Executive only by the Committee (and, notwithstanding Section 2.1, not by the Board). If an Option is cancelled without being exercised, that cancelled Option shall continue to be counted against the limit on Options that may be granted to any individual under this Section 4.2. For purposes of the Plan, an "EXECUTIVE" shall mean any individual who is subject to Section 16 of the Exchange Act or who is a "covered employee" under Section 162(m) of the Code, in either case because of such individual's affiliation with the Company or an affiliate of the Company. SECTION 5. STOCK OPTIONS. 5.1. Grant and Exercise. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Nonqualified Stock Options. Any Stock Option granted under the Plan shall contain such terms, not inconsistent with this Plan, or with respect to Incentive Stock Options, not inconsistent with the Plan and the Code, as the Committee may from time to time approve. The Committee shall have the authority to grant Incentive Stock Options or Non-Qualified Stock Options, or both types of Stock Options which may be granted alone or in addition to other awards granted under the 6 Plan. To the extent that any Stock Option intended to qualify as an Incentive Stock Option does not so qualify, it shall constitute a separate Nonqualified Stock Option. 5.2. Terms and Conditions. Stock Options granted under the Plan shall be subject to the following terms and conditions: (a) Option Term. The term of each Stock Option shall be fixed by the Committee; provided, however, that an Incentive Stock Option may be granted only within the ten-year period commencing from the Effective Date and may only be exercised within ten years of the date of grant (or five years in the case of an Incentive Stock Option granted to an optionee who, at the time of grant, owns Common Stock possessing more than 10% of the total combined voting power of all classes of voting stock of the Company, or the Parent or a Subsidiary of the Company ("10% Stockholder"). (b) Exercise Price. The exercise price per share of Common Stock purchasable under an Incentive Stock Option shall be determined by the Committee at the time of grant and may not be less than 100% of the Fair Market Value on the date of grant (or, if greater, the par value of a share of Common Stock); provided, however, that (i) the exercise price of an Incentive Stock Option granted to a 10% Stockholder shall not be less than 110% of the Fair Market Value on the date of grant; and (ii) if the Stock Option (other than an Incentive Stock Option) is granted in connection with the recipient's hiring, retention, reaching an agreement (oral or written) with the Company with respect to such hiring or retention, promotion or similar event, the option exercise price may be not less than the Fair Market Value on the date on which the recipient is hired or retained, reached such agreement with respect to such hiring or retention, or is promoted (or similar event), if the grant of the Stock Option occurs not more than 120 days after the date of such hiring, retention, agreement, promotion or other event. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee and as set forth in Section 10, below. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, i.e., that it vests over time, the Committee may waive such installment exercise provisions at any time at or after the time of grant in whole or in part, based upon such factors as the Committee shall determine. (d) Method of Exercise. Subject to whatever installment, exercise and waiting period provisions are applicable in a particular case, Stock Options may be exercised in whole or in part at any time during the term of the Option by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased. Such notice shall be accompanied by payment in full of the purchase price, which shall be in cash or, if provided in the Agreement, either in shares of Common Stock (including Restricted Stock and other contingent awards under this Plan) or partly in cash and partly in such Common Stock, or such other means which the Committee determines are consistent with the Plan's purpose and applicable law. Cash payments 7 shall be made by wire transfer, certified or bank check or personal check, in each case payable to the order of the Company; provided, however, that the Company shall not be required to deliver certificates for shares of Common Stock with respect to which an Option is exercised until the Company has confirmed the receipt of good and available funds in payment of the purchase price thereof (except that, in the case of an exercise arrangement approved by the Committee and described in the last sentence of this paragraph, payment may be made as soon as practicable after the exercise). Payments in the form of Common Stock shall be valued at the Fair Market Value on the date prior to the date of exercise. Such payments shall be made by delivery of stock certificates in negotiable form that are effective to transfer good and valid title thereto to the Company, free of any liens or encumbrances. Subject to the terms of the Agreement, the Committee may, in its sole discretion, at the request of the Holder, deliver upon the exercise of a Nonqualified Stock Option a combination of shares of Deferred Stock and Common Stock; provided, however, that, notwithstanding the provisions of Section 8 of the Plan, such Deferred Stock shall be fully vested and not subject to forfeiture. A Holder shall have none of the rights of a Stockholder with respect to the shares subject to the Option until such shares shall be transferred to the Holder upon the exercise of the Option. The Committee may permit a Holder to elect to pay the Exercise Price upon the exercise of a Stock Option by irrevocably authorizing a third party to sell shares of Common Stock (or a sufficient portion of the shares) acquired upon exercise of the Stock Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise. (e) Transferability. Except as may be set forth in the next sentence of this Section or in the Agreement, no Stock Option shall be transferable by the Holder other than by will or by the laws of descent and distribution or as permitted by the Code and Rule 16b-3 under the Exchange Act, and all Stock Options shall be exercisable, during the Holder's lifetime, only by the Holder (or, to the extent of legal incapacity or incompetency, the Holder's guardian or legal representative). Notwithstanding the foregoing, a Holder may (A) transfer any Stock Option pursuant to a Qualified Domestic Relations Order, and (B) with the approval of the Committee, transfer a Nonqualified Stock Option by gift, for no consideration, to or for the benefit of the Holder's "Immediate Family" (as defined below), or to an entity in which the Holder and/or members of Holder's Immediate Family own more than fifty percent of the voting interest, in exchange for an interest in that entity, subject to such limits as the Committee may establish and the execution of such documents as the Committee may require, and the transferee shall remain subject to all the terms and conditions applicable to the Stock Option prior to such transfer. The term "Immediate Family" shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships, any person sharing the Holder's household (other than a tenant or employee), a trust in which these persons have more than fifty percent beneficial interest, 8 and a