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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
/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 0-11094
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RIBI IMMUNOCHEM RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware 81-0394349
- ------------------------ ---------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
553 Old Corvallis Road, Hamilton, MT 59840
- --------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (406) 363-6214
--------------
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 _____
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As of July 31, 1998, there were 20,320,673 shares of common stock outstanding.
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RIBI IMMUNOCHEM RESEARCH, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 3
- -------------------------------
Item 1. Financial Statements: . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Balance Sheets
June 30, 1998 (Unaudited)
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Operations and Comprehensive Loss
Three months and six months ended
June 30, 1998 and 1997 (Unaudited). . . . . . . . . . . . . . . . 5
Condensed Statements of Cash Flows
Six months ended June 30, 1998 and
1997 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 13
- ---------------------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
- ----------
2
RIBI IMMUNOCHEM RESEARCH, INC.
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
The condensed balance sheet as of June 30, 1998, the condensed statements
of operations and comprehensive loss for the three month and six month periods
ended June 30, 1997 and 1998, and the condensed statements of cash flows for the
six months ended June 30, 1997 and 1998, have been prepared by the Company
without audit. In the opinion of management, all adjustments necessary to
present fairly the financial position, results of operations and cash flows as
of and for the periods indicated have been made.
It is suggested that the accompanying condensed financial statements be
read in conjunction with the audited financial statements and the notes thereto
included in the Company's 1997 Annual Report to Stockholders and Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
The results of operations for the three month and six month periods ended
June 30, 1998, are not necessarily indicative of results expected for the full
year 1998.
3
RIBI IMMUNOCHEM RESEARCH, INC.
CONDENSED BALANCE SHEETS
(In Thousands)
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 547 1,224
Available-for-sale investment
securities 9,618 12,146
Accounts receivable 568 870
Inventories 1,316 1,250
Other current assets 163 234
------- -------
Total current assets 12,212 15,724
Property, plant and equipment, net 11,554 11,453
Other investments 1,523 -
Other assets, net 583 593
------- -------
$ 25,872 27,770
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 208 611
Accrued expenses 660 614
Deferred revenue 3,240 1,130
------- -------
Total current liabilities 4,108 2,355
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Stockholders' equity:
Preferred stock - -
Common stock 20 20
Additional paid-in capital 67,528 67,485
Accumulated deficit (45,771) (42,053)
Accumulated other comprehensive losses (13) (37)
------- -------
Total stockholders' equity 21,764 25,415
------- -------
$ 25,872 27,770
======= =======
See accompanying notes.
4
RIBI IMMUNOCHEM RESEARCH, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands Except per Share Data)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Sales $ 625 671 1,424 866
Contracts and licenses 748 650 1,427 1,300
Investment income 165 255 324 496
Other, net 1 7 (4) 8
------- ------- ------- -------
Total revenues 1,539 1,583 3,171 2,670
------- ------- ------- -------
Costs and expenses:
Purchases and production costs 452 385 722 600
Research and development 2,002 1,814 4,056 3,557
Selling, general and
administrative 1,075 928 2,111 1,720
------- ------- ------- -------
Total costs and expenses 3,529 3,127 6,889 5,877
------- ------- ------- -------
Net loss (1,990) (1,544) (3,718) (3,207)
------- ------- ------- -------
Other comprehensive income:
Unrealized investment gains
(losses) (1) 40 (10) (60)
Less reclassification adjustment
for investment losses
included in net loss - - 34 -
------- ------- ------- -------
Other comprehensive income
(loss) (1) 40 24 (60)
------- ------- ------- -------
Comprehensive loss (1,991) (1,504) (3,694) (3,267)
======= ======= ======= =======
Net loss per common share $ (.10) (.08) (.18) (.16)
======= ======= ======= =======
Average number of shares
outstanding 20,317 20,002 20,315 19,867
======= ======= ======= =======
See accompanying notes.
5
RIBI IMMUNOCHEM RESEARCH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
Six Months Ended
June 30,
----------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (3,718) (3,207)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation and amortization 522 494
Common stock grants 3 11
Compensation relating to stock options 10 14
Discount accretion and investment
losses, net 70 (45)
Asset sales and abandoned patents 23 -
Changes in operating assets and
liabilities 2,060 351
------- -------
Net cash used by operating
activities (1,030) (2,382)
------- -------
Cash flows from investing activities:
Capital expenditures (600) (300)
Payments for other assets (41) (53)
Proceeds from sale of assets 5 -
Proceeds from maturities and sales of
available-for-sale investment securities 6,124 4,658
Purchases of available-for-sale
investment securities (3,642) (5,739)
Purchases of other investments (1,523) -
------- -------
Net cash provided (used) by
investing activities 323 (1,434)
------- -------
Cash flows from financing activities:
Sale of common stock, net - 3,978
Proceeds from exercise of options 30 24
------- -------
Net cash provided by financing
activities 30 4,002
------- -------
Net change in cash and short-term
deposits (677) 186
Cash and cash equivalents at
beginning of period 1,224 432
------- -------
Cash and cash equivalents at
end of period $ 547 618
======= =======
See accompanying notes.
6
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Inventories
-----------
Inventories are as follows:
June 30, December 31,
1998 1997
----------- -----------
(In Thousands)
Raw materials $ 104 132
Work in process 1,159 1,053
Finished goods 53 65
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$ 1,316 1,250
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2. Commitments and Contingencies
-----------------------------
The Company, the National Institutes of Health ("NIH") and the Bitterroot
Valley Sanitary Landfill ("Landfill") were notified by the Montana Department of
Health and Environmental Sciences (now known as the Department of Environmental
Quality ["DEQ"]) in March of 1991 that they had been identified as potentially
responsible parties ("PRPs") and as such are jointly and severally liable for
groundwater contamination located at and near the site of the Landfill in
Ravalli County, Montana. The Company's involvement arises out of waste materials
that it deposited at the Landfill from 1982 to 1985, which the Landfill had
permits to receive. The NIH unilaterally and voluntarily initiated and completed
work pursuant to an interim remediation plan approved by the DEQ to remove and
decontaminate the believed source of contamination and treat the aquifers which
tests have shown contain contaminants. Although decontamination of the soil at
and around the Landfill has been completed, treatment of the groundwater in the
proximity of the disposal site continues utilizing air sparging, and it is
anticipated such treatment will continue through 1998 and possibly longer.
Carbon filtering was discontinued in August 1997 based upon non-detectible
amounts of volatile organic compounds in post-air sparging samples. The DEQ
conducted a "Risk Assessment" and issued a "Draft Final Feasibility Study" in
October 1994 that discussed possible final remediation alternatives. In August
1995, the DEQ announced that it had approved a second interim action in the
vicinity of the Landfill being unilaterally and voluntarily conducted by the NIH
and which involves installing individual replacement wells and new wells to
provide both an alternate water supply for the area residents and to develop
additional information on the site hydrogeology. Information collected from
these wells through a multi-year monitoring program will be used by the DEQ to
evaluate the effectiveness of the remediation efforts to date. The current plan
calls for the wells to be installed in three phases: Phase I includes occupied
properties with the highest remaining contamination levels; Phase II includes
occupied properties with lesser degrees of contamination; and Phase III consists
largely of vacant properties. Preliminary studies completed in 1994 estimated
the cost of the wells to be approximately $1,400,000. Recent information
7
indicates that a total of nineteen alternate water supply wells have been
installed at a cost of approximately $1,000,000. The DEQ could require the PRPs
to implement further remediation should these wells not provide sufficient
quality or quantity of water. The NIH has indicated it is undertaking Phase II
groundwater remediation to intercept and treat contaminated groundwater near the
eastern Landfill boundary. The NIH has projected costs for this Phase II
groundwater remediation to be in excess of $1,000,000 through 1999. The NIH,
which has taken the lead and incurred substantially all of the remediation
costs, has represented publicly that it would continue to work with the DEQ
toward an acceptable final remediation plan. The DEQ initiated an action in
1997 against the Company, the Landfill and the owner of the Landfill seeking
recovery of past alleged costs associated with its oversight activities in the
amount of $238,000, as well as a declaratory judgment finding the parties liable
for future remedial costs, plus civil penalties in the event the parties fail to
comply. In May 1998, the Company was informed that the DEQ had entered into a
settlement agreement with the Landfill and its owners, whereby the Landfill and
its owners agreed to collectively pay the DEQ approximately $35,000. The Company
believes that it has meritorious defenses to the claim, including the amount
thereof, and that there are other responsible parties. The Company has filed a
response to the action, including a motion to dismiss. There can be no
assurance that the Company's defenses and motion will be successful.
