-----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, THodioBB4vQ4u76Ds7uZcaAVlxEMruEAAdLr1zMdbNNNtekB8UZ2dAWU8rjqVLI6 l+Ml6EaqIHS/b797jHyBDQ== 0000794154-96-000004.txt : 19960820 0000794154-96-000004.hdr.sgml : 19960820 ACCESSION NUMBER: 0000794154-96-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960819 SROS: NASD SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEPRAGEN CORP CENTRAL INDEX KEY: 0000794154 STANDARD INDUSTRIAL CLASSIFICATION: TOTALIZING FLUID METERS & COUNTING DEVICES [3824] IRS NUMBER: 680073366 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-14068 FILM NUMBER: 96617358 BUSINESS ADDRESS: STREET 1: 30689 HUNTWOOD DRIVE CITY: HAYWARD STATE: CA ZIP: 94544 BUSINESS PHONE: 5106360707 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-25726 SEPRAGEN CORPORATION (Exact name of small business issuer as specified in its charter) California 68-0073366 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identifica- tion No.) 30689 Huntwood Drive, Hayward, California 94544 (Address of principal executive offices) (Issuer's telephone number (including area code): (510) 476-0650 Former name, former address and former fiscal year if changed since last report: Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the number of shares outstanding of each of the registrant's classes of Common equity, as of the latest practicable date: August 11, 1996 Class A Common Stock 2,070,000 Class B Common Stock 786,431 Class E Common Stock 1,209,894 THIS REPORT INCLUDES A TOTAL OF 20 PAGES. THE EXHIBIT INDEX IS ON PAGE 12. PART I - FINANCIAL INFORMATION Item 1. Financial Statements SEPRAGEN CORPORATION CONDENSED BALANCE SHEETS ASSETS December 31, June 30, 1996 1995 (unaudited) Current Assets: Cash and cash equivalents ... $ 1,321,924 $ 23,364 Marketable securities ........ 257,442 3,586,145 Accounts receivable, less allowance for doubtful accounts of $18,782 and $30,459 as of June 30, 1996 and December 31, 1995, respectively .. 444,254 278,688 Inventories ............. 619,862 777,620 Prepaid expenses and other .... 14,470 57,130 Total current assets ...... 2,657,952 4,722,947 Furniture and equipment, net .... 438,048 252,150 Intangible assets ......... 111,709 111,709 $3,207,709 $5,086,806 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable ......... $ 210,938 $ 230,799 Accrued liabilities .......... 28,960 174,395 Accrued payroll and benefits ...... 89,465 80,633 Interest payable .............. -- 4,285 Total current liabilities ..... 329,363 490,112 Class E common stock, no par value - 1,600,000 shares authorized; 1,209,894 shares issued and outstanding at June 30, 1996 and December 31, 1995; redeemable at $.01 per share ............... -- -- Shareholders' equity: Preferred stock, no par value - 5,000,000 shares authorized; none issued or outstanding at June 30, 1996 and December 31, 1995 ............ -- -- Class A common stock, no par value - 20,000,000 shares authorized; 2,070,000 shares issued and outstanding at June 30, 1996 and December 31, 1995 .. 8,353,737 8,353,737 Class B common stock, no par value - 2,600,000 shares authorized; 786,431 shares issued and outstanding at June 30, 1996 and December 31, 1995 ............. 4,559,956 4,559,956 Unrealized loss on available-for-sale securities ............. (73,553) (14,462) Accumulated deficit ....... (9,961,794) (8,302,537) Total shareholders' equity ..... 2,878,346 4,596,694 $3,207,709 $5,086,806 The accompanying notes are an integral part of these condensed financial statements. SEPRAGEN CORPORATION CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Revenues: Net Sales ....... $227,203 $332,812 $862,781 $797,932 Costs and expenses: Cost of goods sold ... 186,292 184,802 637,930 408,223 Selling, general and administrative ..... 587,499 538,323 1,225,350 869,604 Research and development 366,472 306,285 729,310 460,406 Total costs and expenses . 1,140,263 1,029,410 2,592,590 1,738,233 Loss from operations ... (913,060) (696,598)(1,729,809) (940,301) Interest income (expense), net 32,551 82,310 70,551 (59,511) Net loss ....... $ (880,509) $(614,288) $(1,659,258) $(999,812) Net loss per common and common equivalent share ...... $(.31) $(.23) $(.53) $(.55) Weighted average shares outstanding ..... 2,856,431 2,728,352 2,856,431 1,811,473 The accompanying notes are an integral part of these condensed financial statements. SEPRAGEN CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1996 1995 Cash flows from operating activities: Net Loss ............ $ (1,659,258)$ (999,812) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation ............. 41,813 10,952 Changes in assets and liabilities: Accounts receivable ...... (165,566) (156,319) Inventories .......... 157,758 (315,415) Prepaid expenses and other .. 42,660 81,809 Accounts payable ....... (19,861) (211,595) Accrued liabilities ......... (145,435) (128,971) Accrued payroll and benefits .. 8,832 (23,750) Interest payable ........ (4,285) (18,667) Customer deposits ......... -- 20,580 Net cash used in operating activities ..... (1,743,342) (1,741,188) Cash flows from investing activities: Acquisition of furniture and equipment (227,711) (31,846) Acquisitions of marketable securities (140,000) -- Proceeds from sale of marketable securities ............ 3,409,613 -- Net cash provided by (used in) investing activities ............. 3,041,902 (31,846) Cash flows from financing activities: Proceeds from issuance of common stock ... -- 8,832,231 Repayment of bridge notes payable ..... -- (1,550,000) Repayment of notes payable .......... -- (25,000) Repayment of convertible note payable to shareholder .............. -- (25,000) Repayment of convertible note ....... -- (65,000) Net cash provided by financing activities ........ -- 7,167,231 Net increase in cash .... 1,298,560 5,394,197 Cash and cash equivalents at the beginning of the period ............. 