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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT /X/
FILED BY A PARTY OTHER THAN THE REGISTRANT / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
/X/ Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COCENSYS, INC.
-----------------------------------------------------------
(Name of Registrant as Specified in its Charter)
-----------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies: ______
2) Aggregate number of securities to which transaction applies:__________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: __________________________________
4) Proposed maximum aggregate value of transaction:______________________
5) Total fee paid:_______________________________________________________
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount previously paid:_______________________________________________
2) Form, Schedule or Registration Statement No.:_________________________
3) Filing Party:_________________________________________________________
4) Date Filed:___________________________________________________________
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[LOGO]
COCENSYS, INC.
201 Technology Drive
Irvine, California 92618
December 30, 1998
Dear Stockholder:
On behalf of CoCensys, Inc. (the "Company"), I cordially invite you to
attend a Special Meeting of Stockholders, which will begin at 2:00 p.m. local
time on Wednesday, January 27, 1999, at the offices of the Company, 201
Technology Drive, Irvine, California. At the meeting, stockholders will be
asked to approve the issuance by the Company of shares of its Common Stock on
conversion of shares of the Company's Series E Convertible Preferred Stock,
which the Company sold on June 8, 1998 to raise $8 million of working
capital. In addition, the stockholders will be asked to provide the Board of
Directors discretionary authority to effect a "reverse stock split" whereby
the Company would issue one new share of Common Stock in exchange for between
four and ten shares of outstanding Common Stock.
These are very important matters that may have significant impact on the
future of the Company. The accompanying Notice and Proxy Statement describe
these proposals. We urge you to read this information carefully and vote your
shares promptly. The directors and officers of the Company hope that as many
stockholders as possible will be present at the meeting. BECAUSE THE VOTE OF
EACH STOCKHOLDER IS IMPORTANT, WE ASK THAT YOU SIGN AND RETURN THE ENCLOSED
PROXY CARD IN THE ENVELOPE PROVIDED, WHETHER OR NOT YOU NOW PLAN TO ATTEND
THIS MEETING. This will not limit your right to attend the meeting or to
change your vote at the meeting.
We appreciate your cooperation and interest in the Company. To assist
us in preparation for the meeting, please return your proxy card at your
earliest convenience.
Sincerely yours,
F. RICHARD NICHOL, PH.D.
Chairman of the Board
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COCENSYS, INC.
201 Technology Drive
Irvine, California 92618
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 27, 1999
TO THE STOCKHOLDERS OF COCENSYS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of CoCensys,
Inc., a Delaware corporation (the "Company"), will be held on Wednesday,
January 27, 1999, at 2:00 p.m., local time, at the offices of the Company,
201 Technology Drive, Irvine, California for the following purposes:
1. To approve the issuance by the Company from time to time of shares of
its Common Stock on conversion of shares of the Company's Series E
Convertible Preferred Stock and exercise of warrants issued in
connection with such Series E Convertible Preferred Stock;
2. To approve a proposal to provide the Board of Directors the authority
to amend the Company's Amended and Restated Certificate of
Incorporation, as amended, to effect, at any time prior to the 1999
Annual Meeting of Stockholders, a reverse stock split, whereby
the Company would issue one new share of Common Stock in exchange for
between four and ten shares of outstanding Common Stock; and
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice. The Board of Directors has fixed the
close of business on December 11, 1998, as the record date for the
determination of stockholders entitled to notice of and to vote at this
Special Meeting and at any adjournment thereof.
By Order of the Board of Directors,
ROBERT R. HOLMEN
Secretary
Irvine, California
December 30, 1998
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ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING.
PLEASE NOTE, HOWEVER, THAT IF A BROKER, BANK OR OTHER NOMINEE IS THE RECORD
HOLDER OF YOUR SHARES AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM
THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
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COCENSYS, INC.
201 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 27, 1999
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
CoCensys, Inc., a Delaware corporation ("CoCensys" or the "Company"), for use
at the Special Meeting of Stockholders (the "Special Meeting"), or at any
adjournment or postponement thereof, for the purposes set forth in this proxy
statement and in the accompanying Notice of Special Meeting. The Special
Meeting will be held at the offices of the Company, 201 Technology Drive,
Irvine, California, on January 27, 1999, at 2:00 p.m. local time. The
Company intends to mail this proxy statement and accompanying proxy card on
or about December 30, 1998 to all stockholders entitled to vote at the
Special Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies
including preparation, assembly, printing and mailing of this proxy
statement, the proxy and any additional information furnished to
stockholders. Copies of solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding in their names shares of
the Company's Common Stock beneficially owned by others to forward to such
beneficial owners. The Company may reimburse persons representing beneficial
owners of Common Stock for their costs of forwarding solicitation materials
to such beneficial owners. Original solicitation of proxies by mail may be
supplemented by telephone, telegram or personal solicitation by directors,
officers or other regular employees of the Company; no additional
compensation will be paid to directors, officers or other regular employees
for such services. In addition, the Company has retained D.F. King & Co.,
Inc., to conduct additional solicitation of proxies, for which the Company
will pay D.F. King's customary fee, estimated at $6,000 plus reimbursement of
expenses.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on
December 11, 1998 (the "Record Date") will be entitled to notice of and to
vote at the Special Meeting. At the close of business on the Record Date,
the Company had outstanding and entitled to vote 27,280,949 shares of Common
Stock. Each holder of record of Common Stock on such date will be entitled to
one vote for each share held on all matters to be voted upon at the Special
Meeting, except that holders of the Company's Series E Convertible Preferred
Stock (the "Series E Preferred Stock") and warrants issued in connection
therewith are not entitled to vote shares of Common Stock acquired upon
conversion of the Series E Preferred Stock or exercise of such warrants on
Proposal 1.
