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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 3)
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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 Section 240.14a-11(c) or Section 240.14a-12
CHEMTRAK INCORPORATED
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(Name of Registrant as Specified In Its Charter)
N/A
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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Notes:
ChemTrak Incorporated
[ ], 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Annual Meeting") of ChemTrak Incorporated (the "Company") which will be held
at the principal executive offices of the Company, located at 929 East Arques
Avenue, Sunnyvale, California 94086-4520, on , 1998, at 3:00 p.m.,
Pacific Daylight Time. Your Board of Directors and management look forward to
greeting personally those stockholders able to attend.
At the Annual Meeting, you will be asked to consider and vote on the
following proposals: (i) to elect two directors, (ii) to approve the terms of
a proposed equity financing of up to $5,000,000 pursuant to which the Company
will issue 6% Cumulative Convertible Series B Preferred Stock (all of which
may be converted into Common Stock pursuant to a formula which includes a
lower-than-market conversion price for Common Stock and for which there is no
upper limit on the number of shares of Common Stock which will be issued upon
conversion of the Preferred Stock) that could result in the issuance of more
than 20% of the outstanding shares of Common Stock of the Company, (iii) to
approve an amendment to the 1991 Employee Stock Purchase Plan to increase the
aggregate number of shares of Common Stock authorized for issuance under such
plan by 200,000 shares to 400,000 shares, (iv) to approve an amendment to the
Company's Restated Certificate of Incorporation to effect a reverse stock
split such that each three to five shares of the Company's currently issued
and outstanding Common Stock will be exchanged for one share of newly issued
Common Stock, with the precise number of newly issued shares of Common Stock
to be converted to be determined by the Board of Directors within five days of
the Annual Meeting and (v) ratify the appointment of independent auditors.
These proposals are more fully discussed in the accompanying Proxy Statement,
which you are urged to read carefully. Your Board of Directors recommends a
vote FOR all the proposals.
It is important that your shares are represented and voted at the meeting
whether or not you plan to attend. Accordingly, you are requested to sign,
date and mail the enclosed proxy in the envelope provided at your earliest
convenience.
If you have any further questions concerning the Annual Meeting or any of
the proposals, please feel free to contact Don Fluken at the Company at (408)
773-8156 or speak with D. F. King & Co., Inc., our proxy solicitors, at (800)
848-3409.
On behalf of the Board of Directors, thank you for your cooperation and
continued support.
Sincerely,
Prithipal Singh, Ph.D.
Chairman of the Board
929 East Arques Avenue, Sunnyvale, California 94086-4520
(408) 773-8156 (800) 927-7776 FAX (408) 773-1651
PRELIMINARY COPY
CHEMTRAK INCORPORATED
929 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086-4520
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ], 1998
TO THE STOCKHOLDERS OF ChemTrak Incorporated:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of ChemTrak
Incorporated, a Delaware corporation (the "Company"), will be held on [
], 1998, at 3:00 p.m., Pacific Daylight Time at the principal executive
offices of the Company, located at 929 East Arques Avenue, Sunnyvale,
California 94086-4520, for the following purposes:
1. To elect two directors to hold office until the 2001 Annual Meeting of
Stockholders.
2. To approve the terms of a proposed equity financing of up to $5,000,000
pursuant to which the Company will issue 6% Cumulative Convertible
Series B Preferred Stock (all of which may be converted into Common
Stock pursuant to a formula which includes a lower-than-market
conversion price for the Common Stock and for which there is no upper
limit on the number of shares of Common Stock which will be issued upon
conversion of the Preferred Stock) that could result in the issuance of
more than 20% of the outstanding shares of Common Stock of the Company.
3. To approve an amendment to the Company's 1991 Employee Stock Purchase
Plan to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 200,000 shares to 400,000
shares.
4. To approve an amendment to the Company's Restated Certificate of
Incorporation to effect a reverse stock split such that each three to
five shares of the Company's currently issued and outstanding Common
Stock will be exchanged for one share of newly issued Common Stock, with
the precise number of newly issued shares of Common Stock to be
converted to be determined by the Board of Directors within five days of
the Annual Meeting.
5. To ratify the selection of Coopers & Lybrand L.L.P. as independent
auditors of the Company for its fiscal year ending December 31, 1998.
6. To transact such other business as may properly come before the meeting.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on [ ], 1998, as
the record date for the determination of stockholders entitled to notice of
and to vote at this Annual Meeting.
By Order of the Board of Directors
CHEMTRAK INCORPORATED
Donald V. Fluken
Secretary
Sunnyvale, California
[ ], 1998
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING.
PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK
OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE
RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
PRELIMINARY COPY
CHEMTRAK INCORPORATED
929 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086-4520
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
ChemTrak Incorporated, a Delaware corporation (the "Company"), for use at the
Annual Meeting of Stockholders to be held on [ ], 1998, at 3:00 p.m.,
Pacific Daylight Time (the "Annual Meeting") for the purposes set forth herein
and in the accompanying Notice of Annual Meeting. The Annual Meeting will be
held at the principal executive offices of the Company, located at 929 East
Arques Avenue, Sunnyvale, California 94086-4520. The telephone number at that
address is (408) 773-8156. The Company intends to mail this proxy statement
and accompanying proxy card on or about [ ], 1998 to all stockholders
entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies including
the preparation, assembly, printing and mailing of this proxy statement, the
proxy and any additional information furnished to stockholders. The Company
has retained the services of D.F. King & Co., Inc. to solicit proxies, for
which the Company has agreed to pay approximately $8,000 and to reimburse
certain out-of pocket expenses. Copies of solicitation materials will be
furnished to banks, brokerage houses, fiduciaries and custodians holding in
their names shares of Common Stock beneficially owned by others to be
forwarded to such beneficial owners. The Company may reimburse such persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers, or other
regular employees for such services.
There may be significant disadvantages to the Company if the shareholders do
not approve the proposals. In particular, if Proposals 2 and 4 are not
approved, the Company (i) may not continue to qualify for listing on the
Nasdaq SmallCap Market, (ii) may need to decrease significantly its operating
expenditures, particularly in marketing, which in turn may result in
significant losses in the Company's revenues, and (iii) may need to pursue
alternative forms of financing on terms less favorable to the Company.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of the Company's Common Stock at the close of
business on [ ], 1998 (the "Record Date"), will be entitled to notice of
and to vote at the Annual Meeting. At the close of business on the Record
Date, the Company had outstanding and entitled to vote [ ] shares of
Common Stock.
Each holder of record of Common Stock on the Record Date will be entitled to
one vote for each share held on all matters to be voted upon at the Annual
Meeting.
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. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative
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votes. Broker non-votes will be counted towards determining a quorum, but will
not be counted for any purpose in determining whether a matter has been
approved.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of the Company, at the Company's principal executive office, a
written notice of revocation or a duly executed proxy bearing a later date, or
it may be revoked by attending the meeting and voting in person. Attendance at
the meeting will not, by itself, revoke a proxy.
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the Company's
1999 Annual Meeting of Stockholders must be received by the Company not later
than [ ], 1998 in order to be included in the proxy statement and proxy
relating to that annual meeting.
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation and By-Laws provide that
the Board of Directors (the "Board of Directors" or the "Board") shall be
divided into three classes, each class consisting, as nearly as possible, of
one-third of the total number of directors, with each class having a three-
year term. Vacancies on the Board may be filled only by persons elected (i) by
the affirmative vote of the holders of the then-outstanding shares of voting
stock of the Company entitled to vote generally in the election of directors
voting together as a single class, or (ii) by a majority of the remaining
directors. A director elected by the Board to fill a vacancy (including a
vacancy created by an increase in the Board of Directors) shall serve for the
remainder of the full term of the class of directors in which the vacancy
occurred and until such director's successor is duly elected and qualified.
The Board of Directors is presently composed of six members. There are two
directors in the class whose term of office expires in 1998, Gordon W. Russell
and Prithipal Singh, Ph.D., both of whom were previously elected by the
stockholders. If elected at the Annual Meeting, such nominees would serve
until the 2001 Annual Meeting of Stockholders and until their successors are
elected and have qualified, or until any such director's death, resignation or
removal.
Directors are elected by a plurality of the aggregate votes present in
person or represented by proxy and entitled to vote at the Annual Meeting.
Shares represented by executed proxies will be voted, if authority to do so is
not withheld, for the election of the two nominees named above. In the event
that any nominee should be unavailable for election as a result of an
unexpected occurrence, such shares will be voted for the election of such
substitute nominee as management may propose. Each person nominated for
election has agreed to serve if elected, and management has no reason to
believe that any nominee will be unable to serve.
Set forth below is biographical information for each person nominated for
the Board of Directors and each current director whose term will continue
after the Annual Meeting.
NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2001 ANNUAL
MEETING OF STOCKHOLDERS (CLASS III DIRECTORS)
Gordon W. Russell
Gordon W. Russell, age 64, has served as a director of the Company since
1990. Since 1979, Mr. Russell has served as a general partner of Sequoia
Capital, a venture capital fund, and certain of its affiliates. Mr. Russell
also serves as a director of Sangstat Medical Corp., Fusion Medical
Technologies, Inc. and Aradigm Corp.
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Prithipal Singh, Ph.D.
Prithipal Singh, Ph.D., age 58, is a founder of the Company and has served
as a director since 1985, Chairman of the Board since 1988. Dr. Singh also
served as President of the Company from 1988 to 1993, as Chief Executive
Officer from 1988 to January 1997, and as Chief Technical Officer from January
1997 until March 1998. From 1985 to 1988, Dr. Singh was a Senior Vice
President of Idetek, Inc., an animal health care company. Prior to his joining
Idetek, Dr. Singh was a Vice President of Syva Corp., a diagnostics company.
Dr. Singh is also a director of Abaxis, Inc.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
IN FAVOR OF THE NAMED NOMINEES.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 1999 ANNUAL MEETING OF STOCKHOLDERS
(CLASS II DIRECTORS)
Robert P. Kiley
Robert P. Kiley, age 62, has served as a director of the Company since
September 1996. Mr. Kiley has served since 1987 as President of Neal Ward
Realty, Inc., a residential sales and development company. From 1962 to 1987,
Mr. Kiley held a series of progressively responsible positions with Tambrands
Inc., a consumer healthcare products company, most recently as Executive Vice
President responsible for the company's international business. Mr. Kiley was
a director of Tambrands until July 1997.
David Rubinfien
David Rubinfien, age 76, has served as a director of the Company since 1988.
Since 1991, Mr. Rubinfien has been a private investor. From 1989 to 1991, Mr.
Rubinfien held the positions of President, Chief Executive Officer and
Chairman of the Board of Systemix, Inc., a biotechnology company. Mr.
Rubinfien also serves as a director of Biocircuits Corporation, Matritech,
Inc. and Molecular Biosystems, Inc.
DIRECTORS CONTINUING IN OFFICE UNTIL THE 2000 ANNUAL MEETING OF STOCKHOLDERS
(CLASS I DIRECTORS)
Edward F. Covell
Edward F. Covell, age 53, was appointed President and Chief Executive
Officer of the Company in January 1997, after having served as President and
Chief Operating Officer since May 1996 when he joined the Company. He was
elected as a director of the Company in August 1996. Prior to joining the
Company, Mr. Covell was a management consultant from 1994 to 1996, focusing on
the OTC medical device market. From 1992 to 1994 he was President and Chief
Operating Officer of MedChem Products, Inc., a manufacturer of medical devices
serving customers worldwide. Mr. Covell held a series of increasingly
responsible positions with Tambrands Inc., a consumer healthcare products
company, from 1980 through 1990, including corporate Vice President and
General Manager of the Diagnostic Division. Prior to joining Tambrands, Mr.
Covell served in domestic and international management and product development
positions with the Kendall Company, a diversified manufacturing company.
Malcolm Jozoff
Malcolm Jozoff, age 58, has served as a director of the Company since 1993.
He has been Chairman, President and Chief Executive Officer of The Dial
Corporation, a consumer products company, since May 1996. From 1995 to 1997,
he was a consultant on marketing and strategic planning issues. From 1993 to
1995, he served as Chairman and Chief Executive Officer of Lenox, Inc., a
manufacturer of consumer durables. From 1967 to 1992, Mr. Jozoff was employed
in various positions by The Procter and Gamble Company, Inc., most recently as
President, Health Care Products and Corporate Group Vice President. Mr. Jozoff
is a director of Columbia Gas System, Inc. In 1993, in connection with a civil
proceeding brought by the Securities and Exchange
3
Commission, Mr. Jozoff consented, without admitting or denying the
allegations, to the entry of an order enjoining him from violating section
10(b) of the Securities Exchange Act of 1934, as amended.
