-----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, RJpR+nFlCvtATmVX0Fgf4BbKOmTPoicUMLE+ZhyJP38BoaGqCk34CP32nL1SlaKH Jg+2VqUrUy7zkkAkEsOXNg== 0001047469-98-029253.txt : 19980805 0001047469-98-029253.hdr.sgml : 19980805 ACCESSION NUMBER: 0001047469-98-029253 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980804 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOSITE DIAGNOSTICS INC CENTRAL INDEX KEY: 0000834306 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 330288606 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21873 FILM NUMBER: 98676722 BUSINESS ADDRESS: STREET 1: 11030 ROSELLE ST CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194554808 MAIL ADDRESS: STREET 1: 11030 ROSELLE ST CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR / / 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 000-21873 BIOSITE DIAGNOSTICS INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 33-0288606 [State or other jurisdiction [I.R.S. Employer Identification No.] of incorporation or organization] 11030 Roselle Street San Diego, California 92121 [Address of principal executive [Zip Code] offices] Registrant's telephone number, including area code: (619) 455-4808 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) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------- The number of shares of the Registrant's Common Stock, $0.01 par value, outstanding at July 24, 1998 was 12,993,916 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BIOSITE DIAGNOSTICS INCORPORATED FORM 10-Q INDEX PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Balance Sheets as of June 30, 1998 (Unaudited) and December 31, 1997. . . . . . . . . . . . . . . . . . . . . . 1 Condensed Statements of Operations (Unaudited) for the three and six months ended June 30, 1998 and 1997 . . . . . . . . . . . 2 Condensed Statements of Cash Flows (Unaudited) for the six months ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . 3 Notes to Condensed Financial Statements (Unaudited) . . . . . . . . 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 6 Item 3. Quantitative and Qualitative Disclosure about Market Risk . . . . . Not Applicable PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . Not Applicable Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . Not Applicable Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 17 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 18 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOSITE DIAGNOSTICS INCORPORATED CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------ (Unaudited) (Note) Assets Current assets: Cash and cash equivalents $ 2,217,679 $ 2,330,274 Marketable securities, available-for-sale 36,343,070 36,927,167 Accounts receivable 7,080,522 5,931,164 Inventory 3,484,871 2,169,896 Other current assets 4,025,015 3,677,348 ------------ ------------ Total current assets 53,151,157 51,035,849 Property, equipment and leasehold improvements, net 7,589,363 7,216,983 Patents and license rights, net 3,487,063 3,720,035 Other assets 395,964 1,338,341 ------------ ------------ $ 64,623,547 $ 63,311,208 ------------ ------------ ------------ ------------ Liabilities and stockholders' equity Current liabilities: Accounts payable $ 2,322,617 $ 1,420,969 Accrued salaries and other 1,195,508 1,107,476 Accrued contract payable 324,779 563,812 Current portion of long-term obligations 1,531,915 1,332,200 ------------ ------------ Total current liabilities 5,374,819 4,424,457 Long-term obligations 4,048,700 3,796,975 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued and outstanding at June 30, 1998 and December 31, 1997 - - Common stock, $.01 par value, 25,000,000 shares authorized; 12,988,197 and 12,864,745 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 129,882 128,647 Additional paid-in capital 54,622,347 53,684,302 Unrealized net gain (loss) on marketable securities, net of related tax effect (3,638) 5,658 Deferred compensation (263,171) (317,595) Retained earnings 714,608 1,588,764 ------------ ------------ Total stockholders' equity 55,200,028 55,089,776 ------------ ------------ $ 64,623,547 $ 63,311,208 ------------ ------------ ------------ ------------
Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. -1- BIOSITE DIAGNOSTICS INCORPORATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------- ------- 1998 1997 1998 1997 -------------------------------------------------------- Net sales $ 8,710,776 $ 7,796,869 $ 16,594,737 $ 15,329,937 Cost of sales 2,342,185 1,613,005 4,097,246 3,237,251 ----------- ------------ ------------ ------------ Gross profit 6,368,591 6,183,864 12,497,491 12,092,686 Operating Expenses: Research and development 2,973,609 2,681,485 5,938,311 5,419,431 Selling, general and administrative 3,598,790 2,732,451 7,550,214 5,015,670 Defense of patent matters 1,153,668 35,824 2,002,831 55,824 ----------- ------------ ------------ ------------ 7,726,067 5,449,760 15,491,356 10,490,925 ----------- ------------ ------------ ------------ Operating income (loss) (1,357,476) 734,104 (2,993,865) 1,601,761 Other income: Interest and other income 577,185 554,335 1,189,093 878,150 Contract revenue 470,616 244,020 770,616 580,027 ----------- ------------ ------------ ------------ Income (loss) before provision for income taxes (309,675) 1,532,459 (1,034,156) 3,059,938 Benefit (provision) for income taxes (64,000) (547,000) 160,000 (1,082,000) ----------- ------------ ------------ ------------ Net income (loss) $ (373,675) $ 985,459 $ (874,156) $ 1,977,938 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ Net income (loss) per share - - Basic $ (0.03) $ 0.08 $ (0.07) $ 0.17 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - - Diluted $ (0.03) $ 0.07 $ (0.07) $ 0.16 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ Shares used in calculating per share amounts - - Basic 12,938,000 12,750,000 12,922,000 11,931,000 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------ - - Diluted 12,938,000 13,440,000 12,922,000 12,664,000 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------
See accompanying notes. -2- BIOSITE DIAGNOSTICS INCORPORATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1998 1997 -------------- -------------- OPERATING ACTIVITIES Net cash provided by (used in) operating activities $ (570,768) $ 1,131,505 INVESTING ACTIVITIES Proceeds from sales and maturities of marketable securities 21,716,132 15,944,012 Purchase of marketable securities (21,147,529) (41,472,157) Purchase of property, equipment and leasehold improvements (1,817,116) (3,215,591) Patents, license rights, deposits and other assets 315,966 998,453 ----------- ----------- Net cash used in investing activities (932,547) (27,745,283) FINANCING ACTIVITIES Proceeds from issuance of financing obligations 1,132,492 2,098,435 Principal payments under financing obligations (681,052) (763,707) Proceeds from issuance of convertible debenture 500,000 -- Proceeds from issuance of stock, net 439,280 30,275,077 ----------- ----------- Net cash provided by financing activities 1,390,720 31,609,805 ----------- ----------- Increase (decrease) in cash and cash equivalents (112,595) 4,996,027 Cash and cash equivalents at beginning of period 2,330,274 1,609,861 ----------- ----------- Cash and cash equivalents at end of period $ 2,217,679 $ 6,605,888 ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 210,114 $ 114,636 ----------- ----------- ----------- ----------- Income taxes paid $ 4,800 $ 496,850 ----------- ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of convertible debenture into common stock $ 499,992 $ 1,110,904 ----------- ----------- ----------- -----------
See accompanying notes. -3- BIOSITE DIAGNOSTICS INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in sales, expenses and net income or losses will continue. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 2. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share ("Statement No. 128"). Statement No. 128 applies to entities with publicly held common stock or potential common stock and is effective for financial statements issued for periods ending after December 15, 1997. Statement No. 128 replaces APB Opinion 15, Earnings per Share ("EPS"). Statement No. 128 requires dual presentation of basic and diluted earnings per share by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company such as common stock which may be issuable upon exercise of outstanding common stock options. Pursuant to the requirements of the Securities and Exchange Commission, the calculation of the shares used in computing basic and diluted EPS include the convertible preferred stock which converted into 8,328,847 shares of common stock and an outstanding $1.0 million convertible debenture and related accrued interest which converted into 92,575 common shares (based on the initial public offering ("IPO") price of $12.00 per share) upon the completion of the initial public offering, as if they were converted into common stock as of the original dates of issuance. Shares used in calculating basic and diluted earnings per share were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------------------------- 1998 1997 1998 1997 ------------------------------------------------------- Weighted average common shares outstanding 12,938 12,750 12,922 9,685 Effect of the assumed conversion of preferred shares - - - 2,221 Effect of the assumed conversion of convertible debenture - - - 25 ------------------------------------------------------- Shares used in calculating per share amounts - Basic 12,938 12,750 12,922 11,931 Net effect of dilutive common share equivalents using the treasury stock method - 690 - 733 ------------------------------------------------------- Shares used in calculating per share amounts - Diluted 12,938 13,440 12,922 12,664 ------------------------------------------------------- -------------------------------------------------------
-4- 3. BALANCE SHEET INFORMATION Inventories consist of the following:
JUNE 30, DECEMBER 31, 1998 1997 ------------ ------------- Raw materials $ 1,560,205 $ 779,965 Work in process 1,696,273 1,214,894 Finished goods 228,393 175,037 ------------ ------------ $ 3,484,871 $ 2,169,896 ------------ ------------ ------------ ------------
-5- PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties, including the timely development, introduction and acceptance of new products, dependence on others, the impact of competitive products, patent issues, changing market conditions and the other risks detailed under "Factors that May Affect Results," and throughout the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Actual results may differ materially from those projected. These forward-looking statements represent the Company's judgment as of the date of the filing of this Form 10-Q and its Form 10-K, respectively. The Company disclaims any intent or obligation to update these forward-looking statements. OVERVIEW Since the Company's inception in 1988, the Company has been primarily involved in the research, development, manufacturing and marketing of rapid diagnostic tests. In 1992, the Company began commercial sales of the Company's primary product, Triage Panel for Drugs of Abuse ("Triage DOA Panel"), and currently markets the product worldwide primarily through distributors supported by the Company's direct sales force. In 1998, the Company began selling two additional products, the Triage C. DIFFICILE Panel and the Triage Cardiac System. In addition to focusing its attention on commercial activities associated with these products, the Company continues to invest in the research and development of additional rapid tests to aid in the diagnosis of several critical diseases or conditions, including congestive heart failure and certain bacterial and parasitic infections. The Company also is developing a diagnostic test to aid in the dosing of immunosuppressant drugs. The Company anticipates that its results of operations may fluctuate for the foreseeable future due to several factors, including whether and when new products are successfully developed and introduced by the Company, market acceptance of current or new products, defense and resolution of patent matters, regulatory delays, product recalls, manufacturing delays, shipment problems, seasonal customer demand, the timing of significant orders, changes in reimbursement policies, competitive pressures on average selling prices and changes in the mix of products sold. The Company has incurred, and will continue to incur, significant costs associated with its defense of patent matters. The magnitude and timing of such costs are primarily dependent on unpredictable activities associated with the patent lawsuits. If the Company's Triage DOA Panel or Triage Cardiac products were found to infringe patents, and if acceptable licenses were not available, the Company would be materially and adversely affected. Operating results would also be adversely affected by a downturn in the market for the Company's current and future products, order cancellations or order rescheduling. The Company currently manufactures and ships product shortly after receipt of orders and anticipates that it will do so in the future. Accordingly, the Company has not developed a significant backlog and does not anticipate it will develop a material backlog in the future. Because the Company is continuing to increase its operating expenses primarily for personnel and activities supporting newly-introduced products and new product development, the Company's operating results would be adversely affected if its sales did not correspondingly increase or if its product development efforts are unsuccessful or are subject to delays. The Company's limited operating history makes accurate prediction of future operating results difficult or impossible. Although the Company has experienced growth in recent years, the Company may not sustain