SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the registrant [ X ]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Confidential, for Use of the
Commission Only(as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Shaman Pharmaceuticals, Inc.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transactions applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials:
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[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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SHAMAN PHARMACEUTICALS, INC.
213 East Grand Avenue
South San Francisco, California 94080
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
("Annual Meeting") of Shaman Pharmaceuticals, Inc. (the "Company"), which will
be held at 9:00 A.M.Pacific Time on Friday, June 11, 1999 at The Embassy Suites,
250 Gateway Boulevard, South San Francisco, California 94080.
At the Annual Meeting, you will be asked to consider and vote upon the
following proposals:
(i) To elect four Class II directors to serve on the Board of Directors
for two years or until their successors are duly elected and
qualified;
(ii) To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation (the "Restated Certificate") to effect a
20-for-1 reverse stock split of the Company's outstanding Common
Stock;
(iii)To approve an amendment and restatement to the Restated Certificate
to increase the number of authorized shares of the Company's
Preferred Stock by 10,000,000 shares, from 2,000,000 shares to
12,000,000 shares;
(iv) To approve an amendment and restatement to the Restated Certificate
to increase the number of authorized shares of the Company's Common
Stock by 150,000,000 shares, from 70,000,000 shares to 220,000,000
shares;
(v) To approve an amendment and restatement of the Company's Restated
Certificate to (i)delete the provision stating that a transaction or
series of transactions in which in excess of 50% of the Company's
voting power is transferred will be treated as a liquidation,
dissolution or winding up of the Company, for purposes of causing a
required liquidation preference distribution to the holders of the
Company's Preferred Stock, and (ii)delete the reference to the Series
D Preferred Stock from the section, to clarify that the section, as a
result of the amendment in this proposal, no longer applies to the
Series D Preferred Stock;
(vi) To approve amendments to the Company's 1992 Stock Option Plan (the
"1992 Plan") which will result in a series of periodic increases to
the number of shares of Common Stock available for issuance
thereunder; revise the automatic option grant program for non-
employee Board members to provide each current and future non-
employee Board member with a one-time stock option grant for shares
of Common Stock equal to one-half of one percent (0.5%) of the number
of voting shares of the Company's capital stock outstanding on the
grant date; extend the term of the 1992 Plan and increase the limit
on the maximum number of shares for which any one participant may be
granted stock options per calendar year;
(vii) To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1999; and
(viii) To transact such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof.
Following the completion of the June 11, 1999, Annual Meeting of the
Company, and pending approval of the necessary proposals in this proxy, Shaman
expects to conduct a Rights Offering, and intends to file a registration
statement with the SEC covering the issuance of the Series R Preferred Stock to
its stockholders. The Company plans to offer to stockholders on pro-rata basis
shares having an aggregate value of $10,000,000. You will receive more
information on the Rights Offering following the Annual Meeting, including
detailed Questions and Answers (Q&A).
The enclosed Proxy Statement more fully describes the details of the
business to be conducted at the Annual Meeting. After reading the Proxy
Statement, please mark, date, sign and return the enclosed proxy card in the
accompanying reply envelope as soon as possible. If you attend the Annual
Meeting and vote by ballot, your proxy will be automatically revoked and only
your vote at the Annual Meeting will be counted. YOUR SHARES CANNOT BE VOTED
UNLESS YOU MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY OR ATTEND THE ANNUAL
MEETING AND VOTE IN PERSON.
After careful consideration, the Company's Board of Directors has
unanimously approved the proposals and recommends that you vote in favor of each
such proposal.
We look forward to seeing you at the Annual Meeting.
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If you have any questions prior to the date of the Annual Meeting, please
contact our investor hotline at (800) XXX-XXXX.
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Sincerely,
Lisa A. Conte
President, Chief Executive
Officer, Chief Financial Officer
and Director
May ____, 1999
================================================================================
IMPORTANT
Please mark, date, sign and return the enclosed proxy promptly in
the accompanying postage-paid return envelope so that, if you are unable to
attend the Annual Meeting, your shares may be voted.
================================================================================
2
SHAMAN PHARMACEUTICALS, INC.
-----------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 11, 1999
-----------------------------------------------------
TO THE STOCKHOLDERS OF SHAMAN PHARMACEUTICALS, INC.:
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders
("Annual Meeting") of Shaman Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), will be held at 9:00 A.M. Pacific Time on Friday, June 11, 1999 at
The Embassy Suites, 250 Gateway Boulevard, South San Francisco, California
94080, for the following purposes:
(1) To elect four Class II directors to serve on the Board of
Directors for two years or until their successors are duly elected
and qualified. The nominees are G. Kirk Raab, Herbert H. McDade, Jr.,
M. David Titus and Loren D. Israelsen;
(2) To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation (the "Restated Certificate") to effect a
20-for-1 reverse stock split of the Company's outstanding Common
Stock;
(3) To approve an amendment and restatement to the Restated Certificate
to increase the number of authorized shares of the Company's
Preferred Stock by 10,000,000 shares, from 2,000,000 shares to
12,000,000 shares;
(4) To approve an amendment and restatement to the Restated Certificate
to increase the number of authorized shares of the Company's Common
Stock by 150,000,000 shares, from 70,000,000 shares to 220,000,000
shares;
(5) To approve an amendment and restatement of the Company's Restated
Certificate to (i)delete the provision stating that a transaction or
series of transactions in which in excess of 50% of the Company's
voting power is transferred will be treated as a liquidation,
dissolution or winding up of the Company, for purposes of causing a
required liquidation preference distribution to the holders of the
Company's Preferred Stock, and (ii)delete the reference to the Series
D Preferred Stock from the section, to clarify that the section, as a
result of the amendment in this proposal, no longer applies to the
Series D Preferred Stock;
(6) To approve amendments to the Company's 1992 Stock Option Plan (the
"1992 Plan") which will result in a series of periodic increases to
the number of shares of Common Stock available for issuance
thereunder; revise the automatic option grant program for
non-employee Board members to provide each current and future
non-employee Board member with a one-time stock option grant for
shares of Common Stock equal to one-half of one percent (0.5%) of the
number of voting shares of the Company's capital stock outstanding
on the grant date; extend the term of the 1992 Plan and increase the
limit on the maximum number of shares for which any one participant
may be granted stock options per calendar year;
(7) To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1999; and
(8) To transact such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The record date for determining those stockholders entitled to notice of,
and to vote at, the Annual Meeting and any adjournment thereof is April 15,
1999. The stock transfer books will not be closed between the record date and
the date of the Annual Meeting. A list of the stockholders entitled to vote at
the Annual Meeting will be available for inspection at the Company's offices,
213 East Grand Avenue, South San Francisco, California 94080, for a period of 10
days prior to the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting in
person. Whether or not you plan to attend, please carefully read the
accompanying Proxy Statement, which describes the matters to be voted upon at
the Annual Meeting, and mark, date, sign and return the enclosed proxy card in
the reply envelope provided. Should you receive more than one proxy because your
shares are registered in different names and addresses, each proxy should be
returned to ensure that all your shares will be voted. You may revoke your proxy
at any time prior to the Annual Meeting. If you attend the Annual Meeting and
vote by ballot, your proxy vote will be revoked automatically and only your vote
at the Annual Meeting will be counted. The prompt return of your proxy card will
assist us in preparing for the Annual Meeting.
Sincerely,
Lisa A. Conte
President, Chief Executive
Officer, Chief Financial Officer
and Director
South San Francisco, California
May ____, 1999
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE
READ THE ATTACHED PROXY STATEMENT CAREFULLY. IF YOU DO NOT EXPECT TO ATTEND IN
PERSON, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE
ACCOMPANYING ENVELOPE AS PROMPTLY AS POSSIBLE.
2
SHAMAN PHARMACEUTICALS, INC.
213 East Grand Avenue
South San Francisco, California 94080
--------------------------------------------
PROXY STATEMENT
--------------------------------------------
For the Annual Meeting of Stockholders
To Be Held on June 11, 1999
GENERAL INFORMATION FOR STOCKHOLDERS
The enclosed proxy ("Proxy") is solicited on behalf of the Board of
Directors (the "Board") of Shaman Pharmaceuticals, Inc., a Delaware corporation
(the "Company"), for use at the 1999 Annual Meeting of Stockholders (the "Annual
Meeting") to be held at 9:00 A.M. Pacific Time on Friday, June 11, 1999, at the
Embassy Suites, 250 Gateway Boulevard, South San Francisco, California 94080,
and at any adjournment thereof.
This Proxy Statement and the accompanying form of Proxy are to be first
mailed to the stockholders entitled to vote at the Annual Meeting on or about
May 4, 1999.
Record Date and Voting
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice and are described in more
detail in this Proxy Statement. All stockholders of record at the close of
business on April 15, 1999 are entitled to notice of, and to vote at, the Annual
Meeting. However, the holders of Series D Preferred Stock are entitled to vote
only on Proposal Three. As of the close of business on such date, there were
40,745,876 shares of the Company's Common Stock, par value $0.001 per share (the
"Common Stock"), outstanding and entitled to vote, held by approximately 952
stockholders of record. In addition, 400,000 shares of the Company's Series A
Preferred Stock were outstanding and entitled to vote and held by one
stockholder of record, 115,958 shares of Series C Preferred Stock were
outstanding and entitled to vote and held by 21 stockholders, and 2,016 shares
of Series D Preferred Stock were outstanding and held by 6 stockholders. Each
holder of Common Stock as of the record date is entitled to one vote for each
share of Common Stock held by such stockholder as of the record date. Each
holder of Series C Preferred Stock as of the record date is entitled to six
votes for each share of Series C Preferred Stock held by such stockholder as of
the record date. Each holder of Series D Preferred Stock as of the record date
is entitled to one vote for each share of Series D Preferred Stock held by such
stockholder as of the record date. Each share of Series A Preferred Stock as of
the record date is entitled to one vote for each share of Series A Preferred
Stock.
Directors are determined by a plurality vote. Proposals Two and Four will
be decided by the affirmative vote of a majority of the voting shares
outstanding on the record date. Proposal Three will be decided by the
affirmative vote of (a) a majority of all shares of the Company's Common Stock,
including all shares of Series A Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock and (b) a majority of shares of the Series A Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock, voting separately
as a class. Proposal Five will be decided by the affirmative vote of (a) a
majority of all of the Company's outstanding voting shares, including all shares
of Common Stock, Series A Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, voting together as a single class, and (b) a majority of the
shares of the Series A Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, each voting as a separate series. All other matters submitted
for stockholder approval at this Annual Meeting will be decided by the
affirmative vote of a majority of shares present in person or represented by
proxy and entitled to vote on such matters. If a choice as to the matters coming
before the Annual Meeting has been specified by a stockholder on the Proxy, the
shares will be voted accordingly. If no contrary instructions are given, the
shares will be voted for the election of all four directors (unless the
authority to vote on the election of any such director is withheld) and in favor
of the approval of all proposals described in the accompanying Notice of Annual
Meeting and in this Proxy Statement. All votes will be tabulated by the
inspector of election appointed for the meeting, who will separately tabulate
affirmative and negative votes, abstentions and broker non-votes (i.e., the
submission of a Proxy by a broker or indicating the lack of discretionary
authority to vote on the matter). Abstentions and broker non-votes
1
are counted as present for purposes of determining the presence or absence
of a quorum for the transaction of business. Abstentions will be counted towards
the tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes, whereas broker non-votes will not be
counted for purposes of determining whether a proposal has been approved.
However, because Proposals Two, Three, Four and Five require the affirmative
vote of a majority of the Company's outstanding voting shares on the Record
Date, both abstentions and broker non-votes with respect to any of those
particular proposals will have the same effect as votes against the approval of
that proposal.
Any stockholder or stockholder's representative who, because of a
disability, may need special assistance or accommodation to allow him or her to
participate at the Annual Meeting may request reasonable assistance or
accommodation from the Company by contacting Investor Relations in writing at
213 East Grand Avenue, South San Francisco, California 94080 or by telephone at
(650) 952-7070. To provide the Company sufficient time to arrange for reasonable
assistance, please submit such requests by May 28, 1999.
Revocability of Proxies
Any stockholder giving a Proxy pursuant to this solicitation may revoke it
at any time prior to its exercise by filing with the Secretary of the Company at
its principal executive offices at 213 East Grand Avenue, South San Francisco,
California 94080, a written notice of such revocation or a duly executed Proxy
bearing a later date, or by attending the Annual Meeting and voting in person.
Solicitation
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of the Notice of Annual Meeting,
this Proxy Statement, the Proxy and any additional solicitation materials
furnished to stockholders. Copies of solicitation materials will be furnished to
brokerage houses, fiduciaries and custodians holding shares in their names that
are beneficially owned by others so that they may forward this solicitation
material to such beneficial owners. The Company has engaged ____________ to
provide routine advice and services for Proxy solicitation. ________ will
receive approximately $_____ from the Company for such advice and services, plus
reimbursement of costs incurred in forwarding the solicitation materials to the
beneficial owners of Common Stock and Series C Preferred Stock. To assure that a
quorum will be present in person or by proxy at the Annual Meeting, it may be
necessary for _______, certain officers, directors, employees or other agents of
the Company to solicit proxies by telephone, facsimile or other means or in
person. Except with respect to ________, the Company will not compensate such
individuals for any such services. Except as described above, the Company does
not presently intend to solicit proxies other than by mail.
IMPORTANT
Please mark, date, sign and return the enclosed Proxy in the accompanying
postage-prepaid, return envelope as soon as possible so that, if you are unable
to attend the Annual Meeting, your shares may be voted.
2
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
PROPOSAL ONE
ELECTION OF DIRECTORS
The Company's Amended and Restated Certificate of Incorporation provides
for a classified Board consisting of two classes of directors, designated Class
I and Class II, each serving a term of two years, with such terms staggered so
that only one class of directors is elected at each annual meeting of
stockholders. At the Annual Meeting, four Class II directors will be elected to
serve for two years or until their successors shall have been duly elected and
qualified or until their death, resignation or removal. The Board has selected
four nominees, four of whom are current directors of the Company. Each person
nominated for election has agreed to serve if elected, and management has no
reason to believe that any nominee will be unavailable to serve. The four
candidates receiving the highest number of affirmative votes of the shares
entitled to vote at the Annual Meeting will be elected. If any nominee is unable
to or declines to serve as a director, the proxies may be voted for a substitute
nominee designated by the current Board. As of the date of this Proxy Statement,
the Board is not aware of any nominee who is unable or will decline to serve as
a director.
Information with Respect to Directors
Set forth below is information regarding the nominees, as of April 15,1999:
Name of Nominees Position(s) with the Company Age Director Since
---------------- ---------------------------- --- --------------
G. Kirk Raab Chairman of the Board 63 1992
Herbert H. McDade, Jr. Director 72 1991
M. David Titus Director 41 1990
Loren D. Israelsen Director 43 1999
Set forth below is information regarding the continuing directors, as of
April 15, 1999:
Name of Nominees Position(s) with the Company Age Director Since
---------------- ---------------------------- --- --------------
Lisa A. Conte Director, President, Chief 40 1989
Executive Officer and Chief
Financial Officer
Adrian D.P. Bellamy Director 57 1997
Jeffrey Berg Director 51 1998
Business Experience of Director Nominees for Term Ending Upon the 2001
Annual Meeting of Stockholders
G. Kirk Raab became a director of the Company in January 1992 and Chairman
of the Board in September 1995. Mr. Raab was President, Chief Executive Officer
and director of Genentech, Inc. ("Genentech") from February 1990 to July 1995
and President, Chief Operating Officer and director from February 1985 to
January 1990. Before joining Genentech, Mr. Raab was associated with Abbott
Laboratories, serving as President, Chief Operating Officer and director. Mr.
Raab holds a B.A. in Political Science from Colgate University, where he
currently serves as a trustee. Mr. Raab is also Chairman of the Board of
Connectics, Inc. and Oxford GlycoSciences (UK) Ltd. and a director of
Accumetrics, Inc, Applied Imaging Corp., Bridge Medical, Inc. and LXR
Biotechnology, Inc.
Herbert H. McDade, Jr. became a director of the Company in October 1991. He
has served as Chairman of the Board and Chief Executive Officer of Chemex
Pharmaceuticals, Inc. ("Chemex") since February 1989 and as Chief Executive
3
Officer from February 1989 through January 1996, when Chemex merged with Access
Pharmaceutical Corporation ("Access") and the combined entity changed its name
to Access. From October 1986 to January 1988, Mr. McDade was Chairman, President
and Chief Executive Officer of Armour Pharmaceuticals, Inc., after previously
serving as President, International Health Care Division of the Revlon Health
Care Group. Mr. McDade holds a B.S. in Biology from the University of Notre Dame
and a B.P.H. in Theology and Philosophy from Laval University. He is Chairman of
the Board of Access and a director of Cytrx, Inc., Discovery Ltd. and several
privately held companies.
M. David Titus became a director of the Company in April 1990. Mr. Titus is
currently a General Partner of Windward Ventures Management, L.P. ("Windward"),
a venture capital firm, which he founded in November 1997. Prior to founding
Windward, Mr. Titus was Managing Director of Windward Ventures, a venture
capital consulting and investment firm, which he founded in 1993. From May 1986
to December 1992, he served in various capacities at Technology Funding, Inc., a
venture capital firm, including Group Vice President, Technology Funding, Inc.,
and General Partner of Technology Funding Limited. Prior to joining Technology
Funding, Inc. in May 1986, Mr. Titus was a founder and Senior Vice President of
the Technology Division of Silicon Valley Bank. Mr. Titus earned a B.A. in
Economics from the University of California, Santa Barbara. He is a director of
several privately held companies.
Loren D. Israelsen became a director of the Company in April 1999. Mr.
Israelsen has been President of LDI Group, a consulting firm specializing in
dietary supplement and phytomedicine issues, since 1997. From 1990 to 1997, Mr.
Israelsen practiced law at a private firm. From 1981 to 1990, Mr. Israelsen
served in various positions at Murdock International Corp., including President
from 1989 to 1990, Vice President of Strategic Development from 1986 to 1989 and
General Counsel from 1981 to 1986. While acting as Vice President of Strategic
Development, he identified and negotiated several license agreements to bring
the world's leading phytomedicines, including Ginkgo biloba extract, milk
thistle extract, echinacea, evening primrose oil, and saw palmetto extract, to
the United States. Mr. Israelsen has served as General Counsel/Vice President to
the American Herbal Products Association, Co-counsel to the European American
Phytomedicine Coalition, industry liaison to FDA's expert advisory committee on
Ephedra and advisor to the Natural Products Quality Assurance Alliance, the
Office of Technology Assessment and the Office of Dietary Supplements. Since
1992, he has served as Executive Director of the Utah Natural Products Alliance,
which was instrumental in developing and passing the Dietary Supplement Health
and Education Act of 1994.
Business Experience of Continuing Directors for Term Ending Upon the 2000
Annual Meeting of Stockholders
Lisa A. Conte founded the Company in May 1989 and currently serves as the
Company's President, Chief Executive Officer and Chief Financial Officer and a
director. From 1987 to 1989, Ms. Conte was Vice President at Technology Funding,
Inc., a venture capital firm, where she was responsible for the analysis and
management of healthcare industry investments. From 1985 to 1987, she conducted
risk and strategy audits for venture capital portfolio companies at Strategic
Decisions Group, a management consulting firm. Ms. Conte received an A.B. in
Biochemistry from Dartmouth College, an M.S. in Physiology/Pharmacology from the
University of California, San Diego and an M.B.A. from The Amos Tuck School,
Dartmouth College.
Adrian D.P. Bellamy became a director of the Company in October 1997. Since
April 1995, Mr. Bellamy has served as Chairman and a director of each of Airport
Group International Holdings LLC and Gucci Group N.V. From September 1983 to
April 1995, Mr. Bellamy served as Chairman of the Board of Directors and Chief
Executive Officer of DFS Group Limited, a specialty retailer. He received a B.A.
in Communications and an M.B.A. from the University of South Africa. Mr. Bellamy
is a director of The Body Shop, Inc., The Body Shop International PLC, The Gap,
Inc., Paragon Trade Brands, Inc. and Williams-Sonoma, Inc.
Jeffrey Berg became a director of the Company in June 1998. Mr. Berg has
been the Chairman and Chief Executive Officer of International Creative
Management, Inc. since 1985. Mr. Berg, one of the leading agents in the
entertainment industry, has been in the entertainment industry for over 25
years. Mr. Berg received a B.A. from the University of California at Berkeley
and a Master of Liberal Arts from the University of Southern California. He
served as Co-Chair of the California Information Technology Council and is a
director of Oracle Corporation and Excite, Inc.
4
Number of Directors; Relationships
The Company's Bylaws authorize the Board to fix the number of directors
serving on the Board, provided that such number shall not be less than five nor
more than nine. The number of directors is currently fixed at seven. All
directors hold office until the second annual meeting of stockholders following
the annual meeting of stockholders at which such director was elected, or until
their successors have been duly elected and qualified.
There are no family relationships among executive officers or directors of
the Company.
Board Meetings and Committees
The Board held ten meetings during the 1998 fiscal year and acted by
written consent on two occasions. The Board has an Audit Committee and a
Compensation Committee. All directors who served on the Board of Directors
throughout the 1998 fiscal year participated in or attended at least 75% of the
aggregate of (i) the total number of meetings of the Board of Directors held
during the period in which they served and (ii) the total number of meetings
held by all committees of the Board on which he or she served during the past
fiscal year.
The Audit Committee is primarily responsible for annually recommending
independent auditors for appointment by the Board, for reviewing the services
performed by the Company's independent auditors and reviewing reports submitted
by the independent auditors. The Audit Committee includes two directors, Messrs.
Titus and Raab. The Audit Committee held no meetings during the 1998 fiscal
year.
The Compensation Committee, which is comprised of Messrs. McDade and
Bellamy, reviews and approves the Company's general compensation policies and
practices, sets compensation levels for the Company's executive officers and
administers the Company's 1992 Stock Option Plan (the "1992 Plan") and other
employee benefits programs. During the 1998 fiscal year, the Compensation
Committee held eight meetings.
Director Compensation
Each non-employee Board member receives an annual retainer fee of $10,000,
provided the non-employee Board member attends at least 75% of the Board
meetings. In addition, non-employee Board members are reimbursed for reasonable
expenses incurred in connection with their attendance at such meetings.
While the information given below is for historical purpose, effective as
of April _____, 1999, each member of the Board of Directors has surrendered
their outstanding options to purchase shares of the Company's Common Stock.
Under the Automatic Option Grant Program in effect under the 1992 Plan for
the 1998 fiscal year, each individual who first became a non-employee Board
member, whether through appointment by the Board or upon election by the
stockholders, was automatically granted, at the time of such initial appointment
or election, an option to purchase 20,000 shares of Common Stock, provided such
individual had not previously been in the Company's employ. In addition, on the
date of the 1998 Annual Meeting of Stockholders, each individual who continued
to serve as a non-employee Board member received an automatic stock option grant
under the program, provided he or she has served as a Board member for at least
six months. The option grant allowed the continuing non-employee Board member to
purchase that number of shares of Common Stock determined by dividing $50,000 by
the average closing selling price per share of Common Stock for the 30 trading
days immediately preceding the date of the Annual Meeting on which such option
was granted, but in no event would such grant be for more than 7,500 shares nor
fewer than 5,000 shares per non-employee Board member. Each granted option had
an exercise price per share equal to the fair market value per share of Common
Stock on the grant date and had a maximum term of 10 years measured from such
grant date. The option would become exercisable for the option shares in a
series of 24 successive equal monthly installments upon the optionee's
completion of each month of Board service over the 24-month period measured from
the grant date. The option would, however, become immediately exercisable for
all the option shares upon certain changes in control or ownership of the
Company.
5
Pursuant to the foregoing provisions of the Automatic Option Grant
Program, Mr. Berg received an option grant for 20,000 shares of Common Stock on
June 30, 1998 in connection with his initial appointment to the Board. The
option has an exercise price of $3.375 per share, the fair market value per
share of the Common Stock on the grant date.
Messrs. McDade, Raab, Titus and Bellamy each received, on the May 15, 1998
date of the 1998 Annual Stockholders Meeting, an option grant for 7,500 shares
of Common Stock under the Automatic Option Grant Program with an exercise price
per share of $4.9375, the fair market value per share of Common Stock on that
date.
On October 20, 1998, the Compensation Committee in its capacity as the
Plan Administrator implemented an option cancellation/regrant program for
certain key consultants and the non-employee Board members (other than the
members of the Compensation Committee) holding options under the 1992 Plan.
Pursuant to that program, each eligible non-employee Board member was given the
opportunity to surrender his outstanding options under the 1992 Plan with
exercise prices in excess of $1.4375 per share in return for a new option grant
for the same number of shares but with an exercise price of $1.4375 per share,
the closing selling price per share of Common Stock as reported on the Nasdaq
National Market on the October 20, 1998 grant date of the new option. To the
extent the higher-priced option was exercisable for any option shares on the
October 20, 1998 cancellation date, the new option granted in replacement of
that option would become exercisable for those shares in a series of 12
successive equal monthly installments upon the optionee's completion of each
month of service over the one-year period measured from the October 20, 1998
grant date. The option would become exercisable for the remaining option shares
in one or more installments over the optionee's period of continued service,
with each such installment to vest on the same vesting date in effect for that
installment under the cancelled higher-priced option. The following non-employee
Board members participated in the October 20, 1998 cancellation/regrant program
with respect to the indicated number of option shares: Mr. Raab, 344,282 shares
with a weighted average exercise price of $5.528 per share; Mr. Titus, 58,282
shares with a weighted average exercise price of $6.4242 per share; Mr. Berg,
20,000 shares with a weighted average exercise price of $3.3750 per share. Each
of the foregoing directors subsequently surrendered such options.
If Proposal Six is approved by the stockholders at the 1999 Annual Meeting,
substantial revisions will be made to the Automatic Option Grant Program for the
non-employee Board members. For further information concerning the Automatic
Option Grant Program, please see Proposal Six below for a discussion of those
revisions.
On May 1, 1997, the Company approved a consulting arrangement with Mr.
Titus, one of the non-employee Board members, pursuant to which he was to serve
as a consultant to the Company on financing matters and financial operations.
Under this arrangement, Mr. Titus was paid consulting fees in the amount of
$36,000 for the 1998 fiscal year. This agreement expired in June 1998. As part
of the initial consulting agreement, Mr. Titus was granted an option to purchase
up to 14,000 shares of Common Stock under the Discretionary Option Grant Program
in effect under the Plan. Such option has an exercise price of $5.375 per share,
the fair market value of the Company's Common Stock on the May 22, 1997 grant
date of that option and was exercisable in full at any time prior to May 22,
2007. This option was surrendered on October 20, 1998 under the option
cancellation/regrant program, in return for a new option grant for the same
number of shares but with an exercise price of $1.4375 per share. The option
would have become exercisable in a series of 12 successive equal monthly
installments over the one-year period measured from the October 20, 1998 grant
date; however, the option has been surrendered and is no longer outstanding.
In August 1995, the Company entered into a consulting arrangement (the
"Consulting Arrangement") with Mr. G. Kirk Raab, Chairman of the Board. As
consideration for the special consulting services Mr. Raab performed under the
Consulting Arrangement, Mr. Raab was paid an annual consulting fee of $100,000.
In addition, he was granted an option for 200,000 shares of Common Stock on
August 21, 1995 with an exercise price per share of $5.50, the fair market value
per share of Common Stock on that date. The option was granted under the
Discretionary Option Grant Program in effect under the Plan, and the option
would have become exercisable in a series of 48 successive equal monthly
installments over the four-year period measured from the August 21, 1995 grant
date, provided Mr. Raab continued to render services to the Company pursuant to
his Consulting Arrangement. This option was surrendered on October 20, 1998
under the option cancellation/regrant program, in return for a new option grant
for the same number of shares but with an exercise price of $1.4375 per share.
To the extent, this option was exercisable for any option shares on the October
20, 1998 cancellation date, the new option granted in replacement of that option
would have become exercisable for those shares in a series of 12 successive
6
equal monthly installments over the one-year period measured from the
October 20, 1998 grant date. The option would have become exercisable for the
remaining option shares in one or more installments upon the optionee's period
of continued service, with each such installment to vest on the same vesting
date in effect for that installment under the cancelled higher-priced option.
The option would have, however, become immediately exercisable for all the
option shares upon certain changes in control or ownership of the Company.
However, this option has been surrendered and is no longer outstanding In
addition, in connection with his services as a director and as Chairman of the
Board, Mr. Raab received an annual retainer fee of $60,000, payable after each
Annual Meeting of Stockholders so long as Mr. Raab continued to render services
to the Company as Chairman of the Board. The Company paid a total of $66,667 of
the consulting fees in cash and on November 7, 1998, issued 135,652 shares of
Common Stock in payment of his consulting services for the 1998 fiscal year. The
Company and Mr. Raab have agreed to terminate the compensation component of this
agreement, and no further payments are to be due under this agreement. Mr. Raab
still serves as Chairman of the Board.
In January 1999, the Company entered into a consulting agreement with Mr.
Loren D. Israelsen, a director of the Company, pursuant to which he is to serve
as an interim Chief Executive Officer of Shaman's Botanicals division. Under
this agreement, Mr. Israelsen was paid a total of $30,000 for his service in
January and February 1999. In addition, upon further funding of the Company, Mr.
Israelsen is to be paid $10,000 in deferred consulting expenses and a project
retainer to help close a corporate deal for Shaman's Botanicals division. Such
retainer will be paid in three installments. Mr. Israelsen will also receive a
success payment for each corporate partnership as a percentage of the up front
fee received from such partner, which fee varies from three to five percent
depending upon the timing of closing such partnership.
No other compensation was paid or accrued for directors of the Company
with respect to their 1998 services as directors of or consultants to the
Company.
Recommendation of the Board of Directors
The Board recommends that the stockholders vote IN FAVOR OF the election
of each of the above nominees to serve as directors of the Company until the
2001 annual meeting of stockholders or until their successors have been duly
elected and qualified or until their death, resignation or removal.
7
PROPOSAL TWO
REVERSE STOCK SPLIT
General
The Board of Directors of the Company has approved a proposal to amend the
Company's Amended and Restated Certificate of Incorporation (the "Restated
Certificate") to effect a 20-for-1 reverse stock split of the Company's
outstanding Common Stock, subject to the approval of the Company's stockholders.
This proposal provides for the combination and reclassification of the presently
issued and outstanding shares of Common Stock, into a smaller number of shares
of identical Common Stock, on the basis of one share of Common Stock for each 20
shares of Common Stock previously issued and outstanding (the "Reverse Stock
Split"). Except as may result from the rounding of fractional shares as
described below, each stockholder will hold the same percentage of Common Stock
outstanding immediately following the Reverse Stock Split as each stockholder
did immediately prior to the Reverse Stock Split. If approved by the Company's
stockholders as provided herein, the Reverse Stock Split will be effected by an
amendment and restatement of the Company's Restated Certificate in substantially
the form attached to this Proxy Statement as Appendix A (the "Reverse Stock
Split Amendment"), and will become effective upon the filing of the Reverse
Stock Split Amendment with the Secretary of State of Delaware (the "Effective
Time"). The Amended and Restated Certificate of Incorporation attached hereto as
Appendix A includes the amendment set forth in this Proposal Two and the
amendments set forth in Proposals 3, 4 and 5 of this Proxy Statement. Only the
amendments approved by the stockholders will be included in the Restated
Certificate of Incorporation as filed with the Secretary of State of Delaware.
The following discussion is qualified in its entirety by the full text of the
Reverse Stock Split Amendment, which is incorporated by reference herein.
At the Effective Time, each share of Common Stock issued and outstanding
will automatically be reclassified and converted into 1/20th of a share of
Common Stock. Fractional shares of Common Stock will not be issued as a result
of the Reverse Stock Split. Stockholders entitled to receive a fractional share
of Common Stock as a consequence of the Reverse Stock Split will, instead,
receive one share of Common Stock.
The Company expects that, if this Proposal Two is approved by the
stockholders at the Annual Meeting, the Reverse Stock Split Amendment will be
filed promptly. However, notwithstanding approval of this Proposal Two by the
stockholders of the Company, the Board of Directors of the Company may elect not
to file, or to delay the filing of, the Reverse Stock Split Amendment, if the
Board determines that filing the Reverse Stock Split Amendment would not be in
the best interest of the Company's stockholders at such time. Factors leading to
such a determination could include, without limitation, any possible effect on
future securities offerings (see "Reasons for the Reverse Stock Split" below).
Following the completion of the June 11, 1999, Annual Meeting of the
Company, and pending approval of the necessary proposals in this proxy, Shaman
expects to conduct a Rights Offering, and intends to file a registration
statement with the SEC covering the issuance of the Series R Preferred Stock to
its stockholders. The Company plans to offer to stockholders on pro-rata basis
shares having an aggregate value of $10,000,000. You will receive more
information on the Rights Offering following the Annual Meeting, including
detailed Questions and Answers (Q&A).
Reasons for the Reverse Stock Split
The primary purpose of the Reverse Stock Split is to combine the
outstanding shares of the Company's Common Stock so that the Company has
adequate authorized but unissued shares of Common Stock available for issuance
upon conversion of the Company's Series C Preferred Stock, Series D Preferred
Stock and proposed Series R Preferred Stock. The Company may not have adequate
shares of Common Stock available for issuance upon such conversions. If shares
are not available to accommodate conversion of the Series C Preferred Stock and
Series D Preferred Stock when requested, the Company will be in breach of its
obligations and therefore will face significant penalties under the agreements
relating to the issuance of such securities and may entitle the holders of the
Series C and/or Series D Preferred Stock to have their shares redeemed for cash.
The Company does not have the financial resources to redeem such shares.
Additionally, the Company expects to issue shares of Series R Preferred Stock in
connection with its proposed Rights Offering, and the Company must have a
significant number of shares of Common Stock available for issuance upon
conversion of such shares of Series R Preferred Stock.
8
Another effect of the Reverse Stock Split is that by combining the
outstanding shares of Common Stock, the Common Stock outstanding after giving
effect to the Reverse Stock Split trades at a significantly higher price per
share than the Common Stock outstanding before giving effect to the Reverse
Stock Split. The Company anticipates that, following the consummation of the
Reverse Stock Split, the Common Stock will trade at a price per share that is
significantly higher than the current market price of the Common Stock. However,
there can be no assurance that, following the Reverse Stock Split, such higher
price will be maintained.
For the above reasons, the Company believes that the Reverse Stock Split
is in the best interests of the Company and its stockholders. However, there can
be no assurances that the Reverse Stock Split will have the desired
consequences.
Effect of the Reverse Stock Split
Subject to stockholder approval, the Reverse Stock Split will be effected
by filing the Reverse Stock Split Amendment to the Company's Restated
Certificate and will be effective immediately upon such filing. Although the
Company expects to file the Reverse Stock Split Amendment with the Delaware
Secretary of State's office promptly following approval of this Proposal Two at
the Annual Meeting, the actual timing of such filing will be determined by the
Company's management based upon their evaluation as to when such action will be
most advantageous to the Company and its stockholders. The Company reserves the
right to forego or postpone filing the Reverse Stock Split Amendment if such
action is determined to be in the best interests of the Company and its
stockholders.
Each of the Company's stockholders will continue to own one or more shares
of Common Stock and will continue to share in the assets and future growth of
the Company as a stockholder. Each stockholder that owns fewer than 20 shares of
Common Stock will have such stockholder's fractional share of Common Stock
converted into one share of Common Stock. Each stockholder that owns 20 or more
shares of Common Stock will own that number of shares as equals 1/20th as many
shares as such stockholder owned before the Reverse Stock Split, subject to the
adjustment for fractional shares, in which case such stockholder shall receive
one share of Common Stock in lieu of such fractional share. The number of shares
of Common Stock that may be purchased upon the exercise of outstanding options,
warrants, and other securities exercisable for, shares of Common Stock
(collectively, "Exercisable Securities") and the per share exercise or
conversion prices thereof, will be adjusted appropriately as of the Effective
Date, so that the aggregate number of shares of Common Stock issuable in respect
of Exercisable Securities immediately following the Effective Date will be
1/20th of the number issuable in respect thereof immediately prior to the
Effective Date, the per share exercise price immediately following the Effective
Date will be 20 times the per share exercise or conversion price immediately
prior to the Effective Date, and the aggregate exercise or conversion prices
thereunder shall remain unchanged. The Reverse Stock Split will have no effect
on the authorized or outstanding shares of Series A Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock.
The Reverse Stock Split will also result in some stockholders owning "odd
lots" of less than 100 shares of Common Stock received as a result of the
Reverse Stock Split. Brokerage commissions and other costs of transactions in
odd lots may be higher, particularly on a per-share basis, than the cost of
transactions in even multiples of 100 shares.
The Company is currently authorized to issue 70,000,000 shares of Common
Stock, par value $0.001 per share, of which 40,745,876 shares were issued and
outstanding at the close of business on April 15, 1999, the record date. The
Company is also authorized to issue 2,000,000 shares of Preferred Stock, each
share having a par value of $0.001 per share (the "Preferred Stock), of which
400,000 shares of the Company's Series A Preferred Stock were outstanding,
115,958 shares of the Company's Series C Preferred Stock were outstanding and
2,016 shares of Series D Preferred Stock were outstanding.
Adoption of the Reverse Stock Split will reduce the shares of Common Stock
outstanding on April 15, 1999, the record date, from 40,745,876 to
approximately 2,037,294 but will not affect the number of authorized shares of
Common Stock or the authorized or outstanding shares of Preferred Stock. After
the Reverse Stock Split, the Company estimates that it will have approximately
the same number of stockholders. Except for changes resulting in rounding of
fractional shares, the Reverse Stock Split will not affect any stockholder's
proportionate equity interest in the Company.
9
The Common Stock is currently listed on the Nasdaq OTC Bulletin Board,
under the trading symbol SHMN.
Exchange of Stock Certificates
The combination and reclassification of shares of Common Stock pursuant to
the Reverse Stock Split will occur automatically on the Effective Date without
any action on the part of stockholders of the Company and without regard to the
date certificates representing shares of Common Stock prior to the Reverse Stock
Split are physically surrendered for new certificates. If the number of shares
of Common Stock to which a holder is entitled as a result of the Reverse Stock
Split would otherwise include a fraction, the Company will issue to the
stockholder, in lieu of issuing fractional shares of the Company, one share of
Common Stock.
As soon as practicable after the Effective Date, transmittal forms will be
mailed to each holder of record of certificates for shares of Common Stock to be
used in forwarding such certificates for surrender and exchange for certificates
representing the number of shares of Common Stock such stockholder is entitled
to receive as a consequence of the Reverse Stock Split. The transmittal forms
will be accompanied by instructions specifying other details of the exchange.
Upon receipt of such transmittal form, each stockholder should surrender the
certificates representing shares of Common Stock prior to the Reverse Stock
Split, in accordance with the applicable instructions. Each holder who
surrenders certificates will receive new certificates representing the whole
number of shares of Common Stock that he or she holds as a result of the Reverse
Stock Split. STOCKHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES UNTIL THEY
RECEIVE A TRANSMITTAL FORM.
After the Effective Date, each certificate representing shares of Common
Stock outstanding prior to the Effective Date (an "Old Certificate") will, until
surrendered and exchanged as described above, be deemed, for all corporate
purposes, to evidence ownership of the whole number of shares of Common Stock
into which the shares of Common Stock evidenced by such certificate have been
converted by the Reverse Stock Split, except that the holder of such unexchanged
certificates will not be entitled to receive any dividends or other
distributions payable by the Company after the Effective Date until the Old
Certificates have been surrendered. Such dividends and distributions, if any,
will be accumulated, and at the time of surrender of the Old Certificates, all
such unpaid dividends or distributions will be paid without interest.
Certain Federal Income Tax Considerations
The following discussion describes certain material federal income tax
considerations relating to the Reverse Stock Split. This discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed regulations thereunder, legislative history, judicial decisions, and
current administrative rulings and practices, all as amended and in effect on
the date hereof. Any of these authorities could be repealed, overruled, or
modified at any time. Any such change could be retroactive and, accordingly,
could cause the tax consequences to vary substantially from the consequences
described herein. No ruling from the Internal Revenue Service (the "IRS") with
respect to the matters discussed herein has been requested, and there is no
assurance that the IRS would agree with the conclusions set forth in this
discussion.