On April 21, 1998, the Company received notice that the U.S. Department of
Justice ("USDJ"), acting on behalf of the Department of Health and Human
Services, which overseas the NIH, filed suit in United States District Court
seeking contribution from the Company of an "equitable share" of past and future
response costs incurred by the United States in connection with the remediation
at and near the Landfill. The complaint alleges that as of September 30, 1997,
the United States had incurred response costs in excess of $3,400,000 and that
it expects to incur more than $1,000,000 in additional response costs. On or
about June 4, 1998, the Company received notice that the Plaintiff United States
of America had entered into a settlement agreement with the Landfill and the
Landfill owner pursuant to which the settling parties agreed to make payment in
the amount of $440,000. In view of the settlement, the Plaintiff United States
of America filed with the Court a Joint Motion for Stay of Proceedings between
the United States of America, the Landfill and the Landfill owner. The Company
has filed a response to the action. Although the Company believes it has
meritorious defenses to the claim, including the amount thereof, and that there
are other responsible parties, there can be no assurance that the Company will
be successful in its defenses to claims arising out of the Landfill, including
the claims made by the United States.
On or about June 6, 1998, the DEQ as a Plaintiff-Intervenor, filed a
complaint in the United States District Court against the Company, the Landfill
and the owner of the Landfill seeking recovery of past alleged costs associated
with its oversight activities in the amount of $258,500, of which it indicated
not more than $154,000 had been reimbursed, plus interest and attorneys fees and
costs as well as a declaratory judgment finding the parties liable for future
response costs. The Company has filed a response to the action, including a
counterclaim against the Plaintiffs. The Company believes that it has
meritorious defenses to the claim, including the amount thereof, and that there
are other responsible parties. There can be no assurance that the Company's
defenses and counterclaim will be successful.
8
Depending upon the eventual outcome of the above discussed litigation and
when in time the litigation is concluded, the outcome may or may not have a
material adverse effect on the Company's financial condition. Accordingly, it
is not possible at present to accurately predict whether an adverse outcome will
have a material adverse effect on the Company's financial condition. The
Company is unable to determine its overall potential liability with respect to
the Landfill at this time. As of June 30, 1998, the Company has accrued a
reserve of approximately $230,000, primarily to cover billed and potential
legal, consulting, remediation and DEQ reimbursement costs associated with the
Company as a PRP. Net costs charged against operations during the first six
month periods of 1998 and 1997 were $47,000 and $45,000, respectively.
In June 1997, a complaint was filed in District Court in Ravalli County
against the Company by a former employee who was discharged for cause in June
1996. The plaintiff alleges discharge in violation of the Montana Wrongful
Discharge from Employment Act ("Act") and further, that discharge was for
refusal to violate public policy. The Court granted dismissal with respect to
the portion of the complaint which alleges termination for refusal to violate
public policy. Plaintiff filed a motion for reconsideration asking the Court to
reverse its decision with respect to the issue of termination for refusal to
violate public policy and requested the Court for permission to amend the
complaint to include additional allegations relative to the public policy issue.
On April 6, 1998, the Court allowed plaintiff to amend the complaint as
requested. The Company believes that it has a meritorious defense and plans to
vigorously defend the suit. Because the action is in early stages, it is not
possible to reliably assess the outcome. Depending upon the eventual outcome of
this litigation and when in time the litigation is concluded, the outcome may or
may not have a material adverse effect of the Company's financial condition.
Accordingly, it is not possible at this time to accurately predict whether an
adverse outcome will have an adverse effect on the Company's financial
condition.
The plaintiff has also filed a petition for Judicial Review in District
Court in Missoula County naming the Company and the State of Montana Department
of Labor and Industry respondents and asking the Court to review and overturn
the Department of Labor's decision finding plaintiff was terminated for
misconduct as defined in MCA Section 39-51-2303 and, therefore, not allowing
plaintiff to collect unemployment benefits. The Company has filed a response
arguing the correctness of the Department of Labor's decision. It is not
possible to determine the outcome of this Judicial Review at this time.
However, in the event plaintiff is successful, it would not have a material
adverse effect on the financial condition of the Company.
3. Subsequent Event - Sale of Convertible Preferred Stock
------------------------------------------------------
In July 1998, RGC International Investors, LDC, ("Holder") purchased 8,240
shares of convertible preferred stock of the Company for gross proceeds of
$8,240,000 ("stated value"). The preferred stock's liquidation preference
equals its stated value plus an amount equal to 5% per annum. Beginning the 91st
day after the July 17th closing, the preferred stock is convertible into shares
of common stock of the Company. From the 91st day until 120 days after the
closing, the conversion price is fixed at $6.04. After 120 days, the conversion
price is a floating conversion price, which is the lesser of the fixed
conversion price and a market price based upon average market bid prices for a
defined period prior to the conversion date. The actual number of shares of
common stock that will be issued will depend upon the preferred stock's
liquidation preference and
9
the actual conversion price when the preferred stock is converted. Beginning
with the 91st day from the closing date, each thirty days thereafter, on a
cumulative basis, a maximum amount of 15% of the preferred stock may be
converted into shares of common stock if the conversion price is less than
$4.00. This restriction does not apply if the conversion price is $4.00 or
greater. The Holder and affiliates of the Holder may not hold shares of common
stock in excess of 4.9% of the outstanding shares of common stock at any given
time. In addition, except for block trades of not less than 15,000 shares of
converted common shares, there are restrictions on the number of common shares
that may be traded on any given trading day. Subject to certain conditions, the
Company has the right to redeem all or a portion of the preferred stock at a
premium over the purchase price paid by the Holder. In the event the Company
fails to meet certain obligations under the agreement with the Holder, the
Holder can require the Company to redeem the preferred stock at a premium over
the purchase price paid by the Holder. Any shares not converted or redeemed will
automatically be converted into common stock three years from the closing date.
4. Future Accounting Changes
-------------------------
During 1998 the Financial Accounting Standards Board released two
Statements of Financial Accounting Standards ("FAS") that the Company will be
required to adopt. FAS No. 132 revises certain disclosures about pension and
other post-retirement benefit plans. FAS No. 133 requires uniform accounting
for derivative instruments and hedging activities. While the Company is still
evaluating FAS No. 133, it does not expect either Standard to have a material
impact on the Company's financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
- -------
Since its inception in 1981, the Company has been engaged primarily in the
research and development of immunostimulants for use in preventing and treating
human diseases. To date, the Company has received limited revenues from
commercial sales and sales of clinical supplies. The Company has incurred net
losses in each year since its inception and expects to incur additional losses
for at least the next year, and probably longer. At June 30, 1998, the Company's
accumulated deficit was approximately $45,771,000.
The Company's results of operations can vary significantly from quarter to
quarter and depend, among other factors, on costs related to the progress of
clinical trials conducted by the Company and, to a lesser extent, on revenues
and costs associated with manufacturing. To date, research and development
expenses, together with manufacturing costs, have exceeded product and other
revenues in all periods.
The Company is not able to estimate with certainty the amount of cash and
working capital which may be needed for operations. Such requirements typically
vary depending upon the results of basic research and clinical trials, the time
and expense required for governmental approval of products, and competitive and
technical developments, most of which are beyond management's control. There is
no assurance that the Company will be able to obtain the necessary funding in
10
sufficient amounts or at the appropriate time for its planned activities. In the
event the Company may require additional funding, it might not be able to
proceed as rapidly as it would like, if at all, with the development and
commercialization of its products, which would have a material adverse effect on
its future financial condition and results of operations.
In computer systems and applications developed in the 1970s and 1980s,
years were often stored in a 2-digit rather than 4-digit format to save
expensive computer storage and processing space. These systems correctly assumed
the 2-digit year in data was preceded by the digits "19." At year 2000, a 2-
digit date of "00" may not be interpreted correctly by these systems, which
could lead to incorrect or inadequate results. The Company established a
committee, which made a preliminary assessment, and hired an outside firm which
is determining in reasonable detail the Company's exposure to the "Year 2000"
problem. The Company has begun prioritizing systems that will potentially
require remediation and testing. The Company expects to continue to incur both
internal staffing costs, as well as consulting and other expenses related to
these issues. These costs will be expensed as incurred. Preliminary assessment
indicates that resulting solutions will involve a mix of purchasing new systems
and modifying existing systems. The Company is working to solve these issues in
a timely manner, but there can be no assurance that all of the Year 2000
problems will be resolved before the end of 1999 or that all of the Company's
vendors and customers will be Year 2000 compliant. The Company is not yet able
to estimate the potential costs associated with the Year 2000 problem.
Pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, several forward-looking statements that involve a number of
risks and uncertainties are included within this Management's Discussion and
Analysis of Financial Condition and Results of Operations. In addition to the
risks and uncertainties discussed with the forward-looking statements, there are
a number of other factors that could cause actual results to differ materially
from projected results, including, but not limited to the following: levels of
expenditure on and results of the Company's research and the impact of those
results on milestone and transfer payments from partners; research results of
other companies using the Company's products; competition from other companies;
changes in government regulation, including price controls for newly developed
drugs; and risk factors listed from time-to-time in the Company's reports to the
Securities and Exchange Commission. Forward-looking statements herein are
followed by an asterisk ("*").
Results of Operations
- ---------------------
The Company incurred a greater net loss in the second quarter and first six
months of 1998 than in the same periods in 1997. Increased revenues for the
first half of 1998 and nearly level revenues for the second quarter, when
compared to the same periods in the previous year, were more than offset by
increased expenses, largely related to commercial license application filings
for MELACINE melanoma theraccine.