foundation in which these persons (or the Holder) control the management of the assets. (f) Termination by Reason of Death. If a Holder's Termination is by reason of death, any Stock Option held by such Holder, unless otherwise determined by the Committee and set forth in the Agreement, shall thereupon automatically terminate, except that the portion of such Stock Option that has vested on the date of death may thereafter be exercised by the legal representative of the estate or by the legatee of the Holder under the will of the Holder, for a period of one year (or such other greater or lesser period as the Committee may specify in the Agreement) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. (g) Termination by Reason of Disability. If a Holder's Termination is by reason of Disability, any Stock Option held by such Holder, unless otherwise determined by the Committee and set forth in the Agreement, shall thereupon automatically terminate, except that the portion of such Stock Option that has vested on the date of Termination may thereafter be exercised by the Holder for a period of one year (or such other greater or lesser period as the Committee may specify in the Agreement) from the date of Termination or until the expiration of the stated term of such Stock Option, whichever period is shorter. (h) Other Termination. Subject to the provisions of Section 13.3, below, and unless otherwise determined by the Committee and set forth in the Agreement, if a Holder's Termination is for any reason other than death or Disability, then the portion of such Stock Option that has vested on the date of Termination may be exercised for the lesser of three months after Termination or the balance of such Stock Option's term (or such other greater or lesser period as the Committee may specify in the Agreement). (i) Additional Incentive Stock Option Limitation. In the case of an Incentive Stock Option, the aggregate Fair Market Value (on the date of grant of the Option) with respect to which Incentive Stock Options become exercisable for the first time by a Holder during any calendar year (under all such plans of the Company and its Parent and Subsidiaries) shall not exceed $100,000. (j) Buyout and Settlement Provisions. The Committee may at any time, in its sole discretion, offer to repurchase a Stock Option previously granted, based upon such terms and conditions as the Committee shall establish and communicate to the Holder at the time that such offer is made. 5.3. Stock Reload Option. If a Holder tenders shares of Common Stock to pay the exercise price of a Stock Option ("Underlying Option") and/or arranges to have a portion of the shares otherwise issuable upon exercise withheld to pay the applicable withholding taxes, then the Holder may receive, at the discretion of the Committee, a new Stock 9 Reload Option to purchase that number of shares of Common Stock equal to the number of shares tendered to pay the exercise price and the withholding taxes (but only if such tendered shares were held by the Holder for at least six months). Stock Reload Options may be any type of option permitted under the Code and will be granted subject to such terms, conditions, restrictions and limitations as may be determined by the Committee from time to time. Such Stock Reload Option shall have an exercise price equal to the Fair Market Value as of the date of exercise of the Underlying Option. Unless the Committee determines otherwise, a Stock Reload Option may be exercised commencing one year after it is granted and shall expire on the date of expiration of the Underlying Option to which the Reload Option is related. SECTION 6. STOCK APPRECIATION RIGHTS. 6.1. Grant and Exercise. The Committee may grant Stock Appreciation Rights to participants who have been or are being granted Stock Options under the Plan as a means of allowing such participants to exercise their Stock Options without the need to pay the exercise price in cash. In the case of a Nonqualified Stock Option, a Stock Appreciation Right may be granted either at or after the time of the grant of such Nonqualified Stock Option. In the case of an Incentive Stock Option, a Stock Appreciation Right may be granted only at the time of the grant of such Incentive Stock Option. 6.2. Terms and Conditions. Stock Appreciation Rights shall be subject to the following terms and conditions: (a) Exercisability. Stock Appreciation Rights shall be exercisable as shall be determined by the Committee and set forth in the Agreement, subject to the limitations, if any, imposed by the Code with respect to related Incentive Stock Options. (b) Termination. A Stock Appreciation Right shall terminate and shall no longer be exercisable upon the termination or exercise of the related Stock Option. (c) Method of Exercise. Stock Appreciation Rights shall be exercisable upon such terms and conditions as shall be determined by the Committee and set forth in the Agreement and by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the Holder shall be entitled to receive a number of shares of Common Stock equal to the SAR Value divided by the Fair Market Value on the date the Stock Appreciation Right is exercised. (d) Shares Affected Upon Plan. The granting of a Stock Appreciation Right shall not affect the number of shares of Common Stock available under for awards under the Plan. The number of shares Available for awards under the Plan will, however, be reduced by the number of shares of Common Stock acquirable upon exercise of the Stock Option to which such Stock Appreciation Right relates. 10 SECTION 7. RESTRICTED STOCK. 7.1. Grant. Shares of Restricted Stock may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be awarded, the number of shares to be awarded, the price (if any) to be paid by the Holder, the time or times within which such awards may be subject to forfeiture ("Restriction Period"), the vesting schedule and rights to acceleration thereof and all other terms and conditions of the awards. 7.2. Terms and Conditions. Each Restricted Stock award shall be subject to the following terms and conditions: (a) Certificates. Restricted Stock, when issued, will be represented by a stock certificate or certificates registered in the name of the Holder to whom such Restricted Stock shall have been awarded. During the Restriction Period, certificates representing the Restricted Stock and any securities constituting Retained Distributions (as defined below) shall bear a legend to the effect that ownership of the Restricted Stock (and such Retained Distributions) and the enjoyment of all rights appurtenant thereto are subject to the restrictions, terms and conditions provided in the Plan and the Agreement. Such certificates shall be deposited by the Holder with the Company, together with stock powers or other instruments of assignment, each endorsed in blank, which will permit transfer to the Company of all or any portion of the Restricted Stock and any securities constituting Retained Distributions that shall be forfeited or that shall not become vested in accordance with the Plan and the Agreement. (b) Rights of Holder. Restricted Stock shall constitute issued and outstanding shares of Common Stock for all corporate purposes. The Holder will have the right to vote such Restricted Stock, to receive and retain all regular cash dividends and other cash equivalent distributions as the Board may in