BOARD COMMITTEES AND MEETINGS
During the year ended December 31, 1997, the Board of Directors held eight
meetings. The Board has an Audit Committee, a Compensation Committee and a
Non-Officer Stock Option Committee.
The Audit Committee meets with the Company's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained or
dismissed; and receives and considers the accountants' comments as to
controls, adequacy of staff and management performance and procedures in
connection with the Company's audit and financial controls. The Audit
Committee is comprised of two non-employee directors: Messrs. Jozoff and
Russell. The Audit Committee acted once by written consent during 1997.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants
under the Company's stock option plans, and otherwise determines compensation
levels and performs such other functions regarding compensation as the Board
may delegate. The Compensation Committee is currently composed of two non-
employee directors: Messrs. Rubinfien and Kiley. The Compensation Committee
acted once by written consent during 1997.
A Non-Officer Stock Option Committee was established in May 1992 which has
the ability to administer the Company's stock option plans only for non-
officer employees and to make stock option grants to such employees not in
excess of 10,000 shares. All option grants in excess of this limit and all
option grants to officers must be approved by the Compensation Committee. The
Non-Officer Stock Option Committee is currently composed of two employee
directors: Dr. Singh and Mr. Covell. Mr. Covell became a member of the Non-
Officer Stock Option Committee in September 1996. Prior to this time, the Non-
Officer Option Committee was composed of Dr. Singh alone.
The Board of Directors has no standing nominating committee or any committee
performing the functions of such committee.
During the year ended December 31, 1997, each Board member attended 75% or
more of the aggregate of the meetings of the Board and of the committees on
which he served held during the period for which he was a director or
committee member, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Rubinfien and Kiley served as members of the Compensation Committee
during the fiscal year ended December 31, 1997. No past or present members of
the Compensation Committee are or have been employees or officers of the
Company.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION/1/
The Board of Directors of the Company, with input from the Company's
Compensation Committee, administers the Company's policies governing employee
compensation and the Company's employee benefit plans, including its stock
option plans and its 1991 Employee Stock Purchase Plan. The Board of Directors
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/1/ The material in this report is not "soliciting material," is not deemed
filed with the Securitries and Exchange Commission and is not to be
incorporated by reference into any filing of the Company under the
Securities Act of 1933, as amended, or the Exchange Act of 1934, as
amended, whether made before or after the date hereof and irrespective of
any general corporation language contained in such filing.
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evaluates the performance of management, sets compensation policies and
levels, and determines salaries and incentive compensation. Dr. Singh and Mr.
Covell, officers of the Company, do not take part in the deliberation of their
compensation.
The Company's executive compensation program is designed to attract and
retain executives capable of leading the Company to meet its business
objectives and to motivate them to enhance long-term stockholder value. The
key elements of the program are competitive pay and equity incentives. Annual
compensation for the Company's executive officers consisted in 1997 of a cash
salary, bonuses and stock option grants.
The Board of Directors makes a subjective assessment of a variety of
factors, both personal and corporate, in making salary and equity compensation
decisions regarding the Company's executive officers, including the Chief
Executive Officer. These factors include the midrange of compensation paid by
comparable medical and pharmaceutical companies in the San Francisco Bay Area
to individuals in comparable positions, the individual contributions of each
officer to the Company, and most important, the progress of the Company
towards its objectives. The companies examined for comparative purposes may,
but need not, include those comprising the Russell 2000 Index and the
Hambrecht & Quist Healthcare (excluding Biotechnology) Index. At this point in
the Company's evolution, the measures the Board of Directors looks to in
evaluating the Company's progress when determining compensation for executive
officers are product sales, advancement of the Company's product candidates
through development and clinical testing, procurement of requisite regulatory
approvals and the establishment of relationships with appropriate marketing
partners.
Mr. Covell's compensation and equity incentive package is based upon the
same factors as that of the other executive officers. Mr. Covell's salary was
increased from $13,375 per month in 1996 to $16,083 per month in May 1997,
when he was appointed Chief Executive Officer of the Company, and to $17,917
per month in February 1998.
Stock options awarded to executives in 1997 were consistent with the
Company's option policy. In awarding stock options, the Board of Directors
considers the number and value of an executive officer's outstanding options.
All new employees are granted incentive stock options in an amount based upon
the position's salary grade. Based on the Board of Directors' evaluation of
the Chief Executive Officer's ability to influence the long-term growth and
profitability of the Company, the Board of Directors decided that Mr. Covell
should receive option grants to purchase 99,273 shares of the Company's Common
Stock with an exercise price of the current fair market value. Of these shares
subject to option, 39,273 shares vested immediately and 60,000 shares vest
pursuant to the Company's standard vesting schedule over a four-year period.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), limits the Company to a deduction for federal income tax purposes of
no more than $1 million of compensation paid to certain named Executive
Officers in a taxable year. Compensation above $1 million may be deducted if
it is "performance-based compensation" within the meaning of the Code. The
Board of Directors has determined that stock options granted under the
Company's 1993 Equity Incentive Plan with an exercise price at least equal to
the fair market value of the Company's Common Stock on the date of the grant
shall be treated as "performance-based compensation."
Gordon W. Russell, Member, Compensation Committee
Robert P. Kiley, Member, Compensation Committee
Prithipal Singh, Ph.D.
Edward F. Covell
David Rubinfien
Malcolm Jozoff
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COMPENSATION OF DIRECTORS
Each non-employee director of the Company receives a per-meeting fee of
$750. In the last fiscal year ended December 31, 1997, the total aggregate
compensation paid or accrued to non-employee directors was $22,500. The
members of the Board of Directors are also eligible for reimbursement for
their expenses incurred in connection with attendance at Board meetings in
accordance with Company policy.
Each non-employee director of the Company receives stock option grants under
the 1992 Non-Employee Directors' Stock Option Plan (the "Directors' Plan").
Only non-employee directors of the Company or an affiliate of such directors
(as defined in the Code) are eligible to receive options under the Directors'
Plan. Options granted under the Directors' Plan are not intended by the
Company to qualify as incentive stock options under the Code.
Option grants under the Directors' Plan are non-discretionary. On September
16, 1992, each non-employee director received an option to purchase 2,000
additional shares of the Common Stock of the Company. On January 2 of each
year (or the next business day should such date be a legal holiday), each
member of the Company's Board of Directors who is not an employee of the
Company is automatically granted under the Directors' Plan, without any
further action by the Company, the Board of Directors or the stockholders of
the Company, an option to purchase 2,000 shares of Common Stock of the
Company. In addition, each new person who becomes a non-employee director is
granted an option to purchase 5,000 shares of Common Stock of the Company upon
the date of first election to the Board. No other options may be granted at
any time under the Directors' Plan. The exercise price of the options granted
under the Directors' Plan is 100% of the fair market value of the Common Stock
subject to the option on the date of the option grant. Options granted under
the Directors' Plan become exercisable in four equal installments beginning on
the first anniversary of the grant of the option. Such vesting is conditioned
upon continued service as a director of the Company. The term of options
granted under the Directors' Plan is 10 years.
During the last fiscal year, options to purchase 2,000 shares were granted
under the Director's Plan to each of Messrs. Jozoff, Rubinfien, Russell and
Kiley at an exercise price per share of $1.59. The fair market value of such
Common Stock on the date of the grant was $1.59 per share (based on the
closing sales price reported on the Nasdaq National Market on the date of
grant). As of December 31, 1997, no options had been exercised under the
Directors' Plan. Directors are also eligible to receive options to purchase
stock under the 1988 Stock Option Plan (the "1988 Plan") and certain stock
awards, such as stock bonuses, stock appreciation rights, and rights to
purchase restricted stock, under the Company's 1993 Equity Incentive Plan (the
"1993 Plan"). Employee directors of the Company are also eligible to
participate in the 1991 Employee Stock Purchase Plan.
As of December 31, 1997, the total number of outstanding options to purchase
shares of Common Stock that had been granted to non-employee directors under
the 1988 Plan was 64,000 and under the Director's Plan was 58,000. In October
1995, Mr. Jozoff entered into a consulting agreement with the Company and was
granted a non-qualified stock option under the 1988 Plan to purchase 30,000
shares of Common Stock at the price of $1.625 per share, equal to the fair
market value of the Common Stock on the date of grant. In April 1996, he was
subsequently granted a non-qualified stock option to purchase 24,000 shares of
Common Stock at the price of $3.31 per share, equal to the fair market value
of the Common Stock on the date of grant. These options become exercisable in
six monthly installments beginning one month from the date of grant. In
September 1996, Mr. Kiley entered into a consulting agreement with the Company
and was granted a non-qualified stock option under the 1988 Plan to purchase
5,000 shares of Common Stock at the price of $2.47 per share, equal to the
fair market value of the Common Stock at the date of grant. These options vest
in eight quarterly installments beginning three months from the date of grant.
6
PROPOSAL 2
APPROVAL OF TERMS OF EQUITY FINANCING
BACKGROUND OF THE FINANCING
General. The stockholders of the Company are being asked to approve the
issuance and sale of up to 5,000 shares (the "Financing") of 6% Cumulative
Series B Convertible Preferred Stock, $0.001 par value per share, convertible
to Common Stock pursuant to a formula that includes a lower-than-market
conversion price (the "Series B Preferred Stock") in a private placement of up
to $5,000,000 to qualified persons (the "Investors"), on the terms and
conditions outlined below. All shares of the Series B Preferred Stock are
convertible into Common Stock, and the conversion formula does not contain an
upper limit on the number of shares of Common Stock that may be issued upon
conversion. The Company executed a private placement of approximately
[$1,002,000] on [April 6, 1998] through the issuance and sale of 1,002 shares
of the Series B Preferred Stock, and now seeks shareholder approval for
additional rounds of financing on identical terms. The Company anticipates
that the Financing, if approved by the Stockholders, would occur in a series
of closings on separate dates (each, a "Closing Date").
THIS PROXY STATEMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OF THE COMPANY. THE SECURITIES REFERRED TO IN THIS
PROXY STATEMENT HAVE NOT BEEN REGISTERED FOR SALE BY THE COMPANY UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR ANY STATE SECURITIES
LAWS AND MAY NOT BE SO OFFERED OR SOLD ABSENT SUCH REGISTRATION UNDER THE 1933
ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS THEREOF.
Substantial Dilutive Effect. If executed, the Financing may have a
substantial dilutive effect on current stockholders. The number of shares of
Common Stock issuable upon conversion of the Series B Preferred Stock may
increase substantially in certain circumstances, including, but not
necessarily limited to, the circumstance wherein the trading price of the
Common Stock declines before conversion. In addition, there is no upper limit
on the number of shares of Common Stock that will be issued upon conversion of
the Series B Preferred Stock. The Company would be obliged to issue the shares
of Common Stock upon conversion of the Series B Preferred Stock regardless of
the substantial dilution such issuance might have on the ownership interests
of other shareholders of the Company.
The pro forma net tangible book value of the Company as of December 31, 1997
was $4.6 million or $0.25 per share of Common Stock. Pro forma net tangible
book value per share represents the Company's total tangible assets less total
liabilities (including proceeds of $1.3 million received from issuance of
Series A 6% Cumulative Convertible Preferred Stock ("Series A Preferred
Stock") in January 1998, deduction of commissions and offering expenses,
$500,000 worth of prepaid advertising less offering expenses of approximately
$50,000 as partial consideration in execution of a Media Purchase Agreement
(described below) in March 1998 (the "Media Purchase Agreement") and proceeds
of $1,002,000 received from issuance of Series B 6% Cumulative Convertible
Preferred Stock ("Series B Preferred Stock") in April 1998, deduction of
commissions and offering expenses divided by the pro forma number of
outstanding shares of Common Stock (after giving effect to the conversion of
the Series A Preferred Stock and accrued and unpaid dividend on such shares
into Common Stock and after giving effect to the issuance of $500,000 of
Common Stock as partial consideration in execution of the Media Purchase
Agreement and after giving effect to the conversion of the Series B Preferred
Stock). Dilution per share represents the difference between the amount per
share paid by investors in this offering and the pro forma net tangible book
value per share after the offering. After giving the effect to the sale of the
remaining 3,998 shares of Series B Preferred Stock in this offering and after
deducting commissions and estimated offering expenses, the pro forma net
tangible book value of the Company as of December 31, 1997 would have been
$8.2 million or $0.34 per share. This represents an immediate increase of pro
forma net tangible book value of $0.09 per share to existing stockholders and
an immediate dilution in
7
pro forma net tangible book value of $0.41 per share to new investors
purchasing shares of Common Stock in this offering, as illustrated in the
following table:
Initial conversion price per share............................... $0.75
Pro forma net tangible book value per share before the
offering...................................................... 0.25
Increase attributable to new investors......................... 0.09
----
Pro forma net tangible book value per share after the offering... 0.34
-----
Dilution per share to new investors.............................. $0.41
=====
The following table summarizes, on a pro forma basis as of December 31,
1997, the difference between shares held by stockholders (assumed to include
investors of Series A Preferred Stock, the investor in the Media Purchase
Agreement and investors of 1,002 shares of Series B Preferred Stock) and
shares to be issued to new investors of the remaining Series B Preferred Stock
with respect to the number of shares of Common Stock purchased from the
Company, their percentage ownership of the Company and the average price paid
that would result from the conversion based on a range of various prices if
all the remaining Series B Preferred Stock were converted.