Sales were up 64% in the first half of 1998 compared to the first half of
1997. Improved sales reflect increased orders of custom adjuvants by the
Company's marketing partners. Slightly increased revenues from contracts and
licenses were offset by lower investment income. Investment income has decreased
as a result of a diminishing investment portfolio.
11
Purchases and production costs increased during the second quarter of 1998
compared to the second quarter of 1997 on a slight decrease in sales. During the
first half of 1998 compared to the first half of 1997, purchases and production
costs were 20% higher, but sales were up by 64%. Fluctuations in the
relationship of purchases and production costs to sales is primarily a function
of the Company's manufacturing plant level of throughput, which varies with the
plant and process validation testing being conducted at the time.
Research and development expenses increased 10% in the second quarter of
1998 compared to the second quarter of 1997 and increased 14% in the first six
months of 1998 compared to the first six months of 1997. Most of the increase in
the second quarter and first six months of 1998 over the same periods in 1997
are labor and outside contract costs associated with the preparation and filing
of commercial license applications for MELACINE in the treatment of Stage IV
(late stage) melanoma. Enrollment of patients also continues in a Phase III
human clinical trial using MELACINE with interferon alfa-2b to treat stage IV
melanoma patients.
The Company has filed for marketing clearance for MELACINE to be used in
the treatment of Stage IV melanoma in Canada and Europe and is preparing a
Biologics License Application for filing in the United States. In July
representatives of the Health Protection Branch ("HPB"), which is the Canadian
agency reviewing the filing in Canada, conducted an in-depth preliminary Good
Manufacturing Practices (GMP) audit of the Company's Hamilton, Montana facility.
During the extensive inspection, the HPB officials identified certain issues
that it indicated should be addressed before it conducts its final inspection.
The Company is responding to the issues raised on a priority basis and once the
modifications are completed, will schedule a return visit by the HPB inspectors.
Recently, as part of the normal regulatory process, the reviewers of the
European filing requested further information regarding the Marketing
Authorization Application for MELACINE filed in Europe. A response is in
preparation. In late July the Company was informed that a site inspection would
be conducted by the European authorities prior to the end of the third quarter
1998. Company representatives also recently met with representatives of the U.S.
Food and Drug Administration ("FDA") to discuss preliminary information provided
by the Company and to receive guidance as to the content of a Biologics License
Application in preparation for filing with the FDA to market MELACINE in the
United States. The FDA informed the Company during this meeting that the
clinical data should be reorganized and also requested additional manufacturing
information. This effort will delay filing in the United States, which is
anticipated to be sometime toward the middle of next year.* However, there can
be no assurance that the Company will file the application in the United States
within the time frame stated. Additionally, there can be no assurance that
regulatory authorities will approve marketing MELACINE for any indication or
that revenues will be significant if marketing approval is granted.
Selling, general and administrative expenses were up 16% in the second
quarter of 1998 and up 23% in the first six months of 1998 compared to those
same periods in 1997. The increases result primarily from costs associated with
commercial license application filings, as well as legal and professional fees,
investor relations expenses and year 2000 assessment costs.
12
Financial Condition
- -------------------
During the first six months of 1998 the Company used $1,030,000 in
operations which was 57% less than the amount used in the first six months of
1997. The decrease in cash usage is attributable primarily to changes in
operating assets and liabilities connected to differences in the timing of
recognition of license fee revenues. The Company expects cash flows used in
operations for the year 1998 to continue to be less than those in the year 1997
as an increase in revenues on a cash basis is expected to exceed the increase in
research and development expenditures.* Projected cash flows are dependent upon
the Company receiving revenues that are anticipated and preparing the commercial
filings and conducting the research and clinical trials that are now planned.
In July 1998, RGC International Investors, LDC, purchased 8,240 shares of
5% convertible preferred stock of the Company for gross proceeds of $8,240,000.
The preferred stock is convertible into shares of common stock of the Company.
(See Note 3 of the Notes to Condensed Financial Statements and Part II, Item
2(b) for more information regarding the sale of preferred stock). With this
additional funding, the Company believes its available cash, cash equivalents
and investments together with funds from licensing agreements and product sales
should be sufficient to meet its capital requirements through 2000.* However,
it is possible that revenues from license agreements, product sales and
investments could be lower than anticipated and/or operating cost and expenses
could be higher than anticipated which could result in having sufficient capital
for a period less than through 2000.
See Note 2 of the Notes to Condensed Financial Statements for a discussion
of contingencies related to the Company's identification as a Potentially
Responsible Party for groundwater contamination at and near the Bitterroot
Valley Sanitary Landfill, and a suit filed by the U.S. Department of Justice
seeking to recover a portion of the related remediation costs. Note 2 also
contains information regarding the Company being a named defendant in two suits
brought by the Montana Department of Environmental Quality seeking to recover
alleged costs associated with its oversight activities of the Landfill and two
suits filed by a former employee.
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
(a) See Note 2 of the Notes to Condensed Financial Statements for a
discussion of the Company's involvement as a PRP and a defendant in
civil suits relating to the Bitterroot Valley Sanitary Landfill. Note
2 also contains information regarding two suits filed by a former
employee.
Item 2. Changes in Securities
(b) On July 17, 1998, the Company sold to RGC International Investors,
LDC, 8,240 shares of Series A Convertible Preferred Stock with a par
value of $.10 and a stated value of $1,000 per share for gross
13
proceeds of $8,240,000. The sale was made pursuant to a private
placement exemption under Section 4(2) of the Securities Act of 1933.
Such shares rank prior to the Company's common stock as to
distribution of assets upon liquidation or the payment of dividends.
See Note 3 of the Notes to Condensed Financial Statements for more
information, including rights of converting the preferred shares
into common shares.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on April 24, 1998.
(b) Proxies were solicited by the Company pursuant to Regulation 14A of
the Securities Exchange Act of 1934 and all of management's nominees
for director were elected as follows:
TOTAL
FOR WITHHELD VOTED
--- -------- -----
John L. Cantrell 16,700,122 256,307 16,956,429
Philipp Gerhardt 16,807,072 149,357 16,956,429
Paul Goddard 16,711,672 244,757 16,956,429
Mark I. Greene 16,712,122 244,307 16,956,429
Robert E. Ivy 16,660,047 296,382 16,956,429
Thomas N. McGowen, Jr. 16,804,552 151,877 16,956,429
Frederick B. Tossberg 16,828,752 127,677 16,956,429
Item 5. Other Information
Any stockholder proposal submitted outside the processes of Rule 14a-8
under the Securities Exchange Act of 1934 for presentation to the
Company's 1999 Annual Meeting of Stockholders will be considered
untimely for purposes of Rules 14a-4 and 14a-5 if notice thereof is
received by the Company after February 3, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 - Certificate of Designations, Preferences, and
Rights of Series A Convertible Preferred Stock
Exhibit 27 - Financial Data Schedule (filed only electronically)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June
30, 1998.
14
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.
RIBI IMMUNOCHEM RESEARCH, INC.
------------------------------
(Registrant)
August 12,1998 By /s/Vern D. Child
------------------------------------------
Vern D. Child, Vice President-Finance
and Treasurer (duly authorized officer
and principal financial and accounting
officer)
15
RIBI IMMUNOCHEM RESEARCH, INC.
EXHIBIT INDEX
Exhibit No. Description and Incorporation by Reference Page
- ---------- ------------------------------------------ ----
3.1 Certificate of Designations, Preferences, and Rights 17
of Series A Convertible Preferred Stock.
27 Financial Data Schedule (filed only electronically).
16
Exhibit 3.1
CERTIFICATE OF
DESIGNATIONS, PREFERENCES, AND RIGHTS
of
SERIES A CONVERTIBLE PREFERRED STOCK
of
RIBI IMMUNOCHEM RESEARCH, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Ribi ImmunoChem Research, Inc., a corporation organized and existing under
the Delaware General Corporation Law (the "Corporation"), hereby certifies that
the following resolutions were adopted by the Board of Directors of the
Corporation on July 13, 1998 pursuant to authority of the Board of Directors as
required by Section 151(g) of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Corporation (the "Board of Directors" or the "Board") in
accordance with the provisions of its Articles of Incorporation, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $.10 per share (the "Preferred Stock"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
Series A Convertible Preferred Stock
I. Designation and Amount
The designation of this series, which consists of 8,240 shares of Preferred
Stock, is Series A Convertible Preferred Stock (the "Series A Preferred Stock")
and the stated value shall be One Thousand Dollars ($ 1,000) per share (the
"Stated Value").
II. Rank
The Series A Preferred Stock shall rank (i) prior to the Corporation's
common stock, par value $.001 per share (the "Common Stock"); (ii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of Series A Preferred Stock obtained in
accordance with Article IX hereof, such class or series of capital stock
specifically, by its terms, ranks senior to or pari passu with the Series A
Preferred Stock) (collectively, with the Common Stock, "Junior Securities");
(iii) pari passu with any class or series of capital stock of the Corporation
17
hereafter created (with the consent of the holders of Series A Preferred Stock
obtained in accordance with Article IX hereof) specifically ranking, by its
terms, on parity with the Series A Preferred Stock ("Pari Passu Securities");
and (iv) junior to any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of Series A Preferred Stock
obtained in accordance with Article IX hereof) specifically ranking, by its
terms, senior to the Series A Preferred Stock ("Senior Securities"), in each
case as to distribution of assets upon liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary.