23,364 240,472 Cash and cash equivalents at the end of the period ........... $ 1,321,924 $ 5,634,669 Supplemental disclosure of non-cash financing activities: Conversion of note payable to shareholder and related interest to common stock ... -- $ 794,909 Deferred costs of securities registration offset against proceeds from issuance of common stock ...... -- $ 478,494 The accompanying notes are an integral part of these condensed financial statements. SEPRAGEN CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS SIX MONTH PERIOD ENDED JUNE 30, 1996 (Unaudited) Note 1 - Interim Financial Reporting. The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10- QSB. Accordingly, certain information and footnotes required by generally accepted accounting principles have been condensed or omitted. These interim statements should be read in conjunction with the financial statements and the notes thereto, included in the Sepragen Corporation's (the "Company's") Annual Report on Form 10-KSB for the year ended December 31, 1995. The December 31, 1995 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The unaudited interim condensed financial statements have been prepared on the same basis as the audited annual financial statements, and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. The Company's quarterly results may be subject to fluctuations. As a result, the Company believes its results of operations for the interim period are not necessarily indicative of the results expected for any future period. The Company will be required to conduct significant research, development and testing activities which, together with expenses to be incurred for manufacturing, the establishment of a large marketing and distribution presence and other general and administrative expenses, are expected to result in operating losses for the next few years. Accordingly, there can be no assurance that the Company will ever achieve profitable operations. The Company expects to have sufficient working capital to support its operating needs for up to an twelve month period from June 30, 1996. There is no assurance, however, that sufficient revenues will be generated in this and future periods to fund the Company's operations, which would result in the Company needing to raise additional financing in the near future. Note 2 - Initial Public Offering. The Company's initial public offering was declared effective by the Securities and Exchange Commission on March 23, 1995. The offering of 1,800,000 Units, each consisting of one share of Class A common stock, one redeemable five year Class A warrant and one redeemable five year Class B warrant, provided net proceeds of $7,242,351 to the Company. On the effective date of the offering, the Company issued 57,224 shares of Class B common stock and 88,039 shares of Class E common stock in exchange for the cancellation of a note payable to a shareholder of $727,000 and related accrued interest of $67,909. In May, 1995 the underwriter exercised its overallotment option for 270,000 Units, generating an additional $1,181,386 of net proceeds to the Company. Note 3 - Net Loss Per Share. Net loss per common and common equivalent share is computed using the weighted average number of common shares and common equivalent shares outstanding during each period. Restricted shares issued as Class E common shares and contingent options are considered contingently issuable and, accordingly, are excluded from the weighted average number of common and common equivalent shares outstanding. For the periods ended June 30, 1996 and 1995 common equivalent shares relating to options have been excluded as they are anti-dilutive. SEPRAGEN CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS SIX MONTH PERIOD ENDED JUNE 30, 1996 (Unaudited) Note 4 - Inventory. Inventories consist of the following: 6/30/96 12/31/95 Raw Materials $367,582 $459,474 Finished Goods 252,280 318,146 $619,862 $777,620 Note 5 - Stock Option Plan Effective June 28, 1996, the Company adopted a new 1996 Stock Option Plan which reserves an additional 250,000 shares of Class A common stock for future grant. The terms of this plan are similar to the 1994 Stock Option Plan. Item 2. Management's Discussion and Analysis. First six months of 1996 compared to first six months of 1995 Net sales increased by $65,000 or 8% from the first half of 1995. This increase in sales is due primarily to the shipment of two large QuantaSeps, a computer controlled liquid chromatography system. Gross Margin decreased by $165,000 or 42% from the first half of the prior year, and as a percent of sales, decreased by 23% from 49% to 26%. This decrease was attributable to higher material cost and development of software for the large QuantaSeps, and booking of a reserve for obsolescence and slow moving inventory. Selling, general and administrative expenses increased by $352,000 from $870,000 in the first half of 1995 to $1,222,000 in the first half of 1996. The increase was primarily due to: the hiring of additional personnel in sales and marketing, corporate development and administration; and additional expenses related to training, advertising and promotion, public relations, product evaluation and demonstration. Research and development expenses increased by $269,000 or 58% from $460,000 in the first half of 1995 to $729,000 in the first half of 1996. The increase was attributable to expenditures related to the development of a process for dairy whey fractionation, expenditures related to the development of a special absorbent media and further development of QuantaSep products and other related products. Interest income, net for the first half of 1996 reflects interest income earned on the proceeds of the initial public offering; and interest expense, net for the first half of 1995 mainly reflects interest expense relating to bridge financing preceding the initial public offering. Second quarter 1996 compared to second quarter 1995. Net