The inspector of election appointed for the meeting will separately
tabulate affirmative and negative votes, abstentions and broker non-votes.
Abstentions will be counted toward the tabulation of votes cast on proposals
presented to the stockholders and will have the same effect as negative
votes. Broker non-votes are counted toward a quorum. With respect to
Proposal 1, broker non-votes are not counted for any purpose in determining
whether the matter has been approved. With respect to Proposal 2, broker
non-votes will have the same effect as negative votes.
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REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with
the Secretary of the Company, at the Company's principal executive office,
201 Technology Drive, Irvine, California 92618, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be
revoked by attending the meeting and voting in person. Attendance at the
meeting will not, by itself, revoke a proxy.
STOCKHOLDER PROPOSALS
The deadline for submitting a stockholder proposal for inclusion in the
Company's proxy statement and form of proxy for the Company's 1999 Annual
Meeting of Stockholders pursuant to Rule 14a-8 of the Securities and Exchange
Commission (the "Commission") is January 2, 1999. The deadline for
submitting a stockholder proposal or a nomination for director that is not to
be included in such proxy statement and proxy is also January 2, 1999.
PROPOSAL 1
APPROVAL OF THE ISSUANCE BY THE COMPANY FROM TIME TO TIME OF SHARES OF ITS
COMMON STOCK ON CONVERSION OF SHARES OF THE COMPANY'S SERIES E CONVERTIBLE
PREFERRED STOCK AND EXERCISE OF WARRANTS ISSUED IN CONNECTION WITH SUCH
SERIES E CONVERTIBLE PREFERRED STOCK
Under this Proposal, the Company is seeking stockholder approval to
issue shares of its Common Stock on conversion of shares of the Series E
Preferred Stock and exercise of warrants issued in connection with the sale
of the Series E Preferred Stock. As discussed more fully below, the Company
sold 8,000 shares of Series E Preferred Stock, along with Warrants to
purchase 350,000 shares of Common Stock (the "Initial Warrants"), in order to
raise $8 million in working capital to fund product development and clinical
trials. Under the terms of sale of Series E Preferred Stock and Initial
Warrants, the Company issued to the investors additional Warrants to purchase
100,000 shares of Common Stock on November 8, 1998 (the "Additional Warrants"
and, along with the Initial Warrants, the "Warrants"), and the Company may be
obligated to sell to the initial investors an additional 2,000 shares of
Series E Preferred Stock for $2 million on or before August 30, 1999.
The Series E Preferred Stock is convertible into shares of Common Stock
at the election of the holders at a price based on the market price of the
Company's Common Stock as quoted on the Nasdaq National Market at the time of
conversion. In certain circumstances, in order to maintain listing of the
Company's Common Stock on the Nasdaq National Market, Nasdaq Stock Market,
Inc. rules require that the Company seek stockholder approval to issue shares
of Common Stock in excess of 20% of the outstanding shares of Common Stock.
Based on the current market price for the Company's Common Stock, the Company
anticipates that it will be required to issue Common Stock in excess of that
20% limit upon conversion of the Series E Preferred Stock and exercise of
Warrants; accordingly, the Company is seeking stockholder approval for the
Common Stock issuance.
The exact number of shares of Common Stock issuable on conversion of the
Series E Preferred Stock is dependent on the market price of the Common Stock
at the time of conversion and, therefore, is not currently known or
determinable. The number of shares of Common Stock that may be issuable upon
conversion of the Series E Preferred Stock at certain assumed conversion
prices and upon exercise of the Warrants is set forth in the table on page 5
below. There is no limit on the number of shares that may be issuable upon
conversion of the Series E Preferred Stock. ACCORDINGLY, STOCKHOLDERS ARE
BEING ASKED IN THIS PROPOSAL 1 TO AUTHORIZE THE ISSUANCE OF SUCH CURRENTLY
INDETERMINATE NUMBER OF SHARES OF COMMON STOCK AS MAY BE REQUIRED TO EFFECT
CONVERSIONS OF SERIES E PREFERRED STOCK AND EXERCISE OF WARRANTS IN
ACCORDANCE WITH THEIR RESPECTIVE TERMS AS DESCRIBED BELOW AND, IN THE CASE OF
THE SERIES E PREFERRED STOCK, IN THE CERTIFICATE OF DESIGNATION INCLUDED AS
APPENDIX A TO THIS PROXY STATEMENT.
THE BOARD OF DIRECTORS STRONGLY RECOMMENDS THAT THE STOCKHOLDERS VOTE IN
FAVOR OF THIS PROPOSAL. AS DISCUSSED MORE FULLY BELOW, FAILURE TO APPROVE
THIS PROPOSAL MAY FORCE THE COMPANY TO REDEEM THE SERIES E PREFERRED STOCK,
WHICH COULD SIGNIFICANTLY DEPLETE THE COMPANY'S CASH RESERVES AND MATERIALLY
ADVERSELY AFFECT ITS OPERATIONS AND FINANCIAL CONDITION.