revenue growth or remain profitable on a quarterly or annual basis and that its operating results may not be consistent with predictions made by securities analysts. RECENT DEVELOPMENTS NEW PRODUCTS During the first quarter of 1998, the Company received final approval from the U.S. Food and Drug Administration ("FDA") to market the Triage Cardiac Panel and the Triage Meter in the United States (together called "Triage Cardiac System") and the Triage C. DIFFICILE Panel. The Triage Cardiac System is Biosite's first -6- product to utilize the Company's Triage Meter System technology and is designed to deliver precise, quantitative results in a STAT timeframe. The Triage Cardiac System may aid in the diagnosis of Acute Myocardial Infarction ("AMI") and provide physicians with an enhanced ability to make treatment decisions in a timely manner. Used in conjunction with the Triage Meter, the Triage Cardiac Panel quantitatively measures, in a single test device, the level of CK-MB, troponin I and myoglobin from a whole-blood sample. The Triage C. DIFFICILE Panel is a rapid test designed to identify CLOSTRIDIUM DIFFICILE, an opportunistic pathogen of the intestinal tract that may thrive as a result of broad spectrum antibiotic treatment. The Company began selling the Triage C. DIFFICILE Panel in March and the Triage Cardiac System in May. RESEARCH AND DEVELOPMENT In June 1998, the Company completed the 510(k) pre-market notification filing with the FDA for the Triage Parasite Panel. The 510(k) seeks clearance to market the Triage Parasite Panel, which is designed to detect the presence of three common waterborne parasites, GIARDIA LAMBLIA, CRYPTOSPORIDIUM PARVUM AND ENTAMOEBA HISTOLYTICA/DISPAR, within 20 minutes. In January 1998, Novartis finalized its investment of an additional $500,000 in Biosite in exchange for a convertible debenture as a result of Biosite's successful completion of the initial feasibility studies for the NeoralChek System (formerly the "Triage Neoral System"). The convertible debenture was immediately converted into 41,666 shares of common stock of the Company based on a conversion price of $12.00 per share. Additionally, the Company and Novartis expanded the scope of the collaborative development to include the development of a second version of the NeoralChek System. The attainment of certain milestones under the expansion of the collaboration resulted in contract revenues of $300,000 and $400,000 during the first and second quarters of 1998, respectively. Additional payments to Biosite will be made if certain milestones are achieved. The Company initiated clinical trials for both versions of the NeoralChek System in June and July 1998 . The NeoralChek Systems are designed to provide a cost-effective means of measuring a patient's level of cyclosporine on a real-time basis in order to enable physicians to optimize the dosing of the therapeutic drug during the patient's visit. PRODUCT DISTRIBUTION AGREEMENTS As the Company has launched two new products in 1998 and with the potential launch of additional products from the Company's development pipeline, the Company has increased the size of its sales force in the U.S. and negotiated a new long-term distribution agreement with the Fisher HealthCare Division ("Fisher") of the Fisher Scientific Company, the Company's distributor of the Triage DOA Panel products in the U.S. hospital market segment. This long-term distribution agreement expanded Fisher's role to include the distribution of the Triage Cardiac System, the Triage C. DIFFICILE Panel and certain of the potential new products in the U.S. medical market. As a result of a decision by Merck KGaA ("Merck"), the Company's distributor of Triage DOA in Europe, to refocus away from certain aspects of the human diagnostic business, the Company terminated the development and distribution agreement for the Triage Cardiac System with Merck in December 1997 and terminated the distribution agreement with Merck for the Triage DOA Panel product line, effective no earlier than December 1998. The Company is continuing to evaluate product distribution alternatives for the international markets, including, among other things, alliances with other distribution partners and the establishment of a direct sales force in certain European countries. The Company anticipates that it may, if appropriate, enter into additional distribution agreements with respect to its current products, products currently under development and products that it may develop in the future, if any of such products receive the requisite regulatory clearance or approvals. The Company may not be able to enter into these or other distribution agreements on acceptable terms or at all. If the Company elects to distribute products directly, the Company's direct sales, marketing and distribution efforts may not be successful. A failure to enter into acceptable distribution agreements or a failure of the Company to successfully market its products would have a material and adverse effect on the Company. -7- LITIGATION In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics, GmbH filed a patent infringement action against the Company in the U.S. District Court for the District of Delaware. The patent infringement action alleges that the Company's Triage DOA Panel products infringe a patent held by the plaintiffs, which expires in August 2000. The plaintiffs seek to recover damages of an unspecified amount and to enjoin future sales of the Triage DOA Panel products by the Company. Biosite has answered the complaint, denying infringement and asserting affirmative defenses that the patent is invalid and unenforceable. The Company also has asserted counterclaims arising under the antitrust laws that seek to require Dade International Inc. to divest itself of its acquisition of Behring Diagnostics, Inc. and Behring Diagnostics, GmbH, treble monetary damages and attorney fees. In February 1998, the plaintiffs filed an amended complaint, adding a new party, Dade-Behring, Inc., and changing the names of the parties, Behring Diagnostics Inc. to Syva Company and Behring Diagnostics GmbH to Dade Behring Marburg. If the Company's Triage DOA Panel products were found to infringe the patent, and if an acceptable license was not available, the Company would be materially and adversely affected. The Company's Triage Meter product platform, including the Triage Cardiac System is not the subject of the patent infringement claims as filed. On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent infringement action against the Company in the U.S. District Court for the Western District of Wisconsin, alleging that the Company's Triage Cardiac Panel infringes U.S. patent 5,744,358 which was issued on the date the suit was filed. Spectral seeks a permanent injunction and damages. Spectral also sought a preliminary injunction that would enjoin the Company from selling the Triage Cardiac Panel prior to the conclusion of the trial, which is scheduled to commence on August 31, 1998. On July 16, 1998, the Court issued an opinion denying the motion for a preliminary injunction. Spectral also moved for partial summary judgment on the issue of infringement. That motion was denied on July 20, 1998. If the Company's Triage Cardiac products were found to infringe the patent, and if an acceptable license was not available, the Company would be materially and adversely affected. The Company believes it has meritorious defenses to each of these suits and intends to vigorously defend its position. The Company has incurred and will continue to incur significant legal costs in executing its defenses. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of net sales:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Net sales . . . . . . . . . . . . . . . 100% 100% 100% 100% Cost of sales . . . . . . . . . . . . . 27 21 25 21 ----- ----- ----- ----- Gross profit. . . . . . . . . . . . . . 73 79 75 79 Operating Expenses: Research and development. . . . . . . . 34 34 36 35 Selling, general and administrative . . 41 36 45 33 Defense of patent matters . . . . . . . 13 -- 12 -- ----- ----- ----- ----- Total operating expenses. . . . . . . . 88 70 93 68 Income (loss) from operations . . . . . (15) 9 (18) 11 Interest and other income, net. . . . . 12 11 12 9 ----- ----- ----- ----- Income (loss) before benefit (provision) for income taxes. . . . . . . . . . . (3) 20 (6) 20 Benefit (provision) for income taxes. . (1) (7) 1 (7) ----- ----- ----- ----- Net income (loss) . . . . . . . . . . . (4)% 13% (5)% 13% ----- ----- ----- ----- ----- ----- ----- -----
NET SALES. Net sales for the three and six months ended June 30, 1998 were $8.7 million and $16.6 million, respectively, representing increases of 12% and 8%, respectively, compared to the same periods of 1997. The increase in net sales for the second quarter of 1998 as compared to the second quarter of 1997, was primarily attributable to the timing of shipments of Triage DOA products to international customers and the introduction of the TRIAGE C. DIFFICILE Panel and Triage Cardiac System during 1998. Although year-to-date international sales for -8- 1998 remain comparable to the same period of 1997, the timing of shipments to E. Merck, the Company's largest international customer, resulted in higher international sales during the second quarter of 1998 as compared to the second quarter of 1997. The increase in net sales for the six months ended June 30, 1998 as compared to the same period in 1997 was primarily attributable to a greater proportion of products sold during the first half of 1998 consisting of higher-priced Triage DOA products than the mix of products sold during the same period in 1997 as well as an increase in the volume sold in the U.S. The Company believes that the overall growth in sales of the Triage DOA Panel products is slowing as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market. Net sales of the Company's newly introduced products totaled approximately $380,000 for the second quarter of 1998 and $432,000 year-to-date. GROSS PROFIT. Gross profit for the three and six months ended June 30, 1998 was $6.4 million and $12.5 million, respectively, representing an increase of 3% over the comparable periods of 1997. Gross margins for the three months and six months ended June 30, 1998 were 73% and 75%, respectively, as compared to 79% for the same periods of 1997. The gross margins decreased during the second quarter of 1998 primarily as a result of the introduction of the Triage C. DIFFICILE Panel and Triage Cardiac System. Such new products are expected to realize lower gross margins during the early stages of their commercialization as incremental manufacturing costs are spread over smaller sales volumes. The Company expects that gross margins will continue to decrease as a result of competitive pricing pressures related to the maturing Triage DOA product line and the incremental manufacturing costs associated with new products until economies of scale can be achieved with such new products. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the three months and six months ended June 30, 1998 were $3.0 million and $5.9 million, respectively, representing increases of 11% and 10%, respectively, from the comparable periods of 1997. This increase resulted primarily from the expansion of the Company's research and development and manufacturing scale-up efforts for its cardiac, microbiology, and therapeutic drug monitoring products under development. During 1998, the Company expended significant efforts on activities related to manufacturing scale-up and product optimization for the Triage C. DIFFICILE Panel and Triage Cardiac System, while increasing research and development activities related to other products under development. The Company expects that its level of investment in research and development expenses will continue to remain higher in 1998, as compared to 1997. The increased expenditures are expected to primarily relate to preclinical and clinical studies, hiring of additional personnel, product development efforts and manufacturing scale-up activities for potential products. The timing of such expenditures and their magnitude are primarily dependent on the progress and success of the research and development, clinical studies and the timing of potential product launches. With the request for the FDA to approve the marketing of the Triage Parasite Panel, manufacturing scale-up activities related to this product are expected to occur during the third quarter of 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three and six months ended June 30, 1998 were $3.6 million and $7.6 million, respectively, representing increases of 32% and 51%, respectively, from the comparable periods of 1997. The 1998 increases resulted primarily from the costs of Company's expanded sales force, increased marketing activities related to the introduction of new products and potential new products, and the expansion of administrative functions to support the Company's expanded operations and business development activities. During the second quarter of 1998, the Company expended significant efforts related to the introduction of the Triage Cardiac System and Triage C. DIFFICILE Panel, including marketing and new product awareness activities. The Company expects selling, general and administrative costs in 1998 to remain significantly higher than in 1997, as the Company continues to expand its operations and in anticipation of potential changes in its operations resulting from, among other things, the potential introduction of additional products and the Company's business development activities. The timing of such increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of the Triage C. DIFFICILE Panel and Triage Cardiac System products, the development of other potential new products and the timing of their commercialization, and international distribution strategies. DEFENSE OF PATENT MATTERS. Costs associated with the defense of patent matters for the three and six months ended June 30, 1998 were $1.2 million and $2.0 million, respectively, as compared to $36,000 and $56,000, respectively, for the same periods in 1997. The Company intends to vigorously defend itself in these matters and expects that total legal costs associated in executing its defenses for the remainder of 1998 will continue to be substantially higher than in 1997 and may continue to be significant in 1999. -9- INTEREST AND OTHER INCOME. Interest income for the three months ended June 30, 1998 was consistent with same period in 1997. Contract revenues increased by $227,000 as contract revenues in the second quarter of 1997 consisted of $244,000 from Merck related to the development of the Triage Cardiac System while contract revenues recognized in the second quarter of 1998 consisted of $400,000 from Novartis related to the milestones achieved in the development of the NeoralChek System and $71,000 related to licensing of certain technologies. BENEFIT (PROVISION) FOR INCOME TAXES. As a result of the pre-tax loss recorded in the second quarter of 1998 and estimated earnings for 1998, the Company recorded a provision for income taxes of $64,000 while for the same period in 1997, the Company recorded a provision for income taxes of $547,000. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations principally through a public offering, private placements of equity securities, revenues from operations, debt and capital lease financing and interest income earned on the net proceeds from the public offering and private placements. Since its inception, the Company has raised over $21.7 million in net proceeds from the private placement of equity securities and $1.5 million from the issuance of convertible debentures. In February 1997, the Company raised approximately $29.8 million in net proceeds from its initial public offering of 2,760,000 shares of common stock. At June 30, 1998, the Company had cash, cash equivalents, and marketable securities of approximately $38.6 million compared to $39.3 million at December 31, 1997. The decrease in cash, cash equivalents, and marketable securities during the six months ended June 30, 1998 was largely attributable to cash used in operating activities of $571,000 for the six months ended June 30, 1998 as compared to net cash generated from operating activities of $1.1 million for the same period in 1997. Significant sources of cash for the six months ended June 30, 1998 included the receipt of $1.1 million in proceeds from equipment financing and $939,000 in proceeds from the issuance of a convertible debenture and common stock. Significant uses of cash for the six months ended June 30, 1998 included expenditures of $2.0 million for expenses associated with the defense of patent matters and $1.8 million for the purchase of capital equipment and leasehold improvements. Additionally, as the Company has expanded its operations to support the commercialization of new products, its working capital, excluding cash and marketable securities, has increased by approximately $1.9 million. The Company's primary short-term needs for capital, which are subject to change, are for the support of its commercialization efforts related to new products, defense and resolution of patent matters including potential licensing of certain technologies patented by others, potential procurement and enforcement of patents, expansion of its manufacturing capacity for new products, and the continued advancement of research and development efforts. The Company recently executed agreements to license technologies patented by others which call for cash payments and future royalties based on product sales utilizing the licensed technologies. The Company may enter into additional licensing agreements which may include cash payments and future royalties based on product sales utilizing the licensed technologies. The Company utilizes credit arrangements with financial institutions to finance the purchase of capital equipment. As of July 15, 1998, the Company had equipment financing lines of credit with financial institutions totaling $6.0 million, of which $5.5 million was available for future borrowing. The $4.0 million and $2.0 million lines of credit expire on June 30, 1999 and March 31, 1999, respectively. Additionally, the Company utilizes cash generated from operating activities to meet its capital requirements. The Company is negotiating with various parties for the leasing of a new campus corporate facility to be constructed in San Diego, which would be adequate for its foreseeable future needs. The Company does not anticipate relocating its operations to the new facility prior to January 2000. This is expected to result in an increase in rent upon occupancy. The Company believes that its available cash, cash from operations and funds from existing credit arrangements will be sufficient to satisfy its funding needs for at least the next 24 months. Thereafter, if cash generated from operations is insufficient to satisfy the Company's working capital and capital expenditure requirements, the Company may be required to sell additional equity or debt securities or obtain additional credit facilities. There can -10- be no assurance that such additional capital, if needed, will be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. The Company's future liquidity and capital funding requirements will depend on numerous factors, including the extent to which the Company's new products and products under development are successfully developed, gain market acceptance and become and remain competitive, the timing and results of clinical studies and regulatory actions regarding the Company's potential products, the costs and timing of further expansion of sales, marketing and manufacturing activities, facilities expansion needs, and the costs and timing associated with the enforcement, defense and resolution of patent matters, including potential licensing of certain technologies patented by others. The failure by the Company to raise capital on acceptable terms when needed could have a material adverse effect on the Company's business, financial condition and results of operations. IMPACT OF YEAR 2000 ISSUE The Company is currently developing a plan to ensure its system and software infrastructure will function properly with respect to the dates in the year 2000 and thereafter. Key financial, information and operational systems will be assessed and plans will be developed to address required systems modifications. The Company will coordinate these activities with suppliers, distributors, financial institutions and others with whom it does business. The Company believes that, with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems and will not have a material adverse effect on the Company's business. However, if such modifications and conversions are not made or are not completed in a timely fashion, the Year 2000 Issue could have a material impact on the operations of the Company. Additionally, there is no guarantee that the systems of other companies on which Biosite's systems rely will be timely converted and would not have an adverse effect on the Company's systems. For example, to the extent that customers would be unable to order products or pay invoices or suppliers would be unable to manufacture or deliver product, the Company's operations would be affected. FACTORS THAT MAY AFFECT RESULTS This report includes certain forward-looking statements about the Company's business and results of operations which are subject to risks and uncertainties that could cause the Company's actual results to vary materially from that indicated from such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein and in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. The factors discussed below should be read in conjunction with the risk factors discussed in the Company's Annual Report on Form 10-K, which are incorporated by reference. - - DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS FOR REVENUE GROWTH AND PROFITABILITY Except for the Triage DOA Panel, Triage C. DIFFICILE Panel and Triage Cardiac System, all of the Company's products are still under development, and such products may not be successfully developed or commercialized on a timely basis, or at all. The Company believes that its revenue growth and profitability will substantially depend upon its ability to complete development of and successfully introduce these new products. In addition, the successful development of some of these new products will depend on the development of new technologies. The Company will be required to undertake time-consuming and costly development activities and seek regulatory approval for these new products. The Company may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products, that regulatory clearance or approval of any new products may not be granted by the U.S. Food and Drug Administration or foreign regulatory authorities on a timely basis, or at all, and the new products may not be successfully commercialized. The Company has limited resources to devote to the development of all its potential products and consequently a delay in the development of one product may delay the development of other products. In order to successfully commercialize any new products, the Company will be required to establish and maintain reliable, cost-efficient, high-volume manufacturing capacity and a cost effective sales force and administrative infrastructure and an effective product distribution system for such products. If the Company is unable, for technological or other reasons, to complete the development, introduction or scale-up of manufacturing -11- for any new product or if any new product is not approved for marketing or does not achieve a significant level of market acceptance, the Company's business, financial condition and results of operations would be materially and adversely affected. - - LIMITED HISTORY OF PROFITABILITY; POTENTIAL QUARTERLY FLUCTUATIONS IN FUTURE OPERATING RESULTS The Company incurred an operating loss during the last three quarters. The Company may not return to profitability on a quarterly or annual basis in the future. The Company believes that future operating results will be subject to quarterly fluctuations due to a variety of factors, including whether and when new products are successfully developed and introduced by the Company, market acceptance of current or new products, regulatory delays, product recalls, manufacturing delays, shipment problems, seasonal customer demand, the timing of significant orders, changes in reimbursement policies, competitive pressures on average selling prices, changes in the mix of products sold and defense and resolution of patent matters. The Company has and will continue to incur significant costs associated with its defense of patent matters. The magnitude and timing of such costs are primarily dependent on unpredictable activities associated with the Behring and Spectral lawsuits. If the Company's Triage DOA Panel or Triage Cardiac products were found to infringe such patents, and if an acceptable license was not available, the Company would be materially and adversely affected. Operating results would also be adversely affected by a downturn in the market for the Company's current and future products, if there are any. Because the Company is continuing to increase its operating expenses for supporting its expanded sales and marketing activities, manufacturing scale-up costs, defense of patent matters and new product development, the Company's operating results would be adversely affected if its sales did not correspondingly increase or if its product development efforts are unsuccessful or subject to delays. The Company's limited operating history makes accurate prediction of future operating results difficult or impossible. Although the Company has experienced growth in recent years, in the future, the Company may not sustain revenue growth or remain profitable on a quarterly or annual basis and its growth may not be consistent with predictions made by securities analysts. - - NEAR-TERM DEPENDENCE OF THE COMPANY ON THE TRIAGE DOA PANEL PRODUCTS Sales of the Triage DOA Panel products have to date accounted for almost all of the Company's sales. The Company expects its revenue and profitability will substantially depend on the sale of the Triage DOA Panel products for the foreseeable future. A reduction in demand for the Triage DOA Panel products would have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that growth in sales of the Triage DOA Panel products is slowing as the available U.S. market becomes saturated. Competitive pressures could also erode the Company's profit margins for the Triage DOA Panel products. The Company's continued growth will depend on its ability to successfully develop and commercialize other products, including the Triage C. DIFFICILE Panel, and Triage Cardiac System, and to gain additional acceptance of the Triage DOA Panel products in new market segments, such as occupational health. The Company has received FDA approval to market the Triage C. DIFFICILE Panel and the Triage Cardiac System and began selling each of the products in March and May, respectively. Sales of the Triage C. DIFFICILE Panel and the Triage Cardiac System represented less than 5% of net sales thus far in 1998. The Company may not be able to successfully develop and commercialize new products, including the Triage C. DIFFICILE Panel, and Triage Cardiac System, and the Company may not be able to maintain or expand its share of the drug-testing market. Technological change or the development of new or improved diagnostic technologies could result in the Company's products