SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
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|X| Preliminary Proxy Statement |_| Confidential, For Use of the
|_| Definitive Proxy Statement Commission Only (as permitted by
|_| Definitive Additional Materials Rule 14a-6(e)(2))
|_| Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
3Dshopping.com
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
|X| No fee required.
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(3) Per unit price or other underlying value of transaction computed pursuant
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previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
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* Set forth the amount on which the filing fee is calculated and state how it
was determined.
<PAGE>
PRELIMINARY COPY
3DSHOPPING.COM
(d/b/a O2 Essential Marketing Technologies)
308 Washington Boulevard
Marina del Rey, California 90292
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Notice of Annual Meeting of Shareholders
January 31, 2001
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To the Shareholders of 3DSHOPPING.COM:
The annual meeting of the shareholders of 3Dshopping.com (d/b/a O2
Essential Marketing Technologies) ("Company"), a California corporation, will be
held at 1:00 p.m., Pacific Time, on January 31, 2001, at the Company's
headquarters at 308 Washington Boulevard, Marina del Rey, California for the
following purposes:
1. To elect four directors to serve for the following year and
until their successors are elected and qualified;
2. To approve the change of the state of incorporation of the
Company from California to Delaware, the effect of which
would result in a change of the Company's name from
"3DShopping.com" to "O2 Essential Marketing Technologies,
Inc." and an increase in the number of authorized shares of
capital stock from 15,000,000 to 120,000,000 shares,
consisting of 100,000,000 shares of common stock, $.001 par
value, and 20,000,000 shares of preferred stock, $.001 par
value;
3. To approve the 2000 Performance Equity Plan;
4. To approve the potential issuance of 20% or more of the
Company's outstanding common stock in connection with the
conversion of shares of Series A Convertible Preferred
Stock;
5. To approve the potential issuance of 20% or more of the
Company's outstanding common stock in connection with the
conversion of shares of Series B through Series D Preferred
Stock; and
6. To transact such other business as may properly come before
the meeting and any and all adjournments thereof.
The nominees for election to the board of directors are: Terry L.
Gourley, Joel P. Gayner, Maryann O'Donnell and Jon A. Allegretti.
Only shareholders of record at the close of business on December 20,
2000 will be entitled to notice of, and to vote at, the annual meeting and any
postponement(s) and adjournment(s) thereof.
Please date and sign the enclosed proxy and return it in the
postage-prepaid envelope enclosed for that purpose. You may attend the meeting
in person even if you send in your proxy; retention of the proxy is not
necessary for admission to or identification at the meeting.
By Order of the Board of Directors
Lynda Gibson
Secretary
Marina del Rey, California
December 26, 2000
<PAGE>
3DSHOPPING.COM
(d/b/a O2 Essential Marketing Technologies)
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Proxy Statement
Annual Meeting of Shareholders
To Be Held January 31, 2001
-----------
The enclosed proxy is solicited on behalf of the board of directors of
3Dshopping.com (d/b/a O2 Essential Marketing Technologies) ("Company"), a
California corporation, for use at the annual meeting of shareholders to be held
on January 31, 2001 and at any postponement(s) or adjournment(s) thereof. Any
person giving a proxy in the form accompanying this proxy statement has the
power to revoke it at any time before its exercise. The proxy may be revoked by
filing with the Company, attention Lynda Gibson, Secretary, an instrument of
revocation or a duly executed proxy bearing a later date. The proxy also may be
revoked by voting in person at the meeting. A shareholder who attends the
meeting, however, is not required to revoke the proxy and vote in person. All
valid, unrevoked proxies will be voted at the annual meeting in accordance with
the instructions given. Unless otherwise specified in the proxy, shares
represented by proxies will be voted "FOR" the election of the nominees for
directors as described below under Proposal 1, "FOR" the proposal to change the
Company's state of incorporation from California to Delaware as described below
under Proposal 2, "FOR" the proposal to approve the 2000 Performance Equity Plan
("2000 Plan") as described below under Proposal 3, "FOR" the proposal to approve
the potential issuance of 20% or more of the Company's outstanding shares of
common stock in connection with the conversion of shares of Series A Convertible
Preferred Stock ("Private Placement Stock Issuance") as described under Proposal
4, "FOR" the proposal to approve the potential issuance of 20% or more of the
Company's outstanding shares of common stock in connection with the conversion
of shares of Series B through Series D Preferred Stock ("Acquisition Stock
Issuance") as described under Proposal 5 and, in the discretion of the proxy
holders, on any other business properly coming before the meeting and any
postponement(s) or adjournment(s) thereof.
The mailing address of the Company's principal executive offices is
308 Washington Boulevard, Marina del Rey, California 90292. The approximate date
that this proxy statement and the accompanying proxy card are first being sent
to shareholders is December 26, 2000.
Upon written request to Lynda Gibson, Secretary, any person whose
proxy is solicited by this proxy statement will be provided, without charge, a
copy of the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 2000. A complete copy of the Annual Report on Form 10-K is also available
for download at the Company's web site at www.O2emt.com.
Voting Securities
The common stock is the only outstanding authorized voting security of
the Company. The record date for determining holders of common stock entitled to
vote at the annual meeting is December 20, 2000. On that date, there were
5,304,164 shares of common stock outstanding, entitled to one vote per share.
The presence, in person or by proxy, of a majority of all of the outstanding
shares of common stock constitutes a quorum at the annual meeting. Proxies that
are marked "abstain" and proxies relating to "street name" shares that are
returned to the Company but marked by brokers as "not voted" ("broker
non-votes") will be treated as shares present for purposes of determining the
presence of a quorum on all matters. However, broker non-votes will not be
treated as shares entitled to vote on the matter as to which authority to vote
is withheld by the broker.
<PAGE>
Shareholders will have cumulative voting rights with respect to the
election of directors only upon proper compliance with the notice requirements
of California law. Cumulative voting rights allow shareholders to give one
nominee for director, and only one nominee, a number of votes equal to the
number of votes to which a shareholder's shares are normally entitled multiplied
by the number of nominees. Alternatively, a shareholder can distribute this
total number of votes between as many of the nominees as the shareholder
desires. Cumulative voting rights can be exercised only if a shareholder gives
notice at the annual meeting prior to the voting for directors of the
shareholder's intention to cumulate votes. Once such notice is given, all
shareholders may cumulate their votes for nominees. The Company is seeking
discretionary authority in the proxy to cumulate votes.
The approval of the proposal to change the state of incorporation from
California to Delaware requires the affirmative vote of a majority of the shares
of common stock outstanding. Abstentions from voting with respect to this
proposal (which are considered present and entitled to vote) and shares deemed
present but not entitled to vote on this matter (because of a broker non-vote),
will have the effect of a negative vote with respect to such proposal.
Additionally, the affirmative vote of the holders of a majority of the
outstanding shares of Series A Convertible Preferred Stock ("Series A Preferred
Stock"), voting together as a single class, will be necessary to change the
Company's state of incorporation from California to Delaware. The Company has
obtained a binding proxy from the holder of the Series A Preferred Stock,
pursuant to which such holder has agreed to vote in favor of reincorporation.
All other matters to be voted on, including the approval of the 2000
Plan, the Private Placement Stock Issuance and the Acquisition Stock Issuance,
will be decided by the affirmative vote of a majority of the shares of common
stock present or represented at the annual meeting and entitled to vote. On any
such matter, an abstention will have the same effect as a negative vote, but
because shares of common stock held by brokers will not be considered entitled
to vote on matters as to which the brokers withhold authority, a broker non-vote
will have no effect on the vote.
Principal Shareholders
The following table sets forth certain information as of the record
date regarding the beneficial ownership of the common stock by (i) each person
or group known by the Company to own beneficially more than 5% of the common
stock, (ii) each director and nominee for director of the Company, (iii) each
current executive officer of the Company whose compensation exceeded $100,000
for the fiscal year ended June 30, 2000 and (iv) all executive officers and
directors as a group. Except as otherwise noted, the persons listed below have
sole investment and voting power with respect to the common stock owned by them.
Except as otherwise indicated in the table below, the business address of each
of the persons listed is c/o of the Company at 308 Washington Boulevard, Marina
del Rey, California 90292.
Number of Shares Percentage
Name of Beneficial Owner Beneficially Owned of Shares
------------------------ ------------------ ----------
Terry L. Gourley.............................. 225,000(1) 4.1%
Joel P. Gayner................................ 250,000(2) 4.5%
Maryann O'Donnell............................. 0(3) *
c/o O'Donnell & Ganns, LLC
1896 Rising Glen Road
Los Angeles, California 90069
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<PAGE>
Number of Shares Percentage
Name of Beneficial Owner Beneficially Owned of Shares
------------------------ ------------------ ----------
Jon A. Allegretti............................. 0(4) *
1798 Robson Drive
Pittsburgh, Pennsylvania 15241
Lawrence Weisdorn............................. 820,000(5) 12.6%
20485 Roca Chica Drive
Malibu, California 90265
All directors and executive officers
as a group (eight persons)...... 502,100(6) 8.7%
----------------------------
* Less than 1%.
(1) Represents shares of common stock issuable upon exercise of
immediately exercisable options. Excludes 200,000 shares of common
stock issuable upon exercise of options, 1/3 of which become
exercisable on each of October 23, 2001, 2002 and 2003.
(2) Represents shares of common stock issuable upon exercise of
immediately exercisable options. Excludes 200,000 shares of common
stock issuable upon exercise of options, 1/3 of which become
exercisable on each of October 23, 2001, 2002 and 2003.
(3) Excludes (i) 20,000 shares of common stock issuable upon exercise of
options, 1/4 of which become exercisable on each of June 20, 2001,
2002, 2003 and 2004 and (ii) 55,000 shares of common stock issuable
upon exercise of options, 1/4 of which become exercisable on each of
October 23, 2001, 2002, 2003 and 2004.
(4) Excludes 20,000 shares of common stock issuable upon exercise of
options, 1/4 of which become exercisable on each of October 23, 2001,
2002, 2003 and 2004.
(5) Includes (i) 100,000 shares of common stock issuable upon exercise of
immediately exercisable options and (ii) 35,000 shares of common stock
issuable upon exercise of immediately exercisable options owned by Mr.
Weisdorn's spouse.
(6) Includes shares referred to as being included in notes 1-4. Excludes
shares referred to in such notes as being excluded. Also includes (i)
1,100 shares of common stock owned by and 25,000 shares of common
stock issuable upon exercise of currently exercisable options granted
to Howard A. Cohn, the Company's chief financial officer and (ii)
1,000 shares of common stock owned by Jacalyn Hughes, the Company's
executive vice president of operations and chief technology officer.
Excludes (i) 50,000 shares of common stock issuable upon exercise of
options granted to Mr. Cohn, 1/4 of which become exercisable in each
of October 2001, 2002, 2003 and 2004, (ii) 50,000 shares of common
stock issuable upon exercise of options granted to David C. Williams,
the Company's executive vice president of business development, 1/4 of
which become exercisable in each of October 2001, 2002, 2003 and 2004
3
<PAGE>
and (iii) 40,000 shares of common stock issuable upon exercise of
options granted to Jacalyn Hughes, 1/4 of which become exercisable in
each of March 2001, 2002, 2003 and 2004.
Proposal 1: Election of Directors
The directors of the Company are elected at each annual meeting to
serve until the next annual meeting and until their successors are elected and
qualified. Each nominee is currently serving as a director of the Company. If a
quorum of shareholders is present at the annual meeting, the four nominees for
election as directors who receive the greatest number of votes cast at the
meeting will be elected directors. Abstentions and broker non-votes will have no
effect on the results of the vote. The board of directors has nominated Terry L.
Gourley, Joel P. Gayner, Maryann O'Donnell and Jon A. Allegretti as the
candidates for election. Unless otherwise instructed, proxy holders will vote
the proxies they receive for the nominees named below. If any of the nominees
for director at the annual meeting becomes unavailable for election for any
reason, the proxy holders will have discretionary authority to vote pursuant to
the proxy for a substitute or substitutes. If any shareholder gives notice at
the annual meeting prior to the voting for directors of the shareholder's
intention to cumulate votes, the proxy holders will have discretionary authority
to cumulate votes for directors.
Information About the Nominees
Terry L. Gourley, 38, has served as our chief executive officer since
May 2000 and became our chairman of the board in September 2000. From November
1999 to May 2000, he served as our director of marketing communications. From
February 1998 until November 1999, Mr. Gourley served as president and branch
manager of a financial services business at NLSB Bank Financial Service Center.
From March 1993 until February 1998, Mr. Gourley was an independent business
owner and branch manager for FLPL Financial Services.
Joel P. Gayner, 56, has served as our president since May 2000, and
became a member of our board of directors in September 2000. From February 2000
to May 2000, he served as our senior vice president of sales and marketing. From
1990 until February 2000, Mr. Gayner was the president of Group G Associates,
Inc., a marketing company.
Maryann O'Donnell, 49, became a member of our board of directors in
June 2000. Since January 2000, Ms. O'Donnell has been a partner of and investor
in O'Donnell & Ganns, LLC, a venture capital investment firm. From July 1998
until January 2000, Ms. O'Donnell served as the president of ETI, LLC, a
television production company. Ms. O'Donnell was one of the original investors
in Earthlink Network, an Internet service provider for which she assisted in
sales management recruitment from 1994 until July 1998. Ms. O'Donnell is
currently a member of the Tech Coast Angels, an investment group in Southern
California.
4
<PAGE>
Jon A. Allegretti, 44, became a member of our board of directors in
October 2000. Mr. Allegretti has served as chief financial officer and chief
legal and administrative officer for ChannelSpace Entertainment, Inc. since
January 2000, and was executive vice president and chief business affairs
officer from February 1999 through December 1999. From August 1997 to January
1999, Mr. Allegretti was vice president of administration for Crown
Communications, Inc. (now Crown-Castle International - USA). From October 1986
to December 1996, Mr. Allegretti was with Tele-Media Corporation, serving as
executive vice president and chief financial officer from January 1996 to
December 1996, as executive vice president and chief operating officer from
January 1990 to December 1995 and as vice president of legal affairs from
October 1986 to December 1989.
Other Executive Officers
Jacalyn A. Hughes, 48, has served as our chief technology officer
since February 2000 and is also currently our executive vice president of
operations. From January 1998 to February 2000, Ms. Hughes was vice president of
information technology and chief information officer at Specialty Laboratories,
Inc., a reference laboratory serving hospitals and specialist physicians. From
August 1989 to January 1998, Ms. Hughes served as director of management
information systems at Candle Corporation, a supplier of networked business
applications. Ms. Hughes currently serves on boards for the Society for
Information Management, Southern California, and the Organization of Women
Executives.
Howard A. Cohn, 60, has served as our senior vice president of
administration and chief financial officer since May 2000. From November 1999 to
May 2000, he served as our controller and treasurer. From 1995 to November 1999,
Mr. Cohn was vice president of strategic planning and corporate development at
West LA Music. Mr. Cohn is a certified public accountant. Mr. Cohn declared
personal bankruptcy under Chapter 7 of the federal Bankruptcy Code in 1996.
David C. Williams, 43, became our executive vice president of business
development in June 2000. From June 1997 to June 2000, Mr. Williams was a
director and principal in The Management Group, a management consulting firm
specializing in e-commerce strategy. From 1991 through May 1997, he was managing
director of Hudson Hill Consulting, a business development and strategic
planning consulting firm.
Board Meetings and Committees
The board of directors met seven times in the fiscal year ended June
30, 2000 and acted by unanimous consent on 11 occasions. No director attended
fewer than 75% of the aggregate of all meetings of the board of directors and
the committees of which the director was a member during 2000. In July 1999, the
Company formed a standing audit committee and compensation committee. The
Company does not have a nominating committee.
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<PAGE>
Compensation Committee
Maryann O'Donnell currently serves on the compensation committee and
C. James Jensen served on the compensation committee from June 2000 to December
2000. The compensation committee determines compensation for the Company's
executive officers and administers the Company's stock option plans. The
compensation committee acted by unanimous consent on one occasion during fiscal
2000.
Audit Committee Report
Maryann O'Donnell and Jon A. Allegretti currently serve on the audit
committee, and C. James Jensen served on the audit committee from June 2000 to
December 2000. Each of these members is an "independent director" and is
"financially literate" as defined under the recently adopted American Stock
Exchange ("Amex") listing standards. The Amex listing standards define an
"independent director" generally as a person, other than an officer of the
company, who does not have a relationship with the company that would interfere
with the director's exercise of independent judgment. The Amex's listing
standards define "financially literate" as being able to read and understand
fundamental financial statements (including a company's balance sheet, income
statement and cash flow statement).
The audit committee acted by unanimous consent on one occasion during
the fiscal year ended June 30, 2000. The audit committee makes recommendations
concerning the engagement of the independent public accountants, reviews with
the independent public accountants the plans and results of audits, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and nonaudit fees, reviews the adequacy of the Company's internal
accounting controls and reviews all related party transactions on an ongoing
basis for potential conflict of interest situations. The audit committee has
adopted a formal written audit committee charter, a copy of which is attached to
this proxy statement as Appendix I.
The audit committee has met and held discussions with management and
the Company's independent auditors. Management represented to the committee that
the Company's consolidated financial statements were prepared in accordance with
generally accepted accounting principles, and the committee has reviewed and
discussed the consolidated financial statements with management and the
independent auditors. The committee discussed with the independent auditors the
matters required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees). The Company's independent auditors also
provided the audit committee with the written disclosures required by
Independence Standards Board Standard No. 1(Independence Discussions with Audit
Committees), and the committee discussed with the independent auditors the
auditor's independence. Based upon the committee's discussion with management
and the independent auditors and the committee's review of the representations
of management and the report of the independent auditors to the audit committee,
the committee recommended that the board of directors include the audited
consolidated financial statements in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 2000 filed with the SEC.
C. James Jensen (resigned as a member of the board of directors in
December 2000)
Maryann O'Donnell
Jon A. Allegretti
Compensation of Directors
Directors who are not officers of the Company receive $1,000 for
attendance at each board meeting and $500 for attendance at each committee
meeting, plus reasonable out-of-pocket expenses incurred in attending meetings.
In June 2000, the Company's non-employee directors were granted options to
purchase shares of common stock under the Company's 1999 Stock Option Plan. Ms.
O'Donnell was granted options to purchase 20,000 shares of common stock, 1/4 of
which become exercisable in each of June 2001, 2002, 2003 and 2004. C. James
Jensen, who served as a member of the board of directors from June 2000 to
December 2000, was granted options to purchase 40,000 shares of common stock,
1/5 of which are exercisable until January 2001 and the remainder of which
expired upon his resignation from the board in December 2000. In October 2000,
the Company's non-employee directors, Ms. O'Donnell, Mr. Jensen and Mr.
Allegretti, were granted options to purchase 55,000, 35,000 and 20,000 shares of
common stock, respectively, under the 1999 Stock Option Plan. 1/4 of each of
these options become exercisable in each of October 2001, 2002, 2003 and 2004,
except for Mr. Jensen's options, which expired upon his resignation from the
board in December 2000.
6
<PAGE>
Executive Compensation
The following table shows the compensation for the fiscal years ended
June 30, 2000, 1999 and 1998 earned by (i) Terry L. Gourley, our chairman and
chief executive officer, (ii) Joel P. Gayner, our president, (iii) Brian A.