TERMS OF PREFERRED STOCK AND WARRANTS
CONVERSION OF SERIES E PREFERRED STOCK. On June 8, 1998 (the "Closing
Date"), the Company sold 8,000 shares of Series E Preferred Stock and the
Initial Warrants for an aggregate purchase price of $8 million in a private
placement to three investors pursuant to Regulation D of the Securities Act
of 1933, as amended. Each share of Series E Preferred Stock is convertible
into the number of shares of Common Stock equal to (a) the stated value of a
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share of Series E Preferred Stock ($1,000) plus any accrued and unpaid
dividends on the date of conversion divided by (b) the "Conversion Price,"
which equals the lesser of (i) the average of the three lowest trading prices
during the 15 trading days ending one trading day prior to the conversion,
multiplied by 100% (until October 8, 1998) or 90% (after October 8, 1998), or
(ii) $3.93.
The Series E Preferred Stock may be converted into Common Stock at any
time at the election of the holder, subject to the limitation that no holder
can convert its shares of Series E Preferred Stock into Common Stock if such
conversion would result in it, along with its affiliates, being the
beneficial owner of more than 4.9% of the outstanding Common Stock of the
Company. The preceding condition may be waived by the holder by providing 61
days' notice to the Company. The Series E Preferred Stock automatically
converts on June 8, 2001 if not converted earlier.
DIVIDENDS. The Series E Preferred Stock accrues a 7.5% per annum
dividend until converted, subject to reduction in the dividend rate to (i)
5.5%, if the Common Stock trades at or above $4.05 per share for 10
consecutive trading days, (ii) 3.5%, if the Common Stock trades at or above
$4.95 per share for 10 consecutive trading days and (iii) 1.5%, if the Common
Stock trades at or above $6.00 per share for 10 consecutive trading days, in
each case so long as the price threshold is met. Dividends are payable
quarterly in cash or, at the election of the Company, by adding the amount of
the dividend to the conversion value of the Series E Preferred Stock.
VOTING RIGHTS. Prior to conversion or exercise, holders of the Series E
Preferred Stock and Warrants do not have voting rights except as required by
the Delaware General Corporation Law. Upon receipt of Common Stock following
conversion of Series E Preferred Stock or exercise of Warrants, the holders
are entitled to vote Common Stock received on such conversion or exercise on
an equivalent basis with all other Common Stock; however, the holders of
Series E Preferred Stock and Warrants may not vote any Common Stock held by
them on this Proposal 1 if the holders received the Common Stock on
conversion of the Series E Preferred Stock or exercise of Warrants.
WARRANTS. The Initial Warrants remain exercisable for five years from
the date of issuance, with an exercise price of $4.50 per share. On November
8, 1998, each initial investor in the Series E Preferred Stock received its
pro rata portion of the Additional Warrants exercisable for $0.625 per share,
based on the investors having held at least 65% of the Series E Preferred
Stock purchased by each investor as of that date. The Additional Warrants
also remain exercisable for five years from date of issuance.
REGISTRATION OF SHARES. The Company filed a registration statement with
the Commission on Form S-3 registering the resale of up to 12,000,000 shares
of Common Stock issuable upon conversion of the Series E Preferred Stock and
350,000 shares issuable upon exercise of the Initial Warrants. The
registration statement was declared "effective" by the Commission on
September 4, 1998. The Company is required to register additional shares
with the Commission (i) as necessary to cover resale of shares of Common
Stock in excess of the initial 12,000,000 issuable upon conversion of Series
E Preferred Stock and (ii) to cover resale of up to 100,000 shares of Common
Stock issuable on exercise of the Additional Warrants. The Company intends
to file a registration statement on Form S-3, if available, covering those
additional shares promptly following the Special Meeting.
SALE OF ADDITIONAL SERIES E PREFERRED STOCK. During the period
beginning December 3, 1998 (90 days after the Commission declared the
registration statement effective) and ending August 30, 1999 (360 days after
that declaration), the Company is obligated to sell, and the investors are
obligated to purchase, an additional $2 million in Series E Preferred Stock
subject to, among other things, the closing price for the Common Stock being
greater than $3.75 per share for 10 consecutive trading days.
REDEMPTION AND REPURCHASE. If at any time the number of shares issued
on conversion of Series E Preferred Stock and exercise of Warrants equals
19.99% of the number of shares of Common Stock outstanding as of the Closing
Date, and if the Company is then prevented from issuing additional shares of
Common Stock on conversion of the Series E Preferred Stock and has not
obtained the approval of the Company's stockholders in accordance with its
listing requirements on the Nasdaq National Market, then the Company is
required to redeem the Series E Preferred Stock at 110% of the value of
Common Stock into which the Series E Preferred Stock is then convertible.
SEE "Nasdaq Limitation on Common Stock Issuance," below.