III. Dividends
The Series A Preferred Stock shall not bear any dividends. In no event, so
long as any Series A Preferred Stock shall remain outstanding, shall any
dividend whatsoever be declared or paid upon, nor shall any distribution be made
upon, any Junior Securities, nor shall any shares of Junior Securities be
purchased or redeemed by the Corporation nor shall any moneys be paid to or made
available for a sinking fund for the purchase or redemption of any Junior
Securities (other than a distribution of Junior Securities), without, in each
such case, the written consent of the holders of a majority of the outstanding
shares of Series A Preferred Stock, voting together as a class.
IV. Liquidation Preference
A. LIQUIDATION EVENT. If the Corporation shall commence a voluntary case
under the Federal bankruptcy laws or any other applicable Federal or State
bankruptcy, insolvency or similar law, or consent to the entry of an order for
relief in an involuntary case under any law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official of the Corporation or of any substantial part of its properly, or make
an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief in respect of the Corporation shall be entered by a court having
jurisdiction in the premises in an involuntary case under the Federal bankruptcy
laws or any other applicable Federal or state bankruptcy, insolvency or similar
law resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"Liquidation Event"), no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities) upon
liquidation, dissolution or winding up unless prior thereto, the holders of
shares of Series A Preferred Stock, subject to Article VI, shall have received
the Liquidation Preference (as defined in Article IV.C) with respect to each
share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series A Preferred Stock and
holders of Pari Passu Securities (including any dividends or distribution paid
on any Pari Passu Securities after the date of filing of this Certificate of
Designation) shall be insufficient to permit the payment to such holders of the
preferential amounts payable thereon, then the entire assets and funds of the
Corporation legally available for distribution to the Series A Preferred Stock
and the Pari Passu Securities shall be distributed ratably among such shares in
proportion to
18
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate liquidation preference payable on all such shares. Any prior
dividends or distribution made after the date of filing of this Certificate of
Designation shall offset, dollar for dollar, the amount payable to the class or
series to which such distribution was made.
B. CERTAIN ACTS DEEMED LIQUIDATION EVENT. At the option of any holder of
Series A Preferred Stock, the sale, conveyance or disposition of all or
substantially all of the assets of the Corporation, the effectuation by the
Corporation of a transaction or series of related transactions in which more
than 50% of the voting power of the Corporation is disposed of, or the
consolidation, merger or other business combination of the Corporation with or
into any other Person (as defined below) or Persons when the Corporation is not
the survivor shall either: (i) be deemed to be a liquidation, dissolution or
winding up of the Corporation pursuant to which the Corporation shall be
required to distribute upon consummation of and as a condition to such
transaction an amount equal to 130% of the Liquidation Preference with respect
to each outstanding share of Series A Preferred Stock or (ii) be treated
pursuant to Article VI.C(b) hereof. "Person" shall mean any individual,
corporation, limited liability company, partnership, association, trust or other
entity or organization.
C. LIQUIDATION PREFERENCE. For purposes hereof, the "Liquidation
Preference" with respect to a share of the Series A Preferred Stock shall mean
an amount equal to the sum of (i) the Stated Value thereof plus (ii) and amount
equal to five percent (5%) per annum of such Stated Value for the period
beginning on the date of issuance of the Series A Preferred Stock (the "Issue
Date") and ending on the date of final distribution to the holder thereof
(prorated for any portion of such period). The liquidation preference with
respect to any Pari Passu Securities shall be as set forth in the Certificate of
Designation filed in respect thereof.
V. Redemption
A. MANDATORY REDEMPTION. If any of the following events (each, a
"Mandatory Redemption Event") shall occur:
(i) The Corporation fails to issue shares of Common Stock to the
holders of Series A Preferred Stock upon exercise by the holders of their
conversion rights in accordance with the terms of this Certificate of
Designation (for a period of at least sixty (60) days if such failure is solely
as a result of the circumstances governed by the second paragraph of Article
VI.E below and the Corporation is using all commercially reasonable efforts to
authorize a sufficient number of shares of Common Stock as soon as practicable),
fails to transfer or to cause its transfer agent to transfer (electronically or
in certificated form) any certificate for shares of Common Stock issued to the
holders upon conversion of the Series A Preferred Stock as and when required by
this Certificate of Designation or the Registration Rights Agreement, dated as
of July 17, 1998, by and among the Corporation and the other signatories thereto
(the "Registration Rights Agreement"), fails to remove any restrictive legend
(or to withdraw any stop transfer instructions in respect thereof) on any
certificate or any shares of Common Stock issued to the holders of Series A
Preferred Stock upon conversion of the Series A Preferred Stock as and when
required by this Certificate of Designation, the Securities Purchase Agreement
dated as of July 17, 1998, by and between the Corporation and the other
signatories thereto (the "Purchase Agreement") or the Registration Rights
Agreement, or fails to fulfill
19
its obligations pursuant to Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the
Purchase Agreement (or makes any announcement, statement or threat that it does
not intend to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any announcement, statement or threat not to
honor its obligations shall not be rescinded in writing) for ten (10) business
days;
(ii) The Corporation fails to obtain effectiveness with the Securities
and Exchange Commission (the "SEC") of the Registration Statement (as defined in
the Registration Rights Agreement) prior to January 17, 1999 (adjusted for any
delays which are solely attributable to (a) changes in the Registration
Statement required by the holders of the Series A Preferred Stock with respect
to the information relating to the holders of the Series A Preferred Stock,
including, without limitation, changes to the plan of distribution, or to the
failure of the holders of the Series A Preferred Stock to conduct their review
of the Registration Statement pursuant to Section 3(h) of the Registration
Rights Agreement in a reasonably prompt manner and (b) any delay resulting
solely from inclusion of underwriters in the offering of shares pursuant to the
Registration Statement) or such Registration Statement lapses in effect (or
sales otherwise cannot be made thereunder, whether by reason of the
Corporation's failure to amend or supplement the prospectus included therein in
accordance with the Registration Rights Agreement or otherwise) for more than
thirty (30) consecutive Trading Days (as defined below) or more than sixty (60)
Trading Days in any twelve (12) month period after such Registration Statement
becomes effective;
(iii) The Corporation shall make an assignment for the benefit of
creditors, or apply for or consent to the appointment of a receiver or trustee
for it or for all or substantially all of its property or business; or such a
receiver or trustee shall otherwise be appointed;
(iv) Bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Corporation or any
subsidiary of the Corporation;
(v) The Corporation shall fail to maintain the listing of the Common
Stock on the Nasdaq National Market ("Nasdaq"), the Nasdaq SmallCap Market, the
New York Stock Exchange or the American Stock Exchange, then, upon the
occurrence and during the continuation of any Mandatory Redemption Event
specified in subparagraphs (i), (ii) or (v) at the option of the holders of at
least 50% of the then outstanding shares of Series A Preferred Stock by written
notice (the "Mandatory Redemption Notice") to the Corporation of such Mandatory
Redemption Event, or upon the occurrence of any Mandatory Redemption Event
specified in subparagraphs (iii) or (iv), the Corporation shall purchase each
holder's shares of Series A Preferred Stock for an amount per share equal to the
greater of (1) the sum of (a) the Redemption Percentage (as defined below)
multiplied by the Stated Value of the shares to be redeemed plus (b) an amount
equal to five percent (5%) per annum of such Stated Value for the period
beginning on the Issue Date and ending on the date of payment of the Mandatory
Redemption Amount (the "Mandatory Redemption Date") plus (c) other amounts due
pursuant to the terms of this Certificate of Designation or the Registration
Rights Agreement, and (2) the "parity value" of the shares to be redeemed, where
parity value means the product of (a) the highest number of shares of Common
Stock issuable upon conversion of such shares in accordance with Article VI
below
20
(without giving any effect to any limitations on conversions of shares contained
herein, and treating the Trading Day (as defined in Article VI.B) immediately
preceding the Mandatory Redemption Date as the "Conversion Date" (as defined in
Article VI.B(a)) for purposes of determining the lowest applicable Conversion
Price), unless the Mandatory Redemption Event arises as a result of a breach in
respect of a specific Conversion Date in which case such Conversion Date shall
be the Conversion Date), multiplied by (b) the High Trading Price (as defined
below) for the Common Stock on such "Conversion Date" (the greater of such
amounts being referred to as the "Mandatory Redemption Amount"). The "Redemption
Percentage" shall mean 115% for purposes of any Mandatory Redemption Event
specified in subparagraph (ii); and the then applicable Optional Redemption
Percentage (as defined in Article V.C) for all other purposes. "High Trading
Price" means for any security as of any date, the highest trade price on Nasdaq
as reported by Bloomberg Financial Markets or an equivalent reliable reporting
service mutually acceptable to and hereafter designated by the holders of a
majority in interest of the shares of Series A Preferred Stock and the
Corporation ("Bloomberg"), or, if Nasdaq is not the principal trading market for
such security, the highest trade price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the highest trade price
of such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no highest trade price of
such security is available in the over-the-counter market on the electronic
bulletin board for such security or in any of the foregoing manners, the average
of the bid prices of any market makers for such security that are listed in the
"pink sheets" by the National Quotation Bureau, Inc. If the high Trading Price
cannot be calculated for such security on such date in the manner provided
above, the High Trading Price shall be the fair market value as mutually
determined by the Company and the majority in interest of the holders of the
outstanding shares of Series A Preferred Stock.