its sole discretion designate, pay or distribute on such Restricted Stock and to exercise all other rights, powers and privileges of a holder of Common Stock with respect to such Restricted Stock, with the exceptions that (i) the Holder will not be entitled to delivery of the stock certificate or certificates representing such Restricted Stock until the Restriction Period shall have expired and unless all other vesting requirements with respect thereto shall have been fulfilled; (ii) the Company will retain custody of the stock certificate or certificates representing the Restricted Stock during the Restriction Period; (iii) other than regular cash dividends and other cash equivalent distributions as the Board may in its sole discretion designate, pay or distribute, the Company will retain custody of all distributions ("Retained Distributions") made or declared with respect to the Restricted Stock (and such Retained Distributions will be subject to the same restrictions, terms and conditions as are applicable to the Restricted Stock) until such time, if ever, as the Restricted Stock with respect to which such Retained Distributions shall have been made, paid or declared shall have become vested and with respect to which the Restriction Period shall have expired; 11 (iv) a breach of any of the restrictions, terms or conditions contained in this Plan or the Agreement or otherwise established by the Committee with respect to any Restricted Stock or Retained Distributions will cause a forfeiture of such Restricted Stock and any Retained Distributions with respect thereto. (c) Vesting; Forfeiture. Upon the expiration of the Restriction Period with respect to each award of Restricted Stock and the satisfaction of any other applicable restrictions, terms and conditions (i) all or part of such Restricted Stock shall become vested in accordance with the terms of the Agreement, subject to Section 10, below, and (ii) any Retained Distributions with respect to such Restricted Stock shall become vested to the extent that the Restricted Stock related thereto shall have become vested, subject to Section 10, below. Any such Restricted Stock and Retained Distributions that do not vest shall be forfeited to the Company and the Holder shall not thereafter have any rights with respect to such Restricted Stock and Retained Distributions that shall have been so forfeited. SECTION 8. DEFERRED STOCK. 8.1. Grant. Shares of Deferred Stock may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the eligible persons to whom and the time or times at which grants of Deferred Stock will be awarded, the number of shares of Deferred Stock to be awarded to any person, the duration of the period ("Deferral Period") during which, and the conditions under which, receipt of the shares will be deferred, and all the other terms and conditions of the awards. 8.2. Terms and Conditions. Each Deferred Stock award shall be subject to the following terms and conditions: (a) Certificates. At the expiration of the Deferral Period (or the Additional Deferral Period referred to in Section 8.2 (d) below, where applicable), share certificates shall be issued and delivered to the Holder, or his legal representative, representing the number equal to the shares covered by the Deferred Stock award. (b) Rights of Holder. A person entitled to receive Deferred Stock shall not have any rights of a Stockholder by virtue of such award until the expiration of the applicable Deferral Period and the issuance and delivery of the certificates representing such Common Stock. The shares of Common Stock issuable upon expiration of the Deferral Period shall not be deemed outstanding by the Company until the expiration of such Deferral Period and the issuance and delivery of such Common Stock to the Holder. (c) Vesting; Forfeiture. Upon the expiration of the Deferral Period with respect to each award of Deferred Stock and the satisfaction of any other applicable restrictions, terms and conditions all or part of such Deferred Stock shall become vested in accordance with the terms of the Agreement, subject to Section 10, below. Any such 12 Deferred Stock that does not vest shall be forfeited to the Company and the Holder shall not thereafter have any rights with respect to such Deferred Stock. (d) Additional Deferral Period. A Holder may request to, and the Committee may at any time, defer the receipt of an award (or an installment of an award) for an additional specified period or until a specified event ("Additional Deferral Period"). Subject to any exceptions adopted by the Committee, such request must generally be made at least one year prior to expiration of the Deferral Period for such Deferred Stock award (or such installment). SECTION 9. OTHER STOCK-BASED AWARDS. Other Stock-Based Awards may be awarded, subject to limitations under applicable law, that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of Common Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, purchase rights, shares of Common Stock awarded which are not subject to any restrictions or conditions, convertible or exchangeable debentures, or other rights convertible into shares of Common Stock and awards valued by reference to the value of securities of or the performance of specified Subsidiaries. Other Stock-Based Awards may be awarded either alone or in addition to or in tandem with any other awards under this Plan or any other plan of the Company. Each other Stock-Based Award shall be subject to such terms and conditions as may be determined by the Committee. SECTION 10. ACCELERATED VESTING AND EXERCISABILITY. 10.1 Fundamental Transactions. If the Company merges with another entity in a transaction in which the Company is not the surviving entity or if, as a result of any other transaction or event, other securities are substituted for the Shares or Shares may no longer be issued (each a "FUNDAMENTAL TRANSACTION"), then, notwithstanding any other provision of this Plan, the Committee shall do one or more of the following contingent on the closing or completion of the Fundamental Transaction: (a) arrange for the substitution of Awards on equity securities other than Shares (including, if appropriate, equity securities of an entity other than the Company) in exchange for such Awards, (b) accelerate the vesting and termination of outstanding Options so that Options can be exercised in full before or otherwise in connection with the closing or completion of the transaction or event but then terminate, (c) terminate the Restriction Period or Deferral Period applicable to any outstanding Awards, and (d) cancel Awards in exchange for cash payments to Award holders. The Committee need not adopt the same rules for each Award or each Award holder. 