This discussion may not address certain federal income tax consequences
that may be relevant to particular stockholders in light of their personal
circumstances (such as persons subject to the alternative minimum tax) or to
certain types of stockholders (such as dealers in securities, insurance
companies, foreign individuals and entities, financial institutions, and
tax-exempt entities) who may be subject to special treatment under the federal
income tax laws. This discussion also does not address any tax consequences
under state, local or foreign laws.
STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR
TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT FOR THEM, INCLUDING THE
APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES IN APPLICABLE TAX
LAWS AND ANY PENDING OR PROPOSED LEGISLATION.
The Company should not recognize any gain or loss as a result of the
Reverse Stock Split. No gain or loss should be recognized by a stockholder who
receives only Common Stock upon the Reverse Stock Split. A stockholder who
10
receives one share of Common Stock in lieu of a fractional share of Common Stock
that otherwise would be held as a capital asset generally will recognize capital
gain or loss in an amount equal to the difference between the cash value of the
one share of Common Stock received and the stockholder's basis in such
fractional share of Common Stock. For this purpose, a stockholder's basis in
such fractional share of Common Stock will be determined as if the stockholder
actually received such fractional share. Except as provided with respect to
fractional shares, the aggregate tax basis of the shares of Common Stock held by
a stockholder following the Reverse Stock Split will equal the stockholder's
aggregate basis in the Common Stock held immediately prior to the Reverse Stock
Split and generally will be allocated among the shares of Common Stock held
following the Reverse Stock Split on a pro-rata basis. Stockholders who have
used the specific identification method to identify their basis in shares of
Common Stock combined in the Reverse Stock Split should consult their own tax
advisors to determine their basis in the post-Reverse Stock Split shares of
Common Stock received in exchange therefor.
Required Vote
The affirmative vote of a majority of the Company's outstanding voting
shares is required to approve the amendment and restatement of the Company's
Restated Certificate to effect the Reverse Stock Split.
Recommendation of the Board of Directors
The Board of Directors recommends that the stockholders vote IN FAVOR OF
the amendment and restatement of the Company's Restated Certificate to effect
the Reverse Stock Split. The purpose of the Reverse Stock Split is to combine
the outstanding shares of the Company's Common Stock so that the Company has
adequate authorized but unissued shares of Common Stock available for issuance
upon the conversion of several Series of Preferred Stock. If shares are not
available to accommodate conversion of the Series C Preferred Stock and Series D
Preferred Stock when requested, the Company will be in breach of its obligations
and therefore will face significant penalties under the agreements relating to
the issuance of such securities and may entitle the holders of the Series C
and/or Series D Preferred Stock to have their shares redeemed for cash. The
Company does not have the financial resources to redeem such shares.
11
PROPOSAL THREE
AMENDMENT AND RESTATEMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF PREFERRED SHARES
AUTHORIZED FOR ISSUANCE
The present capital structure of the Company authorizes 2,000,000 shares of
Preferred Stock, par value $0.001 per share (the "Preferred Stock"). Of the
2,000,000 shares of Preferred Stock authorized, 400,000 shares are designated as
Series A Preferred Stock, all of which are issued and outstanding, 200,000
shares are designated as Series C Preferred Stock, 115,958 of which are issued
and outstanding, and 6,285 shares are designated as Series D Preferred Stock,
2,016 of which are issued and outstanding. The Board believes this capital
structure is inadequate for the present and future needs of the Company.
Therefore, the Board has unanimously approved the amendment and restatement of
the Company's Restated Certificate to increase the number of shares of Preferred
Stock authorized for issuance under Article IV of the Restated Certificate by
10,000,000 shares, from 2,000,000 shares to 12,000,000 shares. The Board
believes this capital structure more appropriately reflects the present and
future needs of the Company and recommends that the Company's stockholders
approve such amendment and restatement. The Preferred Stock may be issued from
time to time in one or more series with such rights, preferences and privileges,
including dividend rates, conversion and redemption prices, and voting rights,
as may be determined by the Board.
If approved by the Company's stockholders as provided herein, the increase
in shares of Preferred Stock will be effected by an amendment and restatement of
the Company's Restated Certificate in substantially the form attached to this
Proxy Statement as Appendix A (the "Preferred Increase Amendment"), and will
become effective upon the filing of the Preferred Increase Amendment with the
Secretary of State of Delaware. The Amended and Restated Certificate of
Incorporation attached hereto as Appendix A includes the amendment set forth in
this Proposal Three and the amendments set forth in Proposals 2, 4 and 5 of this
Proxy Statement. Only the amendments approved by the stockholders will be
included in the Restated Certificate of Incorporation as filed with the
Secretary of State of Delaware. The following discussion is qualified in its
entirety by the full text of the Preferred Increase Amendment, which is
incorporated by reference herein.
Purpose of Authorizing Additional and Preferred Stock
The authorization of an additional 10,000,000 shares of Preferred Stock
would give the Board the express authority, without further action of the
stockholders, to issue such shares of Common Stock and Preferred Stock from time
to time as the Board deems necessary. The Board believes it is necessary to have
the ability to issue such additional shares of Preferred Stock primarily to be
able to complete the Company's proposed Rights Offering. The 10,000,000 shares
of Preferred Stock should be sufficient to accommodate the Series R Preferred
Stock that the Company plans to issue in connection with the proposed Rights
Offering. The Company intends to use the proceeds from the Rights Offering to
fund ongoing operations of its Botanicals business, including research and
development and commercialization activities, and for general corporate purposes
and also believes the Rights Offering is the only way the holders of Common
Stock can mitigate the dilution potential of the holders of the Series C
Preferred Stock.
The additional Preferred Stock would be available for issuance by the
Board without future action by the stockholders, unless such action was
specifically required by applicable law or rules of any stock exchange or
quotation system on which the Company's securities may then be listed.
Effect of Authorizing Additional Preferred Stock
The Board of Directors of the Company believes the increase in the
authorized shares is necessary to provide the Company with the flexibility to
act in the future with respect to financing programs, including the proposed
Rights Offering, acquisitions and other corporate purposes without the delay and
expense associated with obtaining special stockholder approval each time an
opportunity requiring the issuance of shares may arise.
12
The proposed increase in the authorized number of shares of Preferred
Stock could have a number of effects on the Company's stockholders depending
upon the exact nature and circumstances of any actual issuances of authorized
but unissued shares. The increase could have an anti-takeover effect, in that
additional shares could be issued (within the limits imposed by applicable law)
in one or more transactions that could make a change in control or takeover of
the Company more difficult. For example, additional shares could be issued by
the Company so as to dilute the stock ownership or voting rights of persons
seeking to obtain control of the Company. Similarly, the issuance of additional
shares to certain persons allied with the Company's management could have the
effect of making it more difficult to remove the Company's current management by
diluting the stock ownership or voting rights of persons seeking to cause such
removal.
In addition, an issuance of additional shares by the Company could have an
effect on the potential realizable value of a stockholder's investment. In the
absence of a proportionate increase in the Company's earnings and book value, an
increase in the aggregate number of outstanding shares of the Company caused by
the issuance of the additional shares would dilute the earnings per share and
book value per share of all outstanding shares of the Company's capital stock.
If such factors were reflected in the price per share of Common Stock, the
potential realizable value of a stockholder's investment could be adversely
affected.
The Company currently has no plans to issue shares of Preferred Stock
beyond the Rights Offering.
Vote Required for Stockholder Approval
The affirmative vote of (a) a majority of all shares of the Company's
Common Stock, including all shares of Series A Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock and (b) a majority of shares of the
Series A Preferred Stock Preferred C, Series C Preferred Stock and Series D
Preferred Stock, voting separately as a class, outstanding at the time of voting
is required for approval of the amendment and restatement of the Restated
Certificate to increase the number of authorized shares of Preferred Stock
issuable thereunder by 10,000,000 shares, from 2,000,000 shares to 12,000,000
shares.
Recommendation of the Board of Directors
The Board of Directors recommends that the stockholders vote IN FAVOR OF
the amendment and restatement of the Company's Restated Certificate. These
additional shares of Preferred Stock are expected to be used to complete the
Company's proposed Rights Offering to its current stockholders. The Company
believes that the Rights Offering is the best way the current holders of Common
Stock can be protected from the potential dilution of currently existing
Preferred Stock.
13
PROPOSAL FOUR
AMENDMENT AND RESTATEMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF COMMON SHARES
AUTHORIZED FOR ISSUANCE
The present capital structure of the Company authorizes 70,000,000 shares
of Common Stock, par value $0.001 per share. Of the 2,000,000 shares of
Preferred Stock authorized, 400,000 shares are designated as Series A Preferred
Stock, all of which are issued and outstanding, 200,000 shares are designated as
Series C Preferred Stock, 115,958 of which are issued and outstanding, and 6,285
shares are designated as Series D Preferred Stock, 2,016 of which are issued and
outstanding. The Board believes this capital structure is inadequate for the
present and future needs of the Company. Therefore, the Board has unanimously
approved the amendment and restatement of the Company's Restated Certificate to
increase the number of shares of Common Stock authorized for issuance under
Article IV of the Restated Certificate by 150,000,000 shares, from 70,000,000
shares to 220,000,000. The Board believes this capital structure more
appropriately reflects the present and future needs of the Company and
recommends that the Company's stockholders approve such amendment and
restatement. On April 15, 1999, 2,037,294 shares of Common Stock were
outstanding(taking into account the effect of the 20-for-1 reverse stock split
described in Proposal Two). On April 15, 1999, assuming the conversion of the
outstanding shares of the Company's Series A Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock and exercise of all outstanding warrants and
options, approximately 202,941,267 shares of Common Stock would be outstanding
on a fully diluted basis (taking into account the effect of the 20-for-1 reverse
stock split described in Proposal Two).
If approved by the Company's stockholders as provided herein, the increase
in shares of Common Stock will be effected by an amendment and restatement of
the Company's Restated Certificate in substantially the form attached to this
Proxy Statement as Appendix A (the "Common Increase Amendment"), and will become
effective upon the filing of the Common Increase Amendment with the Secretary of
State of Delaware. The Amended and Restated Certificate of Incorporation
attached hereto as Appendix A includes the amendment set forth in this Proposal
Four and the amendments set forth in Proposals 2, 3 and 5 of this Proxy
Statement. Only the amendments approved by the stockholders will be included in
the Restated Certificate of Incorporation as filed with the Secretary of State
of Delaware. The following discussion is qualified in its entirety by the full
text of the Common Increase Amendment, which is incorporated by reference
herein.
Purpose of Authorizing Additional Common Stock
The authorization of an additional 150,000,000 shares of Common Stock
would give the Board the express authority, without further action of the
stockholders, to issue such shares of Common Stock from time to time as the
Board deems necessary. The Board believes it is necessary to have the ability to
issue such additional shares of Common Stock primarily to accommodate the
proposed Rights Offering. The Company expects to issue shares of Series R
Preferred Stock in connection with its proposed Rights Offering to its current
stockholders, and the Company must have a significant number of shares of Common
Stock available for issuance upon conversion of such shares of Series R
Preferred Stock into Common Stock. If insufficient shares of Common Stock are
available for conversion of the Series R Preferred Stock, there will be limited
liquidity for the holder of the Preferred Stock.
Additionally, it is important that the Company has adequate authorized but
unissued shares of Common Stock available for issuance upon the conversion of
several Series of Preferred Stock. If shares are not available to accommodate
conversion of the Series C Preferred Stock and Series D Preferred Stock when
requested, the Company will be in breach of its obligations and therefore will
face significant penalties under the agreements relating to the issuance of such
securities and may entitle the holders of the Series C and/or Series D Preferred
Stock to have their shares redeemed for cash. The Company does not have the
financial resources to redeem such shares.
14
The additional Common Stock would be available for issuance by the Board
without future action by the stockholders, unless such action was specifically
required by applicable law or rules of any stock exchange or quotation system on
which the Company's securities may then be listed.
Effect of Authorizing Additional Common Stock
The Board of Directors believes the increase in the authorized shares is
necessary to provide the Company with the flexibility to act in the future with
respect to financings, including the proposed Rights Offering, acquisitions and
other corporate purposes without the delay and expense associated with obtaining
special stockholder approval each time an opportunity requiring the issuance of
shares may arise.
An issuance of additional shares by the Company could have an effect on
the potential realizable value of a stockholder's investment. In the absence of
a proportionate increase in the Company's earnings and book value, an increase
in the aggregate number of outstanding shares of the Company caused by the
issuance of the additional shares would dilute the earnings per share and book
value per share of all outstanding shares of the Company's capital stock. If
such factors were reflected in the price per share of Common Stock, the
potential realizable value of a stockholder's investment could be adversely
affected.
Vote Required for Stockholder Approval
The affirmative vote of a majority of the Company's outstanding voting
shares is required to approve the amendment and restatement of the Restated
Certificate to increase the number of authorized shares of Common Stock issuable
thereunder by 150,000,000 shares, from 70,000,000 shares to 220,000,000 shares
Recommendation of the Board of Directors
The Board of Directors recommends that the stockholders vote IN FAVOR OF
the amendment and restatement of the Company's Restated Certificate. The Company
expects to issue shares of Series R Preferred Stock in connection with its
proposed Rights Offering, to its current stockholders, and the Company must have
a significant number of shares of Common Stock available for issuance upon
conversion of such shares of Series R Preferred Stock into Common Stock. If
sufficient shares of Common Stock are not available for conversion of the Series
R Preferred Stock, there may be limited liquidity for the Series R Preferred
Stockholders.
Additionally, it is important that the Company has adequate authorized but
unissued shares of Common Stock available for issuance upon the conversion of
several Series of Preferred Stock. If shares are not available to accommodate
conversion of the Series C Preferred Stock and Series D Preferred Stock when
requested, the Company will be in breach of its obligations and therefore will
face significant penalties under the agreements relating to the issuance of such
securities and may entitle the holders of the Series C and/or Series D Preferred
Stock to have their shares redeemed for cash. The Company does not have the
financial resources to redeem such shares.
15
PROPOSAL FIVE
AMENDMENT AND RESTATEMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
TO AMEND CERTAIN LIQUIDATION PREFERENCE RIGHTS
OF PREFERRED STOCK
The Board of Directors has approved a proposal to amend Article IV, Section
B.5(e) of the Company's Restated Certificate to (i) delete the provision stating
that a transaction or series of transactions in which in excess of 50% of the
Company's voting power is transferred will be treated as a liquidation,
dissolution or winding up of the Company, and (ii) delete the reference to the
Series D Preferred Stock from the section, since the section, as amended, will
no longer apply to the Series D Preferred Stock. If approved by the Company's
stockholders as provided herein, the amendment to Section B.5(e) will be
effected by an amendment to Section B.5(e) of the Company's Restated Certificate
in substantially the form attached to this Proxy Statement as Appendix A which
will become effective upon the filing of the amendment with the Secretary of
State of Delaware. The following discussion is qualified in its entirety by the
full text of the amendment, which is incorporated by reference herein. The
Amended and Restated Certificate of Incorporation attached hereto as Appendix A
includes the amendment set forth in this Proposal Five and the amendments set
forth in Proposals 2, 3 and 4 of this Proxy Statement. Only the amendments
approved by the stockholders will be included in the Restated Certificate of
Incorporation as filed with the Secretary of State of Delaware.
Currently, this section of the Restated Certificate provides as follows:
"With respect to the Series A Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock (except as limited with respect to Series D
Preferred Stock as set forth in Section 5(b) above), (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary (other than a mere reincorporation transaction) or (ii) a sale
of all or substantially all of the assets of the Corporation or (iii) any other
transaction or series of related transactions by the Corporation in which in
excess of 50% of the Corporation's voting power is transferred, shall be treated
as a liquidation, dissolution or winding up of the Corporation and shall entitle
the holders of the Series C Preferred Stock and Series A Preferred Stock to
receive at the closing thereof the amount as specified in Section 5(a) and
Section 5(c), respectively."
The stockholders are being asked to vote on a proposal to delete subclause
(iii) of this section. The effect of this amendment would be that transactions
by the Company in which more than 50% of the Company's voting stock is
transferred would not be treated as a liquidation event, and that such
transactions would therefore not result in a requirement that the liquidation
preference amounts of the preferred stock be distributed to the holders of the
preferred stock. The deletion of subclause (iii) will make the provisions of
Section B.5(e) inapplicable to the Series D Preferred Stock, since subclauses
(i) and (ii), which provide that mergers and other reorganizations, and sales of
the Company's assets, shall be deemed to be liquidation events, do not apply to
the Series D Preferred Stock in any event, pursuant to section 5(b) of the
Restated Certificate. The amendment to delete the Series D Preferred Stock from
the section is therefore intended to clarify that the section is intended to
apply only to Series A Preferred Stock and Series C Preferred Stock.
Reasons for the Amendments
The proposed amendments would avoid having a change in control of the
Company involving the transfer of over 50% of the Company's voting power cause a
liquidation event under the Restated Certificate that would require the Company
to distribute to the holders of the preferred stock their liquidation preference
amounts. Since it is possible that the proposed Rights Offering could result in
such a change in control of the Company, the Company could be required to pay
the liquidation amounts in cash to its preferred stockholders upon completion of
the Rights Offering. The Company does not have the financial resources to pay
the liquidation preference amounts, and any such required payment would
therefore be detrimental to the Company and its stockholders. The possibility
that the Rights Offering could result in requiring the Company to distribute the
16
preferred stockholders' liquidation preference amounts could make it impossible
to proceed with the Rights Offering or any similar financing transaction, and
the Board believes it is necessary and in the best interests of its stockholders
to avoid this possibility.
In addition, since the Restated Certificate currently provides that, with
respect to the Series D Preferred Stock, mergers and other reorganizations and
sales of the Company's assets shall not in and of themselves be considered
liquidation events, the elimination of subclause (iii) in effect makes the
entire section inapplicable to the Series D Preferred Stock, and the deletion of
the Series D Preferred Stock from the section is intended to clarify that the
section is intended to apply only to the Series A and Series C Preferred Stock.
Vote Required for Stockholder Approval
The affirmative vote of (a) a majority of all of the Company's outstanding
voting shares, including all shares of Common Stock, Series A Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock, voting together as a
single class, and (b) a majority of the shares of the Series A Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock, each voting as a separate
series, is required to approve the amendments of the Restated Certificate to
delete subclause (iii) of Article IV, Section B.5(e) of the Restated
Certificate, which provides that a transaction or series of transactions in
which in excess of 50% of the Company's voting power is transferred will be
treated as a liquidation, dissolution or winding up of the Company, and to
delete the reference to the Series D Preferred Stock from the section.
Recommendation of the Board of Directors
The Board of Directors recommends a vote IN FAVOR OF this proposal. The
possibility that the Rights Offering could result in requiring the Company to
distribute the preferred stockholders' liquidation preference amounts could make
it impossible to proceed with the Rights Offering or any similar financing
transaction, since the Company does not have the financial resources to pay the
liquidation preference amounts.
17
PROPOSAL SIX
AMENDMENT TO 1992 STOCK OPTION PLAN
Introduction
EXCEPT AS OTHERWISE STATED IN THIS PROPOSAL SIX, ALL SHARE NUMBERS AND
EXERCISE PRICES REFLECT THE APPROVAL OF THE REVERSE STOCK SPLIT AND THE FILING
OF THE REVERSE STOCK SPLIT AMENDMENT, AND ARE THEREFORE REFLECTED ON A
POST-REVERSE STOCK SPLIT BASIS.
The stockholders are being asked to vote on a proposal to approve a series
of amendments to the Company's 1992 Stock Option Plan (the "1992 Plan) the Board
adopted on March 15, 1999, subject to stockholders approval at the Annual
Meeting. The amendments will effect the following principal changes to the
existing provisions of the 1992 Plan:
(i) increase the maximum number of shares of the Company's Common Stock
issuable over the term of the 1992 Plan by an additional 6,689,167
shares so that the number of shares reserved for future option grant
under the 1992 Plan, when added to the number of shares subject to
outstanding options, will equal 7,000,000 shares;
(ii) effective as of February 1, 2000, increase the maximum number of
shares of Common Stock issuable over the term of the 1992 Plan by
that number of additional shares which, when added to the number of
shares subject to then outstanding options under the 1992 Plan and
the number of shares available for future option grant under the 1992
Plan immediately prior to that increase, will equal the lesser of (a)
25,000,000 shares or (b) twenty percent (20%) of the sum of (i) the
number of voting shares of the Company's capital stock outstanding at
that time plus (ii) the number of shares of Common Stock subject to
the then outstanding options under the 1992 Plan plus (iii) the
number of shares available for future option grant under the 1992
Plan (after taking such increase into account);
(iii)implement an automatic share increase feature pursuant to which the
number of shares of Common Stock available for issuance under the
1992 Plan will automatically increase on the first trading day of
January each calendar year, beginning with calendar year 2001 and
continuing through calendar year 2008, by an amount equal to four
percent (4%) of the total number of shares outstanding on the last
trading day of the immediately preceding calendar year, but in no
event will any such annual increase exceed the lesser of (a)
5,000,000 shares or (b) that number of additional shares needed so
that the number of shares available for future grant under the 1992
Plan (after taking that annual increase into account) will, when
added to the number of shares subject to the then outstanding
options, equal twenty percent (20%) of the sum of (i) the number of
voting shares of the Company's capital stock outstanding at that time
plus (ii) the number of shares of Common Stock subject to the then
outstanding options under the 1992 Plan plus (iii) the number of
shares available for future option grant under the 1992 Plan;
(iv) increase the limitation on the maximum number of shares of Common
Stock for which any one individual may be granted stock options and
separately exercisable stock appreciation rights per calendar year
from 125,0000 shares to 5,000,000 shares:
(v) extend the term of the 1992 Plan so that the 1992 Plan will terminate
on December 31, 2008; and
18
(vi) revise the Automatic Option Grant Program in effect for the
non-employee Board members to eliminate the annual stock option grant
feature of that program and to provide instead the following stock
option grants: (a) a one-time option grant on February 1, 2000 to
each individual serving as a non-employee Board member on that date,
with each such grant to have an exercise price per share equal to the
fair market value per share of Common Stock on the grant date and to
cover that number of shares of Common Stock equal to one half of one
percent (0.5%) of the number of voting shares of the Company's
capital stock outstanding at that time and (b) a one-time option
grant to each new non-employee Board member at the time he or she
first joins the Board, with each such grant to have an exercise price
per share equal to the fair market value of the Common Stock at the
grant date and to cover the same number of shares of Common Stock
for which each non-employee Board members is granted an option on
February 1, 2000l. Stockholders should be advised that each member
of the Board of Directors has surrendered all of his or her currently
outstanding options to purchase shares of the Company's Common Stock.
The series of proposed share increases~ to the 1992 Plan will assure that
a sufficient reserve of Common Stock will be available under the 1992 Plan to
provide the Company with the continuing opportunity to utilize equity incentives
to attract and retain the services of employees essential to the Company's
long-term growth and financial success. The proposed revision to the Automatic
Option Grant Program is designed to provide a more meaningful equity incentive
to attract and retain the services of highly qualified and experienced
non-employee Board members.
The principal terms and provisions of the 1992 Plan as modified by the
most recent amendment, are summarized below. The summary is not, however,
intended to be a complete description of all the terms of the 1992 Plan. A copy
of the actual plan document will be furnished without charge to any stockholder
upon written request to the attention of the Company's Investor Relations
Department at 213 East Grand Avenue, South San Francisco, CA 94080.
Description of the 1992 Plan
Structure. The 1992 Plan is divided into two separate equity incentive
programs: (i) a Discretionary Option Grant Program under which key employees,
non-employee Board members and consultants may be granted options to purchase
shares of Common Stock at a fixed price per share and (ii) an Automatic Option
Grant Program under which eligible non-employee Board members will automatically
receive a special one-time option grant.
Options granted under the Discretionary Option Grant Program may be either
incentive stock options designed to meet the requirements of Section 422 of the
Internal Revenue Code or non-statutory options not intended to satisfy such
requirements. All grants under the Automatic Option Grant Program will be
non-statutory options.
Administration. The Discretionary Option Grant Program is administered by
the Compensation Committee of the Board (the "Compensation Committee" or the
"Plan Administrator"). Compensation Committee members are appointed by the Board
and may be removed by the Board at any time.
The Compensation Committee as Plan Administrator has full authority,
subject to the provisions of the 1992 Plan, to determine the eligible
individuals who are to receive option grants and/or stock appreciation rights
under the Discretionary Option Grant Program, the type of option (incentive
stock option or non-statutory stock option) or stock appreciation right (tandem
or limited) to be granted, the number of shares to be covered by each granted
option or right, the date or dates on which the option or right is to become
exercisable and the maximum term for which the option or right is to remain
outstanding.
All grants under the Automatic Option Grant Program will be made in strict
compliance with the express provisions of that program, and no administrative
discretion will be exercised by the Plan Administrator.
19
Eligibility. Key employees (including officers), non-employee Board
members, and consultants in the service of the Company are eligible to receive
option grants under the Discretionary Option Grant Program. Non-employee Board
members are also eligible to participate in the Automatic Option Grant Program.
As of April 15, 1999 approximately twenty eight (28) employees (including
seven (7) executive officers) and six (6) non-employee Board members were
eligible to participate in the Discretionary Option Grant Program, and the six
(6) non-employee Board members were also eligible to participate in the
Automatic Option Grant Program.
Securities Subject to the 1992 Plan. If this Proposal is approved by the
stockholders, then the number of shares of Common Stock issuable over the term
of the 1992 Plan will be immediately increased by 6,689,167 shares from 310,833
shares to 7,000,000 shares. In addition, on February 1, 2000, the number of
shares of Common Stock issuable under the 1992 Plan will automatically increase
by that number of shares which, when added to the number of shares subject to
then outstanding options under the 1992 Plan and the number of shares available
for future option grant under the 1992 Plan immediately prior to such increase,
will equal the lesser of (a) 25,000,000 shares or (b) twenty percent (20%) of
the sum of (i) the number of voting shares of the Company's capital stock
outstanding at that time plus (ii) the number of shares of Common Stock subject
to the then outstanding options under the 1992 Plan plus (iii) the number of
shares available for future option grant under the 1992 Plan (after taking such
increase into account).
The share reserve under the 1992 Plan will automatically increase on the
first trading day of January each calendar year, beginning with calendar year
2001 and continuing through calendar year 2008, by an amount equal to four
percent (4%) of the total number of shares outstanding on the last trading day
of the immediately preceding calendar year, but in no event will any such annual
increase exceed the lesser of (a) 5,000,000 shares or (b) that number of
additional shares needed so that the number of shares available for future grant
under the 1992 Plan (after taking that annual increase into account) will, when
added to the number of shares subject to the then outstanding options, equal
twenty percent (20%) of the sum of (i) the number of voting shares of the
Company's capital stock outstanding at that time plus (ii) the number of shares
of Common Stock subject to the then outstanding options under the 1992 Plan plus
(iii) the number of shares available for future option grant under the 1992
Plan.
The shares issuable under the 1992 Plan may be made available either from
the authorized but unissued shares of Common Stock or from shares of Common
Stock repurchased by the Company, including shares purchased on the open market.
As of April 15, 1999, approximately 27,571 shares of Common Stock had been
issued under the 1992 Plan, 207,018 shares of Common Stock were subject to
outstanding options, and 6,765,411 shares of Common Stock were available for
future option grant, taking into account the initial 6,689,167-share increase
which forms part of this Proposal Six.
If this Proposal is approved by the stockholders, then the maximum number
of shares of Common Stock for which any one individual participating in the 1992
Plan be granted stock options or separately exercisable stock appreciation
rights per calendar year, beginning with the 1999 calendar year, will be
increased from 125,000 shares to 5,000,000 shares. The 5,000,000-share
limitation will be subject to adjustment from time to time.
Should an option expire or terminate for any reason prior to exercise in
full, the shares subject to the portion of the option not so exercised will be
available for subsequent grant under the 1992 Plan. In addition, unvested shares
issued under the 1992 Plan and subsequently repurchased by the Company at the
option exercise price paid per share will be added back to the share reserve and
will accordingly be available for subsequent issuance under the 1992 Plan.
However, shares subject to any option surrendered or cancelled in accordance
with the stock appreciation right provisions of the 1992 Plan will not be
available for subsequent grants.
Discretionary Option Grant Program
Price and Exercisability. The option exercise price per share for
incentive stock option grants may not be less than the fair market value of the
Common Stock on the grant date. The exercise price per share for non-statutory
option grants may be less than, equal to or greater than such fair market value
of the date of grant. Options granted under the Discretionary Option Grant
20
Program may either become exercisable in periodic installments over the
optionee's period of service or may be immediately exercisable for all of the
option shares, with such shares subject to repurchase by the Company, at the
exercise price paid per share, in the event the optionee leaves the Company's
service prior to vesting in those shares. No granted option will have a term in
excess of 10 years from the date of grant.
The exercise price may be paid in cash or in shares of Common Stock.
Options may also be exercised through a same-day sale program, pursuant to which
a designated brokerage firm effects the immediate sale of the shares purchased
under the option and pays over to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the exercise price
for the purchased shares plus all applicable withholding taxes. The Plan
Administrator may also assist any optionee (including an officer) in the
exercise of his or her outstanding options by (a) authorizing a Company loan to
the optionee or (b) permitting the optionee to pay the exercise price in
installments over a period of years. The terms and conditions of any such loan
or installment payment will be established by the Plan Administrator in its sole
discretion, but in no event may the maximum credit extended to the optionee
exceed the aggregate exercise price payable for the purchased shares, plus any
federal or state income or employment taxes incurred in connection with the
purchase.
Valuation. For purposes of establishing the exercise price and for all
other valuation purposes under the 1992 Plan, the fair market value per share of
Common Stock on any relevant date will be deemed equal to the closing selling
price per share on that date, as such price is reported on the Nasdaq OTC
Bulletin Board. The closing price of the Common Stock on April 15, 1999 was
$0.065 per share.
Termination of Service. Any option held by the optionee at the time of
cessation of service will not remain exercisable beyond the limited post-service
period designated by the Plan Administrator at the time of the option grant.
Under no circumstances, however, may any option be exercised after the specified
expiration date of the option term. Each such option will normally, during such
limited period, be exercisable only to the extent of the number of shares of
Common Stock for which the option is exercisable at the time of the optionee's
cessation of service. The optionee will be deemed to continue in service for so
long as such individual performs services for the Company (or any parent or
subsidiary corporation), whether as an employee, a non-employee member of the
Board or an independent consultant or advisor.
The Plan Administrator has complete discretion to extend the period
following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability or
vesting of such options in whole or in part. Such discretion may be exercised at
any time while the options remain outstanding, whether before or after the
optionee's actual cessation of service.
Stockholder Rights. No optionee is to have any stockholder rights with
respect to the option shares until the optionee has exercised the option and
paid the exercise price for the purchased shares. Options are generally not
assignable or transferable other than by will or the laws of inheritance and,
during the optionee's lifetime, the option may be exercised only by such
optionee. However, the Plan Administrator may allow non-statutory options to be
transferred or assigned during the optionee's lifetime to one or more members of
the optionee's immediate family or to a trust established exclusively for one or
more such family members, to the extent such transfer or assignment is in
furtherance of the optionee's estate plan.
Repurchase Rights. The shares of Common Stock acquired upon the exercise
of one or more options may be subject to repurchase by the Company, at the
original exercise price paid per share, upon the optionee's cessation of service
prior to vesting in those shares. The Plan Administrator has complete discretion
in establishing the vesting schedule to be in effect for any such unvested
shares and may cancel the Company's outstanding repurchase rights with respect
to those shares at any time, thereby accelerating the vesting of the shares
subject to the cancelled rights.
21
Acceleration of Options. In the event of any of the following
stockholder-approved transactions to which the Company is a party (a "Corporate
Transaction"):
(i) a merger or consolidation in which the Company is not
the surviving entity, except for a transaction the
principal purpose of which is to change the state of
the Company's incorporation;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company or
complete liquidation or dissolution of the Company; or
(iii)a reverse merger in which the Company is the surviving
entity but in which securities possessing more than 50%
of the total combined voting power of the Company's
outstanding securities are transferred to a person or
persons different from those who held such securities
immediately prior to such merger;
each outstanding option will automatically accelerate so that each
option will, immediately prior to the specified effective date for a Corporate
Transaction, become exercisable for the total number of shares of Common Stock
at that time subject to such option and may be exercised for all or any portion
of such shares as fully-vested shares. However, an outstanding option will not
so accelerate if and to the extent: (1) the option is to be assumed by the
successor corporation (or its parent corporation) in such Corporate Transaction
or (2) the acceleration of such option is subject to other limitations imposed
by the Plan Administrator at the time of grant.
Immediately following the consummation of a Corporate Transaction, all
outstanding options under the 1992 Plan will terminate and cease to be
exercisable, except to the extent assumed by the successor corporation.
The Company's outstanding repurchase rights under the 1992 Plan will also
terminate, and the shares subject to such repurchase rights will become fully
vested, upon a Corporate Transaction, except to the extent (i) one or more of
such repurchase rights are to be assigned to the successor corporation (or its
parent company) or (ii) such accelerated vesting is precluded by other
limitations imposed by the Plan Administrator at the time the repurchase rights
are issued.
The Plan Administrator will have full power and authority, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options under the Discretionary Option Grant Program in the event of
a Change in Control (as described below) so that each such option will,
immediately prior to such Change in Control, become exercisable for all the
shares of Common Stock at that time subject to that option and may be exercised
for all or any portion of those shares as fully-vested shares. The Plan
Administrator will also have complete discretion in establishing the specific
terms and conditions upon which one or more of the Company's outstanding
repurchase rights under the 1992 Plan are to terminate in connection with a
Change in Control.
For all purposes under the 1992 Plan, a "Change in Control" will be deemed
to occur if:
(i) any person or related group of persons (other than the
Company or a person that directly or indirectly
controls, is controlled by, or is under common control
with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3
of the Securities Exchange Act of 1934, as amended) of
securities possessing more than 50% of the total
combined voting power of the Company's outstanding
securities pursuant to a tender or exchange offer made
directly to the Company's stockholders; or
(ii) the composition of the Board changes over a period of
24 consecutive months or less such that a majority of
the Board members cease, by reason of one or more
contested elections for Board membership, to be
comprised of individuals who either (A) have been Board
members continuously since the beginning of such period
or (B) have been elected or nominated for election as
Board members during such period by at least a majority
of the Board members described in clause (A) who were
still in office at the time such election or nomination
was approved by the Board.
22
Upon a Change in Control, all outstanding options will remain exercisable
until the expiration or sooner termination of the option term specified in the
instrument evidencing the option.
The acceleration of options in the event of a Corporate Transaction or
Change in Control may be seen as an anti-takeover provision and may have the
effect of discouraging a merger proposal, a takeover attempt or other efforts to
gain control of the Company.
Cancellation and Regrant of Options. The Plan Administrator has the
authority to effect the cancellation of any or all options outstanding under the
1992 Plan and to grant in substitution therefor new options covering the same or
different numbers of shares of Common Stock but with an exercise price per share
based upon the fair market value of the Common Stock on the new grant date.
Please note that the share numbers and exercise prices in this
"Cancellation and Regrant of Options" section DO NOT reflect the approval of the
proposed Reverse Stock Split or filing of the Reverse Stock Split Amendment, and
are therefore not reflected on a post-Reverse Stock Split basis.
On September 18, 1998, the Plan Administrator implemented an option
cancellation/regrant program for all employees of the Company, including the
Company's executive officers. Pursuant to that program, each such employee was
given the opportunity to surrender his or her outstanding options under the 1992
Plan with exercise prices in excess of $1.281 per share in return for a new
option grant for the same number of shares but with an exercise price of $1.281
per share, the closing selling price per share of Common Stock as reported on
the Nasdaq National Market on the September 18, 1998 grant date of the new
option. Options for a total of 1,855,205 shares with a weighted average exercise
price of $5.2745 per share were surrendered for cancellation, and new options
for the same number of shares were granted with the $1.281 per share exercise
price. To the extent the higher-priced option was exercisable for any option
shares on the September 18, 1998 cancellation date, the new option granted in
replacement of that option will become exercisable for those shares in a series
of 12 successive equal monthly installments upon the optionee's completion of
each month of service over the one-year period measured from the September 18,
1998 grant date. The option will become exercisable for the remaining option
shares in one or more installments over the optionee's period of continued
service, with each such installment to vest on the same vesting date in effect
for that installment under the cancelled higher-priced option.
On October 20, 1998, the Plan Administrator implemented an option
cancellation/regrant program for the non-employee Board members and certain key
consultants holding options under the Plan. Pursuant to the October program,
each such individual was given the opportunity to surrender his or her
outstanding options under the Plan with exercise prices in excess of $1.4375 per
share in return for a new option grant for the same number of shares but with an
exercise price of $1.4375 per share, the closing selling price per share of
Common Stock as reported on the Nasdaq National Market on the October 20, 1998
grant date of the new option. Options for a total of 584,639 shares with a
weighted average exercise price of $6.1233 per share were surrendered for
cancellation, and new options for the same number of shares were granted with
the $1.4375 per share exercise price. To the extent the higher-priced option was
exercisable for any option shares on the October 20, 1998 cancellation date, the
new option granted in replacement of that option will become exercisable for
those shares in a series of 12 successive equal monthly installments upon the
optionee's completion of each month of service over the one-year period measured
from the October 20, 1998 grant date. The option will become exercisable for the
remaining option shares in one or more installments over the optionee's period
of continued service, with each such installment to vest on the same vesting
date in effect for that installment under the cancelled higher-priced option.
Stock Appreciation Rights. The Plan Administrator is authorized to issue
two types of stock appreciation rights in connection with option grants made
under the Discretionary Option Grant Program:
Tandem stock appreciation rights provide the holders with
the right to surrender their options for an appreciation
distribution from the Company equal in amount to the excess of
(a) the fair market value of the vested shares of Common Stock
subject to the surrendered option over (b) the aggregate exercise
price payable for such shares. Such appreciation distribution
may, at the discretion of the Plan Administrator, be made in cash
or in shares of Common Stock.
23
Limited stock appreciation rights may be provided to one or
more officers of the Company as part of their option grants. Any
option with such a limited stock appreciation right will
automatically be cancelled upon the successful completion of a
hostile tender offer for more than 50% of the Company's
outstanding voting securities. In return for the cancelled
option, the officer will be entitled to a cash distribution from
the Company in an amount per cancelled option share equal to the
excess of (a) the highest price per share of Common Stock paid in
connection with the tender offer over (b) the exercise price
payable for such share.
Outstanding stock appreciation rights granted before January 26, 1993 to
certain officers and directors of the Company under the Predecessor Plan and
incorporated into the 1992 Plan allow such individuals to surrender the
underlying options to the Company for a cash distribution, calculated in the
manner indicated above, in the event a hostile tender offer for 50% or more of
the Company's outstanding voting securities is successfully completed or a
change in the majority of the Board of Directors is effected through one or more
proxy contests.
Automatic Option Grant
If this Proposal is approved by the stockholders, the following changes
will be made to the Automatic Option Grant Program for the non-employee Board
members:
(i) The existing provisions of the program pursuant to which
the non-employee Board members receive an annual option grant, on
the date of each Annual Stockholders Meeting, for that number of
shares of Common Stock determined by dividing $50,000 by the
average closing selling price of the Common Stock for the 30
trading days immediately preceding the date of such Annual
Meeting, but in no event will the number of shares of Common
Stock subject to such grant be more than 375 shares nor fewer
than 250 shares will be eliminated, and no such annual option
grants will be made at the 1999 Annual Meeting.
(ii) A special one-time option grant will be made on
February 1, 2000 to each individual serving as a non-employee
Board member at that time. The option will allow each such
non-employee Board member to purchase that number of shares of
Common Stock equal to one half of one percent (0.5%) of the
number of voting shares of the Company's capital stock
outstanding at that time.
(iii)Each individual who first joins the Board as a
non-employee Board member will, upon his or her initial
appointment or election to the Board, receive a special one-time
option grant for that number of shares of Common Stock equal to
one half of one percent (0.5%) of the number of voting shares of
the Company's capital stock outstanding on February 1, 2000,
provided such individual has not previously been the Company's
employ. Such grant will be lieu of the 1,000-share option grant
currently provided under the program for newly-appointed or
elected non-employee Board members, and the number of shares sub-
ject to such adjusted for any, subsequent changes in the Company's
capital structure resulting from stock dividends, stock splits, or
other similiar transactions.