In the case of a Mandatory Redemption Event, if the Corporation fails
to pay the Mandatory Redemption Amount for each share within five (5) business
days of written notice that such amount is due and payable, then (assuming there
are sufficient authorized shares) in addition to all other available remedies,
each holder of Series A Preferred Stock shall have the right at any time, so
long as the Mandatory Redemption Event continues, to require the Corporation,
upon written notice, to immediately issue (in accordance with and subject to the
terms of Article VI below), in lieu of the Mandatory Redemption Amount with
respect to each outstanding share of Series A Preferred Stock held by such
holder, the number of shares of Common Stock of the Corporation equal to the
Mandatory Redemption Amount divided by the Conversion Price then in effect.
B. TRADING MARKET REDEMPTION. If the Series A Preferred Stock ceases to
be convertible by any holder as a result of the limitations described in Article
VI.A(c) below (a "Trading Market Redemption Event"), and the Corporation has not
prior to, or within thirty (30) days of, the date that such Trading Market
Redemption Event arises, (i) obtained the Stockholder Approval (as defined in
Article VI.A(c)) or (ii) eliminated any prohibitions under applicable law or the
rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Corporation or any
of its securities on the Corporation's ability to issue shares of Common Stock
in excess of the Maximum Share Amount, then the Corporation shall be obligated
to redeem immediately all of the then outstanding Series A Preferred Stock, in
accordance with this Article V.B. An irrevocable redemption notice (the "Trading
Market
21
Redemption Notice") shall be delivered promptly to the holders of Series A
Preferred Stock at their registered address appearing on the records of the
Corporation and shall state (i) that the Maximum Share Amount (as defined in
Article VI.A) has been issued upon exercise of the Series A Preferred Stock,
(ii) that the Corporation is obligated to redeem all of the outstanding Series A
Preferred Stock and (iii) the Mandatory Redemption Date, which shall be a date
within five (5) business days of the earlier of (a) the date of the Redemption
Notice or (b) the date on which the holders of the Series A Preferred Stock
notify the Corporation of the occurrence of a Trading Market Redemption Event.
On the Mandatory Redemption Date, the Corporation shall make payment of the
Mandatory Redemption Amount (as defined in Article V.A above and using the
Redemption Percentage applicable to Article V.A.(ii)) in cash.
C. OPTIONAL REDEMPTION. Notwithstanding anything to the contrary
contained in this Article V, so long as (i) no Mandatory Redemption Event or
Trading Market Redemption Event shall have occurred and be continuing, (ii) the
Registration Statement is then in effect and has been in effect and sales can be
made thereunder for at least twenty (20) days prior to the Optional Redemption
Date (as defined below) and (iii) the Conversion Price is less than the Fixed
Conversion Price for ten (10) consecutive Trading Days (as defined below) and on
the day an Optional Redemption Notice is delivered, then at any time after the
Issue Date, the Corporation shall have the right, exercisable on not less than
ten (10) but no more than thirty (30) Trading Days prior written notice to the
holders of Series A Preferred Stock (which notice may not be sent to the holders
of the Series A Preferred Stock until the Corporation is permitted to redeem the
Series A Preferred Stock pursuant to this Article V.C), to redeem any or all of
the outstanding shares of Series A Preferred Stock in accordance with this
Article V. Any notice of redemption hereunder (an "Optional Redemption") shall
be delivered to the holders of Series A Preferred Stock at their registered
addresses appearing on the books and records of the Corporation and shall state
(1) that the Corporation is exercising its right to redeem all of the
outstanding shares of Series A Preferred Stock issued on the Issue Date and (2)
the date of redemption (the "Optional Redemption Notice"). On the date fixed for
redemption (the "Optional Redemption Date"), the Corporation shall make payment
of the Optional Redemption Amount (as defined below) to or upon the order of the
holders as specified by the holders in writing to the Corporation at least one
(1) business day prior to the Optional Redemption Date. If the Corporation
exercises its right to redeem the Series A Preferred Stock, the Corporation
shall make payment to the holders of an amount in cash (the "Optional Redemption
Amount") equal to the Optional Redemption Percentage (as defined below)
multiplied by the sum of (i) the Stated Value of the shares of Series A
Preferred Stock to be redeemed and (ii) an amount equal to five percent (5%) per
annum of such Stated Value for the period beginning on the Issue Date and ending
on the Optional Redemption Date, for each share of Series A Preferred Stock then
held. The "Optional Redemption Percentage" shall mean 115% from the Issue date
through October 17, 1998; 120% from October 18, 1998 through January 17, 1999;
125% from January 18, 1999 through April 17, 1999; and 130% thereafter.
Notwithstanding notice of an Optional Redemption, the holders shall at all times
prior to the Optional Redemption Date maintain the right to convert all or any
shares of Series A Preferred Stock in accordance with Article VI and any shares
of Series A Preferred Stock so converted after receipt of an Optional Redemption
Notice and prior to the Optional Redemption Date set forth in such notice and
payment of the aggregate Optional Redemption Amount shall be deducted from the
shares of Series A Preferred Stock which are otherwise subject to redemption
pursuant to such notice. If the Corporation delivers an Optional Redemption
Notice and fails to
22
pay the Optional Redemption Amount due to the holders of the Series A Preferred
Stock within two (2) business days following the Optional Redemption Date, the
Corporation shall forever forfeit its right to redeem the Series A Preferred
Stock pursuant to this Article V.C.
VI. Conversion at the Option of the Holder
A. OPTIONAL CONVERSION
(a) CONVERSION AMOUNT. Subject to the conversion schedule set forth
in Article VI.A.(b) below, each holder of shares of Series A Preferred Stock
may, at its option at any time and from time to time, upon surrender of the
certificates therefor, convert any or all of its shares of Series A Preferred
Stock of at least $200,000 Stated Value (or such lesser amount if such amount is
the aggregate remaining unconverted portion of such holder's shares of Series A
Preferred Stock at the time of conversion) into Common Stock as set forth below
(an "Optional Conversion"). Each share of Series A Preferred Stock shall be
convertible into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing (1) the sum of (a) the Stated Value thereof
plus (b) the Premium Amount (as defined below), by (2) the then effective
Conversion Price (as defined below); provided, however, that, in no event (other
than pursuant to the Automatic Conversion (as defined in Article VII)) shall a
holder of shares of Series A Preferred Stock be entitled to convert any such
shares in excess of that number of shares upon conversion of which the sum of
(x) the number of shares of Common Stock beneficially owned by the holder and
its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
shares of Series A Preferred Stock or the unexercised or unconverted portion of
any other securities of the Corporation subject to a limitation on conversion or
exercise analogous to the limitations contained herein) and (y) the number of
shares of Common Stock issuable upon the conversion of the shares of Series A
Preferred Stock with respect to which the determination of this proviso is being
made, would result in beneficial ownership by a holder and such holder's
affiliates of more than 4.9% of the outstanding shares of Common Stock. For
purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as
otherwise provided in clause (x) of such proviso. The "Premium Amount" means the
product of the Stated Value, multiplied by .05, multiplied by (N/365), where "N"
equals the number of days elapsed from the Issue Date to and including the
Conversion Date (as defined in Article VI.B).
(b) CONVERSION RESTRICTIONS. Each holder of shares of Series A
Preferred Stock may convert only up to that percentage of the aggregate Stated
Value of all shares of Series A Preferred Stock received by such holder on the
Issue Date specified below during the time period set forth opposite such
percentage.
23
Percentage Time Period
---------- -----------
0% 0 - 90 days following the Issue Date
15% 91 -120 days following the Issue Date
30% 121 -150 days following the Issue Date
45% 151 - 180 days following the Issue Date
60% 181 - 210 days following the Issue Date
75% 211 - 240 days following the Issue Date
90% 241 - 270 days following the Issue Date
100% 271 days following the Issue Date
Provided, however, that the restrictions on conversion set forth above shall not
apply to conversions taking place on any Conversion Date (i) after ninety (90)
days from the Issue Date, that the Conversion Price (as defined below) is
greater than or equal to $4.00 or (ii) occurring on or after the date the
Corporation makes a public announcement that it intends to merge or consolidate
with any other corporation or sell transfer substantially all of the assets of
the Corporation or (iii) occurring on or after the date any person, group or
entity (including the Corporation) publicly announces a tender offer to purchase
50% or more of the Corporation's Common Stock or otherwise publicly announces an
intention to replace a majority of the Corporation's Board of Directors by
waging a proxy battle or otherwise or (iv) occurring on or after there is a
material adverse change in the business, operation, assets, financial condition
or prospects of the Corporation or its subsidiaries, taken as a whole or (v)
upon the occurrence of any Mandatory Redemption Event or upon the delivery of
any Optional Redemption Notice by the Corporation; and further provided,
however, that the Corporation may, in its sole discretion, waive or reduce the
restrictions or conversion set forth above so as to allow the holders of Series
A Preferred Stock to convert additional shares of Series A Preferred Stock
despite such restrictions.