sales decreased by $106,000 or 32% from the second quarter of 1995. The decrease in sales was due to decreased orders of the QuantaSep System. Gross margin decreased by $107,000 or 72% from the second quarter of 1995, and as a percent of sales, decreased by 26% from 44% to 18%. Gross Margin decreased due to product mix and booking of a reserve for obsolescence and slow moving inventory. Selling, general and administrative increased by $49,000 from $538,000 in the second quarter of 1995 to $587,000. The increase was mainly due to the preparation of the proxy statement and the annual report to shareholders for the shareholders meeting which was held on June 28, 1996. Inflation The Company believes that the impact of inflation on its operations since its inception has not been material. Volatility of Sales In the last several years, the Company has experienced a relative increase in customer equipment orders in the third and fourth quarters and a relative decrease in orders in the first and second quarters. The Company believes this fluctuation relates to capital appropriations and spending cycles in the biopharmaceutical business. Liquidity and Capital Resources. The Company had working capital of $2,329,000 on June 30, 1996 and $4,233,000 on December 31, 1995. The decrease in the working capital of $1,904,000 reflects the use of net cash in operating activities and leasehold improvements. Since the IPO, the Company has funded its working capital requirements substantially from the net cash proceeds from the IPO. Prior to the IPO, the Company had funded its activities primarily through sales of its SuperfloR columns and QuantaSepR systems, loans from its principal shareholders, and private placements of securities. The IPO generated net proceeds of $7,242,000 and the exercise by the underwriter of its over-allotment option generated additional net proceeds of $1,111,000. From its inception in 1985 until the IPO, the Company's expenditures have exceeded its revenues. Prior to the IPO, the Company financed its operations primarily through private equity placements in an aggregate amount of approximately $3,971,000, a substantial portion of which was purchased by H. Michael Schneider, the secretary and a director of the Company until October 1, 1995, and his affiliates, including Romic Environmental Technologies Corporation ("Romic"), an entity controlled by Mr. Schneider. In addition, the Company has historically relied on customers to provide purchase price advances for development and scale-up of its radial flow chromatography columns. As of June 30, 1996, the Company had shareholders' equity of approximately $2,878,000. As of June 30, 1996, the Company had a working capital balance of approximately $2,329,000. For the first half of 1996, net cash used in operating activities was $1,743,000. This negative cash out flow of working capital from operations must be reversed and working capital increased significantly in order for the Company to fund the level of manufacturing and marketing required to meet the anticipated growth in demand for its products from the pharmaceutical and biotechnology industries during the next two years. Moreover, the Company requires additional funds to extend the use of its technology to new applications within the pharmaceutical and biotechnology industries as well as to applications within the food and dairy and environmental industries and to attract the interest of strategic partners in one or more of these markets. The decrease of $158,000 in inventory from December 31, 1995 to June 30, 1996 was due primarily to the shipment of two large QuantaSep Systems. As of June 30, 1996, the Company had no borrowings. During fiscal year 1996, the Company is committed to pay approximately $245,000 as compensation for its current executive officers. The Company expects to hire additional executive officers as the need arises. The Company's financing requirements may vary materially from those now planned because of results and changes in the focus and direction of research and development programs, relationships with strategic partners, competitive advances, technological change, changes in the Company's marketing strategy and other factors, many of which will be beyond the Company's control. Based on the Company's current operating plan, the Company believes that the net proceeds of the 1995 IPO, together with trade credit arrangements and cash flow generated from operations, will be sufficient to fund the Company's operations for the twelve month period following June 30, 1996. There is no assurance, however, that sufficient revenues will be generated in this and future periods to fund the Company's operations, which would result in the Company needing to raise additional financing in the near future. Company's cash requirements may vary materially from those planned because of factors such as the timing of significant product orders, commercial acceptance of new products, patent developments and the introduction of competitive products. The Company currently has no credit facility with a bank or other financial institution. Historically, the Company and certain of its customers have jointly borne a substantial portion of developmental expenses on projects with such customers. There can be no assurance that such sharing of expenses will continue. The Company continues its efforts to increase sales of its existing products and to complete development and initiate marketing of its products and processes now under development. The Company is seeking to enter into strategic alliances with corporate partners in the industries comprising its primary target markets (biopharmaceutical, food, dairy and environmental management). The Company hopes to enter into alliances that will provide funding to the Company for the development of new applications of its radial flow chromatography technology in return for royalty