Smith, our former executive vice president of marketing and creative, who
resigned in November 2000, (iv) Lawrence Weisdorn, our former chairman and chief
executive officer who resigned in September 2000, and (v) Robert J. Vitamante,
our former president and chief operating officer who resigned in May 2000. The
compensation for each of Messrs. Gayner, Smith, Weisdorn and Vitamante exceeded
$100,000 during the fiscal year ended June 30, 2000. None of the named
individuals received noncash compensation benefits having a value exceeding 10%
of his cash compensation during the fiscal years ended June 30, 2000, 1999 and
1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- --------------------
Awards
--------------------
Securities
Underlying All Other
Name and Principal Year Salary Bonu Options/SARs Compensation
Position During Period ($) ($) (# of shares) ($)
---------------------------------- ------- ------------ --------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
Terry L. Gourley 2000 114,423(1) - 125,000 -
Chairman and Chief Executive 1999 -0- -
Officer 1998 -0- -
Joel P. Gayner 2000 145,282(2) - 150,000 -
President 1999 -0- -
1998 -0- -
Brian A. Smith(3) 2000 126,511 90,000
Former Executive Vice President 1999 -0- - - -
of Marketing and Creative 1998 -0- -
Lawrence Weisdorn(4) 2000 125,218 - 100,000 -
Former Chairman and Chief 1999 53,000 -
Executive Officer 1998 48,000 -
Robert J. Vitamante(5) 2000 201,150 - 142,940 100,000
Former President and Chief 1999 -0- -
Operating Officer 1998 -0- -
</TABLE>
------------------------
(1) Reflects Mr. Gourley's salary commencing October 25, 1999 when he
joined the Company.
(2) Reflects Mr. Gayner's salary commencing February 8, 2000 when he
joined the Company.
(3) The Company formerly employed Mr. Smith as executive vice president of
marketing and creative. Mr. Smith's annual base compensation at the
time his employment ceased was $120,000. On November 3, 2000, Mr.
Smith resigned his employment and pursuant to a termination agreement
between the Company and Mr. Smith, the Company agreed to pay Mr. Smith
a gross amount of $10,000 per month for a period of six months. Mr.
Smith also has until November 3, 2001 to exercise options to purchase
90,000 shares of common stock at an exercise price of $15.875 per
share.
(4) The Company formerly employed Mr. Weisdorn as chairman and chief
executive officer. Mr. Weisdorn's annual base compensation at the time
his employment ceased was $150,000. On September 1, 2000, Mr. Weisdorn
resigned his employment and pursuant to a termination agreement
between the Company and Mr. Weisdorn, the Company agreed to pay Mr.
7
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Weisdorn a gross amount of $300,000, $150,000 of which was paid upon
signing the agreement, $56,250 of which was paid when the Company
received $1.5 million of financing as described in Proposal 4 and
$93,750 of which will be paid when and if the Company receives $2.5
million of additional financing (with pro rata payments as the Company
receives such financing). Mr. Weisdorn also has until March 1, 2002 to
exercise options to purchase 100,000 shares of common stock at an
exercise price of $7.70 per share.
(5) The Company formerly employed Mr. Vitamante as president and chief
operating officer. Mr. Vitamante's annual base compensation at the
time his employment ceased was $200,000. On May 25, 2000, Mr.
Vitamante resigned his employment and pursuant to a termination
agreement between the Company and Mr. Vitamante, the Company agreed to
pay Mr. Vitamante a gross amount of $100,000, which was paid upon
signing the agreement. Mr. Vitamante also has until February 24, 2001
to exercise options to purchase 75,000 shares of common stock at an
exercise price of $11.00 per share.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------
Number of Percent of
Securities Total
Underlying Options/SARs
Option/SARs Granted to Market Price on
Granted Employees in Exercise Price Expiration Date of Grant
Name (#) Fiscal Year ($/Share) Date ($)
----------------------------- --------------- --------------- ---------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Terry L. Gourley 25,000 14.3% $7.125 11/1/09 $7.125
Chairman and Chief Executive 100,000 $7.00 5/18/10 $7.00
Officer
Joel P. Gayner 50,000 17.2% $13.188 2/9/10 $13.188
President 100,000 $7.00 5/18/10 $7.00
Brian A. Smith 0 -- -- -- --
Former Executive Vice
President of Marketing and
Creative
Lawrence Weisdorn 100,000 11.5% $7.70 3/1/02 $7.00
Former Chairman and Chief
Executive Officer
Robert J. Vitamante 142,940 16.4% $11.00 2/24/01 $11.00
Former President and Chief
Operating Officer
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired Value Fiscal Year-End (#) Fiscal Year-End(1) ($)
on Exercise Realized -------------------- ----------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
--------------------------- ------------- ---------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Terry L. Gourley -- -- 0 125,000 $0 $809,375
Chairman and Chief
Executive Officer
Joel P. Gayner -- -- 10,000 140,000 $3,120 $662,480
President
Brian A. Smith -- -- 22,500 67,500 $0 $0
Former Executive Vice
President of Marketing
and Creative
Lawrence Weisdorn -- -- 100,000 0 $580,000 $0
Former Chairman and
Chief Executive Officer
Robert J. Vitamante -- -- 75,000 0 $187,500 $0
Former President and
Chief Operating Officer
</TABLE>
-------------------
(1) Represents the difference between the aggregate market value at June
30, 2000 of the common stock underlying the options (based on a last
sale price of $13.50 on that date) and the options' aggregate exercise
price.
Compensation Arrangements for Current Executive Officers
Terry L. Gourley. In October 2000, Mr. Gourley and the Company entered
into a three-year employment agreement, pursuant to which Mr. Gourley continues
to serve as the Company's chairman of the board and chief executive officer. The
employment agreement provides for an annual base salary of at least $190,000,
with bonuses as may be determined from time to time by the compensation
committee of the board of directors. Mr. Gourley is entitled to a bonus of up to
$190,000 for the year ending December 31, 2001 if the Company achieves the
following performance objectives: (i) if the Company's revenues during the year
ending December 31, 2001 equal or exceed $15,000,000, the Company will pay Mr.
Gourley $63,333; (ii) if the average closing price of the common stock during
the period from December 1, 2001 through December 31, 2001 exceeds $8.00 per
share, the Company will pay Mr. Gourley $63,333; and (iii) if the Company is
profitable for the six-month period ending December 31, 2001, the Company will
pay Mr. Gourley $63,333. In consideration of Mr. Gourley executing the
employment agreement, the Company awarded Mr. Gourley a $100,000 bonus, which
will be paid when the Company successfully arranges for a financing or series of
financings in the aggregate amount of at least $4,000,000 (with pro rata
payments to be made as the Company receives such financing). $37,500 of the
bonus became payable when the Company received $1.5 million of financing as
described in Proposal 4. Additionally, the Company agreed to (i) accelerate
the vesting of the options to purchase 125,000 shares of common stock which were
previously granted to Mr. Gourley and (ii) grant to Mr. Gourley options to
purchase 300,000 shares of common stock under one of the Company's stock option
plans at an exercise price of $5.875 per share, the closing sale price of the
common stock on the day immediately preceding the agreement date. 100,000 of the
options are immediately exercisable and the remaining 200,000 options will vest
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one-third on each of the first, second and third anniversaries of the agreement
date. The Company also agreed to forgive all amounts due it under Mr. Gourley's
$25,000 promissory note to the Company, including interest accrued, once at
least $4,000,000 in financing has been arranged. The note was forgiven in
December 2000 when the Company entered into the financing arrangement described
in Proposal 4.
Joel P. Gayner. In October 2000, Mr. Gayner and the Company entered
into a three-year employment agreement, pursuant to which Mr. Gayner continues
to serve as the Company's president. The employment agreement provides for an
annual base salary of at least $190,000, with bonuses as may be determined from
time to time by the compensation committee of the board of directors. Mr. Gayner
is entitled to a bonus of up to $190,000 for the year ending December 31, 2001
if the Company achieves the following performance objectives: (i) if the
Company's revenues during the year ending December 31, 2001 equal or exceed
$15,000,000, the Company will pay Mr. Gayner $63,333; (ii) if the average
closing price of the common stock during the period from December 1, 2001
through December 31, 2001 exceeds $8.00 per share, the Company will pay Mr.
Gayner $63,333; and (iii) if the Company is profitable for the six-month period
ending December 31, 2001, the Company will pay Mr. Gayner $63,333. In
consideration of Mr. Gayner executing the employment agreement, the Company
awarded Mr. Gayner a $100,000 bonus, which will be paid when the Company
successfully arranges for a financing or series of financings in the aggregate
amount of at least $4,000,000 (with pro rata payments to be made as the Company
receives such financing). $37,500 of the bonus became payable when the Company
received $1.5 million of financing as described in Proposal 4. Additionally, the
Company agreed to (i) accelerate the vesting of the options to purchase 150,000
shares of common stock which were previously granted to Mr. Gayner and (ii)
grant to Mr. Gayner options to purchase 300,000 shares of common stock under one
of the Company's stock option plans at an exercise price of $5.875 per share,
the closing sale price of the common stock on the day immediately preceding the
agreement date. 100,000 of the options are immediately exercisable and the
remaining 200,000 options will vest one-third on each of the first, second and
third anniversaries of the agreement date.
David C. Williams. David Williams does not have a written employment
agreement. He currently receives an annual base salary of $150,000 and is
entitled to the same benefits that other employees generally receive.
Jacalyn Hughes. Jacalyn Hughes does not have a written employment
agreement. She currently receives an annual base salary of $165,000 and is
entitled to the same benefits that other employees generally receive.
Howard A. Cohn. Howard Cohn does not have a written employment
agreement. He currently receives an annual base salary of $165,000 and is
entitled to the same benefits that other employees generally receive.
1999 Stock Option Plan
In February 1999, the Company adopted the 1999 Stock Option Plan. The
1999 Stock Option Plan authorizes the granting of awards of up to 2,000,000
shares of common stock to the Company's key employees, officers, directors and
consultants. Awards consist of both nonqualified options and options intended to
qualify as "Incentive" stock options under Section 422 of the Internal Revenue
Code of 1986, as amended, as described in the 1999 Stock Option Plan. As of the
record date, options to purchase 1,661,800 shares of common stock were
outstanding or committed for grant under the 1999 Stock Option Plan, with
336,798 shares available for future grant.
1999 Employee Stock Purchase Plan
In November 1999, the shareholders approved the Company's 1999
Employee Stock Purchase Plan, under which a total of 2,000,000 shares of common
stock are available for issuance. Under this stock purchase plan, as currently
administered by the compensation committee, all full-time employees, including
employees who are officers or directors, may use a portion of their salary to
acquire shares of the Company's common stock. Offering periods are six months
long and commence on January 1 and July 1 of each year and end on the last day
of June and December following. On the first day of each offering period, known
as the "offering date," each eligible employee is automatically granted an
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option to purchase shares of the Company's common stock to be automatically
exercised on the last trading day of the six-month purchase period comprising an
offering period. The last trading day of a purchase period is known as a
"purchase date." On the purchase date, the amounts withheld will be applied to
purchase shares for the employee from the Company. The purchase price will be
the lesser of 85% of the closing market price of the Company's common stock on
the offering date or on the purchase date. As of the record date, no shares of
common stock have been issued under the 1999 Employee Stock Purchase Plan.
2000 Performance Equity Plan
In October 2000, the board of directors approved the 2000 Performance
Equity Plan, under which a total of 1,000,000 shares of common stock will be
made available for grants to the Company's key employees, officers, directors
and consultants, upon shareholder approval as contemplated by Proposal 3 below.
Awards may consist of both nonqualified options and options intended to qualify
as "Incentive" stock options under Section 422 of the Internal Revenue Code of
1986, as amended, restricted stock awards, deferred stock awards, stock
appreciation rights and other stock-based awards, as described in the 2000 plan.
There are currently no options outstanding under the 2000 plan.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act, as amended, requires the
Company's officers, directors and persons who beneficially own more than ten
percent of the Company's common stock to file reports of ownership and changes
in ownership with the Securities and Exchange Commission. These reporting
persons also are required 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 forms furnished to it and representations that no other
reports were required, the Company believes that all Section 16(a) reporting
requirements were complied with during the year ended June 30, 2000.
Certain Relationships and Related Transactions
From August 1996 to June 30, 1998, Mr. Weisdorn, our former chairman
and chief executive officer, and his father, Lawrence Weisdorn, Sr. advanced a
total of $178,683 to the Company. These advances were made in the form of loans
on which the Company pays annual interest of 7%. In fiscal 1998, the Weisdorns
advanced $108,860 to the Company and during fiscal 1998 were owed as much as
$111,824. At June 30, 1999, the Company owed Lawrence Weisdorn, Sr. a total of
$50,201, and Lawrence Weisdorn, Jr., a total of $20,522. All sums owing to the
Weisdorns were repaid from the proceeds of the Company's initial public offering
in July 1999.
In July 1999, the Company loaned $225,000 to C. Michael Mellin, the
Company's former senior vice president, technology operations, under a
promissory note bearing interest at 10% per annum and secured by a deed of trust
on Mr. Mellin's residence. The note plus accrued interest became due on
September 1, 2000 and was not repaid. Foreclosure proceedings were initiated
against Mr. Mellin on September 12, 2000. Management believes that the value of
the security exceeds the outstanding indebtedness.
Effective October 1999, the Company adopted a policy on future related
party transactions. Under that policy, all transactions between the Company and
any of its executive officers, directors or affiliates must be approved or
ratified by a majority of the independent outside members of the Company's board
of directors who do not have an interest in the transactions.
In March and May 2000, the Company loaned an aggregate of $85,000
under two promissory notes to Terry L. Gourley, who was then our director of
marketing communications and is now our chairman and chief executive officer.
The promissory notes for $25,000 and $60,000 bear interest at 10% per annum and,
along with any accrued interest, are repayable upon demand by the Company. In
connection with entering into an employment agreement with Mr. Gourley in
October 2000, the Company agreed to forgive all amounts due under the
promissory note for $25,000, including interest accrued, once at least
$4,000,000 in financing has been arranged. The note was forgiven in December
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2000 when the Company entered into the financing arrangement described in
Proposal 4.
In May 2000, the Company loaned $25,000 under a promissory note to
Joel Gayner, our president and chief operating officer. The promissory note is
non-interest bearing and serves as an advance against future sales commissions
earned. If Mr. Gayner is still employed by the Company on February 7, 2001, the
Company will forgive all amounts due under the promissory note.
In September 2000, Lawrence Weisdorn resigned his employment as
chairman of the board. Pursuant to a termination agreement between the
Company and Mr. Weisdorn, the Company agreed to pay Mr. Weisdorn a gross amount
of $300,000, $150,000 of which was paid upon signing the agreement, $56,250 of
which was paid when the Company received $1.5 million of financing as described
in Proposal 4 and $93,750 of which will be paid when and if
the Company receives $2.5 million of additional financing (with pro rata
payments as the Company receives such financing). Pursuant to the termination
agreement, Mr. Weisdorn agreed that he would not sell, transfer or otherwise
dispose of more than 100,000 shares of the Company's common stock owned by
Weisdorn or issuable upon exercise of options held by Weisdorn during any
quarterly period commencing September 1, 2000 without the Company's prior
written consent, which may not be unreasonably withheld. If Mr. Weisdorn sells
less than 100,000 shares during any quarter, in any subsequent quarter, he may
without the Company's consent, sell on a cumulative basis an additional number
of shares equal to the difference between 100,000 and the number of shares sold.
Mr. Weisdorn also has until March 1, 2002 to exercise options to purchase
100,000 shares of common stock at an exercise price of $7.70 per share.
[THIS TRANSACTION HAS NOT BEEN SIGNED OR COMPLETED BUT HAS BEEN
PRESENTED AS IF SIGNED AND COMPLETED. THERE CAN BE NO ASSURANCE THAT THIS
TRANSACTION WILL BE COMPLETED.] In December 2000, the Company entered into an
asset purchase agreement with ChannelSpace Entertainment, Inc. ("CSEI"),
pursuant to which the Company agreed to acquire from CSEI its electronic Content
Management System (eCMS) technology. Jon A. Allegretti, a shareholder and
executive officer of CSEI, became a member of the Company's board of directors
in October 2000. In consideration for the purchase, the Company agreed to issue
to CSEI shares of Series B Preferred Stock, which will automatically convert
into the number of shares of common stock equal to the sum of 833,333 and the
quotient obtained by dividing $500,000 by the average of the closing prices of
the common stock for the five trading days prior to the closing date upon the
effectiveness of a registration statement registering the resale of the
underlying shares of common stock. The Company also agreed to issue to CSEI
shares of each of Series C-1 through Series C-12 Preferred Stock, each
series of which will automatically convert into shares of common stock based
upon a gross revenue formula for each of 12 quarterly periods with the first
period ending on March 31, 2001. The Company also agreed to issue to CSEI shares
of Series D Preferred Stock, which will automatically convert into
shares of common stock if the average of the closing prices of the Company's
common stock during the three-month period commencing fifteen months after the
closing date does not equal or exceed $12 per share. See Proposal 5 for a more
detailed discussion of the asset purchase.
Compensation Committee Interlocks and Insider Participation
The Company's compensation committee was established in July 1999 and
currently consists of Maryann O'Donnell. C. James Jensen served as a member of
the compensation committee from June 2000 to December 2000. Donald L.
Hejmanowski and Joel F. McIntyre served as members of the compensation committee
during the fiscal year ended June 30, 2000. Mr. Hejmanowski served as a director
of the Company from August 1996 through February 2000 and from August 1996 to
February 1997, he was employed as the Company's investor relations manager. Mr.
McIntyre served as a director of the Company from June 1999 to September 2000.
No executive officer of the Company sits on the compensation committee of
another entity, one of whose executive officers serves as a director of the
Company or on our board of directors, nor does any executive officer of the
Company serve as a director of another entity, one of whose executive officers
serves on our board of directors.
Compensation Committee Report on Executive Compensation
Pursuant to authority delegated by the board of directors, the
compensation committee determines and administers the compensation of the
Company's executive officers. In setting the compensation for the executive
officers other than the chief executive officer, the compensation committee
works closely with the chief executive officer, who makes specific
recommendations to the committee concerning compensation for each of the other
executive officers. Although the board of directors has granted the compensation
committee full authority to set executive compensation, in practice the
decisions of the compensation committee are usually reported as recommendations
to the full board of directors.
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Internal Revenue Code Section 162(m), as currently in effect, limits
to $1,000,000 per person the amount that the Company may deduct for compensation
paid to any of its most highly compensated officers. Generally the levels of
salary and bonus paid by the Company do not exceed this limit. However, upon the
exercise of nonstatutory stock options, the excess of the current market price
over the option exercise price ("option spread") is treated as compensation and,
therefore, it may be possible for option exercises by an officer in any year to
cause the officer's total compensation to exceed $1,000,000. Under certain
regulations, option spread compensation from options that meet certain
requirements will not be subject to the $1,000,000 cap on deductibility, and it
is the Company's current policy generally to grant options that meet those
requirements.
Compensation Principles
Executive compensation in fiscal year 2001 will be based on several
general principles, including the following:
o Provide competitive total compensation that enables the
Company to attract and retain key executives;
o Link corporate and individual performance to compensation;
o Encourage long-term success and align shareholder interests
with management interests by giving executives the
opportunity to acquire stock in the Company; and
o Reward initiative.
Compensation Components
The primary components of the Company's executive officer compensation
program are base salary, annual incentive arrangements and long-term incentive
compensation in the form of stock options.
Base Salary. Executive officer base salaries for fiscal 2000 were
established by the compensation committee at salary levels appropriate for the
responsibilities of the executive officers of the Company. In determining
salaries, they took into account individual experience, job responsibility and
individual performance. No specific weight was attached to these factors in
establishing base salaries. For fiscal 2001 and future years, the Company will
attempt to establish base salary levels for the Company's executive officers
that are competitive with those established by companies of similar size in the
Internet marketing industry. When determining salaries, the compensation
committee also will take into account individual experience levels, job
responsibility and individual performance. Each executive officer's salary will
be reviewed annually, and increases to base salary will be made to reflect
competitive market increases and the individual factors described above.