10.2 Changes of Control. The Committee may also, but need not, specify that other transactions or events constitute a "CHANGE OF CONTROL". The Committee may do that either before or after the transaction or event occurs. Examples of transactions or 13 events that the Committee may treat as Changes of Control are: (a) the Company or an "AFFILIATE" (as defined in Regulation D of the Securities Act) is a party to a merger, consolidation, amalgamation, or other transaction in which the beneficial shareholders of the Company, immediately before the transaction, beneficially own securities representing 50% or less of the total combined voting power or value of the Company immediately after the transaction, (b) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Exchange Act, acquires securities holding 30% or more of the total combined voting power or value of the Company, or (c) as a result of or in connection with a contested election of Company Directors, the persons who were Company Directors immediately before the election cease to constitute a majority of the Board. In connection with a Change of Control, notwithstanding any other provision of this Plan, the Committee may take any one or more of the actions described in Section 10.1. In addition, the Committee may extend the date for the exercise of Options (but not beyond their original Expiration Date). The Committee need not adopt the same rules for each Award or each Award holder. 10.3 Divestiture. If the Company or an Affiliate sells or otherwise transfers equity securities of an Affiliate to a person or entity other than the Company or an Affiliate, or leases, exchanges or transfers all or any portion of its assets to such a person or entity, then the Committee, in its sole and absolute discretion, may specify that such transaction or event constitutes a "DIVESTITURE". In connection with a Divestiture, notwithstanding any other provision of this Plan, the Committee may take one or more of the actions described in Section 10.1 or 10.2 with respect to Options or Option Shares held by, for example, Employees, Directors or Consultants for whom that transaction or event results in a Termination. The Committee need not adopt the same rules for each Option or each Optionee. 10.4 Dissolution. If the Company adopts a plan of dissolution, the Committee may, in its sole and absolute discretion, cause Options to be fully vested and exercisable (but not after their Expiration Date) before the dissolution is completed but contingent on its completion and may cause the Company's repurchase rights on Option Shares to lapse upon completion of the dissolution. To the extent not exercised before the earlier of the completion of the dissolution or their Expiration Date, Options shall terminate just before the dissolution is completed. The Committee need not adopt the same rules for each Option or each Optionee. 10.5 Cut-Back to Preserve Benefits. If the Administrator determines that the net after-tax amount to be realized by any Award holder, taking into account any accelerated vesting, termination of Restriction or Deferral Periods, or cash payments to that Award holder in connection with any transaction or event addressed in this Section 10 would be greater if one or more of those steps were not taken with respect to that Award holder's Award, then and to that extent one or more of those steps shall not be taken. SECTION 11. AMENDMENT AND TERMINATION. 14 The Board may at any time, and from time to time, amend alter, suspend or discontinue any of the provisions of the Plan, but no amendment, alteration, suspension or discontinuance shall be made that would impair the rights of a Holder under any Agreement theretofore entered into hereunder, without the Holder's consent. SECTION 12. TERM OF PLAN. 12.1. Effective Date. The Plan shall be effective as of October 1, 2001, subject to the approval of the Plan by the Company's stockholders within one year after the Effective Date. Any awards granted under the Plan prior to such approval shall be effective when made (unless otherwise specified by the Committee at the time of grant), but shall be conditioned upon, and subject to, such approval of the Plan by the Company's stockholders and no awards shall vest or otherwise become free of restrictions prior to such approval. 12.2. Termination Date. Unless terminated by the Board, this Plan shall continue to remain effective until such time as no further awards may be granted and all awards granted under the Plan are no longer outstanding. Notwithstanding the foregoing, grants of Incentive Stock Options may be made only during the ten year period following the Effective Date. SECTION 13. GENERAL PROVISIONS. 13.1. Written Agreements. Each award granted under the Plan shall be confirmed by, and shall be subject to the terms of, the Agreement executed by the Company and the Holder, or such other document as may be determined by the Committee. The Committee may terminate any award made under the Plan if the Agreement relating thereto is not executed and returned to the Company within 10 days after the Agreement has been delivered to the Holder for his or her execution. 13.2. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Holder by the Company, nothing contained herein shall give any such Holder any rights that are greater than those of a general creditor of the Company. 13.3. Employees. (a) Termination for Cause. If a Holder's Termination is due to cause, the Committee may, in its sole discretion, take action to cause all of the Holder's Options to terminate and cease to be exercisable at the time of termination. "Cause" means (i) the willful and continued failure by the Holder to substantially perform his or her duties and obligations (other than any such failure resulting from his or her incapacity due to physical or mental illness) after there has been delivered to the Holder a written demand for performance from the Company which describes the basis for the Company's belief 15 that the Holder has not substantially performed his or her duties; or (ii) the perpetration by the Holder of a material dishonest act or fraud against the Company or its respective subsidiaries; or (iii) the willful engaging by the Holder in misconduct which is materially injurious to the Company or any of its subsidiaries, monetarily or otherwise, including but not limited to, disclosure or misuse of any confidential information, intoxication during the performance of Company duties, or use of unlawful controlled substances or unlawful use of lawful controlled substances; or (iv) the Holder's conviction of a felony not disclosed to the Company prior to initiation of service for the Company which the Committee reasonably believes has had or will have a material detrimental effect on the Company's reputation or business. For purposes of this paragraph, no act, or failure to act, on Holder's part shall be considered "willful" unless done, or omitted to be done, by the Holder in bad faith and without reasonable belief that the action or omission was in the best interests of the Company and its subsidiaries. (b) No Right of Employment. Nothing contained in the Plan or in any award hereunder shall be deemed to confer upon any Holder who is an employee of the Company or any Subsidiary any right to continued employment with the Company or any Subsidiary, nor shall it interfere in any way with the right of the Company or any Subsidiary to terminate the employment of any Holder who is an employee at any time. 13.4. Investment Representations; Company Policy. The Committee may require each person acquiring shares of Common Stock pursuant to a Stock Option or other award under the Plan to represent to and agree with the Company in writing that the Holder is acquiring the shares for investment without a view to distribution thereof. Each person acquiring shares of Common Stock pursuant to a Stock Option or other award under the Plan shall be required to abide by all policies of the Company in effect at the time of such acquisition and thereafter with respect to the ownership and trading of the Company's securities. 