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In the event of an acquisition, merger or change of control of the
Company, the holders of Series E Preferred Stock may elect to have the
Company repurchase their holdings for 125% of the stated value (including
accrued dividends) of the shares. If the holders do not elect for the
Company to repurchase the shares, the Company has the right to redeem the
Series E Preferred Stock in connection with an acquisition, merger or other
change of control at the greater of 130% of stated value (including accrued
dividends) or 100% of the value of Common Stock into which the Series E
Preferred Stock is then convertible. If the holders do not elect for the
Company to repurchase the shares, and the Company does not elect to redeem
the shares, the holders of Series E Preferred Stock receive either equivalent
shares in the acquiring entity or receive the consideration (E.G. cash or
securities of the acquiring entity) paid to holders of Common Stock.
Notwithstanding the foregoing, if any acquisition, merger or change of
control is to be accounted for on a "pooling of interests" basis, the holders
of the Series E Preferred Stock are required to accept the greater of (i) the
amount to be received on repurchase (125% of stated value) or (ii) the
securities of the acquiring entity that the holder would otherwise receive in
the transaction in exchange for the shares of Series E Preferred Stock.
The Company also may be required to redeem the Series E Preferred Stock,
at the election of the holder, under certain events of default, including
bankruptcy events and delisting of the Common Stock from the Nasdaq National
Market (SEE Proposal 2 below), in each case at the greater of 130% of stated
value (including accrued dividends) or 100% of the value of Common Stock into
which the Series E Preferred Stock is then convertible.
NASDAQ LIMITATION ON COMMON STOCK ISSUANCE
The Company's Common Stock is listed on the Nasdaq National Market. In
order to maintain listing on the Nasdaq National Market, the Company must
comply with certain rules and listing standards promulgated by the Nasdaq
Stock Market, Inc. ("Nasdaq"). In particular, Rule 4460(i)(1)(D) of Nasdaq
requires companies listed on the Nasdaq National Market to obtain approval of
the stockholders prior to issuing common stock (or securities convertible
into or exercisable for common stock) in a private financing at a price less
than the market value of the common stock, where the number of shares of
common stock to be issued (or issuable) is at least 20% of the common stock
or voting power of the Company outstanding prior to the issuance. Therefore,
the Company is required to obtain the approval of the holders of a majority
of its Common Stock prior to issuing shares of Common Stock as a dividend on
or upon conversion of the Series E Preferred Stock or exercise of Warrants in
excess of an aggregate of 20% of the number of shares of Common Stock
outstanding on the original Closing Date of sale of the Series E Preferred
Stock and Warrants. At that time, 20% of the outstanding shares equaled
4,932,948 shares (the "20% Share Limit"). In order for the Company to issue
shares in excess of the 20% Share Limit, the Company must obtain stockholder
approval.
IF THE COMPANY FAILS TO OBTAIN THE NECESSARY APPROVAL, THE COMPANY WOULD
BE REQUIRED TO REDEEM THE THEN-OUTSTANDING SERIES E PREFERRED STOCK FOR CASH
IN AN AMOUNT EQUAL TO 110% OF THE AGGREGATE CONVERSION PRICE THEN IN EFFECT.
REDEMPTION OF THE SERIES E PREFERRED STOCK COULD SIGNIFICANTLY DEPLETE THE
COMPANY'S CASH RESERVES AND MATERIALLY ADVERSELY AFFECT ITS OPERATIONS AND
FINANCIAL CONDITION.
Specifically, if the stockholders do not approve this Proposal 1, then
the Company will be limited to issuing 4,932,948 shares of stock on
conversion of the Series E Preferred Stock and exercise of the Warrants.
That 20% Share Limit is applied pro rata to each holder of Series E Preferred
Stock and Warrants (E.G. the holder of 10% of the Series E Preferred Stock
and Warrants is entitled to receive up to 10% of the 4,932,948 shares, or
493,295 shares, on conversion of Series E Preferred Stock and exercise of
Warrants). Once the Series E Preferred Stock ceases to be convertible
because the Company has reached the 20% Share Limit, and if the stockholders
have failed to approve issuance of Common Stock above the 20% Share Limit,
then the Company must immediately redeem all of the outstanding Series E
Preferred Stock (which may be required as soon as five (5) business days
after reaching the 20% Share Limit) at 110% of the market value of Series E
Preferred Stock, based on the then-applicable conversion price.
The amount of cash that the Company would be required to expend to redeem
the outstanding Series E Preferred Stock could vary greatly depending on the
market price and volatility of the Common Stock. Based on a
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conversion price of $0.422 (90% of the average of the three lowest trading
prices during the 15 trading days ending one trading day prior to December
11, 1998) and the current market price of the Common Stock on December 11,
1998 of $0.4375 per share, the Company would be required to pay $7,639,358 to
redeem the outstanding Series E Preferred Stock, which would substantially
deplete the Company's cash reserves and materially and adversely affect the
Company's operations and financial condition.
EFFECT OF SALE OF SERIES E STOCK AND WARRANTS ON HOLDERS OF COMMON STOCK
At the time the first $8 million of Series E Preferred Stock was sold,
the closing price for the Company's Common Stock on the Nasdaq National
Market was $3.00 per share, so that the Series E Preferred Stock then would
have converted into approximately 2,700,000 shares of Common Stock, which was
well below the 20% Share Limit. Since that time, the market price of the
Company's Common Stock has declined significantly; as of December 11, 1998,
the closing price for the Company's Common Stock on the Nasdaq National
Market was $0.4375 per share. As of that date, 2,563,060 shares had been
issued on conversion of $1,555,000 of Series E Preferred Stock, and an
additional 15,873,991 shares were issuable on conversion of the remaining
$6,445,000 (plus accrued dividends of $251,840) of Series E Preferred Stock
then outstanding, based on the conversion price in effect at that time of
$0.422 per share. The number of shares issuable on future conversions may
prove to be significantly greater in the event of a decrease in the market
price of the Common Stock, or less if the market price of the Common Stock
rises. Stockholders may experience substantial dilution of their investment
upon conversion of the Series E Preferred Stock.