(c) TRADING MARKET LIMITATION. Unless (i) permitted by the applicable
rules and regulations of the principal securities market on which the Common
Stock is listed or traded or (ii) the Corporation has obtained approval of the
issuance of the Common Stock upon conversion of the Series A Preferred Stock in
accordance with applicable law and the rules and regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or any of its securities (the
"Stockholder Approval"), in no event shall the total number of shares of Common
Stock issued upon conversion of the Series A Preferred Stock (including any
shares of capital stock or rights to acquire shares of capital stock issued by
the Corporation which are aggregate or integrated with the Common Stock issued
or issuable upon conversion of the Series A Preferred Stock for purposes of any
such rule or regulation) exceed the maximum number of shares of Common Stock
that the Corporation can so issue pursuant to any rule of the principal United
States securities market on which the Common Stock trades (including Rule
4460(i) of Nasdaq or any successor rule) (the "Maximum Share Amount") which, as
of the Issue Date, shall be 4,062,103 (19.99% of the total shares of Common
Stock outstanding on the Issue Date). With respect to each holder of Series A
Preferred Stock, the Maximum Share Amount shall refer to such holder's pro rata
share thereof determined in accordance with Article X below. In the event that
(a) the aggregate number of shares of Common Stock actually issued upon
conversion of the Series A Preferred Stock represents at least thirty percent
(30%) of the Maximum Share Amount and (b) the sum of (x) the aggregate number of
shares of Common Stock actually issued upon conversion of the outstanding Series
A Preferred Stock
24
plus (y) the aggregate number of shares of Common Stock that remain issuable
upon conversion of Series A Preferred Stock at the then effective Conversion
Price, represents at least one hundred percent (100%) of the Maximum Share
Amount (the "Triggering Event"), the Corporation will use its best efforts to
seek and obtain Stockholder Approval (or obtain such other relief as will allow
conversions hereunder in excess of the Maximum Share Amount) as soon as
practicable following the Triggering Event.
B. CONVERSION PRICE.
(a) CALCULATION OF CONVERSION PRICE. Subject to subparagraph (b)
below, the "Conversion Price" shall be (i) from the Issue Date until November
17, 1998, the Fixed Conversion Price (as defined herein) and (ii) after November
17, 1998, the lesser of the Market Price (as defined herein) and the Fixed
Conversion Price, subject to adjustments pursuant to the provisions of Article
VI.C below. "Market Price" shall mean the average Closing Bid Prices for any
three (3) consecutive Trading Days during the twenty-two (22) Trading Day period
ending one (1) Trading Day prior to the date (the "Conversion Date") the Notice
of Conversion (as defined in Article VI.E) is sent by a holder to the
Corporation via facsimile (the "Pricing Period"). "Fixed Conversion Price" shall
mean $6.04. "Closing Bid Price" means, for any security as of any date, the
closing bid price on Nasdaq as reported by Bloomberg or, if Nasdaq is not the
principal trading market for such security, the closing bid price of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the closing bid price of such security in the over-the-counter market
on the electronic bulletin board for such security as reported by Bloomberg, or,
if no closing bid price of such security is available in the over-the-counter
market on the electronic bulletin board for such security or in any of the
foregoing manners, the average of the bid prices of any market makers for such
security that are listed in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date in the manner provided above, the Closing Bid Price shall be the fair
market value as mutually determined by the Corporation and the holders of a
majority in interest of shares of Series A Preferred Stock being converted for
which the calculation of the Closing Bid Price is required in order to determine
the Conversion Price of such Series A Preferred Stock. "Trading Day" shall mean
any day on which the Common Stock is traded for any period on Nasdaq, or on the
principal securities exchange or other securities market on which the Common
Stock is then being traded.
C. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be subject
to adjustment from time to time as follows:
(a) ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK
DIVIDEND, ETC. If at any time when Series A Preferred Stock is issued and
outstanding, the number of outstanding shares of Common Stock is increased or
decreased by a stock split, stock dividend, combination, reclassification,
rights offering below the Trading Price (as defined below) to all holders of
Common Stock or other similar event, which event shall have taken place during
the reference period for determination of the Conversion Price for any Optional
Conversion or Automatic Conversion of the Series A Preferred Stock, then the
Conversion Price shall be calculated giving appropriate effect to the stock
split, stock dividend, combinations reclassification or other similar event. In
such event, the Corporation shall notify the Transfer Agent of such change on or
before the effective date thereof "Trading Price," which shall be measured as of
25
the record date in respect of the rights offering means (i) the average of the
last reported sale prices for the shares of Common Stock on Nasdaq as reported
by Bloomberg, as applicable, for the five (5) Trading Days immediately preceding
such date, or (ii) if Nasdaq is not the principal trading market for the shares
of Common Stock, the average of the last reported sale prices on the principal
trading market for the Common Stock during the same period as reported by
Bloomberg, or (iii) if market value cannot be calculated as of such date on any
of the foregoing bases, the Trading Price shall be the fair market value as
reasonably determined in good faith by (a) the Board of Directors of the
Corporation or, (b) at the option of a majority-in-interest of the holders of
the outstanding Series A Preferred Stock by an independent investment bank of
nationally recognized standing in the valuation of businesses similar to the
business of the Corporation.
(b) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time
when Series A Preferred Stock is issued and outstanding and prior to the
conversion of all Series A Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Corporation
shall be changed into the same or a different number of shares of another class
or classes of stock or securities of the Corporation or another entity, or in
case of any sale or conveyance of all or substantially all of the assets of the
Corporation other than in connection with a plan of complete liquidation of the
Corporation, then the holders of Series A Preferred Stock shall thereafter have
the right to receive upon conversion of the Series A Preferred Stock, upon the
bases and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the holders of Series A Preferred Stock would
have been entitled to receive in such transaction had the Series A Preferred
Stock been converted in full (without regard to any limitations on conversion
contained herein) immediately prior to such transaction, and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the holders of Series A Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares of Common Stock issuable upon conversion of
the Series A Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities or assets thereafter deliverable
upon the conversion of Series A Preferred Stock. The Corporation shall not
effect any transaction described in this subsection (b) unless (a) it first
gives, to the extent practical, thirty (30) days' prior written notice (but in
any event at least fifteen (15) business days prior written notice) of such
merger, consolidation, exchange of shares, recapitalization, reorganization or
other similar event or sale of assets (during which time the holders of Series A
Preferred Stock shall be entitled to convert the Series A Preferred Stock) and
(b) the resulting successor or acquiring entity (if not the Corporation) assumes
by written instrument the obligations of this subsection (b). The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers or share exchanges.
(c) ADJUSTMENT DUE TO DISTRIBUTION. Subject to Article III, if the
Corporation shall declare or make any distribution of its assets (or rights to
acquire its assets) to holders of Common Stock as a dividend, stock repurchase,
by way of return of capital or otherwise (including any dividend or distribution
to the Corporation's shareholders in cash or shares (or rights to acquire
shares) of capital stock of a subsidiary (i.e., a spin-off)) (a "Distribution"),
then the
26
holders of Series A Preferred Stock shall be entitled, upon any conversion of
shares of Series A Preferred Stock after the date of record for determining
shareholders entitled to such Distribution, to receive the amount of such assets
which would have been payable to the holder with respect to the shares of Common
Stock issuable upon such conversion had such holder been the holder of such
shares of Common Stock on the record date for the determination of shareholders
entitled to such Distribution.