13.5. Additional Incentive Arrangements. Nothing contained in the Plan shall prevent the Board from adopting such other or additional incentive arrangements as it may deem desirable, including, but not limited to, the granting of Stock Options and the awarding of Common Stock and cash otherwise than under the Plan; and such arrangements may be either generally applicable or applicable only in specific cases. 13.6. Withholding Taxes. Not later than the date as of which an amount must first be included in the gross income of the Holder for Federal income tax purposes with respect to any Stock Option or other award under the Plan, the Holder shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state and local taxes of any kind required by law to be withheld or paid with respect to such amount. If permitted by the Committee, tax withholding or payment obligations may be settled with Common Stock, including Common Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditioned upon such payment or arrangements and the 16 Company or the Holder's employer (if not the Company) shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Holder from the Company or any Subsidiary. 13.7. Governing Law. The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware (without regard to choice of law provisions). 13.8. Other Benefit Plans. Any award granted under the Plan shall not be deemed compensation for purposes of computing benefits under any retirement plan of the Company or any Subsidiary and shall not affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation (unless required by specific reference in any such other plan to awards under this Plan). 13.9. Non-Transferability. Except as otherwise expressly provided in the Plan or the Agreement, no right or benefit under the Plan may be alienated, sold, assigned, hypothecated, pledged, exchanged, transferred, encumbranced or charged, and any attempt to alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. 13.10. Applicable Laws. The obligations of the Company with respect to all Stock Options and awards under the Plan shall be subject to (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the Securities Act of 1933 (the "Securities Act"), as amended, and (ii) the rules and regulations of any securities exchange on which the Common Stock may be listed. 13.11. Conflicts. If any of the terms or provisions of the Plan or an Agreement conflict with the requirements of Section 422 of the Code, then such terms or provisions shall be deemed inoperative to the extent they so conflict with such requirements. Additionally, if this Plan or any Agreement does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein and therein with the same force and effect as if such provision had been set out at length herein and therein. If any of the terms or provisions of any Agreement conflict with any terms or provisions of the Plan, then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of the Plan. Additionally, if any Agreement does not contain any provision required to be included therein under the Plan, such provision shall be deemed to be incorporated therein with the same force and effect as if such provision had been set out at length therein. [END OF DOCUMENT] 17 EX-10.3 7 p66877exv10w3.txt EX-10.3 EXHIBIT 10.3 * CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. AMENDMENT FOUR TO DEVELOPMENT AGREEMENT ADDITIONAL WORK This Amendment Four made as of 13 May 2001 ("Effective Date") between SRI International, a California, non-profit and public benefit corporation, having a place of business located at 333 Ravenswood Avenue, Menlo Park, CA 94025 (hereinafter "SRI") and Lipid Sciences Incorporated, a Delaware corporation, having a place of business located at 7068 Koll Center Parkway, Suite 401, Pleasanton, CA 94566 (hereinafter "LSI"). WHEREAS, SRI and LSI have entered into a development agreement having an effective date of October 6, 2000 and an Amendment One thereto dated March 8, 2001 and Amendment Two dated March 28, 2001 and Amendment Three dated May 12, 2001 (hereinafter individually and collectively "Development Agreement") and which the parties hereby amend; and WHEREAS, the parties intend that this Amendment Four provides for the details of additional work, which is outside of the scope of Phase II Development Plan of the Development Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, SRI and LSI agree as follows: 1. For consistency and unless otherwise defined herein all initially capitalized terms shall have the meaning set forth in the Development Agreement. 2. The scope of work and project cost, which the parties agree are outside of the scope of Phase II Development Plan of the Development Agreement are attached hereto as Exhibit A. 3. Unless expressly amended by this Amendment Three, all other terms and conditions of the Development Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date last subscribed below. SRI: LSI: SRI International Lipid Sciences, Incorporated By: /s/ Margaret Baxter-Pearson By: /s/ Phil Radlick --------------------------- ---------------- Margaret Baxter-Pearson Phil Radlick, Ph.D. Contracts Manager President & Chief Executive Officer Date: 11/8/01 Date: 11/13/01 ---------------------------- -------------- EXHIBIT A [ * ] 2 EX-10.4 8 p66877exv10w4.txt EX-10.4 EXHIBIT 10.4 * CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. AMENDMENT FIVE TO DEVELOPMENT AGREEMENT This Amendment Five made as of 13 May 2001 ("Effective Date") between SRI International, a California, non-profit and public benefit corporation, having a place of business located at 333 Ravenswood Avenue, Menlo Park, CA 94025 (hereinafter "SRI") and Lipid Sciences Incorporated, an Arizona corporation, having a place of business located at 7068 Koll Center Parkway, Suite 401, Pleasanton, CA 94566 (hereinafter "LSI"). WHEREAS, SRI and LSI have entered into a development agreement having an effective date of October 6, 2000 and an Amendment One thereto dated March 8, 2001 and Amendment Two dated March 28, 2001; Amendment Three dated May 12, 2001 and Amendment Four dated May 13, 2001 (hereinafter individually and collectively "Development Agreement") and which the parties hereby amend; and WHEREAS, the parties intend that this Amendment Five provides for the amendment of Amendment Three to reflect that LSI and SRI will compile and agree to 90 day work plans identifying issues to be addressed and deliverables to be met within the 90 day window and serve as the basis for work on the project subject to the terms and conditions contained in the Development Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, SRI and LSI agree as follows: 1. For consistency and unless otherwise defined herein all initially capitalized terms shall have the meaning set forth in the Development Agreement. 