Stockholder approval of this Proposal Six will also constitute pre-approval
of each option granted on or after the date of this Annual Meeting pursuant to
the provisions of the Automatic Option Grant Program summarized in this Proposal
and the subsequent exercise of that option in accordance with those provisions.
The option exercise price per share for each automatic grant will be equal
to the fair market value per share of Common Stock on the grant date and will be
payable in cash or shares of Common Stock. The options may also be exercised
through a same-day sale program, pursuant to which a designated brokerage firm
effects the immediate sale of the shares purchased under the option and pays
over to the Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the exercise price for the purchased shares.
Each automatic option grant will have a maximum term of 10 years. Each
automatic grant will become exercisable for the option shares in a series of 48
24
successive equal monthly installments over the optionee's period of continued
Board service, measured from the grant date. Prior option grants under the
program, all of which have been surrendered, vested in a series of 24 successive
equal monthly installments measured from the applicable grant date. Each
outstanding option under the revised Automatic Option Grant Program will become
immediately exercisable for all of the option shares upon a Corporate
Transaction or Change in Control. In addition, each such option grant will be
automatically cancelled upon the successful completion of a hostile tender offer
for more than 50% of the Company's outstanding voting securities. In return, the
optionee will be entitled to a cash distribution from the Company in an amount
per cancelled option share equal to the excess of (a) the highest price per
share of Common Stock paid in connection with the tender offer over (b) the
exercise price payable for such share. Stockholder approval of this Proposal
Six will constitute approval of each option granted with such an automatic
cancellation provision on or after the date of this Annual Meeting and the
subsequent cancellation of that option in accordance with such provision. No
additional approval of the Plan Administrator or the Board will be required at
the time of the actual option cancellation and cash distribution.
All automatic option grants held by the non-employee Board member at the
time of his or her cessation of Board service will remain exercisable for a
period of six months for any or all shares for which those options are
exercisable at the time of such cessation of Board service. However, should the
optionee die while holding one or more options, then those options will remain
exercisable for a 12-month period following the date of the optionee's death and
may be exercised, for any or all shares for which those options are exercisable
at the time of the optionee's cessation of Board service, by the personal
representative of the optionee's estate or by the persons to whom the options
are transferred by the optionee's will or by the laws of inheritance. In no
event may any such option be exercised after the expiration date of the 10-year
option term.
General Provisions
Amendment and Termination of the 1992 Plan. The Board may amend or modify
the 1992 Plan in any or all respects whatsoever. However, no such amendment may
adversely affect the rights of outstanding option holders without their consent.
In addition, certain amendments may require stockholder approval pursuant to
applicable law or regulation.
The Board may terminate the 1992 Plan at any time, and the 1992 Plan will
in all events terminate not later than December 31, 2002 or December 31, 2008 if
this Proposal Six is approved. Any options outstanding at the time of such plan
termination will continue to remain outstanding and exercisable in accordance
with the terms and provisions of the instruments evidencing those grants. The
1992 Plan will, however, automatically terminate on the date all shares
available for issuance are issued as vested shares or cancelled pursuant to the
exercise, surrender or cash-out of outstanding options under the 1992 Plan.
Tax Withholding. The Compensation Committee may, in its discretion and
upon such terms and conditions as it may deem appropriate, provide one or more
option holders under the Discretionary Option Grant Program with the election to
have the Company withhold, from the shares of Common Stock otherwise issuable
upon the exercise of their options, a portion of those shares with an aggregate
fair market value equal to the designated percentage (up to 100% as specified by
the option holder) of the federal, state and local withholding tax liability to
which such option holder may become subject in connection with the exercise of
such option. Any election so made will be subject to the approval of the
Compensation Committee, and no shares will actually be withheld in satisfaction
of such taxes except to the extent approved by the Compensation Committee. One
or more option holders may also be granted the alternative right, subject to
Committee approval, to deliver previously-issued shares of Common Stock in
satisfaction of such tax liability.
Changes in Capitalization. In the event any change is made to the Common
Stock issuable under the 1992 Plan by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares, or other change in
corporate structure effected without the Company's receipt of consideration,
appropriate adjustments will be made to (i) the maximum number and/or class of
securities issuable under the 1992 Plan, (ii) the number and/or class of
securities and price per share in effect under each outstanding option, (iii)
the maximum number and/or class of securities for which any one individual may
be granted stock options and separately exercisable stock appreciation rights
under the 1992 Plan per calendar year, (iv) the number and/or class of
securities for which automatic option grants are subsequently to be made to each
25
newly-elected non-employee Board member and (v) the maximum number and/or class
of securities by which the .share reserve is to increase each calendar year
pursuant to the automatic share increase provisions of the 1992 Plan.
Each outstanding option which is assumed or is otherwise to continue in
effect after a Corporate Transaction will be appropriately adjusted to apply and
pertain to the number and class of securities which would have been issued, in
connection with such Corporate Transaction, to the holder of such option had the
option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments will also be made to the exercise price payable per
share and to the number and class of securities subsequently available for
issuance under the 1992 Plan on both an aggregate and per participant basis.
Option grants under the 1992 Plan will not affect the right of the Company
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
Excess Grants. The 1992 Plan permits the grant of options to purchase
shares of Common Stock in excess of the number of shares then available for
issuance under the 1992 Plan. Any options so granted cannot be exercised prior
to stockholder approval of an amendment sufficiently increasing the number of
shares available for issuance under the 1992 Plan.
Option Grants
The table below shows, on a pre-Reverse Stock Split basis, as to each of
the executive officers named in the Summary Compensation Table below and the
various other indicated persons and groups, the following information with
respect to stock option grants effected during the period from January 1, 1998
through March 31, 1999: (i) the number of shares of Common Stock subject to
options granted under the 1992 Plan during that period; and (ii) the weighted
average exercise price payable per share under such options. The number of
shares and weighted average exercise price calculations include all options
which were granted during the indicated period and subsequently cancelled and
regranted at a lower exercise price per share on either September 18, 1998 or
October 20, 1998. All share numbers and exercise prices are reported on a basis
which does not reflect the proposed Reverse Stock Split.
Options Granted Weighted Average
Name and Position (Number of Shares) Exercise Price ($)
---------------------------------- ------------------ -----------------
Lisa A. Conte
President, Chief Executive Officer
and Chief Financial Officer 2,045,000 $1.2810
Gerald M. Reaven, M.D.
Senior Vice President,
Medical and Clinical Advisor 215,000 $1.2810
Atul S. Khandwala, Ph.D. (1)
Former Senior Vice President,
Development and Chief Regulatory
Officer 40,000 $1.4375
Steven R. King, Ph.D.
Senior Vice President,
Ethnobotany and Conservation 148,810 $1.2810
James S. Pennington, M.D. (2)
Former Senior Vice President, Clinical
Research and Chief Medical Officer 125,000 $1.2810
Laurie Peltier
Vice President, Project Coordination 65,000 $1.2810
All executive officers as a group 3,070,463 $1.3911
(11 persons)
All directors who are not executive
officers as a group (5 persons) 472,564 $1.6633
All employees (88 persons) and
consultants as a group, excluding
executive officers 897,717 $1.7400
---------------------
(1) The Company accepted the resignation of Dr. Khandwala
effective October 2, 1998.
(2) Dr. Pennington was terminated effective February 19,1999
due to the elimination of his position in connection with the
Company's restructuring.
26
The number of options granted on either September 18, 1998 or October 20,
1998 in cancellation of outstanding higher-priced options was as follows for
each of the indicated individuals and groups: Ms. Conte, options for 545,000
shares; Dr. Reaven, options for 215,000 shares; Dr. Khandwala, options for 0
shares; Dr. King, options for 148,810 shares; Dr. Pennington, options for
125,000, Ms. Peltier, options for 55,000 shares; all executive officers as a
group, 1,278,810 shares; all directors who are not executive officers as a
group, 422,564 shares; and all employees (other than executive officers and
directors) and consultants as a group, 738,470 shares.
Effective as of April ___, 1999, each member of the Board of Directors,
including Ms. Conte has surrendered all of his or her outstanding options to
purchase shares of the Company's Common Stock.
On November 7, 1998, the Company issued 747,206 shares of Common Stock in
the aggregate to certain individuals in connection with the consulting services
they rendered the Company. None of the shares were issued under the 1992 Plan.
However, certain individuals eligible to participate in the 1992 Plan received a
portion of the issued shares. G. Kirk Raab, Chairman of the Board of Directors,
was issued 135,652 shares of Common Stock and Atul S. Khandwala, Ph.D., the
Company's former Senior Vice President, Development and Chief Regulatory
Officer, was issued 87,326 shares of Common Stock.
Federal Tax Consequences
Options granted under the 1992 Plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
federal income tax treatment for the two types of options differs as described
below.
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. However, the difference between the fair market
value of the purchased shares and the exercise price is generally included as
alternative minimum taxable income for purposes of the alternative minimum tax.
The optionee will recognize taxable income in the year in which the purchased
shares are sold or otherwise made the subject of disposition. For federal tax
purposes, dispositions are divided into two categories: (i) qualifying and (ii)
disqualifying. The optionee will make a qualifying disposition of the purchased
shares if the sale or other disposition of such shares is made after the
optionee has held the shares for more than two years after the grant date of the
option and more than one year after the exercise date. If the optionee fails to
satisfy either of these two minimum holding periods prior to the sale or other
disposition of the purchased shares, then a disqualifying disposition will
result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (i) the amount
realized upon the sale or other disposition of the purchased shares over (ii)
the exercise price paid for such shares. If there is a disqualifying disposition
of the shares, then the excess of (a) the fair market value of those shares on
the exercise date over (b) the exercise price paid for the shares will be
taxable as ordinary income. Any additional gain recognized upon the disposition
will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the exercise date over (ii) the exercise price
paid for the shares. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
Special provisions of the Internal Revenue Code apply to the acquisition
of unvested shares of Common Stock under a non-statutory option. These special
provisions may be summarized as follows:
27
(i) If the shares acquired upon exercise of the
non-statutory option are subject to repurchase by the Company at
the original exercise price in the event of the optionee's
termination of service prior to vesting in such shares, then the
optionee will not recognize any taxable income at the time of
exercise but will have to report as ordinary income, as and when
the Company's repurchase right lapses, an amount equal to the
excess of (a) the fair market value of the shares on the date the
Company's repurchase right lapses with respect to those shares
over (b) the exercise price paid for the shares.
(ii) The optionee may, however, elect under Section 83(b) of
the Internal Revenue Code to include as ordinary income in the
year of exercise of the non-statutory option an amount equal to
the excess of (a) the fair market value of the purchased shares
on the exercise date (determined as if the shares were not
subject to the Company's repurchase right) over (b) the exercise
price paid for such shares. If the Section 83(b) election is
made, the optionee will not recognize any additional income as
and when the Company's repurchase right lapses.
The Company will be entitled to a business expense deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such ordinary income is recognized by the
optionee.
Deductibility of Executive Compensation. The Company anticipates that any
compensation deemed paid by it in connection with disqualifying dispositions of
incentive stock option shares or exercises of non-statutory options granted with
an exercise price equal to the fair market value of the option shares will
qualify as performance-based compensation for purposes of Code Section 162(m)
and will not have to be taken into account for purposes of the $1 million
limitation per covered individual on the deductibility of the compensation paid
to certain executive officers of the Company.
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. The Company will be entitled to a business
expense deduction equal to the appreciation distribution for the taxable year of
the Company in which the ordinary income is recognized by the optionee.
Parachute Payments. If the exercisability of an option or stock
appreciation right is accelerated as a result of a change of control, all or a
portion of the value of the option or stock appreciation right at that time may
be a parachute payment for purposes of the excess parachute provisions of the
Internal Revenue Code. Those provisions generally provide that if parachute
payments equal or exceed three times an employee's average compensation for the
five tax years preceding the change of control, the Company loses its deduction
and the recipient is subject to a 20% excise tax for the amount of the parachute
payments in excess of one times such average compensation.
Note Forgiveness. If any promissory note delivered in payment of shares
acquired under the 1992 Plan is forgiven in whole or in part, the amount of such
forgiveness will be reportable by the participant as ordinary compensation
income. The Company will be entitled to a business expense deduction equal to
the amount of ordinary income recognized by the participant in connection with
the acquisition of the shares and any note forgiveness. The deduction will be
allowed for the taxable year of the Company in which the ordinary income is
recognized by the participant.
Accounting Treatment
Option grants or stock issuances to employees and members of the Board of
Directors with exercise or issue prices less than the fair market value of the
shares on the grant or issue date will result in compensation expense to the
Company's earnings equal to the excess of the fair market value of the shares on
the grant or issue date over the exercise or issue price. Such charge will be
expensed by the Company over the period benefited (usually the vesting period of
the option). Option grants or stock issuances with exercise or issue prices not
less than the fair market value of the shares on the grant or issue date will
not result in any direct charge to the Company's earnings. However, the fair
value of those options is required to be disclosed in the notes to the Company's
financial statements, and the Company must also disclose, in pro-forma
disclosures in the Company's financial statements, the impact those options
28
would have upon the Company's reported earnings were the value of those options
at the time of grant treated as compensation expense. Whether or not granted at
a discount, the number of outstanding options may be a factor in determining the
Company's earnings per share on a fully-diluted basis.
The Financial Accounting Standards Board recently announced its intention
to issue an exposure draft of a proposed interpretation of APB Opinion 25,
"Accounting for Stock Issued to Employees." Under the proposed interpretation,
option grants made to non-employee Board members after December 15, 1998 will
result in a direct charge to the Company's reported earnings based upon the fair
value of the option measured initially as of the grant date and then
subsequently on the vesting date of each installment of the option shares.
Accordingly, such charge will include the appreciation in the value of the
option shares over the period between the grant date of the option (or, if
later, the effective date of the final interpretation ) and the vesting date of
each installment of the option shares. In addition, if the proposed
interpretation is adopted, any options which are repriced after December 15,
1998 will also trigger a direct charge to Company's reported earnings measured
by the appreciation in the value of the underlying shares over the period
between the grant date of the option (or, if later, the effective date of the
final interpretation) and the date the option is exercised for those shares. The
accounting is the same as is currently applied for option grants to independent
consultant.
Should one or more optionees be granted stock appreciation rights which
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in compensation expense to be charged
against the Company's earnings. Accordingly, at the end of each fiscal quarter,
the amount (if any) by which the fair market value of the shares of common stock
subject to such outstanding stock appreciation rights has increased from prior
quarter-end will be accrued as compensation expense, to the extent such fair
market value is in excess of the aggregate exercise price in effect for such
rights.
New Plan Benefits
No stock option grants have been made to date under the Plan on the basis
of the amendments for which stockholder approval is sought under this Proposal
Six. However, if such stockholder approval is obtained, the on February 1, 2000
each of the non-employee Board members will receive an automatic option grant
for that number of shares of Common Stock equal to one half of one percent
(0.5%) of the number of voting shares of the Company's capital stock outstanding
at that time. Each such option will have an exercise price per share equal to
the fair market value per share of Common Stock on that date.
Stockholder Vote
The affirmative vote of the holders of a majority of the Company's
outstanding voting shares, present or represented by Proxy at the Annual Meeting
and entitled to vote is required for approval of this Proposal Six.
Recommendation of the Board of Directors
The Board of Directors recommends that the stockholders vote FOR the
approval of the amendment to the 1992 Plan as described in this Proposal Six.
If such stockholder approval is not obtained, then any options granted on the
basis of the proposed share increases which form part of such Proposal will
terminate without becoming exercisable for any of the shares of Common Stock
subject to those options, and no further option grants will be made on the basis
of such increases. In addition, the special one-time option grants proposed to
be made to the non-employee Board members on February 1, 2000 will not be made.
However, in the absence of such stockholder approval, the 1992 Plan will
continue to remain in effect, and option grants may continue to be made pursuant
to the provisions of the 1992 Plan in effect prior to the amendments summarized
in this Proposal Six, until the available reserve of Common Stock as last
approved by the stockholders has been issued. Because the shares subject to the
1992 Plan are subject to the 20 to 1 Reverse Stock Split in Proposal Two, the
shares reserved for future issuance under the 1992 Plan are expected to be
exhausted very quickly. Additionally, those Board Members who have voluntarily
surrendered their options would not receive any further compensation under the
1992 Plan.
29
The Board believes that the proposed amendments to the 1992 Plan are
essential to the Company's efforts in attracting and retaining the services of
highly qualified individuals who can contribute significantly to the Company's
business and financial success. Without access to such option pool, it may
require substantially more cash to attract and retain such individuals, if such
attraction and retention is even possible. Accordingly, the Board recommends
that the stockholders vote IN FAVOR OF approval of the amendments to the 1992
Plan.
30
PROPOSAL SEVEN
RATIFICATION OF INDEPENDENT AUDITORS
Upon the recommendation of the Audit Committee, the Board has appointed
the firm of Ernst & Young LLP, independent auditors, to audit the financial
statements of the Company for the year ending December 31, 1999, and is asking
the stockholders to ratify this appointment.
In the event the stockholders fail to ratify the appointment, the Board
will reconsider its selection. Even if the selection is ratified, the Board in
its discretion may direct the appointment of a different independent auditing
firm at any time during the year if the Board feels that such a change would be
in the best interests of the Company and its stockholders. The affirmative vote
of the holders of a majority of the Company's outstanding voting shares, present
or represented by Proxy at the Annual Meeting and entitled to vote is required
to ratify the selection of Ernst & Young LLP.
Ernst & Young LLP has audited the Company's financial statements annually
since November 1992. A representative of Ernst & Young LLP is expected to be
present at the Annual Meeting to respond to appropriate questions, and will be
given the opportunity to make a statement if he or she so desires.
Recommendation of the Board of Directors
The Board recommends that the stockholders vote IN FAVOR OF the
ratification of the selection of Ernst & Young LLP to serve as the Company's
independent auditors for the year ending December 31, 1999.
31
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Certain information about the Company's executive officers, as of March
31, 1999, is set forth below. Information concerning the Class I and Class II
directors, including Lisa A. Conte, the Company's President, Chief Executive
Officer and Chief Financial Officer is contained in "Proposal One - Election of
Directors."
Name Age Position
- ------------------------- --- -------------------------------------------
Steven R. King, Ph.D..... 41 Senior Vice President, Ethnobotany and
Conservation
Gerald M. Reaven, M.D.... 70 Senior Vice President, Medical and Clinical
Advisor
Thomas Carlson, M.D...... 42 Vice President, Medical Ethnobotany
John W.S. Chow, Ph.D..... 47 Vice President, Technical Operations
J.D. Haldeman............ 34 Vice President, Commercial Development
Laurie Peltier .......... 47 Vice President, Project Coordination
Steven R. King, Ph.D. joined Shaman in March 1990. He currently serves as
Senior Vice President, Ethnobotany and Conservation and is responsible for
coordinating the Company's Scientific Strategy Team. From 1989 to 1990, Dr. King
was the chief botanist for Latin America at Arlington, Virginia's Nature
Conservancy. He worked in 1988 as Research Associate for the Committee on
Managing Global Genetic Resources at the National Academy of Sciences, and was a
Doctoral Fellow from 1983 to 1988 at The New York Botanical Garden's Institute
of Economic Botany. Dr. King received a B.A. in Human Ecology from the College
of the Atlantic and M.S. and Ph.D. degrees in Biology from City University of
New York.
Gerald M. Reaven, M.D. joined Shaman as a consultant in February 1995 and
became an employee in July 1995. He currently serves as Senior Vice President,
Medical and Clinical Advisor. Dr. Reaven came to Shaman from the Stanford
University School of Medicine where he served as a faculty member since 1960 and
a Professor of Medicine since 1970. Over the last 20 years, Dr. Reaven served as
head of the Division of Endocrinology and Metabolic Diseases, Division of
Gerontology and director of the General Clinical Research Center. Dr. Reaven
also served as head of the Division of Endocrinology, Gerontology and Metabolism
at Stanford University School of Medicine, and Director of the Geriatric
Research, Education and Clinical Center, at the Palo Alto Veterans Affairs
Medical Center. Dr. Reaven received his A.B., B.S. and M.D. from the University
of Chicago.
Thomas Carlson, M.D. joined Shaman in October 1992. He currently serves
Vice President, Medical Ethnobotany and is responsible for developing
ethnobotancial field research and coordinating clinical studies. Dr. Carlson has
conducted research with traditional healers in over 40 different ethnolinguistic
groups in 15 different tropical countries. Prior to joining Shaman, from 1990 to
1992, Dr. Carlson practiced General Pediatrics at Kaiser Permanente in Santa
Clara, California and worked at the Aravind Childrens and Eye Hospitals in
Madurai, India on child malnutrition and blindness. From 1987 to 1990, Dr.
Carlson completed his Internship and Residence in Pediatrics at Stanford
University Medical Center. Dr. Carlson received his M.D. from Michigan State
University and a B.S. and M.S. in Botany from the University of Michigan.
John W.S. Chow, Ph.D. joined Shaman in April 1998 as Vice President of
Technical Operations. Prior to joining the Company, from December 1997 to April
1998, Dr. Chow served as Director, Product and Technology Evaluation at
Bristol-Myers Squibb Company, where he performed technical due diligence toward
the acquisition and licensing of various dosage forms and technologies and
reviewed and approved new product specifications. Prior to holding this
position, from July 1980 to December 1997, Dr. Chow held other positions, also
with Bristol-Myers Squibb Company, where he was responsible for developing
strategies for manufacturing consolidation, facilitating technology transfers of
new and existing products, and directing technical operations of an
international plant. Dr. Chow received a B.S. in Pharmacy from Washington State
University, a Ph.D. in
32
Pharmaceutical Chemistry from Ohio State University and an M.B.A. in
Pharmaceutical/Chemical Studies from Fairleigh Dickinson University.
J.D. Haldeman joined Shaman in July 1997 as Vice President, Commercial
Development. Prior to joining the Company, from April 1988 to June 1997, Ms.
Haldeman served in various positions at Warner-Lambert/Parke-Davis
Pharmaceuticals ("Warner-Lambert"), most recently as Senior Director,
Cardiovascular Marketing from October 1995 to June 1997. Prior to that, she
served as Director, Customer Marketing--West Customer Business Unit; Product
Manager, Epilepsy Team; Associate Product Manager, Global Cardiovascular Product
Planning; and Sales Specialist for Warner-Lambert. Ms. Haldeman received her
B.A. from Brigham Young University and her Masters of Management from the J.L.
Kellogg Graduate School of Management, Northwestern University.
Laurie Peltier joined Shaman in June 1997 as Vice President, Project
Coordination. Prior to joining the Company, from June 1992 to May 1997, Ms.
Peltier served as Senior Director, Project Management at Amylin Pharmaceuticals,
Inc. Prior to that, she served as Director, Development at Quintiles
Transnational Corp., a contract research organization, from May 1990 to May
1992. Ms. Peltier served in various positions in biostatics clinical operations
at Syntex Corporation from May 1979 through April 1990. Ms. Peltier received a
B.S. in Psychology from the University of Michigan, Flint, an M.A. in Psychology
and an M.S. in Statistics from Northern Illinois University and an M.B.A. from
Golden Gate University.
Compensation Committee Interlocks and Insider Participation
During the 1998 fiscal year, Herbert H. McDade and Adrian D.P. Bellamy
served as members of the Compensation Committee of the Board of Directors. No
member of the Compensation Committee was, at any time during the 1998 fiscal
year or at any earlier time, an officer or employee of the Company.
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
Compensation Committee Report on Executive Compensation
As members of the Compensation Committee of the Board, it is our duty to
exercise the power and authority of the Board of Directors with respect to the
compensation levels to be in effect for the Company's executive officers. As
such, it is our responsibility to set the base salary of certain executive
officers and to administer the 1992 Plan under which grants may be made to such
officers and other key employees. In addition, we approved special bonus awards
for executive officers for the 1998 fiscal year.
For 1998, we established the compensation payable to Lisa A. Conte,
President, Chief Executive Officer and Chief Financial Officer, the Company's
highest-paid executive officer, and the Company's four other most highly-paid
executive officers. Ms. Conte reported to us the performance evaluations of each
executive officer, including herself, and the factors to be considered in
setting their compensation. We endorse those factors and include them as part of
our report.
General Compensation Policy. Under our supervision, the Company has
developed a compensation policy that is designed to attract and retain qualified
key executives critical to the Company's success and to provide such executives
with performance-based incentives tied to corporate milestones. It is our
objective to have a substantial portion of each officer's compensation
contingent upon the Company's performance as well as upon the individual's
contribution to the success of the Company as measured by personal performance.
Accordingly, each executive officer's compensation package is normally comprised
of three elements: (i) base salary, which reflects individual performance and is
commensurate with salaries for comparable positions in other biotechnology
companies given the level of seniority and skills possessed by such officer,
(ii) long-term, stock-based incentive awards, which strengthen the mutuality of
interests between the executive officers and the Company's stockholders and
which may be tied to the Company's achievement of certain pre-established goals,
and (iii) bonus incentive plan, which tie to individual and Company performance.
33
Guidelines. Because the Company is in the pre-product commercialization
stage, the use of traditional performance standards (such as profitability and
return on equity) is not appropriate in evaluating the performance of its
executive officers. In particular, the unique nature of the biotechnology
industry, the relatively short period of time during which the Company's stock
has been publicly traded, the performance of the stock during this period, and
the absence of product revenues have made it impossible to tie performance
objectives to standard financial considerations. The primary guidelines which we
did consider in establishing the components of each executive officer's
compensation package for 1998 are summarized below. However, we may in our
discretion apply entirely different guidelines, particularly different measures
of performance, in setting executive compensation for future fiscal years.
Base Salary. Base compensation is initially established through
negotiation between the Company and the executive at the time the executive is
hired, and it is subject to periodic review or reconsideration, usually on an
annual basis. When establishing or reviewing the level of base compensation for
each executive officer, we consider numerous factors, including the
qualifications of the executive and his or her level of relevant experience,
strategic goals for which the executive has responsibility, specific
accomplishments of the executive during the last fiscal year and the
compensation levels in effect at companies in the Company's industry which
compete with the Company for business and executive talent.
For comparative compensation purposes, we have selected a peer group of
companies within the industry and estimated the salary levels in effect for
similar positions at those companies. We also relied on specific compensation
surveys, making our decisions as to the appropriate market level of base salary
for each executive officer on the basis of our understanding of the salary
levels in effect for similar positions at various peer group companies. In
selecting the peer group companies, we focused primarily on whether those
companies were actually competitive with the Company in seeking executive
talent, whether those companies had a management style and corporate culture
similar to the Company's and whether similar positions existed within their
corporate structure. For this reason, there is not a meaningful correlation
between the peer group companies surveyed for comparative compensation purposes
and the companies included in the Hambrecht & Quist Biotechnology Index which
the Company has chosen as the industry index for purposes of the Company Stock
Price Performance graph which follows this report.
Base salaries are reviewed annually, and adjustments to each executive
officer's base salary are made to reflect individual performance and salary
increases effected by the peer group companies. A major objective, accordingly,
is to have base salary levels commensurate with those of comparable positions
with the peer group companies, given the level of seniority and skills possessed
by the executive officer in question and our assessment of such executive's
performance over the year.
We estimate (on the basis of 1998 surveys of executive compensation) that
the base salary levels in effect for the Company's executive officers for the
1998 fiscal year ranged from the 15th percentile to the 100th percentile of the
base salary levels in effect for executive officers in comparable positions with
peer group companies.
Incentive Compensation. The Committee did not award any speical cash
bonuses to the executive officers for the 1998 fiscal year. However, all
employees, including executive officers, were each awarded a $3,000 cash bonus
during the 1998 fiscal year based upon the Company's achievement of certain
milestones during the 1997 fiscal year.
Stock-Based Incentive Compensation. In addition to establishing and
reviewing the base salary levels in effect for the executive officers, we also
have discretionary authority to award equity incentives in the form of stock
option grants to the executive officers as a way to more closely align the
interests of management with those of the Company's stockholders and to reward
officers for achieving certain defined personal and corporate performance
targets. Factors which we consider in determining whether to grant options and
the number of shares underlying each such grant include the executive's position
in the Company, his or her performance and responsibilities, the extent to which
he or she already holds an equity interest in the Company and the equity
incentives granted to employees with similar responsibilities at other
biotechnology companies. We have also established general guidelines for
maintaining the unvested option holdings of each executive officer at a targeted
level based upon his or her position with the Company, and option grants are
periodically made to maintain the targeted levels. These factors, however, are
used only as guidelines, and the relative weight given to each factor varies
from individual to individual as we deem appropriate under the circumstances.
34
For 1998, we approved total stock option grants under the 1992 Plan for
4,420,244 shares. Ten of the executive officers of the Company received option
grants in fiscal 1998. Each grant allows the executive officer to acquire shares
of the Company's Common Stock at a fixed price per share (the market price on
the grant date) over a specified period of time (up to 10 years). The options
vest in periodic installments over four year periods, contingent upon the
executive officer's continued employment with the Company. In all cases, the
options will provide a return to the executive officer only if he or she remains
with the Company and then only if the market price of the underlying shares
appreciates over the option term.
Special Option Regrant Program
During the 1998 fiscal year, the Compensation Committee felt that
circumstances had made it necessary for the Company to implement an option
cancellation/regrant program for all employees of the Company, including the
executive officers. Accordingly, on September 18, 1998, each of the employees
was given the opportunity to surrender his or her outstanding options under the
1992 Plan with exercise prices in excess of $1.281 per share in return for a new
option grant for the same number of shares but with a lower exercise price of
$1.281 per share, the fair market value per share of the Company's Common Stock
on the regrant date. Each employee eligible for a new option grant was given the
choice of accepting that option with a new vesting schedule in cancellation of
his or her higher-priced option or rejecting the new grant and retaining the
higher-priced option with its original vesting schedule.
The Compensation Committee determined that this program was necessary
because equity incentives are a significant component of the total compensation
package of each key Company employee and play a substantial role in the
Company's ability to retain the services of individuals essential to the
Company's long-term financial success. The Compensation Committee felt that the
Company's ability to retain key employees would be significantly impaired,
unless value were restored to their options in the form of regranted options at
the current market price of the Company's Common Stock. However, in order for
the regranted options to serve their primary purpose of assuring the continued
service of each optionee, a new vesting schedule was imposed with respect to the
option shares. Accordingly, to the extent the higher-priced option was vested
and exercisable for any option shares on the September 18, 1998 cancellation
date, the new option granted in replacement of that option will become
exercisable for those shares in a series of 12 successive equal monthly
installments upon the optionee's completion of each month of service over the
one-year period measured from the September 18, 1998 grant date. The option will
become exercisable for the unvested and unexercisable option shares in one or
more installments over the optionee's period of continued service, with each
such installment to vest on the same vesting date in effect for that installment
under the cancelled higher-priced option. As a result, each optionee will only
have the opportunity to acquire the option shares at the lower exercise price if
he or she remains in the Company's employ.
As a result of the new vesting schedules imposed on the regranted options,
the Compensation Committee believes that the program strikes an appropriate
balance between the interests of the option holders and those of the
stockholders. The lower exercise prices in effect under the regranted options
make those options valuable once again to the executive officers and key
employees critical to the Company's financial performance. However, those
individuals will enjoy the benefits of the regranted options only if they in
fact remain in the Company's employ and contribute to the Company's financial
success and only if the current trading price of the stock is higher that the
exercise price of all regranted options.
CEO Compensation. The annual base salary of Lisa A. Conte, the Company's
President, Chief Executive Officer and Chief Financial Officer, was set at
$311,537 for the 1998 fiscal year, as compared to $312,901 for the 1997 fiscal
year, based on our performance review of Ms. Conte for 1997. This amount
includes $59,573 and $13,431 attributable to child care costs and family travel,
respectively. In setting Ms. Conte's compensation, we considered the level of
experience and unique qualifications Ms. Conte has brought to Shaman as Chief
Executive Officer, the Company's goals for which Ms. Conte had responsibility
and the degree to which she helped the Company attain those goals. Among the
Company's accomplishments during 1998 which we felt Ms. Conte helped the Company
achieve were the generation of resources to support the continued clinical
development of the Company's products in human trials and development of new
35
product and industry opportunities for Shaman's technology. The base salary of
Ms. Conte for the 1998 fiscal year was at the 45th percentile of the salary
levels in effect for chief executive officers at the peer group companies.
Deduction Limit for Executive Compensation. As a result of Section 162(m)
of the Internal Revenue Code, which was enacted into law in 1993, the Company
will not be allowed a federal income tax deduction for compensation paid to
certain executive officers, to the extent that compensation exceeds $1 million
per officer in any one year. This limitation will be in effect for each fiscal
year of the Company beginning after December 31, 1993 and will apply to all
compensation paid to the covered executive officers which is not considered to
be performance based. Compensation which qualifies as performance-based
compensation will not have to be taken into account for purposes of this
limitation. The 1992 Plan has been structured so that any compensation deemed
paid in connection with the exercise of stock options granted under that Plan
with an exercise price equal to the fair market value of the option shares on
the grant date will qualify as performance-based compensation.
We do not expect that the compensation to be paid to the Company's
executive officers for the 1999 fiscal year will exceed the $1 million limit per
officer. Accordingly, we have decided at this time not to take any other action
to limit or restructure the elements of cash compensation payable to the
Company's executive officers. We will reconsider this decision should the
individual compensation of any executive officer ever approach the $1 million
level.
Compensation Committee
Herbert H. McDade, Jr.
Adrian D.P. Bellamy
36
Compensation of Executive Officers
The following table sets forth the compensation earned, for services
rendered in all capacities to the Company, for each of the last three fiscal
years by (i) the Company's Chief Executive Officer and (ii) the four other
highest paid executive officers serving as such at the end of the 1998 fiscal
year whose salary and bonus for that fiscal year was in excess of $100,000. The
individuals named in the table will be hereinafter referred to as the "Named
Officers." No other executive officer who would otherwise have been included in
such table on the basis of fiscal year 1998 salary and bonus resigned or
terminated employment during the year.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Awards
---------
----------------------------------------------
Other Securities
Name and Annual Underlying All Other
Principal Salary Compen- Options/ Compen-
Position Year ($)(1) Bonus ($) sation($) SARS (#) sation($)
- ----------------- ---- ---------- --------- ---------- --------- ---------
Lisa A. Conte 1998 311,537(2) 3,000(3) -- 2,045,000(4) --
President, 1997 312,901(5) 91,689(6) -- 295,000(4) --
Chief 1996 286,190(7) 53,000(8) -- 105,000(4) --
Executive
Officer and
Chief
Financial
Officer
Gerald M. 1998 243,015 3,000(3) -- 215,000 --
Reaven, M.D. 1997 239,114 25,000(9) -- -- --
Senior Vice 1996 227,878 3,000 -- 5,000 --
President,
Medical and
Clinical
Advisor
Atul S. 1998 177,474 3,000(3) 125,531(11) 140,000 66,356(12)
Khandwala, 1997 226,031 20,000(9) -- -- 82,217(13)
Ph.D. (10) 1996 187,563 3,000 51,200(14) 125,000 106,399(15)
Former
Senior Vice
President,
Development
and Chief
Regulatory
Officer
Steven R. King, 1998 179,329 3,000(3) -- 148,810 --
Ph.D. 1997 176,202 40,000(9) -- -- --
Senior Vice 1996 171,822 3,000 -- 55,000 --
President,
Ethnobotany
and
Conservation
James E. 1998 257,544 3,000(3) -- 125,000 --
Pennington, 1997 58,490 70,000(17) -- 125,000 --
M.D. (16) 1996 -- -- -- -- --
Former
Senior Vice
President,
Clinical
Research and
Chief Medical
Officer
Laurie
Peltier(18), 1998 152,654 3,000(3) -- 65,000 25,000(19)
Vice President, 1997 87,674 20,000(20) -- 55,000 19,223(21)
Project 1996 -- -- -- -- --
Coordination
- -----------------
(1) Includes amounts deferred under the Company's Internal Revenue Code
Section 401(k) Plan and the Company's Section 125 Plan.
(2) Includes $59,573 and $13,431 attributable to child care costs and family
travel, respectively.
(3) Represents all employees bonus paid in 1998 for achievement of the
Company's milestones in 1997.
(4) Ms. Conte has surrendered all of her currently held options.
(5) Includes $61,214 and $27,287 attributable to childcare costs and family
travel, respectively.
(6) Includes $75,000 paid in 1998 for achievement of milestones in 1997.
(7) Includes $49,646 and $16,858 attributable to child care costs and family
travel, respectively.
(8) Includes $50,000 paid in 1997 for achievement of milestones in 1996.
(9) Represents bonus paid in 1998 for achievement of milestones in 1997.
(10) The Company accepted the resignation of Dr. Khandwala effective
October 2, 1998.
(11) Represents amount paid in Common Stock for services rendered.
(12) Includes $3,000 received as a housing subsidy, $2,018 for travel
expenses and $61,338 for indebtedness for which repayment was
forgiven.
(13) Includes $16,500 received as a housing subsidy, $1,164 for travel expenses
and $64,553 in indebtedness for which repayment was forgiven.
(14) Represents fees received from consulting services.
(15) Includes $13,445 received as a housing subsidy, $23,746 for moving
and relocation expenses, $1,562 for travel expenses and $67,646 in
indebtedness for which repayment was forgiven.
(16) Dr. Pennington joined the Company in September 1997. In 1997, he
earned $58,490, based on an annual salary of $255,000. Dr.
Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with the Company's
restructuring.
(17) Includes $60,000 sign-on bonus and $10,000 bonus paid in 1998 for
achievement of milestones in 1997.
(18) Ms. Peltier joined the Company in June 1997. In 1997, she earned
$87,674, based on an annual salary of $150,000.
(19) Represents closing costs on the sale of Ms. Peltier's former
residence.
37
(20) Includes $10,000 sign-on bonus and $10,000 bonus paid in 1998
for achievement of milestones in 1997.
(21) Represents moving and relocation expenses.
Stock Option and Stock Appreciation Rights
The following table contains information concerning the grant of stock
options under the Plan to the Named Officers during the 1998 fiscal year. Except
for the limited stock appreciation right described in footnote (2) below which
formed part of the option grant made to each Named Officer, no stock
appreciation rights were granted to such Named Officers during the 1998 fiscal
year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term (1)
---------------------------------------------- ----------------------------------------
% of Total
Number Options
of Granted
Securities to
Underlying Employees Exercise
Options/SARs in Fiscal Price Expiration 5% 5% 10% 10%
Name(*) Granted(#)(2) Year ($/Share)(3) Date 12/31/98 3/31/99 12/31/98 3/31/99
- ------------ ------------- --------- ----------- --------- -------- ------- ---------- -------
Lisa A. Conte(4) 545,000 14.60% 1.2810 09/17/08 $439,059 0 $1,112,663 0
1,500,000 40.19% 1.2810 09/17/08 1,208,421 0 3,062,376 0
Gerald M. 215,000 5.76% 1.2810 09/17/08 173,207 0 438,941 0
Reaven, M.D.
Atul S. 40,000 1.07% 1.4375 10/19/08 4,211 0 8,535 0
Khandwala,
Ph.D. (5)
Steven R. 148,810 3.99% 1.2810 09/17/08 119,883 0 303,808 0
King, Ph.D.
James 125,000 3.35% 1.2810 09/17/08 100,702 0 255,198 0
Pennington,
M.D. (6)
Laurie Peltier 55,000 1.47% 1.2810 09/17/08 44,309 0 112,287 0
10,000 0.27% 1.2810 09/17/08 8,053 0 20,413 0
- -----------------
(1) Potential realizable value is based on assumption that the market price of
the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the 10-year option term.
There can be no assurance that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% and 10% levels or at any
other defined level. As of March 31, 1999 the exercise price of all
options was significantly higher than the trading price of the stock on
that date.
(2) Each option has a maximum term of 10 years, subject to earlier termination
in the event of the optionee's cessation of service with the Company.
