<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-QSB
(MARK ONE)
<TABLE>
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ________ TO ________
</TABLE>
COMMISSION FILE NUMBER 0-15324
STAR SCIENTIFIC, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 52-1402131
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
16 SOUTH MARKET STREET
PETERSBURG, VIRGINIA 23803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(804) 861-0681
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Check whether the issuer: (1) filed all reports to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 58,495,241 shares of Common
Stock, $.01 par value, and 61 shares of Series B Convertible Preferred Stock
(convertible into 200,080 shares of Common Stock), outstanding as of October 29,
1999.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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<PAGE> 2
STAR SCIENTIFIC, INC.
TABLE OF CONTENTS
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Index to Condensed Consolidated Financial Statements........ F-1
Condensed Consolidated Balance Sheets as of September 30,
1999 (Unaudited) and December 31, 1998.................... F-2
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 1999 and
1998 (Unaudited).......................................... F-3
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 (Unaudited)...... F-4
Notes to Condensed Consolidated Financial Statements for the
three and nine months ended September 30, 1999 and 1998
(Unaudited)............................................... F-5
Item 2. Management's Discussion and Analysis or Plan of Operation... 3-6
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 7
Signatures........................................................... 8
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2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
An index to the financial statements of the Company filed as a part of this
report appears at Page F-1. The financial statements of the Company appear at
Pages F-2 through F-6 of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL; RECENT DEVELOPMENTS
At its inception in 1990 and through 1994, the Company primarily was
engaged in the business of manufacturing cigars and cigarettes for others as a
contract manufacturer. By late 1994, the Company had commenced development and
commercialization of its own brands of discount cigarettes using primarily
Virginia flue-cured tobacco, without additives, and competed principally on the
basis of price. At about that same time, the Company commenced a program of
research and development relating to a range of safer tobacco and tobacco
cessation products wherein the Company filed and secured certain Investigatory
New Drug applications (INDs) from the U. S. Food and Drug Administration (FDA)
to commence human testing. Shortly thereafter, the Company shifted its near-term
research focus to reducing the toxicity of the tobacco leaf and tobacco smoke.
In pursuance of that focus, the Company filed and received patents, as well as
filed other patents which are now pending, pertaining to a tobacco leaf curing
process which has been named StarCure(TM). The StarCure(TM) process, which
involves the use of specially designed curing barns manufactured exclusively for
the Company by Powell Manufacturing Corporation (the largest barn manufacturer
in the United States), virtually precludes and/or substantially reduces the
formation in the tobacco leaf of carcinogenic tobacco specific nitrosamines
(TSNAs), which are widely believed by medical and scientific experts to be among
the most carcinogenic compounds present in tobacco and in side stream tobacco
smoke.
The Company's long-term strategy is to aggressively increase and expand its
production capacity for StarCure(TM) processed tobacco, through its 2-step
barn/microwave processing facilities, and to continue to explore the development
of safer smoked and smokeless tobacco products, as well as tobacco cessation
products. The Company intends to integrate into its present discount brands its
low TSNA StarCure(TM) tobacco within the next 24-30 months. The Company's
central focus will continue to be to reduce the health hazards associated with
the use of tobacco products. The Company fully accepts the evidence showing
links between tobacco smoking and a variety of diseases and premature death and
believes that it is unlikely that the health risks of smoked tobacco can be
completely eliminated. Nevertheless, in a world where one billion people smoke,
there is an urgent need to reduce the toxicity of smoked tobacco to the maximum
extent possible using available technology. The Company believes that it has a
corporate responsibility to continue to expand its research and development
efforts to manufacture tobacco products that are as safe as technologically
possible. The Company has now demonstrated that the method it has developed and
patented for curing tobacco, i.e., the StarCure(TM) process, can be scaled up to
meet broad commercial needs. This coming year it anticipates that it will have
the ability to produce in excess of 20 million pounds of StarCure(TM) processed
tobacco in order not only to fulfill its contractual obligations under its
recently executed agreement with Brown & Williamson (see below), but to provide
a significant portion of that tobacco for integration into its own discount
brands: MAIN STREET(R), SPORT(R), VEGAS(R) and GUNSMOKE(R) (now G.SMOKE(R)).
In pursuance of its long-term strategy, on October 12, 1999, the Company
and Brown & Williamson Tobacco Corporation ("B&W") entered into a long-term
contract (the "B&W Contract") under which B&W agreed to purchase Star Cure(TM)
tobacco. During the third quarter and early fourth quarter of 1999, the Company
produced and delivered to B&W over three million pounds of low TSNA Star
Cure(TM) processed tobacco. This tobacco will be used to explore the production
feasibility and commercial acceptance of low TSNA cigarettes. In each of the
years 2000 and 2001, B&W is obligated to purchase five million pounds of
Virginia flue-cured tobacco that has been cured using the Star Cure(TM) process;
and B&W has an option to purchase three million pounds of burley tobacco cured
using the same process. B&W also has the option to become the exclusive
purchaser of tobacco cured using the Star Cure(TM)process in each of the years
2002
3
<PAGE> 4
through 2004, if it purchases from the Company at least 30 million pounds of
tobacco in each of those years. During the same period and beyond that period if
certain conditions are met, the Company has agreed to provide sufficient
quantities of tobacco cured using the Star Cure(TM) process to meet the demands
of B&W and all participating B&W affiliates, including British American Tobacco
PLC, the second largest tobacco company in the world. The B&W Contract also
provides that B&W will finance the Company's purchase of 600 of the specially
designed curing barns and, subject to certain preconditions, an additional 400
such barns. In addition to the sale of tobacco and the financing of curing
barns, B&W has agreed to collaborate with the Company in the development of a
new low TSNA cigarette and the possible licensing of trademark rights to B&W in
connection with the sale of this new product.
RESULTS OF OPERATIONS
Substantially all of the Company's revenues in 1999 have been derived from
sales of its four brands of discount cigarettes using primarily Virginia
flue-cured tobacco and activated charcoal filters, as well as sales of its low
TSNA tobacco. The third quarter results of operation reflected a continued
upswing in sales of the Company's discount cigarettes as a result of growing the
customer base across the country, including the addition of several major retail
chains. Slight increases in product pricing had a positive effect, contributing
somewhat to higher revenue from sales. In addition, the Company's sales team's
emphasis on the Company's strategy to integrate into its products, within the
next 24 to 30 months, the low TSNA tobacco assisted in establishing with its
distribution network of over 300 businesses a connection to the Company's
mission to produce less toxic tobacco products. However, no health claims with
respect to the Company's low TSNA tobacco will be made directly or indirectly
until there is sufficient science to justify such claims.
Sales in the third quarter of 1999 were $27.7 million, an increase of $23.3
million, or 523% over the third quarter of 1998, and 80% over the second quarter
of 1999. Year-to-date sales in 1999 of $58.9 million reflect an increase of
$47.6 million, or 422% over 1998 year-to-date sales. Included in the third
quarter of 1999 are sales to B&W of $4.2 million in low TSNA tobacco, with the
balance of B&W's purchase order (approximately $4.8 million) to be delivered in
October and November 1999. There were no such sales in 1998, except for minor
leaf deliveries to major tobacco companies during the development stage of the
Company's low TSNA program.
Marketing and distribution expenses totaled $1.6 million for the third
quarter, which is in line with the increased volume of sales, and reflects
incentive compensation to sales personnel, and compares favorably as a
percentage of sales for both the quarterly (5.6% in 1999 versus 7.3% in 1998)
and year-to-date (approximately 8% in both periods) periods. The Company's
marketing and distribution expenses are expected to grow significantly through
the balance of 1999 and 2000 as the Company expands its commercialization
capabilities.
General and administrative expenses for the third quarter included
operating costs for the Company's Chase City facility. This facility processes
the low TSNA tobacco during the months of June through November. Chase City
facility costs in 1998 were significantly lower, due to the experimental nature
of the operation at the time, and were classified in 1998 as research and
development costs, in keeping with the Company's mission at the time to develop
the Star Cure(TM) process to a commercially feasible production level, which was
accomplished in 1999. Other third quarter and year-to-date general and
administrative costs, when compared to the comparable periods in 1998, are
associated with the increased sales volume, as well as the legal and consulting
costs associated with the Company's technical recruitment efforts and expansion
of its Scientific Advisory Board.
Research and development expenses in 1999 consist primarily of costs
incurred by the Company for consulting services on public policy and regulatory
matters, and for professional fees and expenses in connection with the Company's
continuing research and development programs. Research and development expenses
were significantly higher in 1998 primarily as a result of costs incurred in
this period specifically related to the development of its TSNA reduction
technology.
4
<PAGE> 5
As a percentage of net sales, total operating expenses compared favorably
in 1999 at approximately 17% for the third quarter and 19% for year-to-date, a
reduction from approximately 30% and 35%, respectively, for the comparable
periods in 1998.
Net interest income in 1999 reflects positively against net interest
expense in 1998 for both periods, reflecting interest on higher 1999 cash
balances generated by the improved operating results.
Income tax expense reflects use of the Company's net operating loss
carryover from 1998, which will be fully utilized in 1999.
Net income of $3.4 million and $6.3 million for the three and nine months
ended September 30, 1999, respectively, compared very favorably with net losses
of ($1.2 million) and ($3.2 million) for the comparable 1998 periods. Earnings
per share for the three and nine months ended September 30, 1999 were $.06 and
$.15, respectively, versus ($.13) and ($.45) per share for the comparable 1998
periods. Weighted average shares outstanding were 57,870,048 and 41,649,923
during the three and nine months ended September 30, 1999, respectively, versus
9,398,001 and 7,045,663 for the comparable 1998 periods.
LIQUIDITY ANALYSIS
Accounts receivable and accounts payable throughout 1999 have been current
and the Company has normal industry terms with all of its suppliers, a situation
that did not exist at all in 1998. During the third quarter 1999, the Company
incurred approximately $3 million in capital expenditures, virtually all of it
as part of the Star Cure(TM) barn production program with Powell Manufacturing,
which has continued into the fourth quarter. All of the expenditures were funded
from operations. Year-to-date capital expenditures have totaled approximately
$5.5 million, mostly attributable to the Star Cure(TM) barn program, although
there have been some relatively minor expenditures for normal office technology
and manufacturing equipment.
During the third quarter 1999, the Company negotiated a line of credit with
a new lender, which is to be collateralized by accounts receivable from its
cigarette business, in the amount of $3 million, and will replace its existing
$1 million line. Closing is expected by the end of November. There were no
borrowings against the line of credit at September 30, 1999.
In connection with the B&W Contract, in October 1999 the Company received
from B&W a non-refundable deposit of $6 million, which is to be applied toward
B&W's year 2000 Star Cure(TM) processed tobacco purchase orders. These orders
are expected to be at least eight million pounds. In addition, as described
above, B&W has agreed to loan the Company the capital necessary to finance the
purchase of up to 1,000 curing barns designed by the Company and specially
manufactured for the Company by Powell Manufacturing, over 235 of which already
have been delivered. The Company has expended approximately $4.7 million to date
for the purchase of curing barns. The credit facility with B&W enables the
Company to borrow up to $22,000 per barn and the barns purchased to date and
paid for from operations will be financed through B&W.
In October 1999, the Company also received $1 million in proceeds from the
exercise of a warrant to purchase 500,000 shares of Company common stock. The
Company currently has warrants outstanding to purchase a total of one million
shares of common stock that are exercisable until September 2000. All of such
warrants have exercise prices of $2.00 per share.