ASSUMED AVERAGE PRICE PER COMMON SHARE FOR CLOSING SERIES B
-----------------------------------------------------------------------
$1.00 $1.20 $0.90
----------------------- ----------------------- -----------------------
SHARES SHARES SHARES
(000) % PRICE/SHARE (000) % PRICE/SHARE (000) % PRICE/SHARE
------ ---- ----------- ------ ---- ----------- ------ ---- -----------
Pro forma shares at
December 31, 1997...... 18,170 77% $0.25 18,170 80% $0.25 18,170 75% $0.25
Shares belonging to new
investors.............. 5,411 23% $0.75 4,509 20% $0.90 6,012 25% $0.68
------ ---- ------ ---- ------ ----
Total................... 23,581 100% 22,679 100% 24,182 100%
====== ==== ====== ==== ====== ====
The computations in the above tables assume (i) the conversion price for the
Series A Preferred Stock to be 75% of the average of the Closing Bid Price of
the Common Stock for the five trading days immediately preceding the date of
issuance of the Series A Preferred Stock, (ii) the conversion price for the
Series B Preferred Stock to be 75% of the average of the Closing Bid Price of
the Common Stock for the five trading days immediately preceding the date of
conversion of the Series B Preferred Stock, but in no event more than 100% of
the average of the Closing Bid Price of the Common Stock for the five trading
days immediate preceding the issuance of the Series B Preferred Stock, (iii)
the five day average closing bid price on the date of issuance of the
remaining 3,998 shares of Series B Preferred Stock to be $0.90, (iv) the
conversion of the Series A Preferred Stock and Series B Preferred Stock to
take place 60 days and 90 days, respectively, after issuance and all accrued
and unpaid dividend on such shares to be converted into Common Stock, (v) no
additional shares to be issued in the Media Purchase Agreement as the Closing
Bid Price of the Company's Common Stock on the re-valuation date (120 days
after closing or on the effective date of the proposed registration) is
assumed to be equal or above the Average Bid Price (the average closing bid
price for the five preceding trading days prior to execution of the
agreement), and (vi) exclusion of the aggregate 59,259 shares of Common Stock
subject to warrants, exercisable for five years at a price of $0.935 per
share, issued as partial consideration pursuant to the Media Purchase
Agreement. To the extent Series A and Series B Preferred Stock are converted
later than 60 days and 90 days, respectively, after issuance, the five day
average Closing Bid Price falls below $0.90 on the date of conversion of the
Series B Preferred Stock the Company's Common Stock on the re-valuation date
is below the Average Bid Price, and to the extent outstanding warrants are
exercised there will be further dilution to new investors.
The beneficial conversion feature attached to the Series A Preferred Stock
and the Series B Preferred Stock will be recognized and measured by allocating
a portion of the proceeds equal to the intrinsic value of that feature to
additional paid-in capital. The intrinsic value will be calculated at the date
of issue as the difference between the issue price and the fair market value
of the Common Stock into which the security is convertible,
8
multiplied by the number of shares into which the security is convertible. As
the security provides more than one method of determining the conversion rate,
the computation will be made using the conversion terms that are most
beneficial to the investor. The discount resulting from an allocation of
proceeds to the beneficial conversion feature is analogous to a dividend and
will be recognized as a return to the preferred stockholders over the minimum
period in which the preferred stockholders can realize that return, which is
60 days and 90 days after issuance for the Series A Preferred Stock and the
Series B Preferred Stock, respectively. The discount, or the "deemed
dividend," will be accreted using the effective interest method from the date
of issuance through the date the security is first convertible.
The mechanics of the conversion for the $1,300,000 of Series A Preferred
Stock state that the conversion price will be computed as the lesser of: (i)
75% of the average of the closing bid price of the Common Stock for the five
trading days immediately preceding the date of issuance of the Series A
Preferred Stock; or (ii) 75% of the average of the closing bid price of the
Common Stock for the five trading days immediately preceding conversion of the
Series A Preferred Stock. Beginning 60 days after issuance, each holder would
have the right at any time, and from time to time, to convert some or all such
shares into fully paid and nonassessable shares of Common Stock.
On January 23, 1998 the Company issued $1,300,000 of Series A Preferred
Stock to private investors. The following table sets forth the deemed dividend
and the impact on net loss per share as of the date of issuance and the number
of shares outstanding as of December 31, 1997.
Five day average closing bid price on the date of issuance
(January 23, 1998): $ 0.8190
Conversion price: $ 0.61425
----------
Intrinsic value per post conversion share: $ 0.20475
Series A Preferred Stock offered: $1,300,000
Minimum shares to be issued: 2,116,402
Deemed dividend: $ 433,333
Shares used in calculating net loss attributable to common
stockholders per common share as of December 31, 1997: 13,643,145
Impact on net loss per share as of the date of issuance: $ 0.032
The deemed dividend or return to the preferred stockholders that should be
recognized over the minimum period in which the preferred stockholders can
realize the return by converting will be $433,333. The deemed dividend will
affect net loss per share in computing net loss attributable to common
stockholders. Additional shares will be issued if the stock price falls below
$0.8190 on the date of conversion. Based on the computations in the above
table, the anticipated impact on net loss per share from the 25% conversion
feature of the Series A Preferred Stock will result in an increase in net loss
per share to common stockholders of $0.032. The deemed dividend of $433,333
was accreted to accumulated deficit in the first three months of 1998.
The mechanics of the conversion for the $5,000,000 of Series B Preferred
Stock state that the conversion price will be computed as 75% of the average
closing bid price of the Common Stock for the five trading days immediately
preceding the date of the conversion of the Series B Preferred Stock, but at
no event more than 100% of the average Closing Bid Price for the five trading
days immediately preceding the date of issuance of the Series B Preferred
Stock. Beginning 90 days after issuance, each holder would have the right at
any time, and from time to time, to convert some or all such shares into fully
paid and nonassessable shares of Common Stock.
9
The following is an example showing the deemed dividend or return to the
holders of Preferred Stock that should be recognized over the minimum period
in which the holders of Series B Preferred Stock can realize the return by
converting and the different number of shares to be issued based upon the five
day average closing bid price the date of conversion.
EXAMPLE 1 EXAMPLE 2 EXAMPLE 3 EXAMPLE 4
---------- ---------- ---------- ----------
Five day average closing bid
price on the date of issuance
(assumed issuance date
March 27, 1998): $ 0.90 $ 0.90 $ 0.90 $ 0.90
Assumed five day average
closing bid price the date of
conversion: $ 1.20 $ 1.00 $ 1.50 $ 0.90
Conversion price: $ 0.90 $ 0.75 $ 0.90 $ 0.675
---------- ---------- ---------- ----------
Intrinsic value per post
conversion share: $ 0.225 $ 0.225 $ 0.225 $ 0.225
Series B Preferred Stock
offered: $5,000,000 $5,000,000 $5,000,000 $5,000,000
Shares to be issued: 5,555,555 6,666,666 5,555,555 7,407,407
Deemed dividend: $1,666,667 $1,666,667 $1,666,667 $1,666,667
The deemed dividend will affect net loss per share in computing net loss
attributable to common stockholders. The minimum shares to be issued are
5,555,555 shares. Additional shares will be issued if the five day average
closing bid price falls below $1.20 on the date of conversion.
Based on the computations in the above table, if all shares of Series B
Preferred Stock are issued, the anticipated impact on net loss per share from
the conversion feature of the Series B Preferred Stock will result in an
increase in net loss per share to common stockholders.
On April 6, 1998 the Company issued $1,002,000 of Series B Preferred Stock
to private investors. The following table sets forth the deemed dividend and
the impact on net loss per share as of the date of issuance and the number of
shares outstanding as of March 31, 1998.
Five day average closing bid price on the date of issuance
(April 6, 1998): $ 0.74375
Assumed five day average closing bid price on the date of
conversion: $ 0.74375
Conversion price (75%): $ 0.55781
----------
Intrinsic value per post conversion share: $ 0.18594
Series B Preferred Stock offered: $1,002,000
Shares to be issued: 1,796,311
Deemed dividend: $ 334,006
Shares used in calculating net loss attributable to common
stockholders per common share as of March 31, 1998: 14,061,000
Impact on net loss per share as of the date of issuance: $ 0.024
For purposes of the calculation in the above table the five day average
closing bid price on the date of conversion has assumed to be the same as the
five day average closing bid price on the date of issuance on April 6, 1998.
The deemed dividend of $334,006 will be accreted to accumulated deficit in the
second quarter of 1998.
No Affiliates or Insiders. No affiliates or insiders of the Company will be
allowed to invest in connection with the Financing. The effects of the
Financing on Company affiliates and insiders will be based entirely on the
proportionate share of Company securities owned by each of them, and will not
be different from the effects on other stockholders.
Exemption from Registration. The Financing will be exempt from the
registration requirements of the 1933 Act, and the Company may rely upon the
Regulation D or Regulation S "safe harbor" provisions, or other exemptions,
promulgated under the 1933 Act.
10
Exploration of Various Financing Options by the Company. During 1997 and
1998, Company management and the Board explored a number of different
financing options before electing to seek stockholder approval for the
Financing. The options explored by the Company included (i) issuing common
stock, (ii) issuing convertible preferred stock under a variety of possible
terms and conditions, (iii) obtaining funds from various venture capital
entities, (iv) obtaining funds through debt financing, and (v) issuing
securities in exchange for services. The Board determined the general terms
and conditions of the Financing, including the conversion ratio and the number
of shares to be issued, after due investigation of the options available to
the Company and due deliberation. Management will be authorized to conduct
additional arms-length bargaining before closing the Financing.
The Board of Directors determined the conversion ratio, determined the
number of shares to be issued in the conversion, and accepted the lack of a
limitation on the number of shares of Common Stock that could be issued upon
conversion of the Preferred after the Board of Directors and management
reviewed investment proposals from multiple sources of financing, and
concluded that the terms set forth in this Proposal 2 were the most favorable
the Company could reasonably expect to obtain under present circumstances.
Description of Media Purchase Transaction. The Company entered into the
Media Purchase Agreement with Grow Marketing Services, a division of GRO
Enterprises Inc., an Illinois-based media and services company, and Proxhill
Marketing Ltd., a Colorado-based provider of dedicated advertising financing
to small and medium-sized companies that have a consumer product or service.
Under the terms of the agreement, the Company has agreed to purchase up to $3
million in advertising media from Grow Marketing over the next 12 months to
provide national and regional advertising support for the company's products.
Proxhill has agreed to provide two-thirds of the funding needed for the
advertising placements in return for shares of the Company's Common Stock. The
Common Stock will be issued to Proxhill at the average closing bid price for
the five days preceding each closing and is subject to certain restrictions
regarding registration of the stock for sale. The financing was arranged by
First Capital Investments Inc., a merchant and investment banking firm that
arranges private placement financing, bridge financing, mergers, acquisitions
and joint ventures in addition to providing financial advisory services to its
clients. An initial transaction of $750,000 ($500,000 from Proxhill, $250,000
from the Company) was executed on March 2, 1998, and is being used to purchase
national and regional radio advertising to support ChemTrak's CholesTrak Home
Cholesterol Test over the next few months. The Company will transfer 592,593
shares of Common Stock to Proxhill in return for the $500,000.
STOCKHOLDER APPROVAL
The 20% Rule. The issuance by the Company of the Preferred Stock is subject
to stockholder approval pursuant to the Rules of the National Association of
Securities Dealers, Inc. ("NASD"). On February 23, 1998, the requirements of
NASD Rule 4460(i)(1)(D) (the "20% Rule") were made applicable to companies
whose securities are traded on the Nasdaq SmallCap Market. The 20% Rule
requires such companies to obtain stockholder approval before issuing common
stock (or shares convertible into common stock) in a transaction other than a
public offering at a price less than the market value of the common stock,
when the amount of common stock to be issued (or issuable upon conversion) is
or will be greater than 20% of the common stock or voting power of the company
outstanding prior to issuance.