Stock Options. The Company's 1999 Stock Option Plan is intended as a
long-term incentive plan for executive officers, managers and other key
employees of the Company. The objectives of the 1999 Stock Option Plan are to
align employee and shareholder long-term interests by creating a direct link
between compensation and shareholder value. The compensation committee
administers the 1999 Stock Option Plan and recommends to the full board of
directors awards of stock options to executive officers and other employees of
the Company. In the past, options granted under the 1999 Stock Option Plan
generally have been granted at an exercise price equal to the fair market value
of the common stock on the day prior to the date of grant. Prior to the
Company's initial public offering in July 1999, fair market value was based on
the reported bid prices of the common stock on the NASD OTC Bulletin Board. For
incentive stock options granted after the initial public offering, the fair
market value is deemed to be the closing price as reported in The Wall Street
Journal on the day prior to the date of grant. For nonqualified options granted
after the initial public offering, fair market value is established by the board
of directors, upon recommendation of the compensation committee, as the closing
price as reported on the American Stock Exchange on the day prior to the date of
grant. Options generally become exercisable over a four-year period with 25% of
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the options exercisable at the end of each year from the date of grant. Stock
options generally have a ten-year term, but terminate earlier if employment is
terminated. Initial option grants to executive officers depend upon the level of
responsibility and position, and subsequent grants are made based on the
compensation committee's subjective assessment of performance, among other
factors. In fiscal 2000, the board of directors made the following option grants
under the 1999 Stock Option Plan to executive officers of the Company: Lawrence
Weisdorn - 100,000, Terry Gourley - 125,000, Joel Gayner - 150,000, Howard Cohn
- 25,000 and Jacalyn Hughes - 40,000. The compensation committee expects that in
the future, if additional grants are made, consideration will be given to the
number of options granted in the past and the exercise price of such grants.
Compensation of Chief Executive Officer
The compensation committee employed the same criteria to determine the
chief executive officer's compensation that they used to set compensation for
the other executive officers in fiscal 2000. The compensation committee
increased Mr. Weisdorn's salary in fiscal 2000, as it had the previous year. The
increase in salary was based on the view that Mr. Weisdorn's salary was below
competitive salary levels for executives with similar experience and ability,
and partly in recognition of Mr. Weisdorn's individual performance.
In May 2000, Lawrence Weisdorn resigned his position as chief
executive officer of the Company. In connection with this agreement to continue
to serve as the chairman of the board and to facilitate the transition to Terry
L. Gourley as chief executive officer, the Company agreed to pay Mr. Weisdorn a
base annual salary of $150,000, an increase from $120,000. The Company also
granted Mr. Weisdorn options to purchase 100,000 shares of common stock at
exercise price of $7.70 per share.
In September 2000, Mr. Weisdorn resigned his employment as chairman of
the board and pursuant to a termination agreement between the Company and Mr.
Weisdorn, the Company agreed to pay Mr. Weisdorn a gross amount of $300,000,
Proposal 4 and $93,750 of which will be paid when and if the Company receives
$2.5 million of additional financing (with pro rata payments as the Company
receives such financing). Mr. Weisdorn also has until March 1, 2002 to exercise
his options to purchase 100,000 shares of common stock.
In May 2000, Terry Gourley became the Company's chief executive
officer. The Company agreed to pay Mr. Gourley a base annual salary of $200,000
subject to partial recoupment of $50,000 if certain performance targets were
not achieved. The Company also granted Mr. Gourley options to purchase 100,000
shares of common stock at an exercise price of $7.00 per share. In October 2000,
the Company and Mr. Gourley entered into an employment agreement pursuant to
which Mr. Gourley will continue to serve as chairman and chief executive officer
for a three-year term. The terms of Mr. Gourley's employment agreement are
described in the section "Employment Agreements."
Conclusion
The compensation committee believes that the compensation provided to
the chief executive officer and the Company's other executive officers during
the fiscal year ended June 30, 2000 was fair, reasonable and in the best
interests of the shareholders of the Company.
Compensation Committee Members
C. James Jensen (resigned as a member of the board of directors in
December 2000)
Maryann O'Donnell
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Performance Graph
The graph below compares the cumulative total return on the Company's
common stock with the cumulative total return of (i) the AMEX Market Value Index
and (ii) the Chase H&Q Internet 100 Index. The graph assumes $100 was invested
on June 26, 1997 (the date the Company's common stock began trading on the OTC
Bulletin Board) in shares of the Company's common stock, the stocks comprising
the AMEX Market Value Index and the stocks comprising the Chase H&Q Internet 100
Index. The returns have been calculated assuming reinvestment of dividends. The
Company has not paid any dividends.
Comparison of 36 Month Cumulative Total Return*
Among 3dshopping.com, the AMEX Market Value Index
and the Chase H&Q Internet 100 Index
Company June 26 June 30, June 30, June 30, June 30,
Name/Index 1997 1997 1998 1999 2000
----------------------- ---------- ---------- --------- --------- -------
AMEX Market Value 100.00 103.46 129.78 146.29 172.30
Chase H&Q Internet 100 100.00 99.35 226.62 547.98 844.91
3dshopping.com 100.00 95.87 113.53 783.33 900.00
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Proposal 2: To Approve a Change in the Company's State of Incorporation
from California to Delaware
General
The board of directors has unanimously approved and recommends for
shareholder approval a proposal to change the Company's state of incorporation
from California to Delaware. The board of directors believes the change in
domicile to be in the best interests of the Company and its shareholders for
several reasons. Principally, the board of directors believes that
reincorporation in Delaware, along with certain measures the board intends to
concurrently adopt which are designed to make hostile takeovers of the Company
more difficult, will enable the board to consider fully any proposed takeover
attempt and to negotiate terms that maximize benefits to the Company and its
shareholders. The board also believes that reincorporation in Delaware will
enhance the Company's ability to attract and retain qualified members of the
Company's board of directors as well as encourage directors to continue to make
independent decisions in good faith on behalf of the Company. Finally,
reincorporation in Delaware will allow the Company the increased flexibility and
predictability afforded by Delaware law.
Hostile Takeovers. The Company intends as part of the reincorporation
to adopt certain measures which may have the effect of deterring hostile
takeover attempts. A hostile takeover attempt may have a positive or a negative
effect on the Company and its shareholders, depending on the circumstances
surrounding a particular takeover attempt. Takeover attempts that have not been
negotiated or approved by a corporation's board of directors can seriously
disrupt the business and management of a corporation. Many of these types of
takeovers are done when the corporation's value is low and often lead to certain
shareholders obtaining more favorable terms than other shareholders. In
contrast, board-approved transactions may be carefully planned and undertaken at
an opportune time in order to obtain maximum value for the corporation and all
of its shareholders with due consideration to matters such as the recognition or
postponement of gain or loss for tax purposes, the management and business of
the acquiring corporation and maximum strategic deployment of corporate assets.
The board of directors recognizes that hostile takeover attempts do
not always have the unfavorable consequences or effects described above and may
frequently be beneficial to a corporation's shareholders, providing all
shareholders with considerable value for their shares. However, the board of
directors believes that the potential disadvantages of unapproved takeover
attempts sufficiently outweigh the possible benefits of such takeovers.
Accordingly, the reincorporation plan includes certain proposals that may have
the effect of discouraging or deterring hostile takeover attempts.
Notwithstanding the benefits that may be caused by these changes,
shareholders should recognize that one of the effects of such changes may be to
discourage a future attempt to acquire control of the Company which is not
presented to and approved by the board of directors. Due to these changes,
opportunities may be lost that a substantial number, and perhaps even a
majority, of the Company's shareholders believe to be in their best interests,
or in which shareholders might receive a substantial premium for their shares
over the current market prices. As a result, shareholders who might desire to
participate in such a transaction may not have an opportunity to do so.
Director Liability: Ability to Attract and Retain Directors. In 1986,
Delaware amended its corporate law to allow corporations to limit the personal
monetary liability of its directors for their conduct as directors under certain
circumstances. The directors have elected to adopt such a provision in the
Delaware certificate of incorporation and bylaws. It should be noted that
Delaware law does not permit a Delaware corporation to limit or eliminate the
liability of its directors for intentional misconduct or bad faith, for any
transaction from which the director derives an improper personal benefit or for
violations of federal laws. The board of directors believes that Delaware
incorporation will enhance the Company's ability to recruit and retain directors
in the future. Shareholders should be aware, however, that such a provision
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inures to the benefit of the directors, and the interest of the board of
directors in recommending the reincorporation may therefore be in conflict with
the interests of the shareholders. See "--Indemnification and Limitation of
Liability" for a more complete discussion of these issues.
In 1987, California amended its corporate law in a manner similar to
Delaware to permit a California corporation to limit the personal monetary
liability of its directors for their conduct as directors under certain
circumstances. Nonetheless, the board of directors believes that protection from
liability for directors is somewhat greater under Delaware law than under
California law and, therefore, that the Company's objectives in adopting this
type of provision can be better achieved by reincorporation in Delaware.
Predictability of Delaware Law. For many years, Delaware has followed
a policy of encouraging incorporation in its state. In furtherance of that
policy, Delaware has adopted comprehensive corporate laws which are revised
regularly to meet changing business circumstances. The Delaware legislature is
particularly sensitive to issues regarding corporate law and is especially
responsive to developments in modern corporate law. The Delaware courts have
developed considerable expertise in dealing with corporate issues as well as a
substantial body of case law construing Delaware's corporate law. As a result,
many major corporations have initially chosen Delaware for their domicile or
have subsequently reincorporated in Delaware in a manner similar to that
proposed by the Company.
In contrast, the California General Corporation Law, to which the
Company is presently subject, has not been subject to the same degree of
judicial scrutiny and interpretation that Delaware corporate law has. The board
of directors believes that the interests of the Company's shareholders are
better served by reincorporating in a state that has a more defined and
comprehensive corporate law. It is anticipated that the proposed reincorporation
will provide greater predictability in the Company's legal affairs than is
presently available under California law.
Rights of Shareholders. The interests of the board of directors of the
Company, management and affiliated shareholders in voting on the reincorporation
proposal may not be the same as those of unaffiliated shareholders. Delaware law
does not afford minority shareholders some of the rights and protections
available under California law. Reincorporation of the Company in Delaware may
make it more difficult for minority shareholders to elect directors and
influence Company policies.
Method of Reincorporation. The proposed reincorporation would be
accomplished by merging the Company into O2 Essential Marketing Technologies,
Inc., a newly-formed Delaware corporation which, just before the merger, will be
a wholly-owned subsidiary of the Company ("Delaware Company"), pursuant to an
Agreement and Plan of Merger ("Merger Agreement"). The reincorporation will not
result in any change in the Company's business, assets or liabilities, will not
cause its corporate headquarters to be moved and will not result in any
relocation of management or other employees.
On the effective date of the proposed reincorporation, each
outstanding share of common stock of the Company will automatically convert into
one share of common stock of the Delaware Company, and shareholders of the
Company will automatically become shareholders of the Delaware Company. On the
effective date of the reincorporation, the number of outstanding shares of
common stock of the Delaware Company will be equal to the number of shares of
common stock of the Company outstanding immediately prior to the effective date
of the reincorporation. In addition, each outstanding option or right to acquire
shares of common stock of the Company will be converted into an option or right
to acquire an equal number of shares of common stock of the Delaware Company,
under the same terms and conditions as the original options or rights. All of
the Company's employee benefit plans, including the 1999 Stock Option Plan and
the 1999 Employee Stock Purchase Plan and the 2000 Performance Equity Plan if it
is approved by the shareholders at this annual meeting, will be adopted and
continued by the Delaware Company following the reincorporation. Shareholders
should recognize that approval of the proposed reincorporation will constitute
approval of the adoption and assumption of those plans by the Delaware Company.
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No action need be taken by shareholders to exchange their stock
certificates; this will be accomplished at the time of the next transfer by the
shareholder. Certificates for shares in the Company will automatically represent
an equal number of shares in the Delaware Company upon completion of the merger.
The proposed reincorporation requires the approval of a majority of
the outstanding shares entitled to vote on the proposal. If approved by the
shareholders, it is anticipated that the reincorporation would be completed as
soon thereafter as practicable. However, the reincorporation may be abandoned or
the Merger Agreement may be amended (with certain exceptions), either before or
after shareholder approval has been obtained if, in the opinion of the board of
directors, circumstances arise that make such action advisable; provided, that
any amendment that would effect a material change from the charter provisions
discussed in this proxy statement would require further approval by the holders
of a majority of the outstanding shares of the common stock.
Significant Changes Caused by Reincorporation
In general, the Company's corporate affairs currently are governed by
the California General Corporation Law, the Company's Articles of Incorporation,
as amended ("California Articles") and the Company's bylaws ("California
Bylaws"), which have been adopted pursuant to California law. The California
Articles and California Bylaws are available for inspection during business
hours at the principal executive offices of the Company. In addition, copies may
be obtained by writing to the Company at 308 Washington Boulevard, Marina del
Rey, California 90292, Attention: Corporate Secretary.
If the reincorporation proposal is adopted, the Company will merge
into, and its business will be continued by, the Delaware Company. Upon the
effective date of the merger, the Delaware Company's name will be O2 Essential
Marketing Technologies, Inc. The board of directors believes that this name
change is in the best interest of the Company. In light of the recent changes to
the Company's business plan, the name "3Dshopping.com" no longer accurately
reflects all of the Company's operations and interests. The name "O2 Essential
Marketing Technologies, Inc." better communicates the Company's mission to
become a leading provider of marketing and distribution solutions for content
rich Internet businesses. The Company has been conducting business under the
name "O2 Essential Marketing Technologies" since August 2000.
The California Articles currently authorize the issuance of 10,000,000
shares of common stock, no par value, and 5,000,000 shares of preferred stock,
no par value. The Delaware Company's capitalization, as set forth in the
Delaware Certificate, which will be the Company's governing charter if the
merger is effected, is identical to that of the Company with the addition of a
per share par value, authorizing 100,000,000 shares of common stock, par value
$.001 per share, and 20,000,000 shares of preferred stock, par value $.001 per
share.
The California Bylaws provide that the board of directors, in its sole
discretion, may elect to create a classified board only if the number of
directors is greater than five. If there are more than five and less than nine
directors, the board only may be divided into two classes and if there are more
than eight directors, the board may be divided into three classes. In contrast,
the Delaware Bylaws provide for a classified board without specifying a required
number of directors or classes. If the reincorporation proposal is adopted, the
directors of the Delaware Company will, in effect, become the directors of the
Company. The Delaware Company's board would be classified into three classes,
with each class holding office for a term of three years. Maryann O'Donnell and
Jon A. Allegretti, comprising the Class I directors, would initially hold office
for a term expiring at the 2001 annual meeting of shareholders; Joel P. Gayner,
comprising the Class II directors, would initially hold
18
<PAGE>
office for a term expiring at the 2002 annual meeting of shareholders; and Terry
L. Gourley, comprising the Class III directors, would initially hold office for
a term expiring at the 2003 annual meeting of shareholders.
Following the merger, issues of corporate governance and control would
be controlled by Delaware law rather than California law. But see "--
Application of California Law After Reincorporation" for a discussion of the
remaining effects of California law on the Company following the merger. The
California Articles and California Bylaws, will, in effect, be replaced by the
Certificate of Incorporation of the Delaware Company ("Delaware Certificate")
and the bylaws of the Delaware Company ("Delaware Bylaws"). Accordingly, the
differences among these documents and between Delaware and California law are
relevant to your decision whether to approve the reincorporation proposal.
Aside from the differences discussed above, a number of significant
differences between California and Delaware law and among the various charter
documents are summarized in the chart below. Shareholders are requested to read
the following chart in conjunction with the discussion following the chart. For
each item summarized in the chart, there is a reference to a page of this proxy
statement on which a more detailed discussion appears.
<TABLE>
Issue Delaware California
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Limitation on Director Liability Delaware law permits the limitation of California law contains additional
(see page 21). liability of directors to the Company exceptions to the liability
except in connection with: (i) limitations
of directors. breaches of their duty of
loyalty; (ii) acts or omissions not in good
faith or involving intentional misconduct
or knowing violations of law; (iii) the
payment of unlawful dividends or unlawful
stock repurchases or redemptions; or (iv)
transactions in which a director received
an improper personal benefit.
------------------------------------------------------------------------------------------------------------------
Indemnification of Officers and Delaware law permits somewhat broader California law permits
Directors (see page 22). indemnification and could result in indemnification under certain
indemnification of directors and circumstances, subject to certain
officers in circumstances where limitations.
California law would not permit
indemnification.
------------------------------------------------------------------------------------------------------------------
Cumulative Voting for Directors Cumulative voting is permitted under Cumulative voting is permitted at a
(see page 24). Delaware law provided the certificate shareholders' meeting at which
of incorporation contains a provision directors are to be elected,
authorizing such. The Delaware provided (i) the candidate's name
Certificate does not contain such a has been placed in nomination prior
provision. to voting and (ii) the shareholder
has given notice at the meeting prior
to voting of his intention to cumulate
his votes. California law permits a
corporation whose shares are listed
on the New York Stock Exchange or the
American Stock Exchange or whose
</TABLE>
19
<PAGE>
<TABLE>
Issue Delaware California
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
securities are designated as qualified
for trading as a national market
system security on the National Association
Quotation System to eliminate, by amendment
to its certificate of incorporation or
by-laws, cumulative voting under all
circumstances. The California Articles and
Bylaws have not been so amended.
------------------------------------------------------------------------------------------------------------------
Classified Board of Directors (see Classified board is permitted. Classified board is permitted.
page 25). Delaware Company's charter documents Company's Bylaws provide for
provide for classes of directors. classes of directors only if there
are more than five board members.
------------------------------------------------------------------------------------------------------------------
Removal of Directors by Unless the board is classified, Unless the board is classified,
Shareholders (see page 27). removal with or without cause by removal with or without cause by
affirmative vote of a majority of the affirmative vote of a majority of
outstanding shares entitled to vote at the outstanding shares entitled to
an election of directors. vote, provided that shares voting
against removal could not elect
such director under cumulative
voting.
------------------------------------------------------------------------------------------------------------------
Filling Board Vacancies (see page Delaware law provides for the Delaware California law permits (a) any
27). Court of Chancery to order an election holder of an aggregate of 5% or
to fill vacancies or newly created more of the corporation's voting
directorships upon the application of stock or (b) the superior court of
the holders of 10% of the outstanding the appropriate county to call a
a shares having a right to vote for such special meeting of shareholders to
directors if, at the time of filling such elect the entire board if, after
vacancies or directorships, the directors filling any vacancy, the directors
then in office constitute less than a then in office who have been
majority of the entire board as elected by the shareholders
constituted immediately prior to any constitute less than a majority
increase. of the directors then in office.
------------------------------------------------------------------------------------------------------------------
Powers to Call Special The board of directors, the President The board of directors, the
Shareholders' Meeting (see page 28). or shareholders of record owning a Chairman of the board, the
majority of the issued and outstanding President, or holders of 10% of the
stock. shares entitled to vote at the
special meeting.
------------------------------------------------------------------------------------------------------------------
Action by Written Consent of Action by written consent permitted by Action by written consent permitted
Shareholders (see page 28) Delaware law and Bylaws. by California law and Bylaws.
------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
Issue Delaware California
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Approval of Certain Restricts hostile two-step takeovers. No comparable statute.
Business Combinations (see page 29)
------------------------------------------------------------------------------------------------------------------
Amendment of Charter Documents (see Amendments of all provisions of the Only amendment of certain
page 31). Delaware Certificate requires approval provisions of the California
by a majority of the outstanding Articles requires approval by a
shares entitled to vote. majority of the outstanding shares
entitled to vote.
------------------------------------------------------------------------------------------------------------------
Loans to Officers, Directors and Board of directors may authorize if Loans must generally be approved by
Employees (see page 31). expected to benefit the Company. a majority of the outstanding
shares. California law permits a
corporation whose shares are held by 100
or more persons, and that has a bylaw
approved by a majority of the
outstanding shares entitled to vote, to
make a loan approved solely by the
board. The California Bylaws do not
contain such a provision.
------------------------------------------------------------------------------------------------------------------
Class Vote for Certain Generally not required unless a A reorganization transaction must
Reorganizations reorganization adversely affects a generally be approved by a majority
(see page 32). specific class of shares. vote of each class of shares
outstanding.