The Company believes that its existing working capital, together with
anticipated earnings from its operations, will be sufficient to meet its
liquidity and capital requirements in the foreseeable future. The Company's
need, if any, to raise additional funds to meet its working capital and capital
requirements will depend upon numerous factors, including the results of its
marketing and sales activities, any escrow obligations it may be required to
comply with under the Master Settlement Agreement (see below), the success of
the Company's new product development efforts and competitive conditions.
MASTER TOBACCO SETTLEMENT AGREEMENT
In November 1998, 46 states and several U.S. territories entered into a
settlement agreement to resolve litigation that had been instituted by them
against the major tobacco manufacturers. The Company was not
5
<PAGE> 6
named as a defendant in any of the litigation matters and chose not to become a
participating manufacturer under the terms of the Master Settlement Agreement.
As a nonparticipating manufacturer, the Company potentially would be required to
satisfy certain escrow obligations under statutes which the Master Settlement
Agreement required participating states to pass, if they were to receive the
full benefits of the settlement. The so-called "level playing field" statutes
require nonparticipating manufacturers to fund escrow accounts that could be
used to satisfy judgments or settlements in lawsuits filed by the participating
states against such nonparticipating tobacco manufacturers. Absent a legal
challenge to the state specific statutes or an agreement with respect to the
funding of the required escrow accounts, the Company would be obligated to place
an amount equal to $1.88 per carton for 1999, and increased amounts per carton
for subsequent years, in escrow accounts beginning April 2000 for sales of
cigarettes occurring in each such state after the effective date of each state
specific statute. Such escrowed funds will be used to fund tobacco-related
litigation or settlements and if not so used, returned to the Company after 25
years. Also, absent a challenge to the state specific statutes or some
accommodation as to the payment of the escrow amounts, the failure to pay the
required escrow could result in penalties to the Company and potential
restrictions on its ability to sell tobacco products within particular states.
The Company is continuing to assess its options with respect to the state
specific statutes, including a range of legal challenges to the statutes and/or
the Master Settlement Agreement under a variety of legal theories, including
unconstitutional taking of property. The Company has assembled a team of highly
respected trial lawyers, lobbyists and constitutional scholars to assist the
Company in considering and implementing these options.
YEAR 2000 ISSUES
The Company has made an internal assessment of its information technology
systems relating to Year 2000 issues at the Company's Virginia facilities. The
assessment resulted in the development of a plan to prepare the Company for Year
2000 readiness. The plan included replacement of certain hardware systems and
the upgrading or replacement of software applications. The costs for
implementation of the Company's plan were in the $75,000-$100,000 range; all
such costs were expensed as incurred. Implementation has been completed and the
domestic operations of the Company have not been materially disrupted by the
implementation process.
There can be no assurance that the Company's assessment of its Year 2000
readiness resulted in the identification of all material issues, or that its
plan to address the issues identified will result in the Company's being Year
2000 ready.
The Company has contacted key vendors to obtain assurances that the
operations of a key vendor, as they affect the Company, will not be interrupted
because of Year 2000 issues. The Company has received assurances from its key
vendors as to their compliance with Year 2000 issues. In the event that any of
its vendors is not compliant as to Year 2000 issues, the Company believes this
non-compliance will not cause a material interruption in the Company's business
operations. Any such interruption, however, could have a material adverse effect
upon the operations of the Company.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION" RELATE TO FUTURE EVENTS AND EXPECTATIONS AND AS SUCH CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THE WORDS "ANTICIPATES", "BELIEVES", "ESTIMATES",
"EXPECTS", "PLANS", "INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS REFLECT THE COMPANY'S CURRENT
BELIEFS AND ARE BASED UPON INFORMATION CURRENTLY AVAILABLE TO IT. ACCORDINGLY,
SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH MAY CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, SUCH
STATEMENTS. THESE RISKS, UNCERTAINTIES AND CONTINGENCIES INCLUDE, WITHOUT
LIMITATION, THE CONTINUED DEVELOPMENT AND COMMERCIALIZATION OF THE COMPANY'S
PROPRIETARY PATENTED PROCESS FOR
6
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REDUCING AND/OR VIRTUALLY ELIMINATING TSNAS IN THE PROCESSING OF TOBACCO LEAF,
POTENTIAL DISPUTES CONCERNING THE COMPANY'S INTELLECTUAL PROPERTY, POTENTIAL
DELAYS IN OBTAINING ANY NECESSARY GOVERNMENT APPROVALS OF THE COMPANY'S PROPOSED
REDUCED RISK TOBACCO PRODUCTS, MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS, THE
EFFECT OF YEAR 2000 ISSUES ON CUSTOMER ORDERING PATTERNS, COMPETITION FROM
COMPANIES WITH GREATER RESOURCES THAN THE COMPANY, THE COMPANY'S DECISION NOT TO
JOIN THE MASTER SETTLEMENT AGREEMENT ("MSA"), THE ADOPTION OF REQUIRED STATE
STATUTES AND ANY SUBSEQUENT MODIFICATION OF THE MASTER SETTLEMENT AGREEMENT. THE
IMPACT OF POTENTIAL LITIGATION, IF INITIATED AGAINST OR BY INDIVIDUAL STATES
THAT HAVE ADOPTED THE MSA, COULD BE MATERIALLY ADVERSE TO THE COMPANY. THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR ADVISE UPON ANY SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
FILING OF THIS QUARTERLY REPORT OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED
EVENTS. SEE ADDITIONAL DISCUSSION PREVIOUSLY INCLUDED IN THE COMPANY'S FORMS
10-QSB AND 10-KSB.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
3.01 Restated Certificate of Incorporation. (Form 10-KSB for
fiscal year ended December 31, 1992).*
3.02 Certificate of Amendment of Restated Certificate of
Incorporation, dated March 25, 1993 and effective April 2,
1993 (Form 10-KSB for fiscal year ended December 31, 1996).*
3.04 Certificate of Amendment of Restated Certificate of
Incorporation, dated December 15, 1998 (Form 8-K dated
January 15, 1999).*
3.05 Bylaws of the Company as Amended to Date (Form 10-KSB for
fiscal year ended December 31, 1992).*
4.02 Certificate of Designations, Preferences and Rights of Class
A Convertible Preferred Stock (Form 8-K dated June 7,
1993).*
4.03 Certificate of Designations of Series B Convertible
Preferred Stock (Form 10-KSB for fiscal year ended December
31, 1996).*
10.28 Executive Employment Agreement dated as of April 12, 1999
entered into by the Company and James A. McNulty.
10.29 Stock Option Agreement dated as of April 12, 1999 entered
into by the Company and James A. McNulty.
10.30 Restricted Stock Award Agreement dated as of April 12, 1999
entered into by the Company and James A. McNulty.
</TABLE>
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* These items are hereby incorporated by reference from the exhibits to the
filing or report indicated (Commission File No. 0-15324) and are hereby made a
part of this report.
(b) Form 8-K
No report on Form 8-K was filed during the fiscal quarter for which
this report is filed.
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<PAGE> 8
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STAR SCIENTIFIC, INC.
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Date: November 15, 1999 /s/ JAMES A. MCNULTY
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Authorized Signatory and Chief Financial Officer
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INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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F-2 Star Scientific, Inc. and Subsidiaries Condensed
Consolidated Balance Sheets as of September 30, 1999
(Unaudited) and December 31, 1999
F-3 Star Scientific, Inc. and Subsidiaries Condensed
Consolidated Statements of Operations for the Three and
Nine Month Periods Ended September 30, 1999 and 1998
(Unaudited)
F-4 Star Scientific, Inc. and Subsidiaries Condensed
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (Unaudited)
F-5 Star Scientific, Inc. and Subsidiaries Notes to Condensed
Consolidated Financial Statements for the Three and Nine
Months Ended September 30, 1999 and 1998 (Unaudited)
</TABLE>
F-1
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STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,118,065 $ 102,695
Accounts receivable:
Trade, net............................................. 3,403,768 1,497,457
Other.................................................. 93,954 68,271
Inventories............................................... 1,198,362 636,456
Prepaid expenses and other current assets................. 104,716 197,401
----------- -----------
Total current assets.............................. 5,918,865 2,502,280
Property, plant and equipment, net.......................... 6,631,446 1,704,569
Intangibles, net............................................ 94,482 135,928
Notes receivable, net....................................... 120,823 92,379
Other assets................................................ 81,915 --
----------- -----------
$12,847,531 $ 4,435,156
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of notes payable....................... $ 464,000 $ 379,082
Accounts payable, trade................................... 2,211,563 2,516,658
Federal excise taxes payable.............................. 683,299 876,875
Accrued expenses.......................................... 1,101,262 646,115
Income taxes payable...................................... 2,021,000 --
----------- -----------
Total current liabilities......................... 6,481,124 4,418,730
Notes payable, less current maturities...................... 300,062 611,584
----------- -----------
Total liabilities................................. 6,781,186 5,030,314
----------- -----------
Commitments and contingencies
Redeemable preferred stock (Series A, convertible, 250
shares issued and outstanding, liquidation value at
December 1998)............................................ -- 44,000
----------- -----------
Stockholders' equity (deficit):
Common stock(A)........................................... 579,275 98,198
Preferred stock(B)........................................ 1 143
Additional paid-in capital................................ 8,566,964 6,668,392
Accumulated deficit....................................... (1,079,895) (7,326,724)
Unearned compensation..................................... -- (79,167)
----------- -----------
8,066,345 (639,158)
Less stock subscription receivable........................ (2,000,000) --
----------- -----------
Total stockholders' equity (deficit).............. 6,066,345 (639,158)
----------- -----------
$12,847,531 $ 4,435,156
=========== ===========
</TABLE>
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(A) ($.01 par value, 100,000,000 shares authorized, 57,927,560 and 9,819,740
shares issued and outstanding at September 30, 1999 and December 31, 1998,
respectively)
(B) (Series B, convertible; 15,000 shares authorized, 61 and 14,086 shares
issued and outstanding at September 30, 1999 and December 31, 1998,
respectively)
See notes to condensed consolidated financial statements.