Based on the recent prices of the Company's Common Stock, it is anticipated
that the number of shares of Common Stock issuable upon conversion of the
Preferred Stock may be equal to or greater than 20% of the Common Stock or
voting power of the Company outstanding immediately prior to the Financing.
The terms of the Preferred Stock will allow the holders of the Preferred Stock
to obtain shares of Common Stock at a price below the current market value.
See "Terms of Preferred Stock" below. Therefore, the Board of Directors has
determined that the approval of the Company's stockholders is a condition of
the Financing. The private placement of [April 6, 1998] is governed, and the
Financing will be governed, by a limitation (the "Exchange Cap") providing
that the Company is not obligated to issue, in the aggregate, more than 19.9%
of its outstanding shares of Common Stock determined as of the date of first
issuance of the Series B Preferred Shares (such amount to be proportionately
and equitably adjusted from time to time in the event of stock splits, stock
11
dividends, combinations, reverse stock splits, reclassification, capital
reorganizations and similar events relating to the Common Stock) upon
conversion of the Series B Preferred Stock, if issuance of a larger number of
shares of Common Stock would constitute a breach of the 20% Rule any other of
the Company's obligations under the rules or regulations of The NASDAQ Stock
Market, Inc. or any other principal securities exchange or market upon which
the Common Stock is or becomes traded.
TERMS OF THE SERIES B PREFERRED STOCK
Purchase Price; Conversion Rights. Each share of the Series B Preferred
Stock will be offered at a purchase price of $1,000 and a stated value of
$1,000 (the "Stated Value"). Beginning 90 days following the issuance of the
shares of Series B Preferred Stock, each holder of shares of Preferred Stock
would have the right at any time, and from time to time, to convert some or
all such shares into fully paid and nonassessable shares of Common Stock.
Any conversion shall occur according to a conversion formula that is either
equal to or more favorable to the Company than the following conversion
formula. The number of shares of Common Stock issuable upon conversion of each
share of Series B Preferred Stock will equal (i) the sum of (A) the Stated
Value per share and (B) accrued and unpaid dividends on such share, divided by
(ii) the Conversion Price. The Conversion Price shall be equal to 75% the
average of the Closing Bid Price (as defined below) of the Common Stock for
the five trading days immediately preceding the date of Series B conversion of
the Series B Preferred Stock but in no event more than 100% of the average
Closing Bid Price for the five trading days immediately preceding the Closing
Date. The Closing Bid Price shall mean the closing bid price of the Common
Stock as reported from the Nasdaq SmallCap Market (or if not reported by
Nasdaq as reported by such other exchange or market where traded. The
conversion formula does not specify an upper limit on the number of shares of
Common Stock that may be issued upon conversion of the Preferred Stock.
Two years after the issuance of the Preferred Stock (the "Mandatory
Conversion Date"), any shares of Preferred Stock not previously converted into
shares of Common Stock shall automatically be converted into shares of Common
Stock at the Conversion Price. On and after the Mandatory Conversion Date, all
dividends on the Preferred Stock shall cease to accrue and the shares
represented thereby shall no longer be deemed outstanding and all rights of
the holders thereof as stockholders of the Company shall cease and terminate,
except the right to receive the shares of Common Stock upon conversion.
Preferential Cumulative Dividends. The holders of outstanding shares of
Preferred Stock will be entitled to receive preferential dividends in cash out
of any funds of the Company legally available at the time for declaration of
dividends before any dividend or other distribution will be paid or declared
and set apart for payment on any shares of any Common Stock or other class of
stock junior to the Preferred Stock (the Common Stock and such junior stock
being hereinafter collectively the "Junior Stock") at the rate of 6% simple
interest per annum on the Stated Value per share payable quarterly when and as
declared; provided, however, that these preferential cumulative dividends, if
not paid, will accumulate as a liability of the Company. In addition, fully
paid and non-assessable shares of Preferred Stock at a rate of one share of
Preferred Stock for each $1,000 of such dividend not paid in cash, and the
issuance of such additional shares will constitute full payment of such
dividend.
The dividends on the Preferred Stock will be cumulative whether or not
earned so that if, at any time, full cumulative dividends at the rate
aforesaid on all shares of the Preferred Stock then outstanding from the date
from and after which dividends thereon are cumulative to the end of the
quarterly dividend period next preceding such time shall not have been paid or
declared and set apart for payment, or if the full dividend on all such
outstanding Preferred Stock for the then current dividend period shall not
have been paid or declared and set apart for payment, the amount of the
deficiency shall be paid or declared and set apart for payment (but without
interest thereon) before any sum shall be set apart for or applied by the
Company or a subsidiary of the Company to the purchase redemption or other
acquisition of the Preferred Stock and before any dividend or other
12
distribution shall be paid or declared and set apart for payment on any Junior
Stock and before any sum shall be set aside for or applied to the purchase,
redemption or other acquisition of Junior Stock.
Dividends on all shares of the Preferred Stock will begin to accrue and be
cumulative from and after the date of issuance thereof on a quarterly basis.
Liquidation Rights. In the event of the dissolution, liquidation or winding-
up of the Company, whether voluntary or involuntary, the holders of the
Preferred Stock will be entitled to receive before any payment or distribution
will be made on the Junior Stock, out of the assets of the Company available
for distribution to stockholders, the Stated Value per share of Preferred
Stock and all accrued and unpaid dividends to and including the date of
payment thereof. Upon the payment in full of all amounts due to holders of the
Preferred Stock, then the holders of the Junior Stock of the Company will
receive, ratably, all remaining assets of the Company legally available for
distribution. If the assets of the Company available for distribution to the
holders of the Preferred Stock are insufficient to permit payment in full of
the amounts payable as aforesaid to the holders of Preferred Stock upon such
liquidation, dissolution or winding-up, whether voluntary or involuntary, then
all such assets of the Company will be distributed to the exclusion of the
holders of shares of Junior Stock ratably among the holders of Preferred
Stock.
Neither purchase nor the redemption by the Company of shares of any class of
stock nor the merger nor consolidation of the Company with or into any other
corporation or corporations nor the sale or transfer by the Company of all or
any part of its assets will be deemed to be a liquidation, dissolution or
winding-up of the Company for the purposes of the liquidation rights that
would be available under the Financing. The Investors will enjoy a right of
participation in any proposed public offering of Common Stock and a right of
first refusal in the event of any future private equity financing.
Redemption Provisions. The Company may elect to redeem all or part of the
shares of outstanding Preferred Stock upon payment of Stated Value (plus any
dividends accumulated thereon) multiplied by 1.333 (the "Redemption Price").
After the date (the "Redemption Date") on which Company gives written notice
to the Holder of the Company's intent to redeem the Preferred Stock, the
Holder shall have five business days to notify the Company if such Holder
elects to convert the Preferred Stock to Common Stock (rather than have the
Preferred Stock redeemed by the Company).
Exchange Cap. If the Company cannot issue shares of Common Stock pursuant to
the conversion provisions of the Financing for any reason, including the
Exchange Cap, the Holder of those shares of Series B Preferred Stock for which
the Company is unable to issue Common Stock, solely at such Holder's option,
may elect to require the Company to redeem all of part of such Series B
Preferred Stock at the Redemption Price within ten business days of receiving
notice; provided the Company can make such a distribution to such holders
under the provisions of the state corporation laws then applicable. In the
event the Company receives a conversion notice from more than one Holder of
Series B Preferred Stock on the same day, and the Company is able to convert
some, but not all, of such Series B Preferred Stock, the Company will convert
from each such Holder electing to have Series B Preferred Stock converted at
such time an amount equal to such Holder's pro rata amount (based on the
number of Preferred Shares held by such Holder relative to the number of
Series B Preferred Stock outstanding) of all Series B Preferred Stock being
converted and the remaining shares that cannot be converted will be redeemed
pro rata at such time at the Redemption Price.
Voting Rights. The shares of Common Stock into which the Preferred Stock is
converted will have full voting rights.
Registration with the Securities and Exchange Commission. The Company will
agree to prepare and file with the Securities and Exchange Commission, as soon
as reasonably practicable after the Closing Date, a registration statement
registering the resale of the shares of Common Stock into which the Preferred
Stock is convertible, and to undertake commercially reasonable efforts to
cause the registration statement to become effective 120 days of the Closing
Date. The Company will agree that if such a registration statement is not
13
effective within 120 days due to the failure of the Company to exercise such
efforts, it will pay to Holders as liquidated damages a fee of 3% per month of
the principal amount converted by such Holder for a maximum of eight months.
Indemnification. Under the Financing, the Company would indemnify, hold
harmless, reimburse and defend each Investor against any claim, costs,
expense, liability, obligation, loss or damage (including reasonable legal
fees) of any nature, incurred by or imposed upon the Investor that results,
arises out of or is based upon
any misrepresentation or breach of any warranty by Company in connection with
the Financing, or any breach or default in performance by Company of any
covenant or undertaking to be performed by the Company thereunder. Each of the
Investors would indemnify, hold harmless, reimburse and defend the Company
against any claim, costs, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon
the Company that results, arises out of or is based upon any misrepresentation
by the Investor in connection with the Financing or any breach or default in
performance by the Investor of any covenant or undertaking to be performed by
the Investor thereunder.
Fees. Under the Financing, the Company would agree to pay to an agent a
commission in an amount up to 10% of the proceeds of the gross offering, in
exchange for the agent's services in identifying qualified investors and
advising the Company as to the terms and conditions such investors might
accept. The Company would also agree to pay to such agent an additional
reimbursement fee of up to 3%. Such payments to the agent would be in addition
to the separate payment of the fees and costs of the Company to Company
counsel of up to 3% of the gross proceeds of the offering to reimburse such
agent for its costs, fees and expenses.
USE OF PROCEEDS
The Company currently intends to use the proceeds of the Financing for
general corporate purposes.
ADVANTAGES AND DISADVANTAGES OF THE PROPOSED EQUITY FINANCING
Disadvantages. Before voting, each Stockholder should consider the following
disadvantages of the Financing: (i) the holders of the Preferred Stock may
limit the Company's ability to enter into mergers and or acquisitions with
other entities, (ii) short sales by the holders of the Preferred Stock may
depress the per share price of the Common Stock of the Company, (iii)
conversion of the shares of Preferred Stock to Common Stock (especially in
light of the conversion formula that may result in large numbers of shares
being issued upon conversion) and sale of those converted shares, may depress
the per share price of the Common Stock of the Company, (iv) because there is
no upper limit to the number of shares of Common Stock that may be issued upon
conversion of the Preferred, substantial percentage ownership changes in the
Company's outstanding Common Stock may result, and (v) there may be increased
costs imposed on the Company to undertake the registration of the securities
and to cause the registration statement to become effective.
Advantage. Before voting, each Stockholder should also consider the
following advantage of the Financing: the Financing will provide financial
resources without which the Company is unlikely to be able to continue as a
going concern and execute its current business plan.
Stockholders are requested in this Proposal 2 to approve the terms of a
proposed equity financing of up to $5,000,000 pursuant to which the Company
will issue 6% Cumulative Convertible Series B Preferred Stock (all of which
may be converted into Common Stock pursuant to a formula that includes a
lower-than-market conversion price for Common Stock and for which there is no
upper limit on the number of shares of Common Stock which will be issued upon
conversion of the Preferred Stock), that could result in the issuance of more
than 20% of the outstanding shares of Common Stock of the Company before such
issuance. The affirmative vote of the holders of a majority of the shares
present in person or represented by proxy and entitled to vote at the meeting
will be required to approve such issuance. If the Stockholders fail to approve
this proposal, the Company will be restricted from issuing the Series B
Preferred Stock on terms that may result in the issuance of voting securities,
at a price less than the market value of the Common Stock, that would
constitute greater than
14
20% of the voting power of the Company prior to the issuance. Accordingly, the
financing alternatives available to the Company would be limited, and the
Company may seek funding in a series of smaller transactions on terms similar
to those outlined in this proposal with a limitation imposed in each financing
on the conversion ratio of the Preferred Stock so that the 20% Rule would not
be invoked.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2
PROPOSAL 3
AMENDMENT TO THE 1991 EMPLOYEE STOCK PURCHASE PLAN
At the Annual Meeting, the shareholders are being asked to approve the
adoption of an amendment to the Company's 1991 Employee Stock Purchase Plan
(the "Purchase Plan"), as adopted by the Board in January 1992 to increase the
number of shares reserved for issuance thereunder by 200,000 shares for an
aggregate of 400,000 of Common Stock reserved under the Purchase Plan.