Except for the options for 1,500,000 shares granted to Ms. Conte, 40,000
shares granted to Mr. Khandwala and 10,000 shares granted to Ms. Peltier,
each option granted to the Named Officers in fiscal 1998 were part of the
September 18,1998 cancellation/regrant program. Accordingly, to the extent
the cancelled option for the same number of shares was exercisable for any
of those shares on the September 18, 1998 cancellation date, the new
option granted in replacement of that option will become exercisable for
those shares in a series of 12 successive equal monthly installments upon
his or her completion of each month of service over the one-year period
measured from the September 18, 1998 grant date. The option will become
exercisable for the remaining option shares in one or more installments
over her period of continued service, with each such installment to vest
on the same vesting date in effect for that installment under the
cancelled option. The options for 1,500,000 shares to Ms. Conte and 10,000
shares to Ms. Peltier will will become exercisable for 12.5% of the option
shares upon completion of 6 months of service measured from the grant
date, and the balance of the option shares will become exercisable in a
series of 42 successive equal monthly installments over the optionee's
period of continued service thereafter. The Option for 40,000 shares to
Mr. Khandwala will become exercisable in a series of six successive equal
monthly installments over the optionee's period of continued service
thereafter. However, each of the options granted to the named executive
officers will become immediately exercisable in full upon an acquisition
of the Company by merger or asset sale, unless the option is assumed by
the successor entity. Each option includes a limited stock appreciation
right which will result in the cancellation of that option, to the extent
exercisable for vested shares, upon the successful completion of a hostile
tender for securities possessing more than 50% of the combined voting
power of the Company's outstanding voting securities. In return for the
cancelled option, the optionee will receive a cash distribution per
cancelled option share equal to the excess of (i) the highest price paid
per share of the Company's Common Stock in such hostile tender offer over
(ii) the exercise price payable per share under the cancelled option.
(3) The exercise price may be paid in cash or in shares of Common Stock
(valued at fair market value on the exercise date) or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
38
sufficient funds to pay the exercise price for the purchased shares and
the federal and state income tax liability incurred by the optionee in
connection with such exercise. The optionee may be permitted, subject to
the approval of the Plan Administrator, to apply a portion of the shares
purchased under the option (or to deliver existing shares of Common Stock)
in satisfaction of such tax liability.
(4) Ms. Conte has surrendered all of her currently held options.
(5) The Company accepted the resignation of Dr. Khandwala effective
October 2, 1998.
(6) Dr. Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with the Company's
restructuring.
Option Exercises and Holdings
The following table provides information with respect to the Named
Officers concerning the exercise of options during the last fiscal year and
unexercised options held as of the end of the fiscal year (as of December 31,
1998). No stock appreciation rights were exercised during such fiscal year, and
except for the limited stock appreciation right described in Footnote (2) to the
Stock Option/SAR Grants Table which forms part of each outstanding stock option,
no stock appreciation rights were outstanding at the end of that fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Value
Realized Value of Unexcercised
(Market In-the-Money Options
price at at FY-End (Market
Shares exercise No. of Securities price of shares at
Acquired date less Underlying Unexcersied FY-End less excercise
on exercise Options FY-End (#) price) ($)(1)
Name Exercise price) ------------------------- --------------------------
(#) ($)(2) Exercisable Unexercisable Exercisable Unexercisable
- ------------ ------- ----- ----------- ------------- ----------- -------------
Lisa A. -- -- 95,417 2,024,583 $130,961 $1,265,364
Conte(3)
Gerald M. -- -- 53,750 161,250 $33,594 $100,781
Reaven, M.D.
Atul S. -- -- 13,333 26,667 $6,247 $12,493
Khandwala,
Ph.D. (4)
Steven R. -- -- 41,500 112,957 $25,902 $70,598
King, Ph.D.
James -- -- 15,625 109,375 $9,766 $68,359
Pennington,
M.D. (5)
Laurie -- -- 5,625 59,375 $3,516 $37,106
Peltier
- -----------------
(1) Based on the fair market value of the Company's Common Stock on December
31, 1998 of $1.906 per share, the Nasdaq National Market trading price at
the close of business that same day. As of March 31, 1999, these options
had no value since the exercise price of all options was significantly
higher than the current trading price of the stock on that date.
(2) Equal to the closing selling price of the purchased shares on the option
exercise date less the exercise price paid for such shares.
(3) Ms. Conte has surrendered all of her currently held options.
(4) The Company accepted the resignation of Dr. Khandwala effective
October 2, 1998.
(5) Dr. Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with the Company's
restructuring.
39
Option Repricings
As discussed in the Compensation Committee Report on Executive
Compensation below, the Company implemented a special option
cancellation/regrant program for all of its employees, including executive
officers, holding stock options with an exercise price per share in excess of
the fair market value of the Company's Common Stock on the regrant date. The
cancellations/regrants were effected on September 18, 1998, and a number of
outstanding options with an exercise price in excess of $1.281 per share were
surrendered for cancellation and new options for the same aggregate number of
shares were granted with an exercise price of $1.281 per share.
The following table sets forth information with respect to each of the
Named Officers concerning his or her participation in the option
cancellation/regrant program effected on September 18, 1998. The Company has not
implemented any other option cancellation/regrant programs in which the
Company's executive officers have participated
Number of Market Length of
Securities Price of Excercise Option Term
Underlying Stock at Price at Remaining at
Options Time of Time of Date of
Repriced Repricing Repricing New Repricing
Repricing or or or Excercise or
Name Date Amended(1) Amendment Amendment Price Amendment
- ------------------ --------- ---------- --------- --------- --------- ---------
Lisa A. Conte(2) 9/18/98 10,000 $1.281 $3.500 $1.281 6.4 years
9/18/98 135,000 1.281 3.500 1.281 6.4 years
9/18/98 100,000 1.281 6.875 1.281 7.4 years
9/18/98 5,000 1.281 5.875 1.281 8.1 years
9/18/98 295,000 1.281 5.016 1.281 8.4 years
Gerald M. 9/18/98 200,000 $1.281 $3.625 $1.281 6.4 years
Reaven, M.D 9/18/98 10,000 1.281 3.500 1.281 6.4 years
9/18/98 5,000 1.281 5.875 1.281 8.1 years
Atul S. Khandwala, --- --- --- --- --- ---
Ph.D.(3)
Steven R. King, 9/18/98 35,000 $1.281 $5.250 $1.281 6.2 years
Ph.D 9/18/98 25,000 1.281 3.500 1.281 6.4 years
9/18/98 23,810 1.281 3.500 1.281 6.4 years
9/18/98 10,000 1.281 3.500 1.281 6.4 years
9/18/98 50,000 1.281 6.875 1.281 7.4 years
9/18/98 5,000 1.281 5.875 1.281 8.1 years
James Pennington, 9/18/98 125,000 $1.281 $6.063 $1.281 9.0 years
M.D.(4)
Laurie Peltier 9/18/98 40,000 $1.281 $5.938 $1.281 8.8 years
9/18/98 15,000 1.281 5.938 1.281 8.8 years
- ----------------------
(1) As of March 31, 1999, the exercise price of the options was significantly
higher than the trading price of the stock on that date.
(2) Ms. Conte has surrendered all of her currently held options.
(3) The Company accepted the resignation of Dr. Khandwala effective
October 2, 1998.
(4) Dr. Pennington was terminated effective February 19, 1999 due to the
elimination of his position in connection with the Company's
restructuring.
Employment Contracts, Termination Agreements and Change of Control
Agreements
On March 15, 1999, the Board of Directors approved a Change in Control
provision concerning severance benefits for key executives. Pursuant to the
provision, should their employment with the Company terminate within 12 months
after a Change in Control, for any reason other than for cause, they will be
entitled to receive in one lump sum payment the cash equivalent of 12 months of
base salary plus any benefits to which they would otherwise be entitled. In
connection with these severance benefits, the Company has agreed to pay the
premiums for any COBRA coverage to which these individuals or their spouse or
dependents are entitled under a Company sponsored medical plan after a Change in
Control. In addition, in the event of a Change in Control, all of the options
held by such key executives will automatically become fully vested and
40
exercisable. Such executives' exercisable shares will be fixed at the
termination of their employment, and they will have a period of 90 days from
their termination date to purchase such exercisable shares, as set forth in the
stock option agreements applicable to their options.
On May 27, 1998, the Company entered into a letter agreement with
Stephanie C. Diaz pursuant to which she served as Vice President, Chief
Financial Officer, commencing in June 1998. Pursuant to the letter agreement,
Ms. Diaz was paid an annual salary of $135,000 in addition to a $15,000 sign-on
bonus. In addition, Ms. Diaz was granted an option for 45,000 shares of Common
Stock on June 30, 1998 with an exercise price per share of $3.375, the fair
market value per share of Common Stock on that date. The option became
exercisable for 12.5% of the option shares upon completion of six months of
employment and for the balance of the option shares in 42 equal monthly
installments over the next 42 months of employment. In the event the Company
terminated Ms. Diaz's employment other than for cause, she was to be paid salary
and benefits for six months or until she obtained full-time employment,
whichever occurs first. Ms. Diaz resigned from the Company effective January 4,
1999. In connection with a revised agreement, Ms. Diaz received a payment of
three months salary and the continuance of the exercise period under existing
options for a period of 12 months following termination of her employment.
On March 30, 1998, the Company entered into a letter agreement with John
W.S. Chow, Ph.D. pursuant to which he is to serve as Vice President, Technical
Operations, commencing in May 1998. Pursuant to the letter agreement, Dr. Chow
is to be paid an annual salary of $165,000 in addition to the sign-on bonus paid
to him in the amount of $10,000, and he is to be reimbursed, in an amount not to
exceed $25,000, for closing costs incurred in the sale of his former residence
in New Jersey and the purchase of his new residence in the Bay Area. Dr. Chow
will, however, be obligated to repay a prorated portion of both the sign-on
bonus and the reimbursed closing costs should he resign from the Company within
two years after his hire date. Dr. Chow was also granted an option for 50,000
shares of Common Stock on May 15, 1998 with an exercise price per share of
$4.9375, the fair market value per share of Common Stock on that date. The
option will become exercisable in a series of monthly installments over the four
year period measured from the grant date as follows: 10% of the option shares
will become exercisable upon his completion of six months of employment measured
from such grant date, an additional 30% of the option shares will become
exercisable in a series of 18 successive equal monthly installments upon his
completion of each additional month of employment over the next 18 months
thereafter, and the remaining 60% of the option shares will become exercisable
in a series of 24 successive equal monthly installments upon his completion of
each additional month of employment during the 3rd and 4th years of employment
measured from the grant date. Dr. Chow was also granted an additional 15,000
shares of Common Stock on May 15, 1998 with an exercise price of $4.9375, the
fair market value per share of Common Stock on that date. The 15,000-share grant
will become exercisable as follows: 7,500 shares upon Dr. Chow's completion of
three years of employment measured from the grant date, and the remaining 7,500
shares upon his completion of four years of employment measured from the grant
date. The Company further agreed to pay Dr. Chow's reasonable moving expenses in
an amount not to exceed $20,000 and to provide him with an apartment for up to
four months at a rental not to exceed $2,500 per month. Should the Company
terminate Dr. Chow's employment for any reason other than for cause prior to May
1, 2001, the Company will continue to pay Dr. Chow's base salary plus benefits
on a monthly basis for up to six months or until Dr. Chow obtains near full-time
employment or consulting of at least 80% of his time, whichever occurs sooner.
The Company also extended a $300,000 loan to Dr. Chow in connection with his
purchase of a new residence in the Bay Area. See "Certain Relationships and
Related Transactions."
On August 21, 1997, the Company entered into a letter agreement with James
Pennington, Ph.D. pursuant to which he is to serve as Senior Vice President,
Clinical Research and Chief Medical Officer, commencing October 1997. Pursuant
to the letter agreement, Dr. Pennington is to be paid an annual salary of
$255,000 in addition to a sign-on bonus paid to him in the amount of $60,000. In
addition, Dr. Pennington was granted, on September 16, 1997, an option to
purchase 125,000 shares of Common Stock at a purchase price of $6.0625 per
share. The option had a term of 10 years and was to become exercisable as
follows: 12.5% of the option shares upon Dr. Pennington's completion of six
months of service, measured from the grant date, and the balance of the option
shares in 42 successive equal monthly installments upon his completion of each
of the next 42 months of service thereafter. In the event that the Company
terminated Dr. Pennington's employment other than for cause, he would be
entitled to receive salary and benefits for nine months, or, if sooner, until
Dr. Pennington obtained near full time employment or consulting of at least 80%
of his time. On February 15, 1999, the Company entered into an new agreement
with Dr. Pennington in connection with his resignation as Senior Vice President,
Clinical Research and Chief Medical Officer, effective February 19, 1999. Under
this agreement, payments will continue to be made to Dr. Pennington in
41
compliance with the terms of the agreement described above. In addition, options
previously granted to him will continue to vest during this period following his
termination.
On February 9, 1996, the Company entered into a letter agreement with Atul
S. Khandwala, Ph.D. pursuant to which served as Senior Vice President,
Development, commencing March 1996. Pursuant to the letter agreement, Dr.
Khandwala was paid an annual salary of $225,000. In addition, Dr. Khandwala was
granted an option to purchase 120,000 shares of Common Stock at a purchase price
of $6.875 per share. The option had a term of ten years and would become
exercisable over a four-year period in a series of 48 successive equal monthly
installments upon Dr. Khandwala's completion of each month of service with the
Company over the four-year period measured from March 1, 1996. In the event that
the Company terminated Dr. Khandwala's employment for any reason, Dr. Khandwala
would receive salary and benefits for a period of six months. On August 24,
1998, the Company entered into a severance agreement with Dr. Khandwala in
connection with his resignation as Senior Vice President, Development and Chief
Regulatory Officer on October 2, 1998. Under this agreement, the Company will
continue to forgive the remaining balance of his loan over the remaining two and
one half years of the loan term, provided that Dr. Khandwala continues to
provide consulting services to the Company. On October 28, 1998, the Company
entered into an agreement with Dr. Khandwala pursuant to which he rendered
consulting services to the Company through April 2, 1999. In connection with
this agreement, the Company issued to Dr. Khandwala 87,326 shares of Common
Stock and loaned him the funds necessary to satisfy the federal and state
withholding taxes applicable to those shares. In addition, the Company granted
Dr. Khandwala an option to purchase 40,000 shares of Common Stock at an exercise
price of $1.4375, the fair market value of the Company's Common Stock on October
20,1998. The option will become exercisable in six successive equal monthly
installments on the last day of each month during the Consulting Period.
None of the Company's other executive officers have employment agreements
with the Company, and their employment may be terminated at any time at the
discretion of the Board of Directors. As administrator of the Plan, the
Compensation Committee has the authority to provide for accelerated vesting of
the shares of Common Stock subject to any outstanding options held by the Chief
Executive Officer and the Company's other executive officers or any unvested
shares actually held by those individuals under the Plan upon a change in
control of the Company effected through a successful tender offer for more than
50% of the Company's outstanding voting securities or through a change in the
majority of the Board as a result of one or more contested elections for Board
membership.
Certain Relationships and Related Transactions
On June 17, 1998, the Company loaned $300,000 to John W.S. Chow, Ph.D.,
the Vice President, Technical Operations, to reimburse him for a reasonable
difference between the purchase price of his residence in the Bay Area and the
cost of comparable housing in New Jersey, his former state of residence. The
loan is evidenced by his promissory note of the same date which will become due
and payable in a series of five successive equal annual installments, with the
first such installment due on June 25, 1999. The note will bear interest at a
variable per annum rate equal to the short-term applicable federal rate in
effect under the federal tax laws for January of each calendar year the loan
remains outstanding. Accordingly, the interest rate in effect for the period Dr.
Chow's note was outstanding during the 1998 calendar year was 5.52%. Accrued and
unpaid interest will become due and payable each year on the same date the
principal installment for that year becomes payable. Each installment of
principal and accrued interest will automatically be forgiven as that
installment becomes due, provided Dr. Chow continues in the Company's employ.
However, the entire unpaid balance of the note, together with all accrued and
unpaid interest, will become immediately due and payable upon Dr. Chow's
termination of employment with the Company prior to June 25, 2003, unless Dr.
Chow's employment is involuntarily terminated by the Company other than for
cause. In the event (i) the Company terminates Dr. Chow's employment for any
reason other than for cause or (ii) Dr. Chow's employment terminates by reason
of his death or disability, then the entire principal balance of the note plus
accrued interest will be forgiven. The amount outstanding on Dr. Chow's note
(including accrued interest) was approximately $313,188 as of March 31, 1999;
and the highest amount outstanding on that note during the 1998 fiscal year was
$308,729.
See "Employment Contracts, Termination Agreements and Change of Control
Agreements" and "Director Compensation" with respect to further transactions
between the Company and its officers and directors.
42
The Company's Restated Certificate of Incorporation and Bylaws provide for
indemnification of directors, officers and other agents of the Company. Each of
the current directors and certain officers and agents of the Company have
entered into separate indemnification agreements with the Company.
43
SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Common Stock as of March 31,
1999 by (i) all persons who are beneficial owners of five percent or more of the
Common Stock, (ii) each director, (iii) the Named Officers in the Summary
Compensation Table above and (iv) all current directors and executive officers
as a group. The number of shares beneficially owned by each director or
executive officer is determined under rules of the SEC and the information is
not necessarily indicative of beneficial ownership for any other purpose. Shares
of Common Stock subject to options or warrants currently exercisable or
exercisable within 60 days of March 31, 1999 are deemed to be beneficially owned
by the person holding such option or warrant for computing the percentage
ownership of such person, but are not treated as outstanding for computing the
percentage of any other person. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based upon
such information furnished by such owners, have sole investment power with
respect to such shares, subject to community property laws where applicable.
Number of Percent of Total Shares
Name and Address Shares Outstanding (1)(2)
- ------------------------------------- --------------- ------------------------
Vulcan Ventures, Inc. (3).......... 2,080,000 5.43%
110 110th Avenue N.W.
Suite 550
Bellevue, WA 98004
Lisa A. Conte (4).................. 883,292 2.28%
Steven R. King, Ph.D. (5).......... 111,745 *
James E. Pennington, M.D. (6)...... 41,667 *
Gerald R. Reaven, M.D. (7)......... 143,833 *
John Chow (8)...................... 14,166 *
J.D. Haldeman (9).................. 14,445 *
Laurie Peltier (10)................ 16,667 *
Atul S. Khandwala, Ph.D. (11)...... 40,000 *
Thomas Carlson, M.D. (12).......... 61,172 *
G. Kirk Raab (13).................. 310,032 *
Adrian D.P. Bellamy (14)........... 19,583 *
Jeffrey Berg (15).................. 4,167 *
Herbert H. McDade, Jr. (16)........ 40,532 *
M. David Titus (17)................ 38,451 *
Current Officers and Directors as
a group (18)
(12 persons)....................... 1,658,085 4.21%
- ----------------------
*....Less than 1.0%
(1) Percentage of beneficial ownership is calculated assuming 38,337,156
shares of Common Stock were outstanding as of March 31, 1999. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to options or
warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of March 31, 1999, are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other
person. Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock beneficially owned.
(2) This table is based upon information supplied to the Company by executive
officers, directors and stockholders owning greater than five percent, as
set forth in filings required by the Securities and Exchange Commission or
as otherwise provided. The address of each officer and director identified
in this table is that of the Company's executive offices, 213 East Grand
Avenue, South San Francisco, CA 94080. Unless otherwise indicated in the
44
footnotes to this table and subject to applicable community property laws,
each of the stockholders named in this table has sole voting and
investment power with respect to the shares shown as beneficially owned by
it, him or her.
(3) Does not include 20,000 shares of Series C Preferred Stock which is
convertible into shares of Common Stock, such number which is determined
in accordance with that certain Series C Stock Purchase Agreement.
(4) Includes 420,992 shares subject to options exercisable within 60 days of
March 31, 1999.
(5) Includes 96,487 shares subject to options exercisable within 60 days of
March 31, 1999.
(6) Represents shares subject to options exercisable within 60 days
of March 31, 1999.
(7) Includes 143,333 shares subject to options exercisable within 60 days of
March 31, 1999.
(8) Represents shares subject to options exercisable within 60 days
of March 31, 1999.
(9) Represents shares subject to options exercisable within 60 days
of March 31, 1999.
(10) Represents shares subject to options exercisable within 60 days of March
31, 1999.
(11) Represents shares subject to options exercisable within 60 days of March
31, 1999. Dr. Khandwala resigned from the Company in October 1998.
(12) Represents shares subject to options exercisable within 60 days of March
31, 1999.
(13) Includes 174,380 shares subject to options exercisable within 60 days of
March 31, 1999. Does not include 1,500 shares of Series C Preferred Stock
which is convertible to a certain number of shares of Common Stock, such
number which is determined in accordance with that certain Series C Stock
Purchase Agreement.
(14) Represents shares subject to options exercisable within 60 days of March
31, 1999.
(15) Represents shares subject to options exercisable within 60 days of March
31, 1999.
(16) Represents shares subject to options exercisable within 60 days of March
31, 1999.
(17) Includes 33,451 shares subject to options exercisable within 60 days of
March 31, 1999.
(18) Includes shares held by family members associated with directors and
officers listed above. Also includes 1,039,375 shares which are currently
issuable upon the exercise of outstanding options.
45
Stock Performance Graph
The graph below depicts the Company's stock price as an index assuming
$100 invested on January 26, 1993 (the date of the Company's initial public
offering), along with the composite prices of companies listed in the Hambrecht
& Quist Biotechnology Index and Nasdaq Total U.S. Stock Market Index. This
information has been provided to the Company by Hambrecht & Quist. The
comparisons in the graph are required by regulations of the Securities and
Exchange Commission and are not intended to forecast or to be indicative of the
possible future performance of the Common Stock.
COMPARISON OF CUMULATIVE TOTAL RETURN SINCE JANUARY 26, 1993**
Among Shaman Pharmaceuticals, Inc.,
the Hambrecht & Quist Biotechnology Index and
The Nasdaq Stock Market - U.S. Index
PERFORMANCE GRAPH
** $100 invested on January 26, 1993 in stock or index, including reinvestment
of dividends.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, which might incorporate future filings made by
the Company under those statutes, the preceding Compensation Committee Report on
Executive Compensation and the Company Stock Performance Graph will not be
incorporated by reference into any of those prior filings, nor will such report
or graph be incorporated by reference into any future filings made by the
Company under those Acts.
46
COMPLIANCE WITH SECTION 16(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who are the beneficial owners of
more than 10% of the Common Stock to file initial reports of ownership and
reports of changes in ownership of the Common Stock with the United States
Securities and Exchange Commission ("SEC"). Officers, directors and greater than
10% stockholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms furnished to the
Company and the written representations that no other reports were required, the
Company believes that, during the period from January 1, 1998 to December 31,
1998, all officers, directors and beneficial owners of more than 10% of the
Common Stock complied with all Section 16(a) requirements, except as described
herein. Each of Dr. Chow and Ms. Diaz did not timely file his or her Form 3,
each of which untimely filings was subsequently corrected. Each of Mr. McDade,
Mr. Bellamy, Mr. Raab and Mr. Titus did not timely file a Form 4 for the option
grant on May 15, 1998, which untimely filing was subsequently corrected. Each of
Mr. Berg, Mr. Raab, Mr. Titus, Ms. Conte, Dr. Reaven, Dr. King, Dr. Pennington,
Ms. Peltier, Dr. Chow and Ms. Haldeman was late in filing a Form 5, which
untimely filing was subsequently corrected.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of the Company that are intended to be presented
by such stockholders at the Company's 2000 Annual Meeting must be received by
the Company no later than December ___, 1999 in order that they may be included
in the proxy statement and form of proxy relating to that meeting.
In addition, the proxy solicited for the 2000 Annual Meeting will confer
discretionary authority to vote on any stockholder proposals presented at that
meeting, unless the Company is provided with notice of such proposal no later
than ___________, 2000.
ANNUAL REPORT
A copy of the Company's Annual Report to Stockholders for the year ended
December 31, 1998 has been mailed concurrently with this Proxy Statement to all
stockholders entitled to notice of and to vote at the Annual Meeting. The Annual
Report is not incorporated into this Proxy Statement and is not considered proxy
soliciting material.
FORM 10-K
The Company filed an Annual Report on Form 10-K with the Securities and
Exchange Commission. A copy of this report may be obtained, without charge, by
writing to Investor Relations, Shaman Pharmaceuticals, Inc., 213 East Grand
Avenue, South San Francisco, California 94080.
47
OTHER MATTERS
The Company knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters properly come before
the Annual Meeting, it is the intention of the persons named in the enclosed
form of Proxy to vote the shares they represent as the Board may recommend.
Discretionary authority with respect to such other matters is granted by the
execution of the enclosed Proxy.
THE BOARD OF DIRECTORS
Dated: May ___, 1999
48
Appendix A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF SHAMAN PHARMACEUTICALS, INC.
a Delaware Corporation
SHAMAN PHARMACEUTICALS, INC., a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
1. The name of this corporation is Shaman Pharmaceuticals, Inc. The
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on December 21, 1992.
2. The Amended and Restated Certificate of Incorporation has been
duly adopted by its Board of Directors and stockholders in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
3. The text of the Restated Certificate of Incorporation is hereby
restated toread in its entirety as follows:
ARTICLE I
The name of this corporation is Shaman Pharmaceuticals, Inc.
ARTICLE II
The address of the registered office of the corporation in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under General Corporation Law of Delaware.
ARTICLE IV
A. Classes of Stock. The Corporation is authorized to issue two classes of
shares to be designated, respectively, Common Stock ("Common") and Preferred
Stock ("Preferred"). The total number of shares of Preferred the corporation
shall have authority to issue is 12,000,000 with a par value of $0.001 per
share,
and the total number of shares of Common the corporation shall have authority to
issue is 220,000,000 with a par value of $0.001 per share.
Upon the filing of this Amended and Restated Certificate of
Incorporation, each outstanding 20 shares of Common Stock shall be
converted into one share of Common Stock (the "Stock Split"). No fractional
shares of Common Stock shall be issued upon the Stock Split. In lieu of any
fractional shares to which a holder would otherwise be entitled (after
aggregating all such shares of Common Stock to which such holder is entitled),
the Corporation shall issue to such holder one share of Common Stock.
B. Rights, Preferences and Restrictions of Preferred. The Preferred
authorized by this Amended and Restated Certificate of Incorporation may be
issued from time to time in series. The Board of Directors is hereby authorized
to fix or alter the rights, preferences, privileges and restrictions granted to
or imposed upon any authorized series of Preferred, and the number of shares
constituting any such series and the designation thereof, or of any of them.
Subject to compliance with applicable protective voting rights which may be
granted to the holders of the Preferred or series thereof in Certificates of
Designation or in the corporation's Certificate of Incorporation, as amended and
restated from time to time, and requirements and restrictions of applicable law
("Protective Provisions"), the rights, privileges, preferences and restrictions
of any such additional series may be subordinated to, pari passu with
(including, without limitation, inclusion in provisions with respect to
liquidation and acquisition preferences, redemption and/or approval of matters
by vote or written consent), or senior to any of those of any present or future
class or series of Preferred or Common. Subject to compliance with applicable
Protective Provisions, the Board of Directors is also authorized to increase or
decrease the number of shares of any series, prior or subsequent to the issue of
that series, but not below the number of shares of such series then outstanding.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
The number of shares constituting the Series A Preferred Stock,
$0.001 par value per share, shall be Four Hundred Thousand (400,000) shares. The
number of shares constituting Series C Preferred Stock shall be Two Hundred
Thousand (200,000) shares, $0.001 par value per share. The number of shares
constituting the Series D Convertible Preferred Stock (the "Series D Preferred
Stock") shall be Six Thousand Two Hundred Eighty-five (6,285) shares, $0.001 par
value per share and shall not be subject to increase. The Corporation shall not
issue any shares of Series D Preferred Stock after the Issuance Date (defined
below), except that on or prior to May 31, 1999, the corporation may issue up to
1,500 shares of Series D Preferred Stock to MMC/GATX in exchange for
indebtedness of the corporation to MMC/GATX on a basis of one share of Series D
Preferred Stock for each $1,000 of such indebtedness. The Board of Directors is
also authorized to decrease number of shares of any series of preferred stock
prior or subsequent to the issue of the Series A Preferred Stock but not below
the number of shares of such series then outstanding. In case the number of
shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
2
The rights, preferences, privileges, and restrictions granted to and
imposed on the Series A Preferred Stock, the Series C Preferred Stock, and the
Series D Preferred Stock are as set forth below in this Article IV(B).
1. Certain Defined Terms. The following terms shall have the
following meanings as used in this Article IV(B) (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Adjustment Notice" means an Adjustment Notice substantially in the
form set forth in Section 14(f).
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the subject Person. For purposes
of the term "Affiliate," the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or to cause the direction of the management and
policies of a Person, whether through the ownership of securities, by contract
or otherwise.
"Aggregated Person" means, with respect to any holder of shares of
Series D Preferred Stock, any Person whose beneficial ownership of shares of
Common Stock would be aggregated with such holder's beneficial ownership of
shares of Common Stock for purposes of Section 13(d) of the 1934 Act and
Regulation 13D-G thereunder.
"AMEX" means the American Stock Exchange, Inc.
"Arrearage Interest" means interest at the rate of 12% per annum on
any dividend on shares of Series D Preferred Stock which dividend is not paid on
a Dividend Payment Date, whether or not declared, from such Dividend Payment
Date.
"Auditors" means Ernst & Young LLP or such other firm of independent
public accountants of recognized national standing as shall have been engaged by
the corporation to audit its financial statements.
"Auditors' Determination" means a determination requested by the
corporation and signed by the Auditors concurring with the corporation's
conclusion that a requirement of the corporation to redeem, or a right of any
holder of shares of Series D Preferred Stock to require redemption of, shares of
Series D Preferred Stock by reason of the occurrence of a specified Optional
Redemption Event which occurs by reason of an event described in clause (1), (2)
or (3) of the definition of Optional Redemption Event would result in the
corporation being required to classify the Series D Preferred Stock as
redeemable preferred stock on a balance sheet of the Corporation in accordance
with Generally Accepted Accounting Principles. The Auditors' Determination shall
(i) set forth in reasonable detail all relevant facts considered by the Auditors
in connection therewith, (ii) set forth all applicable accounting principles and
assumptions used, and (iii) set forth in reasonable detail or attach copies of
all legal, expert and other advice or information used by the Auditors in
reaching their conclusion. To the extent any facts are assumed for purposes of
either the Corporation's conclusion or the Auditor's Determination, the validity
3
of such conclusion or determination shall depend upon such assumed facts being
true and complete in all material respects.
"Blackout Period" means the period of up to 20 consecutive days after
the date the Corporation notifies the holders of shares of Series D Preferred
Stock that they are required to suspend offers and sales of Registrable
Securities as a result of an event or circumstance described in Section
3.b.(5)(A) of the Exchange Agreement, which period commences after the date
which is 90 days after the date of the Closing and during which period, by
reason of Section 3.b.(5)(B) of the Exchange Agreement, the Corporation is not
required to amend any Registration Statement or to supplement the Prospectus
relating to any Registration Statement; provided, however, that such period may
be up to 30 consecutive days if the Corporation so elects in accordance with
Section 3.b.(5)(B) of the Exchange Agreement, subject to the limitations
provided therein.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Business Combination Redemption Percentage" means 118% with respect
to a redemption of shares of Series D Preferred Stock in accordance with Section
8(c)(ii)(f).
"Business Combination Redemption Price" means an amount in cash equal
to the product obtained by multiplying (A) the sum of (i) $1,000 plus (ii) an
amount equal to the accrued but unpaid dividends on the share of Series D
Preferred Stock to be redeemed and any Arrearage Interest on dividends thereon
in arrears to the date of payment of the redemption price pursuant to Section
8(c)(ii)(f) times (B) the Business Combination Redemption Percentage.
"Business Day" means (a) in the case of the Series C Preferred Stock,
any day other than a Saturday, Sunday or other day on which commercial banks in
The City of San Francisco are authorized or required by law to remain closed and
(b) in the case of the Series D Preferred Stock, any day other than a Saturday,
Sunday or other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.
"Cash and Cash Equivalent Balances" of any Person on any date shall
be determined from such Person's books maintained in accordance with Generally
Accepted Accounting Principles, and means, without duplication, the sum of (1)
the cash accrued by such Person and its subsidiaries on a consolidated basis on
such date and available for use by such Person and its subsidiaries on such date
and (2) all assets which would, on a consolidated balance sheet of such Person
and its subsidiaries prepared as of such date in accordance with Generally
Accepted Accounting Principles, be classified as cash or cash equivalents.
"Common Stock" means the Common Stock, $0.001 par value per share, of
the Corporation or any shares of capital stock into which such stock shall be
changed or reclassified after the Issuance Date.
"Control Notice" means a Control Notice substantially in the form set
forth in Section 14(e).
4
"Converted Restriction Amount" means on any date of determination a
number of shares of Common Stock equal to 4.9% of the shares of Common Stock
outstanding on such date.
"Corporation Notice" means a Corporation Notice substantially in the
form set forth in Section 14(c).
"Dividend Payment Date" means each February 1, May 1, August 1 and
November 1.
"Exchange Agreement" means the Exchange Agreement, dated as of
December 10, 1998, by and between the Corporation and the several original
holders of the Senior Subordinated Convertible Notes pursuant to which such
Senior Subordinated Convertible Notes will be exchanged for shares of Series D
Preferred Stock.
"Generally Accepted Accounting Principles" for any Person means the
generally accepted accounting principles and practices applied by such Person
from time to time in the preparation of its audited financial statements.
"Holder Notice" means a Holder Notice substantially in the form set
forth in Section 14(d).
"Indebtedness" as used in reference to any Person means all
indebtedness of such Person for borrowed money, the deferred purchase price of
property, goods and services and obligations under leases which are required to
be capitalized in accordance with Generally Accepted Accounting Principles and
shall include all such indebtedness guaranteed in any manner by such Person or
in effect guaranteed by such Person through a contingent agreement to purchase
and all indebtedness for the payment or purchase of which such Person has
contingently agreed to advance or supply funds and all indebtedness secured by
mortgage or other lien upon property owned by such Person, although such Person
has not assumed or become liable for the payment of such indebtedness, and, for
all purposes hereof, such indebtedness shall be treated as though it has been
assumed by such Person.
"Issuance Date" means (a) with respect to the Series C Preferred
Stock, the first date of original issuance of any shares of Series C Preferred
Stock and (b) with respect to the Series D Preferred Stock, the date of original
issuance of the shares of Series D Preferred Stock pursuant to the Exchange
Agreement.
"Initial Reserve Amount" means 6,285,000 shares of Common Stock
reserved by the Corporation for issuance upon conversion of the shares of Series
D Preferred Stock.
"Junior Dividend Stock" means, collectively, the Series A Preferred
Stock, the Common Stock and any other class or series of capital stock of the
Corporation ranking junior as to dividends to the Series D Preferred Stock.
"Junior Liquidation Stock" means, collectively, the Series A
Preferred Stock, the Common Stock and any other class or series of capital stock
of the Corporation ranking junior as to liquidation rights to the Series D
Preferred Stock.
5
"Majority Holders" means at any time the holders of shares of Series
D Preferred Stock which shares constitute a majority of the outstanding shares
of Series D Preferred Stock outstanding at such time.
"Market Price" of any security on any date means the closing bid
price of such security on such date on the Nasdaq or such other securities
exchange or other market on which such security is listed for trading which
constitutes the principal securities market for such security, as reported by
Bloomberg, L.P.
"Measurement Period" means with respect to any Series D Conversion
Date, the period consisting of 12 consecutive Trading Days ending on and
including the Trading Day immediately preceding such Series D Conversion Date.
"Nasdaq" means The Nasdaq National Market or The Nasdaq
SmallCap Market, whichever system lists the Common Stock.
"1934 Act" means the Securities Exchange Act of 1934,
as amended.
"1933 Act" means the Securities Act of 1933, as amended.
"NYSE" means the New York Stock Exchange, Inc.
"Optional Redemption Date" means the date which is three Business
Days after a holder of shares of Series D Preferred Stock who is entitled to
redemption rights under Section 7(c)(ii)(a) and 7(c)(ii)(b) gives a Holder
Notice.
"Optional Redemption Event" means any one of thefollowing events:
1) For any period of five consecutive Trading Days following the
Issuance Date there shall be no reported sale price of the Common Stock on any
of the Nasdaq, the NYSE or the AMEX;
2) The Common Stock ceases to be listed for trading on the Nasdaq,
the NYSE or the AMEX;
3) Any consolidation or merger of the Corporation or any subsidiary
of the Corporation with or into another entity or other business combination
transaction involving the Corporation or any subsidiary of the Corporation
(other than a merger or consolidation of a subsidiary of the Corporation into
the Corporation or a wholly-owned subsidiary of the Corporation) where the
stockholders of the Corporation immediately prior to such transaction do not
collectively own at least 51% of the outstanding voting securities of the
surviving corporation of such transaction immediately following such transaction
or the common stock of such surviving corporation is not listed for trading on
the Nasdaq, the NYSE or the AMEX; or the sale of all or substantially all of the
assets of the Corporation and its subsidiaries;
4) The adoption of any amendment to the Certificate of Incorporation
of the Corporation (other than any certificate designating a series of preferred
stock of the Corporation which does not contravene the rights of the holders of
shares of Series D Preferred Stock) which materially and adversely affects the
6
rights of the holders of shares of Series D Preferred Stock in respect of their
interest in the Common Stock in a different and more adverse manner than it
affects the rights of holders of Common Stock generally or the taking of any
other action which materially and adversely affects the rights of the holders of
Series D Preferred Stock;
5) The inability of any holder of shares of Series D Preferred Stock
for (x) (i) 20 days (whether or not consecutive) or (ii) if in accordance with
Section 3.b.(5)(B) of the Exchange Agreement the Corporation elects a Blackout
Period of up to 30 consecutive days which commences more than 90 days after the
Issuance Date, such greater number of days as shall equal the number of days the
Blackout Period so elected is in effect (but in no event more than 30 days), in
either the case of such clause (i) or such clause (ii) during the period
commencing on the Issuance Date and ending on the first anniversary of the
Issuance Date or (y) 60 days (whether or not consecutive) subsequent to August
29, 1997, to sell shares of Common Stock issued or issuable upon conversion of
shares of Series D Preferred Stock pursuant to any Registration Statement (1) by
reason of the requirements of the 1933 Act, the 1934 Act or any of the rules or
regulations under either thereof or (2) due to such Registration Statement
containing any untrue statement of material fact or omitting to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or any other failure of such Registration Statement to comply
with the rules and regulations of the SEC; or
6) The Corporation shall fail or default in the timely performance of
any material obligation to a holder of shares of Series D Preferred Stock under
the terms of this Amended and Restated Certificate of Incorporation or under the
Exchange Agreement or any other agreement or document entered into in connection
with the issuance of shares of Series D Preferred Stock, as such agreements and
instruments may be amended from time to time.
"Optional Redemption Percentage" means 118%.
"Optional Redemption Price" means an amount in cash equal to the
product obtained by multiplying (a) the sum of (i) $1,000 plus (ii) an amount
equal to the accrued but unpaid dividends on the share of Series D Preferred
Stock to be redeemed and any Arrearage Interest on dividends thereon in arrears
to the applicable Optional Redemption Date times (b) the Optional Redemption
Percentage.
"Parity Dividend Stock" means any class or series or the
Corporation's capital stock ranking, as to dividends, on a parity with the
Series D Preferred Stock.
"Parity Liquidation Stock" means any class or series of the
Corporation's capital stock ranking, as to liquidation rights, on a parity with
the Series D Preferred Stock.
"Permitted Indebtedness" means (i) Indebtedness which is outstanding
and which would be reflected on a balance sheet of the Corporation as of the
Issuance Date prepared in accordance with Generally Accepted Accounting
Principles and (ii) Indebtedness incurred to finance (A) inventory or (B) the
lease or purchase of equipment (which Indebtedness shall be secured by such
equipment) used in the Corporation's business, the outstanding amount thereof
which does not exceed $10,000,000 during the first year after the Issuance Date,
7
$15,000,000 during the second year after the Issuance Date and $30,000,000
during the third year after the Issuance Date.
"Person" means an individual, partnership, corporation, limited
liability company, trust, incorporated organization, unincorporated association,
joint stock company, government, governmental agency or political subdivision.
"Redemption Date" means December 30, 1998.
"Redemption Notice" means a Redemption Notice substantially in the
form set forth in Section 14(b).
"Redemption Price" means an amount in cash equal to the product
obtained by multiplying (i) the sum of (A) $1,000 plus (B) an amount equal to
the accrued but unpaid dividends on such share of Series D Preferred Stock to be
redeemed and any Arrearage Interest on dividends thereon in arrears to the date
of payment of the Redemption Price times (ii) 130%.