bearing licenses to the developed applications. No assurance can be given, however, that the terms of any such alliance will be successfully negotiated or that any such alliance will be successful. The Company's Class A Common Stock, Class A Warrants, Class B Warrants and Units are quoted on the NASDAQ SmallCap Market and are listed on the Pacific Stock Exchange (Tier II). The Company entered into a lease for new facilities in Hayward, California with annual rent of $76,900 and relocated its facilities in February 1996. PART II - OTHER INFORMATION Item 1 Legal Proceedings. Not Applicable. Item 2. Changes in Securities Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders. On June 28, 1996, the registrant held its annual meeting of shareholders and Vinit Saxena (8,397,310 votes FOR and no votes withheld), Armin Ramel (8,334,385 votes FOR and 62,925 votes withheld), Werner Nielsen (8,334,385 votes FOR and 62,925 votes withheld), and Robert Leach (8,334,385 votes FOR and 62,925 votes withheld) were elected as directors for the next fiscal year. In addition, the registrant's 1996 Stock Option plan and grant of options officers and directors pursuant to the plan was approved (8,320,035 votes FOR, 9,350 votes AGAINST and 67,925 votes ABSTAINED); and Coopers & Lybrand, L.L.P. was approved (8,333,385 votes FOR, 1,000 votes AGAINST, and 62,925 votes ABSTAINED) as the registrant's independent accountants for the December 31, 1996 fiscal year. Item 5. Other Information. Not Applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are filed as part of this Report: 3.1(1) Restated Articles of Incorporation of the Company, as amended to date 3.2(2) Restated Bylaws, as amended to date 4.1(1) Form of Warrant Agreement among the Company, the Underwriter and American Stock Transfer Company, including Forms of Class A Warrant Certificates and Class B Warrant Certificates 4.2(1) Form of Unit Option Agreement between the Company and the Underwriter 4.3(1) Form of Specimen Class A Common Stock Certificate 4.4(1) Form of Specimen Class B Common Stock Certificate 4.5(1) Form of Specimen Class E Common Stock Certificate 4.6(1) Bridge Warrant Agreement, including forms of Bridge Warrant Certificate 10.1(2) Lease dated July 3, 1995 between Hayward Business Park, Inc. and the Company 10.2(1) Employment Agreement between the Company and Vinit Saxena effective September 1, 1994 10.3(1) Employment Agreement between the Company and Q. R. Miranda effective September 1, 1994 10.4(1) Form of Indemnification Agreement between the Company and each director and officer of the Company 10.5(1) Convertible Promissory Notes and Warrants 10.6(1) 1994 Stock Option Plan 10.7(3) Master Purchasing Agreement with Thermax Limited dated April 23, 1996 10.6 1996 Stock Option Plan (1) These exhibits which are incorporated herein by reference were previously filed by the Company as exhibits to its Registration Statement on Form SB-2 and Amendments Nos. 1, 2, 3, 4 and 5 and Post Effective No. 1 (File No. 33-86888). (2) These exhibits which are incorporated herein by reference were previously filed by the Company as exhibits to its Quarterly Report on Form 10- QSB for the quarter ended September 30, 1995. (3) This exhibit which is incorporated herein by reference was previously filed by the Company as an exhibit to its Quarterly Report on Form 10- QSB for the quarter ended March 31, 1996. Exhibits not listed above have been omitted because they are inapplicable or because the required information is given in the financial statements or notes thereto. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter for which this report is filed. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEPRAGEN CORPORATION Date: August 15, 1996 By: /s/Vinit Saxena Vinit Saxena Chief Executive Officer, President and Principal Financial and Chief Accounting Officer EXHIBIT LIST Description Page 10.8 1996 Stock Option Plan 13 EX-10 2 EXHIBIT A SEPRAGEN CORPORATION 1996 STOCK OPTION PLAN 1. Purpose. The purpose of this plan (the "Plan") is to secure for Sepragen Corporation (the "Company") and its shareholders the benefits arising from capital stock ownership by employees, officers and directors of, and consultants or advisors to, the Company and its subsidiary corporations who are expected to contribute to the Company's future growth and success. Except where the context otherwise requires, the term "Company" shall include all present and future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended or replaced from time to time (the "Code"). Those provisions of the Plan which make express reference to Section 422 shall apply only to Incentive Stock Options (as that term is defined in the Plan). 2. Type of Options and Administration. a. Types of Options. Options granted pursuant to the Plan shall be authorized by action of the Board of Directors of the Company (or a Committee designated by the Board of Directors) and may be either incentive stock options ("Incentive Stock Options") meeting the requirements of Section 422 of the Code or non-statutory options which are not intended to meet the requirements of Section 422 of the Code. b. Administration. The Plan will be administered by a committee (the "Committee") appointed by the Board of Directors of the Company, whose construction and interpretation of the terms and provisions of the Plan shall be final and conclusive. The delegation of powers to the Committee shall be consistent with applicable laws or regulations (including, without limitation, applicable state law and Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3")). The Committee may in its sole discretion grant options to purchase shares of the Company's Class A Common Stock ("Common Stock") and issue shares upon exercise of such options as provided in the Plan. The Committee shall have authority, subject to the express provisions of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director or person acting pursuant to authority delegated by the Board of Directors shall be liable for any action or determination under the Plan made in good faith. c. Applicability of Rule 16b-3. Those provisions of the Plan which make express reference to Rule 16b-3 shall apply to the Company only at such time as the Company's Common Stock is registered under the Exchange Act, subject to the last sentence of Section 3(b), and then only to such persons as are required to file reports under Section 16(a) of the Exchange Act (a "Reporting Person"). 