2. Paragraph 11 of Amendment Three is revised to reflect the following understanding between the parties: the parties agree that going forward from the Effective Date hereof the parties shall mutually agree in writing to consecutive ninety (90) day program plans for the milestones stated in Appendix A of Amendment 3 of this Agreement. Each ninety-day plan shall be proposed and agreed upon prior to proceeding to the start of the next 90-day period. Each plan shall identify the issues to be addressed and the party responsible for addressing the issues as well as deliverables associated therewith. Marc Bellotti, V.P. of Product Development for LSI and * are each hereby authorized to act on behalf of LSI and SRI, respectively in all technical matters relating to the development of the consecutive ninety (90) day plans. The parties agree that the milestones listed in Exhibit A of this Agreement remain as is and the dates in the project development plan of June 1, 2001 shall not apply to this Agreement since the concurrent ninety day plans that are to be determined will replace them. 3. Unless expressly amended by this Amendment Five, all other terms and conditions of the Development Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date last subscribed below. SRI: LSI: SRI International Lipid Sciences, Incorporated By: /s/ V. Rene Harmount By: /s/ Phil Radlick -------------------------- --------------------------- V. Rene Harmount Phil Radlick, Ph.D. Group Manager, Contracts President & Chief Executive Officer 2 EX-10.5 9 p66877exv10w5.txt EX-10.5 EXHIBIT 10.5 * CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. AMENDMENT SIX TO DEVELOPMENT AGREEMENT ADDITIONAL WORK-SOLVENT SENSOR This Amendment Six made as of 5 December, 2001 ("Effective Date") between SRI International, a California, non-profit and public benefit corporation, having a place of business located at 333 Ravenswood Avenue, Menlo Park, CA 94025 (hereinafter "SRI") and Lipid Sciences Incorporated, an Arizona corporation, having a place of business located at 7068 Koll Center Parkway, Suite 401, Pleasanton, CA 94566 (hereinafter "LSI"). WHEREAS, SRI and LSI have entered into a development agreement having an effective date of October 6, 2000 and an Amendment One thereto dated March 8, 2001 and Amendment Two dated March 28, 2001; Amendment Three dated May 12, 2001; Amendment Four dated May 13, 2001 and Amendment Five dated May 13, 2001 (hereinafter individually and collectively "Development Agreement") and which the parties hereby amend; and WHEREAS, the parties intend that this Amendment Six provide for the details of additional work related to develop a solvent sensor, which is outside of the scope of Phase II Development Plan of the Development Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, SRI and LSI agree as follows: 1. For consistency and unless otherwise defined herein all initially capitalized terms shall have the meaning set forth in the Development Agreement. 2. The scope of work and project cost, which the parties agree are outside of the scope of Phase II Development Plan of the Development Agreement are attached hereto as Exhibit A. 3. Unless expressly amended by this Amendment Six, all other terms and conditions of the Development Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date last subscribed below. SRI: LSI: SRI International Lipid Sciences, Incorporated By: /s/ V. Rene Harmount By: /s/ Phil Radlick -------------------- ---------------------- V. Rene Harmount Phil Radlick, Ph.D. Group Manager, Contracts President & Chief Executive Officer EXHIBIT A [ * ] 2 EX-10.6 10 p66877exv10w6.txt EX-10.6 EXHIBIT 10.6 AMENDMENT SEVEN TO DEVELOPMENT AGREEMENT This Amendment Seven, with an effective date of October 6, 2000, between SRI International, a California, non-profit and public benefit corporation, having a place of business located at 333 Ravenswood Avenue, Menlo Park, CA 94025 (hereinafter "SRI") and Lipid Sciences Incorporated, an Arizona corporation, having a place of business located at 7068 Koll Center Parkway, Suite 401, Pleasanton, CA 94566 (hereinafter "LSI"). WHEREAS, SRI and LSI have entered into a development agreement having an effective date of October 6, 2000 and An Amendment One thereto dated March 8, 2001 and Amendment Two dated March 28, 2001, Amendment Three dated May 12, 2001, Amendment Four dated May 13, 2001, Amendment Five dated May 13, 2001 and Amendment 6 dated 12/05/01 (hereinafter individually and collectively "Development Agreement") and which the parties hereby amend; and WHEREAS, the parties intend that this Amendment Seven clarify that Paragraph 5.1 of the Confidentiality clause includes all interactions between the parties during the term of this Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, SRI and LSI agree as follows: 1. For consistency and unless otherwise defined herein all initially capitalized terms shall have the meaning set forth in the Development Agreement. 2. Paragraph 5. 1, replace line 11 through the end of the sentence on line 12 to read: ".... in connection with the interaction between the parties during the term of this Agreement.." Lines 12-13: delete "To the extent that disclosure is authorized by this Agreement," and begin that sentence with "Prior to the disclosure..." Incorporation of the changes identified above results in Paragraph 5.1 to now read as follows: 5.1 Confidential Information. During the term of this Agreement, and five (5) years thereafter, following the expiration or earlier termination hereof, each party shall exercise reasonable care to maintain in confidence all information of the other party (including samples) disclosed by the other party and identified at the time of disclosure, to be confidential ("Confidential Information"), and shall not use, disclose or grant the use of the Confidential Information except on a need-to-know basis to those directors, officers, employees, agents, permitted sublicensces and permitted assignees, to the extent such disclosure is reasonably necessary in connection with the interaction between the parties during the term of this Agreement. Prior to disclosure, each party hereto shall obtain the written agreement of any such Person, who is not otherwise bound by fiduciary obligations to such party, to hold in confidence and not make use of the Confidential Information for any purpose other than those permitted by this Agreement. Each party shall notify the other promptly upon discovery of the any unauthorized use or disclosure of the other party's Confidential Information. 3. Unless expressly amended by this Amendment Seven, all other terms and conditions of the Development Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date last subscribed below. SRI: LSI: SRI International Lipid Sciences, Incorporated By: /s/ V. Rene Harmount By: /s/ Phil Radlick ------------------------ ----------------- V. Rene Harmount Phil Radlick, Ph.D. Group Manager, Contracts President and Chief Executive Officer 2 EX-10.7 11 p66877exv10w7.txt EX-10.7 EXHIBIT 10.7 * CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. AMENDMENT EIGHT TO DEVELOPMENT AGREEMENT TESTING OF SOLVENT LEVELS IN PLASMA BAGS This Amendment Eight made as of February 13, 2002 ("Effective Date") between SRI International, a California, non-profit and public benefit corporation, having a place of business located at 333 Ravenswood Avenue, Menlo Park, CA 94025 (hereinafter "SRI") and Lipid Sciences Incorporated, an Arizona corporation, having a place of business located at 7068 Koll Center Parkway, Suite 401, Pleasanton, CA 94566 (hereinafter "LSI"). WHEREAS, SRI and LSI have entered into a development agreement having an effective date of October 6, 2000 and an Amendment One thereto dated March 8, 2001 and Amendment Two dated March 28, 2001; Amendment Three dated May 12, 2001; Amendment Four dated May 13, 2001, Amendment Five dated May 13, 2001, Amendment Six dated December 5, 2001 and Amendment Seven dated October 6, 2000, (hereinafter individually and collectively "Development Agreement") and which the parties hereby amend; and WHEREAS, the parties intend that this Amendment Eight provide for the details of additional work related to the testing needed to incubate saline in various plasma storage bags with varying levels of solvent, which is outside of the scope of Phase II Development Plan of the Development Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, SRI and LSI agree as follows: 1. For consistency and unless otherwise defined herein all initially capitalized terms shall have the meaning set forth in the Development Agreement. 