In addition, the Company is required to issue up to 450,000 shares
of Common Stock on exercise of the Warrants. If the conditions to issuing
the additional 2,000 shares ($2 million) of Series E Preferred Stock are met
(which conditions include that the closing price for the Common Stock is
greater than $3.75 per share for 10 consecutive trading days), the Company
will be obligated to issue additional shares of Common Stock on conversion of
those shares of Series E Preferred Stock. The following table illustrates
the effect of various conversion prices, assuming all remaining Series E
Preferred Stock (including accrued dividends), plus the $2 million additional
Series E Preferred Stock that may be issued, is converted at the same time at
these prices:
<TABLE>
<CAPTION>
Common Shares Total Common
Common Shares Common Shares Issuable Common Shares Shares Issuable
Assumed Issued on Issuable on Conversion of Issuable on Total As a % of Shares
Conversion Conversion Conversion Additional Exercise Common Shares Outstanding After
Price (1) Prior to 12/11/98 At 12/11/98 $2 million (2) of Warrants Issuable Conversion (3)
- ---------- ----------------- ------------- --------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$0.25 2,563,060 26,787,360 8,000,000 450,000 37,800,420 60.6%
$0.50 2,563,060 13,393,680 4,000,000 450,000 20,406,740 45.3%
$1.00 2,563,060 6,696,840 2,000,000 450,000 11,709,900 32.3%
$2.00 2,563,060 3,348,420 1,000,000 450,000 7,361,480 23.0%
$3.00 2,563,060 2,232,280 666,667 450,000 5,912,007 19.4%
$3.93(4) 2,563,060 1,704,031 508,906 450,000 5,225,997 17.5%
</TABLE>
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(1) The conversion price equals the lesser of (i) the average of the three
lowest trading prices during the 15 trading days ending one trading day
prior to the conversion, multiplied by 100% (until October 8, 1998) or 90%
(after October 8, 1998), or (ii) $3.93.
(2) The additional $2 million in Series E Preferred Stock is issuable only if,
among other conditions, the closing price for the Common Stock is greater
than $3.75 per share for 10 consecutive trading days on or before
August 30, 1999.
(3) Assumes that the number of shares outstanding other than shares issued or
issuable on conversion of Series E Preferred Stock and exercise of Warrants
is 24,594,700, which was the number of shares outstanding at June 8, 1998.
(4) Represents the maximum conversion price.
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Note that, under applicable Delaware law and the Company's Amended and
Restated Certificate of Incorporation, as amended, the Board of Directors has
the authority, without further action by the stockholders, to issue
additional shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon
any series of unissued preferred stock and to fix the number of shares
constituting any series and the designation of such series, without any
further vote or action by the stockholders.
POTENTIAL FOR CHANGE OF CONTROL
The approval of this Proposal 1 could, depending on the market prices of
the Common Stock during the periods prior to conversion of the Series E
Preferred Stock, result in the issuance of a large number of shares of Common
Stock, thereby possibly resulting in a change of control of the Company if
the converting holders were to retain such shares of Common Stock rather than
sell them. Under the terms of the Series E Convertible Preferred Stock, no
holder can convert its shares into Common Stock if such conversion would
result in it, along with its affiliates, being the beneficial owner of more
than 4.9% of the Common Stock that would be outstanding after giving effect
to such conversion. However, this restriction can be terminated at any time
upon 61 days' prior written notice to the Company by the affected holder.
Note also that, under Nasdaq rules and listing standards, the Company must
obtain stockholder approval for transactions that result in a "change of
control." ALTHOUGH THE COMPANY DOES NOT BELIEVE THAT SALE OF THE SERIES E
CONVERTIBLE PREFERRED STOCK AND WARRANTS, AND ISSUANCE OF COMMON STOCK ON
CONVERSION AND EXERCISE THEREOF, CONSTITUTES A CHANGE OF CONTROL UNDER THESE
RULES, IF THE TRANSACTIONS WERE TO BE SO CONSTRUED, THE APPROVAL SOUGHT UNDER
THIS PROPOSAL 1 WILL BE EFFECTIVE TO SATISFY THE STOCKHOLDER VOTE
REQUIRED FOR A CHANGE OF CONTROL. The Company's opinion that these
transactions do not constitute a change of control is based on the facts that
(i) holders of Series E Preferred Stock were not granted voting rights, (ii)
the holders have no contractual or other right to elect a director or
otherwise influence management of the Company, (iii) there has been no change
in the Company's President & Chief Executive Officer or composition of the
Board of Directors since the Closing Date (other than the election of one new
director nominated by the Board prior to the Closing Date), and (iv) no
holder can convert its shares of Series E Preferred Stock into Common Stock
if such conversion would result in it being the beneficial owner of more than
4.9% of the Common Stock without giving 61 days' prior written notice to the
Company (and no holder has provided such notice as of the date of this Proxy
Statement).