(d) PURCHASE RIGHTS. Subject to Article III, if at any time when any
Series A Preferred Stock is issued and outstanding, the Corporation issues any
convertible securities or rights to purchase stock, warrants, securities or
other property (the "Purchase Rights") pro rata to the record holders of any
class of Common Stock, then the holders of Series A Preferred Stock will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon complete
conversion of the Series A Preferred Stock (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(e) ADJUSTMENT FOR RESTRICTED PERIODS. In the event that (i) the
Corporation fails to obtain effectiveness with the Securities and Exchange
Commission of the Registration Statement (as defined in the Registration Rights
Agreement) on or prior to one hundred twenty (120) days following the Issue Date
(adjusted for any delays which are solely attributable to (a) changes in the
Registration Statement required by the holders of the Series A Preferred Stock
with respect to the information relating to the holders of the Series A
Preferred Stock, including, without limitation, changes to the plan of
distribution, or to the failure of the holders of the Series A Preferred Stock
to conduct their review of the Registration Statement pursuant to Section 3(h)
of the Registration Rights Agreement in a reasonably prompt manner and (b) any
delay resulting solely from inclusion of underwriters in the offering of shares
pursuant to the Registration Statement), or (ii) such Registration Statement
lapses in effect or sales otherwise cannot be made thereunder, whether by reason
of the Corporation's failure or inability to amend or supplement the prospectus
(the "Prospectus") included therein in accordance with the Registration Rights
Agreement or otherwise, after such Registration Statement becomes effective
(including, without limitation, during an Allowed Delay (as defined in Section
3(f) of the Registration Rights Agreement), then, at the election of each holder
of Series A Preferred Stock, the Pricing Period shall be comprised of, (x) in
the case of an event described in clause (i), the twenty-two (22) Trading Days
preceding the 120th day following the Issue Date plus all Trading Days through
and including the third Trading Day following the date of effectiveness of the
Registration Statement; and (y) in the case of an event described in clause
(ii), the twenty-two (22) Trading Days preceding the date on which the holder of
the Series A Preferred Stock is first notified that sales may not be made under
the Prospectus, plus all Trading Days through and including the third Trading
Day following the date on which the Holder is first notified that such sales may
again be made under the Prospectus. If a holder of Series A Preferred Stock
determines that sales may not be made pursuant to the Prospectus (whether by
reason of the Corporation's failure or inability to amend or supplement the
Prospectus or otherwise) it shall so notify the Corporation in writing and,
unless the Corporation provides such holder with a written opinion of the
27
Corporation's counsel to the contrary, such determination shall be binding for
purposes of this paragraph.
(f) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article VI.C, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series A Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
A Preferred Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of Series A Preferred Stock.
D. MECHANICS OF CONVERSION. In order to convert Series A Preferred Stock
into full shares of Common Stock, a holder of Series A Preferred Stock shall:
(i) submit a copy of the fully executed notice of conversion in the form
attached hereto as Exhibit A ("Notice of Conversion") to the Corporation by
facsimile dispatched on the Conversion Date (or by other means resulting in, or
reasonably expected to result in, notice to the Corporation on the Conversion
Date) at the office of the Corporation or its designated Transfer Agent for the
Series A Preferred Stock that the holder elects to convert the same, which
notice shall specify the number of shares of Series A Preferred Stock to be
converted, the applicable Conversion Price and a calculation of the number of
shares of Common Stock issuable upon such conversion (together with a copy of
the first page of each certificate to be converted) prior to Midnight, New York
City time (the "Conversion Notice Deadline") on the date of conversion specified
on the Notice of Conversion; and (ii) surrender the original certificates
representing the Series A Preferred Stock being converted (the "Preferred Stock
Certificates"), duly endorsed, along with a copy of the Notice of Conversion to
the office of the Corporation or the Transfer Agent for the Series A Preferred
Stock as soon as practicable thereafter. The Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable upon such
conversion, unless either the Preferred Stock Certificates are delivered to the
Corporation or its Transfer Agent as provided above, or the holder notifies the
Corporation or its Transfer Agent that such certificates have been lost, stolen
or destroyed (subject to the requirements of subparagraph (a) below). In the
case of a dispute as to the calculation of the Conversion Price, the Corporation
shall promptly issue such number of shares of Common Stock that are not disputed
in accordance with subparagraph (b) below. The Corporation shall submit the
disputed calculations to its outside accountant via facsimile within two (2)
business days of receipt of the Notice of Conversion. The accountant shall audit
the calculations and notify the Corporation and the holder of the results no
later than 48 hours from the time it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive absent manifest error.
(a) LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation of
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificates representing shares of Series A Preferred Stock, and (in the case
of loss, theft or destruction) of indemnity reasonably satisfactory to the
Corporation, and upon surrender and cancellation of the Preferred Stock
Certificate(s), if mutilated, the Corporation shall execute and deliver new
Preferred Stock Certificate(s) of like tenor and date.
28
(b) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the surrender of
certificates as described above together with a Notice of Conversion, the
Corporation shall issue and, within two (2) business days after such surrender
(or, in the case of lost, stolen or destroyed certificates, after provision of
agreement and indemnification pursuant to subparagraph (a) above) (the "Delivery
Period"), deliver (or cause its Transfer Agent to so issue and deliver) to or
upon the order of the holder (i) that number of shares of Common Stock for the
portion of the shares of Series A Preferred Stock converted as shall be
determined in accordance herewith and (ii) a certificate representing the
balance of the shares of Series A Preferred Stock not converted, if any. In
addition to any other remedies available to the holder, including actual damages
and/or equitable relief, the Corporation shall pay to a holder $2,000 per day in
cash for each day beyond a two (2) business day grace period following the
Delivery Period (the "Delivery Default Date") that the Corporation fails to
deliver Common Stock (a "Delivery Default") issuable upon surrender of shares of
Series A Preferred Stock with a Notice of Conversion until such time as the
Corporation has delivered all such Common Stock (the "Delivery Default
Payments"); provided, however, that if the Corporation is required to make
Conversion Default Payments (as defined in Article VI.E) pursuant to Article
VI.E relating to a Notice of Conversion, such Conversion Default Payments shall
be in lieu of any Delivery Default Payments relating to such Notice of
Conversion. Such Delivery Default Payments shall be paid to such holder by the
fifth day of the month following the month in which it has accrued or, at the
option of the holder (by written notice to the Corporation by the first day of
the month following the month in which it has accrued), shall be convertible
into Common Stock in accordance with the terms of this Article VI.
In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Corporation's Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the holder and its compliance with
the provisions contained in Article VI.A and in this Article VI.D, the
Corporation shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to the
holder by crediting the account of holder's Prime Broker with DTC through its
Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for
delivery and penalties described in the immediately preceding paragraph shall
apply to the electronic transmittals described herein.
(c) NO FRACTIONAL SHARES. If any conversion of Series A Preferred
Stock would result in a fractional share of Common Stock or the right to acquire
a fractional share of Common Stock, such fractional share shall be disregarded
and the number of shares of Common Stock issuable upon Conversion of the Series
A Preferred Stock shall be the next higher number of shares.
(d) CONVERSION DATE. The "Conversion Date" shall be the date
specified in the Notice of Conversion, provided that the Notice of Conversion is
submitted by facsimile (or by other means resulting in, or reasonably expected
to result in, notice) to the Corporation or its Transfer Agent before Midnight,
New York City time, on the Conversion Date. The person or persons entitled to
receive the shares of Common Stock issuable upon conversion shall be treated for
all purposes as the record holder or holders of such securities as of the
Conversion Date and all rights with respect to the shares of Series A Preferred
Stock surrendered shall forthwith terminate except the right to receive the
shares of Common Stock or other securities or property issuable on such
29
conversion and except that the holders preferential rights as a holder of Series
A Preferred Stock shall survive to the extent the Corporation fails to deliver
such securities by the Delivery Default Date; provided, however, that unless the
Corporation fails to deliver the shares of Common Stock or other securities or
property issuable on such conversion prior to the tenth (10th) business day
after the expiration of the Delivery Period, the Premium Amount with respect to
the shares of Series A Preferred Stock surrendered shall cease accruing as of
the Conversion Date.
E. RESERVATION OF SHARES. A number of shares of the authorized but
unissued Common Stock sufficient to provide for the conversion of the Series A
Preferred Stock outstanding at the then current Conversion Price shall at all
times be reserved by the Corporation, free from preemptive rights, for such
conversion or exercise. As of the date of issuance of the Series A Preferred
Stock, 3,296,000 authorized and unissued shares of Common Stock have been duly
reserved for issuance upon conversion of the Series A Preferred Stock (the
"Reserved Amount"). The Reserved Amount shall be increased from time to time in
accordance with the Company's obligations pursuant to Section 4(h) of the
Purchase Agreement. in addition, if the Corporation shall issue any securities
or make any change in its capital structure which would change the number of
shares of Common Stock into which each share of the Series A Preferred Stock
shall be convertible at the then current Conversion Price, the Corporation shall
at the same time also make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding Series A Preferred Stock.