------------------------------------------------------------------------------------------------------------------
Inspection of Shareholder Lists Permitted for any purpose reasonably Permitted for any purpose
(see page 32). related to such shareholder's interest reasonably related to such
as a shareholder. shareholder's interest as a
shareholder. Also, an absolute
right to 5% shareholders and
certain 1% shareholders.
------------------------------------------------------------------------------------------------------------------
Appraisal Rights Generally available if shareholders Available in certain circumstances
(see page 32). receive cash in exchange for the if the holders of 5% of the class
shares and in certain other assert such rights.
circumstances.
------------------------------------------------------------------------------------------------------------------
Dividends (see page 34). Paid from surplus (including paid-in Generally limited to the greater of
and earned surplus or net profits). (i) retained earnings or (ii) an
amount which would leave the Company
with assets of at least 125% of
liabilities and current assets of at
least 100% of current liabilities.
------------------------------------------------------------------------------------------------------------------
</TABLE>
Limitation of Liability and Indemnification
Limitations on Director Liability
Both California and Delaware law permit a corporation to limit the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of certain duties as a director. The California and
Delaware laws adopt a self-governance approach by enabling a corporation to take
advantage of these provisions only if an amendment to the charter limiting such
liability is approved by a majority of the outstanding shares or such language
is included in the original charter.
21
<PAGE>
The California Articles eliminate the liability of directors to the
corporation to the fullest extent permissible under California law. California
law does not permit the elimination of monetary liability where such liability
is based on: (a) acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law; (b) acts or omissions that a director
believes to be contrary to the best interests of the corporation or its
shareholders, or that involve the absence of good faith on the part of the
director; (c) a transaction from which the director derived an improper personal
benefit; (d) acts or omissions that show a reckless disregard for the director's
duty to the corporation or its shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course of
performing his duties, of a risk of serious injury to the corporation or its
shareholders; (e) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation and its shareholders; (f) interested transactions between the
corporation and a director in which a director has a material financial
interest; and (g) liability for improper distributions, loans or guarantees.
In accordance with Delaware law, the Delaware Certificate states that
a director shall not be personally liable to the corporation or its shareholders
for monetary damages for a breach of fiduciary duty as a director, except for
liability for: (a) breaches of the director's duty of loyalty to the corporation
or its shareholders; (b) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (c) the payment of
unlawful dividends or unlawful stock repurchases or redemptions; or (d) for any
transaction from which the director derived an improper personal benefit. This
limitation of liability provision may not eliminate or limit the liability of a
director for violation of, or otherwise relieve the Delaware Company or its
directors from the necessity of complying with, federal or state securities laws
or affect the availability of non-monetary remedies such as injunctive relief or
rescission.
Shareholders should recognize that the proposed reincorporation and
associated measures are designed to shield a director from suits by the Delaware
Company or its shareholders for monetary damages for negligence or gross
negligence by the director in failing to satisfy the director's duty of care. As
a result, an action for monetary damages against a director predicated on a
breach of the duty of care would be available only if the Delaware Company or
its shareholders were able to establish that the director was disloyal in his
conduct, failed to act in good faith, engaged in intentional misconduct,
knowingly violated the law, derived an improper personal benefit or approved an
illegal dividend or stock repurchase. Consequently, the effect of such measures
may be to limit or eliminate an effective remedy which might otherwise be
available to a shareholder who is dissatisfied with a director's decisions.
Although an aggrieved shareholder could sue to enjoin or rescind an action taken
or proposed by the board of directors, such remedies may not be timely or
adequate to prevent or redress injury in all cases.
The Company believes that directors are motivated to exercise due care
in managing the Company's affairs primarily by concern for the best interests of
the Company and its shareholders rather than by the fear of potential monetary
damage awards. As a result, the Company believes that the reincorporation
proposal should sustain the board of directors' continued high standard of
corporate governance without any decrease in accountability by directors to the
Company and its shareholders.
Indemnification of Officers and Directors
The California Bylaws and Delaware Bylaws relating to indemnification
similarly require that the Company and the Delaware Company, respectively,
indemnify its directors and officers to the fullest extent permitted by the
respective state law, provided that the Company and the Delaware Company may
modify the extent of such indemnification by individual contracts with its
directors and executive officers. The Delaware Company, however, will not be
required to indemnify any director or officer in connection with a proceeding
initiated by such person unless the proceeding was authorized by the board of
directors. The California Bylaws and Delaware Bylaws permit the Company and the
Delaware Company to provide indemnification to its other officers, employees and
agents as set forth in California and Delaware law.
22
<PAGE>
California and Delaware have similar laws respecting indemnification
by a corporation of its officers, directors, employees and other agents. There
are nonetheless certain differences between the laws of the two states, as well
as the California and Delaware Bylaws.
California law permits indemnification of expenses incurred in
derivative or third-party actions with two exceptions. First, corporations may
not, without court approval, indemnify a person if such person is adjudged to be
liable to the corporation in the performance of his or her duties to the
corporation and its shareholders. If a court approves the indemnification, it
may be made only to the extent that the court shall determine. Second, no
indemnification may be made under California law, without court approval, in
respect of amounts paid or expenses incurred in settling or otherwise disposing
of a threatened or pending action, or amounts incurred in defending a pending
action which is settled or otherwise disposed of.
In all other cases, indemnification is permitted by California law
provided the person seeking indemnification acted in good faith and in a manner
the person reasonably believed to be in the best interests of the corporation
(and in the case of a criminal proceeding, had no reasonable cause to believe
the conduct was unlawful). Whether such person's conduct meets this standard is
determined by (i) a majority vote of a disinterested quorum of the directors,
(ii) independent legal counsel (if a quorum of independent directors is not
obtainable) set forth in a written opinion, (iii) a majority vote of a quorum of
the shareholders (excluding shares owned by the interested party) or (iv) the
court handling the action.
Delaware law generally permits indemnification of expenses incurred in
the defense or settlement of a derivative or third-party action, provided there
is a determination (i) by a majority of the disinterested directors, even though
less than a quorum, (ii) by a committee of such directors designated by a
majority vote of such directors, even though less than a quorum, (iii) if there
are no independent directors, or if such directors so direct, by independent
legal counsel set forth in a written opinion or (iv) by a majority vote of a
quorum of the shareholders, that the person seeking indemnification acted in
good faith and in a manner reasonably believed to be in or (in contrast to
California law as described above) not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the person's conduct was unlawful. Without court
approval, however, no indemnification may be made in respect of any derivative
action in which such person is adjudged liable to the corporation.
California law requires indemnification when the individual has
successfully defended the action on the merits as opposed to Delaware law which
requires indemnification relating to a successful defense on the merits or
otherwise, but only for present or former directors and officers.
Both California and Delaware law and the California Bylaws permit a
corporation to advance expenses to a director or officer related to any
proceeding upon receipt of an undertaking by or on behalf of the individual to
repay the advanced sums if it is ultimately determined that the individual was
not entitled to be indemnified.
California corporations may include in their articles of incorporation
a provision which extends the scope of indemnification through agreements,
bylaws or other corporate action beyond that specifically authorized by the
California statute. The California Articles do not include such a provision.
There is no comparable provision in Delaware law.
A provision of Delaware law states that the indemnification provided
by statute shall not be deemed exclusive of any other rights that the person
seeking indemnification or advancement of expenses may be entitled to under any
bylaw, agreement, vote of shareholders or disinterested directors or otherwise.
Under Delaware law, rights to indemnification and expenses are non-exclusive, in
that they need not be limited to those expressly provided by statute. California
law is similar in that it permits non-exclusive indemnification if authorized in
the Company's charter. The California Articles do not contain such an enabling
provision. Under Delaware law, the Delaware Company is permitted to indemnify
23
<PAGE>
its directors and officers within the limits established by law and public
policy, pursuant to an express contract, bylaw provision, shareholder vote, vote
of disinterested directors or otherwise, any or all of which could provide
indemnification rights broader than those currently available under the
California Bylaws or the California indemnification statutes.
The indemnification and limitation of liability provisions of
California law, and not Delaware law, will apply to actions of the directors and
officers of the Company made prior to the proposed reincorporation.
Nevertheless, the board of directors has recognized in considering this
reincorporation proposal that the individual directors have a personal interest
in obtaining the application of Delaware law to such indemnity and limitation of
liability issues affecting them and the Company in the event they arise from a
potential future case, and that the application of Delaware law, to the extent
that any director or officer is actually indemnified in circumstances where
indemnification would not be available under California law, would result in
expense to the Company which the Company would not incur if the Company were not
reincorporated. The board of directors believes, however, that the overall
effect of reincorporation is to provide a corporate legal environment that
enhances the Company's ability to attract and retain high quality outside
directors and thus benefits the interests of the Company and its shareholders.
There is no pending or, to the Company's knowledge, threatened
litigation to which any of its directors is a party in which the rights of the
Company or its shareholders would be affected if the Company currently were
subject to the provisions of Delaware law rather than California law.
Indemnification Agreements
If the reincorporation is approved, the Delaware Company intends to
enter into indemnification agreements with certain of its directors and
officers. The indemnification agreements, among other things, require the
Delaware Company to indemnify such officers and directors to the fullest extent
permitted by Delaware law, and to advance to such directors all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. The Delaware Company is also required to
indemnify and to advance all expenses incurred by directors and officers seeking
to enforce their rights under the indemnification agreements.
Although the indemnification agreements offer substantially the same
scope of coverage afforded by provisions in the Delaware Certificate and
Delaware Bylaws, they provide greater assurance to officers and directors that
indemnification will be available, because, as a contract, they cannot be
modified unilaterally in the future by the board of directors of the Delaware
Company or by the shareholders to eliminate the rights that they provide, an
action that may be possible with respect to the relevant provisions of the
Delaware Bylaws, at least as to prospective elimination of such rights.
Cumulative Voting for Directors
Cumulative voting permits the holder of each share of stock entitled
to vote in the election of directors to cast that number of votes multiplied by
the number of directors to be elected. The holder may allocate all votes
represented by a share to a single candidate or may allocate those votes among
as many candidates as he chooses. Thus, a shareholder with a significant
minority percentage of the outstanding shares may be able to elect one or more
directors if voting is cumulative. In contrast, under non-cumulative voting, the
holder or holders of a majority of the shares entitled to vote in an election of
directors will be able to elect all the directors of the Company.
Under California law, cumulative voting in the election of directors
is allowed upon notice given by a shareholder at a shareholders' meeting at
which directors are to be elected. In order to cumulate votes, the candidate's
name must have been placed in nomination prior to voting and the shareholder
must have given notice of his intention to cumulate his votes. If any one
shareholder gives such notice, all shareholders may cumulate their votes.
California law permits a company, by amending its articles of incorporation or
24
<PAGE>
bylaws, to eliminate cumulative voting in all situations if (i) the company's
shares are listed on the New York Stock Exchange or the American Stock Exchange
or (ii) the company's outstanding securities are designated as qualified for
trading as a national market system security on the National Association
Quotation System. The California Articles do not include such a provision.
Cumulative voting is not available under Delaware law unless so
provided in the corporation's certificate of incorporation. The Delaware
Certificate does not provide for cumulative voting.
The elimination of cumulative voting could deter investors from
acquiring a minority block in the Company with a view toward obtaining a board
seat and influencing Company policy. It is also conceivable that the absence of
cumulative voting might deter efforts to seek control of the Company, which some
shareholders might deem favorable.
Other Matters Relating to Directors
Number of Directors
California law allows the number of persons constituting the board of
directors of a corporation to be fixed by the bylaws or the articles of
incorporation, or permits the bylaws to provide that the number of directors may
vary within a specified range, the exact number to be determined by the board of
directors. The California Bylaws provide for a board of directors that may vary
between five and nine members, inclusive, and the board of directors has fixed
the exact number of directors at five. California law also requires that any
change in the articles or bylaws to increase or decrease the number of directors
on a board must be approved by a majority in interest of the outstanding shares
entitled to vote (or such greater proportion of the outstanding shares as may be
required by the articles of incorporation). In addition, a change reducing the
minimum number of directors to less than three cannot be adopted if votes cast
against its adoption are equal to more than 16 2/3% of the outstanding shares
entitled to vote. The California Bylaws require the vote of a majority of the
outstanding shares to change the number of the Company's board of directors;
provided, however, that any amendment reducing the minimum number of directors
to less than five cannot be adopted if the votes cast against the amendment are
equal to more than 16 2/3% of the outstanding shares entitled to vote on the
amendment.
Delaware law permits a board of directors to change the authorized
number of directors by amendment to the bylaws unless the number of directors is
fixed in the certificate of incorporation, in which case the number of directors
may be changed only by amendment to the certificate of incorporation or in the
manner specified in the certificate of incorporation, as the case may be. The
Delaware Bylaws provide that the number of directors shall be fixed by
resolution of the board of directors.
Classification of the Board of Directors and Certain Other Related Matters
Under California law, California corporations whose shares are listed
on the New York Stock Exchange or American Stock Exchange may amend their
articles of incorporation or bylaws to provide for a classified board. For
corporations not so qualified, directors must be elected annually and a
classified board is not permitted. The California Bylaws currently contain a
provision allowing for the creation of a classified board. Currently, the board
is not classified and all directors are to be elected annually for a term of one
year. In the event the board elects to create a classified board, the number of
directors at the time of the change must be greater than five. The California
Bylaws further provide that if there are more than five and less than nine
directors, the board only may be divided into two classes and if there are more
than eight directors, the board may be divided into three classes.
Delaware law provides that in order to have a classified board of
directors, a provision must be included in the certificate of incorporation or
initial bylaws or by a subsequent bylaw adopted by a vote of the corporation's
shareholders. In contrast to California law, Delaware law does not require
classified boards to have a specific number of directors in each class. To
25
<PAGE>
enhance continuity and stability of the board of directors and the policies
formulated by the board, the initial Delaware Bylaws provide for classification
of the board of directors ("Classified Board Provision"). The Classified Board
Provision provides that directors will be classified into three classes, as
nearly equal in number as possible: Class I would hold office initially for a
term expiring at the 2001 annual meeting of shareholders; Class II would hold
office initially for a term expiring at the 2002 annual meeting of shareholders;
and Class III would hold office initially for a term expiring at the 2003 annual
meeting of shareholders. At each annual meeting of shareholders following this
initial classification and election, the successors to the class of directors
whose terms expire at that meeting would be elected for a term of three years
and expiring at the third succeeding annual meeting of shareholders after their
election.
Under Delaware law, directors chosen to fill vacancies on a classified
board shall hold office until the next election of the class for which such
directors shall have been chosen, and until their successors are elected and
shall have qualified. Delaware law also provides that, unless the certificate of
incorporation provides otherwise, directors serving on a classified board of
directors may be removed only for cause. The Delaware Certificate will not
provide otherwise.
The Classified Board Provision will significantly extend the time
required to effect a change in control of the board of directors and may
discourage hostile takeover bids for the Delaware Company. Currently, a change
in control of the board of directors of the Company can be made by shareholders
holding a plurality of the votes cast at a single annual meeting of
shareholders. If the shareholders approve the Reincorporation, it will take at
least two annual meetings of shareholders for even a majority of shareholders to
make a change in control of the board of directors, because only a minority of
the directors will be elected at each meeting.
Because of the additional time required to change control of the board
of directors, the Classified Board Provision will tend to perpetuate present
management. Without the ability to obtain immediate control of the board of
directors, a takeover bidder will not be able to take action to remove other
impediments to its acquisition of the Delaware Company. Because the Classified
Board Provision will increase the amount of time required for a takeover bidder
to obtain control of the Delaware Company without the cooperation of the board
of directors, even if the takeover bidder were to acquire a majority of the
Delaware Company's outstanding stock, it will tend to discourage certain tender
offers, perhaps including some tender offers that shareholders may feel would be
in their best interests. The Classified Board Provision will also make it more
difficult for the shareholders to change the composition of the board of
directors even if the shareholders believe such a change would be desirable.
The Classified Board Provision is designed to assure continuity and
stability in the board of directors' leadership and policies. The board of
directors also believes that the Classified Board Provision will assist the
board of directors in protecting the interests of the Delaware Company's
shareholders in the event of an unsolicited offer for the Delaware Company.
This Classified Board Provision is intended to encourage persons
seeking to acquire control of the Delaware Company, including through proxy
fights or hostile takeovers, to initiate such efforts through negotiations with
the board of directors. The board of directors believes that the Classified
Board Provision will help give the board of directors the time necessary to
evaluate unsolicited offers, as well as appropriate alternatives, in a manner
which assures fair treatment of the Delaware Company's shareholders. The
Classified Board Provision is also intended to increase the bargaining leverage
of the board of directors, on behalf of the Delaware Company's shareholders, in
any negotiations concerning a potential change of control of the Delaware
Company. The Classified Board Provision will, however, make more difficult or
discourage a proxy contest or the assumption of control by a substantial
shareholder and thus could increase the likelihood that incumbent directors will
retain their positions. The Classified Board Provision could also have the
effect of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of the Delaware Company even though such attempt
might be beneficial to the Delaware Company's shareholders.
26
<PAGE>
The Classified Board Provision is permitted by Delaware law and is
consistent with the rules of the American Stock Exchange on which the Delaware
Company's common stock will be traded. The Classified Board Provision is not
being implemented as the result of any specific efforts of which the Delaware
Company is aware to obtain control of the Delaware Company.
Removal of Directors by Shareholders
Under California law, unless the board of directors is classified, a
director may be removed with or without cause by the affirmative vote of a
majority of the outstanding shares. With regard to classified boards, a director
may not be removed if the votes cast against removal of the director would be
sufficient to elect the director by cumulative voting. Under Delaware law,
unless the board is classified or cumulative voting is permitted, a director can
be removed from office during his term with or without cause by the holders of a
majority of the shares then entitled to vote at an election of directors. Since
the Delaware Certificate and Delaware Bylaws provide for a classified board, the
Company's directors may be removed from office only for cause by the affirmative
vote of the holders of a majority of shares then entitled to vote at the
election of directors. The term "cause" with respect to the removal of directors
is not defined in the Delaware General Corporation Law and its meaning has not
been precisely delineated by the Delaware courts.
Filling Board Vacancies
Under California law, vacancies in the board of directors may be
filled by approval of the board or, if the number of directors remaining in
office is less than a quorum, by (i) unanimous written consent of directors then
in office, (ii) the affirmative vote of a majority of the directors then in
office at a meeting of the board of directors or (iii) a sole remaining
director. California law further provides that, if after the filling of any
vacancy by the directors, the directors then in office who have been elected by
the corporation's shareholders constitute less than a majority of the directors
then in office, (i) any holder owning an aggregate of 5% or more of the
corporation's voting stock may call a special meeting of shareholders, or (ii)
the superior court of the appropriate county may, upon application of such
shareholder, order a special meeting of shareholders to elect the entire board
of directors of the corporation. Delaware law provides that vacancies or newly
created directorships may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director. Delaware
law further provides that, if at the time of filling any vacancy or newly
created directorship, the directors then in office constitute less than a
majority of the entire board of directors as constituted immediately prior to
any increase, the Delaware Court of Chancery may, upon application of any
shareholder or shareholders holding at least 10% of the outstanding shares
entitled to vote on the election of directors, summarily order an election to be
held to fill any such vacancies or newly created directorships or to replace the
directors chosen by the directors then in office.
The proposed Delaware Bylaws provide that vacancies shall be filled by
the affirmative vote of a majority of directors then in office, even if such
directors comprise less than a quorum of the board of directors.
Capitalization
Currently, the Company's capital stock consists of 10,000,000
authorized shares of common stock, no par value, of which 5,304,164 shares were
issued and outstanding as of the record date, and 5,000,000 authorized shares of
preferred stock, no par value, of which 1,500 shares of Series A Preferred Stock
were issued and outstanding as of the record date.
27
<PAGE>
Upon effectiveness of the proposed reincorporation, the Delaware
Company will have the same number of outstanding shares of common stock that the
Company had outstanding immediately prior to the reincorporation.