Stockholders should consider also that the potential for the issuance of
a significant number of shares of Common Stock on conversion of the Series E
Preferred Stock and exercise of Warrants may tend to have the effect of
discouraging tender offers for the Company or delaying, deferring or
preventing a change of control of the Company.
VOLATILITY OF COCENSYS COMMON STOCK
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating
performance of particular companies. In addition, the market prices of the
common stock of many publicly traded biopharmaceutical companies, including
the Company, have in the past been, and can in the future be expected to be,
especially volatile. Announcements of technological innovations or new
products by the Company or its competitors, developments or disputes
concerning patents or proprietary rights, publicity regarding actual or
potential medical results relating to products under development by the
Company or its competitors, regulatory developments in both the United States
and foreign countries, public concern as to the safety of biotechnology
products and economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, may have a significant
impact on the market price of the Company's Common Stock.
The sale of a large number of shares of the Company's Common Stock in the
public market following conversion of the Series E Preferred Stock could have an
adverse effect on the market price of the Company's Common Stock. Substantially
all of the outstanding shares of the Company's Common Stock are available for
immediate sale in the public markets, subject to volume restrictions applicable
to affiliates. Approximately
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<PAGE>
4,500,000 additional shares subject to currently exercisable options and
warrants also may be sold freely immediately following exercise thereof.
REQUIRED VOTE
The affirmative vote of a majority of the shares present in person or
represented by proxy and entitled to vote is necessary to approve issuance of
the shares of Common Stock in accordance with this Proposal 1.
AVAILABLE INFORMATION
The terms of the Series E Preferred Stock and Warrants are complex and
only briefly summarized in this Proxy Statement. Stockholders wishing
further information concerning the rights, preferences and terms of the
Series E Preferred Stock should review the full description of the Series E
Preferred Stock contained in the Certificate of Powers, Designation,
Preferences, Rights and Limitations of Series E Convertible Preferred Stock
of CoCensys, Inc., included as APPENDIX A to this Proxy Statement. The
Series E Preferred Stock and Warrant purchase agreement, along with the forms
of Initial Warrant and Additional Warrant, may be obtained by any of the
following methods:
1. By reviewing the copy on file with the Securities and Exchange
Commission (the "Commission") at the public reading rooms maintained by the
Commission at Securities Exchange Commission, Public Reference Branch, Stop
1-2, 450 Fifth Street, NW, Washington, DC, 20549-1004;
2. By viewing the copy maintained in the Commission's "EDGAR"
database, which may be accessed through the Commission's web site at
http://www.sec.gov; or
3. By submitting a written request to the Company, attention Investor
Relations, 201 Technology Drive, Irvine, CA 92618.
THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE FOR PROPOSAL 1
-7-
<PAGE>
PROPOSAL 2
APPROVAL OF A PROPOSAL TO PROVIDE THE BOARD OF DIRECTORS THE AUTHORITY TO
AMEND THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, AS
AMENDED, TO EFFECT, AT ANY TIME PRIOR TO THE 1999 ANNUAL MEETING OF
STOCKHOLDERS, A REVERSE STOCK SPLIT, WHEREBY THE COMPANY WOULD ISSUE ONE NEW
SHARE OF COMMON STOCK IN EXCHANGE FOR BETWEEN FOUR AND TEN SHARES OF
OUTSTANDING COMMON STOCK
BACKGROUND
The Company's stockholders are being asked in this Proposal 2 to
authorize the Company to amend the Company's Amended and Restated Certificate
of Incorporation, as amended (the "Restated Certificate"), to effect, at any
time prior to the 1999 Annual Meeting of Stockholders (currently scheduled
for June 9, 1999), a reverse stock split of the Company's Common Stock
whereby the Company would issue one new share of Common Stock in exchange for
between four and ten shares of outstanding Common Stock (the "Reverse Split").
THE BOARD OF DIRECTORS STRONGLY RECOMMENDS THAT THE STOCKHOLDERS VOTE IN
FAVOR OF THIS PROPOSAL. AS DISCUSSED MORE FULLY BELOW, APPROVAL OF THIS
PROPOSAL MAY BE NECESSARY TO MAINTAIN LISTING OF THE COMPANY'S COMMON STOCK
ON THE NASDAQ NATIONAL MARKET.
The complete text of the form of amendment to the Restated Certificate
that would be filed with the office of the Secretary of State of the State of
Delaware to effect the Reverse Split is set forth in Appendix B to this Proxy
Statement; provided, however, that such text is subject to amendment to
include such changes as may be required by the office of the Secretary of
State of the State of Delaware and as the Company's Board of Directors (the
"Board") deems necessary and advisable to effect the Reverse Split in the
range described above.
REASONS FOR THE REVERSE SPLIT
The Board believes that the Reverse Split is desirable for a number of
reasons. First, the Board believes that the Reverse Split may be necessary
to enable the Company to maintain the listing of the Company's Common Stock
on the Nasdaq National Market. Second, the Reverse Split may improve the
Company's ability to raise new capital. Finally, the Board believes that the
Reverse Split will improve the marketability and liquidity of the Company's
Common Stock. In addition, the Board believes that stockholder approval of
an exchange ratio range (as opposed to approval of a specified exchange
ratio) in which the Reverse Split may be effected will provide the Board with
maximum flexibility to achieve the purposes of the Reverse Split and,
therefore, is in the best interests of the Company and its stockholders.