If at any time a holder of shares of Series A Preferred Stock submits a
Notice of Conversion, and the Corporation does not have sufficient authorized
but unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Article VI (a "Conversion Default"), the
Corporation shall issue to the holder (or holders, if more than one holder
submits a Notice of Conversion in respect of the same Conversion Date, pro rata
based on the ratio that the number of shares of Series A Preferred Stock then
held by each such holder bears to the aggregate number of such shares held by
such holders) all of the shares of Common Stock which are available to effect
such conversion. The number of shares of Series A Preferred Stock included in
the Notice of Conversion which exceeds the amount which is then convertible into
available shares of Common Stock (the "Excess Amount") shall, notwithstanding
anything to the contrary contained herein, not be convertible into Common Stock
in accordance with the terms hereof until (and at the holder's option at any
time after) the date additional shares of Common Stock are authorized by the
Corporation to permit such conversion, at which time the Conversion Price in
respect thereof shall be the lesser of (i) the Conversion Price on the
Conversion Default Date (as defused below) and (ii) the Conversion Price on the
Conversion Date elected by the holder in respect thereof. The Corporation shall
use its best efforts to effect an increase in the authorized number of shares of
Common Stock as soon as possible following a Conversion Default. In addition,
the Corporation shall pay to the holder payments ("Conversion Default Payments")
for a Conversion Default in the amount of (a) (N/365), multiplied by (b) the sum
of the Stated Value plus the Premium Amount per share of Series A Preferred
Stock through the Authorization Date (as defined below), multiplied by (c) the
Excess Amount on the day the holder submits a Notice of Conversion giving rise
to a Conversion Default (the "Conversion Default Date"), multiplied by (d).24,
where (i) N = the number of days from the Conversion Default Date to the date
(the "Authorization Date") that the Corporation authorizes a sufficient number
of shares of Common Stock to
30
effect conversion of the full number of shares of Series A Preferred Stock. The
Corporation shall send notice to the holder of the authorization of additional
shares of Common Stock, the Authorization Date and the amount of holder's
accrued Conversion Default Payments. The accrued Conversion Default Payment for
each calendar month shall be paid in cash or shall be convertible into Common
Stock at the Conversion Price, at the holder's option, as follows:
(a) In the event the holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth day of the month following the
month in which it has accrued; and
(b) In the event the holder elects to take such payment in Common
Stock, the holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the time of Conversion) at any time after the
fifth day of the month following the month in which it has accrued in accordance
with the terms of this Article VI (so long as there is then a sufficient number
of authorized shares).
Nothing herein shall limit the holder's right to pursue actual damages
for the Corporation's failure to maintain a sufficient number of authorized
shares of Common Stock, and each holder shall have the right to pursue all
remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
F. NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article VI,
the Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustment or
readjustment, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon conversion of a share of
Series A Preferred Stock.
G. STATUS AS STOCKHOLDERS. Upon submission of a Notice of Conversion by a
holder of Series A Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their issuance would exceed
such holder's allocated portion of the Reserved Amount) shall be deemed
converted into shares of Common Stock and (ii) the holder's rights as a holder
of such converted shares of Series A Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such holder because of a failure by the Corporation to comply with the terms
of this Certificate of Designation. Notwithstanding the foregoing, if a holder
has not received certificates (including, without limitation, through DWAC) for
all shares of Common Stock prior to the tenth (10th) business day after the
expiration of the Delivery Period with respect to a conversion of shares of
Series A Preferred Stock for any reason, then (unless the holder otherwise
elects to retain its status as a holder of Common Stock by so notifying the
Corporation) the holder shall regain the rights of a holder of such shares of
Series A Preferred Stock with respect to such unconverted shares of Series A
Preferred
31
Stock and the Corporation shall, as soon as practicable, return such unconverted
shares of Series A Preferred Stock to the holder or, if such shares of Series A
Preferred Stock have not been surrendered, adjust its records to reflect that
such shares of Series A Preferred Stock have not been converted. In all cases,
the holder shall retain all of its rights and remedies (including, without
limitation, the right to receive Conversion Default Payments pursuant to Article
VI.E to the extent required thereby for such Conversion Default and any
subsequent Conversion Default).
VII. Automatic Conversion
Subject to the limitations on conversion set forth in Article VI.A(c) and
so long as all of the shares of Common Stock issuable upon conversion of the
Series A Preferred Stock are (x) authorized and reserved for issuance, (y)
registered for re-sale under the Securities Act of 1933, as amended, by the
holders of the Series A Preferred Stock and (z) eligible to be traded on Nasdaq,
the NYSE, AMEX or Nasdaq Small Cap and (ii) there is not then a continuing
Mandatory Redemption Event or Trading Market Redemption Event, each share of
Series A Preferred Stock issued and outstanding on July 17, 2001, (the
"Automatic Conversion Date"), automatically shall be converted into shares of
Common Stock on such date at the then effective Conversion Price in accordance
with, and subject to, the provisions of Article VI hereof (the "Automatic
Conversion"). The Automatic Conversion Date shall be delayed by one (1) Trading
Day each for each Trading Day occurring prior thereto and prior to the full
conversion of the Series A Preferred Stock that (i) sales cannot be made
pursuant to the Registration Statement (whether by reason of the Company's
failure to properly supplement or amend the prospectus included therein in
accordance with the terms of the Registration Rights Agreement or otherwise
including any Allowed Delays (as defined in Section 3(f) of the Registration
Rights Agreement)) (adjusted for any delays which are solely attributable to (a)
changes in the Registration Statement required by the holders of the Series A
Preferred Stock with respect to the information relating to the holders of the
Series A Preferred Stock, including, without limitation, changes to the plan of
distribution, or to the failure of the holders of the Series A Preferred Stock
to conduct their review of the Registration Statement pursuant to Section 3(h)
of the Registration Rights Agreement in a reasonably prompt manner, and (b) any
delay resulting solely from inclusion of underwriters in the offering of shares
pursuant to the Registration Statement) or (ii) any Mandatory Redemption Event
or Trading Market Redemption Event exists, without regard to whether any cure
periods shall have run. The Automatic Conversion Date shall be the Conversion
Date for purposes of determining the Conversion Price and the time within which
certificates representing the Common Stock must be delivered to the holder.
VIII. Voting Rights
The holders of the Series A Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
("DGCL"), in this Article VIII, and in Article IX below.
Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
32
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least ten (10) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under the DGCL the vote of the holders of the Series A
Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the Series A
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series A Preferred Stock
(except as otherwise may be required under the DGCL) shall constitute the
approval of such action by the class. To the extent that under the DGCL holders
of the Series A Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series A Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series A Preferred Stock shall be entitled to
notice of all shareholder meetings or written consents (and copies of proxy
materials and other information sent to shareholders) with respect to which they
would be entitled to vote, which notice would be provided pursuant to the
Corporation's bylaws and the DGCL.
IX. Protective Provisions
So long as shares of Series A Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent as provided by the DGCL of the holders of at least a majority of the
then outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock or any capital stock of the Corporation so as to
affect adversely the Series A Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article 11 hereof, "Senior Securities");
(c) create any new class or series of capital stock ranking pari
passu with the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "Pari Passu Securities");
(d) increase the authorized number of shares of Series A Preferred
33
Stock;
(e) issue any Senior Securities or Pari Passu Securities;
(f) increase the par value of the Common Stock; or
(g) do any art or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series A Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
In the event holders of at least a majority of the then outstanding
shares of Series A Preferred Stock agree to allow the Corporation to alter or
change the rights, preferences or privileges of the shares of Series A Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series A Preferred
Stock, then the Corporation will deliver notice of such approved change to the
holders of the Series A Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) days to convert pursuant to the terms of this
Certificate of Designation as they exist prior to such alteration or change or
continue to hold their shares of Series A Preferred Stock.
X. Pro Rata Allocations
The Maximum Share Amount and the Reserved Amount (including any increases
thereto) shall be allocated by the Corporation pro rata among the holders of
Series A Preferred Stock based on the number of shares of Series A Preferred
Stock issued to each holder. Each increase to the Maximum Share Amount and the
Reserved Amount shall be allocated pro rata among the holders of Series A
Preferred Stock based on the number of shares of Series A Preferred Stock held
by each holder at the time of the increase in the Maximum Share Amount or
Reserved Amount. In the event a holder shall sell or otherwise transfer any of
such holder's shares of Series A Preferred Stock, each transferee shall be
allocated a pro rata portion of such transferor's Maximum Share Amount and
Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount
which remains allocated to any person or entity which does not hold any Series A
Preferred Stock shall be allocated to the remaining holders of shares of Series
A Preferred Stock, pro rata based on the number of shares of Series A Preferred
Stock then held by such holders.
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation this 17th day of July, 1998.
RIBI IMMUNOCHEM RESEARCH, INC.
By:
---------------------------
Robert E. Ivy
Chief Executive Officer,
President and Chairman
34
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series A Preferred Stock)
The undersigned hereby irrevocably elects to convert _______________ shares
of Series A Preferred Stock, represented by stock certificate No(s).
_______________ (the "Preferred Stock Certificates") into shares of common stock
("Common Stock") of Ribi ImmunoChem Research, Inc. (the "Corporation") according
to the conditions of the Certificate of Designation of Series A Preferred Stock,
as of the date written below. If securities are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates. No
fee will be charged to the Holder for any conversion, except for transfer taxes,
if any. A copy of each Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series A Preferred Stock shall be made pursuant to registration of the
securities under the Securities Act of 1933, as amended (the "Act"), or pursuant
to an exemption from registration under the Act.
Date of Conversion:_______________________________
Applicable Conversion Price:______________________
Number of Shares of
Common Stock to be Issued:________________________
Signature:________________________________________
Name:_____________________________________________
Address:__________________________________________
__________________________________________
__________________________________________
*The Corporation is not required to issue shares of Common Stock until the
original Series A Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
Transfer Agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than two (2) business days following receipt
of the original Preferred Stock Certificate(s) to be converted, and shall make
payments pursuant to the Certificate of Designation for the number of business
days such issuance and delivery is late.
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