The capitalization of the Delaware Company is identical to the
capitalization of the Company with the addition of a per share par value, with
authorized capital stock of 100,000,000 shares of common stock, par value $.001
per share, and 20,000,000 shares of preferred stock, par value $.001 per share,
consistent with maintaining adequate capitalization for the current needs of the
Company. The Delaware Company's authorized but unissued shares of preferred
stock will be available for future issuance.
Under the Delaware Certificate, as under the California Articles, the
board of directors has the authority to determine or alter the rights,
preferences, privileges and restrictions to be granted to or imposed upon any
wholly unissued series of preferred stock and to fix the number of shares
constituting any such series and to determine the designation thereof.
The board of directors may authorize the issuance of preferred stock
for the purpose of adopting shareholder rights plans or in connection with
various corporate transactions, including corporate partnering arrangements. If
the reincorporation is approved, it is not the present intention of the board of
directors to seek shareholder approval prior to any issuance of preferred stock,
except as required by law or regulation.
Power to Call Special Shareholders' Meeting
Under California law, a special meeting of shareholders may be called
by the board of directors, the Chairman of the board of directors, the
President, the holders of shares entitled to cast not less than 10% of the votes
at such meeting and such persons as are authorized by the articles of
incorporation or bylaws. Under Delaware law, a special meeting of shareholders
may be called by the board of directors or by any other person authorized to do
so in the certificate of incorporation or the bylaws. The Delaware Bylaws
provide that such a meeting may be called by the President, the board of
directors or at the request in writing by the holders of a majority of the
outstanding shares entitled to vote at a special meeting.
Action by Written Consent of Shareholders
Under California and Delaware law, shareholders may execute an action
by written consent in lieu of a shareholder meeting. While both California and
Delaware law permits a corporation to eliminate the ability of shareholders to
act by written consent in its charter, neither the California Articles nor the
Delaware Certificate eliminate this ability.
Advance Notice Requirement for Shareholder Proposals and Director Nominations
There is no specific statutory requirement under either California or
Delaware law with regard to advance notice of director nominations and
shareholder proposals. Absent a bylaw restriction, director nominations and
shareholder proposals may be made without advance notice at the annual meeting.
However, federal securities laws generally provide that shareholder proposals
that the proponent wishes to include in the Company's proxy materials must be
received not less than 120 days in advance of the date stated in the proxy
statement released in connection with the previous year's annual meeting.
Anti-Takeover Measures
Delaware law has been widely viewed to permit a corporation greater
flexibility in governing its internal affairs and its relationships with
shareholders and other parties than do the laws of many other states, including
California. In particular, Delaware law permits a corporation to adopt a number
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of measures designed to reduce a corporation's vulnerability to hostile takeover
attempts. Such measures are either not currently permitted or are more narrowly
drawn under California law. Among these measures are certain types of "poison
pill" defenses (such as shareholder rights plans) discussed below which have
been upheld by Delaware courts, while California courts have yet to decide on
the validity of such defenses, thus rendering their effectiveness in California
less certain.
Shareholder Approval of Certain Business Combinations
In the last several years, a number of states (but not California)
have adopted special laws designed to make certain kinds of "unfriendly"
corporate takeovers, or other transactions involving a corporation and one or
more of its significant shareholders, more difficult. Under Section 203 of the
Delaware General Corporation Law ("Section 203"), certain "business
combinations" by Delaware corporations with "interested shareholders" are
subject to a three-year moratorium unless specified conditions are met. Under
Section 1203 of the California General Corporation Law, certain business
combinations with a majority shareholder are subject to specified conditions,
but there is no equivalent provision to Section 203, which addresses business
combinations with a significant but not majority shareholder.
Section 203 prohibits a Delaware corporation from engaging in a
"business combination" with an "interested shareholder" for three years
following the date that such person becomes an interested shareholder. With
certain exceptions, an interested shareholder is any individual, corporation,
partnership, unincorporated association or entity that owns 15% or more of the
corporation's outstanding shares entitled to vote (including any rights to
acquire stock pursuant to an option, warrant, agreement, arrangement or
understanding, or upon the exercise of conversion or exchange rights, and stock
with respect to which the person has voting rights only), or is an affiliate or
associate of the corporation and was the owner of 15% or more of such voting
stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is
defined broadly to include:
o mergers with, or caused by, interested shareholders;
o sales or other dispositions to interested shareholders
(except proportionately with the corporation's other
shareholders) of the corporation's or a subsidiary's assets
equal to 10% or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock;
o the issuance or transfer by the corporation or a subsidiary
of stock of the corporation or such subsidiary to an
interested shareholder (except for transfers in a conversion
or exchange, a pro rata distribution or certain other
transactions, none of which increase the interested
shareholder's proportionate ownership of any class or series
of the corporation's or such subsidiary's stock); or
o receipt by an interested shareholder (except proportionately
as a shareholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits
provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section
203 does not apply if: (i) prior to the date on which such shareholder becomes
an interested shareholder, the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested shareholder; (ii) the interested shareholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested shareholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
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confidentially whether to accept a tender or exchange offer); or (iii) on or
after the date such person becomes an interested shareholder, the board approves
the business combination and it is also approved at a shareholder meeting by
66-2/3% of the voting stock not owned by the interested shareholder.
Section 203 only applies to Delaware corporations which have a class
of securities that is (i) listed on a national securities exchange, (ii)
authorized for quotation on the Nasdaq Stock Market or (iii) held of record by
more than 2,000 shareholders. Since the Delaware Company will have a class of
securities that is listed on a national securities exchange, Section 203 will be
immediately applicable to the Delaware Company following the reincorporation. A
Delaware corporation may elect not to be governed by Section 203 by a provision
in its original certificate of incorporation or an amendment thereto or to the
bylaws, which amendment must be approved by majority shareholder vote and may
not be further amended by the board of directors. An amendment to the
certificate of incorporation or bylaws electing not to be governed by Section
203 will not be effective for 12 months in certain situations. The Delaware
Company, however, does not intend to opt out of the provisions of Section 203.
The constitutionality of Section 203 is challenged from time to time
in lawsuits arising out of ongoing takeover disputes, and it is not yet clear
whether and to what extent its constitutionality will be upheld by the courts.
Although the United States District Court for the District of Delaware has
consistently upheld the constitutionality of Section 203, the Delaware Supreme
Court has not yet considered the issue. The Company believes that so long as the
constitutionality of Section 203 is upheld, Section 203 will encourage any
potential acquiror to negotiate with the Company's board of directors. Section
203 also has the effect of limiting the ability of a potential Delaware acquiror
to make a two-tiered bid for the Delaware Company in which all shareholders
would not be treated equally. Shareholders should note that the application of
Section 203 to the Delaware Company will confer upon the board the power to
reject a proposed business combination, even though a potential acquiror may be
offering a substantial premium for the Delaware Company's shares over the
then-current market price (assuming the stock is then publicly traded). Section
203 should also discourage certain potential acquirors unwilling to comply with
its provisions.
Additional Anti-Takeover Measures
There can be no assurance that the board of directors would not adopt
any further anti-takeover measures available under Delaware law (some of which
may not require shareholder approval). Moreover, the availability of such
measures under Delaware law, whether or not implemented, may have the effect of
discouraging a future takeover attempt which a majority of the Delaware
Company's shareholders may deem to be in their best interests or in which
shareholders may receive a premium for their shares over then current market
prices. As a result, shareholders who might desire to participate in such
transactions may not have the opportunity to do so. Shareholders should
recognize that, if adopted, the effect of such measures, along with the
possibility of discouraging takeover attempts, may be to limit in certain
respects the rights of shareholders of the Delaware Company compared with the
rights of shareholders of the Company.
The board of directors recognizes that hostile takeover attempts do
not always have the unfavorable consequences or effects described above and may
frequently be beneficial to the shareholders, providing all of the shareholders
with considerable value for their shares. However, the board of directors
believes that the potential disadvantages of unapproved takeover attempts (such
as disruption of the Company's business and the possibility of terms which may
be less than favorable to all of the shareholders than would be available in a
board-approved transaction) are so great that prudent steps to reduce the
likelihood of such takeover attempts and to enable the board of directors to
fully consider the proposed takeover attempt and actively negotiate its terms
are in the best interests of the Company and its shareholders.
In addition to the various anti-takeover measures that would be
available to the Delaware Company after the reincorporation, the Delaware
Company would retain the rights currently available to the Company under
California law to issue shares of its authorized but unissued capital stock.
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Following the effectiveness of the proposed reincorporation, the Delaware
Company could issue shares of authorized but unissued common stock in one or
more transactions (subject to the limitations imposed by applicable law), or
preferred stock could be issued with terms, provisions and rights which would
make a takeover of the Delaware Company more difficult and, therefore, less
likely to occur. Any such issuance of additional stock could have the effect of
diluting the earnings per share and book value per share of existing shares of
common stock and preferred stock, and such additional shares could be used to
dilute the stock ownership of persons seeking to obtain control of the Delaware
Company.
It should be noted that the voting rights to be accorded to any
unissued series of preferred stock remain to be fixed by the Delaware board of
directors. Accordingly, if the Delaware board of directors so authorizes, the
holders of preferred stock may be entitled to vote separately as a class in
connection with approval of certain extraordinary corporate transactions in
circumstances where Delaware law does not ordinarily require such a class vote,
or might be given a disproportionately large number of votes. Such preferred
stock could also be convertible into a large number of shares of common stock of
the Delaware Company under certain circumstances or have other terms which might
make acquisition of a controlling interest in the Delaware Company more
difficult or more costly, including the right to elect additional directors to
the Delaware board of directors. Potentially, the preferred stock could be used
to create voting impediments or to frustrate persons seeking to effect a merger
or otherwise to gain control of the Delaware Company. Also, preferred stock
could be privately placed with purchasers who might side with the management of
the Delaware Company in opposing a hostile tender offer or other attempt to
obtain control.
If the reincorporation is approved, it is not the present intention of
the board of directors to seek shareholder approval prior to any issuance of any
common stock or preferred stock of the Delaware Company, except as required by
law or regulation. Frequently, opportunities arise that require prompt action,
and it is the belief of the board of directors that the delay necessary for
shareholder approval of a specific issuance would be a detriment to the Delaware
Company and its shareholders. The board of directors does not intend to issue
any preferred stock except on terms which the board of directors deems to be in
the best interests of the Delaware Company and its then existing shareholders.
Amendment of Charter Documents
California and Delaware law provide that the provisions of the
Articles and Certificate of Incorporation may be amended by the affirmative vote
of a simple majority of the holders of the outstanding shares entitled to vote
on such an amendment. California law does, however, provide for certain
situations where the board may approve an amendment without shareholder
approval.
The California Bylaws provide that its provisions may be amended by
the affirmative vote or by written consent of the holders of a majority of the
outstanding shares entitled to vote on such an amendment. The Delaware Bylaws
provide that its provisions may be amended by the affirmative vote or by written
consent of a majority in interest of the shareholders represented and entitled
to vote upon the election of directors.
Loans to Officers, Directors and Employees
California law generally provides that any loan or guaranty (other
than loans to permit the purchase of shares under certain stock purchase plans)
for the benefit of any officer or director, or any employee benefit plan
authorizing such loan or guaranty (except certain employee stock purchase
plans), must be approved by the shareholders of a California corporation.
California law permits a corporation, whose shares are held by 100 or more
persons and that has a bylaw approved by the outstanding shares entitled to
vote, to make a loan to an officer or director upon approval by the board alone.
The California Bylaws, though, do not contain such a provision.
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Under Delaware law, a corporation may make loans to, or guarantee the
obligations of, officers or other employees when, in the judgment of the board
of directors, the loan or guaranty may reasonably be expected to benefit the
corporation. Both California law and Delaware law permit such loans or
guaranties to be unsecured and without interest.
Class Vote for Certain Reorganizations
With certain exceptions, California law requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved by
a majority vote of each class of shares outstanding. Delaware law generally does
not require class voting for such transactions, except in certain situations
involving an amendment to the certificate of incorporation which adversely
affects a specific class of shares.
California law also requires that holders of a California
corporation's common stock receive non-redeemable common stock in a merger of
the corporation with the holder (or an affiliate of the holder) of more than 50%
but less than 90% of its common stock, unless all of the holders of its common
stock consent to the merger or the merger has been approved by the California
Commissioner of Corporations at a "fairness" hearing. This provision of
California law may have the effect of making a cash "freezeout" merger by a
majority shareholder more difficult to accomplish. A cash freezeout merger is a
transaction whereby a minority shareholder is forced to relinquish his share
ownership in a corporation in exchange for cash, subject in certain instances to
dissenters' rights. Although Delaware law does not parallel California law in
this respect, under some circumstances Section 203 does provide similar
protection against coercive two-tiered bids for a corporation in which the
shareholders are not treated equally. See "Significant Changes Caused By
Reincorporation--Shareholder Approval of Certain Business Combinations."
Inspection of Shareholder Lists
California law provides for an absolute right of inspection of the
shareholder list for shareholders holding at least 5% of a corporation's
outstanding shares entitled to vote or shareholders holding at least 1% of such
shares who have filed a Schedule 14A with the SEC. Delaware law provides no such
absolute right of shareholder inspection. However, both California and Delaware
law permit any shareholder of record to inspect the shareholder list for any
purpose reasonably related to that person's interest as a shareholder.
Appraisal Rights
Under both California law and Delaware law, a shareholder of a
corporation participating in certain mergers and reorganizations may be entitled
to receive cash in the amount of the "fair value" (Delaware) or "fair market
value" (California) of its shares, as determined by a court, in lieu of the
consideration it would otherwise receive in the transaction. The limitations on
such dissenters' appraisal rights are somewhat different in California and
Delaware.
Shareholders of a California corporation, the shares of which are
listed on a national securities exchange certified by the Commissioner of
Corporations or on the National Market System of the Nasdaq Stock Market,
generally do not have appraisal rights unless the holders of at least 5% of the
class of outstanding shares assert the appraisal right. In any reorganization in
which one corporation or the shareholders of one corporation own more than 5/6
of the voting power of the surviving or acquiring corporation, shareholders are
denied dissenters' rights under California law. For this reason, appraisal
rights will not be available to shareholders in connection with the
reincorporation proposal.
Under Delaware law appraisal rights are not available to shareholders
with respect to a merger or consolidation by a corporation, the shares of which
are either listed on a national securities exchange or designated as a national
market system security or an interdealer quotation system security by the
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National Association of Securities Dealers, Inc., or are held of record by more
than 2,000 holders if the shareholders receive shares of the surviving
corporation or shares of any other corporation which are similarly listed or
dispersed, and the shareholders do not receive any other property in exchange
for their shares except cash for fractional shares. Appraisal rights are also
unavailable under Delaware law to shareholders of a corporation surviving a
merger if no vote of those shareholders is required to approve the merger
because, among other things, the number of shares to be issued in the merger
does not exceed 20% of the shares of the surviving corporation outstanding
immediately before the merger and certain other conditions are met.
Holding Company Reorganization
Section 251(g) was added to the Delaware General Corporation Law to
permit a Delaware corporation to reorganize as a holding company without
shareholder approval. The reorganization contemplated by the statute is
accomplished by merging the subject corporation with or into a direct or
indirect wholly owned subsidiary of the corporation and converting the stock of
the corporation into stock of another direct or indirect wholly owned subsidiary
of the corporation, which would be the new holding company. The statute
eliminates the requirement for shareholder approval on such a merger but
contains several provisions designed to ensure that the rights of shareholders
are not changed by or as a result of the merger.
In order to comply with Section 251(g), the resulting holding company
must be a Delaware corporation and have the same certificate of incorporation
(except for provisions that could have been amended or deleted without
shareholder approval), bylaws, and directors that the corporation had prior to
the reorganization. The corporation or its successor must, as a result of the
reorganization, become a direct or indirect wholly owned subsidiary of the
holding company and must retain the same certificate of incorporation and bylaws
that the corporation had prior to the reorganization (except that the
capitalization may be reduced and except for the addition of the provision
described in the next sentence). To ensure that the voting rights of the
shareholders of the corporation are not changed or evaded as a result of the
reorganization, the statute requires that the certificate of incorporation of
the corporation provide that any extraordinary transactions involving the
corporation be approved by the shareholders of the holding company by the same
vote required of the shareholders of the corporation under the General
Corporation Law and/or by the corporation's certificate of incorporation. To
ensure that any restrictions on shareholders of the corporation imposed by
Section 203 or any exemption from such restrictions, remains unaffected by a
holding company reorganization, the statute further provides that the provisions
of Section 203 will apply to persons who are shareholders of the holding company
immediately after the effectiveness of a holding company reorganization to the
same extent that they applied to shareholders of the corporation immediately
prior to the reorganization. In order for no shareholder vote to be required, a
holding company reorganization must be tax-free for federal income tax purposes
to shareholders of the corporation. Appraisal rights are not available to
shareholders in a merger that qualifies as a holding company reorganization.
Fairness Opinion Requirement
California law also provides that, except in certain circumstances,
when a tender offer or a proposal for a reorganization or for a sale of assets
is made by an interested party (generally a controlling or managing party of the
target corporation), an affirmative opinion in writing as to the fairness of the
consideration to be paid to the shareholders must be delivered to the
shareholders. This fairness opinion requirement does not apply to a corporation
which does not have shares held of record by at least 100 persons, or to a
transaction which has been qualified under California state securities laws.
Furthermore, if a tender of shares or vote is sought pursuant to an interested
party's proposal and a later proposal is made by another party at least ten days
prior to the date of acceptance of the interested party proposal, the
shareholders must be informed of the later offer and be afforded a reasonable
opportunity to withdraw any vote, consent or proxy, or to withdraw any tendered
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shares. Delaware law has no comparable provision, and the shareholders of the
Delaware Company might, therefore, be deprived of an opportunity to consider
such other proposal.
Voting and Appraisal Rights in Certain Transactions
Delaware law does not provide shareholders with voting or appraisal
rights when a corporation acquires another business through the issuance of its
stock, whether in exchange for assets or stock or in a merger with a subsidiary.
California law treats these kinds of acquisitions in the same manner as a merger
of the corporation directly with the business to be acquired and provides
appraisal rights in the circumstances described in the section entitled
"Appraisal Rights" above.
Dividends
Under California law, any dividends or other distributions to
shareholders, such as redemptions, are limited to the greater of (i) retained
earnings or (ii) an amount which would leave the corporation with assets
(excluding certain intangible assets) equal to at least 125% of its liabilities
(excluding certain deferred items) and current assets equal to at least 100%
(or, in certain circumstances, 125%) of its current liabilities. Delaware law
allows the payment of dividends and redemption of stock out of surplus
(including paid-in and earned surplus) or out of net profits for the current and
immediately preceding fiscal years. The Company has never paid cash dividends
and has no present plans to do so.
Application of California Law After Reincorporation
California law provides that a foreign corporation may be subject to
California law if (i) the average of certain property, payroll and sales factors
results in a finding that more than 50% of the foreign corporation's business is
conducted in California and (ii) more than one-half of the foreign corporation's
outstanding voting securities are held of record by persons having addresses in
California. The law, however, does not apply to corporations (a) with
outstanding securities listed on the New York Stock Exchange or the American
Stock Exchange, (b) with at least 800 holders of its equity securities and such
outstanding securities are designated as qualified for trading as a national
market security on the National Association of Securities Dealers Automatic
Quotation System or (iii) if such corporation's voting securities are owned
directly or indirectly by a corporation not subject to the law. Because the
Delaware Company's common stock is traded on the American Stock Exchange,
California law will not initially apply to the Delaware Company if the
reincorporation is approved. The Company would not be subject to California law
as long as it continued to fit into one of the above stated exceptions.
If the Delaware Company were to become subject to the provisions of
California law referred to above, and such provisions were enforced by
California courts in a particular case, many of the Delaware laws described in
this proxy statement would not apply to the Delaware Company. Instead, the
Delaware Company could be governed by certain California laws, including those
regarding liability of directors for breaches of the duty of care,
indemnification of directors, dissenters' rights of appraisal, removal of
directors as well as certain other provisions discussed above, to the exclusion
of Delaware law. The effects of applying both Delaware and California laws to a
Delaware corporation whose principal operations are based in California have not
yet been determined.