NASDAQ LISTING. The Company's shares of Common Stock have been listed,
and have traded, on the Nasdaq National Market since January 1993 when the
Company completed its initial public offering. The rules of the Nasdaq Stock
Market require that, as a condition of the continued listing of a Company's
securities on the Nasdaq National Market, a company must satisfy certain
maintenance requirements. The maintenance requirements generally require
that a company meet certain minimum criteria relating to its financial
condition, results of operations and trading market for its listed
securities. The maintenance criteria applicable to the Company consist of
maintaining (i) a public float of at least 750,000 shares, (ii) a market
value of the public float of at least $5 million, (iii) a minimum bid price
equal to or greater than $1.00 per share, (iv) at least 400 shareholders
("round-lot" holders, as described under "MARKETABILITY AND LIQUIDITY OF
COMMON STOCK," below), (v) net tangible assets of at least $4 million, (vi)
at least two registered market makers and (vii) compliance with certain
corporate governance requirements. The Company believes that it satisfies
all of these maintenance criteria other than having a minimum bid price equal
to or greater than $1.00 per share.
ON DECEMBER 1, 1998, THE COMPANY RECEIVED A NOTICE FROM THE NASDAQ STOCK
MARKET CONFIRMING NASDAQ'S DETERMINATION THAT THE COMPANY NO LONGER MEETS THE
MINIMUM BID PRICE REQUIREMENT. NASDAQ HAS PROVIDED THE COMPANY UNTIL
FEBRUARY 28, 1999 TO CORRECT THE DEFICIENCY; OTHERWISE, THE
-8-
<PAGE>
COMPANY'S SECURITIES WILL BE DELISTED FROM THE NASDAQ NATIONAL MARKET AT THE
OPEN OF BUSINESS ON MARCH 2, 1999. BASED ON THE RECENT TRADING HISTORY OF
THE COMPANY'S COMMON STOCK, UNLESS THE STOCKHOLDERS APPROVE THIS PROPOSAL,
THE COMPANY MAY BE UNABLE TO MEET THE MINIMUM BID PRICE REQUIREMENT AND THE
COMPANY'S COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET.
The Company believes that if the Reverse Split is approved by the
stockholders at the Special Meeting, and the Reverse Split is effectuated,
the Company's Common Stock should initially have a minimum bid price in
excess of the $1.00 per share necessary to maintain its listing on the Nasdaq
National Market. The Company would also need to continue to satisfy all
other maintenance criteria. There can be no assurance, however, that the
Company will be successful in meeting and maintaining these maintenance
criteria or that, even if these maintenance criteria are met, the Company's
Common Stock will continue to be traded on the Nasdaq National Market.
If the Reverse Split is not approved by the stockholders at the Meeting,
then it is possible, depending on the volatility and future price of the
Company's Common Stock and the Company's ability to meet the maintenance
criteria described above, that the Company's Common Stock will be delisted
from the Nasdaq National Market on March 2, 1999. The delisting of the
Company's Common Stock from the Nasdaq National Market could adversely affect
the liquidity of the Company's Common Stock and the ability of the Company to
raise capital. In the event of delisting, the shares of Common Stock would
likely be quoted in the "pink sheets" maintained by the National Quotation
Bureau, Inc. or the NASD Electronic Bulletin Board. In that event, the
spread between the bid and ask price of the shares of Common Stock is likely
to be greater than at present, and stockholders may experience a greater
degree of difficulty in engaging in trades of shares of Common Stock.
CAPITAL RAISING EFFORTS. The Company will require additional sources of
capital to fund its existing and future product development efforts and
clinical trials and to fund continuing operations. In meetings with its
financial advisors, the Company has been advised that an increase in per
share price of the Company's Common Stock, which the Company expects
initially as a consequence of the Reverse Split, may enhance the
acceptability of the Common Stock by the financial community and the
investing public and broaden the investor pool from which the Company might
be able to obtain additional financing. In theory, the total number of
shares outstanding should not, by itself, affect the marketability of the
Common Stock, the type of investor who acquires it or the Company's
reputation in the financial community. As a practical matter, however, the
opposite is in fact often the case. For example, because of the trading
volatility often associated with low-priced stocks, as a matter of policy
many institutional investors are prohibited from purchasing such stocks. For
the same reason, brokers often discourage their customers from purchasing
such stocks.
The reduction in the number of outstanding shares of Common Stock caused
by the Reverse Split is anticipated initially to increase proportionally the
per share market price of the Common Stock. However, because some investors
may view the Reverse Split negatively in that it reduces the number of shares
available in the public market, there can be no assurance that the market
price of the Common Stock will reflect proportionately the Reverse Split, or
that such price, if it does rise proportionally to such levels, will continue
to escalate or be sustained in the future.
MARKETABILITY AND LIQUIDITY OF COMMON STOCK. The Board also believes
that the increased market price of its Common Stock expected as a result of
the Reverse Split will improve the marketability and liquidity of the
Company's Common Stock by appealing to a broader market than that which
currently exists and will encourage interest and trading in the Common Stock.