3. Eligibility. i. General. Options may be granted to persons who are, at the time of grant, employees, officers or directors of, or consultants or advisors to, the Company provided, that Incentive Stock Options may only be granted to individuals who are employees of the Company (within the meaning of Section 3401(c) of the Code). A person who has been granted an option may, if he or she is otherwise eligible, be granted additional options if the Board of Directors shall so determine. a. Grant of Options to Reporting Persons. From and after the registration of the Common Stock of the Company under the Exchange Act, the selection of a director or an officer who is a Reporting Person (as the terms "director" and "officer" are defined for purposes of Rule 16b-3) as a recipient of an option, the timing of the option grant, the exercise price of the option and the number of shares subject to the option shall be determined either (i) by the Board of Directors, of which all members shall be "disinterested persons" (as hereinafter defined), (ii) by a committee consisting of two or more directors having full authority to act in the matter, each of whom shall be a "disinterested persons or (iii) pursuant to provisions for automatic grants set forth in Section 3(c) below. For the purposes of the Plan, a director shall be deemed to be a "disinterested person" only if such person qualifies as a "disinterested person" within the meaning of Rule 16b-3, as such term is interpreted from time to time. If at least two of the members of the Board of Directors do not qualify as a "disinterested person" within the meaning of Rule 16b-3, as such term is interpreted from time to time, then the granting of options to officers and directors who are Reporting Persons under the Plan shall not be determined in accordance with this Section 3(b) but shall be determined in accordance with the other provisions of the Plan. b. Officer's and Director's Options. A maximum of 100,000 option shares may be granted to directors or executive officers under this plan. 4. Stock Subject to Plan. The stock subject to options granted under the Plan shall be shares of authorized but unissued Class A Common Stock. Subject to adjustment as provided in Section 15 below, the maximum number of shares of Class A Common Stock of the Company which may be issued and sold under the Plan is 250,000 shares. If an option granted under the Plan shall expire, terminate or is cancelled for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan. 5. Forms of Option Agreements. As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients. 6. Purchase Price. a. General. The purchase price per share of stock deliverable upon the exercise of an option shall be determined by the Board of Directors at the time of grant of such option; provided, however, that in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the Fair Market Value (as hereinafter defined) of such stock, at the time of grant of such option, or less than 110% of such Fair Market Value in the case of options described in Section 11(b). "Fair Market Value" of a share of Common Stock of the Company as of a specified date for the purposes of the Plan shall mean the closing price of a share of the Common Stock on the principal securities exchange on which such shares are traded on the day immediately preceding the date as of which Fair Market Value is being determined, or on the next preceding date on which such shares are traded if no shares were traded on such immediately preceding day, or if the shares are not traded on a securities exchange, Fair Market Value shall be deemed to be the average of the high bid and low asked prices of the shares in the over-the-counter market on the day immediately preceding the date as of which Fair Market Value is being determined or on the next preceding date on which such high bid and low asked prices were recorded. If the shares are not publicly traded, Fair Market Value of a share of Common Stock (including, in the case of any repurchase of shares, any distributions with respect thereto which would be repurchased with the shares) shall be determined in good faith by the Board of Directors. In no case shall Fair Market Value be determined with regard to restrictions other than restrictions which, by their terms, will never lapse. b. Payment of Purchase Price. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or, to the extent provided in the applicable option agreement, (i) by delivery to the Company of shares of Common Stock of the Company having a Fair Market Value on the date of exercise equal in amount to the exercise price of the options being exercised, (ii) by any other means which the Board of Directors determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, the provisions of Rule 16b-3 and Regulation T promulgated by the Federal Reserve Board) or (iii) by any combination of such methods of payment. 7. Option Period. Subject to earlier termination as provided in the Plan, each option and all rights thereunder shall expire on such date as determined by the Board of Directors and set forth in the applicable option agreement, provided, that such date shall not be later than (10) ten years after the date on which the option is granted. 