"Registrable Securities" means the shares of Common Stock issuable
upon conversion of shares of Series D Preferred Stock and the shares of Common
Stock issuable as dividends on the Series D Preferred Stock, and any stock or
other securities into which or for which the Common Stock may hereafter be
changed, converted or exchanged by the Corporation or its successor, as the case
may be, and any other securities issued to holders of such Common Stock (or such
shares into which or for which such shares are so changed, converted or
exchanged) upon any reclassification, share combination, share subdivision,
share dividend, merger, consolidation or similar transaction or event.
"Registration Statement" shall have the meaning provided in the
Exchange Agreement.
"SEC" means the United States Securities and Exchange Commission.
"Senior Dividend Stock" means the Series C Preferred Stock of the
Corporation and any other class or series of capital stock of the Corporation
ranking senior as to dividends to the Series D Preferred Stock.
"Senior Liquidation Stock" means the Series C Preferred Stock of the
Corporation and any other class or series of capital stock of the Corporation
ranking senior as to liquidation rights to the Series D Preferred Stock.
"Series C Conversion Agent" means Boston EquiServe Limited
Partnership, as Servicing Agent for BankBoston, N.A., or its duly appointed
successor who shall be serving as transfer agent and registrar for the Common
Stock and who shall have been authorized by the Corporation to act as conversion
agent for the Series C Preferred Stock.
"Series C Conversion Date" means (1) the date on which a notice of
conversion of Series C Preferred Stock is actually received by the Series C
Conversion Agent, whether by mail, courier, personal service, telephone line
facsimile transmission or other means, in case of a conversion of shares of
Series C Preferred Stock pursuant to Section 8(b)(i); or (2) the fourth
8
anniversary of the Issuance Date, in the case of a conversion of shares of
Series C Preferred Stock pursuant to Section 8(b)(ii).
"Series C Conversion Price" means an amount equal to 85% of the
average Closing Price of the Common Stock for the ten Trading Day period ending
three Trading Days prior to the Series C Conversion Date.
"Series D Conversion Agent" means BankBoston, N.A., or its duly
appointed successor, who shall serve as conversion agent for the Series D
Preferred Stock.
"Series D Conversion Date" means the date on which a Series D
Conversion Notice is actually received by the Series D Conversion Agent, whether
by mail, courier, personal service, telephone line facsimile transmission or
other means, in case of a conversion of shares of Series D Preferred Stock
pursuant to Section 8(c)(i).
"Series D Conversion Notice" means a Notice of Conversion of Series D
Convertible Preferred Stock substantially in the form set forth in Section
14(a).
"Series D Conversion Price" means the lesser of (a) $1.125 per share
(subject to equitable adjustments from time to time on terms reasonably
acceptable to the Majority Holders for (i) stock splits, (ii) stock dividends,
(iii) combinations, (iv) capital reorganizations, (v) issuance to all holders of
Common Stock of rights or warrants to purchase shares of Common Stock, (vi)
distribution by the Corporation to all holders of Common Stock of evidences of
indebtedness of the Corporation or cash (other than regular quarterly cash
dividends), (vii) Tender Offers by the Corporation or any Subsidiary for, or
other repurchases of shares of, Common Stock in one or more transactions which,
individually or in the aggregate, result in the purchase of more than 10% of the
Common Stock outstanding, and (viii) similar events relating to the Common
Stock, in each case which occur, or with respect to which "ex-" trading of the
Common Stock begins, on or after December 9, 1998, and on or before the
applicable Series D Conversion Date) and (b) on any Series D Conversion Date,
90% of the lowest per share Trading Price during the applicable Measurement
Period for such Series D Conversion Date in a trade in which neither the Holder
nor any of its Affiliates was the seller, subject to adjustment in the case of
such clause (a) and clause (b) in accordance with Section 7(c).
"Series D Preferred Stock" means the Series D Convertible Preferred
Stock of the Corporation.
"Stockholder Approval" shall have the meaning provided in the
Exchange Agreement.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) Nasdaq or (z) such other securities market, which at the time
constitutes the principal securities market for the Common Stock is open for
general trading of securities.
"Trading Price" on any date means the lowest sale price (regular way)
for one share of the Common Stock on such date, on the first applicable among
the following: (a) the national securities exchange on which the shares of
9
Common Stock are listed which constitutes the principal securities market for
the Common Stock, (b) Nasdaq, or (c) such other securities market which
constitutes the principal securities market for the Common Stock, in any such
case as reported by Bloomberg, L.P. or if no such sale prices are so reported,
then the representative bid price of the Common Stock as quoted by a broker or
dealer which is a member firm of the NASD (in each such case subject to
equitable adjustment from time to time on terms reasonably acceptable to the
Majority Holders for (i) stock splits, (ii) stock dividends, (iii) combinations,
(iv) capital reorganizations, (v) issuance to all holders of Common Stock of
rights or warrants to purchase shares of Common Stock at a price per share less
than the Trading Price which would otherwise be applicable, (vi) the
distribution by the Corporation to all holders of Common Stock of evidences of
indebtedness of the Corporation or cash (other than regular quarterly cash
dividends), (vii) Tender Offers by the Corporation or any subsidiary of the
Corporation or other repurchases of shares of Common Stock in one or more
transactions which, individually or in the aggregate, result in the purchase of
more than 10% of the Common Stock outstanding, and (viii) similar events
relating to the Common Stock, in each such case which occur on or after the
Issuance Date); provided, however, that if on any Trading Day there shall be no
reported sale price (regular way) of such security, the "Trading Price" on such
Trading Day shall be the lowest sale price (regular way) of such security on the
Trading Day next preceding such Trading Day on which a sale price (regular way)
for such security has been so reported.
2. Rank. The shares of Series C Preferred Stock shall rank senior
to the Series D Preferred Stock, and both the Series C Preferred Stock and the
Series D Preferred Stock shall rank senior to the Series A Preferred Stock and
the Common Stock and any shares of any other series of Preferred Stock or
any shares of any other class of preferred stock of the Corporation, now or
hereafter issued, as to payment of dividends and distribution of assets upon
liquidation, dissolution, or winding up of the Corporation, whether voluntary or
involuntary. However, the relative rank of the Series D Preferred Stock to
future issuances may be altered by written consent of the Majority Holders in
advance of such issuance.
3. Dividend Rights.
a. Series A Preferred Stock. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, the holders
of the Series A Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors. The Board of Directors shall not pay any dividend to the
holders of the Common Stock unless and until it has paid an equivalent dividend,
on a pro rata per share basis, to the holders of the Series A Preferred Stock.
b. Series C Preferred Stock. The holders of shares of Series C
Preferred Stock shall be entitled to receive, when, as, and if declared by
the Board of Directors out of funds legally available for such purpose,
dividends paid semi-annually on May 31 and November 30 of each year to the
holders of record of such shares on March 31 and September 30 of such year
as follows: (i) a stock-on-stock dividend of $10.00 per annum, paid in
arrears, in shares of Common Stock (valued at 85% of the average closing price
of the Common Stock for the ten Trading Day period ending three Trading Days
prior to the date on which the dividend is paid); plus (ii) a cash amount
equaling 0.00005% of the Company's United States net sales, if any, for the
10
preceding two calendar quarters of its SP-303/Provir product for the treatment
of diarrhea less $5.00 (the value of the semi-annual stock dividend). Dividends
on the shares of Series C Preferred Stock shall be cumulative. If under
Delaware law, the Company is unable to pay the cash amount of the dividends,
then this portion of the dividends shall be payable in shares of Common
Stock (valued at 85% of the average closing price of the Common Stock for the
ten Trading Day period ending three Trading Days prior to the date on which the
dividend is paid).
c. Series D Preferred Stock
(i) The holders of shares of Series D Preferred Stock
shall be entitled to receive, when, as, and if declared by the Board of
Directors out of funds legally available for such purpose, dividends at the rate
of $55 per annum per share, and no more (except as otherwise provided herein),
which shall be fully cumulative, shall accrue without interest (except as
otherwise provided herein as to dividends in arrears) from the date of
original issuance of each share of Series D Preferred Stock and shall be
payable quarterly on each Dividend Payment Date of each year commencing
February 1, 1999 (except that if any such date is not a Business Day, then such
dividend shall be payable on the next succeeding day that is a Business
Day) to holders of record as they appear on the stock books of the Corporation
on such record dates, not more than ten nor less than five days preceding the
payment dates for such dividends, as shall be fixed by the Board.
Notwithstanding any other provision hereof, the rate of dividends on the shares
of Series D Preferred Stock shall be subject to increase in accordance with
Section 7(c)(ii)(b)(iv).
Dividends on the Series D Preferred Stock shall be paid in cash or,
subject to the limitations in Section 3(c)(ii), shares of Common Stock or any
combination of cash and shares of Common Stock, at the option of the Corporation
as hereinafter provided. The amount of the dividends payable per share of Series
D Preferred Stock for each quarterly dividend period shall be computed by
dividing the annual dividend amount by four. The amount of dividends payable for
the initial dividend period and any period shorter than a full quarterly
dividend period shall be computed on the basis of a 360-day year of twelve
30-day months. Dividends not paid on a Dividend Payment Date, whether or not
such dividends have been declared, will bear Arrearage Interest until paid. No
dividends or other distributions, other than dividends payable solely in shares
of any Junior Dividend Stock, shall be paid or set apart for payment on any
shares of Junior Dividend Stock, and no purchase, redemption, or other
acquisition shall be made by the Corporation of any shares of Junior Dividend
Stock unless and until all accrued and unpaid dividends on the Series D
Preferred Stock and Arrearage Interest on dividends in arrears at the rate
specified herein shall have been paid or declared and set apart for payment.
If at any time any dividend on any Senior Dividend Stock shall be in
default, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Series D Preferred Stock unless and until all accrued
and unpaid dividends with respect to the Senior Dividend Stock, including the
full dividends for the then current dividend period, shall have been paid or
declared and set apart for payment, without interest. No full dividends shall be
paid or declared and set apart for payment on any Parity Dividend Stock for any
period unless all accrued but unpaid dividends (and Arrearage Interest on
dividends in arrears) have been, or contemporaneously are, paid or declared and
set apart for such payment on the Series D Preferred Stock. No full dividends
shall be paid or declared and set apart for payment on the Series D Preferred
11
Stock for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series D Preferred Stock and the Parity Dividend Stock, all dividends paid or
declared and set apart for payment upon shares of Series D Preferred Stock (and
Arrearage Interest on dividends in arrears) and the Parity Dividend Stock shall
be paid or declared and set apart for payment pro rata, so that the amount of
dividends paid or declared and set apart for payment per share on the Series D
Preferred Stock and the Parity Dividend Stock shall in all cases bear to each
other the same ratio that accrued and unpaid dividends per share on the shares
of Series D Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 3(c) shall
not be deemed to include any stock dividend or distributions made in connection
with any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(ii) If the Corporation elects in the exercise of its sole
discretion to issue shares of Common Stock in payment of dividends on the
Series D Preferred Stock with respect to any Dividend Payment Date, the
Corporation shall (1) give notice to the holders of the Series D Preferred Stock
at least 14 days prior to the applicable Dividend Payment Date of the
Corporation's election to exercise such right and (2) deliver, or cause to be
delivered, by the third Trading Day after such Dividend Payment Date to each
holder of such shares the number of whole shares of Common Stock arrived at by
dividing the per share Series D Conversion Price (determined as if the
applicable Dividend Payment Date were a Series D Conversion Date) of such shares
of Common Stock into the total amount of cash dividends such holder would be
entitled to receive if the aggregate dividends on the Series D Preferred Stock
held by such holder which are being paid in shares of Common Stock were being
paid in cash; provided, however, that if shares of Common Stock for such
dividend are not delivered to holders of Series D Preferred Stock on or prior to
the third Trading Day after a Dividend Payment Date, then the Corporation shall
not be entitled to pay such dividend in shares of Common Stock and such
dividend, together with Arrearage Interest from the applicable Dividend Payment
Date, shall be payable solely in cash. No fractional shares of Common Stock
shall be issued in payment of dividends. In lieu thereof, the Corporation shall
pay cash in an amount equal to the product of (x) the Trading Price of the
Common Stock for the 12 consecutive Trading Days ending on and including the
Trading Day immediately preceding such Dividend Payment Date times (y) the
fraction of a share of Common Stock which would otherwise be issuable by the
Corporation. The Corporation shall not exercise its right to issue shares of
Common Stock in payment of dividends on Series D Preferred Stock if:
(A) the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, together with the number
of shares of Common Stock held in the Corporation's treasury, is insufficient to
pay the portion of such dividends to be paid in shares of Common Stock;
12
(B) the issuance or delivery of shares of Common Stock
as a dividend payment would require registration with or approval of any
governmental authority under any law or regulation, and such registration or
approval has not been effected or obtained;
(C) the shares of Common Stock to be issued as a
dividend payment have not been authorized for listing, upon official notice
of issuance, on any securities exchange or market on which the Common Stock is
then listed; or have not been approved for quotation if the Common Stock is
traded in the over-the-counter market;
(D) the Series D Conversion Price (determined as
if the applicable Dividend Payment Date were a Series D Conversion Date) is less
than the par value of one share of Common Stock;
(E) the shares of Common Stock t o be issued as a
dividend (1) cannot be sold or transferred without restriction by holders of
shares of Series D Preferred Stock who receive such shares of Common Stock as a
dividend payment and who are not Affiliates of the Corporation or (2) are no
longer listed on the NYSE, the AMEX or the Nasdaq;
(F) the issuance of shares of Common Stock in payment
of dividends on Series D Preferred Stock held by any holder of shares of
Series D Preferred Stock would result in such holder (including all Aggregated
Persons of such holder) beneficially owning more than 4.9% of the Common Stock,
determined as provided in the proviso to the second sentence of Section 8(c)
(i)(a) or would result in the issuance to such holder (including all Aggregated
Persons of such holder) of an aggregate number of shares of Common Stock upon
conversion of shares of Series D Preferred Stock or in payment of dividends on
shares of Series D Preferred Stock in excess of the 4.9% limitation provided in
Section 8(c)(i)(b);
(G) an Optional Redemption Event shall have occurred
and on the applicable Dividend Payment Date any holder of shares of Series D
Preferred Stock shall be entitled to exercise optional redemption rights
under Section 7(c)(ii) hereof by reason of such Optional Redemption Event or
shall have exercised such optional redemption rights and the Corporation
shall not have paid the applicable Optional Redemption Price.
Shares of Common Stock issued in payment of dividends on Series D
Preferred Stock pursuant to this Section shall be, and for all purposes shall be
deemed to be, validly issued, fully paid and nonassessable shares of Common
Stock of the Corporation; the issuance and delivery thereof is hereby
authorized; and the dispatch in full thereof will be, and for all purposes shall
be deemed to be, payment in full of the cumulative dividends to which holders
are entitled on the applicable Dividend Payment Date.
(iii) Neither the Corporation nor any subsidiary of the
Corporation shall (1) make any Tender Offer for outstanding shares of
Common Stock, unless the Corporation contemporaneously therewith makes an offer,
or (2) enter into an agreement regarding a Tender Offer for outstanding shares
of Common Stock by any Person other than the Corporation or any subsidiary of
the Corporation, unless such Person agrees with the Corporation to make an
offer, in either such case to each holder of outstanding shares of Series D
13
Preferred Stock to purchase for cash at the time of purchase in such Tender
Offer the same percentage of shares of Series D Preferred Stock held by such
holder as the percentage of outstanding shares of Common Stock offered to be
purchased in such Tender Offer at a price per share of Series D Preferred Stock
equal to the greater of (i) the quotient obtained by dividing (a) the sum of (1)
$1,000 plus (2) an amount equal to the accrued but unpaid dividends on such
share of Series D Preferred Stock and any Arrearage Interest on dividends
thereon in arrears to the date of purchase pursuant to this Section 3(c)(iii) by
(b) 0.9 and (ii) an amount equal to the product obtained by multiplying (x) the
number of shares of Common Stock which would, but for the purchase pursuant to
such Tender Offer, be issuable on conversion in accordance with Section 9(a) of
one share of Series D Preferred Stock if a Series D Conversion Notice were given
by the holder of such share of Series D Preferred Stock on the date of purchase
pursuant to such Tender Offer (determined without regard to any limitation on
beneficial ownership contained in the second sentence of Section 8(c)(i)(a) or
in Section 8(c)(i)(b) times (y) the price per share of Common Stock offered in
such Tender Offer.
4. Series D Preferred Stock Capital. The amount to be represented in
the capital account for the Series D Preferred Stock at all times for each
outstanding share of Series D Preferred Stock shall be an amount at least equal
to the sum of (1) $1,000 plus (2) to the extent that the corporation has surplus
in its capital account, an amount equal to the accrued but unpaid dividends on
such share of Series D Preferred Stock and any Arrearage Interest on dividends
thereon in arrears to the date of determination plus (3) to the extent that the
corporation has surplus in its capital account, an amount equal to the product
obtained by multiplying (a) the sum of (1) $1,000 plus (2) an amount equal to
the accrued but unpaid dividends on such share of Series D Preferred Stock and
any Arrearage Interest on dividends thereon in arrears to the date of
determination times (b) 18%. Upon original issuance of each share of Series D
Preferred Stock, an amount equal to $1,000 shall be credited to the Series D
Preferred Stock capital account of the corporation and, to the extent at such
time the corporation has surplus in its capital account, an amount equal to the
amount specified in the preceding clause (3) (or so much thereof as is in
surplus) shall be transferred from surplus to the Series D Preferred Stock
capital account. If at any time the corporation shall have credited to the
Series D Preferred Stock capital account less than the full amount required by
the preceding clauses (1) through (3), then (x) if at any time thereafter the
corporation has surplus in its capital account, the corporation immediately
shall transfer surplus to the Series D Preferred Stock capital account to the
extent available and necessary to satisfy the requirements of the preceding
clauses (1) through (3), (y) notwithstanding the particular shares of Series D
Preferred Stock in respect of which an amount in excess of $1,000 per share of
Series D Preferred Stock shall have been transferred to the Series D Preferred
Stock capital account, any amount in excess of $1,000 for each outstanding share
of Series D Preferred Stock shall be treated as Series D Preferred Stock capital
pro rata for all outstanding shares of Series D Preferred Stock and (z) upon any
conversion of a share of Series D Preferred Stock, an amount equal to $0.001 per
share of common stock issued upon such conversion shall be credited to the
common stock capital account and the balance in the Series D Preferred Stock
capital account in respect of such converted share of Series D Preferred Stock
shall be retained in the Series D Preferred Stock capital account, to the extent
required under the preceding clauses (1) through (3). Nothing in this Section
shall require the corporation in a balance sheet prepared in accordance with
generally accepted accounting principles to reflect more than $1,000 per share
in Series D Preferred Stock capital for purposes of such balance sheet, if such
presentation would not be in accordance with generally accepted accounting
14
principles, so long as the notes to any such balance sheet make adequate
disclosure of the requirements of this Section and the capital accounts of the
corporation for purposes of the general corporation law of the state of
Delaware.
5. Liquidation Preference.
a. In the event of a liquidation, dissolution, or winding up of
the Corporation, whether voluntary or involuntary, the holders of Series C
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution to the holders of the Series D Preferred Stock, the Series A
Preferred Stock, and the Common Stock, out of the assets of the Corporation,
whether such assets constitute stated capital or surplus of any nature, an
amount per share of Series C Preferred Stock equal to $100.00 plus any accrued
and unpaid dividends and no more. In the event that the assets of the
Corporation are insufficient to make the foregoing distribution, then the entire
assets of the Corporation available for distribution shall be distributed
ratably among the holders of the Series C Preferred Stock and any stock on
parity with the Series C Preferred Stock with respect to liquidation rights in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
liquidation price of the shares of the Series C Preferred Stock with respect to
liquidation rights, the holders of such shares shall not be entitled to any
further participation in any distribution of the assets by the Corporation.
b. Upon the completion of the distribution required by Section
5(a) above, if any assets remain in the Corporation, the holders of Series
D Preferred Stock shall be entitled to receive out of such remaining assets of
the Corporation, whether such assets constitute stated capital or surplus of any
nature, an amount per share of Series D Preferred Stock equal to the Liquidation
Preference (as defined above) and no more, before any payment shall be made or
any assets distributed to the holders of Junior Liquidation Stock, provided
however, that such rights shall accrue to the holders of Series D Preferred
Stock only in the event that the Corporation's payments with respect to the
liquidation preference of the holders of Senior Liquidation are fully met. After
the liquidation preferences of the Senior Liquidation Stock are fully met, the
entire assets of the Corporation available for distribution shall be distributed
ratably among the holders of the Series D Preferred Stock and any Parity
Liquidation Stock in proportion to the respective preferential amounts to which
each is entitled (but only to the extent of such preferential amounts). After
payment in full of the liquidation price of the shares of the Series D Preferred
Stock and the Parity Liquidation Stock, the holders of such shares shall not be
entitled to any further participation in any distribution of assets by the
Corporation. In the event that the assets of the Corporation are insufficient to
make the foregoing distribution, then the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series D Preferred Stock and any stock on parity with the Series D Preferred
Stock with respect to liquidation rights in proportion to the respective
preferential amounts to which each is entitled (but only to the extent of such
preferential amounts). With respect to the Series D Preferred Stock, neither a
consolidation or merger of the Corporation with another corporation nor a sale
or transfer of all or part of the Corporation's assets for cash, securities, or
other property in and of itself will be considered a liquidation, dissolution,
or winding up of the Corporation.
15
c. After payment in full of the liquidation price as set forth
above in Sections 5(a) and 5(b) above, if assets remain in the corporation, the
holders of Series A Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, the amount of $8.147 (the "Original Issue Price") per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) plus all accrued or declared but unpaid dividends on such share for each
share of Series A Preferred Stock then held by such holder. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amount, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed ratably among the holders of the Series A Preferred Stock
in proportion to the preferential amount each such holder is otherwise entitled
to receive.
d. After payment to the holders of the Series C Preferred Stock,
Series D Preferred Stock, and Series A Preferred Stock of the amounts set forth
in Sections 5(a), (b), and (c), respectively, above, the entire remaining assets
and funds of the Corporation legally available for distribution, if any, shall
be distributed among the holders of the Common Stock and the Series A Preferred
Stock in proportion to the shares of Common Stock then held by them and the
shares of Common Stock which they then have the right to acquire upon conversion
of the shares of Series A Preferred Stock then held by them. The holders of
Series C Preferred Stock and Series D Preferred Stock shall not be entitled to
any further participation in any distribution of assets by the Corporation,
other than payment as set forth in Section 5(a) and 5(b), respectively.
e. With respect to the Series A Preferred Stock and Series C
Preferred Stock, (i) any acquisition of the Corporation by means of merger or
other form of corporate reorganization in which outstanding shares of the
Corporation are exchanged for securities or other consideration issued, or
caused to be issued, by the acquiring corporation or its subsidiary (other than
a mere reincorporation transaction) or (ii) a sale of all or substantially all
of the assets of the Corporation, shall be treated as a liquidation, dissolution
or winding up of the Corporation and shall entitle the holders of Series C
Preferred Stock and Series A Preferred Stock to receive at the closing thereof
the amount as specified in Section 5(a) and Section 5(c), respectively.
f. With respect to the holders of Series A Preferred Stock and
Series C Preferred Stock, whenever the distribution provided for the holders of
the Series A Preferred Stock in this Section 5 shall be payable in securities or
property other than cash, the value of such distribution shall be as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
16
(A) If traded on a securities exchange, the value shall
be deemed to be the average of the closing prices of the securities on such
exchange over the 30-day period ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
are applicable) over the 30-day period ending three (3) days prior to the
closing; and
(C) If there is no active public market, the value
shall be the fair market value thereof, as determined in good faith by the
Board of Directors of the Corporation.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (i) (A), (B) or (C) to reflect the approximate fair
market value thereof, as determined in good faith by the Board of Directors of
the Corporation.
(iii) In the event of any bona-fide dispute between the
Corporation and one or more holders of the Series A Preferred Stock as to
any fair market value determination under clauses (i)(C) or (ii) above, such
dispute shall be resolved through binding arbitration under the rules of the
American Arbitration Association, with the arbitration panel consisting of
persons familiar with the valuation of public and private entities and such
panel being advised, as to such valuation issues, by an investment bank of
nationally recognized standing, the costs thereof to be borne by the
non-prevailing party.
6. No Sinking Fund. The shares of Series D Preferred Stock shall
not be entitled to the benefits of any sinking fund for the redemption or
repurchase of shares of Series D Preferred Stock.
7. Redemption.
(a) Series A Preferred Stock. The Series A Preferred Stock
is not redeemable.
(b) Series C Preferred Stock. The Series C Preferred Stock
is not redeemable.
(c) Series D Preferred Stock. The Series D Preferred Stock
is subject to the following redemption provisions:
(i) Redemption at Option of Corporation.
(A) Optional Redemption.
(1) So long as (x) the Corporation shall be in
compliance in all material respects with its obligations to the holders of
the Series D Preferred Stock (including, without limitation, its obligations
17
under the Exchange Agreement and this Amended and Restated Certificate of
Incorporation) and (y) on the date the Corporation gives the Redemption Notice
and on the Redemption Date, the Corporation has Cash and Cash Equivalent
Balances (excluding investment securities) which are sufficient, after taking
into account the Corporation's cash requirements during the period from the date
the Redemption Notice is given to the Redemption Date, to pay the Redemption
Price of the shares of Series D Preferred Stock to be redeemed, the Corporation
shall have the right to redeem all or any part of the outstanding shares of
Series D Preferred Stock pursuant to this Section 7(c)(i)(A) at the Redemption
Price. In order to exercise its right of redemption under this Section 7(c)(i)
(A), the Corporation shall give a Redemption Notice to the holders of shares of
Series D Preferred Stock not less than 20 or more than 30 days prior to the
Redemption Date.
(2) On the Redemption Date (or such later date
as a holder of shares of Series D Preferred Stock shall surrender to the
Corporation the certificate(s) for the shares of Series D Preferred Stock
redeemed), the Corporation shall pay to or upon the order of each holder of
shares of Series D Preferred Stock by wire transfer of immediately available
funds to such account as shall be specified for such purpose by such holder in
an amount equal to the Redemption Price of all of such holder's shares of Series
D Preferred Stock to be redeemed. A holder of shares of Series D Preferred Stock
which are redeemed pursuant to this Section 7(c) (i)(A) shall not be entitled to
payment of the Redemption Price of such shares of Series D Preferred Stock until
such holder shall have surrendered the certificate(s) for such shares of Series
D Preferred Stock to the Corporation or, in the case of the loss, theft or
destruction of any such certificate, given indemnity in accordance with Section
13. If the Corporation shall fail to pay the Redemption Price of any shares of
Series D Preferred Stock in full when due, then the amount thereof shall bear
interest to the extent not prohibited by applicable law at the rate of 12% per
annum from the due date thereof until paid in full.
(3) Notwithstanding the giving of a Redemption
Notice, each holder of shares of Series D Preferred Stock shall be entitled to
convert in accordance with Section 8(c) any shares of Series D Preferred Stock
which are to be redeemed at any time prior to (1) the Redemption Date or (2) if
the Corporation fails to pay the Redemption Price in full to such holder on the
Redemption Date, the date on which the Corporation pays the Redemption Price
in full to such holder for all shares of Series D Preferred Stock to be redeemed
rom such holder.
(4) Any redemption of shares of Series D Preferred
Stock pursuant to this Section 7(c)(i)(A) shall be made as nearly as
practical pro rata from all holders of shares of Series D Preferred Stock
outstanding, subject to reduction of the shares of Series D Preferred Stock to
be redeemed from any holder by reason of conversions of shares of Series D
Preferred Stock of such holder between the date the Redemption Notice is given
and the Redemption Date.
(5) Upon receipt by the Corporation from a holder
of shares of Series D Preferred Stock of certificates for shares of Series D
Preferred Stock evidencing a greater number of shares of Series D Preferred
Stock than the number of shares of Series D Preferred Stock to be redeemed in
accordance with this Section 7(c)(i)(A), the Corporation shall, within three
Trading Days after such surrender, issue and deliver to or upon the order of
18
such holder a new certificate for the balance of shares of Series D Preferred
Stock, if any.
(B) No Other Redemption at the Option of the
Corporation. Except as otherwise specifically provided in Section 7(a), the
Corporation shall not have any right to redeem any shares of Series D
Preferred Stock at the option of the Corporation.
(ii) Redemption Upon an Optional Redemption Event.
(a) Redemption Right Upon Optional Redemption Event.
If an Optional Redemption Event occurs, then each holder of shares of Series D
Preferred Stock shall have the right, at such holder's option, to require
the Corporation to redeem all of such holder's shares of Series D Preferred
Stock, or any portion thereof, on the date that is three Business Days after
the date of the Holder Notice given with respect to such Optional Redemption
Event. Each holder of shares of Series D Preferred Stock shall have the right
to require the Corporation to redeem all or any such portion of such holder's
shares of Series D Preferred Stock if an Optional Redemption Event occurs at
any time while any of such holder's shares of Series D Preferred Stock are
outstanding at a price per share of Series D Preferred Stock equal to the
Optional Redemption Price.
(b) Notices; Method of Exercising Optional Redemption
Rights, Etc.
(i) On or before the fifth Business Day after the
occurrence of an Optional Redemption Event, the Corporation shall give to each
holder of outstanding shares of Series D Preferred Stock a Corporation
Notice of the occurrence of such Optional Redemption Event and of the redemption
right set forth herein arising as a result thereof.
The Corporation Notice shall set forth:
(A) the date by which the optional redemption
right must be exercised, which date shall be at least 30 days after the date
such Corporation Notice is given, and
(B) a description of the procedure (set forth
below) which each such holder must follow to exercise such holder's optional
redemption right.
No failure of the Corporation to give a Corporation
Notice or defect therein shall limit the right of any holder of shares of Series
D Preferred Stock to exercise the optional redemption right or affect the
validity of the proceedings for the redemption of such holder's shares of
Series D Preferred Stock.
(ii) To exercise its optional redemption right,
each holder of outstanding shares of Series D Preferred Stock shall deliver to
the Corporation on or before the thirtieth day after a Corporation Notice is
given to such holder (or if no Corporation Notice has been given to such holder,
within forty days after such holder first learns of the Optional Redemption
Event) a Holder Notice to the Corporation setting forth the name of such
holder and the number of such holder's shares of Series D Preferred Stock to
19
be redeemed. A Holder Notice may be revoked by such holder giving such Holder
Notice by giving notice of such revocation to the Corporation at any time prior
to the time the Corporation pays the Optional Redemption Price to such holder.
(iii) If a holder of shares of Series D Preferred
Stock shall have given a Holder Notice, on the date which is three Business
Days after the date such Holder Notice is given (or such later date as such
holder surrenders such holder's certificates for the shares of Series D
Preferred Stock redeemed) the Corporation shall make payment in immediately
available funds of the applicable Optional Redemption Price to such account as
specified by such holder in writing to the Corporation at least one Business Day
prior to the applicable redemption date. A holder of shares of Series D
Preferred Stock which are redeemed pursuant to this Section shall not be
entitled to payment of the Optional Redemption Price of such shares of Series D
Preferred Stock until such holder shall have surrendered the certificate(s)
for such shares of Series D Preferred Stock to the Corporation or, in the case
of the loss, theft or destruction of any such certificate, given indemnity in
accordance with Section 11. (iv) Notwithstanding any other provision of this
Amended and Restated Certificate of Incorporation, if an Optional Redemption
Event occurs by reason of the occurrence of an event described in clause (1),
(2) or (3) of the definition of the term Optional Redemption Event, and such
occurrence is by reason of events which are not solely within the control of
the Corporation, the Corporation shall have the right to give a Control
Notice to the holders of shares of Series D Preferred Stock at any time after
such Optional Redemption Event occurs and prior to the earlier of (1) the date
on which all holders of shares of Series D Preferred Stock who had the right
(other than as limited by this Section 7(c)(ii)(b)) to require redemption of
any shares of Series D Preferred Stock by reason of the occurrence of such
Optional Redemption Event no longer have such right and (2) the applicable
Optional Redemption Date by reason of the earliest Holder Notice given by any
holder of shares of Series D Preferred Stock by reason of such Optional
Redemption Event. If the Corporation timely gives such Control Notice and an
Adjustment Notice (which may be combined in a single notice) to the holders
of shares of Series D Preferred Stock, then in lieu of payment of the Optional
Redemption Price by reason of any such Optional Redemption Event and commencing
on the first date on which such Optional Redemption Event occurs the following
adjustments shall take effect:
(A) In the case of an Optional Redemption Event
described in clause (1) of the definition of the term Optional Redemption Event,
for a period of 180 days after the occurrence of such Optional Redemption Event
(i) the Series D Conversion Price will be 80% of the amount which the Series D
Conversion Price would otherwise be and (ii) the cumulative dividend shall
accrue on each share of the Series D Preferred Stock at the rate of $180 per
annum.
(B) In the case of an Optional Redemption Event
described in clause (2) of the definition of the term Optional Redemption Event,
for so long as such Optional Redemption Event continues (i) the Series D
Conversion Price will be 80% of the amount which the Series D Conversion
Price would otherwise be and (ii) the cumulative dividend shall accrue on
each share of Series D Preferred Stock at the rate of $180 per annum.
20
(C) In the case of an Optional Redemption Event
described in clause (3) of the definition of the term Optional Redemption Event,
for so long as any shares of Preferred Stock are outstanding (i) the Series D
Conversion Price will be 70% of the amount which the Series D Conversion Price
would otherwise be and (ii) the cumulative dividend shall accrue on each
share of Series D Preferred Stock at the rate of $300 per annum.
For purposes of this Section 7(c)(ii)(b)(iv), an Optional Redemption
Event described in clause (1), (2) or (3) of the definition of the term Optional
Redemption Event shall be deemed to have occurred by reason of events which are
not solely within the control of the Corporation if a requirement of the
Corporation to redeem, or a right of any holder of shares of Series D Preferred
Stock to require redemption of, shares of Series D Preferred Stock by reason
thereof would result in the Corporation being required to classify the Series D
Preferred Stock as redeemable preferred stock on a balance sheet of the
Corporation prepared in accordance with Generally Accepted Accounting
Principles, and, in the case of an Optional Redemption Event described in clause
(3) of the definition of the term Optional Redemption Event, the Board or the
stockholders of the Corporation do not have the right to approve or disapprove
the transactions resulting in such event.
(d) Other.
(1) If the Corporation fails to pay in full when due
the Optional Redemption Price for the number of shares of Series D Preferred
Stock specified in a Holder Notice, then the amount thereof shall bear interest
to the extent not prohibited by applicable law at the rate of 12% per annum
from the due date thereof until paid in full.
(2) In connection with a redemption pursuant to
these Sections 7(c)(ii) of less than all of the shares of Series D
Preferred Stock evidenced by a particular certificate, promptly, but in no event
later than three Business Days after surrender of such certificate to the
Corporation, the Corporation shall issue and deliver to such holder a
replacement certificate for the shares of Series D Preferred Stock evidenced by
such certificate which have not been redeemed.
(3) A Holder Notice given by a holder of shares of
Series D Preferred Stock shall be deemed for all purposes to be in proper form
unless the Corporation notifies such holder in writing within three Business
Days after such Holder Notice has been given (which notice shall specify all
defects in the Holder Notice), and any Holder Notice containing any such defect
shall nonetheless be effective on the date given if such holder promptly
undertakes in writing to correct all such defects. Notwithstanding the absence
of any such undertaking from such holder, no such claim of error shall limit or
delay performance of the Corporation's obligation to redeem all shares of Series
D Preferred Stock not in dispute.
21
8. Conversion.
a. Series A Preferred Stock. The holders of Series A Preferred
Stock have conversion rights as follows:
(i) Right to Convert. Each share of Series A Preferred
Stock shall be convertible into one share of Common Stock, as adjusted for
any stock dividends, combinations or splits with respect to such shares,
provided, however, that the minimum number of shares which may be converted at
anyone time shall be 75,000 shares or such lesser number of shares as shall be
then outstanding.
(ii) Automatic Conversion. Each share of Series A Preferred
Stock shall automatically be converted into Common Stock, upon the earlier to
occur of:
(A) immediately in the event that at any time prior
to July 23, 1999, the closing sale price (the "Closing Sale Price") of the
Corporation's Common Stock (as listed on the Nasdaq National Market) has for
a period of sixty (60) consecutive trading days exceeded the Original Issue
Price, which event shall be disclosed to each holder of the Series A
Preferred Stock by written notification from the Corporation, in which
event each share of Series A Preferred Stock shall automatically be
converted into one share of Common Stock, as appropriately adjusted for any
stock dividends, combinations or splits with respect to such shares of Common
Stock; or
(B) July 23, 1999, in which event each share of Series
A Preferred Stock shall automatically be converted into such number of shares
of Common Stock as equals the Original Issue Price divided by the
weighted-average Closing Sale Price for the sixty (60) consecutive trading days
ending two days prior to July 23, 1999, but in no event more than the Original
Issue Price divided by $6.00, in each case as appropriately adjusted for any
stock dividends, combinations or splits with respect to such shares of Common
Stock.
22
(iii) Mechanics of Conversion. Before any holder of Series
A Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this Corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice by mail, postage
prepaid, or by facsimile, confirmed by mail, to this Corporation at its
principal corporate office, of the election to convert the same and shall state
therein the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. This Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of the Series A
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
Series A Preferred Stock to be converted, or in the case of automatic conversion
pursuant to Section 8(a)(ii), ten (10) days following written notification as
provided in Section 8(a)(ii), and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock as of
such date.
(iv) Adjustments to Conversion Ratio for Stock Dividends
and for Combinations or Subdivisions of Common Stock. In the event that this
Corporation at any time or from time to time after the purchase date of the
Series A Preferred shall declare or pay, without consideration, any dividend on
the Common Stock payable in Common Stock or in any right to acquire Common
Stock for no consideration, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise than by payment of a
dividend in Common Stock or in any right to acquire Common Stock), or in the
event the outstanding shares of Common Stock shall be combined or consolidated,
by reclassification or otherwise, into a lesser number of shares of Common
Stock, then the number of shares of Common Stock into which the Series A
Preferred Stock can be converted shall be proportionately decreased or
increased, as appropriate. In the event that this Corporation shall declare or
pay, without consideration, any dividend on the Common Stock payable in any
right to acquire Common Stock for no consideration then the Corporation shall be
deemed to have made a dividend payable in Common Stock in an amount of shares
equal to the maximum number of shares issuable upon exercise of such rights to
acquire Common Stock.
(v) Adjustments for Reclassification and Reorganization.
If the Common Stock issuable upon conversion of the Series A Preferred Stock
shall be changed into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification
or otherwise (other than a subdivision or combination of shares provided for in
Section 8(a)(iv) above or a merger or other reorganization referred to in
Section 5(f) above), the number of shares of such other class or classes of
stock into which the Series A Preferred Stock shall be convertible shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series A Preferred
Stock shall be convertible into, in lieu of the number of shares of Common Stock
which the holders would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock equivalent to the number of
shares of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series A Preferred Stock immediately before that change.
23
(vi) No Impairment. This Corporation will not,
by amendment of its Certificate or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 8(a)(iv) and in the taking of
all such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock against
impairment.
(vii) No Fractional Shares and Certificate as to
Adjustments.
(a) No fractional shares shall be issued upon
conversion of the Series A Preferred Stock, and the number of shares of
Common Stock to be issued shall be rounded to the nearest whole share. Whether
or not fractional shares are issuable upon such conversion shall be determined
on the basis of the total number of Series A Preferred Stock the holder is at
the time converting into Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
(b) Upon the occurrence of each adjustment or
readjustment of the number of shares of Common Stock into which the Series A
Preferred Stock can be converted pursuant to this Section 8(a)(iv), this
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. This 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 (A) such adjustment and
readjustment, (B) the conversion ratio at the time in effect, and (C) the number
of shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of the Series A Preferred Stock.
(viii) Notices of Record Date. In the event of any
taking by this Corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to
receive any dividend (other than a cash dividend) or other distribution,
any right to subscribe for, purchase or otherwise acquire any shares of stock
of any class or any other securities or property, or to receive any other right,
this Corporation shall mail to each holder of Series A Preferred Stock, at
least twenty (20) days prior to the date specified therein, a notice specifying
the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right.
(ix) Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the Series A Preferred Stock such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all the then outstanding Series A Preferred Stock,
in addition to such other remedies as shall be available to the holder of such
Series A Preferred Stock, this Corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes.
24
(x) Notices. Any notice required by the
provisions of this Section 8(a)(iv) to be given to the holders of Series A
Preferred Stock shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at his address appearing
on the books of this Corporation.
b. Series C Preferred Stock. The holders of
Series C Preferred Stock have conversion rights as follows:
(i) Conversion at the Option of the Holder.