As of December 31, 1997, and without taking into account the proposed
amendment to the Purchase Plan, the Company had issued and sold an aggregate
of 155,334 shares of Common Stock pursuant to the Purchase Plan, and 44,666
shares remained eligible for purchase under the Purchase Plan.
SUMMARY OF THE PURCHASE PLAN
General. The purpose of the Purchase Plan is to provide employees with an
opportunity to purchase Common Stock of the Company through payroll
deductions.
Administration. The Purchase Plan may be administered by the Board of
Directors or a committee appointed by the Board. All questions of
interpretation or application of the Purchase Plan are determined by the Board
or its appointed committee, and its decisions are final, conclusive and
binding upon all participants.
Eligibility. Each employee of the Company (including officers), whose
customary employment with the Company is at least 20 hours per week and more
than five months in any calendar year, is eligible to participate in an
Offering Period (as defined below); provided, however, that no employee shall
be granted an option under the Purchase Plan (i) to the extent that,
immediately after the grant, such employee would own 5% of either the voting
power or value of the stock of the Company, or (ii) to the extent that his or
her rights to purchase stock under all employee stock purchase plans of the
Company accrues at a rate which exceeds $25,000 worth of stock (determined at
the fair market value of the shares at the time such option is granted) for
each calendar year. Eligible employees become participants in the Purchase
Plan by filing with the Company a subscription agreement authorizing payroll
deductions prior to the beginning of each offering period unless a later time
for filing the subscription agreement has been set by the Board.
Participation in an Offering. The Purchase Plan is implemented by offering
periods lasting up to 27 months (an "Offering Period"), with new Offering
Periods to begin as determined by the Board. Common Stock may be purchased
under the Purchase Plan on each exercise date (an "Exercise Date"), unless the
participant withdraws or terminates employment earlier. To participate in the
Purchase Plan, each eligible employee must authorize payroll deductions
pursuant to the Purchase Plan. Such payroll deductions may not exceed 15% of a
participant's compensation. Once an employee becomes a participant in the
Purchase Plan, the employee will automatically participate in each successive
Offering Period until such time as the employee withdraws from the Purchase
Plan or the employee's employment with the Company terminates. At the
beginning of each Offering Period, each participant is automatically granted
options to purchase shares of the Company's Common Stock. The option expires
on each Exercise Date or upon termination of employment, whichever is earlier,
but is exercised on each Exercise Date to the extent of the payroll deductions
accumulated during such Offering Period.
15
The Board of Directors may determine the maximum number of shares each
employee may purchase during an Offering Period.
Purchase Price, Shares Purchased. Shares of Common Stock may be purchased
under the Purchase Plan at a price not less than 85% of the lesser of the fair
market value of the Common Stock on (i) the first day of the Offering Period
or (ii) on the Exercise Date. The number of shares of Common Stock a
participant purchases in each Offering Period is determined by dividing the
total amount of payroll deductions withheld from the participant's
compensation during that Offering Period by the purchase price.
Termination of Employment. Termination of a participant's employment for any
reason, including disability or death, or the failure of the participant to
remain in the continuous scheduled employ of the Company for at least 20 hours
per week, cancels his or her option and participation in the Purchase Plan
immediately. In such event, the payroll deductions credited to the
participant's account will be returned to him or her or, in the case of death,
to the person or persons entitled thereto as provided in the Purchase Plan.
Adjustment Upon Change in Capitalization, Change in Control. In the event
that the stock of the Company is changed by reason of any stock split, reverse
stock split, stock dividend, combination, reclassification or other change in
the capital structure of the Company effected without the receipt of
consideration, appropriate proportional adjustments shall be made in the
number and class of shares of stock subject to the Purchase Plan, the number
and class of shares of stock subject to options outstanding under the Purchase
Plan, and the exercise price of any such outstanding options. Any such
adjustment shall be made by the Board, whose determination shall be
conclusive. Notwithstanding the above, in connection with any (i) dissolution
or liquidation of the Company; (ii) merger or consolidation of the Company in
which the Company is not the surviving corporation; (iii) reverse merger in
which the Company is the surviving corporation but the shares of the Company's
Common Stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (iv) any other capital reorganization in which more than
50% of the shares of the Company entitled to vote are exchanged, then, as
determined by the Board, (i) options may be assumed or substituted by the
surviving corporation, (ii) the rights may continue in full force and effect,
or (iii) any Offering Periods then in progress may be shortened to a new
Exercise Date and the Board shall notify each participant that his or her
option shall be exercised automatically on the new Exercise Date, unless prior
to such date the participant has withdrawn from the Offering Period.
Amendment and Termination of the Plan. The Board of Directors may at any
time terminate or amend the Purchase Plan; provided, however, that certain
amendments require shareholder approval. The Purchase Plan will terminate in
December 2001.
Withdrawal. Generally, a participant may withdraw from an Offering Period at
any time without affecting his or her eligibility to participate in future
Offering Periods. However, once a participant withdraws from a particular
offering, that participant may not participate again in the same offering.
Federal Tax Information for Purchase Plan. The Purchase Plan, and the right
of participants to make purchases thereunder, is intended to qualify under the
provisions of Sections 421 and 423 of the Code. Under these provisions, no
income will be taxable to a participant until the shares purchased under the
Purchase Plan are sold or otherwise disposed of. Upon sale or other
disposition of the shares, the participant will generally be subject to tax
and the amount of the tax will depend upon the holding period. If the shares
are sold or otherwise disposed of more than two years from the first day of
the Offering Period or more than one year from the date of transfer of the
stock to the participant, then the participant will recognize ordinary income
measured as the lesser of (i) the excess of the fair market value of the
shares at the time of such sale or disposition over the purchase price, or
(ii) an amount equal to 15% of the fair market value of the shares as of the
first day of the Offering Period. Any additional gain will be treated as long-
term capital gain. If the shares are sold or otherwise disposed of before the
expiration of this holding period, the participant will recognize ordinary
income generally measured as the excess of the fair market value of the shares
on the date the shares are purchased over the purchase price. Any additional
gain or loss on such sale or disposition will be long-term or short-term
capital gain or loss,
16
depending on the holding period. The Company is not entitled to a deduction
for amounts taxed as ordinary income or capital gain to a participant except
to the extent of ordinary income is recognized by participants upon a sale or
disposition of shares prior to the expiration of the holding period(s)
described above.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON THE PARTICIPANT AND THE COMPANY WITH RESPECT TO THE SHARES PURCHASED
UNDER THE PURCHASE PLAN. REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS
OF THE CODE. IN ADDITION, THE SUMMARY DOES NOT DISCUSS THE TAX CONSEQUENCES OF
A PARTICIPANT'S DEATH OR THE INCOME TAX LAWS OF ANY STATE OR FOREIGN COUNTRY
IN WHICH THE PARTICIPANT MAY RESIDE.
Stockholders are requested in this Proposal 3 to approve an amendment to the
Company's 1991 Employee Stock Purchase Plan increasing the aggregate number of
shares of Common Stock authorized for issuance under such plan by 200,000
shares to 400,000 shares. The affirmative vote of the holders of a majority of
the shares present in person or represented by proxy and entitled to vote at
the meeting will be required to approve the increase of shares in the Purchase
Plan.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3
PROPOSAL 4
AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION
TO EFFECT A REVERSE STOCK SPLIT
The Board of Directors is asking the Company's stockholders to approve an
amendment to the Company's Restated Certificate of Incorporation to effect a
reverse stock split such that each three to five shares of the Company's
currently issued and outstanding Common Stock will be exchanged for one share
of newly issued Common Stock ("New Common Stock"), with the precise number of
newly issued shares of Common Stock to be converted to be determined by the
Board of Directors at a later time based upon factors described below (the
"Reverse Stock Split").
The Board of Directors believes that the Reverse Stock Split is in the best
interests of the Company and its stockholders. The Common Stock is currently
traded on the Nasdaq SmallCap Market. In order to maintain its listing on the
Nasdaq SmallCap Market, the Company must maintain net tangible assets, capital
and public float at specified levels, and generally must maintain a minimum
bid price of $1.00 per share. The Company's net tangible assets were
approximately $2.2 million at December 31, 1997, compared to the current
listing standard of $2 million. On March 3, 1998, the Company received a
letter from Nasdaq stating that the minimum bid on the Company's Common Stock
was not in compliance with Nasdaq's minimum bid price requirement, and that
the Company would be provided with 90 calendar days, until May 28, 1998, to
comply with such requirement. After such time, Nasdaq will issue a delisting
letter. If the Common Stock is delisted, trading in the Common Stock could be
conducted on the OTC Bulletin Board or in the over-the-counter market in what
is commonly referred to as the "pink sheets." If this occurs a stockholder
will find it more difficult to dispose of his securities or to obtain accurate
quotations as to the price of the Common Stock. In addition, the Common Stock
could become subject to the "penny stock" regulations promulgated under the
Exchange Act of 1934, as amended, which impose additional restrictions on
broker-dealers who trade in such stock and could severely limit the liquidity
of the Common Stock. While there can be no assurance that the Reverse Stock
Split will result in more than a proportional increase in the price at which
the Company's Common Stock trades, in order to maintain its listing on the
Nasdaq SmallCap Market, the Board of Directors believes the Reverse Stock
Split is necessary and in the best interests of the Company and its
stockholders for the reasons noted above. The Board of Directors intends to
select the exact reverse split ratio (three for one, four for one, or five for
one) within five days of the Annual Meeting, and will select the ratio that
will, immediately after the Reverse Split, effect a market price of at least
$2.25 per share with the least possible reduction in the number of shares
outstanding. No assurance can
17
be given that the market price will remain at or above $2.25 after the Reverse
Split. Prior to the vote, the shareholders will not know the exact reverse
split ratio.
The Amendment to the Company's Restated Certificate of Incorporation (the
"Amendment") to effect the Reverse Stock Split, will provide that upon the
filing of the Amendment, every three to five shares of the Company's currently
issued and outstanding shares of Common Stock will be converted into one share
of Common Stock depending on the precise conversion ratio determined by the
Board of Directors, and the par value of each share of New Common Stock will
be correspondingly adjusted to between $0.003 and $.005 per share. The
Amendment will further provide that each stockholder who, as a result of
Reverse Stock Split, would own a fraction of a whole share of Common Stock
will receive from the Company, in lieu of a fractional share, cash in an
amount equal to the value of the Common Stock as reported on Nasdaq on the
date of filing of the Amendment multiplied by the fraction of a share to which
the stockholder would otherwise be entitled.
In addition, the Company's Amended Certificate to Set Forth Designations,
Voting Powers, Preferences, Limitations, Restrictions, and Relative Rights of
the Series A 6% Cumulative Convertible Preferred Stock $0.001 par value per
share and Series B 6% Cumulative Convertible Preferred Stock, $0.001 par value
per share, currently on file will be amended to correspondingly adjust the
formula for conversion of the Series A Preferred Stock and Series B Preferred
Stock to give effect to the Reverse Stock Split.
The Board reserves the right, notwithstanding stockholder approval and
without further action by the stockholders, not to proceed with the Reverse
Stock Split, if, at any time prior to filing the Amendment with the Secretary
of State of the State of Delaware, the Board of Directors, in its sole
discretion, determines that the Reverse Stock Split is no longer in the best
interests of the Company and its stockholders. The Board of Directors may
consider a variety of factors in determining whether or not to proceed with
the Reverse Stock Split including, but not limited to, overall trends in the
stock market, recent changes and anticipated trends in the per share market
price of the Company's Common Stock, business developments and the Company's
actual and projected financial performance. However, it is the Board's present
intention to effect the Reverse Stock Split, based upon the factors described
above, promptly following receipt of the requisite stockholder approval. The
Board will notify the stockholders that the Reverse Stock Split has been
effected promptly after the filing of the Amendment with the Delaware
Secretary of State. Immediately following the Reverse Stock Split, the Board
will provide for payment of cash in lieu of fractional shares of New Common
Stock otherwise issuable in connection therewith.