F-2
<PAGE> 11
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.......................................... $27,700,054 $ 4,448,853 $58,917,606 $11,286,618
Less:
Cost of goods sold............................... 9,236,341 2,086,643 17,372,531 5,140,608
Excise taxes on products......................... 8,972,076 2,082,802 21,499,171 5,037,752
----------- ----------- ----------- -----------
Gross profit..................................... 9,491,637 279,408 20,045,904 1,108,258
----------- ----------- ----------- -----------
Operating expenses:
Marketing and distribution expenses.............. 1,563,316 323,966 4,544,895 893,024
General and administrative expenses.............. 3,145,548 522,494 6,410,619 1,887,447
Research and development......................... 101,910 506,298 467,431 1,208,356
----------- ----------- ----------- -----------
Total operating expenses.................. 4,810,774 1,352,758 11,422,945 3,988,827
----------- ----------- ----------- -----------
Operating income (loss)................... 4,680,863 (1,073,350) 8,622,959 (2,880,569)
----------- ----------- ----------- -----------
Other (income) expenses:
Interest expense (net of interest income)........ (57,076) 146,383 (18,833) 303,494
Other............................................ -- 6,946 (11,040) 305,482
----------- ----------- ----------- -----------
(57,076) 153,329 (29,873) 608,976
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes..................... 4,737,939 (1,226,679) 8,652,832 (3,489,545)
Income tax expense................................. 1,331,000 -- 2,406,000 --
----------- ----------- ----------- -----------
Income (loss) from continuing operations......... 3,406,939 (1,226,679) 6,246,832 (3,489,545)
Loss from discontinued operations (no applicable
income taxes).................................... -- -- -- --
----------- ----------- ----------- -----------
Income (loss) before extraordinary item............ 3,406,939 (1,226,679) 6,246,832 (3,489,545)
----------- ----------- ----------- -----------
Extraordinary gain from extinguishment of debt (no
applicable income taxes)......................... -- -- -- 293,606
----------- ----------- ----------- -----------
Net income (loss)......................... $ 3,406,939 $(1,226,679) $ 6,246,832 $(3,195,939)
=========== =========== =========== ===========
Basic income (loss) per common share:
Continuing operations............................ $ .06 $ (.13) $ .15 $ (.49)
Discontinued operations.......................... -- -- -- --
Extraordinary gain............................... -- -- -- .04
----------- ----------- ----------- -----------
Net income (loss)......................... $ .06 $ (.13) $ .15 $ (.45)
=========== =========== =========== ===========
Diluted income (loss) per common share:
Continuing operations............................ .06 (.13) .11 (.49)
Discontinued operations.......................... -- -- -- --
Extraordinary gain............................... -- -- -- .04
----------- ----------- ----------- -----------
Net income (loss)......................... $ .06 $ (.13) $ .11 $ (.45)
=========== =========== =========== ===========
Weighted average shares outstanding................ 57,870,048 9,398,001 41,649,923 7,045,663
=========== =========== =========== ===========
Diluted weighted average shares outstanding........ 59,991,198 9,398,001 59,195,614 7,045,663
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE> 12
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss)......................................... $ 6,246,832 $(1,969,260)
----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, amortization and other non-cash
charges............................................... 569,802 840,752
Compensation expense resulting from issuance of common
stock and options..................................... 414,675 --
Extraordinary gain on extinguishment of debt........... -- (251,767)
Increase (decrease) in cash resulting from changes in:
Current assets....................................... (1,964,828) (116,305)
Current liabilities.................................. 1,977,475 1,013,692
Other assets......................................... (513,700) --
----------- -----------
Net cash provided by (used in) operating activities......... 6,730,256 (482,888)
----------- -----------
Investing activities
Increase in notes receivable.............................. (28,444) --
Purchases of property and equipment....................... (5,459,838) (98,500)
Proceeds from disposal of property and equipment.......... -- 175,000
Purchases of intangible assets............................ -- (460)
----------- -----------
Net cash provided by (used in) investing activities......... (5,488,282) 76,040
----------- -----------
Financing activities:
Proceeds from notes payable............................... -- 48,500
Payments on notes payable................................. (226,604) (1,127,893)
Proceeds from sale of stock............................... -- 1,488,679
----------- -----------
Net cash provided by (used in) financing activities......... (226,604) 409,286
----------- -----------
Increase in cash............................................ 1,015,370 2,438
Cash, beginning of period................................... 102,695 10,929
----------- -----------
Cash, end of period......................................... $ 1,118,065 $ 13,367
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... $ 65,875 $ 140,631
=========== ===========
Income taxes........................................... $ 385,000 $ --
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE> 13
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1. The financial statements and notes thereto should be read in conjunction
with the financial statements and notes for the year ended December 31, 1998.
Effective during the nine months ended September 30, 1999, the Company adopted
the accounting provisions of Financial Accounting Standards 123, which
recognizes compensation expense using a fair-value based method of determining
compensation for all arrangements under which employees receive shares of stock
or other equity instruments (warrants and options).
2. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the periods presented have been included. The results of
operations for the three and nine months ended September 30, 1999 and 1998 are
not necessarily indicative of the results for a full year.
3. The Company generated net income for the periods ended September 30,
1999. Diluted earnings per share assumes conversion of common stock options and
warrants.
4. Stock based compensation: In March 1999, the Company granted to a
non-employee member of the Board of Directors, (a) an option to purchase 500,000
shares of Common Stock at an exercise price of $2.00 per share, vesting in two
equal installments on September 6, 2000 and March 6, 2002, and (b) an option to
purchase an additional 500,000 shares of Common Stock at an exercise price of
$3.00 per share, vesting in two equal installments on June 1, 2000 and December
1, 2002. The Company has recognized compensation expense associated with these
options of $22,000 during the nine months ended September 30, 1999.
In April 1999, the Company granted stock purchase rights for 2,000,000
shares of common stock at $1 per share payable in a five-year note for
$2,000,000 bearing 7% interest (85% of the note and all accruing interest are
non-recourse and, as such, the stock purchase right was valued as a stock
option). These stock purchase rights were granted to a key employee in
connection with a 3-year employment agreement. The Company has recorded
compensation expense associated therewith of approximately $50,000. Interest on
the note is payable in arrears annually. Principal is payable in a lump sum on
the fifth anniversary of the note. The employee was also granted an option to
acquire 1,000,000 shares of common stock at an exercise price of $1 11/16 per
share. Compensation expense associated therewith of $147,000 will be recognized
over the term of the employment agreement.
In April 1999, the Company granted to two non-employee consultants and a
director options to purchase 600,000 shares of common stock at an exercise price
of $2 per share for past services. These shares vest on the date of grant and
compensation expense of $113,700 has been recognized during the nine-month
period ended September 30, 1999.
In July and August 1999, the Company granted to two directors options to
purchase 100,000 shares of common stock at exercise prices ranging from $3.25 to
$4.125 for directors fees. These options vest upon issuance and compensation
expense of $50,000 has been recognized for the nine month period ended September
30, 1999.
During April 1999, the Company also issued 20,000 shares of common stock to
three employees. Compensation expense of $24,500 was recognized for the nine
months ended September 30, 1999.
F-5
<PAGE> 14
5. Income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
------------- -------------
<S> <C> <C>
Current............................................ $1,331,000 $2,406,000
Deferred......................................... 450,000 985,000
Change in deferred tax asset valuation
allowance..................................... (450,000) (985,000)
---------- ----------
$1,331,000 $2,406,000
========== ==========
</TABLE>
Income tax expense differs from that which would result from applying
statutory tax rates to pre-tax income. A reconciliation is as follows:
<TABLE>
<S> <C>
Statutory rate.............................................. 34.0%
State income taxes.......................................... 5.0
Effect of change in deferred tax asset valuation
allowance................................................. (11.2)
-----
Effective rate.............................................. 27.8%
=====
</TABLE>
6. Master Settlement Agreement: Certain states have adopted the model
statute under the Master Settlement Agreement. As a result, in April 2000, the
Company will be required to place in escrow an amount equal to $1.88 per carton
sold in each of such states from the date of adoption through December 31, 1999,
and annually thereafter. Such escrowed funds will be used to fund
tobacco-related litigation or settlements and if not so used, returned to the
Company, with interest, after 25 years.
F-6
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.01 Restated Certificate of Incorporation. (Form 10-KSB for
fiscal year ended December 31, 1992).*
3.02 Certificate of Amendment of Restated Certificate of
Incorporation, dated March 25, 1993 and effective April 2,
1993 (Form 10-KSB for fiscal year ended December 31, 1996).*
3.04 Certificate of Amendment of Restated Certificate of
Incorporation, dated December 15, 1998 (Form 8-K dated
January 15, 1999).*
3.05 Bylaws of the Company as Amended to Date (Form 10-KSB for
fiscal year ended December 31, 1992).*
4.02 Certificate of Designations, Preferences and Rights of Class
A Convertible Preferred Stock (Form 8-K dated June 7,
1993).*
4.03 Certificate of Designations of Series B Convertible
Preferred Stock (Form 10-KSB for fiscal year ended December
31, 1996).*
10.28 Executive Employment Agreement dated as of April 12, 1999
entered into by the Company and James A. McNulty.
10.29 Stock Option Agreement dated as of April, 12, 1999 entered
into by the Company and James A. McNulty.
10.30 Restricted Stock Award Agreement dated as of April 12, 1999
entered into by the Company and James A. McNulty.
27 Financial Data Schedule
</TABLE>
- ---------------
* These items are hereby incorporated by reference from the exhibits to the
filing or report indicated (Commission File No. 0-15324) and are hereby made a
part of this report.
<PAGE> 1
EXHIBIT 10.28
STAR SCIENTIFIC, INC.
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered
into as of April 12, 1999, by and between STAR SCIENTIFIC, INC., a Delaware
corporation (the "Company"), and JAMES A. McNULTY ("Executive").
RECITALS
A. The Company is engaged in the research, development and
commercialization of smoking cessation products and reduced-risk smoking
products, and the manufacture and sale of cigarettes.
B. The Company wishes to continue to employ Executive and to have
the benefit of his skills and services, and Executive agrees to continue
employment with the Company, initially as Chief Financial Officer of the Company
and, after a senior Chief Financial Officer ("CFO") is recruited, as Vice
President of Finance.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
-1-
<PAGE> 2
1. EMPLOYMENT AND DUTIES.
(a) POSITION. The Company hereby employs Executive, and Executive
hereby accepts employment with the Company, initially as Chief Financial Officer
of the Company and, as set forth above, as Vice President of Finance if, and
when, a senior CFO is recruited and employed by the Company. Executive will
continue to serve as a member of the Company's Board of Directors, but agrees
not to stand for reelection to the Board.
(b) DUTIES. Executive agrees to devote his best efforts to perform
all duties assigned to him by the Company's Executive Vice President and General
Counsel in a trustworthy business like and loyal manner, and, when a new CFO is
recruited, to perform all such duties assigned to him by the CFO who shall, in
turn, report to the Executive Vice President and General Counsel.
(c) REPORTING. Executive shall initially report to the Company's
Executive Vice President and General Counsel, and, when a new CFO is recruited,
to the CFO.
(d) DEVOTION OF TIME TO COMPANY'S BUSINESS. During the Term of this
Agreement (as such term is defined in Section 1(e) hereof), Executive agrees (i)
to devote his entire productive time, ability and attention to the business of
the Company during normal working hours, (ii) not to engage in any other
business duties or business pursuits whatsoever, (iii) whether directly or
indirectly, not to render any services of a commercial or professional nature to
any individual, trust, partnership, company, corporation, business,
organization, group or other entity (each, a "Person"), whether for
-2-
<PAGE> 3
compensation or otherwise, without the prior written consent of the Board of
Directors, and (iv) whether directly or indirectly, not to acquire, hold or
retain more than a one percent (1%) interest in any business competing with or
similar in nature to the business of the Company or any of its Affiliates (as
such term is defined below); provided, however, the expenditure of reasonable
amounts of time for litigation support, book project, charitable, professional
educational or, subject to the foregoing, the making of passive personal
investments shall not be deemed a breach of this Agreement or require the prior
written consent of the Company if those activities do not materially interfere
with the services required of Executive under this Agreement. For purposes of
this Agreement, "Affiliates" shall mean any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by, or is under
the common control of, the Company.
(e) TERM. Unless sooner terminated as provided in Section 4 hereof,
the term of this Agreement shall be deemed to have commenced on October 15, 1998
and shall continue for a term of fifteen (15) months (the "Initial Term")
through January 15, 2000, and shall be renewable for successive one (1) year
terms (each, a "Renewal Term") at the option of the Company. Notice of renewal,
if applicable, shall be given to Executive in writing at least thirty (30) days
prior to the end of the Initial Term or the applicable Renewal Term, as the case
may be. The Initial Term, together with any Renewal Terms shall be referred to
in this Agreement as the "Term of this Agreement." If the Company does not
provide notice of its intent to renew the Term of this Agreement in accordance
with this paragraph, the Agreement shall continue on a month-to-month basis
until either party notifies the other of the intent not to continue the
Agreement on a month-to-month basis.
-3-
<PAGE> 4
Notice of an intent not to continue the Agreement on a month-to-month basis
shall be effective if provided at least fifteen (15) days prior to the
complection of the then current monthly term.