2. The scope of work and project cost, which the parties agree are outside of the scope of Phase 11 Development Plan of the Development Agreement are attached hereto as Exhibit A. 3. Unless expressly amended by this Amendment Seven, all other terms and conditions of the Development Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date last subscribed below. SRI: LSI: SRI International Lipid Sciences, Incorporated By: /s/ V. Rene Harmount By: /s/ Phil Radlick -------------------------- --------------------- V. Rene Harmount Phil Radlick, Ph.D. Group Manager, Contracts President & Chief Executive Officer EXHIBIT A [ * ] 2 EX-10.8 12 p66877exv10w8.txt EX-10.8 EXHIBIT 10.8 * CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. AMENDMENT NINE TO DEVELOPMENT AGREEMENT This Amendment Nine, made as of April 15, 2002 ("Effective Date") between SRI International, a California, non-profit and public benefit corporation, having, a place of business located at 333 Ravenswood Avenue, Menlo Park, CA 94025 (hereinafter "SRI") and Lipid Sciences Incorporated, an Arizona corporation, having a place of business located at 7068 Koll Center Parkway, Suite 401, Pleasanton, CA 94566 (hereinafter "LSI"). WHEREAS, SRI and LSI have entered into a development agreement having an effective date of October 6, 2000 and an Amendment One thereto dated March 8, 2001 and Amendment Two dated March 28, 2001; Amendment Three dated May 12, 2001; Amendment Four dated May 13, 2001, Amendment Five dated May 13, 2001, Amendment Six dated December 5, 2001, Amendment Seven dated October 6, 2000, and Amendment Eight dated February 13, 2002, (hereinafter individually and collectively "Development Agreement") and which the parties hereby amend; and WHEREAS, the parties intend that this Amendment Nine provide for the details of additional work related to Phase 2 of the test and selection of the sensor development for quantification of N-butanol and Di-isopropyl ether concentration. Both parties recognize that this work is outside of the scope of the Phase 11 Development Plan of the Development Agreement and therefore increases the authorized value of the contract by $343,036 (which is the cost of the effort less $35,000 that LSI will set aside for purchasing materials directly). NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, SRI and LSI agree as follows: 1. For consistency and unless otherwise defined herein all initially capitalized terms shall have the meaning set forth in the Development Agreement. 2. The scope of work and project cost, which the parties agree are outside of the scope of Phase 11 Development Plan of the Development Agreement are attached hereto as Exhibit A (SRI Proposal PYC 02-082) 3. Unless expressly amended by this Amendment Nine, all other terms and conditions of the Development Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date last subscribed below. SRI International Lipid Sciences, Incorporated By: /s/ V. Rene Harmount By: /s/ Phil Radlick --------------------------- ----------------- V. Rene Harmount Phil Radlick, Ph.D. Group Manager, Contracts President and Chief Executive Officer EXHIBIT A [ * ] EX-10.9 13 p66877exv10w9.txt EX-10.9 EXHIBIT 10.9 AMENDMENT TEN TO DEVELOPMENT AGREEMENT This Amendment TEN, made as of April 16, 2002 ("Effective Date") between SRI International, a California, non-profit and public benefit corporation, having a place of business located at 333 Ravenswood Avenue, Menlo Park, CA 94025 (hereinafter "SRI") and Lipid Sciences Incorporated, an Arizona corporation, having a place of business located at 7068 Koll Center Parkway, Suite 401, Pleasanton, CA 94566 (hereinafter "LSI"). WHEREAS, SRI and LSI have entered into a development agreement having an effective date of October 6, 2000, and which includes the following Amendments: Amendment One dated March 8, 2001, Amendment Two dated March 28, 2001; Amendment Three dated May 12, 2001; Amendment Four dated May 13, 2001, Amendment Five dated May 13, 2001, Amendment Six dated December 5, 2001, Amendment Seven dated October 6, 2000, Amendment Eight dated February 13, 2002, and Amendment Nine dated April 15, 2002 (hereinafter individually and collectively "Development Agreement") and which the parties hereby amend; and NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, SRI and LSI agree as follows: 1. For consistency and unless otherwise defined herein all initially capitalized terms shall have the meaning set forth in the Development Agreement. 2. The scope of work and project cost of $29,800 (excluding travel and all non-labor expenses), are attached hereto as Exhibit A (SRI Proposal BDC 02-079). The parties agree that this effort is outside of the scope of the Phase II Development Plan of the Development Agreement 3. Unless expressly amended by this Amendment Ten, all other terms and conditions of the Development Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date last subscribed below. SRI International Lipid Sciences, Incorporated By: /s/ V. Rene Harmount By: /s/ Barry D. Michaels -------------------- --------------------- V. Rene Harmount Barry D. Michaels Group Manager, Contracts Chief Financial Officer EXHIBIT A SRI INTERNATIONAL PROPOSAL #BDC 02-079 STATEMENT OF WORK SRI shall provide assistance to LSI with the transfer and validation of the GC method to determine the residual solvents in delipidated plasma from SRI to the Progen Industries Limited lab in Brisbane, Australia for an estimated 170 labor hours (including travel time) at a price of $29,800. This price does not include non-labor expenses such as air fare, per diem or other non-labor expenses. LSI shall arrange for the payment of such expenses separately. The assistance includes conference calls and e-mail consultations, documents review, help with cGMP laboratory set up, Agilent Chemstation and GC operation training, data analysis training and template set up, as well as ten days of on site assistance with validation protocol execution by SRI personnel (one person) from April 22 to May 1. EX-99.1 14 p66877exv99w1.txt EX-99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Lipid Sciences, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Phil Radlick, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Phil Radlick ------------ Phil Radlick Chief Executive Officer Date: August 12, 2002 EX-99.2 15 p66877exv99w2.txt EX-99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Lipid Sciences, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barry D. Michaels, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Barry D. Michaels ----------------- Barry D. 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•		our ability to obtain regulatory approval of our products in the United States and internationally;