becoming obsolete or noncompetitive. - - DEPENDENCE ON KEY DISTRIBUTORS; LIMITED DIRECT SALES EXPERIENCE The Company relies upon key distributor alliances, such as with Fisher, to distribute the Triage DOA Panel products, Triage C. DIFFICILE Panel and Triage Cardiac System and may rely upon distributors to distribute products under development. The Triage DOA Panel products is currently marketed pursuant to exclusive distribution agreements in the U.S. hospital market segment by Fisher (which accounted for 80% of product sales in 1997) and in certain countries in Europe, Latin America, the Middle East, Asia and Africa by Merck. The loss or termination -12- of either of these distributors could have a material adverse effect on the Company's sales unless suitable alternatives can be arranged. As a result of a decision by Merck to refocus away from certain aspects of the human diagnostic business, the Company terminated the development and distribution agreement for the Triage Cardiac Panel with Merck and effective no earlier than December 1998, the Company terminated its agreement with Merck regarding international distribution rights for the Triage DOA Panel product line. The Company is continuing to evaluate product distribution alternatives for the international markets, including, among other things, alliances with other distribution partners and the establishment of a direct sales force in certain European countries. As the Company has launched two new products in 1998 and with the potential launch of additional products from the Company's development pipeline, the Company has increased the size of its sales force in the U.S. and negotiated a new long-term distribution agreement with Fisher. This long-term distribution agreement expanded Fisher's role to include the distribution of the Triage Cardiac System, the Triage C. DIFFICILE Panel and certain of the potential new products in the U.S. medical market. If any of the Company's distribution or marketing agreements are terminated and the Company is unable to enter into alternative agreements or if the Company elects to distribute new products directly, the Company would have to invest in additional sales and marketing resources, including additional field sales personnel, which would significantly increase future selling, general and administrative expenses. The Company currently has limited experience in direct sales, marketing and distribution of its products. There can be no assurance that the Company's direct sales, marketing and distribution efforts would be successful or that revenue from such efforts would exceed expenses. Further, there can be no assurance that Biosite would be able to enter into new distribution or marketing agreements on satisfactory terms, or at all, or if the Company elects to distribute potential new products directly that the Company's direct sales, marketing and distribution efforts would be successful. A failure to enter into acceptable distribution agreements or a failure of the Company to successfully market its products would have a material and adverse effect on the Company. The Company anticipates that it may, if appropriate, enter into additional distribution agreements with respect to its products currently under development and products that it develops in the future, if any of such products receive the requisite regulatory clearance or approvals. The Company may not be able to enter into such agreements on acceptable terms, or at all. - - INTENSELY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE The market in which the Company competes is intensely competitive. Biosite's competitors include health care companies that manufacture laboratory-based tests and analyzers, as well as clinical reference laboratories. Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical reference laboratories and hospital-based laboratories. The Company expects that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for its products, the Company will be required to demonstrate that its products provide cost-effective and time saving alternatives to tests performed by clinical reference laboratories or traditional hospital-based laboratory procedures. This will require physicians to change their established means of having such tests performed. The Company's products may not be able to compete with the testing services provided by traditional laboratory services. In addition, companies with a significant presence in the diagnostic market, such as Abbott Laboratories, Roche Boehringer Mannheim Corporation, Chiron Diagnostics, Ortho Clinical Diagnostics, a division of Johnson & Johnson, and DADE Behring Marburg GmbH, have developed or are developing diagnostic products that do or will compete with the Company's products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than the Company. Moreover, such competitors offer broader product lines and have greater name recognition than the Company, and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete with or will compete with those of the Company. The Company's competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than the Company's current or future products, or that would render the Company's technologies and products obsolete. Moreover, the Company may not have the financial resources, technical expertise or marketing, -13- distribution or support capabilities to compete successfully in the future. In addition, competitors, many of which have made substantial investments in competing technologies, may be more effective than the Company's technologies, or may prevent, limit or interfere with the Company's ability to make, use or sell its products either in the United States or in international markets. - - UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; POTENTIAL INABILITY TO LICENSE TECHNOLOGY FROM THIRD PARTIES The Company's ability to compete effectively will depend in part on its ability to develop and maintain proprietary aspects of its technology, and to operate without infringing the proprietary rights of others or to obtain licenses to such proprietary rights. Biosite has U.S. and foreign issued patents and is currently prosecuting patent applications in the United States and with certain foreign patent offices. The Company's pending patent applications may not result in the issuance of any patents. Additionally, the Company's patent applications may not have priority over others' applications, or, if issued, the Company's patents may not offer protection against competitors with similar technology. Any patents issued to the Company may be challenged, invalidated or circumvented in the future and the rights created thereunder may not provide a competitive advantage. The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Cardiac System and products under development may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. The Company has obtained licenses for certain technologies and is negotiating to obtain licenses for technologies patented by others. However, the Company may not be able to obtain licenses for technology patented by others on commercially reasonable terms, or at all. The Company may not be able to develop alternative approaches if it is unable to obtain licenses and the Company's current and future licenses may not be adequate for the operation of it's business. The failure to obtain necessary licenses or to identify and implement alternative approaches would prevent the Company from commercializing certain of its products under development and would have a material adverse effect on the Company's business, financial condition and results of operations. Litigation may be necessary to enforce any patents issued to the Company, to protect trade secrets or know-how owned by the Company or to determine the enforceability, scope and validity of the proprietary rights of others. In March 1996, the Company settled a potential patent infringement claim by obtaining a license to the contested patent in return for a one-time payment of $2.2 million. In September 1996, the Company settled a patent infringement claim filed by Abbott Laboratories and obtained a license to the contested patent in return for the payment of $5.5 million and the agreement to pay certain royalties. In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics, GmbH filed a patent infringement action against the Company in the U.S. District Court for the District of Delaware. The patent infringement action alleges that the Company's Triage DOA Panel products infringe a patent held by the plaintiffs, which expires in August 2000. The plaintiffs seek to recover damages of an unspecified amount and to enjoin future sales of the Triage DOA Panel products by the Company. Biosite has answered the complaint, denying infringement and asserting affirmative defenses that the patent is invalid and unenforceable. The Company also has asserted counterclaims arising under the antitrust laws that seek to require Dade International Inc. to divest itself of its acquisition of Behring Diagnostics, Inc. and Behring Diagnostics, GmbH, treble monetary damages and attorney fees. In February 1998, the plaintiffs filed an amended complaint, adding a new party, Dade-Behring, Inc., and changing the names of the parties, Behring Diagnostics Inc. to Syva Company and Behring Diagnostics GmbH to Dade Behring Marburg. If the Company's Triage DOA Panel products were found to infringe the patent, and if an acceptable license was not available, the Company would be materially and adversely affected. The Company's Triage Meter product platform, including the Triage Cardiac System is not the subject of the patent infringement claims as filed. On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent infringement action against the Company in the U.S. District Court for the Western District of Wisconsin, alleging that the Company's Triage Cardiac Panel infringes U.S. patent 5,744,358 which was issued on the date the suit was filed. Spectral seeks a permanent injunction and damages. Spectral also sought a preliminary injunction that would enjoin the Company from selling the Triage Cardiac Panel prior to the conclusion of the trial, which is scheduled to commence on August 31, 1998. On July 16, 1998, the Court issued an opinion denying the motion for a preliminary injunction. Spectral also has moved for partial summary judgment on the issue of infringement. That motion was denied on July 20, 1998. If the Company's Triage Cardiac products were found to infringe the patent, and if an acceptable -14- license was not available, the Company would be materially and adversely affected. The Company believes it has meritorious defenses to each of these suits and intends to vigorously defend its position. The Company has incurred and will continue to incur significant legal costs in executing its defenses. The Company may become subject to additional patent infringement claims and litigation or interference proceedings conducted in the U.S. Patent and Trademark Office ("USPTO") to determine the priority of inventions. The Company also has received correspondence from other parties calling to the Company's attention the existence of certain patents for which they believe Biosite's products and products under development may incorporate technologies that are the subject of such patents. Such correspondence has in certain instances included offers to negotiate the licensing of the patented technologies. Such matters may result in litigation to determine the enforceability, scope, and validity of the patents. Litigation, if initiated, could seek to recover damages as a result of any sales of the products and to enjoin further sales of such products. The Behring and Spectral litigation and any other litigation that could be brought forth by other parties may result in material expenses to the Company and significant diversion of effort by the Company's technical and management personnel, regardless of the outcome. The outcome of litigation is inherently uncertain and there can be no assurance that a court would not find the third-party claims valid and that the Company had no successful defense to such claims. An adverse outcome in litigation or the failure to obtain a necessary license could subject the Company to significant liability and could prevent the Company from selling the Triage DOA Panel, Triage C. DIFFICILE Panel, the Triage Cardiac System or other products it may develop, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company also relies upon trade secrets, technical know-how and continuing invention to develop and maintain its competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, and the Company may not be able to protect its trade secrets or its rights to its trade secrets. Others may have filed and in the future are likely to file patent applications that are similar or identical to those of the Company. To determine the priority of inventions, the Company may have to participate in interference proceedings declared by the USPTO that could result in substantial cost to the Company. Patent applications of others may have priority over patent applications filed by the Company. The commercial success of the Company also depends in part on the Company neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to the Company's technologies and products. The Company is aware of several third-party patents that may relate to the Company's technology. There can be no assurance that the Company does not or will not infringe these patents, or other patents or proprietary rights of third parties. In addition, the Company has received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. Any legal action against the Company or its collaborative partners claiming damages and seeking to enjoin commercial activities relating to the Company's products and processes affected by third party rights, in addition