The Company is presently authorized to issue 40,000,000 shares of Common
Stock, $0.001 par value, of which 18,169,579 were issued and outstanding on a
pro forma basis at the close of business on December 31, 1997 (after giving
effect (i) to the conversion of $1.3 million received from issuance of Series
A 6% Cumulative Convertible Preferred Stock in January 1998 and accrued and
unpaid dividends on such shares to be converted into Common Stock, (ii) to the
issuance of $500,000 worth of Common Stock as partial consideration in
connection with the execution of a Media Purchase Agreement in March 1998, and
(iii) to the conversion of [$1,002,000] received from the issuance of Series B
6% Cumulative Convertible Preferred Stock in April 1998). The Reverse Stock
Split, as proposed and if effected, would have the effect of reducing the
number of outstanding shares on a pro forma basis at the close of business on
December 31, 1997 to between 6,056,526 and 3,633,916, but would not change the
number of authorized shares. The par value of the authorized shares will be
changed to the par value of the outstanding shares after the Reverse Stock
Split. The number of outstanding shares of Series A Preferred Stock and Series
B Preferred Stock would not be affected; however, the number of shares of
Common Stock issuable upon conversion of such shares of Series A Preferred
Stock would be proportionately reduced. Outstanding options and warrants to
purchase Common Stock would be similarly adjusted. The proposed Reverse Stock
Split would not affect any stockholder's proportionate equity interest in the
Company, except for those stockholders who would receive cash in lieu of
fractional shares. The rights presently accruing to holders of Common Stock
and the Preferred Stock would not be affected by this transaction (except to
the par value of such shares). After the Reverse Stock Split, there will be
more shares available for issuance by the Company because no change is being
made to the authorized shares. See the table below regarding shares available
for future issuance. The Company's Common Stock is currently listed on the
Nasdaq
18
SmallCap Market, and upon approval of this proposal, application will be made
to list the New Common Stock on the Nasdaq SmallCap Market. The Company's
reporting obligations under the Securities Exchange Act of 1934, as amended,
are not expected to be affected by the Reverse Stock Split.
Implementation of the Reverse Stock Split may cause some holders of round
lots to become odd lot holders. Holders of odd lots may be required to pay
higher commission rates in connection with sales of the Company's Common Stock
than would be paid if they held round lots.
The following table illustrates the principal effects of the Reverse Stock
Split to the Company's Common Stock:
PRIOR TO AFTER 3 FOR 1 AFTER 4 FOR 1 AFTER 5 FOR 1
REVERSE STOCK REVERSE STOCK REVERSE STOCK REVERSE STOCK
NUMBER OF SHARES(1) SPLIT SPLIT SPLIT SPLIT
- ------------------- ------------- ------------- ------------- -------------
Common Stock(2)
Authorized............ 40,000,000 40,000,000 40,000,000 40,000,000
Outstanding........... 18,169,579 6,056,526 4,542,395 3,633,916
Available for Future
Issuance............. 21,830,421 33,943,474 35,457,605 36,366,084
- --------
(1) On a pro forma basis as of December 31, 1997 and subject to adjustment
resulting from the repurchase of fractional shares.
(2) The par value of the Common Stock is currently $0.001 per share prior to
the Reverse Stock Split and will be between $0.003 and $0.005 per share
after the Reverse Stock Split.
PRIOR TO AFTER 3 FOR 1 AFTER 4 FOR 1 AFTER 5 FOR 1
REVERSE STOCK REVERSE STOCK REVERSE STOCK REVERSE STOCK
FINANCIAL DATA(1) SPLIT ($) SPLIT ($) SPLIT ($) SPLIT ($)
- ----------------- ------------- ------------- ------------- -------------
Stockholders' Equity
Common Stock(2)....... 18,000 18,000 18,000 18,000
Additional Paid-in
Capital.............. 46,088,905 46,088,905 46,088,905 46,088,905
Deferred Compensation. (31,000) (31,000) (31,000) (31,000)
Accumulated Deficit... (41,503,000) (41,503,000) (41,503,000) (41,503,000)
----------- ----------- ----------- -----------
Total Stockholders'
Equity............... 4,572,905 4,572,905 4,572,905 4,572,905
Book Value Per Common
Share................ 0.252 0.755 1.007 1.258
- --------
(1) On a pro forma basis as of December 31, 1997 and subject to adjustment
resulting from the repurchase of fractional shares.
(2) The par value of the Common Stock is currently $0.001 per share prior to
the Reverse Stock Split and will be between $0.003 and $0.005 per share
after the Reverse Stock Split.
Stockholders are requested in this Proposal 4 to approve an amendment to the
Company's Restated Certificate of Incorporation to effect a reverse stock
split such that each three to five shares of the Company's currently issued
and outstanding Common Stock will be exchanged for one share of newly issued
Common Stock, with the precise number of newly issued shares of Common Stock
to be converted to be determined by the Board of Directors within five days of
the Annual Meeting. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and entitled to vote at the
meeting will be required to approve such reverse stock split.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4
19
PROPOSAL 5
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Coopers & Lybrand L.L.P. ("Coopers &
Lybrand") as the Company's independent auditors for the fiscal year ending
December 31, 1998, and has further directed that management submit the
selection of independent auditors for ratification by the stockholders at the
Annual Meeting.
On December 2, 1997, the Board of Directors voted to change independent
public accountants, dismissing Ernst & Young LLP ("Ernst & Young") as the
independent accountants for the Company and engaging Coopers & Lybrand. Notice
of dismissal was delivered to Ernst & Young on December 4, 1997. Ernst &
Young's reports on the Company's financial statements for the fiscal years
ended December 31, 1995 and December 31, 1996 did not contain an adverse
opinion or disclaimer of opinion, and such reports did not contain any adverse
opinion or disclaimer of opinion, and such reports were not otherwise modified
or qualified as to uncertainty, audit scope or accounting principles. During
the Company's two most recent fiscal years and the subsequent interim period
preceding the dismissal of Ernst & Young, (i) there were no disagreements with
Ernst & Young on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which if not resolved
to its satisfaction would have caused it to make reference in connection with
its reports, and (ii) Ernst & Young has not advised the Company of any
reportable events as defined in paragraph (A) through (D) of Regulation S-K
Item 304(a)(1)(v).
During the Company's two most recent fiscal years and the subsequent interim
period prior to engaging Coopers & Lybrand, the Company has not consulted
Coopers & Lybrand with respect to any of the matters described in Regulation
S-K Item 304(a)(2)(i) or (ii).
Representatives of Coopers & Lybrand are expected to be present at the
Annual Meeting, with the opportunity to make a statement, if they so desire,
and will be available to respond to appropriate questions. Representatives of
Ernst & Young are not expected to be present at the meeting.
Stockholder ratification of the selection of Coopers & Lybrand as the
Company's independent auditors is not required by the Company's By-Laws or
otherwise. However, the Board is submitting the selection of Coopers & Lybrand
to the stockholders for ratification as a matter of good corporate practice.
If the stockholders fail to ratify the selection, the Audit Committee and the
Board will reconsider whether or not to retain that firm or to choose another
one. Even if the selection is ratified, the Audit Committee and the Board in
their discretion may direct the appointment of different independent auditors
at any time during the year if they determine 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 shares present or
represented by proxy and entitled to vote at the Annual Meeting will be
required to ratify the selection of Coopers & Lybrand as independent auditors
for the fiscal year ending December 31, 1998.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 5
20
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of the Record Date by: (i) each director;
(ii) each of the executive officers named in the Summary Compensation Table;
(iii) all executive officers and directors of the Company as a group; and (iv)
all those known by the Company to be beneficial owners of more than 5% of its
Common Stock.
BENEFICIAL
OWNERSHIP(2)
--------------------
NUMBER PERCENT
DIRECTORS, EXECUTIVE OFFICERS AND 5% SHAREHOLDERS(1) OF SHARES OF TOTAL
---------------------------------------------------- ----------- --------
Prithipal Singh, Ph.D.(3)................................. [486,194] [3.50]%
Gordon W. Russell(4)...................................... 180,569 [1.32]%
David Rubinfien(5)........................................ [171,134] [1.25]%
Edward F. Covell(6)....................................... [156,566] [1.13]%
Malcolm Jozoff(7)......................................... [77,000] *
Robert P. Kiley(8)........................................ [4,875] *
Niquette L. Hunt(9)....................................... [14,583] *
Donald V. Fluken.......................................... 0 --
Subba Rao Gunupudi, Ph.D.(10)............................. [16,647] *
All directors and executive officers as a group (9
person)(11).............................................. [1,115,781] [7.87]%
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of the Company's Common Stock.
(1) Except as otherwise noted, the business address of each of the persons
named in this table is: c/o ChemTrak Incorporated, 929 East Arques
Avenue, Sunnyvale, CA 94086-4520.
(2) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the
Securities and Exchange Commission (the "SEC"). Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Beneficial
ownership also includes shares of stock subject to options and warrants
currently exercisable or convertible, or exercisable or convertible
within 60 days of the date of this table. Percentage of beneficial
ownership is based on 13,643,145 shares of Common Stock outstanding as of
the Record Date.
(3) Includes 173,084 shares held by Prithipal Singh and Rajinder K. Singh,
trustees, UTD dated April 17, 1986, and [263,110] shares issuable upon
exercise of stock options held by Dr. Singh exercisable within 60 days of
the Record Date.
(4) Includes 123,558 shares held of record by Sequoia Capital Growth Fund and
7,895 shares held of record by Sequoia Technology Partners III. Mr.
Russell is a general partner of Sequoia Capital, the general partner of
these funds. Mr. Russell disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein. Also includes
39,488 shares beneficially owned by the Russell 1988 Revocable Trust and
9,000 shares issuable upon exercise of stock options held by Mr. Russell
exercisable within 60 days of the Record Date.
(5) Includes 12,134 shares held of record by the Rubinfien Living Trust and
9,000 shares issuable upon exercise of stock options held by Mr.
Rubinfien exercisable within 60 days of the Record Date.
(6) Includes [154,898] shares issuable upon exercise of stock options held by
Mr. Covell exercisable within 60 days of the Record Date.
(7) Includes [67,000] shares issuable upon exercise of stock options held by
Mr. Jozoff exercisable within 60 days of the Record Date.
(8) Represents shares issuable upon exercise of stock options held by Mr.
Kiley exercisable with in 60 days of the Record Date.
(9) Represents [14,583] shares issuable upon exercise of stock options held
by Ms. Hunt exercisable within 60 days of the Record Date.
(10) Represents [16,647] shares issuable upon exercise of stock options held
by Dr. Gunupudi exercisable within 60 days of the Record Date.
(11) Includes a total of [535,903] shares issuable upon exercise of stock
options held by all officers and directors exercisable within 60 days of
the Record Date. See Notes (3) through (10) above.
21
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ending December 31, 1997,
1996 and 1995, compensation awarded or paid to, or earned by, the Company's
Chief Executive Officer and the other four most highly compensated executive
officers of the Company at December 31, 1997 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION(3)
--------------------- ---------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(2) BONUS($) OPTIONS(#) ($)(4)
--------------------------- ---- ------------ -------- --------------- ------------
Edward F. Covell(5)................... 1997 193,000 0 99,273 500
President and Chief 1996 107,000 20,000 230,000 500
Executive Officer 1995 -- -- -- --
Prithipal Singh, Ph.D.(6)............. 1997 211,000 0 45,818 500
Chairman of the Board and 1996 206,000 0 0 500
Chief Technical Officer 1995 182,000 0 77,500 500
Niquette L. Hunt(7)................... 1997 120,000 30,000 10,000 500
Vice President, Marketing 1996 4,000 18,000 50,000 0
and Sales 1995 -- -- -- --
Donald V. Fluken(8)................... 1997 103,000 25,500 60,000 500
Vice President, Finance, 1996 -- -- -- --
Chief Financial Officer 1995 -- -- -- --
and Secretary
Subba Rao Gunupudi, Ph.D.(9).......... 1997 96,000 24,000 22,500 500
Vice President, Research 1996 70,000 0 27,500 500
and Development 1995 -- -- -- --
- --------
(1) Other than the salary and bonus described herein, the Company did not pay
any executive officer named in the Summary Compensation Table any fringe
benefits, perquisites or other compensation in excess of 10% of such
executive officer's salary and bonus during fiscal 1995, 1996 or 1997.
(2) Includes amounts earned but deferred at the election of the Named
Executive Officer.
(3) The Company has not granted any stock appreciation rights or restricted
stock awards.
(4) Represents amounts contributed by the Company pursuant to Section 401(k)
of the Code. All full-time employees of the Company are eligible to
participate in the Company's 401(k) plan.
(5) Mr. Covell joined the Company as President in May 1996 and was named Chief
Executive Officer in January 1997.
(6) Dr. Singh resigned as Chief Executive Officer and was appointed Chief
Technical Officer in January 1997. In March 1998, Dr. Singh resigned as
Chief Technical Officer.
(7) Ms. Hunt joined the Company as Vice President, Marketing and Sales, in
December 1996.