8. Exercise of Options. Each option granted under the Plan shall be exercisable either in full or in installments at such time or times and during such period as shall be set forth in the option agreement evidencing such option, subject to the provisions of the Plan. No option granted to a Reporting Person for purposes of the Exchange Act, however, shall be exercisable during the first six months after the date of grant. Subject to the requirements in the immediately preceding sentence, if an option is not at the time of grant immediately exercisable, the Board of Directors may (i) in the agreement evidencing such option, provide for the acceleration of the exercise date or dates of the subject option upon the occurrence of specified events, and/or (ii) at any time prior to the complete termination of an option, accelerate the exercise date or dates of such option. 9. Non-transferability of Option. No option granted under this Plan shall be assignable or otherwise transferable by the optionee except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. An option may be exercised during the lifetime of the optionee only by the optionee. In the event an optionee dies during his employment by the Company or any of its subsidiaries, or during the three-month period following the date of termination of such employment, his option shall thereafter be exercisable, during the period specified in the option agreement, by his executors or administrators to the full extent to which such option was exercisable by the optionee at the time of his death during the periods set forth in Section 10 or 11(d). 10. Effect of Termination of Employment or Other Relationship Except as provided in Section 11(d) with respect to Incentive Stock Options, and subject to the provisions of the Plan, an optionee may exercise an option at any time within three (3) months following the termination of the optionee's employment or other relationship with the Company or within one (1) year if such termination was due to the death or disability of the optionee, but, except in the case of the optionee's death, in no event later than the expiration date of the Option. If the termination of the optionee's employment is for cause or is otherwise attributable to a breach by the optionee of an employment or confidentiality or non-disclosure agreement, the option shall expire immediately upon such termination. The Board of Directors shall have the power to determine what constitutes a termination for cause or a breach of an employment or confidentiality or non-disclosure agreement, whether an optionee has been terminated for cause or has breached such an agreement, and the date upon which such termination for cause or breach occurs. Any such determinations shall be final and conclusive and binding upon the optionee. 11. Incentive Stock Option. Options granted under the Plan which are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions: a. Express Designation. All Incentive Stock Options granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options. b. 10% Shareholder. If any employee to whom an Incentive Stock Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (after taking into account the attribution of stock ownership rules of Section 424(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: i. The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of one share of Common Stock at the time of grant; and ii. the option exercise period shall not exceed five years from the date of grant. c. Dollar Limitation. For so long as the Code shall so provide, options granted to any employee under the Plan (and any other incentive stock option plans of the Company) which are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate Fair Market Value, as of the respective date or dates of grant, of more than $100,000. d. Termination of Employment. Death or Disability. No Incentive Stock Option may be exercised unless, at the time of such exercise, the optionee is, and has been continuously since the date of grant of his or her option, employed by the Company, except that: i. an Incentive Stock Option may be exercised within the period of three months after the date the optionee ceases to be an employee of the Company (or within such lesser period as may be specified in the applicable option agreement), provided, that the agreement with respect to such option may designate a longer exercise period and that the exercise after such three-month period shall be treated as the exercise of a non-statutory option under the Plan; ii. if the optionee dies while in the employ of the Company, or within three months after the optionee ceases to be such an employee, the Incentive Stock Option may be exercised by the person to whom it is transferred by will or the laws of descent and distribution within the period of one year after the date of death (or within such lesser period as may be specified in the applicable option agreement); and iii. if the optionee becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provisions thereto) while in the employ of the Company, the Incentive Stock Option may be exercised within the period of one year after the date the optionee ceases to be such an employee because of such disability (or within such lesser period as may be specified in the applicable option agreement). For all purposes of the Plan and any option granted hereunder, "Unemployment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date. 12. Additional Provisions. a. Additional Option Provisions. The Board of Directors may, in its sole discretion, include additional provisions in option agreements covering options granted under the Plan, including without limitation restrictions on transfer, repurchase rights, rights of first refusal, commitments to pay cash bonuses, to make, arrange for or guarantee loans or to transfer other property to options upon exercise of options, or such other provisions as shall be determined by the Board of Directors; provided, that such additional provisions shall not be inconsistent with any other term or condition of the Plan and such additional provisions shall not cause any Incentive Stock Option granted under the Plan to fail to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. b. Acceleration, Extension, Etc. The Board of Directors may, in its sole discretion, (i) accelerate the date or dates on which all or any particular option or options granted under the Plan may be exercised or (ii) extend the dates during which all, or any particular, option or options granted under the Plan may be exercised; provided, however, that no such extension shall be permitted if it would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3 (if applicable). 