to subjecting the Company to potential liability for damages, may require the Company or its collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. The Company or its collaborative partners may not prevail in any such action and any license (including licenses proposed by third parties) required under any such patent may not be made available on commercially acceptable terms, or at all. There are a significant number of U.S. and foreign patents and patent applications in the Company's areas of interest, and the Company believes that there may be significant litigation in the industry regarding patent and other intellectual property rights. Litigation concerning patent and other intellectual property rights could consume a substantial portion of the Company's managerial and financial resources, which would have a material adverse effect on the Company's business, financial condition and results of operations. - - LIMITED MANUFACTURING EXPERIENCE; POTENTIAL INABILITY TO SCALE-UP MANUFACTURING To be successful, the Company must manufacture its current and future products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. The Company has limited experience manufacturing products other than the Triage DOA -15- Panel products. To achieve the level of production necessary for commercialization of Biosite's new products and products under development, the Company will need to scale-up current manufacturing capabilities. Significant additional work will be required for the scaling-up of each new Biosite product prior to commercialization, and there can be no assurance that such work can be completed successfully. In addition, although the Company expects that certain of its new products and products under development will share certain production attributes with the Triage DOA Panel, production of such products may require the development of new manufacturing technologies and expertise. Such products may not be able to be manufactured by the Company or any other party at a cost or in quantities to make such products commercially viable. If the Company is unable to develop or contract for manufacturing capabilities on acceptable terms for its products under development, the Company's ability to conduct preclinical and clinical testing will be adversely affected, resulting in the delay of submission of products for regulatory clearance or approval and initiation of new development programs, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company anticipates making significant expenditures to develop high volume manufacturing capabilities required for each of its new products and products currently under development, if such products are successfully developed. Manufacturing and quality control problems may arise as the Company attempts to scale-up its manufacturing and such scale-up may not be achieved in a timely manner or at a commercially reasonable cost, or at all. The Company's manufacturing facilities and those of its contract manufacturers are or will be subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies and such facilities are subject to QSR requirements of the FDA. The Company or its contractors may not satisfy such regulatory requirements, and any failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. - - POSSIBLE FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING While the Company believes that its available cash, cash from operations and funds from existing credit arrangements will be sufficient to satisfy its funding needs for at least the next 24 months, there can be no assurance the Company will not require additional capital. The Company's future liquidity and capital funding requirements will depend on numerous factors, including the extent to which the Company's products under development are successfully developed and gain market acceptance, the timing of regulatory actions regarding the Company's potential products, the costs and timing of expansion of sales, marketing and manufacturing activities, facilities expansion needs, procurement and enforcement of patents important to the Company's business, defense and resolution of patent matters, results of clinical investigations and competition. Such additional capital, if needed, may not be available on terms acceptable to the Company, or at all. Certain funding arrangements may require the Company to relinquish its rights to certain of its technologies, products or marketing territories. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. The failure by the Company to raise capital on acceptable terms when needed could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." - - IMPACT OF YEAR 2000 ISSUE The Company is currently developing a plan to ensure its system and software infrastructure will function properly with respect to the dates in the year 2000 and thereafter. Key financial, information and operational systems will be assessed and plans will be developed to address required systems modifications. The Company will coordinate these activities with suppliers, distributors, financial institutions and others with whom it does business. The Company believes that, with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems and will not have a material adverse effect on the Company's business. However, if such modifications and conversions are not made or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. Additionally, the systems of other companies on which Biosite's systems rely may not be timely converted, which may have an adverse effect on the Company's systems. For example, to the extent that customers would be unable to order products or pay invoices or suppliers would be unable to manufacture or deliver product, the Company's operations would be adversely affected. -16- PART II. OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics, GmbH filed a patent infringement action against the Company in the U.S. District Court for the District of Delaware. The patent infringement action alleges that the Company's Triage DOA Panel products infringe a patent held by the plaintiffs, which expires in August 2000. The plaintiffs seek to recover damages of an unspecified amount and to enjoin future sales of the Triage DOA Panel products by the Company. Biosite has answered the complaint, denying infringement and asserting affirmative defenses that the patent is invalid and unenforceable. The Company also has asserted counterclaims arising under the antitrust laws that seek to require Dade International Inc. to divest itself of its acquisition of Behring Diagnostics, Inc. and Behring Diagnostics, GmbH, treble monetary damages and attorney fees. In February 1998, the plaintiffs filed an amended complaint, adding a new party, Dade-Behring, Inc., and changing the names of the parties, Behring Diagnostics Inc. to Syva Company and Behring Diagnostics GmbH to Dade Behring Marburg. If the Company's Triage DOA Panel products were found to infringe the patent, and if an acceptable license was not available, the Company would be materially and adversely affected. The Company's Triage Meter product platform, including the Triage Cardiac System is not the subject of the patent infringement claims as filed. On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent infringement action against the Company in the U.S. District Court for the Western District of Wisconsin, alleging that the Company's Triage Cardiac Panel infringes U.S. patent 5,744,358 which was issued on the date the suit was filed. Spectral seeks a permanent injunction and damages. Spectral also sought a preliminary injunction that would enjoin the Company from selling the Triage Cardiac Panel prior to the conclusion of the trial, which is scheduled to commence on August 31, 1998. On July 16, 1998, the Court issued an opinion denying the motion for a preliminary injunction. Spectral also has moved for partial summary judgment on the issue of infringement. That motion was denied on July 20, 1998. If the Company's Triage Cardiac products were found to infringe the patent, and if an acceptable license was not available, the Company would be materially and adversely affected. The Company believes it has meritorious defenses to each of these suits and intends to vigorously defend its position. The Company has incurred and will continue to incur significant legal costs in executing its defenses. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On May 21, 1998, the Company held its Annual Meeting of Stockholders. The following actions were taken at the annual meeting. As of April 6, 1998, the record date, 12,938,308 shares were entitled to vote at the Annual Meeting. Of these 12,938,308 shares, 1,223,973 were not voted. 1. The following Class I Directors were elected: a. Lonnie M. Smith. 11,711,124 shares voted in favor of the nominee, 3,211 shares withheld their vote; b. Timothy J. Wollaeger. 11,608,012 shares voted in favor of the nominee, 106,323 shares withheld their vote; c. The following directors continue in office for their existing terms: Frederick J. Dotzler Howard E. Greene, Jr. Kim D. Blickenstaff Gunars E. Valkirs -17- 2. A proposal to amend and restate the 1996 Stock Incentive Plan of Biosite Diagnostics Incorporated, among other things, increase the number of shares of Common Stock authorized for issuance thereunder by 500,000 shares. 7,232,358 shares were voted in favor of the proposal, 1,443,859 shares were voted against the proposal, 10,452 shares abstained and 3,027,666 shares were not voted (includes broker non-votes); 3. A proposal to amend and restate the Biosite Diagnostics Incorporated Employee Stock Purchase Plan to, among other things, increase the number of shares of Common Stock authorized for issuance thereunder by 100,000 shares. 8,547,628 shares were voted in favor of the proposal, 128,239 shares were voted against the proposal, 10,802 shares abstained and 3,027,666 shares were not voted (includes broker non-votes); and 4. The selection of Ernst & Young LLP as the Company's independent auditor was ratified. 11,698,827 shares were voted in favor of the proposal, 600 shares were voted against the proposal, 14,908 shares abstained and 0 shares were not voted (includes broker non-votes); ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.1 Amended and Restated 1996 Stock Incentive Plan of Biosite Diagnostics Incorporated 10.2 Amended and Restated Employee Stock Purchase Plan 27.1 Financial Data Schedule (b) Reports on Form 8-K. None -18- 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. Dated: August 3, 1998 BIOSITE DIAGNOSTICS INCORPORATED By: /s/ Christopher J. Twomey --------------------------------- Christopher J. Twomey Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) -19- EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 10.1 Amended and Restated 1996 Stock Incentive Plan of Biosite Diagnostics Incorporated 10.2 Amended and Restated Employee Stock Purchase Plan 27.1 Financial Data Schedule
-20- EX-10.1 2 EXHIBIT 10.1 AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN OF BIOSITE DIAGNOSTICS INCORPORATED (Adopted Effective December 1, 1996) TABLE OF CONTENTS
ARTICLE 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Committee Composition. . . . . . . . . . . . . . . . . . . . . . 1 2.2 Committee Responsibilities . . . . . . . . . . . . . . . . . . . 2 ARTICLE 3. SHARES AVAILABLE FOR GRANTS. . . . . . . . . . . . . . . . . . . 2 3.1 Basic Limitation . . . . . . . . . . . . . . . . . . . . . . . . 2 3.2 Additional Shares. . . . . . . . . . . . . . . . . . . . . . . . 2 3.3 Dividend Equivalents . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 4. ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.1 General Rules. . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.2 Outside Directors. . . . . . . . . . . . . . . . . . . . . . . . 3 4.3 Incentive Stock Options. . . . . . . . . . . . . . . . . . . . . 3 ARTICLE 5. OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.1 Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . 3 5.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . 3 5.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.4 Exercisability and Term. . . . . . . . . . . . . . . . . . . . . 4 5.5 Effect of Change in Control. . . . . . . . . . . . . . . . . . . 4 5.6 Modification or Assumption of Options. . . . . . . . . . . . . . 4 5.7 Other Requirements Prior to Company's Initial Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 6. PAYMENT FOR OPTION SHARES. . . . . . . . . . . . . . . . . . . . 4 6.1 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.2 Surrender of Stock . . . . . . . . . . . . . . . . . . . . . . . 5 6.3 Exercise/Sale. . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.4 Exercise/Pledge. . . . . . . . . . . . . . . . . . . . . . . . . 5 6.5 Promissory Note. . . . . . . . . . . . . . . . . . . . . . . . . 5 6.6 Other Forms of Payment . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 7. STOCK APPRECIATION RIGHTS. . . . . . . . . . . . . . . . . . . . 5 7.1 SAR Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . 6 7.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . 6 7.4 Exercisability and Term. . . . . . . . . . . . . . . . . . . . . 6 7.5 Effect of Change in Control. . . . . . . . . . . . . . . . . . . 6 7.6 Exercise of SARs . . . . . . . . . . . . . . . . . . . . . . . . 6 7.7 Modification or Assumption of SARs.. . . . . . . . . . . . . . . 6 ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS. . . . . . . . . . . . . . . . 7 8.1 Time, Amount and Form of Awards. . . . . . . . . . . . . . . . . 7 8.2 Payment for Awards . . . . . . . . . . . . . . . . . . . . . . . 7 8.3 Vesting Conditions . . . . . . . . . . . . . . . . . . . . . . . 7 8.4 Form and Time of Settlement of Stock Units . . . . . . . . . . . 7 8.5 Death of Recipient . . . . . . . . . . . . . . . . . . . . . . . 8 8.6 Creditors' Rights. . . . . . . . . . . . . . . . . . . . . . . . 8