(f) OBSERVANCE OF COMPANY RULES, REGULATIONS AND POLICIES. Executive
shall duly, punctually and faithfully perform and observe any and all rules,
regulations and policies which the Company may now have or hereafter establish
governing the conduct of its business or its employees to the extent such rules,
regulations and policies are not in conflict with this Agreement. Executive
shall promptly provide written notice to the Board of Directors of any such
apparent conflict of which Executive becomes aware.
2. COMPENSATION.
(a) BASE SALARY. During the Term of this Agreement, the Company
shall pay to Executive a base salary of two hundred thousand dollars ($200,000)
per year in monthly increments of approximately $16,666 (the "Base Salary"),
subject to increase from time to time in the complete and sole discretion of the
Board of Directors, payable in arrears on a regular basis in accordance with the
Company's standard payroll procedures for senior management in effect at the
time of payment.
(b) DISCRETIONARY BONUS. In addition to the Base Salary, the Company
shall pay to Executive such bonuses based on Executive's performance, as well as
that of the Company, as the Board of Directors shall determine, from time to
time, in its complete and sole discretion.
-4-
<PAGE> 5
(c) RESTRICTED STOCK GRANT. In order to encourage Executive's
contribution to the successful performance of the Company, Executive shall be
granted as of October 15, 1998, a total of one hundred thousand (100,000) shares
of Common Stock of the Company (the "Restricted Stock") subject to the
conditions and restrictions set forth in a restricted stock award agreement
substantially in the form attached hereto as Exhibit A, which agreement shall
provide that restrictions shall lapse and Executive shall become vested as to
all such shares of Restricted Stock on October 15, 1999.
(d) STOCK OPTION.
(i) NON-QUALIFIED STOCK OPTION. The parties acknowledge and
agree that, as additional incentive to Executive, Executive shall be granted,
immediately upon execution of this Agreement, a non-qualified stock option (the
"Option") to purchase two hundred thousand (200,000) shares of Common Stock of
the Company at an exercise price of Two Dollars ($2.00) per share pursuant to
an option agreement on the Company's standard form under its 1998 Stock Option
Plan (the "Plan"). Subject to the forfeiture provision and repurchase right of
the Company described below, the option agreement shall provide that:
(ii) VESTING. The Option shall be fully vested on October 15,
1999.
(iii) TERMINATION. To the extent not then fully vested, the
Option shall immediately terminate upon the earlier to occur of (A) March 1,
2009, (B) the effective date of
-5-
<PAGE> 6
termination of this Agreement by the Company for Cause (as such term is defined
in Section 4(c) hereof) or by the Executive without Good Reason (as such term is
defined in Section 4(f) hereof), or (C) the date of notice by the Company to
Executive that, in the good faith determination of the Board of Directors,
Executive has breached his covenant not to compete contained herein.
(iv) ACCELERATED TERMINATION AND FORFEITURE OF OPTION;
COMPANY REPURCHASE RIGHT. On the effective date of termination of this
Agreement by the Company, for Cause or by the Executive without Good Reason, or
as of the date of notice by the Company to Executive that, in the good faith
determination of the Board of Directors, Executive has breached his covenant not
to compete contained herein, as the case may be, (A) the Option shall
immediately terminate and revert to the Company (including all vested but
unexercised shares subject to the Option); and (B) any and all shares issued
upon exercise of the Option on or prior to such effective date of termination or
date of notice shall be subject to a repurchase right in favor of the Company at
a purchase price equal to the exercise price of such shares.
(e) INCENTIVE PLANS. In addition to all other benefits and
compensation provided by this Agreement, Executive shall be eligible to
participate in such of the Company's equity, compensation and incentive plans as
are generally available to any of the management executives of the Company,
including without limitation any executive and performance bonus or incentive
plans.
(f) VACATION. Executive shall be entitled to such annual vacation
time with full pay as the Company may provide in its standard policies and
practices for any other management
-6-
<PAGE> 7
executives; provided, however, that in any event Executive shall be entitled to
a minimum of fourteen (14) days annual paid vacation time.
(g) DIRECTORS AND OFFICERS LIABILITY INSURANCE. Executive shall be
entitled to continued participation in, and have the benefit of, directors and
officers liability insurance to the same extent such coverage is provided to the
Company's other management executives.
(h) HOUSING ALLOWANCE. The Company will reimburse Executive for his
reasonable and documented expenses for temporary housing in Petersburg,
Virginia, not to exceed Twenty Thousand Dollars ($20,000).
(i) AUTOMOBILE. The Company will furnish Executive with an
automobile and will reimburse Executive all reasonable costs and expenses
relating to Executive's use of the automobile, including without limitation,
amounts incurred for insurance, gas and general maintenance and repairs.
(j) MOBILE TELEPHONE. Executive shall have use of a wireless mobile
telephone of his choice and the Company will be responsible for payment of all
business usage charges and all usual operational and maintenance expenses
associated with the use by Executive of such telephone.
(k) OTHER BENEFITS. Executive shall participate in and have the
benefits of all present and future vacation, holiday, paid leave, unpaid leave,
life, accident, disability, dental, vision and
-7-
<PAGE> 8
health insurance plans (including any key man executive health and benefit
programs), pension, profit-sharing and savings plans and all other plans and
benefits which the Company now or in the future from time to time makes
available to any of its management executives.
(l) WITHHOLDING. The parties shall comply with all applicable
withholding requirements in connection with all compensation payable to
Executive.
3. EXPENSE REIMBURSEMENT.
(a) GENERAL BUSINESS EXPENSES. The Company shall reimburse Executive
for all business travel and other out-of-pocket expenses reasonably incurred by
Executive in the course of performing his duties under this Agreement. All
reimbursable expenses shall be appropriately documented and shall be in
reasonable detail and in a format and manner consistent with the Company's
expense reporting policy, as well as applicable federal and state tax record
keeping requirements.
(b) PROFESSIONAL EDUCATIONAL EXPENSES AND FEES. In addition, the
Company shall reimburse Executive for (i) all reasonable expenses incurred for
continuing education courses required to maintain Executive's professional
status as a certified public accountant, and (ii) all reasonable professional
fees and dues associated with Executive's professional status as a certified
public accountant.
-8-
<PAGE> 9
4. TERMINATION AND RIGHTS ON TERMINATION. This Agreement shall
terminate upon the occurrence of any of the following events:
(a) DEATH. Upon the death of Executive, in which event the Company
shall, within thirty (30) days of receiving notice of such death, pay
Executive's estate all salary then due and payable and all accrued vacation pay
and bonuses, if any, in each case payable or accrued through the date of death.
Executive's estate shall not be entitled to any severance compensation.
(b) DISABILITY. Upon the mental or physical Disability (as such term
is defined below) of Executive, in which event the Company shall, within thirty
(30) days following the determination of Disability, pay Executive all salary
then due and payable and all accrued vacation pay and bonuses, if any, in each
case payable or accrued through the date of determination. For purposes of this
Agreement, "Disability" shall mean a physical or mental condition, verified by a
physician designated by the Company, which prevents Executive from carrying out
one or more of the material aspects of his assigned duties for at least ninety
(90) consecutive days, or for a total of ninety (90) days in any six (6) month
period. Executive shall not be entitled to any severance compensation.
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
this Agreement at any time for Cause (as such term is defined below). In this
event, the Company shall, within thirty (30) days following such termination,
pay Executive all salary then due and payable through the date of termination.
Executive shall not be entitled to any severance compensation or any accrued
vacation pay or bonuses. For purposes of this Agreement, "Cause" shall mean:
-9-
<PAGE> 10
(i) Any conduct which, in the sole judgment of the
Board of Directors, has diminished the professional reputation of the Executive
or has adversely affected his ability to serve as Chief Financial Officer of the
Company or Vice President of Finance. By way of example, and not of limitation,
the following types of conduct would be "cause" for termination hereunder;
engaging in competition with the Company, inducing any employee or any
significant customer, contractor, supplier, representative or distributor of the
Company to breach any contract with the Company, or to cease doing business, or
limit business activity, with the Company, intentionally making an unauthorized
disclosure of material confidential information of the Company, committing an
act of dishonesty, fraud, embezzlement or theft, otherwise engaging in
misconduct with respect to the property, business or affairs of the Company, or
deliberately disregarding the rules, regulations and policies of the Company in
such a manner as to cause loss, damage or injury to, otherwise materially
endanger, or, in the sole judgment of the Board of Directors, adversely affect
the property, reputation, operations or employees of the Company;
(ii) Gross negligence by Executive in the performance of
his duties hereunder, dereliction or negligence in performing any of such
duties, or refusal to abide by or comply with the directives of the Board of
Directors;
(iii) Conviction for a felony offense, a crime involving
moral turpitude, or any other offense which could reflect adversely upon the
Company; or
-10-
<PAGE> 11
(iv) Abuse of alcohol or drugs (legal or illegal) that,
in the sole judgment of the Board of Directors, impairs Executive's ability to
perform his duties hereunder.
(d) TERMINATION BY THE COMPANY WITHOUT CAUSE. Thirty (30) days
after delivery by the Company to Executive of a written notice terminating this
Agreement for any reason without cause, in which event the Company shall, within
thirty (30) days following the effective date of termination, pay Executive a
lump sum equal to (i) all salary then due and payable and all accrued vacation
pay and bonuses, if any, in each case payable or accrued through the effective
date of termination, plus (ii) as severance compensation, an amount equal to
three (3) months of Executive's then Base Salary.
(e) VOLUNTARY TERMINATION BY EXECUTIVE. Thirty (30) days after
delivery by Executive to the Company of a written notice terminating this
Agreement for any reason without cause, in which event the Company shall, within
thirty (30) days following the effective date of termination, pay Executive all
salary then due and payable through the date of termination. Executive shall not
be entitled to any severance compensation or any accrued vacation pay or
bonuses.
(f) TERMINATION BY EXECUTIVE FOR GOOD REASON. Thirty (30) days
after delivery by Executive to the Company of a written notice terminating this
Agreement for Good Reason (as such term is defined below), in which event the
Company shall, within thirty (30) days following the effective date of
termination, pay Executive such amounts in such manner as provided for in
Section 4(d) hereof. For purposes of this Agreement, "Good Reason" shall mean:
-11-
<PAGE> 12
(i) The assignment of Executive to any duties
inconsistent with, or any substantial, material and adverse change in,
Executive's positions, duties, responsibilities, functions or status with the
Company, or the removal of Executive from, or failure to reelect Executive to,
any of such positions; provided, however, that a change in Executive's
positions, duties, responsibilities, functions or status that Executive shall
agree to in writing shall not be an event of Good Reason or give rise to
termination under this Section 4(f);
(ii) A reduction by the Company of Executive's Base
Salary without his written consent;
(iii) The failure by the Company to continue in effect
for Executive any material benefit available to any of the management executives
of the Company, including without limitation, any retirement, pension or
incentive plans, life, accident, disability or health insurance plans, equity or
cash bonus plans or savings and profit sharing plans, or any action by the
Company which would adversely affect Executive's participation in or reduce
Executive's benefits under any of such plans or deprive Executive of any fringe
benefit enjoyed by Executive; or
(iv) Any other material breach by the Company of this
Agreement which is not cured within twenty (20) days of delivery of written
notice thereof by Executive to the Company.