At any time at the option of the holder, Commencing twelve (12) months after the
Issuance Date, the holders of the Series C Preferred Stock may convert at any
time all or from time to time any part of their outstanding shares of Series C
Preferred Stock into that number of fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) as equals the greater of (A) 16.6667 shares of Common Stock or (B) such
number of shares of Common Stock as equals $100.00 divided by the Series C
Conversion Price on the applicable Series C Conversion Date.
(ii) Mandatory Conversion. Each share of
Series C Preferred Stock shall automatically convert, on the fourth anniversary
of the Issuance Date, into that number of fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) as equals the greater of (A) 16.6667 shares of Common Stock or (B) such
number of shares of Common Stock as equals $100.00 divided by the Series C
Conversion Price on the applicable Series C Conversion Date.
(iii) Mechanics of Conversion. Before any holder of
Series C Preferred Stock shall be entitled to convert the same into shares
of Common Stock, he shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Transfer Agent, and shall give written
notice by mail, postage prepaid, or by facsimile, confirmed by mail, to the
Transfer Agent at its principal corporate office, of the election to convert the
same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. This Corporation
shall, as soon as practicable thereafter, issue and deliver or cause to be
issued and delivered to such holder of the Series C Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the applicable Conversion Date, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date; provided, however, that a holder of Series C
Preferred Stock shall not be entitled to receive the shares of Common Stock
issuable upon any such conversion of shares of Series C Preferred Stock until
such holder surrenders to the Corporation or the Transfer Agent the certificate
for the shares of Series C Preferred Stock so converted.
25
(iv) Adjustments to Conversion Ratio for Stock
Dividends and for Combinations or Subdivisions of Common Stock. In the
event that this Corporation at any time or from time to time after the purchase
date of the Series C Preferred shall declare or pay, without consideration, any
dividend on the Common Stock payable in Common Stock or in any right to acquire
Common Stock for no consideration, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise than by payment of a
dividend in Common Stock or in any right to acquire Common Stock), or in the
event the outstanding shares of Common Stock shall be combined or consolidated,
by reclassification or otherwise, into a lesser number of shares of Common
Stock, then the number of shares of Common Stock into which the Series C
Preferred Stock can or shall be converted, to the extent such number is
determined under either Section 8(b)(i)(A) or 8(b)(ii)(A), shall be
proportionately decreased or increased, as appropriate. In the event that this
Corporation shall declare or pay, without consideration, any dividend on the
Common Stock payable in any right to acquire Common Stock for no consideration
then the Corporation shall be deemed to have made a dividend payable in Common
Stock in an amount of shares equal to the maximum number of shares issuable upon
exercise of such rights to acquire Common Stock.
(v) Adjustments for Reclassification and Reorganization.
If the Common Stock issuable upon conversion of the Series C Preferred
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for in Section 8(b)(ii) above or a merger or other reorganization
referred to in Section 4(f) above), the number of shares of such other class or
classes of stock into which the Series C Preferred Stock shall be convertible
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series C Preferred
Stock shall be convertible into, in lieu of the number of shares of Common Stock
which the holders would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock equivalent to the number of
shares of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series C Preferred Stock immediately before that change.
(vi) No Impairment. This Corporation will not, by amendment
of its Certificate or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 8(b) and in the taking of all such action as
may be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series C Preferred Stock against impairment.
(vii) No Fractional Shares and Certificate as to
Adjustments.
(A) No fractional shares shall be issued upon
conversion of the Series C Preferred Stock, but, in lieu of any fraction of
a share of Common Stock which would otherwise be issuable in respect of the
aggregate number of shares of Series C Preferred Stock surrendered for
conversion at one time by the same holder, the Corporation shall pay in cash to
26
such holder at the time of issuance of shares of Common Stock in connection with
such conversion an amount equal to the product of (i) an amount equal to the
average closing price of a share of Common Stock for the 10 Trading Day period
ending three Trading Days prior to the Conversion Date times (ii) such fraction
of a share of Common Stock. Whether or not fractional shares are issuable upon
such conversion shall be determined on the basis of the total number of Series C
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(B) Upon the occurrence of each
adjustment or readjustment of the number of shares of Common Stock into which
the Series C Preferred Stock can be converted pursuant to this Section 8(b),
this Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and, upon the written request
at any time of any holder of Series C Preferred Stock, prepare and furnish to
such holder of Series C Preferred Stock a certificate setting forth (A) such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based, (B) the conversion ratio at the time in
effect, and (C) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of the
Series C Preferred Stock.
(viii) Notices of Record Date. In the event of any taking
by this Corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to receive
any dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
Corporation shall mail to each holder of Series C Preferred Stock, at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(ix) Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of (i)
effecting the conversion of the Series C Preferred Stock and (ii) of effecting
the issuance of any shares of Common Stock issuable upon any stock-for-stock
dividend declared on the Series C Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to (a) effect the
conversion of all outstanding shares of the Series C Preferred Stock and (b) to
effect the issuance of any shares of Common Stock issuable upon any
stock-for-stock dividend declared on the Series C Preferred Stock; and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to (x) effect the conversion of all the then outstanding Series C
Preferred Stock or (y) effect the issuance of any shares of Common Stock
issuable upon any stock-for-stock dividend declared on the Series C Preferred
Stock, then, in addition to such other remedies as shall be available to the
holder of such Series C Preferred Stock, this Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
27
(x) Notices. Any notice required by the provisions of this
Section 8(b)to be given to the holders of Series C Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of this
Corporation.
c. Series D Preferred Stock. The holders of Series D Preferred
Stock shall have conversion rights as follows:
(i) Conversion at the Option of the Holder.
(a) Conversion Right. The holders of the Series D
Preferred Stock may convert at any time all or from time to time any part of
their outstanding shares of Series D Preferred Stock into fully paid and
nonassessable shares of Common Stock and such other securities and property as
hereinafter provided. Commencing on the Issuance Date, and at any time
thereafter, each share of Series D Preferred Stock may be converted at the
office of the Corporation or at such additional office or offices, if any, as
the Board of Directors may designate, into such number of fully paid and
nonassessable shares of Common Stock (calculated as to each conversion to the
nearest 1/100th of a share) determined by dividing (x) the sum of (i) $1,000
plus (ii) an amount equal to the accrued but unpaid dividends on the share of
Series D Preferred Stock being converted and any Arrearage Interest on dividends
thereon in arrears to the applicable Series D Conversion Date by (y) the Series
D Conversion Price on the applicable Series D Conversion Date; provided,
however, that in no event shall any holder of shares of Series D Preferred Stock
be entitled to convert any shares of Series D Preferred Stock in excess of that
number of shares of Series D Preferred Stock upon conversion of which the sum of
(1) the number of shares of Common Stock beneficially owned by such holder
(including shares of Common Stock beneficially owned by all Aggregated Persons
of such holder) (other than shares of Common Stock deemed beneficially owned by
such holder or any Aggregated Person of such holder through the ownership of (x)
unconverted shares of Series D Preferred Stock and (y) the unconverted or
unexercised portion of any instrument which contains limitations similar to
those set forth in this sentence) and (2) the number of shares of Common Stock
issuable upon the conversion of the number of shares of Series D Preferred Stock
with respect to which the determination in this proviso is being made, would
result in beneficial ownership by such holder and all Aggregated Persons of such
holder of more than 4.9% of the outstanding shares of Common Stock.
(b) Certain Limitations on Conversion Rights.
Notwithstanding any other provision of this Amended and Restated
Certificate of Incorporation, in no event shall any holder of shares of Series D
Preferred Stock be entitled on any date to convert a number of shares of Series
D Preferred Stock in excess of that number of shares of Series D Preferred Stock
upon conversion of which such holder and any Aggregated Person of such holder
would have acquired, through conversion of shares of Series D Preferred Stock or
otherwise, a number of shares of Common Stock in excess of the Converted
Restriction Amount during the 30-day period ending on and including the date of
the determination being made pursuant to this Section 8(c)(i)(b) (other than
shares of Common Stock deemed beneficially owned by such holder or any
Aggregated Person of such holder through the ownership of (x) unconverted shares
of Series D Preferred Stock and (y) the unconverted or unexercised portion of
any instrument which contains limitations similar to those set forth in this
sentence).
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(c) Beneficial Ownership. For purposes of the
proviso to the second sentence of Section 8(c)(i)(b)and for purposes of Section
8(c)(i)(b), (x) beneficial ownership shall be determined in accordance with
Section 13(d) of the 1934 Act and Regulation 13D-G thereunder, except as
otherwise provided in clause (1) of the proviso to the second sentence of
Section 8(c)(i)(b) or as provided in Section 8(c)(i)(b) and (y) the Corporation
shall be entitled to rely, and shall be fully protected in relying, on any
statement or representation made by a holder of shares of Series D Preferred
Stock to the Corporation in connection with a particular conversion, without any
obligation on the part of the Corporation to make any inquiry or investigation
or to examine its records or the records of any transfer agent for the Common
Stock and without any liability of the Corporation with respect thereto.
(ii) Other Provisions.
(a) The holders of shares of Series D Preferred
Stock at the close of business on the record date for any dividend payment to
holders of Series D Preferred Stock shall be entitled to receive the dividend
payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after the record date for such dividend
payment date or the Corporation's default in payment of the dividend due on such
dividend payment date; provided, however, that the holder of shares of Series D
Preferred Stock converted during the period between the close of business on any
record date for a dividend payment and the opening of business on the
corresponding dividend payment date must pay to the Corporation, within five
days after receipt by such holder, an amount equal to the dividend payable on
such shares on such dividend payment date if such dividend is paid by the
Corporation to such holder. A holder of shares of Series D Preferred Stock on a
record date for a dividend payment who (or whose transferee) converts any of
such shares into shares of Common Stock on or after such dividend payment date
will receive the dividend payable by the Corporation on such shares of Series D
Preferred Stock on such dividend payment date, and the converting holder need
not make any payment of the amount of such dividend in connection with such
conversion of shares of Series D Preferred Stock. Except as provided above, no
adjustment shall be made in respect of cash dividends on Common Stock or Series
D Preferred Stock that may be accrued and unpaid at the date of conversion of
shares of Series D Preferred Stock.
(b) The right of the holders of Series D Preferred
Stock to convert their shares shall be exercised by delivering(which may be made
by telephone line facsimile transmission, which shall be conclusively deemed for
all purposes of this Amended and Restated Certificate of Incorporation to have
been given on the date sent if the sender shall have received electronic
confirmation of the receipt by the Series D Conversion Agent of such facsimile
transmission) to the Series D Conversion Agent a Series D Conversion Notice at
the address or telephone line facsimile number provided in the form of Series D
Conversion Notice set forth in Section 14(a) (or such other address or facsimile
number of the Series D Conversion Agent as shall be provided by the Corporation
by notice to the holders of the shares of Series D Preferred Stock), with a copy
to the Corporation at its address or telephone line facsimile number provided in
or pursuant to Section 12; provided, however, that any failure or delay in
giving a copy of a Series D Conversion Notice to the Corporation shall not
affect the validity of or Series D Conversion Date for such Series D Conversion
Notice. The number of shares of Common Stock to be issued upon each conversion
of shares of Series D Preferred Stock shall be the number set forth in the
applicable Series D Conversion Notice, which number shall be conclusive absent
29
manifest error. The Corporation shall notify a holder who has given a Series D
Conversion Notice of any claim of manifest error within three Trading Days after
such holder gives such Series D Conversion Notice, and no such claim of error
shall limit or delay performance of the Corporation's obligation to issue upon
such conversion the number of shares of Common Stock which are not in dispute. A
Series D Conversion Notice shall be deemed for all purposes to be in proper form
unless the Corporation notifies a holder of shares of Series D Preferred Stock
being converted within three Trading Days after a Series D Conversion Notice has
been given (which notice shall specify all defects in such Series D Conversion
Notice), and any Series D Conversion Notice containing any such defect shall
nonetheless be effective on the date given if the converting holder agrees to
correct all such defects promptly.
(c) If a holder of Series D Preferred Stock elects
to convert any shares of Series D Preferred Stock in accordance with Section
8(c)(i), such holder shall not be required to surrender the certificate(s)
representing such shares of Series D Preferred Stock physically to the
Corporation unless all of the shares of Series D Preferred Stock represented
thereby are so converted. Each holder of shares of Series D Preferred Stock and
the Corporation shall maintain records showing the number of shares so converted
and the dates of such conversions or shall use such other method, satisfactory
to such holder and the Corporation, so as to not require physical surrender of
such certificates upon each such conversion. In the event of any dispute or
discrepancy, such records of the Corporation shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if any shares of Series D Preferred Stock evidenced by a particular certificate
therefor are converted as aforesaid, the holder of Series D Preferred Stock may
not transfer the certificate(s) representing such shares of Series D Preferred
Stock unless such holder first physically surrenders such certificate(s) to the
Corporation, whereupon the Corporation will forthwith issue and deliver upon the
order of such holder of shares of Series D Preferred Stock new certificate(s) of
like tenor, registered as such holder of shares of Series D Preferred Stock
(upon payment by such holder of shares of Series D Preferred Stock of any
applicable transfer taxes) may request, representing in the aggregate the
remaining number of shares of Series D Preferred Stock represented by such
certificate(s). Each holder of shares of Series D Preferred Stock, by acceptance
of a certificate for such shares, acknowledges and agrees that (1) by reason of
the provisions of this paragraph, following conversion of any shares of Series D
Preferred Stock represented by such certificate, the number of shares of Series
D Preferred Stock represented by such certificate may be less than the number of
shares stated on such certificate and (2) the Corporation may place one or more
legends on the certificates for shares of Series D Preferred Stock which refers
to or describes the provisions of this paragraph. The Corporation may by notice
to any holder of shares of Series D Preferred Stock require such holder to
surrender the certificate(s) for such holder's shares of Series D Preferred
Stock in exchange for issuance by the Corporation of one or more new
certificates for the number of shares evidenced by the certificate(s) so
surrendered.
(d) The Corporation shall pay any transfer tax
arising in connection with any conversion of shares of Series D Preferred stock
except that the Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery
upon conversion of shares of Common Stock or other securities or property in a
name other than that of the holder of the shares of the Series D Preferred Stock
being converted, and the Corporation shall not be required to issue or deliver
any such shares or other securities or property unless and until the Person or
30
Persons requesting the issuance thereof shall have paid to the Corporation the
amount of any such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid. A holder of shares of Series D
Preferred Stock who converts such shares shall be responsible for the amount of
any withholding tax payable in connection with such conversion.
(e) (1) The Corporation shall duly reserve and at
all times prior to the Stockholder Approval will continue to reserve 6,285,000
shares of its authorized and unissued Common Stock, free from preemptive rights,
for issuance upon conversion of the shares of Series D Preferred Stock (subject
to reduction from time to time for shares of Common Stock issued upon conversion
of shares of Series D Preferred Stock). From and after the date of the
Stockholder Approval, the Corporation will duly reserve, free from preemptive
rights, for issuance upon conversion of the shares of Series D Preferred Stock a
number of shares of its authorized and issued Common Stock equal to 175% of the
number of shares of Common Stock which would be issuable on conversion of all
authorized shares of Series D Preferred Stock on the Issuance Date if all of
such shares of Series D Preferred Stock were outstanding on such date
(determined without regard to the limitations on conversion continued in Section
8(c)(i), subject to reduction from time to time for shares of Common Stock
issued upon conversion of shares of Series D Preferred Stock. The Corporation
(and any successor corporation) shall take all action necessary so that a number
of shares of the authorized but unissued Common Stock (or common stock in the
case of any successor corporation) equal to the number of shares of Common Stock
(or such common stock) issuable upon conversion of the Series D Preferred Stock
outstanding, determined without regard to any limitation on beneficial ownership
contained in Section 8(c)(i), are at all times reserved by the Corporation (or
any successor corporation), free from preemptive rights, for such conversion,
subject to the provisions of the next succeeding paragraph. 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 D Preferred Stock shall be convertible as herein provided, 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
D Preferred Stock on the new basis. If at any time the number of authorized but
unissued shares of Common Stock shall be insufficient to permit the Corporation
to reserve such number of shares of Common Stock, the Corporation promptly shall
seek such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient to meet such requirement.
(2) The Initial Reserve Amount
shall be allocated among the shares of Series D Preferred Stock at the time of
initial issuance thereof pro rata based on the total number of authorized shares
of Series D Preferred Stock provided in Article IV(B). Each certificate for
shares of Series D Preferred Stock initially issued shall bear a notation as to
the number of shares constituting the portion of the Initial Reserve Amount
allocated to the shares of Series D Preferred Stock represented by such
certificate for purposes of conversion thereof. Upon surrender of any
certificate for shares of Series D Preferred Stock for transfer or
re-registration thereof (or, at the option of the holder of such certificate,
for conversion pursuant to Section 8(c)(i) of less than all of the shares of
Series D Preferred Stock represented thereby), the Corporation shall make a
notation on the new certificate issued upon such transfer or re-registration or
evidencing such unconverted shares, as the case may be, as to the number of
31
shares of Common Stock from the Initial Reserve Amount remaining available for
conversion of the shares of Series D Preferred Stock evidenced by such new
certificate. If any certificate for shares of Series D Preferred Stock is
surrendered for division into two or more certificates representing an aggregate
number of shares of Series D Preferred Stock equal to the number of shares of
Series D Preferred Stock represented by the certificate so surrendered (as
reduced by any contemporaneous conversion of shares of Series D Preferred Stock
represented by the certificate so surrendered), each certificate issued on such
division shall bear a notation of the portion of the Initial Reserve Amount
allocated thereto determined by pro rata allocation of the remaining portion of
the Initial Reserve Amount allocated to the certificate so surrendered. If any
shares of Series D Preferred Stock represented by a single certificate are
converted in full pursuant to Sections 8(c), all of the portion of the Initial
Reserve Amount allocated to such shares of Series D Preferred Stock which
remains unissued after such conversion shall be re-allocated pro rata to the
outstanding shares of Series D Preferred Stock held of record by the holder of
record at the close of business on the date of such conversion of the shares of
Series D Preferred Stock so converted, and if there shall be no other shares of
Series D Preferred Stock held of record by such holder at the close of business
on such date, then such portion of the Initial Reserve Amount shall be allocated
pro rata among the shares of Series D Preferred Stock outstanding at the close
of business on such date. The provisions of this Section 8(c)(ii)(E) shall be
inapplicable after the Stockholder Approval is obtained. If shares of Series D
Preferred Stock are not issued to MMC/GATX in accordance with this Article
IV(B), the shares from the Initial Reserve Amount which were available for
allocation to such shares of Series D Preferred Stock shall be allocated to the
issued shares of Series D Preferred Stock pro rata based on the amounts thereof
initially issued.
(f) (1) In case of any consolidation or merger of
the Corporation with any other corporation (other than a wholly-owned
subsidiary of the Corporation) in which the Corporation is not the surviving
corporation, or in case of any sale or transfer of all or substantially all of
the assets of the Corporation, or in the case of any share exchange pursuant to
which all of the outstanding shares of Common Stock are converted into other
securities or property, the Corporation shall make appropriate provision or
cause appropriate provision to be made so that each holder of shares of Series D
Preferred Stock then outstanding shall have the right thereafter to convert such
shares of Series D Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series D Preferred Stock could have been converted immediately
prior to the effective date of such consolidation, merger, sale, transfer, or
share exchange and on a basis which preserves the economic benefits of the
conversion rights of the holders of shares of Series D Preferred Stock on a
basis as nearly as practical as such rights exist hereunder prior thereto. If,
in connection with any such consolidation, merger, sale, transfer, or share
exchange, each holder of shares of Common Stock is entitled to elect to receive
securities, cash, or other assets upon completion of such transaction, the
Corporation shall provide or cause to be provided to each holder of Series D
Preferred Stock the right to elect prior to the completion of such transaction
the securities, cash, or other assets into which the Series D Preferred Stock
held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions applicable to
holders of the Common Stock (including, without limitation, notice of the right
to elect, limitations on the period in which such election shall be made, and
the effect of failing to exercise the election). Notwithstanding the forgoing,
32
in connection with any such merger, consolidation, sale, transfer or exchange,
the Corporation shall have the right, in lieu of making provision for
preservation of economic benefits of the conversion rights of the holders of
shares of Series D Preferred Stock, to redeem all outstanding shares of Series D
Preferred Stock immediately after completion of such transaction at a redemption
price per share of Series D Preferred Stock in cash equal to the Business
Combination Redemption Price. Such right of redemption shall be exercised by
notice from the Corporation to the holders of shares of Series D Preferred Stock
stating that the Corporation is exercising its redemption right under this
Section 8(c)(ii)(f), which notice shall be given at least 20 days and not more
than 30 days prior to completion of such transaction and shall specify that such
redemption shall occur on the Business Day immediately following the date of
completion of such transaction. On the date specified in such notice (or such
later date as a holder of shares of Series D Preferred Stock surrenders such
holder's certificates for shares of Series D Preferred Stock redeemed) the
Corporation shall make payment in immediately available funds of the applicable
Business Combination Redemption Price to each holder of shares of Series D
Preferred Stock to be redeemed to such account as specified by such holder in
writing to the Corporation at least one Business Day prior to such payment of
the Business Combination Redemption Price. A holder of shares of Series D
Preferred Stock which are redeemed pursuant to this Section 8(c)(ii)(f) shall
not be entitled to payment of the Business Combination Redemption Price of such
shares of Series D Preferred Stock until such holder shall have surrendered the
certificate(s) for such shares of Series D Preferred Stock to the Corporation
or, in the case of the loss, theft or destruction of any such certificate, given
indemnity in accordance with Section 14. If the Corporation shall fail to pay
the Business Combination Redemption Price of any shares of Series D Preferred
Stock in full when due, then the amount thereof shall bear interest to the
extent not prohibited by applicable law at the rate of 12% per annum from the
due date thereof until paid in full. Notwithstanding the giving of a notice of
redemption pursuant to this Section 8(c)(ii)(f), each holder of shares of Series
D Preferred Stock shall be entitled to convert in accordance with this Section
8(c)(ii)(f) any shares of Series D Preferred Stock which are to be redeemed at
any time prior to (1) the redemption date specified in the notice of redemption
or (2) if the Corporation fails to pay the Business Combination Redemption Price
in full to such holder when due, the date on which the Corporation pays the
Business Combination Redemption Price in full to such holder for all shares of
Series D Preferred Stock to be redeemed from such holder. The Corporation shall
not effect any such transaction unless it shall have complied with the
provisions of this paragraph. The above provisions shall similarly apply to
successive consolidations, mergers, sales, transfers, or share exchanges.
(2) Whenever the Corporation shall
propose to take any of the actions specified in this Section 8(c)(ii)(f)(2), the
Corporation shall cause a notice to be mailed, at least 20 days prior to the
date on which the books of the Corporation will close or on which the security
holders entitled to participate in such transaction will be determined, to the
holders of record of the outstanding Series D Preferred Stock on the date of
such notice. Such notice shall specify the action proposed to be taken by the
Corporation and the date as of which holders of record of the Common Stock shall
participate in any such actions or be entitled to exchange their Common Stock
for securities or other property, as the case may be.
(g) Upon receipt by the Series D Conversion
Agent from a holder of shares of Series D Preferred Stock of a Series D
Conversion Notice, the Corporation shall issue and deliver or cause to be issued
and delivered to or upon the order of such holder certificates for the Common
33
Stock issuable upon such conversion by the close of business on the third
Trading Day after such Series D Conversion Notice is received, and as of the
close of business on the date of such receipt such holder (or such holder's
assignee) shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, and all rights with respect to the shares of
Series D Preferred Stock so converted shall forthwith terminate except the right
to receive the Common Stock or other securities, cash, or other assets, as
herein provided, on such conversion. If a holder of Series D Preferred Stock
shall have given a Series D Conversion Notice in accordance with the terms of
this Amended and Restated Certificate of Incorporation, the Corporation's
obligation to issue and deliver the certificates for Common Stock issuable upon
such conversion shall be absolute and unconditional, irrespective of any action
or inaction by the converting holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment against any
Person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Corporation to the holder of record,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the holder or any other Person of any obligation to
the Corporation, or any violation or alleged violation of law by such holder or
any other Person, and irrespective of any other circumstance which might
otherwise limit such obligation of the Corporation to such holder in connection
with such conversion; provided, however, that nothing herein shall limit or
prejudice the right of the Corporation to pursue any such claim in any other
manner permitted by applicable law.
The occurrence of an event which requires an equitable adjustment of
the Trading Price as contemplated by the definition thereof in Section 1 shall
in no way restrict or delay the right of any holder of shares of Series D
Preferred Stock to receive shares of Common Stock upon conversion of shares of
Series D Preferred Stock, and the Corporation shall use its best efforts to
implement each such adjustment on terms reasonably acceptable to the Majority
Holders within two Trading Days after such occurrence.
If the Corporation fails to issue and deliver the certificates for
the Common Stock to the holder converting shares of Series D Preferred Stock as
and when required to do so, in addition to any other liabilities the Corporation
may have hereunder and under applicable law (1) the Corporation shall pay or
reimburse such holder on demand for all out-of-pocket expenses, including,
without limitation, reasonable fees and expenses of legal counsel, incurred by
such holder as a result of such failure, (2) the Series D Conversion Price
applicable to such conversion shall be reduced by one-tenth of a percentage
point from the Series D Conversion Price otherwise applicable to such conversion
for each Trading Day during the period from the date the Corporation was
required to deliver such shares of Common Stock to the date the Corporation so
delivers such shares of Common Stock; provided, however, that in no event shall
any such reduction be made for any Trading Day in such period which is after the
date which is 120 days after the date the Corporation was required to deliver
such shares of Common Stock in connection with such conversion, and (3) such
holder may by written notice or oral notice (promptly confirmed in writing)
given at any time prior to delivery to such holder of the certificates for the
shares of Common Stock issuable upon such conversion of shares of Series D
Preferred Stock, rescind such conversion, whereupon such holder shall have the
right to convert such shares of Series D Preferred Stock thereafter in
accordance herewith; provided, however, that the Corporation shall not be liable
to any holder of shares of Series D Preferred Stock under the preceding clause
(1) or clause (2) to the extent the failure of the Corporation to deliver or to
cause to be delivered such shares of Common Stock results from fire, flood,
storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving
facilities of a common carrier, acts of God, or any similar event outside the
control of the Corporation (it being understood that the action or failure to
act of the Series D Conversion Agent shall not be deemed an event outside the
control of the Corporation except to the extent resulting from fire, flood,
34
storm, earthquake, shipwreck, strike, war, acts of terrorism, crash involving
facilities of a common carrier, acts of God, the bankruptcy, liquidation or
reorganization of the Series D Conversion Agent under any bankruptcy, insolvency
or other similar law or any similar event outside the control of the Series D
Conversion Agent). A holder of shares of Series D Preferred Stock who has given
a Series D Conversion Notice shall notify the Corporation in writing (or by
telephone conversation, confirmed in writing) as promptly as practicable after
becoming aware that shares of Common Stock issued upon such conversion have not
been received as provided in this Section 8(c)(vii).
(h) No fractional shares. No fractional shares of
Common Stock shall be issued upon conversion of Series D Preferred Stock but, in
lieu of any fraction of a share of Common Stock and the related right which
would otherwise be issuable in respect of the aggregate number of shares of
Series D Preferred Stock surrendered for conversion at one time by the same
holder, the Corporation shall pay in cash to such holder at the time of issuance
of shares of Common Stock in connection with such conversion an amount equal to
the product of (A) the arithmetic average of the Market Price of a share of
Common Stock on the three consecutive Trading Days ending on the Trading Day
immediately preceding the Series D Conversion Date times (B) such fraction of a
share of Common Stock
9. Voting Rights.
Except as otherwise required by law or expressly provided herein,
each share of Series A Preferred Stock and Series C Preferred Stock shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock (except as otherwise expressly provided herein or as required by law,
voting together with the Common Stock as a single class) and shall be entitled
to notice of any stockholders' meeting in accordance with the Bylaws of the
Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Series A Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock held by each holder could be converted) shall be
rounded to the nearest whole number (with one-half being rounded upward).
Each holder of shares of Series A Preferred Stock shall be entitled
to the number of votes equal to the number of shares of Common Stock into which
such shares of Series A Preferred Stock could then be converted. Each holder of
shares of Series C Preferred Stock shall be entitled (i) during the first year
after the issuance thereof to six votes for each one share held and (ii)
thereafter, to one vote for each share of Common Stock into which such share of
Series C Preferred Stock is convertible on the record date for the matter to be
voted upon. Each holder of Common Stock shall be entitled to one vote for each
share of Common Stock held.
Except as otherwise required by law or expressly provided herein,
shares of Series D Preferred Stock shall not be entitled to vote on any matter.
35
a. Series D Voting Rights and Restrictions.
(1) Certificate of Incorporation; Certain Stock. The affir-
mative vote or written consent of the Majority Holders, voting separately as a
class, will be required for (i) any amendment, alteration, or repeal, whether by
merger or consolidation or otherwise, of the Corporation's Certificate of
Incorporation if the amendment, alteration, or repeal materially and adversely
affects the rights, preferences or privileges of the Series D Preferred Stock,
or (ii) the creation or issuance of any Senior Dividend Stock or Senior
Liquidation Stock; provided, however, that any increase in the authorized
Preferred Stock of the Corporation or the creation and issuance of any stock
which is both Junior Dividend and Junior Liquidation Stock shall not be deemed
to affect materially and adversely such rights, preferences or privileges and
any such increase or creation and issuance may be made without any such vote by
the holders of Series D Preferred Stock except as otherwise required by law; and
provided further, however, that no such amendment, alteration or repeal shall
(A) reduce the Optional Redemption Price, Redemption Price or the amount payable
to a holder of shares of Series D Preferred Stock pursuant to Section 3(c)(iii),
(B) reduce the percentage in, or otherwise change the definition of Majority
Holders, (C) change the method of calculating the Series D Conversion Price in a
manner adverse to the holders of shares of Series D Preferred Stock or reduce
the number of shares of Common Stock issuable upon any conversion of shares of
Series D Preferred Stock, or (D) amend, modify or repeal any provision of this
Section 9(a)(1), unless in each such case referred to in the preceding clauses
(A) through (D) such amendment, modification or repeal has been approved by the
affirmative vote or written consent of the holders of all outstanding shares of
Series D Preferred Stock, voting separately or as a class.
(2) Repurchases of Series D Preferred Stock. The
Corporation shall not repurchase or otherwise acquire any shares of Series
D Preferred Stock (other than pursuant to Section 7(c)(i) unless the Corporation
offers to repurchase or otherwise acquire simultaneously a pro rata portion of
each holder's shares of Series D Preferred Stock for cash at the same price per
share.
(3) Other. So long as any shares of Series D Preferred
Stock are outstanding:
(a) Limitation on Indebtedness. The Corporation will
not itself, and will not permit any subsidiary of the Corporation to, create,
assume, incur, in any manner become liable in respect of, including, without
limitation, by reason of any business combination transaction, or suffer to
exist (all of which are referred to herein as "incurring"), any Indebtedness
other than Permitted Indebtedness.
(b) Payment of Obligations. The Corporation will pay
and discharge, and will cause each subsidiary of the Corporation to pay and
discharge, all their respective material obligations and liabilities, including,
without limitation, tax liabilities, except where the same may be contested in
good faith by appropriate proceedings.
36
(c) Maintenance of Property; Insurance.
(i) The Corporation will keep, and will cause
each subsidiary of the Corporation to keep, all material property useful and
necessary in its business in good working order and condition, ordinary wear and
tear excepted
(ii) The Corporation will maintain, and will cause
each subsidiary of the Corporation to maintain, with financially sound and
responsible insurance companies, insurance in at least such amounts and against
such risks as are usually insured against in the same geographic region by
companies of comparable size that are engaged in the same or a similar business,
subject to customary deductibles.
(d) Conduct of Business and Maintenance of Existence.
The Corporation will continue, and will cause each subsidiary of the
Corporation to continue, to engage in business of the same general type as
conducted by the Corporation and such subsidiaries on December 9, 1998, the date
the Certificate of Designation for the Series D Preferred Stock was filed with
the Secretary of State of Delaware, and will preserve, renew and keep in full
force and effect, and will cause each subsidiary of the Corporation to preserve,
renew and keep in full force and effect, their respective corporate existence
and their respective material rights, privileges and franchises necessary or
desirable in the normal conduct of business.
(e) Compliance with Laws. The Corporation will comply,
and will cause each subsidiary of the Corporation to comply, in all material
respects with all applicable laws, ordinances, rules, regulations, decisions,
orders and requirements of governmental authorities and courts (including,
without limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected to have a material adverse effect on
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Corporation and its subsidiaries taken as a
whole.
(f) Investment Company Act. The Corporation will
not be or become an open-end investment trust, unit investment trust or
face-amount certificate company that is or is required to be registered under
Section 8 of the Investment Company Act of 1940, as amended, or any successor
provision.
(g) Transactions with Affiliates. The Corporation will
not, and will not permit any subsidiary of the Corporation to, directly or
indirectly, pay any funds to or for the account of, make any investment (whether
by acquisition of stock or Indebtedness, by loan, advance, transfer of property,
guarantee or other agreement to pay, purchase or service, directly or
indirectly, any Indebtedness, or otherwise) in, lease, sell, transfer or
otherwise dispose of any assets, tangible or intangible, to, or participate in,
or effect any transaction in connection with, any joint enterprise or other
joint arrangement with, any Affiliate of the Corporation, except, on terms to
the Corporation or such subsidiary no less favorable than terms that could be
obtained by the Corporation or such subsidiary from a Person that is not an
Affiliate of the Corporation, as determined in good faith by the Board of
Directors.
10. Status of Converted or Redeemed Stock. In the event any Series A
Preferred Stock or Series C Preferred Stock shall be converted pursuan to
37
Section 8(a) or 8(b), respectively, hereof, the shares so converted shall be
promptlycanceled after the conversion thereof. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock and may
bereissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth herein.
11. Outstanding Shares. For purposes of the Certificate of
Designation for the Series D Convertible Preferred Stock filed on December 9,
1998, all shares of Series D Preferred Stock shall be deemed outstanding
except (i) from the date a Series D Conversion Notice is given by a holder of
Series D Preferred Stock, all shares of Series D Preferred Stock converted into
Common Stock and (ii) from the date of registration of transfer, all shares of
Series D Preferred Stock held of record by the Corporation or any subsidiary or
Affiliate (as defined herein) of the Corporation (other than any original holder
of shares of Series D Preferred Stock) and (iii) from the applicable Redemption
Date, Optional Redemption Date or date of redemption pursuant to Section
8(c)(ii)(f), all shares of Series D Preferred Stock which are redeemed, so long
as in each case the Redemption Price, Optional Redemption Price or Business
Combination Redemption Price, as the case may be, of such shares of Series D
Preferred Stock shall have been paid by the Corporation as and when due
hereunder.
12. Notices. Any notices required or permitted to be given under the
terms of this Certificate of Incorporation shall be in writing and shall be
delivered personally (which shall include telephone line facsimile transmission)
or by courier, and shall be deemed given upon receipt, (a) in the case of the
Corporation, addressed to the Corporation at 213 East Grand Avenue, South San
Francisco, California 94080, Attention: President and Chief Executive Officer
(telephone line facsimile transmission number (650) 873-8367), or (b) in the
case of any holder of shares of Series D Preferred Stock, at such holder's
address or telephone line facsimile transmission number shown on the stock books
maintained by the Corporation with respect to the Series D Preferred Stock or
such other address as the Corporation shall have provided by notice to the
holders of shares of Series D Preferred Stock in accordance with this Section or
any holder of shares of Series D Preferred Stock shall have provided to the
Corporation in accordance with this Section.
13. Replacement of Certificates. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation o f any certificate for shares of
Series C Preferred Stock or Series D Preferred Stock and (1) in the case of
loss, theft or destruction, of indemnity from the record holder of the
certificate for such shares of Series C Preferred Stock or Series D Preferred
Stock reasonably satisfactory in form to the Corporation (and without the
requirement to post any bond or other security) or (2) in the case of
mutilation, upon surrender and cancellation of the certificate for such shares
of Series C Preferred Stock or Series D Preferred Stock, the Corporation will
execute and deliver to such holder a new certificate for such shares of Series C
Preferred Stock or Series D Preferred Stock without charge to such holder.
38
14. Forms of Notices.
a. Notice of Conversion of Series D Convertible Preferred Stock.
NOTICE OF CONVERSION
OF
SERIES D CONVERTIBLE PREFERRED STOCK
OF
SHAMAN PHARMACEUTICALS, INC.
TO: BankBoston, N.A.,
as Conversion Agent
150 Royall Street
Canton, Massachusetts 02021
Attention: Client Administration
Facsimile No.: (781) 575-2549
cc: Shaman Pharmaceuticals, Inc.
213 East Grand Avenue
South San Francisco, California 94080
Attention: Chief Financial Officer
Facsimile No.: (650) 873-8367
(1) Pursuant to the terms of the Series D Convertible Preferred Stock
(the "Preferred Stock"), of Shaman Pharmaceuticals, Inc., a Delaware corporation
(the "Corporation"), the undersigned (the "Holder") hereby elects to convert
_______________ shares of the Preferred Stock, including accrued and unpaid
dividends per share of $________ and Arrearage Interest per share of $________
into shares of Common Stock, $0.001 par value (the "Common Stock"), of the
Corporation, at a Series D Conversion Price per share of Common Stock of
$________ or such other securities into which the Preferred Stock is currently
convertible. Capitalized terms used in this Notice and not otherwise defined
herein have the respective meanings provided in the Amended and Restated
Certificate of Incorporation.
(2) The number of shares of Common Stock issuable upon the conversion
of the shares of Preferred Stock to which this Notice relates is
__________________________.
(3) Check (and complete, if applicable) one of the
following:
/__/ (A) Set forth below or on a schedule which accompanies this
Notice are the Trading Prices during the Measurement Period
applicable to this Notice and an indication of the Trading Price used
to determine the Series D Conversion Price set forth above.
39
Date Trading Price
1. __________________________ $____________________
2. __________________________ $____________________
3. __________________________ $____________________
4. __________________________ $____________________
5. __________________________ $____________________
6. __________________________ $____________________
7. __________________________ $____________________
8. __________________________ $____________________
9. __________________________ $____________________
10. __________________________ $____________________
11. __________________________ $____________________
12. __________________________ $____________________
/__/ (B) The conversion to which this Notice relates is based on the
fixed Series D Conversion Price specified in clause (a) of the
definition of such term in the Amended and Restated Certificate of
Incorporation.
(4) Please issue certificates for the number of shares of Common
Stock or other securities into which such number of shares of Preferred Stock is
convertible in the name(s) specified immediately below or, if additional space
is necessary, on an attachment hereto:
_________________________________ _________________________________
Name Name
_________________________________ _________________________________
Address Address
_________________________________ _________________________________
SS or Tax ID Number SS or Tax ID Number
40
(5) The undersigned hereby represents to the Corporation that the
exercise of conversion rights contained in this Notice does not violate the
provisions of Section 8(b) of this Amended and Restated Certificate of
Incorporation relating to beneficial ownership in excess of 4.9% of the Common
Stock.
(6) If the shares of Common Stock issuable upon conversion of the
Preferred Stock have not been registered for resale under the 1933 Act, as
amended (the "1933 Act") and are not being offered or sold pursuant to Rule 144
under the 1933 Act (or any successor or replacement rule or provision), the
Holder represents and warrants that (i) the shares of Common Stock not so
registered are being acquired for the account of the Holder for investment, and
not with a view to, or for resale in connection with, the public distribution
thereof other than pursuant to registration under the 1933 Act or an exemption
from registration under the 1933 Act, and that the Holder has no present
intention of distributing or reselling the shares of Common Stock not so
registered other than pursuant to registration under the 1933 Act or an
exemption from registration under the 1933 Act and (ii) the Holder is an
"accredited investor" as defined in Regulation D under the 1933 Act. The Holder
further agrees that (A) the shares of Common Stock not so registered shall not
be sold or transferred unless (i) they first shall have been registered under
the 1933 Act, (ii) the Corporation first shall have been furnished with an
opinion of legal counsel reasonably satisfactory to the Corporation to the
effect that such sale or transfer is exempt from the registration requirements
of the 1933 Act or (iii) such shares are offered or sold pursuant to Rule 144
under the 1933 Act (or any successor or replacement rule or provision), and (B)
until such shares are registered for resale under the 1933 Act, the Corporation
may place a legend on the certificate(s) for the shares of Common Stock not so
registered to that effect and place a stop-transfer restriction in its records
relating to the shares of Common Stock not so registered, all in accordance with
the Exchange Agreement by which the Holder is bound.