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ARTICLE 9. VOTING AND DIVIDEND RIGHTS . . . . . . . . . . . . . . . . . . . 8 9.1 Restricted Shares. . . . . . . . . . . . . . . . . . . . . . . . 8 9.2 Stock Units. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 10. PROTECTION AGAINST DILUTION. . . . . . . . . . . . . . . . . . . 8 10.1 Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 10.2 Reorganizations. . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 11. AWARDS UNDER OTHER PLANS . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES . . . . . . . . . . . . 9 12.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . 9 12.2 Elections to Receive NSOs, Restricted Shares or Stock Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 12.3 Number and Terms of NSOs, Restricted Shares or Stock Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 13. LIMITATION ON RIGHTS . . . . . . . . . . . . . . . . . . . . . . 10 13.1 Retention Rights . . . . . . . . . . . . . . . . . . . . . . . . 10 13.2 Stockholders' Rights . . . . . . . . . . . . . . . . . . . . . . 10 13.3 Regulatory Requirements. . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 14. LIMITATION ON PAYMENTS . . . . . . . . . . . . . . . . . . . . . 10 14.1 Basic Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 14.2 Reduction of Payments. . . . . . . . . . . . . . . . . . . . . . 11 14.3 Overpayments and Underpayments . . . . . . . . . . . . . . . . . 11 14.4 Related Corporations . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 15. WITHHOLDING TAXES. . . . . . . . . . . . . . . . . . . . . . . . 12 15.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 15.2 Share Withholding. . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS . . . . . . . . . . . . . . . . 12 16.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 16.2 Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 17. FUTURE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . 13 17.1 Term of the Plan . . . . . . . . . . . . . . . . . . . . . . . . 13 17.2 Amendment or Termination . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 18. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 19. EXECUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-ii- AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN OF BIOSITE DIAGNOSTICS INCORPORATED ARTICLE 1. INTRODUCTION. The Plan was adopted by the Board on December 5, 1996, and was approved by the Company's stockholders on December 6, 1996. The Plan is effective December 1, 1996. However, Articles 7, 8 and 9 shall not apply prior to the Company's initial public offering. On February 27, 1998, the Plan was amended by the Board to increase the number of shares under the Plan. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Key Employees to focus on critical long-range objectives, (b) encouraging the attraction and retention of Key Employees with exceptional qualifications and (c) linking Key Employees directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights. The Plan shall be governed by, and construed in accordance with, the laws of the State of California. ARTICLE 2. ADMINISTRATION. 2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. Except as provided below, the Committee shall consist exclusively of directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy: (a) Such requirements, if any, as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and (b) Such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under section 162(m)(4)(C) of the Code. The Board may act on its own behalf with respect to Outside Directors and may also appoint one or more separate committees composed of one or more officers of the Company who need not be directors of the Company and who need not satisfy the foregoing requirements, who may administer the Plan with respect to Key Employees who are not "covered employees" under section 162(m)(3) of the Code and who are not required to report pursuant to Section 16(a) of the Exchange Act. -1- 2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the Key Employees who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan and (d) make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Common Shares available for Restricted Shares, Stock Units, Options and SARs awarded under the Plan shall not exceed 1,400,000. Of the Common Shares available hereunder, no more than 20% in aggregate shall be available with respect to Outside Directors. The limitation of this Section 3.1 shall be subject to adjustment pursuant to Article 10. The number of Common Shares available under this Plan shall be increased by unexercised or forfeited Common Shares under the Company's 1989 Stock Plan. 3.2 ADDITIONAL SHARES. If Stock Units, Options or SARs are forfeited or if Options or SARs terminate for any other reason before being exercised, then the corresponding Common Shares shall again become available for Awards under the Plan. If Restricted Shares are forfeited before any dividends have been paid with respect to such Shares, then such Shares shall again become available for Awards under the Plan. If Stock Units are settled, then only the number of Common Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 3.1 and the balance shall again become available for Awards under the Plan. If SARs are exercised, then only the number of Common Shares (if any) actually issued in settlement of such SARs shall reduce the number available under Section 3.1 and the balance shall again become available for Awards under the Plan. 3.3 DIVIDEND EQUIVALENTS. Any dividend equivalents distributed under the Plan shall not be applied against the number of Restricted Shares, Stock Units, Options or SARs available for Awards, whether or not such dividend equivalents are converted into Stock Units. ARTICLE 4. ELIGIBILITY 4.1 GENERAL RULES. Only Key Employees (including, without limitation, independent contractors who are not members of the Board) shall be eligible for designation as Participants by the Committee. -2- 4.2 OUTSIDE DIRECTORS. The Committee may provide that the NSOs that otherwise would be granted to an Outside Director under this Plan shall instead be granted to an affiliate of such Outside Director. Such affiliate shall then be deemed to be an Outside Director for purposes of the Plan, provided that the service-related vesting and termination provisions pertaining to the NSOs shall be applied with regard to the service of the Outside Director. 4.3 INCENTIVE STOCK OPTIONS. Only Key Employees who are common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, a Key Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the requirements set forth in section 422(c)(6) of the Code are satisfied. ARTICLE 5. OPTIONS. 5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a cash payment or in consideration of a reduction in the Optionee's other compensation. A Stock Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she exercises a prior Option and pays the Exercise Price in the form described in Section 6.2. 5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10. Options granted to any Optionee in a single calendar year shall in no event cover more than 250,000 Common Shares, subject to adjustment in accordance with Article 10. 5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise Price under an ISO shall in no event be less than 100% of the Fair Market Value of a Common Share on the date of grant and the Exercise Price under an NSO shall in no event be less than the par value of the Common Shares subject to such NSO. In the case of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the NSO is outstanding, provided that prior to the Company's initial public offering, the NSO Exercise Price shall be at least 85% (110% for 10% shareholders) of the Fair Market Value of a Common Share of Stock on the date of grant. -3- 5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable, provided that prior to the Company's initial public offering, Options shall become exercisable pursuant to a schedule providing for at least 20% vesting per year over a five-year period (or, in the case of performance options, to the extent permitted under applicable regulations of the California Department of Corporations). The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. Notwithstanding the foregoing, no Options may be accelerated prior to the Company's initial public offering. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. NSOs may also be awarded in combination with Restricted Shares or Stock Units, and such an Award may provide that the NSOs will not be exercisable unless the related Restricted Shares or Stock Units are forfeited. Prior to the Company's initial public offering, Options must be exercised within 30 days of the termination of employment (six months for termination on account of death or disability). 5.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become fully exercisable as to all Common Shares subject to such Option in the event that a Change in Control occurs with respect to the Company. 5.6 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new options for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option. 5.7 OTHER REQUIREMENTS PRIOR TO COMPANY'S INITIAL PUBLIC OFFERING. Prior to the Company's initial public offering, Optionees shall receive Company financial statements at least annually. ARTICLE 6. PAYMENT FOR OPTION SHARES. 6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except as follows: -4- (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. The Stock Option Agreement may specify that payment may be made in any form(s) described in this Article 6. (b) In the case of an NSO, the Committee may at any time accept payment in any form(s) described in this Article 6. 6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which have already been owned by the Optionee for more than six months. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. 6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Common Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. 6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Common Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. 6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is applicable, payment may be made with a full-recourse promissory note; provided that the par value of the Common Shares shall be paid in cash. 6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is applicable, payment may be made in any other form that is consistent with applicable laws, regulations and rules. ARTICLE 7. STOCK APPRECIATION RIGHTS. 7.1 SAR AGREEMENT. Each grant of an SAR under the Plan shall be evidenced by an SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee's other compensation. -5- 7.2 NUMBER OF SHARES. Each SAR Agreement shall specify the number of Common Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Article 10. SARs granted to any Optionee in a single calendar year shall in no event pertain to more than 250,000 Common Shares, subject to adjustment in accordance with Article 10. 7.3 EXERCISE PRICE. Each SAR Agreement shall specify the Exercise Price. An SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding. 7.4 EXERCISABILITY AND TERM. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. An SAR Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. SARs may also be awarded in combination with Options, Restricted Shares or Stock Units, and such an Award may provide that the SARs will not be exercisable unless the related Options, Restricted Shares or Stock Units are forfeited. An SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. An SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control. 7.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the time of granting an SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company. 7.6 EXERCISE OF SARS. The exercise of an SAR shall be subject to the restrictions imposed by Rule 16b-3 (or its successor) under the Exchange Act, if applicable. If, on the date when an SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. Upon exercise of an SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b) cash or (c) a combination of Common Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Common Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Common Shares subject to the SARs exceeds the Exercise Price. 7.7 MODIFICATION OR ASSUMPTION OF SARS. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding -6- SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an SAR shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR. ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS. 8.1 TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be granted in the form of Restricted Shares, in the form of Stock Units, or in any combination of both. Restricted Shares or Stock Units may also be awarded in combination with NSOs or SARs, and such an Award may provide that the Restricted Shares or Stock Units will be forfeited in the event that the related NSOs or SARs are exercised. 8.2 PAYMENT FOR AWARDS. To the extent that an Award is granted in the form of newly issued Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares. To the extent that an Award is granted in the form of Restricted Shares from the Company's treasury or in the form of Stock Units, no cash consideration shall be required of the Award recipients. 8.3 VESTING CONDITIONS. Each Award of Restricted Shares or Stock Units shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement. A Stock Award Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. The Committee may determine, at the time of making an Award or thereafter, that such Award shall become fully vested in the event that a Change in Control occurs with respect to the Company. 8.4 FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Common Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 10. -7- 8.5 DEATH OF RECIPIENT. Any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's estate. 