Federal Income Tax Consequences of the Reincorporation
The reincorporation provided for in the Merger Agreement is intended
to be a tax-free reorganization under the Internal Revenue Code of 1986, as
amended. Assuming the reincorporation qualifies as a reorganization, no gain or
loss will be recognized to the holders of capital stock of the Company as a
result of consummation of the reincorporation, and no gain or loss will be
recognized by the Company or the Delaware Company. Each former holder of capital
stock of the Company will have the same basis in the capital stock of the
Delaware Company received by such holder pursuant to the reincorporation as such
holder has in the capital stock of the Company held by such holder at the time
of consummation of the reincorporation. Each shareholder's holding period with
respect to the Delaware Company's capital stock will include the period during
which such holder held the corresponding Company capital stock, provided the
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latter was held by such holder as a capital asset at the time of consummation of
the reincorporation. The Company has not obtained a ruling from the Internal
Revenue Service or an opinion of legal or tax counsel with respect to the
consequences of the reincorporation.
A successful IRS challenge to the reorganization status of the
proposed reincorporation (in consequence of a failure to satisfy the "continuity
of interest" requirement or otherwise) would result in a shareholder recognizing
gain or loss with respect to each share of the Company's common stock exchanged
in the proposed reincorporation equal to the difference between the
shareholder's basis in such share and the fair market value, as of the time of
exchange therefor. In such event, a shareholder's aggregate basis in the shares
of the common stock received in the exchange would equal their fair market value
on such date, and the shareholder's holding period for such common stock would
commence anew.
The foregoing is only a summary of certain federal income tax
consequences. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE PROPOSED REINCORPORATION, INCLUDING THE
APPLICABILITY OF THE LAWS OF ANY STATE OR OTHER JURISDICTION.
The board of directors unanimously recommends a vote "FOR" the approval
of the proposal to change the Company's state of incorporation from California
to Delaware.
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Proposal 3: To Approve the 2000 Performance Equity Plan
On October 23, 2000, the board of directors adopted the 2000 Plan
subject to shareholder approval at the annual meeting. The board of directors
believes that in order to continue to attract and retain employees and
consultants of the highest caliber, provide increased incentive for directors,
officers and key employees and to continue to promote the well-being of the
Company, it is in the best interest of the Company and its shareholders to
provide directors, officers, key employees and consultants of the Company an
opportunity to acquire a proprietary interest in the Company.
Summary of the 2000 Plan
Administration
The 2000 Plan is administered by the board of directors or, at its
discretion, by the Company's compensation committee or such other committee as
may be designated by the board of directors (the "Committee"). All references
herein to "Committee" or "board" shall mean the Committee or the board, as
appropriate. The Committee has full authority, subject to the provisions of the
2000 Plan, to award (i) Stock Options, (ii) Stock Appreciation Rights, (iii)
Restricted Stock, (iv) Deferred Stock, (v) Stock Reload Options and/or (vi)
Other Stock-Based Awards (collectively, "Awards"). Subject to the provisions of
the 2000 Plan, the Committee determines, among other things, the persons to whom
from time to time Awards may be granted ("Holders"), the specific type of Awards
to be granted (e.g., Stock Options, Restricted Stock), the number of shares
subject to each Award, share prices, any restrictions or limitations on such
Awards (e.g., the "Deferral Period" in the grant of Deferred Stock and the
"Restriction Period" when Restricted Stock is subject to forfeiture), and any
vesting, exchange, deferral, surrender, cancellation, acceleration, termination,
exercise or forfeiture provisions related to such Awards.
Stock Subject to the 2000 Plan
The 2000 Plan authorizes the granting of Awards whose exercise would
allow up to an aggregate of 1,000,000 shares of common stock to be acquired by
the Holders of such Awards. In order to prevent the dilution or enlargement of
the rights of Holders under the 2000 Plan, the number of shares of common stock
authorized by the 2000 Plan is subject to adjustment by the board in the event
of any increase or decrease in the number of shares of outstanding common stock
resulting from a common stock dividend payable on shares of common stock, stock
split of common stock, reverse stock split of common stock, combination or
exchange of common stock, or similar event relating to the common stock
occurring after the grant of an Award which results in a change in the shares of
common stock as a whole. The board, in the event of any of the foregoing, will
make equitable adjustments in the terms of any Awards and the aggregate number
of shares reserved for issuance under the 2000 Plan. If any Award granted under
the 2000 Plan is forfeited or terminated prior to exercise, the shares of common
stock that were available pursuant to such Award shall again be available for
distribution in connection with Awards subsequently granted under the 2000 Plan.
Notwithstanding any other provision of the 2000 Plan, the Committee will not
grant to any one Holder in any one calendar year awards for more than 250,000
shares of common stock in the aggregate.
Eligibility
Subject to the provisions of the 2000 Plan, Awards may be granted to
key employees, officers, directors and consultants who are deemed to have
rendered or to be able to render significant services to the Company and who are
deemed to have contributed or to have the potential to contribute to the success
of the Company. Incentive Stock Options, as hereinafter defined, may be awarded
only to persons who, at the time of grant of such awards, are employees of the
Company.
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Types of Awards
Options. The 2000 Plan provides both for "Incentive" stock options
("Incentive Stock Options") as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and for options not qualifying as
Incentive Options ("Non-Qualified Stock Options"), both of which may be granted
with any other stock-based award under the 2000 Plan. The Committee determines
the exercise price per share of common stock purchasable under an Incentive or
Non-Qualified Stock Option (collectively, "Stock Options"). The exercise price
of Stock Options may not be less than 100% of the fair market value on the day
of the grant (or, in the case of an Incentive Stock Option granted to a person
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, not less than 110% of such fair market value). In the case
of an Incentive Stock Option, the aggregate fair market value (on the date of
grant of the Stock Option) with respect to which Incentive Stock Options become
exercisable for the first time by a Holder during any calendar year shall not
exceed $100,000. An Incentive Stock Option may only be granted within a ten-year
period from the date the 2000 Plan is adopted and approved and may only be
exercised within ten years from the date of the grant (or within five years in
the case of an Incentive Stock Option granted to a person who, at the time of
the grant, owns common stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company).
Stock Options granted under the 2000 Plan may not be transferred other
than by will or by the laws of descent and distribution, by gift to a family
member of the Holder, by domestic relations order, or by transfer to an entity
in which more than fifty percent of the voting interests are owned by family
members of the Holder or the Holder, in exchange for an interest in that entity.
Generally, if the Holder is an employee, no Stock Options, or any
portion thereof, granted under the 2000 Plan may be exercised by the Holder
unless he or she is employed by the Company or a subsidiary at the time of the
exercise and has been so employed continuously from the time the Stock Options
were granted. However, in the event the Holder's employment with the Company is
terminated due to disability, the Holder may still exercise his or her vested
Stock Options for a period of one year (or such other greater or lesser period
as the Committee may specify at the time of grant) from the date of such
termination or until the expiration of the stated term of the Stock Option,
whichever period is shorter. Similarly, should a Holder die while in the
employment of the Company or a subsidiary, his or her legal representative or
legatee under his or her will may exercise the decedent Holder's vested Stock
Options for a period of one year from the date of his or her death (or such
other greater or lesser period as the Committee specifies at the time of grant)
or until the expiration of the stated term of the Stock Option, whichever period
is shorter. If the Holder's employment is terminated for any reason other than
death or disability, the Stock Option shall automatically terminate, except that
if the Holder's employment is terminated by the Company without cause or due to
normal retirement (generally upon attaining the age of 62), then the portion of
any Stock Option that has vested on the date of termination may be exercised for
the lesser of three months after termination or the balance of the Stock
Option's term.
Stock Appreciation Rights. The Committee may grant Stock Appreciation
Rights ("SARs" or singularly "SAR") to Participants who have been, or are being,
granted Stock Options under the 2000 Plan as a means of allowing such
Participants to exercise their Stock Options without the need to pay the
exercise price in cash. In conjunction with Non-Qualified Stock Options, SARs
may be granted either at or after the time of the grant of such Non-Qualified
Stock Options. In conjunction with Incentive Stock Options, SARs may be granted
only at the time of the grant of such Incentive Stock Options. An SAR entitles
the Holder to receive a number of shares of common stock having a fair market
value equal to the excess fair market value of one share of common stock over
the exercise price of the related Stock Option, multiplied by the number of
shares subject to the SAR. The granting of a SAR will not affect the number of
shares of common stock available for awards under the 2000 Plan. The number of
shares available for awards under the 2000 Plan will, however, be reduced by the
number of shares of common stock acquirable upon exercise of the Stock Option to
which the SAR relates.
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Restricted Stock. The Committee may award shares of restricted stock
("Restricted Stock") either alone or in addition to other Awards granted under
the 2000 Plan. The Committee determines the persons to whom grants of Restricted
Stock are made, the number of shares to be awarded, the price (if any) to be
paid for the Restricted Stock by the person receiving such stock from the
Company, the time or times within which awards of Restricted Stock may be
subject to forfeiture (the "Restriction Period"), the vesting schedule and
rights to acceleration thereof, and all other terms and conditions of the
Restricted Stock awards.
Restricted Stock awarded under the 2000 Plan may not be sold,
exchanged, assigned, transferred, pledged, encumbered or otherwise disposed of
other than to the Company during the applicable Restriction Period. Other than
regular cash dividends and other cash equivalent distributions as the Committee
may designate, pay or distribute, the Company will retain custody of all
distributions ("Retained Distributions") made or declared with respect to the
Restricted Stock during the Restriction Period. A breach of any restriction
regarding the Restricted Stock will cause a forfeiture of such Restricted Stock
and any Retained Distributions with respect thereto. Except for the foregoing
restrictions, the Holder shall, even during the Restriction Period, have all of
the rights of a shareholder, including the right to receive and retain all
regular cash dividends and other cash equivalent distributions as the Committee
may designate, pay or distribute on such Restricted Stock and the right to vote
such shares.
In order to enforce the foregoing restrictions, the 2000 Plan requires
that all shares of Restricted Stock awarded to the Holder remain in the physical
custody of the Company until the restrictions on such shares have terminated and
all vesting requirements with respect to the Restricted Stock have been
fulfilled.
Deferred Stock. The Committee may award shares of deferred stock
("Deferred Stock") either alone or in addition to other Awards granted under the
2000 Plan. The Committee determines the eligible persons to whom, and the time
or times at which, Deferred Stock will be awarded, the number of shares of
Deferred Stock to be awarded to any person, the duration of the period (the
"Deferral Period") during which, and the conditions under which, receipt of the
stock will be deferred, and all the other terms and conditions of such Deferred
Stock Awards.
Deferred Stock awards granted under the 2000 Plan may not be sold,
exchanged, assigned, transferred, pledged, encumbered or otherwise disposed of
other than to the Company during the applicable Deferral Period. The Holder
shall not have any rights of a shareholder until the expiration of the
applicable Deferral Period and the issuance and delivery of the certificates
representing such common stock. The Holder may request to defer the receipt of a
Deferred Stock award for an additional specified period or until a specified
event. Such request must generally be made at least one year prior to the
expiration of the Deferral Period for such Deferred Stock award.
Stock Reload Options. The Committee may grant Stock Reload Options to
a Holder who tenders shares of common stock to pay the exercise price of a Stock
Option ("Underlying Option") or arranges to have a portion of the shares
otherwise issuable upon exercise withheld to pay the applicable withholding
taxes. A Stock Reload Option permits a Holder to receive back from the Company a
new Stock Option (at the current market price) for the same number of shares
delivered to exercise the Option. The Committee determines the terms,
conditions, restrictions and limitations of the Stock Reload Options. The
exercise price of Stock Reload Options shall be the fair market value as of the
date of exercise of the Underlying Option. Unless the Committee determines
otherwise, a Stock Reload Option may be exercised commencing one year after it
is granted and expires on the expiration date of the Underlying Option.
Other Stock-Based Awards. The Committee may grant Other Stock-Based
Awards, subject to limitations under applicable law, that are denominated or
payable in, valued in whole or in part by reference to, or otherwise based on,
or related to, shares of common stock, as deemed by the Committee to be
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consistent with the purposes of the 2000 Plan, including purchase rights, shares
of common stock awarded which are not subject to any restrictions or conditions,
convertible or exchangeable debentures or other rights convertible into shares
of common stock and awards valued by reference to the value of securities of or
the performance of specified subsidiaries. Subject to the terms of the 2000
Plan, the Committee has complete discretion to determine the terms and
conditions applicable to Other Stock-Based Awards. Other Stock-Based Awards may
be awarded either alone or in addition to or in tandem with any other awards
under the 2000 Plan or any other plan of the Company.
Competition with the Company; Solicitation of Customers and Employees;
Disclosure of Confidential Information
If a Holder's employment with the Company or a subsidiary is
terminated for any reason whatsoever, and within 18 months after the date
thereof such Holder either (i) accepts employment with any competitor of, or
otherwise engages in competition with, the Company or any of its subsidiaries,
(ii) solicits any customers or employees of the Company or any of its
subsidiaries to do business with or render services to the Holder or any
business with which the Holder becomes affiliated or to which the Holder renders
services or (iii) discloses to anyone outside the Company or uses any
confidential information or material of the Company or any of its subsidiaries
in violation of the Company's policies or any agreement between the Holder and
the Company or any of its subsidiaries, the Committee, in its sole discretion,
may require such Holder to return to the Company the economic value of any award
that was realized or obtained by such Holder at any time during the period
beginning on that date that is six months prior to the date such Holder's
employment with the Company is terminated.
Termination for Cause
The Committee may, if a Holder's employment with the Company or a
subsidiary is terminated for cause, annul any award granted under the 2000 Plan
to such employee and, in such event, the Committee, in its sole discretion, may
require such Holder to return to the Company the economic value of any award
that was realized or obtained by such Holder at any time during the period
beginning on the date that is six months prior to the date such Holder's
employment with the Company is terminated.
Withholding Taxes
Upon the exercise of any Award granted under the 2000 Plan, the Holder
may be required to remit to the Company an amount sufficient to satisfy all
federal, state and local withholding tax requirements prior to delivery of any
certificate or certificates for shares of common stock. Subject to certain
stringent limitations under the 2000 Plan and at the discretion of the Company,
the Holder may satisfy these requirements by electing to have the Company
withhold a portion of the shares to be received upon the exercise of the Award
having a value equal to the amount of the withholding tax due under applicable
federal, state and local laws.
Agreements
Stock Options, Restricted Stock, Deferred Stock, Stock Reload Options,
Other Stock-Based Awards and SARs granted under the 2000 Plan will be evidenced
by agreements consistent with the 2000 Plan in such form as the Committee may
prescribe. Neither the 2000 Plan nor agreements thereunder confer any right to
continued employment upon any Holder of a Stock Option, Restricted Stock,
Deferred Stock, Stock Reload Options, Other Stock-Based Award or SAR.
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Term and Amendments
Unless terminated by the board, the 2000 Plan shall continue to remain
effective until such time as no further Awards may be granted and all Awards
granted under the 2000 Plan are no longer outstanding. Notwithstanding the
foregoing, grants of Incentive Stock Options may be made only during the ten
year period following the date the 2000 Plan becomes effective. The board of
directors may at any time, and from time to time, amend the 2000 Plan, provided
that no amendment shall be made which would impair the rights of a Holder under
any agreement entered into pursuant to the 2000 Plan without the Holder's
consent.
Change in Control
The 2000 Plan contains certain change in control provisions which
could cause Stock Options and other Awards to become immediately exercisable and
restrictions and deferral limitations applicable to other awards to lapse in the
event any "person" as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, including a "group" as defined in Section 13(d), but excluding
certain shareholders of the Company, acquires beneficial ownership of common
stock of the Company having 35% or more of the total voting power of all of the
Company's outstanding voting capital stock. The Committee also may accelerate
the vesting of any Stock Options and other Awards granted under the 2000 Plan or
require a Holder of any Award granted under the 2000 Plan to relinquish such
award to the Company upon tender by the Company of cash in an amount equal to
the repurchase value of such award in the event of an acquisition of
substantially all of the Company's assets or at least 50% of the combined voting
power of the Company's then outstanding securities in one or more transactions.
Federal Income Tax Consequences
The following discussion of the federal income tax consequences of
participation in the 2000 Plan is only a summary of the general rules applicable
to the grant and exercise of Stock Options and other Awards and does not give
specific details or cover, among other things, state, local and foreign tax
treatment of participation in the 2000 Plan. The information contained in this
section is based on present law and regulations, which are subject to being
changed prospectively or retroactively.
Incentive Stock Options
The Holder will recognize no taxable income upon the grant or exercise
of an Incentive Stock Option. The Company will not qualify for any deduction in
connection with the grant or exercise of Incentive Stock Options. Upon a
disposition of the shares after the later of two years from the date of grant or
one year after the transfer of the shares to the Holder, the Holder will
recognize the difference, if any, between the amount realized and the exercise
price as long-term capital gain or long-term capital loss (as the case may be)
if the shares are capital assets. The excess, if any, of the fair market value
of the shares on the date of exercise of an Incentive Stock Option over the
exercise price will be treated as an item of adjustment for a Holder's taxable
year in which the exercise occurs and may result in an alternative minimum tax
liability for the Holder.
If common stock acquired upon the exercise of an Incentive Stock
Option is disposed of prior to the expiration of the holding periods described
above, (i) the Holder will recognize ordinary compensation income in the taxable
year of disposition in an amount equal to the excess, if any, of the lesser of
the fair market value of the shares on the date of exercise or the amount
realized on the disposition of the shares, over the exercise price paid for such
shares and (ii) the Company will qualify for a deduction equal to any such
amount recognized, subject to the limitation that the compensation be
reasonable. In the case of a disposition of shares earlier than two years from
the date of the grant or in the same taxable year as the exercise, where the
amount realized on the disposition is less than the fair market value of the
shares on the date of exercise, there will be no adjustment since the amount
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treated as an item of adjustment, for alternative minimum tax purposes, is
limited to the excess of the amount realized on such disposition over the
exercise price, which is the same amount included in regular taxable income.
Non-Qualified Stock Options
With respect to Non-Qualified Stock Options (i) upon grant of the
Stock Option, the Holder will recognize no income, (ii) upon exercise of the
Stock Option (if the shares of common stock are not subject to a substantial
risk of forfeiture), the Holder will recognize ordinary compensation income in
an amount equal to the excess, if any, of the fair market value of the shares on
the date of exercise over the exercise price, and the Company will qualify for a
deduction in the same amount, subject to the requirement that the compensation
be reasonable and (iii) the Company will be required to comply with applicable
federal income tax withholding requirements with respect to the amount of
ordinary compensation income recognized by the Holder. On a disposition of the
shares, the Holder will recognize gain or loss equal to the difference between
the amount realized and the sum of the exercise price and the ordinary
compensation income recognized. Such gain or loss will be treated as capital
gain or loss if the shares are capital assets and as short-term or long-term
capital gain or loss, depending upon the length of time that the Holder held the
shares.
If the shares acquired upon exercise of a Non-Qualified Stock Option
are subject to a substantial risk of forfeiture, the Holder will recognize
ordinary income at the time when the substantial risk of forfeiture is removed,
unless such Holder timely files under Code Section 83(b) to elect to be taxed on
the receipt of shares, and the Company will qualify for a corresponding
deduction at such time. The amount of ordinary income will be equal to the
excess of the fair market value of the shares at the time the income is
recognized over the amount (if any) paid for the shares.
Stock Appreciation Rights
Upon the grant of a SAR, the Holder recognizes no taxable income and
the Company receives no deduction. The Holder recognizes ordinary income and the
Company receives a deduction at the time of exercise equal to the cash and fair
market value of common stock payable upon such exercise.