-12-
<PAGE> 13
(g) EFFECT OF TERMINATION; OPTIONS. All rights and obligations of
the Company and Executive under this Agreement shall cease as of the effective
date of termination, except that the obligations of the Company under this
Section 4 and Executive's obligations under Sections 5 and 6 hereof shall
survive such termination in accordance with their respective terms. In addition,
notwithstanding anything to the contrary contained herein or in any agreement
with respect thereto, upon termination of Executive's employment pursuant to
this Section 4, all equity options, restricted equity grants and similar rights
held by Executive with respect to securities of the Company, including without
limitation the Option, shall, to the extent not then fully vested, immediately
terminate and revert to the Company.
5. RESTRICTION ON COMPETITION.
(a) COVENANT NOT TO COMPETE. The parties acknowledge that Company
is placing Executive in a position of great trust, responsibility and authority
by virtue of this Agreement, and as a result, that Executive will be exposed to
Company's most sensitive commercial and proprietary information. The parties
also recognize and acknowledge that by virtue of his position, Executive will
come to be identified closely with the Company in the business and industries in
which Company operates. Executive further acknowledges that the Company's
interests in protecting its confidential information and its relationships with
suppliers, customers, and others are both significant and difficult to quantify
economically. Therefore, Executive agrees that during the Term of this Agreement
and for a period of twelve (12) months from the termination of this Agreement,
Executive shall not, without the prior written consent of the Company, either
directly or indirectly,
-13-
<PAGE> 14
for himself or on behalf of or in conjunction with any other Person (i) own,
manage, operate, control, be employed by, participate in, render services to, or
be associated in any manner with the ownership, management, operation or control
of, any business similar to the type of business conducted by the Company or any
of its Affiliates (which are described in Recitals, section A above) within any
of the geographic territories in which the Company or any of its Affiliates
conducts business, (ii) solicit business of the same or similar type being
carried on by the Company or any of its Affiliates from any Person (as defined
in Section 1(d) above) known by Executive to be a customer of the Company or any
of its Affiliates, whether or not Executive had personal contact with such
Person during and by reason of Executive's employment with the Company, or (iii)
solicit any employee or contractor of the Company to terminate that relationship
or endeavor or attempt in any way to interfere with or induce a breach of any
contractual relationship that the Company or any of its Affiliates may have with
any employee, customer, contractor, supplier, representative or distributor.
(b) NO BREACH FOR ACTIVITIES DEEMED NOT COMPETITIVE. It is further
agreed that, in the event that Executive shall cease to be employed by the
Company and enter into a business or pursue other activities that, at such time,
are not in competition with the Company or any of its Affiliates, Executive
shall not be chargeable with a violation of this Section 5 if the Company
subsequently enters the same (or a similar) competitive business or activity.
(c) SEVERABILITY. The parties desire the provisions of this
Section 5 to be enforceable to the greatest degree possible. Therefore, the
covenants in this Section 5 are severable and separate,
-14-
<PAGE> 15
and the unenforceability of any specific covenant shall not affect the
provisions of any other covenant. If any provision of this Section 5 relating to
the time period or geographic area of the restrictive covenants shall be
declared by a court of competent jurisdiction to exceed the maximum time period
or geographic area, as applicable, that such court deems reasonable and
enforceable, such time period or geographic area shall be deemed to be, and
thereafter shall become, the maximum time period or largest geographic area that
such court deems reasonable and enforceable and this Agreement shall
automatically be considered to have been amended and revised to reflect such
determination.
(d) FAIR AND REASONABLE. Executive has carefully read and
considered the provisions of this Section 5 and, having done so, agrees that the
restrictive covenants in this Section 5 impose a fair and reasonable restraint
on Executive and are reasonably required to protect the interests of the
Company, its Affiliates and their respective officers, directors, employees and
stockholders. It is further agreed that the Company and Executive intend that
such covenants be construed and enforced in accordance with the changing
activities, business and locations of the Company throughout the term of these
covenants.
6. CONFIDENTIAL INFORMATION.
(a) CONFIDENTIAL INFORMATION. Executive hereby agrees to hold in
strict confidence and not to disclose to any third party any of the confidential
and proprietary business, financial, technical, economic, sales and/or other
types of proprietary business information relating to the
-15-
<PAGE> 16
Company or any of its Affiliates (including all trade secrets) in whatever form,
whether oral, written, or electronic (collectively, the "Confidential
Information"), to which Executive has, or is given (or has had or been given),
access during the course of his employment with the Company. It is agreed that
the Confidential Information is confidential and proprietary to the Company
because such Confidential Information encompasses technical know-how, trade
secrets, or technical, financial, organizational, sales or other valuable
aspects of the business and trade of the Company or its Affiliates, including
without limitation, technologies, products, processes, plans, clients,
personnel, operations and business activities. This restriction shall not apply
to any Confidential Information that (a) becomes known generally to the public
through no fault of the Executive, (b) is required by applicable law, legal
process, or any order or mandate of a court or other governmental authority to
be disclosed, or (c) is reasonably believed by Executive, based upon the advice
of legal counsel, to be required to be disclosed in defense of a lawsuit or
other legal or administrative action brought against Executive; provided,
however, that in the case of clause (b) or (c), Executive shall give the Company
reasonable advance written notice of the Confidential Information intended to be
disclosed and the reasons and circumstances surrounding such disclosure, in
order to permit the Company to seek a protective order or other appropriate
request for confidential treatment of the applicable Confidential Information.
(b) RETURN OF COMPANY PROPERTY. In the event of termination of
Executive's employment with the Company for whatever reason or no reason, (a)
Executive agrees not to copy, make known, disclose or use, any of the
Confidential Information without the Company's prior written consent, and (b)
Executive or Executive's personal representative shall return to the
-16-
<PAGE> 17
Company (i) all Confidential Information, (ii) all other records, designs,
patents, patent applications, business plans, financial statements, manuals,
memoranda, lists, correspondence, reports, records, charts, advertising
materials and other data or property delivered to or compiled by Executive by or
on behalf of the Company or its respective representatives, vendors or customers
that pertain to the business of the Company or any of its Affiliates, whether in
paper, electronic or other form, and (iii) all keys, credit cards, vehicles and
other property of the Company. Executive shall not retain or cause to be
retained any copies of the foregoing. Executive hereby agrees that all of the
foregoing shall be and remain the property of the Company and the applicable
Affiliates and be subject at all times to their discretion and control.
7. CORPORATE OPPORTUNITIES.
(a) DUTY TO NOTIFY. During the Term of this Agreement, in the
event that Executive shall become aware of any business opportunity related to
the business of the Company, Executive shall promptly notify the Board of
Directors of such opportunity. Executive shall not appropriate for himself or
for any other Person (as herein defined) other than the Company (or any
Affiliate) any such opportunity unless, as to any particular opportunity, the
Board of Directors fails to take appropriate action within thirty (30) days.
Executive's duty to notify the Board of Directors and to refrain from
appropriating all such opportunities for thirty (30) days shall neither be
limited by, nor shall such duty limit, the application of the general laws
relating to the fiduciary duties of an agent or employee.
-17-
<PAGE> 18
(b) FAILURE TO NOTIFY. In the event that Executive fails to notify
the Board of Directors or so appropriates any such opportunity without the
express written consent of the Board of Directors, Executive shall be deemed to
have violated the provisions of this Section notwithstanding the following:
(i) The capacity in which Executive shall have acquired
such opportunity; or
(ii) The probable success in the hands of the Company of
such opportunity.
8. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to
the Company that the execution of this Agreement by Executive, his employment
by the Company, and the performance of his duties hereunder will not violate or
be a breach of any agreement with a former employer, client or any other
Person. Further, Executive agrees to indemnify and hold harmless the Company
and its officers, directors and representatives for any claim, including, but
not limited to, reasonable attorneys' fees and expenses of investigation, of
any such third party that such third party may now have or may hereafter come
to have against the Company or such other persons, based upon or arising out of
any noncompetition agreement, invention, secrecy or other agreement between
Executive and such third party that was in existence as of the effective date
of this Agreement. To the extent that Executive had any oral or written
employment agreement or understanding with the Company, this Agreement shall
automatically supersede such agreement or understanding, and upon execution of
this Agreement by Executive and the Company, such prior agreement or
understanding automatically shall be deemed to have been terminated and shall
be null and void.
-18-
<PAGE> 19
9. REPRESENTATION. Executive acknowledges that he (a) has
reviewed this Agreement in its entirety, (b) has had an opportunity to obtain
the advice of separate legal counsel prior to executing this Agreement, and (c)
fully understands all provisions of this Agreement.
10. ASSIGNMENT; BINDING EFFECT. Executive understands that he has
been selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Executive agrees, therefore, that he
cannot assign or delegate all or any portion of his performance under this
Agreement. This Agreement may not be assigned or transferred by the Company
without the prior written consent of Executive. Subject to the preceding two
sentences, this Agreement shall be binding upon, inure to the benefit of, and
be enforceable by the parties hereto and their respective heirs, legal
representatives, successors, and assigns. Notwithstanding the foregoing, if
Executive accepts employment with an Affiliate, unless Executive and his new
employer agree otherwise in writing, this Agreement shall automatically be
deemed to have been assigned to such new employer (which shall thereafter be an
additional or substitute beneficiary of the covenants contained herein, as
appropriate), with the consent of Executive, such assignment shall be
considered a condition of employment by such new employer, and references to
the "Company" in this Agreement shall be deemed to refer to such new employer.
11. COMPLETE AGREEMENT; WAIVER; AMENDMENT. This Agreement is not
a promise of future employment. Executive has no oral representations,
understandings or agreements with the Company or any of its officers, directors
or representatives covering the same subject matter as this
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<PAGE> 20
Agreement. This Agreement, along with the Restricted Stock Award Agreement and
the Stock Option Agreement, are the final, complete and exclusive statement and
expression of the agreement between the Company and Executive with respect to
the subject matter hereof and thereof, and cannot be varied, contradicted, or
supplemented by evidence of any prior or contemporaneous oral or written
agreements. This Agreement may not be later modified except by a further writing
signed by a duly authorized officer of the Company and Executive, and no term of
this Agreement may be waived except by a writing signed by the party waiving the
benefit of such term.
12. NOTICE. All notices, requests, demands and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be given or made by personally delivering the same to or
sending the same by prepaid certified or registered mail, return receipt
requested, or by reputable overnight courier, or by facsimile machine to the
party to which it is directed at the address set out on the signature page to
this Agreement or at such other address as such party shall have specified by
written notice to the other party as provided in this Section, and shall be
deemed to be given if delivered personally at the time of delivery, or if sent
by certified or registered mail as herein provided three (3) days after the
same shall have been posted, or if sent by reputable overnight courier upon
receipt, or if sent by facsimile machine as soon as the sender receives written
or telephonic confirmation that the facsimile was received by the recipient and
such facsimile is followed the same day by mailing by prepaid first class mail.
13. SEVERABILITY; HEADINGS. If any portion of this Agreement is
held invalid or inoperative, the other portions of this Agreement shall be
deemed valid and operative and, so far as is reasonable and
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<PAGE> 21
possible, effect shall be given to the intent manifested by the portion held
invalid and inoperative. This severability provision shall be in addition to,
and not in place of, the provisions of Section 5(c) above. The Sections headings
herein are for reference purposes only and are not intended in any way to
describe, interpret, define or limit the extent or intent of this Agreement or
of any part hereof.
14. EQUITABLE REMEDY. Because of the difficulty of measuring
economic losses to the Company as a result of a breach of the restrictive
covenants set forth in Sections 5 and 6 hereof, and because of the immediate
and irreparable damage that would be caused to the Company for which monetary
damages would not be a sufficient remedy, it is hereby agreed that in addition
to all other remedies that may be available to the Company at law or in equity,
the Company shall be entitled to specific performance and any injunctive or
other equitable relief as a remedy for any breach or threatened breach of the
aforementioned restrictive covenants.