8.6 CREDITORS' RIGHTS. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Award Agreement. ARTICLE 9. VOTING AND DIVIDEND RIGHTS. 9.1 RESTRICTED SHARES. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company's other stockholders. A Stock Award Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. Such additional Restricted Shares shall not reduce the number of Common Shares available under Article 3. 9.2 STOCK UNITS. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee's discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Common Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach. ARTICLE 10. PROTECTION AGAINST DILUTION. 10.1 ADJUSTMENTS. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make such adjustments as -8- it, in its sole discretion, deems appropriate in one or more of (a) the number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Article 3, (b) the limitations set forth in Sections 5.2 and 7.2, (c) the number of NSOs to be granted to Outside Directors under Section 4.2, (d) the number of Stock Units included in any prior Award which has not yet been settled, (e) the number of Common Shares covered by each outstanding Option and SAR or (f) the Exercise Price under each outstanding Option and SAR. Except as provided in this Article 10, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. 10.2 REORGANIZATIONS. In the event that the Company is a party to a merger or other reorganization, outstanding Options, SARs, Restricted Shares and Stock Units shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting and accelerated expiration (provided the Company has previously had its initial public offering), or for settlement in cash. ARTICLE 11. AWARDS UNDER OTHER PLANS. The Company may grant awards under other plans or programs. Such awards may be settled in the form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Common Shares available under Article 3. ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES. 12.1 EFFECTIVE DATE. No provision of this Article 12 shall be effective unless and until the Board has determined to implement such provision. 12.2 ELECTIONS TO RECEIVE NSOS, RESTRICTED SHARES OR STOCK UNITS. An Outside Director may elect to receive his or her annual retainer payments and meeting fees from the Company in the form of cash, NSOs, Restricted Shares, Stock Units, or a combination thereof, as determined by the Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An election under this Article 12 shall be filed with the Company on the prescribed form. 12.3 NUMBER AND TERMS OF NSOS, RESTRICTED SHARES OR STOCK UNITS. The number of NSOs, Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated -9- in a manner determined by the Board. The terms of such NSOs, Restricted Shares or Stock Units shall also be determined by the Board. ARTICLE 13. LIMITATION ON RIGHTS. 13.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an employee, consultant or director of the Company, a Parent or a Subsidiary. The Company and its Parents and Subsidiaries reserve the right to terminate the service of any employee, consultant or director at any time, with or without cause, subject to applicable laws, the Company's certificate of incorporation and by-laws and a written employment agreement (if any). 13.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of a stock certificate for such Common Shares. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 8, 9 and 10. 13.3 REGULATORY REQUIREMENTS. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing. ARTICLE 14. LIMITATION ON PAYMENTS. 14.1 BASIC RULE. Any provision of the Plan to the contrary notwithstanding, in the event that the independent auditors most recently selected by the Board (the "Auditors") determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a "Payment") would be nondeductible by the Company for federal income tax purposes because of the provisions concerning "excess parachute payments" in section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount; provided that the Committee, at the time of making an Award under this Plan or at any time thereafter, may specify in writing that such Award shall not be so reduced and shall not be subject to this Article 14. For purposes of this Article 14, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any -10- Payment to be nondeductible by the Company because of section 280G of the Code. 14.2 REDUCTION OF PAYMENTS. If the Auditors determine that any Payment would be nondeductible by the Company because of section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Article 14, present value shall be determined in accordance with section 280G(d)(4) of the Code. All determinations made by the Auditors under this Article 14 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. 14.3 OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an "Overpayment") or that additional Payments which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. -11- 14.4 RELATED CORPORATIONS. For purposes of this Article 14, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code. ARTICLE 15. WITHHOLDING TAXES. 15.1 GENERAL. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied. 15.2 SHARE WITHHOLDING. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Common Shares that he or she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. Any payment of taxes by assigning Common Shares to the Company may be subject to restrictions, including any restrictions required by rules of the Securities and Exchange Commission. ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS. 16.1 GENERAL. An Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor's process, whether voluntarily, involuntarily or by operation of law, except as approved by the Committee. Notwithstanding the foregoing, ISOs and, prior to the Company's initial public offering, NSOs may not be transferable. However, this Article 16 shall not preclude a Participant from designating a beneficiary who will receive any outstanding Awards in the event of the Participant's death, nor shall it preclude a transfer of Awards by will or by the laws of descent and distribution. 16.2 TRUSTS. Neither this Article 16 nor any other provision of the Plan shall preclude a Participant from transferring or assigning Restricted Shares to (a) the trustee of a trust that is revocable by such Participant alone, both at the time of the transfer or assignment and at all times thereafter prior to such Participant's death, or (b) the trustee of any other trust to the extent approved in advance by the Committee in writing. A transfer or assignment of Restricted Shares from such trustee to any person other than such Participant shall be permitted only to the extent approved in advance by the Committee in writing, and Restricted Shares held by such trustee shall be subject to all of the conditions and restrictions set forth in the Plan and in the -12- applicable Stock Award Agreement, as if such trustee were a party to such Agreement. ARTICLE 17. FUTURE OF THE PLAN. 17.1 TERM OF THE PLAN. The Plan, as set forth herein, was adopted on December 5, 1996, and became effective December 1, 1996, except that Articles 7, 8 and 9 shall not be effective prior to the date of the Company's initial public offering. The Plan shall remain in effect until it is terminated under Section 17.2, except that no ISOs shall be granted after November 30, 2006. 17.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any reason, amend or terminate the Plan. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. ARTICLE 18. DEFINITIONS. 18.1 "AWARD" means any award of an Option, an SAR, a Restricted Share or a Stock Unit under the Plan. 18.2 "BOARD" means the Company's Board of Directors, as constituted from time to time. 18.3 "CHANGE IN CONTROL" shall mean the occurrence of any of the following events: (a) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization; (b) A change in the composition of the Board, as a result of which fewer than one-half of the incumbent directors are directors who either: (A) Had been directors of the Company 24 months prior to such change; or (B) Were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were -13- still in office at the time of the election or nomination; or (c) Any "person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act) by the acquisition or aggregation of securities is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); except that any change in the relative beneficial ownership of the Company's securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. The term "Change in Control" shall not include the Company's initial public offering or a transaction, the sole purpose of which is to change the state of the Company's incorporation. 18.4 "CODE" means the Internal Revenue Code of 1986, as amended. 18.5 "COMMITTEE" means a committee of the Board, as described in Article 2. 18.6 "COMMON SHARE" means one share of the common stock of the Company. 18.7 "COMPANY" means Biosite Diagnostics Incorporated, a Delaware corporation. 18.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 18.9 "EXERCISE PRICE," in the case of an Option, means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. "Exercise Price," in the case of an SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR. 18.10 "FAIR MARKET VALUE" means the market price of Common Shares, determined by the Committee as follows: (a) If the Common Shares were traded over-the-counter on the date in question but was not traded on the Nasdaq Stock Market or the Nasdaq National Market, then the Fair Market Value shall be equal to the mean between the last -14- reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Common Shares are quoted or, if the Common Shares are not quoted on any such system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.; (b) If the Common Shares were traded over-the-counter on the date in question and were traded on the Nasdaq Stock Market or the Nasdaq National Market, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by the Nasdaq Stock Market or the Nasdaq National Market; (c) If the Common Shares were traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; and (d) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in the Western Edition of THE WALL STREET JOURNAL. Such determination shall be conclusive and binding on all persons. 18.11 "ISO" means an incentive stock option described in section 422(b) of the Code. 18.12 "KEY EMPLOYEE" means (a) a common-law employee of the Company, a Parent or a Subsidiary, (b) an Outside Director and (c) a consultant or adviser who provides services to the Company, a Parent or a Subsidiary as an independent contractor. Service as an Outside Director or as an independent contractor shall be considered employment for all purposes of the Plan, except as provided in Sections 4.2 and 4.3. 18.13 "NSO" means a stock option not described in sections 422 or 423 of the Code. 18.14 "OPTION" means an ISO or NSO granted under the Plan and entitling the holder to purchase one Common Share. 18.15 "OPTIONEE" means an individual or estate who holds an Option or SAR. 18.16 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not a common-law employee of the Company, a Parent or a Subsidiary. 18.17 "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns -15- stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 18.18 "PARTICIPANT" means an individual or estate who holds an Award. 18.19 "PLAN" means this 1996 Stock Incentive Plan of Biosite Diagnostics Incorporated, as amended from time to time. 18.20 "RESTRICTED SHARE" means a Common Share awarded under the Plan. 18.21 "SAR" means a stock appreciation right granted under the Plan. 18.22 "SAR AGREEMENT" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR. 18.23 "STOCK AWARD AGREEMENT" means the agreement between the Company and the recipient of a Restricted Share or Stock Unit which contains the terms, conditions and restrictions pertaining to such Restricted Share or Stock Unit. 18.24 "STOCK OPTION AGREEMENT" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option. 18.25 "STOCK UNIT" means a bookkeeping entry representing the equivalent of one Common Share, as awarded under the Plan. 18.26 "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. -16- ARTICLE 19. EXECUTION. To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to affix the corporate name and seal hereto. BIOSITE DIAGNOSTICS INCORPORATED By /s/ KIM D. BLICKENSTAFF ------------------------------ -17- EX-10.2 3 EXHIBIT 10.2 BIOSITE DIAGNOSTICS INCORPORATED AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN SECTION 1. PURPOSE OF THE PLAN. The Plan was adopted by the Company's Board of Directors on December 5, 1996. On February 27, 1998, the Plan was amended to increase the number of shares available under the Plan. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock from the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Internal Revenue Code of 1986, as amended. SECTION 2. ADMINISTRATION OF THE PLAN. (a) THE COMMITTEE. The Plan shall be administered by the Committee. The interpretation and construction by the Committee of any provision of the Plan or of any right to purchase Stock granted under the Plan shall be conclusive and binding on all persons. (b) RULES AND FORMS. The Committee may adopt such rules and forms under the Plan as it considers appropriate. SECTION 3. ENROLLMENT AND PARTICIPATION. (a) OFFERING PERIODS. While the Plan is in effect, two overlapping Offering Periods shall commence in each calendar year. Except for the first Offering Period, Offering Periods shall consists of the 24-month periods commencing on each January 1 and July 1. The first Offering Period shall commence on the effective date of the Company's initial public offering and end on December 31, 1998. (b) ACCUMULATION PERIODS. While the Plan is in effect, two Accumulation Periods shall commence in each calendar year. Except for the first Accumulation Period, Accumulation Periods shall consist of the six-month periods commencing on each January 1 and July 1. The first Accumulation Period shall commence on the effective date of the Company's initial public offering and end on June 30, 1997. (c) ENROLLMENT. Any individual who, on the day preceding the first day of an Offering Period, qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company not later than one week prior to the last working day prior to the commencement of such Offering Period. (d) DURATION OF PARTICIPATION. Once enrolled in the Plan, a Participant shall continue to participate until he or she ceases to be an Eligible Employee, withdraws from the Plan or reaches the end of the Accumulation Period in which he or she discontinued contributions. A Participant who discontinued contributions under Section 4(d) or withdrew from the Plan under Section 5(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (c) above. (e) APPLICABLE OFFERING PERIOD. For purposes of calculating the Purchase Price under Section 7(b), the applicable Offering Period shall be determined as follows: -1- (i) Once a Participant is enrolled in the Plan for an Offering Period, such Offering Period shall continue to apply to him or her until the earliest of (A) the end of such Offering Period, (B) the end of his or her participation under Subsection (d) above or (C) re-enrollment in a subsequent Offering Period under Paragraph (ii) below. (ii) In the event that the Fair Market Value of Stock on the last trading day before the commencement of the Offering Period in which the Participant is enrolled is higher than on the last trading day before the commencement of any subsequent Offering Period, the Participant shall automatically be re-enrolled for such subsequent Offering Period. (iii) When a Participant reaches the end of an Offering Period but his or her participation is to continue, then such Participant shall automatically be re-enrolled for the Offering Period that commences immediately after the end of the prior Offering Period. SECTION 4. EMPLOYEE CONTRIBUTIONS. (a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan. (b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% nor more than 15%. (c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing a new enrollment form with the Company not later than one week prior to the last working day prior to the commencement of the Accumulation Period for which such change is to be effective. (d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing a new enrollment form at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. SECTION 5. WITHDRAWAL FROM THE PLAN. (a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at any time before the last day of an Accumulation Period. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participant's Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted. (b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has withdrawn from the Plan shall not be a Participant until her or she re-enrolls in the Plan under Section 3(b). SECTION 6. TERMINATION OF EMPLOYMENT OR DEATH. (a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 5(a). (A transfer from one Participating Company to another shall not be treated as a termination of employment.) (b) DEATH. In the event of the participant's death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant's estate. Such form shall be valid only if it was filed with the Company before the Participant's death. -2- SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES. (a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant's Compensation under the Plan, such amount shall be credited to the Participant's Plan Account. No interest shall be credited to Plan Accounts. (b) PURCHASE PRICE. The Purchase Price for each share of Stock purchased at the close of an Accumulation Period shall be the lower of: (i) 85% of the Fair Market Value of such share on the last trading day before the commencement of the applicable Offering Period (as determined under Section 3(e)); or (ii) 85% of the Fair Market Value of such share on the last trading day in such Accumulation Period. (c) NUMBER OF SHARES PURCHASED. As of the last day of each Accumulation Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 5(a). The amount then in the Participant's Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participant's Plan Account. The foregoing notwithstanding, no Participant shall purchase more than a maximum of 2,500 shares of Stock with respect to any Accumulation Period nor shares of Stock in excess of the amounts set forth in Sections 8 and 12(a). The Committee may determine with respect to all Participants that any fractional share, as calculated under this Subsection (c), shall be rounded down to the next lower whole share. (d) AVAILABLE SHARES INSUFFICIENT. In the event that as of the beginning of an Accumulation Period the Committee determines that the aggregate number of shares that all Participants are projected or are likely to elect during an Accumulation Period exceeds the maximum number of shares remaining available for issuance under Section 12(a), including in connection with an Offering Period beginning prior to the date of the Accumulation Period with insufficient shares, then the Committee may either determine that such shares shall not be made in connection with any previous Offering Period but shall be added to any new increase in the shares available under the Plan in a new Offering Period starting on the date of the Accumulation Period with insufficient shares, or the number of shares to which each Participant is entitled in any Offering Period shall be determined by multiplying the number of Shares available for issuance by a fraction, the numerator of which is the number of shares that such Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase. In the event the Committee does not make any determination, the default method for dealing with insufficient shares in an Accumulation Period shall be the fractional method described in the preceding sentence. (e) ISSUANCE OF STOCK. Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Accumulation Period, except that the Committee may determine that such shares shall be held for each Participant's benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property. (f) UNUSED CASH BALANCES. An amount remaining in the Participant's Plan Account that represents the Purchase Price for any fractional share shall be carried over in the Participant's Plan Account to the next Accumulation Period. Any amount remaining in the Participant's Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above or Section 12(a) shall be refunded to the Participant in cash, without interest. (g) FAILURE OF SHAREHOLDERS TO APPROVE PLAN. In the event shareholders of the Company do not approve this Plan, the Participant's Plan Account shall be repaid to the Participant in cash and no Company shares will be purchased for the Participant under this Plan. -3- SECTION 8. LIMITATIONS ON STOCK OWNERSHIP. Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if: (a) Such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company; or (b) Under the terms of the Plan, such Participant's rights to purchase stock under this and all other qualified employee stock purchase plans of the Company or any parent or Subsidiary of the Company would accrue at a rate that exceeds $25,000 of the fair market value of such stock (determined at the time when such right is granted) for each calendar year for which such right or option is outstanding at any time. Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Internal Revenue Code of 1986, as amended. For purposes of this Section 8, each Participant shall be considered to own any stock that he or she has a right or option to purchase under this or any other plan, and each Participant shall be considered to have the right to purchase 2,500 shares of Stock under this Plan with respect to each Accumulation Period. SECTION 9. RIGHTS NOT TRANSFERABLE. The rights of any Participant under the Plan, or any Participant's interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 5(a). SECTION 10. NO RIGHTS AS AN EMPLOYEE. Nothing in the Plan shall be construed to give any person the right to remain in the employ of a Participating Company. Each Participating Company reserves the right to terminate the employment of any person at any time, with or without cause. SECTION 11. NO RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a stockholder with respect to any shares that he or she has purchased, or may have a right to purchase, under the Plan until the date of issuance of a stock certificate for such shares. SECTION 12. STOCK OFFERED UNDER THE PLAN. (a) AUTHORIZED SHARES. The aggregate number of shares of Stock available for purchase under the Plan shall be 350,000 subject to adjustment pursuant to this Section 12. (b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock offered under the Plan, the 2,500-share limitation described in Section 7 (c) and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares, the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company or the distribution of the shares of a Subsidiary to the Company's stockholders. -4- (c) REORGANIZATIONS. In the event of a dissolution or liquidation of the Company, or a merger or consolidation to which the Company is a constituent corporation, the Plan shall terminate unless the plan of merger, consolidation or reorganization provides otherwise, and all amounts that have been withheld but not yet applied to purchase Stock hereunder shall be refunded, without interest. The Plan shall in no event be construed to restrict in any way the Company's right to undertake a dissolution, liquidation, merger, consolidation or other reorganization. SECTION 13. AMENDMENT OR DISCONTINUANCE. The Board of Directors shall have the right to amend, suspend or terminate the Plan at any time and without notice. Except as provided in Section 12, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be subject to approval by a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation. SECTION 14. DEFINITIONS. (a) "ACCUMULATION PERIOD" means a six-month period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 3(b). (b) "BOARD OF DIRECTORS" means the Board of Directors of the Company, as constituted from time to time. (c) "COMMITTEE" means a committee of the Board of Directors, consisting of one or more directors appointed by the Board of Directors. (d) "COMPANY" means Biosite Diagnostics Incorporated, a Delaware corporation. (e) "COMPENSATION" means the total compensation paid in cash to a Participant by a Participating Company, including salaries, wages, overtime pay and commissions, but excluding bonuses, incentive compensation, moving or relocation allowances, car allowances, imputed income attributable to cars or life insurance, taxable fringe benefits and similar items, all as determined by the Committee. (f) "ELIGIBLE EMPLOYEE" means any employee of a Participating Company: (i) Whose customary employment is for more than five months per calendar year and for more than 20 hours per week; and (ii) Who has been an employee of a Participating Company for not less than one month. (g) "FAIR MARKET VALUE" shall mean the market price of Stock, determined by the Committee as follows: (i) If Stock was traded over-the-counter on the date in question but was not traded on the NASDAQ Stock Market or the NASDAQ National Market, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which Stock is quoted or, if the Stock is not quoted on any such system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.; (ii) If Stock was traded over-the-counter on the date in question and was traded on the NASDAQ Stock Market or the NASDAQ National Market, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the NASDAQ Stock Market or the NASDAQ National Market; -5- (iii) If the Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; and (iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in the Western Edition of THE WALL STREET JOURNAL or as reported directly to the Company by NASDAQ or a comparable exchange. Such determination shall be conclusive and binding on all persons. (h) "OFFERING PERIOD" means a 24-month period with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to Section 3(a). (i) "PARTICIPANT" means an Eligible Employee who elects to participate in the Plan, as provided in Section 3(c). (j) "PARTICIPATING COMPANY" means the Company and each present or future Subsidiary, except Subsidiaries excluded by the Committee. (k) "PLAN" means this Biosite Diagnostics Incorporated Employee Stock Purchase Plan, as amended from time to time. (l) "PLAN ACCOUNT" means the account established for each Participant pursuant to Section 6(a). (m) "PURCHASE PRICE" means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 7(b). (n) "STOCK" means the Common Stock of the Company. (o) "SUBSIDIARY" means a corporation, 50% or more of the total combined voting power of all classes of stock of which is owned by the Company or by another Subsidiary. SECTION 15. EXECUTION. To record the adoption of the Plan by the Board of Directors, the Company has caused its duly authorized officer to affix the corporate name and seal hereto. BIOSITE DIAGNOSTICS INCORPORATED By: /s/ KIM D. BLICKENSTAFF --------------------------------- -6- EX-27 4 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q. 1,000 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 2218 36343 7081 0 3485 53151 15874 8285 64624 5375 4049 0 0 130 55070 64624 8711 9759 2342 7726 0 0 0 (310) 64 (374) 0 0 0 (374) (0.03) (0.03) EARNINGS PER SHARE IS CALCULATED BASED UPON PRO FORMA SHARES OUTSTANDING. SEE NOTE 2 OF NOTES TO FINANCIAL STATEMENTS.
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