13. General Restrictions. a. Investment Representations. The Company may require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws, or with covenants or representations made by the Company in connection with any public offering of its Common Stock. b. Compliance With Securities Laws. Each option shall be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration or qualification of the shares subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, or that the disclosure of non-public information or the satisfaction of any other condition is necessary as a condition of, or in connection with the issuance or purchase of shares thereunder, such option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval, or satisfaction of such condition shall have been effected or obtained on conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification, or to satisfy such condition. 14. Rights as a Shareholder. The holder of an option shall have no rights as a shareholder with respect to any shares covered by the option (including, without limitation, any rights to receive dividends or non-cash distributions with respect to such shares) until the date of issue of a stock certificate to him or her for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 15. Adjustment Provisions for Recapitalization, Reorganizations and Related Transactions. a. Recapitalization and Related Transactions. If, through or as a result of any recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, (i) the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities of the Company, or (ii) additional shares or new or different shares or other non-cash assets are distributed with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment shall be made in (x) the maximum number and kind of shares reserved for issuance under the Plan, (y) the number and kind of shares or other securities subject to any then outstanding options under the Plan, and (z) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 15 if such adjustment (i) would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3 or (ii) would be considered as the adoption of a new plan requiring stockholder approval. b. Reorganization, Merger and Related Transactions. If the Company shall be the surviving corporation in any reorganization, merger or consolidation of the Company with one or more other corporations, any then outstanding option granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Common Stock subject to such options would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the purchase price as to which such options may be exercised so that the aggregate purchase price as to which such options may be exercised shall be the same as the aggregate purchase price as to which such options may be exercised for the shares remaining subject to the options immediately prior to such reorganization, merger, or consolidation. c. Board Authority to Make Adjustments. Any adjustments under this Section 15 will be made by the Board of Directors, whose determination as to what adjustments, if any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments. 16. Merger, Consolidation, Asset Sale, Liquidation, etc. a. General. In the event of a consolidation or merger in which the Company is not the surviving corporation, or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash or other property of any other corporation or business entity or in the event of a liquidation of the Company (collectively, a "Corporate Transaction"), the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions, as to outstanding options: (i) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), provided that any such options substituted for Incentive Stock Options shall meet the requirements of Section 424(a) of the Code, (ii) upon written notice to the options, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice, (iii) in the event of a Corporate Transaction under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the Corporate Transaction (the "Transaction Price), make or provide for a cash payment to the options equal to the difference between (A) the Transaction Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Transaction Price) and (B) the aggregate exercise price of all such outstanding options in exchange for the termination of such options, and (iv) provide that all or any outstanding options shall become exercisable in full immediately prior to such event. b. Substitute Options. The Company may grant options under the Plan in substitution for options held by employees of another corporation who become employees of the Company, or a subsidiary of the Company, as the result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or as a result of the acquisition by the Company, or one of its subsidiaries, of property or stock of the employing corporation. The Company may direct that substitute options be granted on such terms and conditions as the Board of Directors considers appropriate in the circumstances. 17. No Special Employment Rights. Nothing contained in the Plan or in any option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company at any time to terminate such employment or to increase or decrease the compensation of the optionee. 