15. ARBITRATION. Except as provided in Section 14 hereof, any
unresolved dispute or controversy arising under or in connection with this
Agreement or otherwise concerning Executive's relationship with the Company,
whether arising in contract, tort or otherwise, shall be settled exclusively by
arbitration conducted in accordance with the rules of the American Arbitration
Association applicable to the arbitration of employment disputes then in
effect. The arbitrators shall not have the authority to add to, detract from,
or modify any provision hereof, nor to award punitive damages to any injured
party. A decision by a majority of the arbitration panel shall be final and
binding. Judgment may be entered on the arbitrators' award in any court having
jurisdiction. The arbitration proceeding shall be held in the city where the
principal office of the Company is located.
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<PAGE> 22
Notwithstanding the foregoing, the Company shall be entitled to seek injunctive
or other equitable relief, as contemplated by Section 14 hereof, from any court
of competent jurisdiction, without the need to resort to arbitration. Should
judicial proceedings be commenced to enforce or carry out this provision or any
arbitration award, the prevailing party in such proceedings shall be entitled to
reasonable attorneys' fees and costs in addition to other relief.
16. GOVERNING LAW AND GOVERNING VENUE. Any or all disputes,
disagreements, or litigation relating to or under terms of this Agreement,
including any arbitration or litigation relating to any arbitration under
Section 15, must be litigated and/or arbitrated in the Commonwealth of
Virginia. In order to effectuate this provision, the parties expressly consent
to personal jurisdiction in Virginia and to a Virginia venue. This Agreement
shall in all respects be construed according to the substantive laws of the
Commonwealth of Virginia, without regard to its conflict of laws principles.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which may be executed by less than all of the parties to
this Agreement, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
18. SIGNATURES. The parties shall be entitled to rely upon and
enforce a facsimile of any authorized signatures as if it were the original.
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<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
COMPANY:
<TABLE>
<S> <C>
STAR SCIENTIFIC, INC. EXECUTIVE:
By: /s/ Paul L. Perito
-------------------------
(Signature) By: /s/ James A. .McNulty
------------------------------
Paul L. Perito, Executive Vice President and (Signature)
- --------------------------------------------
General Counsel JAMES A. McNULTY, C.P.A.
- -------------------------------------------- 6204 Greenwick Drive
(Print Name and Title) Glen Allen, Virginia 23060
Star Scientific, Inc.
16 South Market Street
Petersburg, Virginia 23803 Date: October 19, 1999
----------- ----
Date: October 27, 1999
----------- ----
</TABLE>
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<PAGE> 1
Exhibit 10.29
NEITHER THIS AGREEMENT NOR THE SECURITIES REPRESENTED HEREBY HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY
STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE
SECURITIES SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT AND THE QUALIFICATION REQUIREMENTS UNDER STATE
LAW.
THE SHARES ISSUABLE HEREUNDER ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND
CERTAIN REPURCHASE RIGHTS AS SET FORTH HEREIN AND IN THE 1998 STOCK OPTION PLAN,
A COPY OF WHICH MAY BE INSPECTED AT THE OFFICES OF THE COMPANY.
STAR SCIENTIFIC, INC.
1998 STOCK OPTION PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
NOTICE OF STOCK OPTION GRANT
Optionee's Name and Address: James A. McNulty
6204 Greenwick Drive
Glen Allen, VA 23060
You have been granted an option to purchase shares of Common Stock
of the Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
Grant Number: 1
Date of Grant: April 12, 1999
Vesting Commencement Date: October 15, 1999
Exercise Price per Share: $2.00
Total Number of Shares Granted: 200,000
Total Exercise Price: $400,000
Type of Option: Non-Qualified Stock Option
Term/Expiration Date: March 1, 2009
Grant of Option: Star Scientific, Inc., a Delaware corporation (the "Company"),
hereby grants to the Optionee (the "Optionee") named in the Notice of Stock
Option Grant (the "Notice"), an option (this "Option") to purchase the total
number of shares of Common Stock (the "Shares") set forth in the Notice, at the
exercise price per share set forth in the Notice (the "Exercise Price")
<PAGE> 2
subject to stockholder approval of the Plan (as such term is defined below) and
the terms, definitions and provisions of the Company's Amended and Restated 1998
Stock Option Plan (the "Plan") adopted by the Company, which is incorporated
herein by reference. Unless otherwise defined herein, the terms defined in the
Plan shall have the same defined meanings in this Option Agreement and Notice.
FORFEITURE. Upon the occurrence of the first to occur of (a) the effective date
of termination (the "Company Termination Date") of that certain Employment
Agreement dated as of April 12, 1999 between the Company and the Optionee (the
"Employment Agreement") by the Company for cause (as that term is defined in the
Employment Agreement); (b) the effective date of termination (the "Executive
Termination Date") of the Employment Agreement by the Optionee without Good
Reason (as such term is defined in the Employment Agreement); or (c) in the
event that the Company shall provide to the Optionee a notice that, in the good
faith determination of the Board of Directors of the Company, the Optionee has
breached his covenant not to compete contained in the Employment Agreement (the
"Notice of Breach"), as of the Employment Termination Date or the date of such
Notice of Breach, as the case may be, this Option shall immediately terminate
and revert to the Company (including all Shares subject to this Option that are
then fully vested but as to which this Option remains unexercised).
REPURCHASE RIGHT. In addition, all Shares issued upon exercise of this Option on
or prior to the Company Termination Date, the Executive Termination Date, or the
date of such Notice of Breach, as the case may be, shall be subject to the
Company's right to repurchase any such Shares for a price equal to the price the
Optionee paid for such Shares (the "Repurchase Right"). All Shares issued prior
to the end of the twelve (12) month period following termination of the
Optionee's status as an Employee, Director or Consultant shall bear a legend,
satisfactory to the Company, indicating that such Shares are nontransferable and
that they may be subject to the Repurchase Right.
VESTING SCHEDULE. Subject to other limitations set forth in this Option
Agreement, this Option may be exercised, in whole or in part, in accordance with
the following schedule:
The Shares subject to this Option shall be fully vested on October
15, 1999.
TERMINATION PERIOD:
(a) TERMINATION OF STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT
(OTHER THAN AS A RESULT OF OPTIONEE'S RETIREMENT, DISABILITY OR DEATH). Subject
to the limitations set forth in this Option Agreement, in the event of
termination of the Optionee's status as an Employee, Director or Consultant
(other than termination by reason of the Optionee's retirement in good standing
for reason of age, or the Optionee's death or disability), this Option may be
exercised (to the extent this Option is vested on the date of termination) at
any time after the date of termination but in no event shall this Option be
exercised later than the Term/Expiration Date as provided above. In the event of
the Optionee's change in status from Employee or Director to Consultant or
Consultant to Employee or Director, this Option Agreement shall remain in
effect.
2
<PAGE> 3
(b) TERMINATION OF STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT
AS A RESULT OF OPTIONEE'S RETIREMENT IN GOOD STANDING. Subject to the
limitations set forth in this Option Agreement, in the event of termination of
the Optionee's status as an Employee, Director or Consultant as a result of the
Optionee's retirement in good standing for reason of age but not due to
disability, this Option may be exercised (to the extent this Option is vested on
the date of termination) at any time after the date of termination, but in no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
(c) TERMINATION OF STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT
AS A RESULT OF OPTIONEE'S DEATH OR DISABILITY. Subject to the limitations set
forth in this Option Agreement, in the event of termination of the Optionee's
status as an Employee, Director or Consultant as a result of the Optionee's
death or disability, this Option may be exercised (to the extent this Option is
vested on the date of termination) at any time after the date of termination,
but in no event shall this Option be exercised later than the Term/Expiration
Date as provided above.
1. EXERCISE OF OPTION.
A. RIGHT TO EXERCISE. This Option shall be exercisable
at any time during its term in accordance with the applicable
provisions of the Plan and this Option Agreement. In the event of
termination of Optionee's status as an Employee, Director or
Consultant, this Option shall be exercisable in accordance with the
applicable provisions of the Plan and this Option Agreement. This
Option shall be subject to the provisions of Section 6(j) of the
Plan relating to the exercisability or termination of the Option in
the event of a Change in Control.
b. METHOD OF EXERCISE. This Option shall be exercisable
only by delivery of an Exercise Notice (attached as Exhibit A) which
shall state the election to exercise this Option, the whole number
of Shares in respect of which this Option is being exercised, such
other representations and agreements as to the holder's investment
intent with respect to such Shares and such other provisions as may
be required by the Compensation Committee. Such Exercise Notice
shall be signed by the Optionee and shall be delivered in person or
by certified mail to the Secretary of the Company accompanied by
payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice
accompanied by the Exercise Price.
No Shares will be issued pursuant to the exercise of this
Option unless such issuance and such exercise shall comply with all
Applicable Laws. Assuming such compliance, for income tax purposes,
the Shares shall be considered transferred to the Optionee on the
date on which this Option is exercised with respect to such Shares.
c. TAXES. No Shares will be issued to the Optionee or
other person pursuant to the exercise of this Option until the
Optionee or other person has made arrangements acceptable to the
Compensation Committee for the satisfaction of foreign, federal,
state and local income and employment tax withholding obligations.
3
<PAGE> 4
2. METHOD OF PAYMENT. Payment of the Exercise Price shall be by
any of the following, or a combination thereof, at the election of the Optionee;
provided, however, that such exercise method does not then violate an Applicable
Law:
a. cash;
b. check;
c. surrender of shares of Common Stock of the Company
(including withholding of Shares otherwise deliverable upon exercise
of this Option) which have a Fair Market Value on the date of
surrender equal to the Exercise Price of the Shares as to which this
Option is being exercised (but only to the extent that such exercise
of this Option would not result in an accounting compensation charge
with respect to the shares used to pay the exercise price unless
otherwise determined by the Compensation Committee);
d. delivery of a properly executed Exercise Notice
together with such other documentation as the Compensation Committee
and the broker, if applicable, shall require to effect an exercise
of this Option and delivery to the Company of the sale or loan
proceeds required to pay the Exercise Price;
e. delivery of an interest-bearing, unsecured,
full-recourse promissory note of the Optionee in favor of the
Company in the principal amount equal to the Exercise Price of the
Shares as to which this Option is being exercised, which promissory
note shall be inform and substance satisfactory to the Compensation
Committee;
f. delivery of an interest-bearing, fully-secured,
non-recourse promissory note of the Optionee in favor of the Company
in the principal amount equal to the Exercise Price of the Shares as
to which this Option is being exercised, together with a duly
executed security agreement of the Optionee in favor of the Company
covering such type and amount of collateral satisfactory to the
Compensation Committee, which collateral shall not include any
Shares with respect to which this Option is being exercised, and
which promissory note and security agreement shall be in form and
substance satisfactory to the Compensation Committee; or
g. application of such amount of the Optionee's
accrued and unpaid salary then outstanding that is equal to the
Exercise Price of the Shares as to which this Option is being
exercised.
3. RESTRICTIONS ON EXERCISE. This Option may not be exercised if
the issuance of the Shares subject to this Option upon such exercise would
constitute a violation of any Applicable Laws.
4. TERMINATION OF RELATIONSHIP. In the event the Optionee's
status as an Employee, Director or Consultant terminates, the Optionee may, to
the extent otherwise so entitled at the date
4
<PAGE> 5
of such termination (the "Termination Date"), exercise this Option during the
Termination Period set out in the Notice (but in no event later than the
Term/Expiration Date). Except as provided in Sections 5, 6 and 7 below, to the
extent that the Optionee was not entitled to exercise this Option on the
Termination Date, or if the Optionee does not exercise this Option within the
Termination Period, this Option shall terminate.