•		the other competing therapies that may be available in the future;

•		our plans to develop and market our products;

•		our ability to improve our financial performance; and

•		effects of the merger between the Company and Pre-Merger Lipid.

•		extensive and time-consuming pre-clinical animal studies are required of the Company by the regulatory authorities to demonstrate the safety of the process technology;

•		the data generated by the pre-clinical animal studies does not indicate to the regulatory authorities that there is a sufficient margin of safety and/or the potential clinical benefit from the delipidation cannot be demonstrated in the animal experiments;

•		the relevant regulatory requirements for initiating and maintaining an investigational new drug / investigational device exemption application for a clinical study cannot be met;

•		the product is not effective, or physicians perceive that the product is not effective;

•		patients experience severe side effects during treatment;

•		patients die during a clinical study because their disease is too advanced or because they experience medical problems that are not related to the product being studied;

•		patients do not enroll in the studies at the rate we expect; or

•		the discovery by the sponsor, during the study, of deficiencies in the way the study is being conducted by the study investigators that raises questions as to whether the study is being conducted in conformity with the relevant regulatory authorities’ regulations or Good Clinical Practice.

•		actual or potential clinical results with respect to our products under development or those of our competitors;

•		the announcement and timing of new product introductions by us or others;

•		technical innovations or product development by us or our competitors;

•		regulatory approvals or regulatory issues;

•		developments relating to patents, proprietary rights and orphan drug status;

•		political developments or proposed legislation in the pharmaceutical or healthcare industry;

•		economic and other external factors, disaster or crisis;

•		period-to-period fluctuations in our financial results or results which do not meet or exceed analyst expectations; and

•		market trends relating to or affecting stock prices throughout our industry, whether or not related to results or news regarding us or our competitors.

(a)		Exhibits — See Index to Exhibits.

(b)		Reports on Form 8-K

	(i)		Report on Form 8-K filed July 11, 2002 with respect to Lipid Sciences, Inc.’s change in state of incorporation.

	(ii)		Report on Form 8-K filed July 12, 2002 containing Lipid Sciences, Inc.’s news release dated July 10, 2002 with respect to the election of S. Lewis Meyer, Ph.D. to Lipid Sciences, Inc.’s Board of Directors.