Restricted Stock
A Holder who receives Restricted Stock will recognize no income on the
grant of the Restricted Stock and the Company will not qualify for any
deduction. At the time the Restricted Stock is no longer subject to a
substantial risk of forfeiture, a Holder will recognize ordinary compensation
income in an amount equal to the excess, if any, of the fair market value of the
Restricted Stock at the time the restriction lapses over the consideration paid
for the Restricted Stock. A Holder's shares are treated as being subject to a
substantial risk of forfeiture so long as his or her sale of the shares at a
profit could subject him or her to a suit under Section 16 (b) of the Exchange
Act. The holding period to determine whether the Holder has long-term or
short-term capital gain or loss begins when the Restriction Period expires, and
the tax basis for the shares will generally be the fair market value of the
shares on such date.
A Holder may elect, under Section 83(b) of the Code, within 30 days of
the transfer of the Restricted Stock, to recognize ordinary compensation income
on the date of transfer in an amount equal to the excess, if any, of the fair
market value on the date of such transfer of the shares of Restricted Stock
(determined without regard to the restrictions) over the consideration paid for
the Restricted Stock. If a Holder makes such election and thereafter forfeits
the shares, no ordinary loss deduction will be allowed. Such forfeiture will be
treated as a sale or exchange upon which there is realized loss equal to the
excess, if any, of the consideration paid for the shares over the amount
realized on such forfeiture. Such loss will be a capital loss if the shares are
capital assets. If a Holder makes an election under Section 83(b), the holding
period will commence on the day after the date of transfer and the tax basis
will equal the fair market value of shares (determined without regard to the
restrictions) on the date of transfer.
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On a disposition of the shares, a Holder will recognize gain or loss
equal to the difference between the amount realized and the tax basis for the
shares.
Whether or not the Holder makes an election under Section 83(b), the
Company generally will qualify for a deduction (subject to the reasonableness of
compensation limitation) equal to the amount that is taxable as ordinary income
to the Holder, in its taxable year in which such income is included in the
Holder's gross income. The income recognized by the Holder will be subject to
applicable withholding tax requirements.
Dividends paid on Restricted Stock which is subject to a substantial
risk of forfeiture generally will be treated as compensation that is taxable as
ordinary compensation income to the Holder and will be deductible by the Company
subject to the reasonableness limitation. If, however, the Holder makes a
Section 83(b) election, the dividends will be treated as dividends and taxable
as ordinary income to the Holder, but will not be deductible by the Company.
Deferred Stock
A Holder who receives an award of Deferred Stock will recognize no
income on the grant of such award. However, he or she will recognize ordinary
compensation income on the transfer of the Deferred Stock (or the later lapse of
a substantial risk of forfeiture to which the Deferred Stock is subject, if the
Holder does not make a Section 83(b) election), in accordance with the same
rules as discussed above under the caption "Restricted Stock."
Other Stock-Based Awards
The federal income tax treatment of Other Stock-Based Awards will
depend on the nature of any such award and the restrictions applicable to such
award.
The board of directors unanimously recommends a vote
"FOR" the approval of the proposal to approve the 2000 Plan.
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Proposal 4: To approve the potential issuance of 20% or more of the Company's
outstanding common stock in connection with the conversion of shares of
Series A Convertible Preferred Stock.
Introduction
On December 6, 2000, the Company sold 1,500 shares of the Company's
Series A Preferred Stock for an aggregate purchase price of $1,500,000 ($1,000
per share) to an institutional investor pursuant to the terms of a securities
purchase agreement. The purchase agreement provides for an aggregate purchase of
up to 6,000 shares of the Series A Preferred Stock. A sale of the remaining
4,500 shares of Series A Preferred Stock to the investor would result in the
issuance of 20% or more of the Company's outstanding shares of common stock upon
conversion of the Series A Preferred Stock ("conversion shares"). The Company's
common stock is listed on the American Stock Exchange ("Amex"), the rules of
which require a transaction which could result in the issuance of 20% or more of
the outstanding shares of common stock of a company to be approved by the
company's shareholders.
Terms of the Preferred Stock
Purchase of Remaining Shares. The purchase agreement provides that the
investor will purchase an additional 2,500 shares of Series A Preferred Stock
after the Company obtains shareholder approval of this proposal, if the
"capitalization rate" of the Company (market value of the Company's common stock
held by non-affiliates) for the five trading days prior to the closing date
equals or exceeds $25,000,000. The investor will purchase 1,000 of the remaining
2,000 shares after the effective date of the registration statement covering the
conversion shares, and, if the capitalization rate exceeds $35,000,000, the
investor may, at its option, purchase an additional 1,000 shares of Series A
Preferred Stock. Both remaining purchases are subject to the Company's
compliance with certain general terms and conditions under the purchase
agreement.
Conversion. The investor may, at its option, convert the Series A
Preferred Stock into shares of common stock at any time. The number of
conversion shares into which the Series A Preferred Stock is convertible is
equal to 125% of the stated value of the Series A Preferred Stock ($1,000 per
share) being converted, plus any dividends accrued to such date, divided by the
conversion price. The conversion price is determined by a formula that
fluctuates based on the price of the Company's common stock within certain
parameters. Based on this formula, the conversion price will never be greater
than $3.00 or less than $0.20, regardless of the market price. Each share of
Series A Preferred Stock outstanding on the third anniversary of the date of
issuance will automatically convert into shares of common stock.
Mandatory Redemption. If the Company fails, after this meeting, to
have available a sufficient number of authorized and unreserved shares of common
stock to issue to the holder upon conversion of the Series A Preferred Stock, or
the registration statement covering the conversion shares is not declared
effective within a certain period of time or the Company fails to pay the holder
certain required amounts as set forth in the purchase agreement, the holder of
the Series A Preferred Stock may cause the Company to redeem all or a part of
the outstanding shares of Series A Preferred Stock. Upon such redemption, the
holder will receive a cash amount equal to the number of conversion shares which
would have been issuable upon conversion of the Series A Preferred Stock
multiplied by the greater of the conversion price or the-then market price of a
share of common stock.
Optional Redemption. If the common stock trades at or below the
closing price (five day average stock price determined at the time of the
issuance of the Preferred Stock) for a period of 20 consecutive trading days,
the Company may, at its option, redeem all or part of the outstanding shares of
Series A Preferred Stock for cash at (i) 112.50% of the stated value if redeemed
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within 180 days of the date of issuance, (ii) 118.75% of the stated value if
redeemed between 180 and 270 days after the date of issuance and (iii) 125% of
the stated value if redeemed thereafter.
Dividends. The holders of Series A Preferred Stock are entitled to
receive dividends at a rate equal to 8% of the stated value of the Series A
Preferred Stock which may be paid in cash or in kind.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, before any payment or
distribution of the Company's assets are made to any other holders, the holders
of Series A Preferred Stock are to receive an amount per share equal to 125% of
the stated value of a share of Series A Preferred Stock, plus any dividends
accrued through such date.
Voting Rights. The Series A Preferred Stock does not have voting
rights, except that so long as any shares of the Series A Preferred Stock are
outstanding, the affirmative vote of the holders of a majority of the
outstanding shares of Series A Preferred Stock, voting together as a single
class, will be necessary to amend, alter or repeal any provision of the
Company's Amended Articles of Incorporation or By-laws that will adversely
affect the Series A Preferred Stock.
Warrants. Pursuant to the terms of the purchase agreement, the Company
has agreed to issue to the investor 100,000 five-year warrants for each
$1,000,000 investment at an initial exercise price of 110% of the closing price
determined at the time of the sale of the Preferred Stock, subject to
adjustment. To date, the investor has received warrants to purchase 150,000
shares of Common stock exercisable at $1.5125 per share commencing in June 2001.
American Stock Exchange Shareholder Approval Requirement
Since the Company's common stock is listed on Amex, the Company is
obligated to comply with the applicable rules of the Amex. Section
713(a)(ii) of the Amex rules provides that a company must obtain shareholder
approval prior to the sale or issuance of common stock (or securities
convertible into common stock) equal to 20% or more of presently outstanding
stock for less than the greater of book or market value of the stock. Based upon
the fluctuating conversion price formula and the number of shares of Series A
Preferred Stock which are proposed to be sold, the number of conversion shares
which may be issued will exceed 20% of the Company's currently outstanding
shares of common stock. Moreover, as the market price of the common stock
decreases, the number of conversion shares will continue to increase. In order
to eliminate the requirement to obtain shareholder approval for the issuance of
the initial sale of Series A Preferred Stock at the time such Series A Preferred
Stock was issued, the terms of the Series A Preferred Stock provided that the
Series A Preferred Stock could not convert into more than 19.99% of the
Company's outstanding common stock on the date of issuance of the Series A
Preferred Stock without prior shareholder approval. Unless shareholder approval
to issue 20% or more of the outstanding shares of common stock is obtained, the
investor is not obligated to purchase any additional shares of Series A
Preferred Stock.
The conversion of the Series A Preferred Stock will result in dilution
to the equity interests of other holders of the common stock. Specifically, the
issuance of the additional common stock will result in a decrease of the
relative voting control of the common stock issued and outstanding prior to the
conversion of the Series A Preferred Stock and public resales of common stock
following the conversion of the Series A Preferred Stock may depress the
prevailing market price of the common stock. Even prior to the time of actual
conversions and public resales, the market "overhang" resulting from the mere
existence of the Company's obligation to honor such conversions and exercises
could depress the market price of the common stock.
If the shareholders approve the proposal, there will be no further
vote on the matter at the time of conversion. If shareholder approval is not
obtained, the investor will not purchase any additional shares of Series A
Preferred Stock and the Company will not receive the capital it needs to
continue its operations. Obtaining financing from alternative sources may be
difficult for the Company.
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The Company's board of directors has determined that the additional
shares to be issued upon conversion of the Series A Preferred Stock furthers the
best interests of the Company because the funds raised and to be raised by the
Series A Preferred Stock will provide necessary operating capital for the
Company. The board considered the benefits and risks of raising funds based, in
part, on future market prices relative to other alternatives, and concluded that
the terms set forth in the securities purchase agreement were in the best
interests of the Company and represented the best alternative available to the
Company to meet its funding needs. The board of directors therefore approved the
transaction. The Company's board of directors now solicits your proxy to be
voted to approve the issuance of a sufficient number of shares of the Company's
common stock to be issued upon conversion of the Series A Preferred Stock by
approving this proposal.
As of the record date, the Company's executive officers and directors
beneficially owned, in the aggregate, approximately 8.8% of the issued and
outstanding common stock. The Company has obtained binding proxies from its
executive officers and directors and each of their spouses or relatives who,
directly or indirectly, hold shares of the Company's common stock, pursuant to
which each of them has agreed to vote in favor of any shareholder proposal
required to authorize the issuance of shares of common stock to the holders of
the Series A Preferred Stock in excess of the 20% threshold.
The board of directors unanimously recommends a vote "FOR" the
approval of the proposal the potential issuance of 20% or more of the
Company's outstanding common stock in connection with the
conversion of shares of Series A Preferred Stock.
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Proposal 5: To approve the potential issuance of 20% or more of the Company's
outstanding common stock in connection with the conversion of shares of Series B
through Series D Preferred Stock.
[THIS TRANSACTION HAS NOT BEEN SIGNED OR COMPLETED BUT HAS BEEN PRESENTED AS IF
SIGNED AND COMPLETED. THERE CAN BE NO ASSURANCE THAT THIS TRANSACTION WILL BE
COMPLETED.]
Introduction
On December ___, 2000, the Company and ChannelSpace Entertainment, Inc.
("CSEI") entered into an asset purchase agreement, pursuant to which the Company
agreed to acquire from CSEI its electronic Content Management System ("eCMS")
technology. eCMS is a technology developed by CSEI to manage content for its
affinity channels. This content management technology works with virtually any
content source to automate manual processes such as web production (including
audio, video, image and text content), auditing, access control, site versioning
and accounting. The Company intends to utilize this technology to provide
cost-effective content management applications to small to medium-sized
companies.
In consideration for the purchase, the Company agreed to issue to CSEI
the following:
o ________ shares of Series B Preferred Stock, which will
automatically convert into the number of shares of common stock
equal to the sum of 833,333 and the quotient obtained by dividing
$500,000 by the average of the closing prices of the common stock
for the five trading days prior to the closing date upon the
effectiveness of one or more registration statements registering
the resale of the underlying shares of common stock;
o _________ shares of each of Series C-1 through Series C-12
Preferred Stock (collectively, the "Earnout Preferred Stock").
Each series of Earnout Preferred Stock will automatically convert
into shares of common stock based on a gross revenue formula for
each of 12 quarterly periods, with the first period ending March
31, 2001, but in any event will not convert prior to the first
anniversary of the closing date of the asset purchase;
o __________ shares of Series D Preferred Stock, which will
automatically convert into shares of common stock based upon a
formula if the average of the closing prices of the common stock
during the three-month period ("Market Price") commencing fifteen
months after the closing date does not equal or exceed $12 per
share; and
o __________ shares of Series E Preferred Stock, into which a
portion of the Series B Preferred Stock and all of the Earnout
Preferred Stock and Series D Preferred Stock will be
automatically converted if this proposal is not approved, or a
portion of which will be issued in lieu of shares of common stock
when (i) the Earnout Preferred Stock and Series D Preferred Stock
are convertible into common stock and the maximum number of
shares of common stock into which such series are convertible is
reached or (ii) a portion of the Earnout Preferred Stock and all
of the Series D Preferred Stock are convertible into common stock
and the Company has failed to register such shares for resale
under the Securities Act.
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The conversion of the Series B Preferred Stock, the Earnout Preferred Stock and
the Series D Preferred Stock (collectively, the "Acquisition Preferred Stock")
into shares of common stock could result in the issuance by the Company of 20%
or more of the Company's outstanding shares of common stock. The Company's
common stock is listed on the Amex, the rules of which require a transaction
which could result in the issuance of 20% or more of the outstanding shares of
common stock of a company to be approved by the company's shareholders.
Terms of the Acquisition Preferred Stock
Series B Preferred Stock
Conversion. Each share of Series B Preferred Stock will automatically
convert into _____ shares of common stock upon the effectiveness of a
registration statement registering the resale of the shares of common stock
issuable upon conversion of the Series B Preferred Stock.
Voting Rights. Each holder of Series B Preferred Stock will be entitled
to vote, as a single class with the holders of common stock, on all matters and
will be entitled to that number of votes equal to the number of shares of common
stock into which such holder's shares of Series B Preferred Stock could be
converted on the record date for the determination of shareholders entitled to
vote on such matter. In addition, as a matter of law, so long as any shares of
the Series B Preferred Stock are outstanding, the affirmative vote of the
holders of a majority of the outstanding shares of Series B Preferred Stock,
voting as a single class, will be necessary to amend, alter or repeal any
provision of the Company's Amended Certificate of Incorporation or By-laws that
will adversely affect the Series B Preferred Stock.
Redemption. If not automatically converted into shares of common stock
as provided above, the Series B Preferred Stock will be subject to a right of
redemption by the holders. Commencing 150 days after the issuance of Series B
Preferred Stock, the holders of ______ shares of Series B Preferred Stock will
have the right to cause the Company to redeem such shares within 30 days for, at
the Company's election, cash or shares of registered common stock equal to the
stated value then in effect with respect to each such share. Commencing on the
fifteen-month anniversary of the issuance of the Series B Preferred Stock, the
holders of the remaining shares will have the right to cause the Company to
redeem such shares within 90 days for, at the Company's election, cash or shares
of registered common stock equal to the stated value then in effect with respect
to such shares.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Series B
Preferred Stock will receive a liquidation preference of $0.01 per share and
then participate on a parity with the common stock on the basis of the number of
shares of common stock into which it would be convertible assuming the
effectiveness of a registration statement registering the resale of the shares
of common stock issuable upon conversion.
Ranking. With respect to rights on liquidation, dissolution and winding
up, the $0.01 liquidation preference Series B Preferred Stock will rank senior
to the Company's common stock, on a parity with the each of Series C through
Series E Preferred Stock and junior to the Company's Series A Preferred Stock.
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Dividends. The holders of Series B Preferred Stock will not be
entitled to receive any dividends.
Earnout Preferred Stock
The terms of each series of the Earnout Preferred Stock are identical
to the Series B Preferred Stock, except with respect to conversion, voting
rights, redemption and liquidation preference.
Conversion. Each series of Earnout Preferred Stock will automatically
convert (but in any event, not prior to the first anniversary of the closing
date) into the number shares of common stock determined by dividing the Gross
Revenues (as defined in the asset purchase agreement) earned during each of 12
quarterly earnout periods, with the first period ending March 31, 2001
("Measuring Dates"), by the Market Price during each quarterly period. The
maximum amount of Gross Revenues counted for this purpose is $10,000,000 in the
aggregate. Also, the maximum number of shares of common stock issuable upon
conversion of the Earnout Preferred Stock, in the aggregate, may not exceed
3,333,333 shares. However, the portion of any series of Earnout Preferred Stock,
which would otherwise automatically convert into shares of common stock based
upon the gross revenue formula but for the maximum limit on the number of shares
of common stock into which the Earnout Preferred Stock is convertible, will
convert into an equal number of shares of Series E Preferred Stock with an
aggregate stated value equal to the Market Price multiplied by the number of
shares of common stock into which that portion of the series would have
automatically converted but for the maximum limit. In addition, if, at the time
of conversion of each series of Earnout Preferred Stock issued with respect to
the last eight earnout periods, the Company has not fulfilled its obligation to
register for resale under the Securities Act the shares of common stock issuable
upon conversion of such series, then such series will convert into an equal
number of shares of Series E Preferred Stock with an aggregate stated value
equal to the Market Price multiplied by the number of shares of common stock
into which such series would have automatically converted but for the Company's
failure to register such shares.
Voting Rights. The Earnout Preferred Stock will be entitled to vote, as
a single class, with the holders of the common stock, on all matters and will
initially be entitled to ______ votes per each share of Earnout Preferred Stock.
As soon as any series of Earnout Preferred Stock becomes convertible into shares
of common stock based on Gross Revenues (as explained below, but without regard
to any delay in conversion), each share of that series of Earnout Preferred
Stock will have the number of votes equal to the number of shares of common
stock into which it is convertible (without regard to any delay in conversion).
In addition, as a matter of law, so long as any shares of any series of the
Earnout Preferred Stock are outstanding, the affirmative vote of the holders of
a majority of the outstanding shares of any series of Earnout Preferred Stock,
with such series voting as a single class, will be necessary to amend, alter or
repeal any provision of the Company's Amended Certificate of Incorporation or
By-laws that will adversely affect a series of Earnout Preferred Stock.
Redemption. If not automatically converted into shares of common stock
(or, if applicable, Series E Preferred Stock) as provided above, each series of
Earnout Preferred Stock issued with respect to the first four earnout periods
will be subject to a right of redemption by the holders. Commencing on the
fifteen-month anniversary of the Measuring Date for each such series, the
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holders of the shares of such series will have the right to cause the Company to
redeem such shares within 90 days for, at the Company's election, cash or shares
of registered common stock equal to the stated value then in effect with respect
to such shares.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Earnout
Preferred Stock will receive a liquidation preference of $0.01 per share and
then participate on a parity with the common stock on the basis of the number of
shares of common stock into which it would be convertible assuming the passage
of one year from the closing date.
Series D Preferred Stock
The terms of the Series D Preferred Stock are identical to the Series B
Preferred Stock, except with respect to conversion, voting rights, redemption
and liquidation preference.