5. RETIREMENT IN GOOD STANDING OF OPTIONEE. In the event the
Optionee's status as an Employee, Director or Consultant terminates as a result
of the Optionee's retirement in good standing for reason of age but not due to
disability, the Optionee may, to the extent otherwise so entitled on the
Termination Date, exercise this Option during the Termination Period set out in
the Notice (but in no event later than the Term/Expiration Date). To the extent
that the Optionee was not entitled to exercise this Option on the Termination
Date, or if the Optionee does not exercise this Option to the extent so entitled
within the time specified herein, this Option shall terminate.
6. DISABILITY OF OPTIONEE. In the event the Optionee's status as
an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may, to the extent otherwise so entitled on the
Termination Date, exercise this Option during the Termination Period set out in
the Notice (but in no event later than the Term/Expiration Date). To the extent
that the Optionee was not entitled to exercise this Option on the Termination
Date, or if the Optionee does not exercise this Option to the extent so entitled
within the time specified herein, this Option shall terminate.
7. DEATH OF OPTIONEE. In the event the Optionee's status as an
Employee, Director or Consultant terminates as a result of the Optionee's death,
this Option may, only to the extent the Optionee could have exercised this
Option on the Termination Date, be exercised during the Termination Period set
out in the Notice (but in no event later than the Term/Expiration Date). This
Option may be exercised by the Optionee's estate or by a person who acquired the
right to exercise this Option by bequest or inheritance. To the extent that the
Optionee was not entitled to exercise this Option on the Termination Date, or if
this Option is not exercised to the extent so entitled within the time specified
herein, this Option shall terminate.
8. TRANSFERABILITY OF OPTION. This Option shall not be
transferred by the Optionee otherwise than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security Act, and this
Option may be exercised during the lifetime of the Optionee only by the Optionee
or such Optionee's guardian or legal representative. The terms of this Option
shall be binding upon the executors, administrators, heirs and successors of the
Optionee.
9. TERM OF OPTION. This Option may be exercised only within the
term set out in the Notice, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
10. TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Option Agreement of some of the federal and state tax consequences
of exercise of this Option and
5
<PAGE> 6
disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX
LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
a. EXERCISE OF NONQUALIFIED STOCK OPTION. This Option is
a Nonqualified Stock Option and there may be a regular federal
income tax liability and/or state income tax liability upon the
exercise of this Option. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates)
equal to the excess, if any, of the Fair Market Value of the Shares
on the date of exercise over the Exercise Price. If the Optionee is
an Employee or a former Employee, the Company will be required to
withhold from the Optionee's compensation or collect from the
Optionee and pay to the applicable taxing authorities an amount in
cash equal to a percentage of this compensation income at the time
of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the
time of exercise.
b. SHARES SUBJECT TO THE REPURCHASE RIGHT. For Shares
encumbered by the Repurchase Right as of the date of exercise, the
Optionee will generally not be treated as having received
compensation income immediately upon exercise of the Option and the
receipt of the Shares. Instead, the Optionee will be treated as
having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the
Shares on the date the Repurchase Right lapses over the Exercise
Price. The Optionee may elect, however, to recognize the full amount
of the excess of the Fair Market Value of the Shares on the date of
exercise over the Exercise Price as compensation income. This would
be in lieu of postponing the recognition event to the date the
Repurchase Right lapses. The Optionee would make such an election by
promptly filing an appropriate election form with governmental
taxing authorities. THE OPTIONEE IS ADVISED TO CONSULT WITH HIS OR
HER OWN TAX ADVISOR CONCERNING THIS ELECTION; THE OPTIONEE IS
EXPRESSLY CAUTIONED THAT THE OPPORTUNITY FOR FILING THIS ELECTION
CAN EXPIRE AS EARLY AS THIRTY (30) DAYS FOLLOWING THE EXERCISE OF
THE OPTION.
c. APPLICATION OF ACCRUED SALARY. An Optionee who
elects to exercise an Option by tendering an amount of accrued
salary that had not been previously includable in his gross income
will recognize income in an amount equal to the accrued salary so
tendered. The Optionee would be required to satisfy any withholding
tax liability the Company incurs which is attributable to such
recognition of income.
d. DISPOSITION OF SHARES. If Shares are held for at
least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal and state income
tax purposes.
11. OPTIONEE'S REPRESENTATIONS. By receipt of this Option, by its
execution, and by its exercise in whole or in part, the Optionee represents to
the Company that:
6
<PAGE> 7
a. The Optionee acknowledges that both this Option and
any Shares purchased upon its exercise are securities, the issuance
by the Company of which requires compliance with federal and state
securities laws;
b. The Optionee acknowledges that these securities are
made available to the Optionee only on the condition that the
Optionee makes the representations contained in this
Section 11 to the Company;
c. The Optionee has made a reasonable investigation of
the affairs of the Company sufficient to be well informed as to the
rights and the value of these securities;
d. The Optionee understands that to the extent that
the securities have not been registered under the Securities Act of
1933, as amended (the "Act"), or any applicable state law, such
securities have been made available to the Optionee in reliance upon
one or more specific exemptions contained in the Act and any
applicable state law, which may include reliance on Rule 701
promulgated under the Act, if available, or which may depend upon
(i) the Optionee's bona fide investment intention in acquiring these
securities; (ii) the Optionee's intention with respect to these
securities in compliance with federal and state securities laws;
(iii) the Optionee having no present intention of selling or
transferring any part thereof (recognizing that the Option is not
transferable) in violation of applicable federal and state
securities laws; and (iv) there being certain restrictions on
transfer of the Shares subject to the Option;
e. The Optionee understands that, to the extent that
the Shares are not registered under the Act, the Shares subject to
this Option, in addition to other restrictions on transfer, must be
held indefinitely unless subsequently registered under the Act and
any applicable state law, or unless an exemption from registration
is available; that Rule 144, the usual exemption from registration
under the Act, is only available after the satisfaction of certain
holding periods and in the presence of a public market for the
Shares; that there is no certainty that a public market for the
Shares will exist, and that otherwise it will be necessary that the
Shares be sold pursuant to another exemption from registration which
may be difficult to satisfy; and
f. The Optionee understands that the certificate
representing the Shares will bear a legend prohibiting their
transfer in the absence of their registration or an opinion of
counsel for the Company that registration is not required.
12. ADDITIONAL RESTRICTIONS ON EXERCISE. In addition to the
restrictions set forth in Section 3 above, this Option may not be exercised if
the issuance of such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any applicable
federal or state securities or other law or regulation. As a condition to the
exercise of this Option, the Company may require the Optionee to make any
representation and warranty to the Company as may be required by any applicable
law or regulation.
7
<PAGE> 8
13. ENTIRE AGREEMENT: GOVERNING LAW. The Plan is incorporated
herein by reference. The Plan and this Option Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and the
Optionee with respect to the subject matter hereof, and may not be modified
adversely to the Optionee's interest except by means of a writing signed by the
Company and the Optionee. This Option Agreement is governed by Delaware law
except for that body of law pertaining to conflict of laws.
14. HEADINGS. The captions used in this Option are inserted for
convenience and shall not be deemed a part of this Option for construction or
interpretation.
15. INTERPRETATION. Any dispute regarding the interpretation of
this Option Agreement shall be submitted by the Optionee or by the Company
forthwith to the Board or the Compensation Committee which administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such dispute by the Board or the Compensation Committee shall be final and
binding on all persons.
STAR SCIENTIFIC, INC.
a Delaware corporation
By: /s/ Paul L. Perito
------------------------------------
Name: Paul L. Perito
------------------------------------
Title: Executive Vice President and General
------------------------------------
Counsel
------------------------------------
Date: October 27, 1999
--------------------------------------
8
<PAGE> 9
THE OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING SERVICE ON THE BOARD OF DIRECTORS OR
CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE
ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER).
THE OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR
IN THE COMPANY'S 1998 STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY
REFERENCE, SHALL CONFER UPON THE OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUED
SERVICE ON THE BOARD OF DIRECTORS OR CONTINUATION OF EMPLOYMENT OR CONSULTANCY
BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH THE OPTIONEE'S RIGHT OR
THE COMPANY'S RIGHT TO TERMINATE THE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY
TIME, WITH OR WITHOUT CAUSE.
The Optionee acknowledges receipt of a copy of the Plan and
represents that he is familiar with the terms and provisions thereof, and hereby
accepts this Option Agreement subject to all of the terms and provisions
thereof. The Optionee (i) has reviewed the Plan and this Option Agreement in
their entirety, (ii) has had an opportunity to obtain the advice of counsel
prior to executing this Option Agreement, (iii) is not relying on the Company
for tax advice in connection with the receipt and exercise of this Option, and
(iv) fully understands all provisions of the Option Agreement. The Optionee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Compensation Committee upon any questions arising under
the Plan or this Option Agreement. The Optionee further agrees to notify the
Company upon any change in the residence address indicated below.
Dated: April 12, 1999 Signed: /s/ James A. McNulty
----------------------- ---------------------
JAMES A. McNULTY
Residence Address:
6204 Greenwick Drive
Glen Allen, VA 23060
9
<PAGE> 10
CONSENT OF SPOUSE
The undersigned spouse of the Optionee to the foregoing Stock Option
Agreement acknowledges on his/her own behalf that: I have read the foregoing
Stock Option Agreement and I know its contents. I hereby consent to and approve
of the provisions of the Stock Option Agreement, and agree that the Shares
issued upon exercise of the Options covered thereby and my interest in them are
subject to the provisions of the Stock Option Agreement and that I will take no
action at any time to hinder operation of the Stock Option Agreement on those
Shares or my interest in them.
/s/ Dora McNulty
------------------------------------
[SPOUSE OF OPTIONEE]
SPOUSE OF: James A. McNulty
10
<PAGE> 11
EXHIBIT A
STAR SCIENTIFIC, INC.
1998 STOCK OPTION PLAN
EXERCISE NOTICE
Star Scientific, Inc.
16 South Market Street
Petersburg, Virginia 23803
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, the undersigned
(the "Optionee") hereby elects to exercise the Optionee's option to purchase
____________ (_________) shares of the Common Stock (the "Shares") of Star
Scientific, Inc. (the "Company") under and pursuant to the Company's 1998 Stock
Option Plan (the "Plan") and the Stock Option Agreement dated ________________
(the "Option Agreement").
2. REPRESENTATIONS OF THE OPTIONEE. The Optionee acknowledges
that the Optionee has received, read and understood the Plan and the Option
Agreement and agrees to abide by and be bound by their terms and conditions.
3. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing
such Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a stockholder shall exist with
respect to the Common Stock subject to the Option, notwithstanding the exercise
of the Option. The Company shall issue (or cause to be issued) such stock
certificate promptly after the Option is exercised. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 7 of the Plan.
4. DELIVERY OF PAYMENT. The Optionee herewith delivers to the
Company the full Exercise Price for the Shares.
5. TAX CONSULTATION. The Optionee understands that the Optionee
may suffer adverse tax consequences as a result of the Optionee's purchase or
disposition of the Shares. The Optionee represents that the Optionee has
consulted with any tax consultants the Optionee deems advisable in connection
with the purchase or disposition of the Shares and that the Optionee is not
relying on the Company for any tax advice.
6. TAXES. The Optionee agrees to satisfy all applicable federal,
state and local income and employment tax withholding obligations and herewith
delivers to the Company the full amount of such obligations.