Date _________________________ ________________________________
Signature of Holder
(Must be signed exactly as name
appears on the Preferred Stock Certificate.)
41
b. Form of Redemption Notice.
REDEMPTION NOTICE
(Section 7(a) of Amended and Restated Certificate of
Incorporation)
TO: _____________________________
(Name of Holder)
(1) Pursuant to the terms of the Series D Convertible Preferred Stock
(the "Preferred Stock"), Shaman Pharmaceuticals, Inc., a Delaware corporation
(the "Corporation"), hereby notifies the above-named holder (the "Holder") that
the Corporation is exercising its right to redeem _____________ shares of
Preferred Stock held by the Holder in accordance with Section 7(a) of the
Amended and Restated Certificate of Incorporation:
(2) The Redemption Date is December 30, 1998.
(3) The Redemption Price per share of Preferred Stock
is $_________.
(4) Upon surrender to the Corporation of the certificate(s) for the
shares of Preferred Stock to be redeemed (but in no event earlier than the
Redemption Date), the Corporation will make payment of the applicable Redemption
Price in accordance with the Amended and Restated Certificate of Incorporation.
(5) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
SHAMAN PHARMACEUTICALS, INC.
By _______________________________
Title:
42
c. Form of Corporation Notice.
CORPORATION NOTICE
(Section 7(c)(i) of Amended and Restated Certificate of
Incorporation)
TO: _____________________________
(Name of Holder)
(1) An Optional Redemption Event described in the Amended and
Restated Certificate of Incorporation (the "Amended and Restated Certificate of
Incorporation") of Series D Convertible Preferred Stock, par value $0.001 per
share (the "Preferred Stock"), of Shaman Pharmaceuticals, Inc., a Delaware
corporation (the "Corporation"), occurred on _____________________, _______. As
a result of such Optional Redemption Event, the above-named holder (the
"Holder") is entitled to exercise its optional redemption rights pursuant to
Section 7(c)(ii) of the Amended and Restated Certificate of Incorporation.
(2) The Holder's optional redemption right must be
exercised on or before
__________________,__________.
(3) At or before the date set forth in the preceding paragraph (2),
the Holder must deliver to the Corporation:
(a) a Holder Notice, in the form set forth in Section
14(d) of the Amended and Restated Certificate of
Incorporation; and
(b) the certificates for the shares of Preferred Stock
to be redeemed, duly endorsed for transfer to the
Corporation the shares to be redeemed.
(4) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
Date _________________________ SHAMAN PHARMACEUTICALS, INC.
By__________________________
Title:
43
d. Form of Holder Notice.
HOLDER NOTICE
(Section 7(c)(ii) of Amended and Restated Certificate of
Incorporation)
TO: SHAMAN PHARMACEUTICALS, INC.
(1) Pursuant to the terms of the Series D Convertible Preferred
Stock, par value $0.001 per share (the "Preferred Stock"), of Shaman
Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"), the
undersigned hereby elects to exercise its right to require redemption by the
Corporation pursuant to Sections 7(c)(ii)(a) and 7(c)(ii)(b) of the Amended and
Restated Certificate of Incorporation of _______________ shares of Preferred
Stock at an Optional Redemption Price per share in cash equal to the product
obtained by multiplying (a) the sum of (i) $1,000 plus (ii) an amount equal to
$___________ for the accrued but unpaid dividends on each share of Series D
Preferred Stock to be redeemed and any Arrearage Interest on dividends thereon
in arrears to the date of redemption times (b) 118% .
(2) The aggregate Optional Redemption Price of all shares of
Preferred Stock to be redeemed from the undersigned is $_____________.
(3) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
Date: _______________________ NAME OF HOLDER:
By____________________________
Signature of Registered Holder
(Must be signed exactly as name
appears on the stock certificate.)
44
e. Form of Control Notice.
CONTROL NOTICE
(Section 7(c)(iv) of Amended and Restated Certificate of
Incorporation)
TO: _____________________________
(Name of Holder)
(1) Pursuant to the terms of the Series D Convertible Preferred
Stock, par value $0.001 per share (the "Preferred Stock"), Shaman
Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"), hereby
notifies the above-named holder (the "Holder") that in accordance with the
Amended and Restated Certificate of Incorporation and by reason of events which
are not solely within the control of the Corporation, on _____________(fill in
date) an Optional Redemption Event subject to Section 7(c)(ii)(b)(iv) of the
Amended and Restated Certificate of Incorporation occurred.
(2) Attached to this Notice is an Auditors' Determination with
respect to the occurrence referred to in paragraph (1).
(3) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
Date: _________________________ SHAMAN PHARMACEUTICALS, INC.
By________________________________
Title:
45
f. Form of Adjustment Notice.
ADJUSTMENT NOTICE
(Section 7(c)(iv) of Amended and Restated Certificate of
Incorporation)
VIA FACSIMILE
TO: ____________________________
(Name of Holder)
(1) Pursuant to the terms of the Series D Convertible Preferred
Stock, par value $0.001 per share (the "Preferred Stock"), Shaman
Pharmaceuticals, Inc., a Delaware corporation (the "Corporation"), confirms to
the above-named holder (the "Holder") of shares of Preferred Stock that on
_______________ (fill in date) the Corporation gave the Holder and each other
holder of shares of Preferred Stock a Control Notice in accordance with the
Amended and Restated Certificate of Incorporation of the Preferred Stock (the
"Amended and Restated Certificate of Incorporation"), and hereby notifies the
Holder of the adjustments set forth below.
(2) Effective on _________(fill in date), the Series D Conversion
Price of the Preferred Stock is ____% (fill in percentage) of the amount the
Series D Conversion Price would otherwise be without regard to adjustments
pursuant to Section 7(c)(ii)(b)(iv) of the Amended and Restated Certificate of
Incorporation.
(3) Effective on _________(fill in date), cumulative dividends shall
accrue on each outstanding share of Preferred Stock in the amount of $__________
per annum.
(4) The foregoing adjustments to the Series D Conversion Price and
the cumulative annual dividend amount will continue in effect until a subsequent
Adjustment Notice is given to the Holder.
(5) Capitalized terms used herein and not otherwise defined herein
have the respective meanings provided in the Amended and Restated Certificate of
Incorporation.
Date _________________________ SHAMAN PHARMACEUTICALS, INC.
By___________________________
Title:
46
C. Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Redemption. The Common is not redeemable.
3. Voting Rights. The holder of each share of Common shall have
the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with this Amended and Restated Certificate of
Incorporation and the Bylaws of this corporation, and shall be entitled to vote
upon such matters and in such manner as may be provided by law.
4. Residual Rights. All rights accruing to the outstanding
shares of the corporation not expressly provided for to the contrary herein
shall be vested in the Common.
ARTICLE V
Except as otherwise provided in this Amended and Restated Certificate
of Incorporation, in furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind from time to time any or all of the Bylaws of the
corporation.
ARTICLE VI
The number of directors of the corporation shall be fixed from time
to time by a Bylaw or amendment thereof duly adopted by the Board of Directors
or by the stockholders.
The Board of Directors shall be and is divided into two classes,
Class I and Class II. Such classes shall be as nearly equal in number of
directors as possible. Each director shall serve for a term ending on the second
annual meeting following the annual meeting at which such director was elected.
The foregoing notwithstanding, each director shall serve until his successor
shall have been duly elected and qualified, unless he shall resign, become
disqualified, disabled or shall otherwise be removed. Any director or the entire
Board of Directors may be removed, with or without cause, by the holders of a
majority of the shares entitled to vote at an election of directors.
At each annual election, directors chosen to succeed those whose
terms then expire shall be of the same class as the directors they succeed,
unless by reason of any intervening changes in the authorized number of
directors, the Board shall designate one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes.
47
Notwithstanding the rule that the two classes shall be as nearly
equal in number of directors as possible, in the event of any change in the
authorized number of directors each director then continuing to serve as such
shall nevertheless continue as a director of the class of which he is a member
until the expiration of his current term, or his prior death, resignation or
removal. If any newly created directorship may, consistently with the rule that
the two classes shall be as nearly equal in number of directors as possible, be
allocated to one of two classes, the Board shall allocate it to that of the
available classes whose term of office is due to expire at the earliest date
following such allocation.
ARTICLE VII
Elections of directors need not be by written ballot unless the
Bylaws of the corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or outside of the State
of Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
ARTICLE IX
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is hereafter amended
to authorize, with the approval of the corporation's stockholders, further
reductions in the liability of the corporation's directors for breach of
fiduciary duty, then a director of the corporation shall not be liable for any
such breach to the fullest extent permitted by the Delaware General Corporation
Law as so amended. Any repeal or modification of the foregoing provisions of
this Article IX by the stockholders of the corporation shall not adversely
affect any right or protection of a director of the corporation existing at the
time of such repeal or modification.
ARTICLE X
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this reservation.
48
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed by the President and the Secretary of the
corporation this 11th day of March, 1999.
SHAMAN PHARMACEUTICALS, INC.
By: /s/ Lisa A. Conte
------------------------
Lisa A. Conte, President
49
SHAMAN PHARMACEUTICALS, INC.
PROXY
Annual Meeting of Stockholders, June 11, 1999
This Proxy is Solicited on Behalf of the Board of Directors of
Shaman Pharmaceuticals, Inc.
The undersigned revokes all previous proxies, acknowledges receipt of
the Notice of the Annual Meeting of Stockholders to be held on Friday, June 11,
1999 and the Proxy Statement and appoints Lisa A. Conte and G. Kirk Raab, and
each of them, the Proxy of the undersigned, with full power of substitution, to
vote all shares of Common Stock or Preferred Stock of Shaman Pharmaceuticals,
Inc. (the "Company") which the undersigned is entitled to vote, either on his or
her own behalf or on behalf of any entity or entities, at the Annual Meeting of
Stockholders of the Company to be held at The Embassy Suites, 250 Gateway
Boulevard, South San Francisco, California, 94080 on Friday, June 11, 1999 at
9:00 A.M. Pacific Time (the "Annual Meeting"), and at any adjournment or
postponement thereof, with the same force and effect as the undersigned might or
could do if personally present thereat. The shares represented by this Proxy
shall be voted in the manner set forth on the reverse side.
1. To elect two Class I directors to serve on the Board of Directors for two
years or until their respective successors are duly elected and qualified:
WITHHOLD
AUTHORITY
FOR TO VOTE
--- -------
G. Kirk Raab
Herbert H. McDade, Jr.
M. David Titus
Loren D. Israelsen
2. FOR AGAINST ABSTAIN To approve an amendment to the Company's Amended and
Restated Certificate of Incorporation (the "Restated Certificate") to effect
a 20-for-1 reverse stock split of the Company's outstanding Common Stock;
3. FOR AGAINST ABSTAIN To approve an amendment to the Company's Amended and
Restated Certificate of Incorporation (the "Restated Certificate") to
increase the number of authorized shares of the Company's Preferred Stock
by 10,000,000 shares, from 2,000,000 shares to 12,000,000 shares;
4. FOR AGAINST ABSTAIN To approve an amendment to the Company's Amended and
Restated Certificate of Incorporation (the "Restated Certificate") to
increase the number of authorized shares of the Company's Common Stock by
150,000,000 shares, from 70,000,000 shares to 220,000,000 shares;
5. FOR AGAINST ABSTAIN To approve an amendment and restatement of the
Company's Restated Certificate to (i)delete the provision stating that a
transaction or series of transactions in which in excess of 50% of the
Company's voting power is transferred will be treated as a liquidation,
dissolution or winding up of the Company, for purposes of causing a required
liquidation preference distribution to the holders of the Company's Preferred
Stock, and (ii)delete the reference to the Series D Preferred Stock from the
section, to clarify that the section, as a result of the amendment in this
proposal, no longer applies to the Series D Preferred Stock;
6. FOR AGAINST ABSTAIN To approve amendments to the Company's 1992 Stock Option
Plan (the "1992 Plan") which will result in a series of increases to the
number of shares issuable thereunder, provide a special one-time option
grant to the non-employee Board members, extend the terms of the 1992 Plan
and increase the limit on the number of shares for which a participant may be
granted options per calendar year;
7. FOR AGAINST ABSTAIN To ratify the Board of Director's selection of Ernst
& Young LLP to serve as the Company's independent auditors for the year
ending December 31, 1999; and
8. FOR AGAINST ABSTAIN In accordance with the discretion of the proxy holders,to
act upon all matters incident to the conduct of the meeting and upon other
matters as may properly come before the meeting.
1
The Board of Directors recommends a vote IN FAVOR OF each of the directors
listed above and a vote IN FAVOR OF the other proposals. This Proxy, when
properly executed, will be voted as specified above. If no specification is
made, this Proxy will be voted IN FAVOR OF the election of the directors listed
above and IN FAVOR OF the other proposals.
Please print the name(s) appearing on each share certificate(s) over which
you have voting authority:________________________________________________
(Print name(s) on certificate)
Please sign your name:__________________________ Date:__________________
(Authorized Signature(s))
2
Exhibit A
SHAMAN PHARMACEUTICALS, INC.
1992 STOCK OPTION PLAN
(As Restated and Amended through March 15, 1999)
ARTICLE ONE
GENERAL
I. PURPOSE OF THE PLAN
A. This 1992 Stock Option Plan ("Plan") is intended to promote the
interests of Shaman Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), by providing a method whereby eligible individuals may be offered
the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Company as an incentive for them to remain in the
service of the Company (or its parent or subsidiary corporations).
B. The Plan became effective on the date on which shares of the Company's
common stock were first registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "1934 Act"). Such date is hereby
designated as the Effective Date of the Plan.
C. This Plan shall serve as the successor to the Company's 1990 Stock
Option Plan (the "1990 Plan"), and no further option grants shall be made under
the 1990 Plan from and after the Effective Date of this Plan. All options
outstanding under the 1990 Plan on such Effective Date are hereby incorporated
into this Plan and shall accordingly be treated as outstanding options under
this Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the express terms and conditions of the instrument evidencing
such grant, and no provision of this Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of the Company's common stock
thereunder or their exercise of any outstanding stock appreciation rights
thereunder.
D. For purposes of the Plan, the following provisions shall be applicable
in determining the parent and subsidiary corporations of the Company:
Any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company shall be considered to be a parent of
the Company, provided each such corporation in the unbroken chain (other
than the Company) owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
Each corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company shall be considered to be a
subsidiary of the Company, provided each such corporation (other than the
last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
E. All share figures in this March 15, 1999 restatement of the Plan reflect
the 20-for-1 reverse split of the Common Stock authorized by the Board on March
15, 1999, subject to stockholder approval at the 1999 Annual Stockholders
Meeting.
II. STRUCTURE OF THE PLAN
A. Stock Programs. The Plan shall be divided into two separate components:
the Discretionary Option Grant Program specified in Article Two and the
Automatic Option Grant Program specified in Article Three. Under the
Discretionary Option Grant Program, eligible individuals may, at the discretion
of the Plan Administrator, be granted options to purchase shares of Common Stock
in accordance with the provisions of Article Two. Under the Automatic Option
Grant Program, certain non-employee members of the Company's Board of Directors
(the "Board") will at periodic intervals automatically receive special option
grants to purchase shares of Common Stock in accordance with the provisions of
Article Three.
B. General Provisions. Unless the context clearly indicates otherwise, the
provisions of Articles One and Four of the Plan shall apply to both the
Discretionary Option Grant Program and the Automatic Option Grant Program and
shall accordingly govern the interests of all individuals under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Discretionary Option Grant Program shall be administered by a
committee ("Committee") of two (2) or more non-employee Board members appointed
by the Board. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time.
B. The Committee as Plan Administrator shall have full power and authority
(subject to the express provisions of the Plan) to establish such rules and
regulations as it may deem appropriate for the proper administration of the
Discretionary Option Grant Program and to make such determinations under, and
issue such interpretations of, the provisions of such program and any
outstanding option grants as it may deem necessary or advisable. Decisions of
the Plan Administrator shall be final and binding on all parties who have an
interest in the Discretionary Option Grant Program or any outstanding option
thereunder.
C. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the express terms and conditions of Article
Three, and the Committee as Plan Administrator shall exercise no discretionary
functions with respect to option grants made pursuant to that program.
2
IV. OPTION GRANTS
A. The persons eligible to participate in the Discretionary Option Grant
Program under Article Two of the Plan shall be limited to the following:
(i) officers and other key employees of the Company (or its parent or
subsidiary corporations) who render services which contribute to the
management, growth and financial success of the Company (or its parent
or subsidiary corporations);
(ii) non-employee members of the Board;
(iii) non-employee members of the board of directors of any parent or
subsidiary corporation; and
(iv) those consultants or other independent advisors who provide
valuable services to the Company (or its parent or subsidiary
corporations). B. The Plan Administrator shall have full authority to
determine the eligible individuals who are to receive option grants
under the Discretionary Option Grant Program, the number of shares to
be covered by each such grant, the status of the granted option as
either an incentive stock option ("Incentive Option") which satisfies
the requirements of Section 422 of the Internal Revenue Code or a
non-statutory option not intended to meet such requirements, the time
or times at which each granted option is to become exercisable and the
maximum term for which the option may remain outstanding.
V. STOCK SUBJECT TO THE PLAN
A. Shares of the Company's common stock (the "Common Stock") shall be
available for issuance under the Plan and shall be drawn from either the
Company's authorized but unissued shares of Common Stock or from reacquired
shares of Common Stock, including shares repurchased by the Company on the open
market. The maximum number of shares of Common Stock which may be issued over
the term of the Plan shall not exceed 7,000,000 shares (1), subject to
adjustment from time to time in accordance with the provisions of Paragraphs B
and E of this Section V. Such authorized share reserve includes the increase of
6,689,167 shares authorized by the Board on March 15, 1999, subject to
stockholder approval at the 1999 Annual Stockholders Meeting. To the extent one
or more
- -----------------
(1)Such share reserve reflects (i) the 1-for-3 reverse stock split of the Common
Stock effected in connection with the reincorporation of the Company in
Delaware and the associated exchange of three (3) shares of the California
corporation's common stock for one (1) share of the Delaware corporation's
common stock on January 25, 1993, (ii) the 6,689,167 share increase to the
Plan authorized by the Board on March 15, 1999, subject to stockholder
approval at the 1999 Annual Meeting and (iii) the 20-for-1 reverse split of
the Common Stock, authorized by the Board on March 15, 1999, subject to
stockholder approval at the 1999 Annual Meeting.
3
outstanding options under the 1990 Plan which have been incorporated into this
Plan are subsequently exercised, the number of shares issued with respect to
each such option shall reduce, on a share-for-share basis, the number of shares
available for issuance under this Plan.
B. On February 1, 2000, the number of shares of Common Stock issuable under
the Plan shall automatically increase by that number of shares which, when added
to the number of shares subject to then outstanding options under the Plan and
the number of shares available for future option grant under the Plan
immediately prior to such increase, will equal the lesser of (a) 25,000,000
shares or (b) twenty percent (20%) of the sum of (i) the number of voting shares
of the Company's capital stock outstanding at that time plus (ii) the number of
shares of Common Stock subject to the then outstanding options under the Plan
plus (iii) the number of shares available for future option grant under the Plan
(after taking such increase into account). In addition, the share reserve under
the Plan shall automatically increase on the first trading day of January each
calendar year, beginning with calendar year 2001 and continuing through calendar
year 2008, by an amount equal to four percent (4%) of the total number of shares
of Common Stock outstanding on the last trading day of the immediately preceding
calendar year, but in no event will any such annual increase exceed the lesser
of (a) 5,000,000 shares of Common Stock or (b) that number of additional shares
of Common Stock needed so that the number of shares available for future grant
under the Plan (after taking that annual increase into account) will, when added
to the number of shares subject to the then outstanding options, equal twenty
percent (20%) of the sum of (i) the number of voting shares of the Company's
capital stock outstanding at that time plus (ii) the number of shares of Common
Stock subject to the then outstanding options under the Plan plus (iii) the
number of shares of Common Stock available for future option grant under the
Plan.
C. Subject to stockholder approval at the 1999 Annual Stockholders Meeting,
the maximum number of shares of Common Stock for which any one individual
participating in the Plan may be granted stock options and separately
exercisable stock appreciation rights shall be limited to 5,000,000 shares per
calendar year, beginning with the 1999 calendar year, rather than the prior
limitation of 125,000 shares (2,500,000 shares pre-spilt) per calendar year(2)
(excluding any stock options or stock appreciation rights granted prior to
December 31, 1993).
D. Should one or more outstanding options under this Plan (including
outstanding options under the 1990 Plan incorporated into this Plan) expire or
terminate for any reason prior to exercise in full (including any option
cancelled in accordance with the cancellation-regrant provisions of Section IV
of Article Two of the Plan), then the shares subject to the portion of each
option not so exercised shall be available for subsequent option grant under the
Plan. In addition, any unvested shares issued under the Plan and subsequently
repurchased by the Company at the original exercise price per share pursuant to
the Company's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants under the Plan. However, shares subject to any option or portion thereof
- -----------------
(2)The increase in this limitation from 125,000 (pre-split 2,500,000) shares to
5,000,000 shares per calendar year was authorized by the Board on March 15,
1999, subject to stockholder approval at the 1999 Annual Meeting.
4
surrendered or cancelled in accordance with Section V of Article Two or Section
III of Article Three shall reduce on a share-for-share basis the number of
shares of Common Stock available for subsequent option grants under the Plan. In
addition, should the exercise price of an outstanding option under the Plan
(including any option incorporated from the 1990 Plan) be paid with shares of
Common Stock or should shares of Common Stock otherwise issuable under the Plan
be withheld by the Company in satisfaction of the withholding taxes incurred in
connection with the exercise of an outstanding option under the Plan, then the
number of shares of Common Stock available for issuance under the Plan shall be
reduced by the gross number of shares for which the option is exercised, and not
by the net number of shares of Common Stock actually issued to the option
holder.
E. In the event any change is made to the Common Stock issuable under the
Plan by reason of any stock split, stock dividend, recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Company's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one individual participating in the Plan may be granted
stock options and separately exercisable stock appreciation rights per calendar
year, (iii) the number and/or class of securities for which automatic option
grants are to be subsequently made to each newly-elected Board member under the
Automatic Option Grant Program, (iv) the number and/or class of securities and
price per share in effect under each option outstanding under either the
Discretionary Option Grant or Automatic Option Grant Program under the Plan, (v)
the number and/or class of securities and price per share in effect under each
outstanding option incorporated into this Plan from the 1990 Plan and (vi) the
maximum number and/or class of securities by which the share reserve is to
increase on February 1, 2000 and each subsequent calendar year pursuant to the
automatic share increase provisions of Section V.B of this Article One. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
5
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Discretionary Option Grant Program shall be
authorized by action of the Plan Administrator and may, at the Plan
Administrator's discretion, be either Incentive Options or non-statutory
options. Individuals who are not Employees of the Company or its parent or
subsidiary corporations may only be granted non-statutory options. Each granted
option shall be evidenced by one or more instruments in the form approved by the
Plan Administrator; provided, however, that each such instrument shall comply
with the terms and conditions specified below. Each instrument evidencing an
Incentive Option shall, in addition, be subject to the applicable provisions of
Section II of this Article Two.
A. Option Price.
(1) The option price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The option price per share of the Common Stock subject to an
Incentive Option shall in no event be less than one hundred percent (100%) of
the fair market value of such Common Stock on the grant date.
(ii) The option price per share of the Common Stock subject to a
non-statutory stock option shall be determined by the Plan Administrator in
its sole discretion and may be less than, equal to or greater than the fair
market value of such Common Stock on the grant date.
(2) The option price shall become immediately due upon exercise of
the option and, subject to the provisions of Section VI of this Article Two and
the instrument evidencing the grant, shall be payable in one of the following
alternative forms specified below:
- full payment in cash or check drawn to the Company's order;
- full payment in shares of Common Stock held by the optionee for
the requisite period necessary to avoid a charge to the Company's
earnings for financial reporting purposes and valued at fair
market value on the Exercise Date (as such term is defined
below);
- full payment in a combination of shares of Common Stock of the
Company held by the optionee for the requisite period necessary
to avoid a charge to the Company's earnings for financial
reporting purposes and valued at fair market value on the
Exercise Date and cash or check drawn to the Company's order; or
6
- full payment through a broker-dealer sale and remittance
procedure pursuant to which the optionee (I) shall provide
irrevocable instructions to a Company-designated brokerage firm
to effect the immediate sale of the purchased shares and remit to
the Company, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate option price
payable for the purchased shares plus all applicable Federal and
State income and employment taxes required to be withheld by the
Company in connection with such purchase and (II) shall provide
directives to the Company to deliver the certificates for the
purchased shares directly to such brokerage firm in order to
complete the sale transaction.
For purposes of this subparagraph (2), the Exercise Date shall be the
date on which written notice of the option exercise is delivered to the Company.
Except to the extent the sale and remittance procedure is utilized in connection
with the exercise of the option, payment of the option price for the purchased
shares must accompany such notice.
(3) The fair market value per share of Common Stock shall be
determined in accordance with the following provisions:
- If the Common Stock is not at the time listed or admitted to
trading on any national stock exchange but is traded on the
Nasdaq National Market, the fair market value shall be the
closing selling price per share on the date in question, as such
price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If
there is no reported closing selling price for the Common Stock
on the date in question, then the closing selling price on the
last preceding date for which such quotation exists shall be
determinative of fair market value.
- If the Common Stock is at the time listed or admitted to
trading on any national stock exchange, then the fair market
value shall be the closing selling price per share on the date in
question on the exchange determined by the Plan Administrator to
be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Common Stock on such
exchange on the date in question, then the fair market value
shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.
B. Term and Exercise of Options. Each option granted under this
Discretionary Option Grant Program shall be exercisable at such time or times
and during such period as is determined by the Plan Administrator and set forth
in the instrument evidencing the grant. No such option, however, shall have a
maximum term in excess of ten (10) years from the grant date.
7
C.Limited Transferability of Options. During the lifetime of the optionee,
Incentive Options shall be exercisable only by the optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the optionee's death. However, non-statutory options may,
in connection with the optionee's estate plan, be assigned in whole or in part
during the optionee's lifetime to one or more members of the optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
D. Termination of Service.
(1) The following provisions shall govern the exercise period
applicable to any outstanding options held by the optionee at the time of
cessation of Service or death.
- Should an optionee cease Service for any reason (including
death or permanent disability as defined in Section 22(e)(3) of
the Internal Revenue Code) while holding one or more outstanding
options under this Article Two, then none of those options shall
(except to the extent otherwise provided pursuant to subparagraph
D.(3) below) remain exercisable for more than a thirty-six
(36)-month period (or such shorter period determined by the Plan
Administrator and set forth in the instrument evidencing the
grant) measured from the date of such cessation of Service.
- Any option held by the optionee under this Article Two and
exercisable in whole or in part on the date of his/her death may
be subsequently exercised by the personal representative of the
optionee's estate or by the person or persons to whom the option
is transferred pursuant to the optionee's will or in accordance
with the laws of descent and distribution. Any exercise, however,
must occur prior to the earlier of (i) the third anniversary of
the date of the optionee's death or (ii) the specified expiration
date of the option term. Upon the occurrence of the earlier
event, the option shall terminate and cease to be outstanding.
- Under no circumstances, however, shall any such option be
exercisable after the specified expiration date of the option
term.
- During the applicable post-Service exercise period, the option
may not be exercised in the aggregate for more than the number of
shares (if any) in which the optionee is vested at the time of
his/her cessation of Service. Upon the expiration of the limited
post-Service exercise period or (if earlier) upon the specified
expiration date of the option term, each such option shall
terminate and cease to be outstanding with respect to any vested
shares for which the option has not otherwise been exercised.
However, each outstanding option shall immediately terminate and
8
cease to be outstanding, at the time of the optionee's cessation
of Service, with respect to any shares for which the option is
not otherwise at that time exercisable or in which the optionee
is not otherwise vested.
- Should (i) the optionee's Service be terminated for misconduct
(including, but not limited to, any act of dishonesty, willful
misconduct, fraud or embezzlement) or (ii) the optionee make any
unauthorized use or disclosure of confidential information or
trade secrets of the Company or its parent or subsidiary
corporations, then in any such event all outstanding options held
by the optionee under this Article Two shall terminate
immediately and cease to be outstanding.
(2) The Plan Administrator shall have complete discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to permit one or more options held by the optionee under this
Article Two to be exercised, during the limited post-Service exercise period
applicable under subparagraph (1) above, not only with respect to the number
of vested shares of Common Stock for which each such option is exercisable at
the time of the optionee's cessation of Service but also with respect to one
or more subsequent installments in which the optionee would otherwise have
vested had he/she continued in Service.
(3) The Plan Administrator shall also have full power and authority
to extend the period of time for which the option is to remain exercisable
following the optionee's cessation of Service or death from the limited period
in effect under subparagraph (1) above to such greater period of time as the
Plan Administrator shall deem appropriate. In no event, however, shall such
option be exercisable after the specified expiration date of the option term.
(4) For purposes of the foregoing provisions of this Section I.D (and
for all other purposes under the Discretionary Option Grant Program):
- The optionee shall (except to the extent otherwise specifically
provided in the applicable stock option or stock purchase
agreement) be deemed to remain in the Service of the Company for
so long as such individual renders services on a periodic basis
to the Company (or any parent or subsidiary corporation) in the
capacity of an Employee, a non-employee member of the Board or an
independent consultant or advisor.
- The optionee shall be considered to be an Employee for so long
as he or she remains in the employ of the Company or one or more
parent or subsidiary corporations, subject to the control and
direction of the employer entity not only as to the work to be
performed but also as to the manner and method of performance.
E. Stockholder Rights. An optionee shall have no stockholder rights with
respect to any shares covered by the option until such individual shall have
exercised the option and paid the option price for the purchased shares.
9
F. Repurchase Rights. The shares of Common Stock acquired upon the exercise
of any Article Two option grant may be subject to repurchase by the Company in
accordance with the following provisions:
(i) The Plan Administrator shall have the discretion to authorize the
issuance of unvested shares of Common Stock under this Article Two. Should
the optionee cease Service while holding such unvested shares, the Company
shall have the right to repurchase any or all of those unvested shares at
the option price paid per share. The terms and conditions upon which such
repurchase right shall be exercisable (including the period and procedure
for exercise and the appropriate vesting schedule for the purchased shares)
shall be established by the Plan Administrator and set forth in the
instrument evidencing such repurchase right.
(ii) All of the Company's outstanding repurchase rights under this
Article Two shall automatically terminate, and all shares subject to such
terminated rights shall immediately vest in full, upon the occurrence of
any Corporate Transaction under Section III of this Article Two, except to
the extent: (i) any such repurchase right is expressly assigned to the
successor corporation (or parent thereof) in connection with the Corporate
Transaction or (ii) such accelerated vesting is precluded by other
limitations imposed by the Plan Administrator at the time the repurchase
right is issued.
(iii) The Plan Administrator shall have the discretionary authority,
exercisable either before or after the optionee's cessation of Service, to
cancel the Company's outstanding repurchase rights with respect to one or
more shares purchased or purchasable by the optionee under this
Discretionary Option Grant Program and thereby accelerate the vesting of
such shares in whole or in part at any time.
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Article Two. Incentive Options may only be
granted to individuals who are Employees of the Company. Options which are
specifically designated as "non-statutory" options when issued under the Plan
shall not be subject to such terms and conditions.
10
A. Dollar Limitation. The aggregate fair market value (determined as of the
respective date or dates of grant) of the Common Stock for which one or more
options granted to any Employee after December 31, 1986 under this Plan (or any
other option plan of the Company or its parent or subsidiary corporations) may
for the first time become exercisable as incentive stock options under the
Federal tax laws during any one calendar year shall not exceed the sum of One
Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or
more such options which become exercisable for the first time in the same
calendar year, the foregoing limitation on the exercisability of such options as
incentive stock options under the Federal tax laws shall be applied on the basis
of the order in which such options are granted. Should the number of shares of
Common Stock for which any Incentive Option first becomes exercisable in any
calendar year exceed the applicable One Hundred Thousand Dollar ($100,000)
limitation, then that option may nevertheless be exercised in that calendar year
for the excess number of shares as a non-statutory option under the Federal tax
laws.
B. 10% Stockholder. If any individual to whom an Incentive Option is
granted is the owner of stock (as determined under Section 424(d) of the
Internal Revenue Code) possessing ten percent (10%) or more of the total
combined voting power of all classes of stock of the Company or any one of its
parent or subsidiary corporations, then the option price per share shall not be
less than one hundred and ten percent (110%) of the fair market value per share
of Common Stock on the grant date, and the option term shall not exceed five (5)
years, measured from the grant date. Except as modified by the preceding
provisions of this Section II, the provisions of Articles One, Two and Four of
the Plan shall apply to all Incentive Options granted hereunder.
III. CORPORATE TRANSACTIONS/CHANGES IN CONTROL
A. In the event of any of the following stockholder-approved transactions
(a "Corporate Transaction") to which the Company is a party:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company in complete liquidation or dissolution of
the Company, or
(iii) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to person or persons different from those who held such
securities immediately prior to such merger,
11
then each option which is at the time outstanding under this Article
Two shall automatically accelerate so that each such option shall,
immediately prior to the specified effective date for the Corporate
Transaction, become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be
exercised for all or any portion of such shares. However, an outstanding
option under this Article Two shall not so accelerate if and to the extent:
(i) such option is, in connection with the Corporate Transaction, either to
be assumed by the successor corporation or parent thereof or to be replaced
with a comparable option to purchase shares of the capital stock of the
successor corporation or parent thereof, (ii) such option is to be replaced
with a cash incentive program of the successor corporation which preserves
the option spread existing at the time of the Corporate Transaction and
provides for subsequent payout in accordance with the same vesting schedule
applicable to such option, or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time
of the option grant. The determination of option comparability under clause
(i) above shall be made by the Plan Administrator, and its determination
shall be final, binding and conclusive.
B. Immediately following the consummation of the Corporate Transaction, all
outstanding options under this Article Two shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation or its
parent company.
C. Each outstanding option under this Article Two which is assumed in
connection with the Corporate Transaction or is otherwise to continue in effect
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply and pertain to the number and class of securities which would have been
issued to the option holder, in consummation of such Corporate Transaction, had
such person exercised the option immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the option price
payable per share, provided the aggregate option price payable for such
securities shall remain the same. In addition, the class and number of
securities available for issuance under the Plan on both an aggregate and per
participant basis following the consummation of the Corporate Transaction shall
be appropriately adjusted.
D. The grant of options under this Article Two shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
E. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the option is granted or at any time while the
option is outstanding, to provide for the automatic acceleration of one or more
outstanding options under this Article Two (and the termination of one or more
of the Company's outstanding repurchase rights under this Article Two) upon the
occurrence of the Change in Control. The Plan Administrator shall also have full
power and authority to condition any such option acceleration (and the
termination of any outstanding repurchase rights) upon the subsequent
termination of the optionee's Service within a specified period following the
Change in Control.
F. For purposes of this Section III, a Change in Control shall be deemed to
occur in the event:
12
(i) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities pursuant to a tender
or exchange offer made directly to the Company's stockholders; or
(ii) there is a change in the composition of the Board over a period
of twenty-four (24) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more proxy contests for the
election of Board members, to be comprised of individuals who either (A)
have been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in clause
(A) who were still in office at the time such election or nomination was
approved by the Board.
G. Any options accelerated in connection with the Change in Control shall
remain fully exercisable until the expiration or sooner termination of the
option term.
H. The exercisability as incentive stock options under the Federal tax laws
of any options accelerated under this Section III in connection with a Corporate
Transaction or Change in Control shall remain subject to the dollar limitation
of Section II of this Article Two.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, the cancellation
of any or all outstanding options under this Article Two (including outstanding
options under the 1990 Plan incorporated into this Plan) and to grant in
substitution new options under the Plan covering the same or different numbers
of shares of Common Stock but with an option price per share based on the fair
market value of the Common Stock on the date of the new grant.
V. STOCK APPRECIATION RIGHTS
A. Provided and only if the Plan Administrator determines in its discretion
to implement the stock appreciation right provisions of this Section V, one or
more optionees may be granted the right, exercisable upon such terms and
conditions as the Plan Administrator may establish, to surrender all or part of
an unexercised option under this Article Two in exchange for a distribution from
the Company in an amount equal to the excess of (i) the fair market value (on
the option surrender date) of the number of shares in which the optionee is at
the time vested under the surrendered option (or surrendered portion thereof)
over (ii) the aggregate option price payable for such vested shares.
13
B. No surrender of an option shall be effective hereunder unless it is
approved by the Plan Administrator. If the surrender is so approved, then the
distribution to which the optionee shall accordingly become entitled under this
Section V may be made in shares of Common Stock valued at fair market value on
the option surrender date, in cash, or partly in shares and partly in cash, as
the Plan Administrator shall in its sole discretion deem appropriate.
C. If the surrender of an option is rejected by the Plan Administrator,
then the optionee shall retain whatever rights the optionee had under the
surrendered option (or surrendered portion thereof) on the option surrender date
and may exercise such rights at any time prior to the later of (i) five (5)
business days after the receipt of the rejection notice or (ii) the last day on
which the option is otherwise exercisable in accordance with the terms of the
instrument evidencing such option, but in no event may such rights be exercised
more than ten (10) years after the date of the option grant.
D. One or more officers of the Company subject to the short-swing profit
restrictions of the Federal securities laws may, in the Plan Administrator's
sole discretion, be granted limited stock appreciation rights in tandem with
their outstanding options under the Plan. Upon the occurrence of a Hostile
Take-Over effected at any time when the Company's outstanding Common Stock is
registered under Section 12(g) of the 1934 Act, each outstanding option with
such a limited stock appreciation right shall automatically be cancelled, to the
extent such option is at the time exercisable for fully-vested shares of Common
Stock. The optionee shall in return be entitled to a cash distribution from the
Company in an amount equal to the excess of (i) the Take-Over Price of the
vested shares of Common Stock at the time subject to the cancelled option (or
cancelled portion of such option) over (ii) the aggregate exercise price payable
for such shares. The cash distribution shall be made within five (5) days
following the consummation of the Hostile Take-Over. The Plan Administrator
shall pre-approve, at the time the limited right is granted, the subsequent
exercise of that right in accordance with the terms of the grant and the
provisions of this Section V.D. No additional approval of the Plan Administrator
or the Board shall be required at the time of the actual option cancellation and
cash distribution. The balance of the option (if any) shall continue to remain
outstanding and become exercisable in accordance with the terms of the
instrument evidencing such grant.
E. For purposes of Section V.D, the following definitions shall be in
effect:
A Hostile Take-Over shall be deemed to occur in the event any person
or related group of persons (other than the Company or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Company) acquires directly or indirectly beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting power
of the Company's outstanding securities pursuant to a tender or exchange
offer made directly to the Company's stockholders which the Board does not
recommend such stockholders to accept.
14
The Take-Over Price per share shall be deemed to be equal to the
greater of (a) the fair market value per share of Common Stock on the
option cancellation date, as determined pursuant to the valuation
provisions of Section I.A.(3) of this Article Two, or (b) the highest
reported price per share of Common Stock paid in effecting such Hostile
Take-Over. However, if the cancelled option is an Incentive Option, the
Take-Over Price shall not exceed the clause (a) price per share.
F. The shares of Common Stock subject to any option surrendered or
cancelled for an appreciation distribution pursuant to this Section V shall not
be available for subsequent option grant under the Plan.
VI. LOANS OR INSTALLMENT PAYMENTS
The Plan Administrator may, in its discretion, assist any optionee
(including an optionee who is an officer or director of the Company) in the
exercise of one or more options granted to such optionee under this Article Two,
including the satisfaction of any Federal and State income and employment tax
obligations arising therefrom, by (i) authorizing the extension of a loan from
the Company to such optionee or (ii) permitting the optionee to pay the option
price for the purchased Common Stock in installments over a period of years. The
terms of any loan or installment method of payment (including the interest rate
and terms of repayment) will be upon such terms as the Plan Administrator
specifies in the applicable option agreement or otherwise deems appropriate
under the circumstances. Loans and installment payments may be granted with or
without security or collateral. However, the maximum credit available to the
optionee shall not exceed the sum of (i) the aggregate option price of the
purchased shares plus (ii) any Federal and State income and employment tax
liability incurred by the optionee in connection with the exercise of the
option.