(8) Mr. Fluken was appointed Vice President, Finance and Chief Financial
Officer in April 1997 and Secretary in December 1997.
(9) Dr. Gunupudi, currently a consultant to the Company, joined the Company as
Director, Research and Development, in March 1996 and resigned as Vice
President, Research and Development, in January 1998 .
22
STOCK OPTION GRANTS AND EXERCISES
The Company grants options to its executive officers under the 1988 Plan and
the 1993 Plan (together, the "Plans"). As of December 31, 1997, options to
purchase a total of 1,220,867 shares had been granted and were outstanding
under the Plans and options to purchase 533,279 shares remained available for
grant thereunder. The Company has not granted stock appreciation rights
("SARs").
The following table shows certain information regarding options granted to
each of the Named Executive Officers for the fiscal year ended December 31,
1997:
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------- ANNUAL RATES OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM($)(3)
UNDERLYING EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME OPTIONS FISCAL YEAR(1) ($/SHARE)(2) DATE 5% 10%
---- ---------- -------------- ------------ ---------- ---------- ----------
Edward F. Covell(4)..... 39,273 10.05 0.81 08/13/07 $ 20,060 50,833
60,000 15.36 0.81 08/13/07 30,648 77,661
Prithipal Singh,
Ph.D.(5)............... 45,818 11.73 0.81 08/13/07 23,403 59,305
Niquette L. Hunt........ 10,000 2.56 0.75 09/24/07 4,715 11,947
Donald V. Fluken........ 30,000 7.68 1.18 05/14/07 22,396 56,752
20,000 5.12 0.81 08/13/07 10,216 25,887
10,000 2.56 0.75 09/24/07 4,715 11,947
Subba Rao Gunupudi,
Ph.D. ................. 22,500 5.76 1.19 05/14/07 16,797 42,564
OPTION GRANTS IN LAST FISCAL YEAR
- --------
(1) Based on an aggregate of options to purchase 390,591 shares of the
Company's Common Stock granted to employees of the Company during fiscal
1997, including the Named Executive Officers.
(2) The options in this table have exercise prices equal to the fair market
value of the Common Stock on the date of grant. Options vest 25% on the
first anniversary of the date of grant, and 2.0833% per month thereafter
for the next 36 months.
(3) The potential realizable value is based on the term of the option at the
time of grant which is 10 years for all options covered by this table. The
potential realizable value is calculated by assuming the stock price on
the date of grant appreciates at the specified rates of 5% and 10% for the
entire term of the option, and that the option is exercised and sold on
the last day of its term at such appreciated price. These assumed rates of
appreciation are in accordance with the rules of the SEC, and do not
reflect the Company's estimate or projection of future stock price
performance. Actual gains, if any, are dependent on the actual future
performance of the Company's Common Stock and no gain to the optionee is
possible unless the stock price increases over the exercise price during
the option term, which will benefit all stockholders.
(4) On August 14, 1997, Mr. Covell was granted 39,273 shares of Common Stock
subject to option, which were fully vested as of the date of grant.
(5) On August 14, 1997, Dr. Singh was granted 45,818 shares of Common Stock
subject to option, which were fully vested as of the date of grant.
23
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
the number and value of unexercised shares subject to option for the fiscal
year ended December 31, 1997:
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT FISCAL OPTIONS AT FISCAL
ACQUIRED ON VALUE YEAR-END (#) YEAR-END ($) (2)
EXERCISE REALIZED ---------------------------------- -------------------------
NAME (#)(1) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- --------------- ---------------- ----------- -------------
Edward F. Covell........ -- -- 148,647 150,626 0 0
Prithipal Singh, Ph.D... -- -- 261,585 10,066 0 0
Niquette L. Hunt........ -- -- 12,500 47,500 0 0
Donald V. Fluken........ -- -- 0 60,000 0 0
Subba Rao Gunupudi,
Ph.D................... -- -- 12,500 37,500 0 0
- --------
(1) No Named Executive Officers exercised any stock options during fiscal
year 1997.
(2) Based on the closing price of $0.75 of the Company's Common Stock as
reported on the Nasdaq SmallCap Market at December 31, 1997 minus the
exercise price of the options multiplied by the number of shares
underlying the option. At year end, the exercise price of all exercisable
and unexercisable options granted to the Named Executive Officers
exceeded the closing price of the Company's Common Stock; thus such
options were not in-the-money options.
EMPLOYMENT AGREEMENTS
In February 1996, the Company and Dr. Singh entered into an employment
agreement providing that Dr. Singh's salary be set at $15,333 per month. The
agreement provides that if Dr. Singh's employment is terminated without cause,
he will receive 12 months salary continuation. In addition, in the event of
such termination, all of the Company's Common Stock held by Dr. Singh will be
free of any repurchase options in favor of the Company, and all of Dr. Singh's
options will become fully vested and exercisable. The Company has also agreed
to reimburse Dr. Singh for any medical or other employee insurance coverage
that he elects to continue for a period of one year following such
termination.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
10% of a registered class of the Company's equity securities during fiscal
year 1997, to file with the SEC initial reports of ownership on Form 3 and
reports of changes in ownership of Common Stock and other equity securities of
the Company on Form 4 or 5. Officers, directors and greater than 10%
beneficial owners are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
CHANGES TO COMPENSATION PLANS
The Company has proposed an amendment to increase the number of shares
reserved for issuance under the Purchase Plan. Because each employee's
participation in the Purchase Plan is purely discretionary, the future
24
benefits under the Purchase Plan are not yet determinable. Accordingly, the
following table summarizes the number of shares of Common Stock of the Company
purchased under the Purchase Plan during the fiscal year ended December 31,
1997 by (i) the Named Executive Officers, (ii) all current executive officers,
as a group, and (iii) all current directors who are not executive officers, as
a group, and (iv) all employees, excluding Named Executive Officers, as a
group.
NEW PLAN BENEFITS
1991 EMPLOYEE STOCK
PURCHASE PLAN(1)
---------------------
NUMBER
PURCHASE OF UNITS
NAME AND POSITION PRICE($)(2) PURCHASED
----------------- ----------- ---------
Edward F. Covell....................................... 1,529 1,668
President and Chief Executive Officer
Prithipal Singh, Ph.D.................................. -- 0
Chairman of the Board and Chief Technical Officer
Niquette L. Hunt....................................... -- 0
Vice President, Marketing and Sales
Donald V. Fluken....................................... -- 0
Vice President, Finance, Chief Financial Officer and
Secretary
Subba Rao Gunupudi, Ph.D............................... 10,061 11,423
Vice President, Operations
Executive Officers, as a group......................... 11,590 13,091
Non-Executive Directors, as a group.................... -- --
Non-Executive Officer Employees, as a group............ 31,160 34,614
- --------
(1) Only employees (including officers) whose customary employment with the
Company is at least 20 hours per week and five months in any calendar year
are eligible to participate in the Purchase Plan.
(2) Under the terms of the Purchase Plan, eligible employees may purchase
Common Stock of the Company through payroll deductions at a purchase price
not less than 85% of the fair market value of the Company's Common Stock.
See Proposal 3, "Amendment to the 1991 Employee Stock Purchase Plan."
25
PERFORMANCE MEASUREMENT COMPARISON /1/
The following chart shows a five year comparison of the total cumulative
return of a $100 original investment in each of (i) the Company's Common
Stock, (ii) the Russell 2000 Index, and (iii) the Hambrecht & Quist Healthcare
(excluding Biotechnology) Index. All values assume reinvestment of the full
amount of all dividends and are calculated as of December 31 of each year./2/
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG CHEMTRAK INCORPORATED, THE RUSSELL 2000 INDEX
AND THE HAMBRECHT & QUIST HEALTHCARE EXCLUDING BIOTECHNOLOGY INDEX
[PERFORMANCE GRAPH APPEARS HERE]
HAMBRECHT & QUIST
Measurement Period CHEMTRAK RUSSELL HEALTHCARE EXCLUDING
(Fiscal Year Covered) INCORPORATED 2000 BIOTECHNOLOGY
- ------------------- ------------ --------- ---------------------
Measurement Pt-12/92 $100 $100 $100
FYE 12/93 $ 45 $119 $ 72
FYE 12/94 $ 29 $117 $ 76
FYE 12/95 $ 11 $150 $127
FYE 12/96 $ 13 $175 $141
FYE 12/97 $ 8 $214 $168
* $100 INVESTED ON 12/31/92 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF
DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
- --------
1 The Company has never paid any dividends on its Common Stock and has no
present plans to do so.
2 This section is not "soliciting material," is not deemed filed with the SEC
and is not to be incorporated by reference in any filing of the Company
under the 1933 Act or the Exchange Act of 1934, as amended, whether made
before or after the date hereof and irrespective of any general
incorporation language in any such filing.
26
CERTAIN TRANSACTIONS
The Company has entered into indemnity agreements with certain officers and
directors which provide, among other things, that the Company will indemnify
such officer or director, under the circumstances and to the extent provided
for therein, for expenses, damages, judgments, fines and settlements that may
be required to pay in actions or proceedings which the officer or director may
be a party by reason of their position as a director, officer or other agent
of the Company, and otherwise to the full extent permitted under General
Corporation Law of the State of Delaware and the Company's By-Laws. See also
"Compensation of Directors" and "Employment Agreements."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 0-19749), is incorporated by reference herein. Form 10-K is
included in the Annual Report to Stockholders being mailed concurrently with
this Proxy Statement.
All documents filed by the Company pursuant to sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, after the mailing
date of this proxy statement and prior to [ ], 1998, the date of the
Annual Meeting, shall be deemed to be incorporated by reference herein and to
be a part hereof from the date of filing of such documents. Any statement
contained in this proxy statement or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a statement
contained herein or in any subsequently-filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
as modified or superseded, to constitute a part of this Proxy Statement.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
CHEMTRAK INCORPORATED
Donald V. Fluken
Secretary
[ ], 1998
27
CHEMTRAK INCORPORATED
---------------------
1991 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
Adopted December 18, 1991
1. PURPOSE.
-------
(a) The purpose of the ChemTrak 1991 Employee Stock Purchase Plan (the
"Plan") is to provide a means by which employees of ChemTrak Incorporated, a
Delaware corporation (the "Company"), and its Affiliates, an defined in
subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be
given an opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company, as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
its employees, to secure and retain the services of new employees, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
(d) The Company intends that the rights to purchase stock of the
Company granted under the Plan be considered options issued under an "employee
stock purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
--------------
(a) The Plan shall be administered by the Board of Directors (the
"Board") of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company.
(c) The Board may delegate administration of the Plan to a Committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration in delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
--------------------------
(a) Subject to the provisions of paragraph 12 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to rights granted
under the Plan shall not exceed in the aggregate two hundred thousand (200,000)
shares of the Company's $.001 par value common stock (the "Common Stock"). If
any right granted under the Plan shall for any reason terminate without having
been exercised, the Common Stock not purchased under such right shall again
become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
-------------------------
The Board or the Committee may from time to time grant or provide for
the grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate. If an employee has more than one right outstanding under the Plan,
unless he or she otherwise indicates in agreements or notices delivered
hereunder: (1) each agreement or notice delivered by that employee will be
deemed to apply to all of his or her rights under the Plan, and (2) a right with
a lower exercise price (or an earlier-granted right, if two rights have
identical exercise prices), will be exercised to the fullest possible extent
before a right with a higher exercise price (or a later-granted right, if two
rights have identical exercise prices) will be exercised. The provisions of
separate Offerings need not be identical, but each Offering shall include
(through incorporation of the provisions of this Plan by reference in the
Offering or otherwise) the substance of the provisions contained in paragraphs 5
through 8, inclusive.
-2-
5. ELIGIBILITY.
-----------
(a) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except an provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan, unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be equal to or greater than
two (2) years. In addition, unless otherwise determined by the Board or the
Committee and set forth in the terms of the applicable Offering, no employee of
the Company or any Affiliate shall be eligible to be granted rights under the
Plan, unless, on the Offering Date, such employee's customary employment with
the Company or such Affiliate is at least twenty (20) hours per week and at
least five (5) months per calendar year.
(b) The Board or the Committee may provide that, each person who,
during the course of an Offering, first becomes an eligible employee of the
Company or designated Affiliate will, on a date or dates specified in the
Offering which coincides with the day on which such person becomes an eligible
employee or occurs thereafter, receive a right under that Offering, which right
shall thereafter be deemed to be a part of that Offering. Such right shall have
the same characteristics as any rights originally granted under that Offering,
as described herein, except that:
(i) the date on which such right in granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right;
(ii) the Purchase Period (as defined below) for such right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board or the Committee may provide that if such person
first becomes an eligible employee within a specified period of time before the
end of the Purchase Period (as defined below) for such Offering, he or she will
not receive any right under that Offering.