7. SUCCESSORS AND ASSIGNS. The Company may assign any of its
rights under this Exercise Notice to single or multiple assignees, and this
Exercise Notice shall inure to the benefit
<PAGE> 12
of the successors and assigns of the Company. This Exercise Notice shall be
binding upon the Optionee and his or her heirs, executors, administrators,
successors and assigns.
8. HEADINGS. The captions used in this Exercise Notice are
inserted for convenience and shall not be deemed a part of this Exercise Notice
for construction or interpretation.
9. INTERPRETATION. Any dispute regarding the interpretation of
this Exercise Notice shall be submitted by the Optionee or by the Company
forthwith to the Company's Board of Directors or the Compensation Committee
which administers the Plan, which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Board or the Compensation
Committee shall be final and binding on all persons.
10. GOVERNING LAW; SEVERABILITY. This Exercise Notice shall be
governed by and construed in accordance with the laws of the State of Delaware,
excluding that body of law pertaining to conflicts of law. Should any provision
of this Exercise Notice be determined by a court of law to be illegal or
unenforceable, the other provisions shall nevertheless remain effective and
shall remain enforceable.
11. NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery or
upon deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
12. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Exercise Notice.
13. ENTIRE AGREEMENT. The Plan and the Option Agreement are
incorporated herein by reference. This Exercise Notice, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and the Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and the Optionee.
Submitted by:
OPTIONEE
- --------------------------
(Name of Optionee)
- ----------------------------
- ----------------------------
(Address of Optionee)
2
<PAGE> 13
Accepted by:
STAR SCIENTIFIC, INC.
By:
---------------------------
Name:
---------------------------
Title:
---------------------------
16 South Market Street
Petersburg, Virginia 23803
3
<PAGE> 1
Exhibit 10.30
NEITHER THIS AGREEMENT NOR THE SECURITIES REPRESENTED HEREBY HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY
STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE
SECURITIES SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT AND THE QUALIFICATION REQUIREMENTS UNDER STATE
LAW.
THE SHARES ISSUABLE HEREUNDER ARE SUBJECT TO THE TERMS, CONDITIONS AND
RESTRICTIONS AS SET FORTH HEREIN.
STAR SCIENTIFIC, INC.
RESTRICTED STOCK AWARD AGREEMENT
THIS RESTRICTED STOCK AWARD AGREEMENT (this "Agreement") is entered
into as of April 12, 1999, by and between STAR SCIENTIFIC, INC., a Delaware
corporation (the "Company"), and JAMES A. McNULTY (the "Grantee").
1. RESTRICTED STOCK. In order to encourage the Grantee's
contribution to the successful performance of the Company, and in consideration
of the covenants and promises of the Grantee herein contained, the Company
hereby grants to the Grantee as of October 15, 1998 (the "Date of Grant"), a
total of one hundred thousand (100,000) shares of Common Stock of the Company
(the "Restricted Stock"), subject to the conditions and restrictions set forth
below.
2. RESTRICTIVE LEGEND. The certificates representing shares of
Restricted Stock shall be registered in the name of the Grantee and each such
certificate shall bear a legend determined by the Company, conspicuously
referring to the terms, conditions and restrictions described in this Agreement.
The Grantee, by executing this Agreement, hereby acknowledges that the Company
(or its designee) is authorized to take all such actions and to effectuate such
restrictive legends and transfers of Restricted Stock or releases as are in
accordance with the terms of this Agreement.
3. RESTRICTIONS ON TRANSFER BEFORE VESTING.
(a) The shares of Restricted Stock granted hereunder to the
Grantee may not be sold, assigned, transferred, pledged or otherwise encumbered,
whether voluntarily or involuntarily, by operation of law or otherwise, from the
Date of Grant until said shares shall have become vested in the Grantee (and
restrictions terminated thereon) all accordance with the provisions of Section 4
1
<PAGE> 2
hereof, or as otherwise provided in Section 5 hereof. The period of time between
the Date of Grant and the vesting of shares of Restricted Stock shall be
referred to herein as the "Restricted Period."
(b) Consistent with the foregoing, except as contemplated by
Section 7 hereof, no right or benefit under this Agreement shall be subject to
transfer, anticipation, alienation, sale, assignment, pledge, encumbrance or
charge, whether voluntary, involuntary, by operation of law or otherwise, and
any attempt to transfer, anticipate, alienate, sell, assign, pledge, encumber or
charge the same shall be void. No right or benefit hereunder shall in any manner
be liable for or subject to any debts, contracts, liabilities or torts of the
person entitled to such benefits. If the Grantee shall become bankrupt or
attempt to transfer, anticipate, alienate, sell, assign, pledge, encumber or
charge any right or benefit hereunder, other than as contemplated by Section 7
hereof, or if any creditor shall attempt to subject the same to a writ of
garnishment, attachment, execution, sequestration, or any other form of process
or involuntary lien or seizure, then such right or benefit shall cease and
terminate.
4. VESTING OF RESTRICTED STOCK. Restrictions shall lapse and the
Grantee shall become vested as to all shares of Restricted Stock as of October
15, 1999 (the "Vesting Date"); provided, however, that the Grantee shall not
vest pursuant to this Section 4 in any shares of Restricted Stock if the Grantee
has not been continuously employed by the Company from the Date of Grant through
the Vesting Date or if the Grantee shall have died or be under a Disability (as
such term in defined in that certain Executive Employment Agreement of even date
herewith (the "Employment Agreement) between the Company and the Grantee) on or
prior to the Vesting Date, in each such event the vesting or forfeiture of such
unvested shares to be governed instead by the provisions of Section 5 hereof.
5. EFFECT OF TERMINATION OF EMPLOYMENT. If the Company terminates
the Grantee's employment with the Company, the Grantee resigns from the Company,
or the Grantee shall die or be under a Disability, then the shares of Restricted
Stock that have not previously vested in accordance with Section 4 hereof as of
the date of such termination of employment, death or determination of
Disability, as the case may be, shall be forfeited by the Grantee to the
Company.
6. LIMITATION OF RIGHTS. Nothing in this Agreement shall be
construed to:
(a) give the Grantee any right to be awarded any further
restricted stock other than in the sole discretion of the Board of Directors of
the Company;
(b) give the Grantee or any other person any interest in any
specified asset or assets of the Company or any Affiliate (as such term is
defined below); or
(c) confer upon the Grantee the right to continue in the
employment or service of the Company or any Affiliate, or affect the right of
the Company or any Affiliate to terminate the employment or service of the
Grantee at any time or for any reason.
2
<PAGE> 3
For purposes of this Agreement, "Affiliate" shall mean any trust, partnership,
company, corporation or other legal entity that, directly or indirectly through
one or more intermediaries, controls or is controlled by, or is under common
control with, the Company.
7. PREREQUISITES TO BENEFITS. Neither the Grantee, nor any person
claiming through the Grantee, shall have any right or interest in the Restricted
Stock awarded hereunder, unless and until all the terms, conditions and
provisions of this Agreement which affect the Grantee or such other person shall
have been complied with as specified herein.
8. RIGHTS AS A STOCKHOLDER. Subject to the limitations and
restrictions contained herein, the Grantee shall have all rights as a
stockholder with respect to the shares of Restricted Stock only upon
registration of such shares in the name of the Grantee in the books of the
Company.
9. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of and be enforceable by the Grantee, the Company and their
respective permitted successors and assigns (including personal representatives,
heirs and legatees), except that the Grantee may not assign any rights or
obligations under this Agreement except to the extent and in the manner
expressly permitted herein.
10. SECURITIES ACT. The Company will not be required to deliver
any shares of Common Stock pursuant to this Agreement if, in the opinion of
counsel for the Company, such issuance would violate the Securities Act of 1933,
as amended, or any other applicable federal or state securities laws or
regulations. The Company may require that the Grantee, prior to the issuance of
any such shares pursuant to this Agreement deliver to the Company a written
statement, in form and content acceptable to the Company, in its sole
discretion, stating (i) that the Grantee is purchasing the shares for investment
and not with a view to the sale or distribution thereof; and (ii) that the
Grantee will not sell any securities of the Company that the Grantee may then
own or thereafter acquire except pursuant to a registered offering or a valid
exemption from registration. Any stock certificates issued pursuant to this
Agreement shall bear a restrictive legend as follows:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE
SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT COVERING SUCH SECURITIES, OR THE HOLDER RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT AND THE QUALIFICATION REQUIREMENTS
UNDER STATE LAW.
3
<PAGE> 4
11. FEDERAL AND STATE TAXES. Any amount of Common Stock that is
payable or transferable to the Grantee hereunder may be reduced by any amount or
amounts which the Company is required to withhold under the then applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), or its
successors, or any other federal, state or local tax withholding requirement. If
the Grantee makes the election permitted by Section 83(b) of the Code, the taxes
shall be due and payable for the year in which this Agreement is executed. If
the Employee does not make such election, the taxes shall be payable for the
year in which the restrictions lapse pursuant to Section 4. Upon determination
of the year in which such taxes are due and the determination by the Company of
the amount of taxes required to be withheld, if any, the Grantee shall either
pay to the Company an amount equal to the taxes required to be paid, or the
Grantee shall authorize (in writing) the Company to withhold from other payments
to tile Grantee an amount equal to the amount of federal, state or local taxes
required to be withheld. The Board of Directors of the Company may, in its
discretion, postpone the delivery of any shares pursuant to this Agreement until
the payment or authorization to withhold taxes by the Grantee is completed.
12. MODIFICATION AND AMENDMENT. No supplement, modification or
amendment of this Agreement or waiver of any provision of this Agreement will be
binding unless executed in writing by all parties to this Agreement. No waiver
of any of the provisions of this Agreement will be deemed or will constitute a
waiver of any other provision of this Agreement (regardless of whether similar),
nor will any such waiver constitute a continuing wavier unless otherwise
expressly provided.
13. ENTIRE AGREEMENT: HEADINGS; GOVERNING LAW. This Agreement
constitutes the entire agreement of the parties with respect to the subject
matter hereof and supersedes in its entirety all prior undertakings and
agreements of the Company and the Grantee with respect to the subject matter
hereof. The captions used in this Agreement are inserted for convenience and
shall not be deemed a part of this Agreement for construction or interpretation.
This Agreement is governed by Delaware law except for that body of law
pertaining to conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
STAR SCIENTIFIC, INC. GRANTEE
By: /s/ Paul L. Perito /s/ James A. McNulty
------------------------------------ --------------------
Name: Paul L. Perito JAMES A. McNULTY
----------------------------------
Title: Executive Vice President/General
---------------------------------
Counsel
--------------------------------- Date: October 19, 1999
Date: October 27, 1999 -----------------
-----------------
4
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,118,065
<SECURITIES> 0
<RECEIVABLES> 3,618,545
<ALLOWANCES> 0
<INVENTORY> 1,198,362
<CURRENT-ASSETS> 5,918,865
<PP&E> 8,479,511
<DEPRECIATION> 1,848,065
<TOTAL-ASSETS> 12,847,531
<CURRENT-LIABILITIES> 6,481,124
<BONDS> 0
0
1
<COMMON> 579,275
<OTHER-SE> 5,487,069
<TOTAL-LIABILITY-AND-EQUITY> 12,847,531
<SALES> 58,917,606
<TOTAL-REVENUES> 58,917,606
<CGS> 17,372,531
<TOTAL-COSTS> 38,871,702
<OTHER-EXPENSES> 11,422,945
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,874
<INCOME-PRETAX> 8,652,832
<INCOME-TAX> 2,406,000
<INCOME-CONTINUING> 6,246,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,246,832
<EPS-BASIC> .15
<EPS-DILUTED> .11
</TABLE>