15
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
The provisions of this Article Three reflect the changes to the
Automatic Option Grant Program authorized by the Board on March 15, 1999,
subject to stockholder approval at the 1999 Annual Meeting.
I. ELIGIBILITY
The individuals eligible to receive automatic option grants pursuant to the
provisions of this Article Three program shall be limited to (i) those
individuals who are serving as non-employee Board members on February 1, 2000
and (ii) those individuals who are first elected or appointed as non-employee
Board members after February 1, 2000, whether through appointment by the Board
or election by the Company's stockholders, provided they have not otherwise been
in the prior employ of the Company (or any parent or subsidiary corporation).
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Dates. Option grants shall be made under this Article Three on the
dates specified below. Stockholder approval of this March 15, 1999 restatement
at the 1999 Annual Stockholders Meeting shall constitute pre-approval of each
option granted under this Article Three after the date of that Annual Meeting
and the subsequent exercise of each such option in accordance with the
provisions of this Article Three.
Each individual who is serving as a non-employee Board member on
February 1, 2000 shall automatically be granted, at the that time, a
non-statutory stock option to purchase that number of shares of Common
Stock equal to one half of one percent (0.5%) of the total number of voting
shares of the Company's capital stock outstanding at that time.
(i) (iii)Each individual who first joins the Board as a
non-employee Board member after February 1, 2000 shall automatically
be granted, upon his or her initial appointment or election to the
Board, a non-statutory stock option to purchase that number of shares
of Common Stock equal to one half of one percent (0.5%) of the total
number of voting shares of the Company's capital stock outstanding on
February 1, 2000, provided such individual has not previously been the
Company's employ.
No other option grants shall be made to the non-employee Board members
under this Article Three. The number of shares subject to the automatic option
grants to be made to each newly-elected or appointed non-employee Board member
shall be subject to periodic adjustment pursuant to the applicable provisions of
Section V.E of Article One.
B. Exercise Price. The exercise price per share of each automatic option
grant made under this Article Three shall be equal to one hundred percent (100%)
of the fair market value per share of Common Stock on the automatic grant date.
16
C. Payment.
The exercise price shall be payable in one of the alternative forms
specified below:
(i) full payment in cash or check made payable to the Company's
order; or
(ii) full payment in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Company's reported
earnings and valued at fair market value on the Exercise Date (as such
term is defined below); or
(iii) full payment in a combination of shares of Common Stock
held for the requisite period necessary to avoid a charge to the
Company's reported earnings and valued at fair market value on the
Exercise Date and cash or check payable to the Company's order; or
(iv) full payment through a sale and remittance procedure
pursuant to which the non-employee Board member (I) shall provide
irrevocable instructions to a Company-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the
Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares and shall (II) concurrently provide directives to the
Company to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale transaction. For
purposes of this subparagraph C, the Exercise Date shall be the date
on which written notice of the option exercise is delivered to the
Company, and the fair market value per share of Common Stock on any
relevant date shall be determined in accordance with the provisions of
Section I.A.(3) of Article Two. Except to the extent the sale and
remittance procedure specified above is utilized for the exercise of
the option, payment of the option price for the purchased shares must
accompany the exercise notice.
D. Option Term. Each automatic grant under this Article Three shall have a
maximum term of ten (10) years measured from the automatic grant date.
E. Exercisability. Each automatic grant shall become exercisable for the
option shares in a series of forty-eight (48) successive equal monthly
installments upon the optionee's completion of each month of Board service over
the forty-eight (48)-month period measured from the grant date of that option.
The option shall not become exercisable for any additional option shares
following the optionee's cessation of Board service for any reason.
F. Limited Transferability of Options. Options granted under the Automatic
Option Grant Program may, in connection with the optionee's estate plan, be
assigned in whole or in part during the optionee's lifetime to one or more
members of the optionee's immediate family or to a trust established exclusively
for one or more such family members. The assigned portion may only be exercised
17
by the person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned portion shall
be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
G. Effect of Termination of Board Membership.
(1) Should the optionee cease to serve as a Board member for any
reason (other than death) while holding one or more automatic option grants
under this Article Three, then such optionee shall have a six (6)-month
period following the date of such cessation of Board membership in which to
exercise each such option for any or all of the shares of Common Stock for
which the option is exercisable at the time of such cessation of Board
service. Each such option shall immediately terminate and cease to be
outstanding, at the time of such cessation of Board service, with respect
to any shares for which the option is not otherwise at that time
exercisable.
(2) Should the optionee die while serving as a member of the Board or
within six (6) months after cessation of Board service, then each
outstanding automatic option grant held by the optionee at the time of
death may subsequently be exercised, for any or all of the shares of Common
Stock for which the option is exercisable at the time of the optionee's
cessation of Board service (less any option shares subsequently purchased
by the optionee prior to death), by the personal representative of the
optionee's estate or by the person or persons to whom the option is
transferred pursuant to the optionee's will or in accordance with the laws
of descent and distribution. Any such exercise must occur within twelve
(12) months after the date of the optionee's death. However, each such
automatic option grant shall immediately terminate and cease to be
outstanding, at the time of the optionee's cessation of Board service, with
respect to any option shares for which it was not otherwise exercisable at
that time.
(3) In no event shall any automatic option grant under this Article
Three remain exercisable after the specified expiration date of the ten
(10)-year option term. Upon the expiration of the applicable post-service
exercise under subparagraph 1 or 2 above or (if earlier) upon the
expiration of the ten (10)-year option term, the automatic option grant
shall terminate and cease to be outstanding for any unexercised shares for
which the option was exercisable at the time of the optionee's cessation of
Board service.
H. Stockholder Rights. The holder of an automatic option grant under this
Article Three shall have none of the rights of a stockholder with respect to any
shares subject to such option until such individual shall have exercised the
option and paid the exercise price for the purchased shares.
I. Remaining Terms. The remaining terms and conditions of each automatic
option grant shall be as set forth in the prototype Non-statutory Stock Option
Agreement attached as Exhibit A to the Plan.
18
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any of the following stockholder-approved transactions
to which the Company is a party (a "Corporate Transaction"):
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State of the Company's incorporation,
(ii) the sale, transfer or disposition of all or substantially all of
the assets of the Company in liquidation or dissolution of the Company, or
(iii) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to person or persons different from those who held such
securities immediately prior to such merger, the exercisability of each
automatic option grant at the time outstanding under this Article Three
shall automatically accelerate so that each such option shall, immediately
prior to the specified effective date for the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common
Stock at the time subject to such option and may be exercised for all or
any portion of such shares. Immediately following the consummation of the
Corporate Transaction, all automatic option grants under this Article Three
shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation or its parent company.
B. In connection with any Change in Control of the Company, the
exercisability of each automatic option grant at the time outstanding under this
Article Three shall automatically accelerate so that each such option shall,
immediately prior to the specified effective date for the Change in Control,
become fully exercisable with respect to the total number of shares of Common
Stock at the time subject to such option and may be exercised for all or any
portion of such shares at any time prior to the expiration or sooner termination
of the option term. For purposes of this Article Three, a Change in Control
shall be deemed to occur in the event:
(i) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding securities pursuant to a tender or exchange offer made directly
to the Company's stockholders; or
19
(ii) there is a change in the composition of the Board over a period
of twenty-four (24) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more proxy contests for the
election of Board members, to be comprised of individuals who either (A)
have been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in clause
(A) who were still in office at the time such election or nomination was
approved by the Board.
C. Upon the occurrence of a Hostile Take-Over, each option granted under
this Article Three shall automatically be cancelled, and the optionee shall in
return be entitled to a cash distribution from the Company in an amount equal to
the excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to the cancelled option (whether or not the option is otherwise at the
time exercisable for such shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the consummation of the Hostile Take-Over. Stockholder approval of the
March 15, 1999 restatement of the Plan at the 1999 Annual Meeting shall
constitute pre-approval of each option granted after the date of that Annual
Meeting with such an automatic cancellation provision and the subsequent
cancellation of that option in accordance with such provision. No additional
approval of the Plan Administrator or the Board shall be required at the time of
the actual option cancellation and cash distribution.
D. For purposes of this Section III, the following definitions shall be in
effect:
A Hostile Take-Over shall be deemed to occur in the event any person
or related group of persons (other than the Company or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Company) directly or indirectly acquires beneficial
ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act
of 1934, as amended) of securities possessing more than fifty percent (50%)
of the total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders which the Board does not recommend such stockholders to
accept.
The Take-Over Price per share shall be deemed to be equal to the
greater of (a) the fair market value per share of Common Stock on the
option cancellation date, as determined pursuant to the valuation
provisions of Section I.A.(3) of Article Two, or (b) the highest reported
price per share paid by the tender offeror in effecting such Hostile
Take-Over.
E. The shares of Common Stock subject to each option cancelled in
connection with the Hostile Take-Over shall not be available for subsequent
option grant under this Plan.
F. The automatic option grants outstanding under this Article Three shall
in no way affect the right of the Company to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
20
ARTICLE FOUR
MISCELLANEOUS
I. AMENDMENT OF THE PLAN AND AWARDS
The Board has complete and exclusive power and authority to amend or modify
the Plan (or any component thereof) in any or all respects whatsoever. However,
no such amendment or modification shall, without the consent of the Company's
stockholders, adversely affect rights and obligations with respect to options at
the time outstanding under the Plan. In addition, certain amendments may require
stockholder approval pursuant to applicable laws or regulations.
II. TAX WITHHOLDING
The Company's obligation to deliver shares or cash upon the exercise of
stock options or stock appreciation rights granted under the Plan shall be
subject to the satisfaction of all applicable Federal, State and local income
tax and employment tax withholding requirements.
The Plan Administrator may, in its discretion and in accordance with the
provisions of this Section II of Article Four and such supplemental rules as the
Plan Administrator may from time to time adopt (including the applicable
safe-harbor provisions of SEC Rule 16b-3), provide any or all holders of
non-statutory options under the Plan (other than the automatic grants made
pursuant to Article Three of the Plan) with the right to use shares of the
Company's Common Stock in satisfaction of all or part of the Federal, State and
local income and employment withholding taxes to which such holders may be
subject in connection with the exercise of their options (the "Withholding
Taxes"). Such right may be provided to any such option holder in either or both
of the following formats:
(i) Stock Withholding: The holder of the non-statutory option may be
provided with the election to have the Company withhold, from the shares of
Common Stock otherwise issuable upon the exercise of such non-statutory
option, a portion of such shares with an aggregate fair market value equal
to the percentage of the applicable Withholding Taxes (not to exceed one
hundred percent (100%)) designated by the option holder.
(ii) Stock Delivery: The Plan Administrator may, in its discretion,
provide the holder of the non-statutory option with the election to
deliver, at the time the non-statutory option is exercised, one or more
shares of Common Stock already held by such individual with an aggregate
fair market value equal to the percentage of the Withholding Taxes incurred
in connection with such option exercise (not to exceed one hundred percent
(100%)) designated by the option holder.
21
III. EFFECTIVE DATE AND TERM OF PLAN
The information provided in this Section III is based upon a number of
specific amendments made to the Plan since the Effective Date. Except as
otherwise expressly indicated below, none of the share numbers reflect the
20-for-1 reverse split of the Common Stock authorized by the Board on March 15,
1999.
A. The Plan first became effective on the Effective Date and serves as the
successor to the Company's 1990 Stock Option Plan. No further option grants
shall be made under the 1990 Plan from and after the Effective Date.
B. On May 26, 1993, the Board amended the Plan to increase the number of
shares issuable thereunder by 1,000,000 shares. The 1,000,000-share increase was
approved by the Company's stockholders at the 1994 Annual Stockholders Meeting.
On March 28, 1994, the Board further amended the Plan to impose a limitation on
the maximum number of shares for which any one individual participating in the
Plan may be granted stock options and separately exercisable stock appreciation
rights.
C. On February 24, 1995, the Board amended the Plan to increase the number
of shares of Common Stock issuable thereunder by 545,000 shares. The
545,000-share increase was approved by the Company's stockholders at the 1995
Annual Stockholders Meeting.
D. On February 24, 1995, the Board further amended the Plan to increase the
number of shares of Common Stock for which automatic option grants are to be
made to continuing non-employee Board members on the date of each Annual
Stockholders Meeting held after February 24, 1995. The amendment was approved by
the Company's stockholders at the 1995 Annual Stockholders Meeting.
E. On August 21, 1995, the Board amended the Plan to extend the eligibility
provisions of the Discretionary Option Grant Program to all non-employee Board
members other than those at the time serving on the Committee acting as the Plan
Administrator. The amendment was approved by the Company's stockholders at the
1996 Annual Stockholders Meeting.
F. In January 1996, the Board adopted an amendment to the Plan which (i)
increased the number of shares of Common Stock available for issuance under the
Plan by an additional 450,000 shares and (ii) increased the maximum number of
shares for which any one individual may be granted stock options and separately
exercisable stock appreciation rights over the remaining term of the Plan by an
additional 250,000 shares of Common Stock. The amendment was approved by the
Company's stockholders at the 1996 Annual Stockholders Meeting.
G. In February 1997, the Board adopted a series of amendments to the Plan
(the "1997 Amendments") which (i) increased the number of shares of Common Stock
available for issuance under the Plan by an additional 700,000 shares, (ii)
increased the limit on the maximum number of shares of the Company's common
stock for which any one individual may be granted stock options and separately
exercisable stock appreciation rights under the Plan from 500,000 shares to
22
750,000 shares, (iii) rendered the non-employee Board members who serve as Plan
Administrator eligible to receive option grants under the Discretionary Option
Grant Program, (iv) allowed unvested shares issued under the Plan and
subsequently repurchased by the Company at the option exercise price paid per
share to be reissued under the Plan, (v) removed certain restrictions on the
eligibility of non-employee Board members to serve as Plan Administrator, and
(vi) effected a series of additional changes to the provisions of the Plan
(including the stockholder approval requirements, the transferability of
non-statutory stock options and the elimination of the six (6)-month holding
period requirement as a condition to the exercise of stock appreciation rights)
in order to take advantage of the recent amendments to Rule 16b-3 of the
Securities and Exchange Commission which exempts certain officer and director
transactions under the Plan from the short-swing liability provisions of the
federal securities laws. The 1997 Amendments were approved by the stockholders
at the 1997 Annual Stockholders Meeting.
H. On January 29, 1998, the Board adopted an amendment to the Plan which
increased the number of shares of Common Stock available for issuance under the
Plan by an additional 500,000 shares. The amendment was approved by the
stockholders at the 1998 Annual Stockholders Meeting.
I. On September 18, 1998, the Board adopted an amendment to the Plan which
increased the number of shares of Common Stock available for issuance under the
Plan by an additional 2,000,000 shares. The amendment was approved by the
stockholders at the Special Stockholders Meeting held in January 1999.
J. On March 15, 1999, the Board authorized an amendment to the Plan which
(i) increased the number of shares of Common Stock available for issuance under
the Plan by an additional 6,689,167 shares(3), (ii) implemented a series of
automatic increases to the share reserve under the Plan, beginning February 1,
2000 and continuing from calendar year 20001 through calendar year 2008, (iii)
increased the maximum number of shares for which any one individual may be
granted stock options and separately exercisable stock appreciation rights per
calendar year from 125,000 shares(4) to 5,000,000 shares(5), (iv) effected a
series of changes to the Automatic Option Grant Program (including the
implementation of a special one-time option grant to all non-employee Board
members and the elimination of the initial and annual awards made to
non-employee Board members), and (v) extended the term of the Plan by six (6)
years(6). The March 15, 1999 amendment is subject to stockholder approval at the
1999 Annual Stockholders Meeting. If such stockholder approval is not obtained,
then any
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(3)This number reflects the 20-for-1 reverse split of the Common Stock
authorized by the Board on March 15, 1999, subject to stockholder approval at
the 1999 Annual Meeting.
(4)This number reflects the 20-for-1 reverse split of the Common Stock
authorized by the Board on March 15, 1999, subject to stockholder approval at
the 1999 Annual Meeting.
(5)This number reflects the 20-for-1 reverse split of the Common Stock
authorized by the Board on March 15, 1999, subject to stockholder approval at
the 1999 Annual Meeting.
(6)This amendment was authorized by the Board on March 15, 1999, subject to
stockholder approval at the 1999 Annual Meeting.
23
options granted on the basis of the various share increases authorized under the
amendment will terminate without becoming exercisable for any of the shares of
Common Stock subject to those options, and no further option grants will be made
on the basis of those share increases. However, the Plan will continue to remain
in effect, and option grants may continue to be made pursuant to the provisions
of the Plan in effect prior to the March 15, 1999 amendment, until the available
reserve of Common Stock as last approved by the stockholders has been issued.
K. Each option issued and outstanding under the 1990 Plan immediately prior
to the Effective Date shall be incorporated into this Plan and treated as an
outstanding option under this Plan, but each such option shall continue to be
governed solely by the terms and conditions of the instrument evidencing such
grant, and nothing in this Plan shall be deemed to affect or otherwise modify
the rights or obligations of the holders of such options with respect to their
acquisition of shares of Common Stock thereunder.
L. The sale and remittance procedure authorized for the exercise of
outstanding options under this Plan shall be available for all options granted
under this Plan on or after the Effective Date and for all non-statutory options
outstanding under the 1990 Plan and incorporated into this Plan. The Plan
Administrator may also allow such procedure to be utilized in connection with
one or more disqualifying dispositions of Incentive Option shares effected after
the Effective Date, whether such Incentive Options were granted under this Plan
or the 1990 Plan.
M. The option acceleration provisions of Section III of Article Two
relating to Corporate Transactions and Changes in Control may, in the Plan
Administrator's discretion, be extended to one or more stock options which are
outstanding under the 1990 Plan on the Effective Date of this Plan but which do
not otherwise provide for such acceleration.
N. The Plan shall terminate upon the earlier of (i) December 31, 20087 or
(ii) the date on which all shares available for issuance under the Plan shall
have been issued or cancelled pursuant to the exercise, surrender or cash-out of
the options granted under the Plan. If the date of termination is determined
under clause (i) above, then all option grants outstanding on such date shall
thereafter continue to have force and effect in accordance with the provisions
of the instruments evidencing such grants.
O. Options to purchase shares of Common Stock may be granted under the Plan
which are in excess of the number of shares then available for issuance under
the Plan, provided each option granted is not to become exercisable, in whole or
in part, at any time prior to stockholder approval of an amendment authorizing a
sufficient increase in the number of shares available for issuance under the
Plan.
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7 The six (6)-year extension of the term of the Plan is subject to stockholder
approval at the 1999 Annual Meeting.
24
IV. USE OF PROCEEDS
Any cash proceeds received by the Company from the sale of shares pursuant
to options granted under the Plan shall be used for general corporate purposes.
V. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option thereunder and
the issuance of stock upon the exercise or surrender of the option grants made
hereunder shall be subject to the Company's procurement of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the options granted under it, and the stock issued pursuant to it.
VI. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Company in establishing the Plan, nor any action
taken by the Plan Administrator hereunder, nor any provision of the Plan shall
be construed so as to grant any individual the right to remain in the employ or
service of the Company (or any parent or subsidiary corporation) for any period
of specific duration, and the Company (or any parent or subsidiary corporation
retaining the services of such individual) may terminate such individual's
employment or service at any time and for any reason, with or without cause.
VII. MISCELLANEOUS PROVISIONS
A. The right to acquire Common Stock or other assets under the Plan may not
be assigned, encumbered or otherwise transferred by any optionee.
B. The provisions of the Plan relating to the vesting and termination of
outstanding options shall be governed by the laws of the State of California, as
such laws are applied to contracts entered into and performed in such State.
C. The provisions of the Plan shall inure to the benefit of, and be binding
upon, the Company and its successors or assigns, whether by Corporate
Transaction or otherwise, and the optionees, the legal representatives of their
respective estates, their respective heirs or legatees and their permitted
assignees.
25
EXHIBIT A
Non-Statutory Stock Option Agreement
Automatic Option Grant Program
26
[SHAMAN'S LETTERHEAD]
Exhibit B
To Our Stockholders:
On March 23, 1999, Shaman celebrated its 10th Anniversary. Ten years ago
as we began our journey, we never could have predicted the path we are now
taking. Yet in many ways our destination and our goal has remained
consistent--to create novel, proprietary products to meet unmet health needs,
and in so doing, to provide value for our stockholders. Our means to reaching
these goals has never wavered--to collaborate with the rainforest's indigenous
people to look for unique solutions to today's healthcare needs. Although our
goals are the same, we have altered our path.
As we now enter the market for botanical dietary supplements, it is as
though Shaman has come home--to an industry that appreciates our hard work in
identifying novel new botanical products and our commitment to sustainability
and reciprocity, to a pool of potential partners who appreciate the unique
quality and science we bring to the table, and to a growing consumer base who is
today more ready and eager than ever to try novel dietary supplements.
We are entering this market as some important transitions are occurring in
the industry. The 1994 Dietary Supplement Health and Education Act (DSHEA)
created a clear and legal regulatory pathway for the introduction of our product
candidates. More recently, the entrance of large consumer healthcare companies,
such as American Home Products, Bayer, and Warner-Lambert, has created a model
for branded, proprietary, higher margin products for us to follow. Also, with
the maturing demographics of the U.S. consumer public and a greater emphasis on
self-medication and natural solutions, the market seems to be primed and ready
to accept the types of products we plan to introduce.
Finally, and perhaps most importantly, had we not made the investment in
our technology over the past 10 years, we could not pursue our new business
today. The application of this "investment" to the dietary supplement business
is allowing us to change the industry even as we enter it. Shaman offers the
industry a novel, proprietary product pipeline, the depth of which has not
previously been available. It is a natural and logical extension of all that has
transpired at Shaman.
Although the potential is great, we can not make Shaman a success at this
time without additional funding. We expect to launch our first botanical dietary
supplement, SB-300, by mid-year. However, product launches require adequate
support of inventory, advertising, and promotion. For these activities, more
funding is necessary.
As we considered funding options, we were acutely sensitive to the
concerns of our common stockholders about dilution. Given our current low stock
price, and the anticipated conversion of a large block of our current preferred
stockholders to common stock, we understand your concerns. In looking at our
options for raising additional funds, our primary concern has been to protect
our common stockholders. We feel we have a potential solution with our proposed
Rights Offering.
The Rights Offering provides many benefits. First and foremost, common
stockholders who participate in the Rights Offering will be able to preserve
their pro rata stake in Shaman for a minimal additional investment, and thereby
are protected against the dilution potential of our certain current preferred
holders. In fact, this may be the only solution to the current dilution issue.
And, as for our current preferred stockholders, they still receive the benefits
of conversion which they initially sought, regardless of the Rights Offering.
Second, the rights offering will provide cash to fund the launch of our first
product.
While we are pursuing the Rights Offering, be assured that we are
continuing to explore every option for funding to bridge our needs from now
until the Rights Offering closes. In particular, we have initiated a debt
financing, in which a group of investors, including senior management, members
of our Board of Directors, and several of our large stockholders, would loan
Shaman approximately $1 million. This confirms the commitment and confidence
that these individuals and institutions have in Shaman's new strategy.
Finally, our initial barometer of success at Shaman will be the launch of
our first dietary supplement product, SB-300. This product, an extract of the
Croton tree, contains as one of its ingredients, SP-303, the clinically-proven
antidiarrheal compound. Given the continuing unmet need for promoting normal
bowel function in people with HIV/AIDS, we will initially target our marketing
and promotion to this audience. By launching SB-300, we also will be able to
keep our commitment to the HIV/AIDS Community by giving a portion of these sales
to the Shaman HIV Investment Trust, a Community-governed charitable organization
providing funding for HIV/AIDS services, education and research.
In addition to preparing for the launch of SB-300, we are also actively
engaged in discussions with other companies in the dietary supplement industry
for collaborations and commercialization partnerships. We have had particular
interest from the large consumer healthcare companies targeting the mass market,
as well as multi-level marketing companies. Both of these types of potential
partners value the novelty and quality of Shaman's approach.
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In closing, we would like to say that everyone at Shaman is very committed
and working diligently to make our new enterprise a success, for our future
customers and for our stockholders. We have faced and managed through a very
challenging turn of events. We responded quickly and showed great flexibility in
pursuing this new opportunity. We will settle for nothing but success, and we
thank you for your dedication to and support of Shaman. As we rise like a
Phoenix, we are motivated to provide benefits to our customers seeking healthy
lifestyles, to our dedicated stockholders and to the communities with whom we
work.
/s/ Lisa A. Conte /s/ G. Kirk Raab
- ------------------------------------- ----------------------
Lisa A. Conte G. Kirk Raab
President and Chief Executive Officer Chairman of the Board
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[SHAMAN'S LETTERHEAD]
Exhibit C
SHAMAN PHARMACEUTICALS, INC.
1999 Annual Meeting Proxy
Q&A
- --------------------------------------------------------------------------------
TO SPEAK TO A REPRESENTATIVE ON OUR INVESTOR HOTLINE,
PLEASE DIAL 1-800-XXX-XXXX between the hours of X:XX A.M. and X:XX P.M. EDT.
- --------------------------------------------------------------------------------
Following the completion of the June 11, 1999, Annual Meeting of Shaman
Pharmaceuticals, and pending approval of the necessary proposals in the attached
proxy, Shaman expects to conduct a Rights Offering, and intends to file a
registration statement with the SEC covering the issuance of rights to acquire
shares of Series R Preferred Stock to its stockholders. Shaman plans to offer to
stockholders on a pro rata basis shares having an aggregate value of
$10,000,000. You will receive more information on the Rights Offering following
the Annual Meeting, including detailed Questions and Answers (Q&A).
The approval of the proposals in this proxy will allow Shaman to proceed
with the Rights Offering to our current stockholders. The goals of this Rights
Offering are:
1) To attempt to protect the ownership of our current Common Stockholders in the
face of significant potential dilution as currently held Series C and D
Preferred Stock converts to Common Stock. The offering is structured to
assure that the current stockholders of the Company will retain a significant
portion of the value of the Company without regard to intervening dilution
caused by continued conversion of currently outstanding convertible Preferred
Stock;
2) To raise funds for our Botanicals operations, and specifically, the launch
of our first product later this summer.
General:
I didn't get a proxy for some of my shares--why? How do I get one?
You may have bought stock at different times, or even from different sources.
Each transaction is treated separately.
If the stock is held in your name (in other words you were issued a stock
certificate), then please contact: BankBoston, N.A., c/o Boston Equiserve, P.O.
Box 8040, Boston, MA 02266-8040; Telephone:
(781)575-3170; Fax: (781)828-8813.
If the stock is held in a "street name" (the brokerage firm holds the shares of
your stock as part of your brokerage account), then you should contact your
broker.
When is your stockholder meeting and where?
The Annual Meeting of Stockholders will be held on Friday June 11, 1999 at The
Embassy Suites, 250 Gateway Blvd, South San Francisco, California, 94080,at 9:00
A.M. Pacific Time.
How do I get something put on the agenda for the stockholder's meeting?
As stated in last year's 1998 Annual Meeting proxy, the deadline for getting a
stockholder proposal on the agenda for this annual meeting was December 17,
1998, which would have allowed sufficient time for it to be included in the
proxy for this year's upcoming annual meeting. There will be an opportunity for
stockholders to ask questions about the company and the proposals that have been
included in the proxy materials during the annual meeting.
Can I talk to someone at the Company?
We would be happy to answer your questions about the proxy and the proposed
Rights Offering. Please telephone our investor hotline at 1-800-XXX-XXXX between
the hours of X:XX A.M. and X:XX P.M. EDT.
Why is this so complicated? Isn't there an easier way to raise money?
The Board of Directors and management have put a process in place, that while
somewhat more complicated that other kinds of fundraising, gives the existing
stockholders an opportunity to participate in the financing and protect their
ownership position in the Company, while allowing the Company to raise the
capital necessary to implement its plans.
This is an attempt to protect the ownership position of existing stockholders
who choose to participate in the face of significant dilution potential from our
current Preferred Stockholders and particularly the Series C Preferred when it
can begin to convert into Common Stock beginning later this year. By investing a
relatively small amount of money (up to $10 million), the stockholders who
participate in the offering can leverage over $150 million which has been
invested in the company to date. Using the technology and know how that was
developed in the pharmaceutical business, the Company hopes to turn that
investment into a viable near term opportunity in the botanical dietary
supplement business, in addition to pursuing outlicensing revenue that may be
generated from the pharmaceuticals business.
Reverse split:
What is a reverse split? What does it mean that I get 1 share for every 20 I now
own?
A stockholder who owns 100 shares prior to the reverse split will own 5 shares
afterwards. Since all stockholders will be treated in the same way, the
ownership position of each stockholder is unaffected. In the simplest sense, a
reverse stock split is really just an accounting adjustment-sort of like having
one two pound package versus two one pound packages-you still have two pounds.
The other effect of a reverse stock split is that the common shares immediately
after the reverse split should trade at a significantly higher price per share
than before the split.
Why do we need to do a reverse split now?
The company is running out of authorized shares of Common Stock, based upon the
expected conversion when the Series C and D Preferred Stock converts into Common
Stock. If we do not have enough common shares available to accommodate this
conversion, the company faces significant financial penalties beyond currently
available resources in the company. The reverse split will free up authorized
shares needed to meet these conversion obligations. To the extent an existing
stockholder participates in the Rights Offering at his pro rata share, this
should substantially reduce the potential dilution effect of the Series C and
Series D Preferred Stock he would have experienced without the Rights Offering.
For these reasons we believe that it in the best interest of stockholders to
vote in favor of a reverse stock split.
Isn't this just a way of freeing up more available shares to sell later?
We do need to have sufficient shares available to allow for the conversion of
the Series C and D Preferred Stock into Common Stock, without which the company
faces significant financial penalties beyond currently available resources in
the company. These shares may also be needed for the conversion into Common
Stock of the Series R Preferred Stock issued in the Rights Offering. If we do
not need these shares to satisfy conversions, the excess shares are not
currently anticipated to be issued.
The company is also asking for authorization for more common shares as well. Why
do you need more shares if you are doing the reverse split?
We may need both approvals so as to have sufficient shares of Common Stock
available to accommodate the conversion of the existing Preferred C and D stock,
as well as the conversion of the Series R Preferred Stock that will be issued in
the Rights Offering. If we do not need these all these shares to satisfy
conversions, the excess shares are not currently anticipated to be issued.
2
If these common shares are utilized for the conversion of the Preferred R Stock
from the Rights Offering, such shares may be required per a conversion formula.
To the extent an existing stockholder participates in the Rights Offering at his
pro rata share, this should substantially reduce the potential dilution effect
of the Series C and Series D Preferred Stock he would have experienced without
the Rights Offering.
If we do the reverse split, will we get listed on NASDAQ again?
There are a number of requirements that the company must meet in order to be
re-listed on NASDAQ. The reverse split does not automatically entitle the
company to be re-listed.
What happens if I don't own at least 20 shares?
Stockholders who own less than 20 shares will be given 1 share of stock after
the reverse split. In a similar manner, those stockholders who own more than 20
shares would be rounded up in calculating the number of post-split shares which
they would receive. For example, a stockholder who owned 25 shares of stock as
of the date of record would receive 2 shares post split.
How and when do I get the new shares? What do I do with the old shares?
As soon as practical after the effective date of the reverse split, you will be
mailed forms that you will use to surrender the old stock certificates. Once
your old shares have been received, new shares will be mailed to you. Those
stockholders who have the stock certificates in their name will receive the
forms directly. If your stock is held in a brokerage account, your broker will
handle the paperwork on your behalf.
Will I have to pay taxes as a result of the reverse split?
In general there will be no federal tax liability as a result of the reverse
split if a stockholder is not rounded up as a result of the reverse stock split.
However, stockholders who receive a full share of stock instead of the partial
share of stock to which they are entitled may have a tax consequence relating to
the value of the fractional additional share they have received. The Company
urges stockholders to consult a tax professional who is capable of answering
specific questions as they pertain to your individual circumstance and federal
and state tax laws.
Additional Common Shares:
Why does the Company need so many more shares of Common Stock; we just approved
an increase in Common shares from 40 million to 70 million shares?
The company is running out of common shares based upon the expected conversion
of the Series C and D Preferred Stock into common shares. The company also needs
to have enough common shares to accommodate the conversion of Series R investors
who purchase in the Rights Offering. If we do not have enough common shares
available to accommodate these conversions, the company faces significant
financial penalties beyond currently available resources in the company.
If these common shares are utilized for the conversion of the Preferred R Stock
from the Rights Offering, such shares may be required per a conversion formula.
Hence, we feel that it is in the best interest of stockholders to vote in favor
of the increase in authorized common shares.
Won't the reverse stock split take care of the problem?
No, it may not. The Series C and D and R conversion conversions are tied to the
actual market price of the stock. Based upon the current share price, the
company anticipates needing both the reverse split as well as the additional
common shares being authorized. We may not require all these additional shares,
yet we have built in a "safety factor" in calculating the number possibly needed
because, if we do not have enough common shares available to accommodate these
conversions, the company faces significant financial penalties beyond currently
available resources in the company. If we do not need these shares to satisfy
conversions, the excess shares are not currently anticipated to be issued.
3
Additional Preferred Shares:
Why do we need more shares again? I thought we just increased the number of
Preferred shares from 1 million to 2 million?
In order to do the Rights Offering, the company has determined that it is in the
best interest of stockholders to structure it as a Preferred Stock financing.
The company needs stockholder approval in order to have enough shares of
Preferred Stock to complete the Rights Offering as currently structured. The
number of preferred shares was increased previously, but that did not address
the anticipated Rights Offering need for more shares of Preferred Stock.
The Rights Offering will provide the company with capital so that it can develop
the Botanicals business. In addition, it attempts to protect the ownership of
our current Common Stockholders in the face of significant potential dilution as
currently held Series C and D Preferred Stock converts to Common Stock. Without
the additional authorized preferred shares and the Rights Offering, the company
would not have sufficient funds needed to operate the business and would face
significant dilution as a result of the conversion of the Preferred Stock into
common.
What is the difference between "Common Stock" and "Preferred Stock"?
Common Stock is typically the stock that trades once a company goes public.
Preferred Stock has certain features and rights that are different than Common
Stock. Different classes of preferred typically have different rights associated
with them with regard to conversion rights, voting, redemption etc.
If I vote for more preferred shares, doesn't that just mean I'll get more
diluted?
If additional preferred shares are not authorized, the Company does not have
enough preferred shares to complete the Rights Offering as structured, and
existing investors will be subject to significant dilution as a result of the
Series C and D conversions. To the extent an existing stockholder participates
in the Rights Offering at his pro rata share, this should substantially reduce
the potential dilution effect of the Series C and Series D Preferred Stock he
would have experienced without the Rights Offering. For this reason, we believe
it is in the best interest of stockholders to vote in favor of increasing the
number of preferred shares.
How did the company get into this problem with the Series C and D Preferred?
Shouldn't they have known that this would negatively impact Common Stockholders?
We have always believed that we were acting in the best interest of our
stockholders to raise financial resources under terms available at the times
such financings were undertaken. Regardless of what has happened as a result of
the Series C and D Preferred, we view the Rights Offering as the best way to
protect current stockholders.
Can these preferred shares be issued to anyone? How do I know they won't go into
more death-spiral preferred types of offerings like the Series C & D?
The intention is to offer all the new Preferred shares in the Rights Offering.
If we do not need these shares to satisfy conversions, the excess shares are not
currently anticipated to be issued. The existing investors are being offered the
opportunity to buy the shares in this offering. If existing stockholders do not
participate to the full value of the offering, then the company will offer the
uncommitted amount to select institutional investors.
To the extent an existing stockholder participates in the Rights Offering at his
pro rata share, this should substantially reduce the potential dilution effect
of the Series C and Series D Preferred Stock he would have experienced without
the Rights Offering.
Amendment to the Rights of the Preferred Stock
Why are you seeking to amend the rights of the Preferred Stockholders?
At present, the Preferred Stockholders potentially have a right to be
repaid their investment (or a significant penalty amount) in the event of a
change of control of over 50% of the Company's voting stock. The Company
believes that under certain circumstances the proposed Rights Offering could
inadvertently trigger this provision.
4
Why would the Rights Offering potentially trigger a change of control? What is a
change of control?
The Rights Offering could trigger a change of control if some investors chose
not to participate while others decided to invest more than their pro rata
share. While the Stockholders in the company might not change, the relative
stock holdings could change enough to trigger the change of control provision.
A change of control in this context means that the stockholder base of the
Company changes such as that over 50% of voting power of the Company that was
previously held by one group of persons is tranferred to a different person or
persons who previously did not hold a significant, or controlling, amount of our
voting stock; typically this type of sudden and significant change is a result
of a merger or takeover. A Rights Offering also could have the same effect.
What are the ramifications of a change of control?
Under the Company's current Certificate of Incorporation, a change of
control is treated as an event that would require that the Company repay the
Preferred Stockholders their liquidation preference amount or other penalties.
Since this could jeopardize the ability of the Company to effect the Rights
Offering, it is neither in the best interest of the Company nor its
stockholders, and the Company is recommending that stockholders vote in favor of
this amendment.
Why is it in the best interests of the stockholders to amend the rights of the
Preferred Stockholders?
This amendment would eliminate the possibility that the Rights Offering would
trigger a change of control. By voting in favor of this amendment, it would
ensure that Shaman would not incur any penalties from a possible trigger of this
provision and would therefore eliminate the possibilty that the provision could
cost the Company to be unable to effect the Rights Offering.
Option Plan:
How can you ask for an option plan to reward management and the board of
directors when the stock has performed so poorly?
The management and Board are as disappointed as the stockholders in the
performance of the stock.
In order for the company to be successful in the future, a number of key
milestones must be met. To meet those, the company must be able to attract and
retain key management; stock options are an effective way to do this. As an
alternative, Shaman would have to utilize substantial cash reserves to attract,
hire, and retain new employees or to utilize consultants. Employees will be
rewarded as the company is successful and creates value for all stockholders.
Currently, due to the stock price, no currently held options have any positive
value. Additionally, all members of the Board of Directors have surrendered all
previously held stock options.
Does this mean management/employees/the board own 20% of the
company? Isn't that a lot?
The option pool will at any given time represent at most 20% of the outstanding
shares of the company, which is typical for many technology-based companies.
However, all of these shares may not necessarily be granted. The actual issuance
of options can only be made with Board approval and are typically vested over a
four-year period.
Does this mean the current employees get even more options? At what price? Who
is getting them, and how many is each person getting?
The employee option pool will provide options to existing employees as
appropriate with the approval of the Board of Directors. In order to attract and
retain key employees, the long-term value of the stock options must be
sufficient so as to be competitive. The dietary supplement business will require
that the company hire experienced management to run that business; options are
required for these employees. Given the amount of new shares that will be issued
as part of the Rights Offering, the option pool needs to be increased
proportionally. Presently, our intention is to ask all employees who receive new
options to surrender all their old options before receiving new options.
Currently, due to the stock price, no currently held options have any positive
value.
Who decides how the option pool is split up?
The Board has a compensation committee that determines appropriate grants for
senior management. Senior management makes recommendations to the Board as to
appropriate grants for other employees. In both cases, option grants must be
approved first by the compensation committee, then by the full Board of
Directors.
5
What does the automatic increase of 4% per year mean?
This means that the option pool will be able to increase by 4% a year, however
in no case will the option pool available for future grants exceed 20% of the
outstanding shares at a given time. The company believes that this annual
increase will be adequate to provide options to new employees as well as to
existing employees as necessary. This is done so that stockholders are not
inconvenienced by seeking approval every year.
What does the maximum grant number mean?
This is the maximum number of shares that can be granted to any one employee. It
is required by law to set this number in the option plan and to have it approved
by proxy by the stockholders.
Why are you extending the plan?
The existing plan is set to expire in 2002. Given all the work that has gone
into developing this plan, the Board felt that it would be cost effective and
therefore prudent to extend the plan until 2008.
Why are the non-employee members of the Board of Directors being granted
options? Why are they surrendering their existing options?
Each of the non-employee Directors are given an option grant as compensation for
their work on the Board. Each of them has agreed to surrender their existing
grants and receive new option grants that will be made at the same price as the
Preferred R stock will convert. The Board will therefore be on an equal basis
with the existing stockholders who participate in the Rights Offering.
6