(c) No employee shall be eligible for the grant of any rights under
the Plan if, immediately after any such rights are granted, such employee owns
stock possessing five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or of any Affiliate. For purposes
of this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply
in determining the stock ownership of any employee, and stock which such
employee may purchase under all outstanding rights and options shall be treated
as stock owned by such employee.
(d) An eligible employee may be granted rights under the Plan only if
such rights, together with any other rights granted under "employee stock
purchase plans" of the Company and any Affiliates, an specified by Section
423(b)(8) of the Code, do not permit such employee's rights to purchase stock of
the Company or any Affiliate to accrue at a rate which exceeds twenty-five
thousand dollars ($25,000) of fair market value of such stock (determined at the
time such rights are granted) for each calendar year in which such rights are
outstanding at any time.
-3-
(e) Officers of the Company shall be eligible to participate in
Offerings under the Plan, provided, however, that the Board may provide in an
Offering that certain employees who are highly compensated employees within the
meaning of Section 423(b)(4)(D) of the Code shall not be eligible to
participate.
6. RIGHTS; PURCHASE PRICE.
----------------------
(a) On each Offering Date, each eligible employee, pursuant to an
Offering made under the Plan, shall be granted the right to purchase the number
of shares of Common Stock of the Company purchasable with a percentage
designated by the Board or the Committee not exceeding fifteen percent (15%) of
such employee's Earnings (as defined in Section 7(a)) during the period which
begins on the Offering Date (or such later date as the Board or the Committee
determines for a particular Offering) and ends on the date stated in the
Offering, which date shall be no more than twenty-seven (27) months after the
Offering Date (the "Purchase Period"). In connection with each Offering made
under this Plan, the Board or the Committee shall specify a maximum number of
shares which may be purchased by any employee an well as a maximum aggregate
number of shares which may be purchased by all eligible employees pursuant to
such Offering. In addition, in connection with each Offering which contains
more than one Exercise Date (as defined in the Offering), the Board or the
Committee may specify a maximum aggregate number of shares which may be
purchased by all eligible employees on any given Exercise Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(b) The purchase price of stock acquired pursuant to rights granted
under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Exercise Date.
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
--------------------------------------
(a) An eligible employee may become a participant in an Offering by
delivering a participation agreement to the Company within the time specified in
the Offering, in such form as the Company provides. Each such agreement shall
authorize payroll deductions of up to the maximum percentage specified by the
Board or the Committee of such employee's Earnings during the Purchase Period.
"Earnings" is defined as the total compensation paid to an employee, including
all salary, wages (including amounts elected to be deferred by the employee,
that would otherwise have been paid, under any cash or deferred arrangement
established by the Company), overtime pay, commissions, bonuses, and other
remuneration paid directly to the employee, but excluding profit sharing, the
cost of employee benefits paid for by the Company, education or tuition
reimbursements, imputed income arising under
-4-
any Company group insurance or benefit program, traveling expenses, business and
moving expense reimbursements, income received in connection with stock options,
contributions made by the Company under any employee benefit plan, and similar
items of compensation. The payroll deductions made for each participant shall be
credited to an account for such participant under the Plan and shall be
deposited with the general funds of the Company. A participant may reduce
(including to zero), increase or begin such payroll deductions after the
beginning of any Purchase Period only as provided for in the Offering. A
participant may make additional payments into his or her account only if
specifically provided for in the Offering and only if the participant has not
had the maximum amount withheld during the Purchase Period.
(b) At any time during a Purchase Period a participant may terminate
his or her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Purchase Period except as provided by the Board or the Committee in the
Offering. Upon such withdrawal from the Offering by a participant, the Company
shall distribute to such participant all of his or her accumulated payroll
deductions (reduced to the extent, if any, such deductions have been used to
acquire stock for the participant) under the Offering, without interest, and
such participant's interest in that Offering shall be automatically terminated.
A participant's withdrawal from an Offering will have no effect upon such
participant's eligibility to participate in any other Offerings under the Plan
but such participant will be required to deliver a new participation agreement
in order to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating employee's employment
with the Company or an Affiliate, for any reason, and the Company shall
distribute to such terminated employee all of his or her accumulated payroll
deductions (reduced to the extent, if any, such deductions have been used to
acquire stock for the terminated employee), under the Offering, without
interest.
(d) Rights granted under the Plan shall not be transferable, and shall
be exercisable only by the person to whom such rights are granted.
8. EXERCISE.
--------
(a) On each exercise date, as defined in the relevant Offering (an
"Exercise Date"), each participant's accumulated payroll deductions and other
additional payments specifically provided for in the Offering (without any
increase for interest) will be applied to the purchase of whole shares of stock
of the Company, up to the maximum number of shares permitted pursuant to the
terms of the Plan and the applicable Offering, at the purchase price specified
in the Offering. No fractional shares shall be issued upon the exercise of
rights granted under the Plan. The amount, if any, of accumulated payroll
deductions remaining in each participant's account after the purchase of shares
which is less than the amount required to purchase one share of stock on the
final Exercise Date of an Offering shall be held in each such participant's
account for the purchase of shares under the next Offering under the Plan,
unless such participant withdraws from such next Offering, as provided in
subparagraph 7(b), or is no longer eligible to be granted rights under the Plan,
as provided in paragraph 5, in which case such
-5-
amount shall be distributed to the participant after said final Exercise Date,
without interest. The amount, if any, of accumulated payroll deductions
remaining in any participant's account after the purchase of shares which is
equal to the amount required to purchase whole shares of stock on the final
Exercise Date of an Offering shall be distributed in full to the participant
after such Exercise Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent
unless the Plan (including rights granted thereunder) is covered by an effective
registration statement pursuant to the Securities Act of 1933, as amended (the
"Securities Act"). If on an Exercise Date of any Offering hereunder the Plan is
not so registered, no rights granted under the Plan or any Offering shall be
exercised on said Exercise Date and the Exercise Date shall be delayed until the
Plan is subject to such an effective registration statement, except that the
Exercise Date shall not be delayed more than two (2) months and the Exercise
Date shall in no event be more than twenty-seven (27) months from the Offering
Date. If on the Exercise Date of any Offering hereunder, as delayed to the
maximum extent permissible, the Plan is not registered, no rights granted under
the Plan or any Offering shall be exercised and all payroll deductions
accumulated during the purchase period (reduced to the extent, if any, such
deductions have been used to acquire stock) shall be distributed to the
participants, without interest.
9. COVENANTS OF THE COMPANY.
------------------------
(a) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
(b) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the rights granted under the
Plan. If, after reasonable efforts, the Company is unable to obtain from any
such regulatory commission or agency the authority which counsel for the Company
deems necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such rights unless and until such authority in obtained.
10. USE OF PROCEEDS FROM STOCK.
--------------------------
Proceeds from the sale of stock pursuant to rights granted under the
Plan shall constitute general funds of the Company.
11. RIGHTS AS A STOCKHOLDER.
-----------------------
A participant shall not be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until certificates representing such shares shall have
been issued.
-6-
12. ADJUSTMENTS UPON CHANGES IN STOCK.
---------------------------------
(a) If any change is made in the stock subject to the Plan, or subject
to any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), the Plan and outstanding
rights will be appropriately adjusted in the class(es) and maximum number of
shares subject to the Plan and the class(es) and number of shares and price per
share of stock subject to outstanding rights.
(b) In the event of: (1) a dissolution or liquidation of the Company;
(2) a merger or consolidation in which the Company in not the surviving
corporation; (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise; or (4) any other capital
reorganization in which more than fifty percent (50%) of the shares of the
Company entitled to vote are exchanged, then, as determined by the Board in its
sole discretion (i) any surviving corporation may assume outstanding rights or
substitute similar rights for those under the Plan, (ii) such rights may
continue in full force and effect, or (iii) participants' accumulated payroll
deductions may be used to purchase Common Stock immediately prior to the
transaction described above and the participants' rights under the ongoing
Offering terminated.
13. AMENDMENT OF THE PLAN.
---------------------
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares reserved for rights under the
Plan;
(ii) Modify the provisions as to eligibility for participation in
the Plan (to the extent such modification requires stockholder approval in
order for the Plan to obtain employee stock purchase plan treatment under
Section 423 of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended ("Rule
16b-3")); or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee
stock purchase plan treatment under Section 423 of the Code or to comply
with the requirements of Rule 16b-3.
It is expressly contemplated that the Board may amend the Plan in any respect
the Board deems necessary or advisable to provide eligible employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to employee stock purchase plans
and/or to bring the Plan and/or rights granted under it into compliance
therewith.
-7-
(b) Rights and obligations under any rights granted before amendment
of the Plan shall not be altered or impaired by any amendment of the Plan,
except with the consent of the person to whom such rights were granted or except
as necessary to comply with any laws or governmental regulation.
14. TERMINATION OR SUSPENSION OF THE PLAN.
-------------------------------------
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on December 1, 2001. No rights may
be granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is
in effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom such rights were granted or
except as necessary to comply with any laws or governmental regulation.
15. EFFECTIVE DATE OF PLAN.
----------------------
The Plan shall become effective as determined by the Board, but no
rights granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company.
-8-
[X] PLEASE MARK YOUR
VOTES AS THIS
EXAMPLE
For all nominees Withhold Authority
listed below to vote for
(except as marked all nominees
to the contrary below). listed below.
1: To elect these two directors [_] [_]
to hold office until the 2001
Annual Meeting of Stockholders.
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW.
NOMINEES: Gordon W. Russell
Prithipal Singh, Ph.D.
To withhold authority to vote for any nominee(s) write such nominee(s)
name(s) below:
________________________________________________________________________________
FOR AGAINST ABSTAIN
2: To approve the terms of a proposed equity [_] [_] [_]
financing of up to $5,000,000 pursuant
to which the Company will issue 6% Cumulative
Convertible Series B Preferred Stock (all of
which may be converted into Common Stock
pursuant to a formula which includes a lower-
than-market conversion price for Common Stock
and for which there is no upper limit on the
number of shares of Common Stock which will
be issued upon conversion of the Preferred Stock)
that could result in the issuance of more than
20% of the outstanding shares of Common Stock of
the Company.
FOR AGAINST ABSTAIN
3: To approve an amendment to the 1991 [_] [_] [_]
Employee Stock Purchase Plan
increasing the aggregate number of
shares of Common Stock authorized
for issuance under such plan by
200,000 shares to 400,000 shares.
FOR AGAINST ABSTAIN
4: To approve an amendment to the Company's [_] [_] [_]
Restated Certificate of Incorporation to
effect a reverse stock split such that
each three to five shares of the Company's
currently issued and outstanding Common
Stock will be exchanged for one share of
newly issued Common Stock, with the precise
number of newly issued shares of Common
Stock to be converted to be determined by
the Board of Directors within five days of
the Annual Meeting.
FOR AGAINST ABSTAIN
5: To ratify selection of Coopers & Lybrand [_] [_] [_]
L.L.P. as independent auditors of the
Company for its fiscal year ending
December 31, 1998.
PLEASE COMPLETE, SIGN, DATE AND MAIL THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
SIGNATURE _________________________________ DATE ___________________________
SIGNATURE _________________________________ DATE ___________________________
Please date this proxy and sign your name exactly as it appears herein. In the
case of joint ownership, each joint owner should sign. If signing as an
executor, trustee, guardian, attorney-in-fact or in any other representative
capacity or as an officer of a corporation, please indicate your full title as
such.
- --------------------------------------------------------------------------------
CHEMTRAK INCORPORATED
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of ChemTrak Incorporated, a Delaware corporation,
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and
proxy statement, each dated [___________], and hereby appoints Prithipal
Singh, Ph.D. and Edward F. Covell, and each of them, as attorneys-in-fact and
proxies of the undersigned, with full power of substitution, to vote all of the
shares of stock of ChemTrak Incorporated which the undersigned may be entitled
to vote at the Annual Meeting of Stockholders of ChemTrak Incorporated to be
held at the principal executive offices of ChemTrak Incorporated, located at
929 East Arques Avenue, Sunnyvale, California 94086-4520 on [___________]
1998 at 3:00 p.m. local time, and at any and all continuations and any
adjournment(s) thereof, with all powers that the undersigned would possess if
personally present, upon and in respect of the following matters and in
accordance with the following instructions, with discretionary authority as to
any and all other matters that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3 AND 4, AS MORE SPECIFICALLY
DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS
PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
SEE REVERSE
SIDE
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)