Conversion. If the Market Price during the three-month period
commencing fifteen months after the closing date is less than $12 per share,
then each share of the Series D Preferred Stock will automatically convert into
the number of shares of common stock equal to the difference between $12 and the
Market Price divided by the Market Price. The maximum number of shares of common
stock issuable upon conversion of the Series D Preferred Stock, in the
aggregate, may not exceed 2,499,999 shares. However, the portion of Series D
Preferred Stock which would otherwise automatically convert into shares of
common stock but for the maximum limit on the number of shares of common stock
into which the Series D Preferred Stock is convertible, will convert into an
equal number of shares of Series E Preferred Stock with an aggregate stated
value equal to the Market Price multiplied by the number of shares of common
stock into which that portion of the series would have automatically converted
but for the maximum limit. In addition, if, at the time of conversion of the
Series D Preferred Stock, the Company has not fulfilled its obligation to
register for resale under the Securities Act the shares of common stock issuable
upon conversion, then such series will convert into an equal number of shares of
Series E Preferred Stock with an aggregate stated value equal to the Market
Price multiplied by the number of shares of common stock into which such series
would have automatically converted but for the Company's failure to register
such shares.
Voting Rights. The Series D Preferred Stock has the same voting rights
as the Earnout Preferred Stock.
Redemption. The Series D Preferred Stock will not be subject to any
right of redemption by the Company or by the holders.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company prior to the conversion of
the Series D Preferred Stock into common stock (or, if applicable, Series E
Preferred Stock), the holders of Series D Preferred Stock will be entitled to a
liquidation preference equal to an aggregate of $9.5 million reduced by the
product of 833,333 multiplied by the amount distributable per share of common
stock in such liquidation. If, prior to the conversion of the Series D Preferred
Stock into common stock (or, if applicable, Series E Preferred Stock), the
Company enters into a merger, consolidation, share exchange or similar
transaction, the rights of the holders of the Series D Preferred Stock will be
automatically convertible into the security delivered in exchange for the
Company's common stock unless the Company pays the liquidation preference prior
to or in connection with the closing of such transaction.
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American Stock Exchange Shareholder Approval Requirement
Since the Company's common stock is listed on the Amex, the Company is
obligated to comply with applicable rules of the Amex. Section 712(b) of the
Amex Rules provides that a company must obtain shareholder approval where the
present or potential issuance of common stock (or securities convertible into
common stock) could result in an increase in 20% or more of the company's
outstanding shares of common stock. Pursuant to the terms of the asset purchase
agreement, the number of shares of common stock issuable upon conversion of the
Acquisition Preferred Stock could exceed 20% of the Company's currently
outstanding shares of common stock. In order to eliminate the requirement to
obtain shareholder approval for the issuance of the Acquisition Preferred Stock
at the time of issuance, the terms of the Acquisition Preferred Stock provide
that it cannot convert into more than 19.99% of the Company's outstanding common
stock on the date of issuance of the Acquisition Preferred Stock without prior
shareholder approval.
The conversion of the Acquisition Preferred Stock will result in
dilution to the equity interests of other holders of the common stock.
Specifically, the issuance of the additional common stock will result in a
decrease of the relative voting control of the common stock issued and
outstanding prior to the conversion of the Acquisition Preferred Stock and
public resales of common stock following the conversion of the Acquisition
Preferred Stock may depress the prevailing market price of the common stock.
Even prior to the time of actual conversions and public resales, the market
"overhang" resulting from the mere existence of the Company's obligation to
honor such conversions could depress the market price of the common stock.
If the shareholders approve the proposal, there will be no further vote
on the matter at the time of conversion. If shareholder approval is not
obtained, the Earnout Preferred Stock and the Series D Preferred Stock will no
longer be convertible into common stock, but instead will automatically convert
into Series E Preferred Stock. In addition, if the proposal to increase the
Company's authorized capital is not approved, a portion of the Series B
Preferred Stock will automatically convert into Series E Preferred Stock. As
stated above, even if shareholder approval is obtained, the Earnout Preferred
Stock and the Series D Preferred Stock will convert in part into shares of
Series E Preferred Stock if the maximum number of shares of common stock
issuable upon conversion has been reached. In addition, even if shareholder
approval is obtained, each series of Earnout Preferred Stock issued with respect
to the last eight earnout periods and the Series D Preferred Stock will convert
into shares of Series E Preferred Stock if, at the time of conversion, the
Company has not fulfilled its obligation to register for resale under the
Securities Act the shares of common stock issuable upon conversion of each such
series.
Series E Preferred Stock
Dividends. The holders of Series E Preferred Stock will be entitled to
receive quarterly, cumulative dividends at a rate equal to 4% of the stated
value of the Series E Preferred Stock.
Conversion. The Series E Preferred Stock will not be convertible into
common stock.
Voting Rights. The Series E Preferred Stock will have the same voting
rights as the Earnout Preferred Stock and the Series D Preferred Stock.
Stated Value. The Series E Preferred Stock will have, in the aggregate,
a stated value equal to the value of the common stock into which the Series B
through Series D Preferred Stock would have been convertible if shareholder
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approval had been obtained. If such approval is obtained, the Series E Preferred
Stock will have a stated value equal to the Market Price of the common stock
otherwise issuable upon conversion of the Earnout Preferred Stock or the Series
D Preferred Stock, but for either the maximum limit on the number of shares of
common stock issuable, or the failure of the Company to fulfill its obligation
to register the shares of common stock issuable in any of the last eight earnout
periods or with respect to the Series D Preferred Stock.
Redemption. If shareholder approval is subsequently obtained, the
Company will have the obligation to redeem the Series E Preferred Stock on a pro
rata basis for the number of shares of common stock that would have been issued
if shareholder approval had been obtained plus an amount of additional shares of
common stock equal to the accrued dividends divided by the Market Price
determined on a quarterly basis as such dividends accrue.
At any point after a share of Series E Preferred Stock acquires a
stated value (but in any event not prior to the first anniversary of the closing
date), the Company shall have the right to redeem for cash equal to the stated
value plus accrued dividends some or all of such shares of Series E Preferred
Stock with a stated value, such redemption to be pro rata among such shares of
Series E Preferred Stock.
Commencing on the fifteen-month anniversary of the issuance of any
shares of Series E Preferred Stock, the holders will have the right to cause the
Company to redeem such shares within 90 days for, at the Company's election,
cash or registered shares of common stock equal to the stated value plus accrued
dividends then in effect with respect to each such share.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, holders of Series E
Preferred Stock will receive an amount equal to the stated value then in effect
with respect to each such share, plus any dividends accrued through such date.
Ranking. With respect to dividend rights and rights on liquidation,
dissolution and winding up, the Series E Preferred Stock will rank senior to the
Company's common stock, on a parity with each of the Series B through Series D
Preferred Stock and junior to the Company's Series A Preferred Stock.
Board Approval and Recommendation
The Company's board of directors has evaluated the benefits and risks
involved in purchasing the eCMS technology. The board of directors believes that
this acquisition will further expand the Company's range of marketing solutions
for Internet businesses and would be a significant step toward the Company's
goal of becoming a leading marketing and distribution solutions company. The
board concluded that the terms set forth in the asset purchase agreement were in
the best interests of the Company and unanimously approved the transaction (with
the abstention of Mr. Allegretti, who is an officer of CSEI). The board of
directors now solicits your proxy to be voted to approve the issuance of a
sufficient number of shares of the Company's common stock to be issued upon
conversion of the Series B through Series D Preferred Stock by approving this
proposal.
The board of directors unanimously (with Mr. Allegretti's abstention)
recommends a vote "FOR" the approval of the potential issuance of 20% or more
of the Company's outstanding common stock in connection with the conversion of
shares of Series B through Series D Preferred Stock.
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Independent Auditors
Friedman, Minsk, Cole & Fastovsky served as the Company's independent
certified public accountants for the fiscal year ended June 30, 2000. The board
of directors has selected Friedman, Minsk, Cole & Fastovsky as the Company's
independent certified public accountants for the current fiscal period. A
representative of Friedman, Minsk, Cole & Fastovsky is expected to be present at
the annual meeting with an opportunity to make a statement if the representative
desires to do so and is expected to be available to respond to appropriate
questions from shareholders.
Solicitation of Proxies
The solicitation of proxies in the enclosed form is made on behalf of
the Company and the cost of this solicitation is being paid by the Company. In
addition to the use of the mails, proxies may be solicited personally or by
telephone or telegraph using the services of directors, officers and regular
employees of the Company at nominal cost. Banks, brokerage firms and other
custodians, nominees and fiduciaries will be reimbursed by the Company for
expenses incurred in sending proxy material to beneficial owners of the common
stock.
2001 Annual Meeting Shareholder Proposals
In order for any shareholder proposal to be presented at the annual
meeting of shareholders to be held in 2001 or to be eligible for inclusion in
the Company's proxy statement for such meeting, it must be received by the
Company at its principal executive office in Marina del Rey, California, by
August 28, 2001. Pursuant to Rule 14a-4 promulgated by the Securities and
Exchange Commission, shareholders are advised that the Company's management
shall be permitted to exercise discretionary voting authority under proxies it
solicits and obtains for the Company's 2001 annual meeting of shareholders with
respect to any proposal presented by a shareholder at such meeting, without any
discussion of the proposal in the Company's proxy statement for such meeting,
unless the Company receives notice of such proposal at its principal office in
Marina del Rey, California, not later than November 11, 2001.
Other Matters
The board of directors knows of no matter which will be presented for
consideration at the annual meeting other than the matters referred to in this
proxy statement. Should any other matter properly come before the annual
meeting, it is the intention of the persons named in the accompanying proxy to
vote such proxy in accordance with their best judgment.
By Order of the Board of Directors
Lynda Gibson
Secretary
Marina del Rey, California
December 26, 2000
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APPENDIX I
3Dshopping.com
AUDIT COMMITTEE CHARTER
PURPOSE:
The Audit Committee of 3Dshopping.com (the "Corporation") assists the Board of
Directors by providing a continuing review of the Corporation's internal
financial and accounting systems, financial reporting, accounting practices and
policies, internal and external audit functions and procedures for monitoring
compliance with applicable laws and regulations.
COMPOSITION, EXPERTISE AND TERM OF OFFICE:
Composition:
The Audit Committee shall be composed of Members of the Board of Directors. The
Audit Committee shall consist of at least three (3) current Directors appointed
annually by the Board of Directors, each of whom has no relationship to or with
the Corporation which might interfere with the exercise of his or her
independence from management and the Corporation.
One member of the Audit Committee shall be appointed annually by the Board of
Directors to serve as its Chair.
A Director who is or was an employee of the Corporation or any of its affiliates
may not serve on the Audit Committee until three (3) years following termination
of his or her employment with the Corporation or such affiliate(s).
A Director who is a partner, controlling shareholder or executive officer of an
organization that has a business relationship with the Corporation, or who has a
direct business relationship with the Corporation (e.g., a consultant) may serve
on the Audit Committee only if the Corporation's Board of Directors determines
in the reasonable exercise of its business judgment that the relationship does
not interfere with such Director's exercise of independent judgment. To
determine the independence of a Director, the Board of Directors shall consider
the materiality of the relevant business relationship to the Corporation, to the
Director and, if applicable, to the organization with which such Director is
affiliated.
A Director may serve on the Audit Committee without such a determination by the
Board of Directors three (3) years after termination of the relationship
described in the preceding paragraph.
A Director who is employed as an executive of another corporation where any of
the Corporation's executives serve on such other corporation's Compensation
Committee may not serve on the Corporation's Audit Committee.
<PAGE>
A Director who is an immediate family member of an individual who is an
executive officer of the Corporation or any of its affiliates may not serve on
the Audit Committee until three (3) years following the termination of such
immediate family member's relationship to the Corporation
A Director who has one or more of the above described relationships may serve on
the Audit Committee if the Corporation's Board of Directors, under exceptional
and limited circumstances, determines that membership on the Audit Committee by
the particular Director is required by the best interests of the Corporation and
its shareholders and the Corporation discloses, in the next annual proxy
statement subsequent to such determination, the nature of the relationship and
the reasons for its determination.
Expertise:
--------- -
Each Audit Committee Member shall be financially literate, or shall become so
within a reasonable period of time after his or her appointment to the Audit
Committee. Additionally, at least one Member of the Audit Committee shall
currently possess accounting or related financial management expertise (as
determined and interpreted in the Board of Directors' reasonable business
judgment).
Each Audit Committee Member shall possess an understanding of the Corporation's
business and products, recognition and appreciation of the Audit Committee's
role in corporate governance, knowledge of the Corporation's risks and systems
of control, integrity, dedication of time and energy, independent judgment and
the ability to offer insight, new perspective and constructive suggestions.
Meetings:
--------
The Audit Committee shall meet at least once each year and more often
(including, if appropriate, by conference telephone) as and if necessary.
ROLES AND RESPONSIBILITIES:
The responsibilities of the Audit Committee shall be as set forth below.
A. Internal Control
o Evaluate whether management is effectively communicating the
importance of internal controls and ensuring that all affected
employees possess a clear understanding of their roles and
responsibilities;
o Determine whether internal control recommendations made by the
external auditors have been implemented by management; and
o Ensure that the external auditors keep the Audit Committee fully
informed about deficiencies in internal controls, illegal acts, fraud,
and other financial control and disclosure matters.
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B. Financial Reporting
1. General
o Review significant accounting and reporting issues, including recent
professional and regulatory pronouncements, and understand their
impact on the Corporation's financial statements; and
o Consult with management and the external auditors about significant
risks and exposures and the Corporation's plans to minimize the same.
2. Annual Financial Statements
o Review the annual financial statements and determine whether they are
consistent with the information known to Audit Committee members and
whether the Corporation's financial statements are prepared in
accordance with applicable accounting principles;
o Focus on complex and/or unusual transactions;
o Focus on judgmental areas such as those involving valuation of assets
and liabilities, including, for example, the accounting for and
disclosure of: obsolete or slow-moving inventory; warranty, product,
and environmental liabilities, and litigation reserves;
o Focus on significant areas of activity, such as acquisitions;
o Meet with management and the external auditors to review the
Corporation's financial statements and the results of the audit;
o Consider management's handling of proposed audit adjustments
identified by the external auditors;
o Review the MD&A and other sections of the Corporation's annual report
before release and determine whether the information is adequate and
consistent with the Audit Committee members' knowledge of the
Corporation and its operations; and
o Ensure that the external auditors communicate required matters to the
Audit Committee.
3. Interim Financial Statements
o Be informed on how management develops quarterly financial
information, the extent to which the external auditors review
quarterly financial information and whether that review is performed
on a pre- or post- issuance basis;
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o Meet with management and, if a pre-issuance review was completed, with
the external auditors, either telephonically or in person, to review
the interim financial statements and the results of the review. This
action may be taken alone by the Audit Committee Chair;
o To gain insight into the fairness of the interim financial statements
and disclosures made thereby, obtain explanations from management and
the external auditors as to whether:
o Generally accepted accounting principles have been consistently
applied;
o There are any actual or proposed changes in accounting or financial
reporting practices;
o There are any significant or unusual events or transactions;
o The Corporation's financial and operating controls are functioning
effectively;
o The Corporation has complied with the terms of any loan of other
financing agreements; and
o The interim financial statements contain adequate and all appropriate
disclosures.
o Ensure that the external auditors effectively communicate required
matters to the Audit Committee.
4. Compliance with applicable Laws and Regulations
o Review the effectiveness of the Corporation's system for monitoring
compliance with laws and regulations and the results of management's
investigation and follow-up (including disciplinary action taken) with
respect to any fraudulent acts or accounting irregularities;
o Periodically obtain updates regarding compliance issues;
o Be satisfied that all regulatory compliance matters have been
considered and addressed in the preparation of the Corporation's
financial statements; and
o Review the findings of any examination by regulatory agencies (such as
the Securities and Exchange Commission).
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5. Compliance with Code of Conduct
o Ensure that a code of conduct is formalized in writing and that all
employees are aware of and agree to abide by it;
o Evaluate whether management is effectively communicating the
importance of the code of conduct and the guidelines for acceptable
business practices;
o Review the Corporation's program for monitoring compliance with the
code of conduct; and
o Periodically obtain updates regarding code of conduct compliance.
6. External Audit
o Communicate to the external auditors that they are ultimately
accountable to the Board of Directors and the Audit Committee;
o Review the external auditors' scope of audit and methodology;
o Review the performance of the external auditors and recommend to the
Board of Directors the appointment or discharge of the external
auditors; and
o Confirm the independence of the external auditors by reviewing the
nonaudit services provided to the Corporation and the auditors'
assertion of their independence in accordance with applicable
professional standards.
7. Other Responsibilities
o Meet with the external auditors and management in separate sessions to
discuss any matters that the Audit Committee or these groups believe
should be discussed privately;
o Ensure that significant findings and recommendations made by the
external auditors are received and discussed by the Board of Directors
on a timely basis;
o Review legal matters that could significantly impact the Corporation's
financial statements;
o Perform other oversight functions as requested by the Board of
Directors; and
o Review and update this Audit Committee Charter and receive approval of
changes from the Board of Directors.
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8. Reporting Responsibilities
o Regularly update the Board of Directors regarding Audit Committee
activities and make appropriate recommendations;
o Disclose to shareholders in the Corporation's proxy statement or
annual report that the Corporation has adopted an Audit Committee
Charter and that the Audit Committee has satisfied its
responsibilities thereunder; and
o Prepare a letter for inclusion in the annual report and Form 10-K
disclosing whether or not the following have occurred:
o Management and the external auditors have reviewed and discussed
the audited financial statements with the Audit Committee;
o The members of the Audit Committee have discussed among
themselves the results of their discussions with management and
the external auditors; and
o The Audit Committee, in reliance on its review and discussions
with management and the external auditors, believes the
Corporation's financial statements to be fairly presented in
conformity with GAAP.
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3DSHOPPING.COM (d/b/a O2 ESSENTIAL MARKETING TECHNOLOGIES) - PROXY
Solicited by the Board of Directors
for Annual Meeting to be held on January 31, 2001
The undersigned shareholder(s) of 3DSHOPPING.COM (d/b/a O2 ESSENTIAL
P MARKETING TECHNOLOGIES), a California corporation ("Company"), hereby
appoints Terry L. Gourley and Joel P. Gayner, or either of them, with full
power of substitution and to act without the other, as the agents,
attorneys and proxies of the undersigned, to vote the shares standing in
the name of the undersigned at the Annual Meeting of Shareholders of the
Company to be held on January 31, 2001 and at all adjournments thereof.
This proxy will be voted in accordance with the instructions given below.
If no instructions are given, this proxy will be voted FOR all of the
following proposals.
R
1. Election of the following Directors:
O FOR all nominees listed below, except WITHHOLD AUTHORITY to vote
as marked to the contrary below |_| for all nominees listed below |_|
Terry L. Gourley, Joel P. Gayner,
Maryann O'Donnell and Jon A. Allegretti
X
INSTRUCTIONS: To withhold authority to vote for any individual nominee,
write that nominee's name in the space below.
-------------------------------------
Y
2. To approve the change of the state of incorporation of the Company
from California to Delaware, the effect of which would result in a
change of the Company's name from "3Dshopping.com" to "O2 Essential
Marketing Technologies, Inc." and an increase in the number of
authorized shares of capital stock from 15,000,000 to 120,000,000
shares, consisting of 100,000,000 shares of common stock, $.001 par
value, and 20,000,000 shares of preferred stock, $.001 par value.
FOR |_| AGAINST |_| ABSTAIN |_|
3. To approve the 2000 Performance Equity Plan.
FOR |_| AGAINST |_| ABSTAIN |_|
4. To approve the potential issuance of 20% or more of the Company's
outstanding common stock in connection with the conversion of shares
of Series A Convertible Preferred Stock.
FOR |_| AGAINST |_| ABSTAIN |_|
5. To approve the potential issuance of 20% or more of the Company's
outstanding common stock in connection with the conversion of shares
of Series B through Series D Preferred Stock.
FOR |_| AGAINST |_| ABSTAIN |_|
6. In their discretion, the proxies are authorized to vote upon such
other business as may come before the meeting or any adjournment
thereof.
|_| I plan to attend the Annual Meeting.
Date ______________________________
___________________________________
Signature
___________________________________
Signature if held jointly
Please sign exactly as name appears above. When shares
are held by joint tenants, both should sign. When
signing as attorney, executor, administrator, trustee
or guardian, please give full title as such. If a
corporation, please sign in full corporate name by
President or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.