18. Other Employee Benefits. Except as to plans which by their terms include such amounts as compensation, the amount of any compensation deemed to be received by an employee as a result of the exercise of an option or the sale of shares received upon such exercise will not constitute compensation with respect to which any other employee benefits of such employee are determined, including, without limitation, benefits under any bonus, pension, profit-sharing, life insurance or salary continuation plan, except as otherwise specifically determined by the Board of Directors. 19. Amendment of the Plan. a. The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect, except that if at any time the approval of the shareholders of the Company is required under Section 422 of the Code or any successor provision with respect to Incentive Stock Options, or under Rule 16b-3, the Board of Directors may not effect such modification or amendment without such approval. b. The modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board of Directors shall have the right to amend or modify (i) the terms and provisions of the Plan and of any outstanding Incentive Stock Options granted under the Plan to the extent necessary to qualify any or all such options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code and (ii) the terms and provisions of the Plan and of any outstanding option to the extent necessary to ensure the qualification of the Plan under Rule 16b-3. 20. Withholding. a. The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. Subject to the prior approval of the Company, which may be withheld by the Company in its sole discretion, the optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company to withhold shares of Common Stock otherwise issuable pursuant to the exercise of an option or (ii) by delivering to the Company shares of Common Stock already owned by the optionee. The shares so delivered or withheld shall have a Fair Market Value equal to such withholding obligation as of the date that the amount of tax to be withheld is to be determined. An optionee who has made an election pursuant to this Section 20(a) may only satisfy his or her withholding obligation with shares of Common Stock which are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements. b. The acceptance of shares of Common Stock upon exercise of an Incentive Stock Option shall constitute an agreement by the optionee (i) to notify the Company if any or all of such shares are disposed of by the optionee within two years from the date the option was granted or within one year from the date the shares were issued to the optionee pursuant to the exercise of the option, and (ii) if required by law, to remit to the Company, at the time of and in the case of any such disposition, an amount sufficient to satisfy the Company's federal, state and local withholding tax obligations with respect to such disposition, whether or not, as to both (i) and (ii), the optionee is in the employ of the Company at the time of such disposition. c. Notwithstanding the foregoing, in the case of a Reporting Person whose options have been granted in accordance with the provisions of Section 3(b) herein, no election to use shares for the payment of withholding taxes shall be effective unless made in compliance with any applicable requirements of Rule 16b-3. 21. Cancellation and New Grant of Options, Etc. The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of the affected options, (i) the cancellation of any or all outstanding options under the Plan and the grant in substitution there for of new options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the cancelled options or (ii) the amendment of the terms of any and all outstanding options under the Plan to provide an option exercise price per share which is higher or lower than the then-current exercise price per share of such outstanding options. 22. Effective Date and Duration of the Plan. a. Effective Date. The Plan shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months after the date of the Board's adoption of the Plan, no options previously granted under the Plan shall be deemed to be Incentive Stock Options and no Incentive Stock Options shall be granted thereafter. Amendments to the Plan not requiring shareholder approval shall become effective when adopted by the Board of Directors; amendments requiring shareholder approval (as provided in Section 19) shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such Incentive Stock Option to a particular optionee) unless and until such amendment shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months of the Board's adoption of such amendment, any Incentive Stock Options granted on or after the date of such amendment shall terminate to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular optionee. Subject to this limitation, options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan. b. Termination. Unless sooner terminated in accordance with Section 16, the Plan shall terminate upon the earlier of (i) the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors, or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise or cancellation of options granted under the Plan. If the date of termination is determined under (i) above, then options outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options. 23. Provision for Foreign Participants. The Board of Directors may, without amending the Plan, modify awards or options granted to participants who are foreign nationals or employed outside the United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters. 24. Governing Law. The provisions of this Plan shall be governed and construed in accordance with the laws of the State of California. Adopted by the Board of Directors on May 15, 1996 and the Shareholders as of June 28, 1996, -----END PRIVACY-ENHANCED MESSAGE-----