As previously noted, many brokerage houses and institutional investors have
internal policies and practices that either prohibit them from investing in
low-priced stocks or tend to discourage individual brokers from recommending
low-priced stocks to their customers. Some of those policies and practices
may function to make the processing of trades in low-priced stocks
economically unattractive to brokers. Additionally, because brokers'
commissions on low-priced stocks generally represent a higher percentage of
the stock price than commissions on higher-priced stocks, the current average
price per share of the Company's Common Stock can result in individual
stockholders paying transaction costs representing a higher percentage of
their total share value than would be the case if the share price were
substantially higher. If the Reverse Split is
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<PAGE>
implemented, however, holders of fewer than 100 shares of Common Stock
("odd-lots") after the Reverse Split is effected may be charged brokerage
fees that are proportionately higher than holders of more than 100 shares of
Common Stock ("round-lots"). The Board is hopeful that the anticipated
higher market price will reduce, to some extent, the negative effects on the
liquidity and marketability of the Company's Common Stock inherent in some of
the policies and practices of institutional investors and brokerage houses
described above.
Stockholders should note that the effect of the Reverse Split upon the
market price of the Company's Common Stock cannot be accurately predicted.
In particular, there is no assurance that the price for shares of the Common
Stock after the Reverse Split will be four to ten times the prices for shares
of the Common Stock immediately prior to the Reverse Split. Furthermore,
there can be no assurance that the proposed Reverse Split will achieve the
desired results that have been outlined above, nor can there be any assurance
that the Reverse Split will not adversely impact the market price of the
Common Stock or, alternatively, that any increased price per share of the
Common Stock immediately after the proposed Reverse Split will be sustained
for any prolonged period of time.
BOARD DISCRETION TO IMPLEMENT REVERSE SPLIT
If the Reverse Split is approved by the stockholders of the Company at
the Special Meeting, the Reverse Split will be effected, if at all, only upon
a determination by the Board, after consultation with its financial advisors,
that the Reverse Split (in an exchange ratio determined by the Board upon
advice of its financial advisors within the limits set forth in this Proposal
2) is in the best interests of the Company and its stockholders at that time.
Such determination will be based upon certain factors, including but not
limited to the then-current price of the Company's Common Stock, the
availability of additional working capital, existing and expected
marketability and liquidity of the Common Stock, prevailing market conditions
and the likely effect on the market price of the Common Stock.
Notwithstanding approval of the Reverse Split by the stockholders, the Board
may, in its sole discretion, determine not to effect the Reverse Split prior
to the 1999 Annual Meeting of Stockholders. If the Board fails to implement
the Reverse Split prior to such meeting, stockholder approval again would be
required prior to implementing any reverse split.
EFFECTS OF THE REVERSE SPLIT ON REGISTRATION, VOTING RIGHTS AND PREFERRED
STOCK
The Company's Common Stock is currently registered under Section 12(g)
of the Exchange Act, and the Company is subject to the periodic reporting and
other requirements of the Exchange Act. The Reverse Split will not affect
the registration of the Company's Common Stock under the Exchange Act. After
the Reverse Split, assuming that the Company continues to meet all other
listing criteria, the Company's Common Stock will continue to be reported on
the Nasdaq National Market under the symbol "COCN" (although Nasdaq will add
the letter "D" to the end of the trading symbol for a period of 20 trading
days to indicate the Reverse Split has occurred).
Proportionate voting rights and other rights of the holders of Common
Stock will not be affected by the Reverse Split (other than as a result of
the payment of cash in lieu of fractional shares as described below). For
example, a holder of 2% of the voting power of the outstanding shares of
Common Stock immediately prior to the effective time of the Reverse Split
will continue to hold 2% of the voting power of the outstanding shares of
Common Stock after the Reverse Split. Although the Reverse Split will not
affect the rights of stockholders or any stockholder's proportionate equity
interest in the Company (subject to the treatment of fractional shares), the
number of authorized shares of Common Stock will not be reduced and will
increase the ability of the Board to issue such authorized and unissued
shares without further stockholder action. The number of stockholders of
record will not be affected by the Reverse Split (except to the extent that
any stockholder holds only a fractional share interest and receives cash for
such interest after the Reverse Split).
In April 1995, the Company adopted a Preferred Share Purchase Rights
Plan that provided for the distribution of a dividend on each share of the
Company's Common Stock of the right (each, a "Right") to purchase from the
Company one one-hundredth (1/100th) of a share of Series A Junior
Participating Preferred Stock ("Series A Preferred Stock"). The Reverse
Split will result in (i) a reduction in the number of Rights outstanding in
proportion to the exchange ratio of the Reverse Split and (ii) an adjustment
to the conversion ratio of the Series A Preferred
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<PAGE>
Stock that reduces the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock in proportion to the exchange
ratio of the Reverse Split.
The Reverse Split also will result in an adjustment to the conversion
ratio of outstanding shares of the Company's Series C Convertible Preferred
Stock, Series D Convertible Preferred Stock and Series E Convertible
Preferred Stock. In each case, the Reverse Split causes reduction in the
number of shares of Common Stock issuable upon conversion of those series of
Preferred Stock. The table below shows the effect of the Reverse Split
(using the minimum and maximum ratios for the Reverse Split) on the Company's
Common Stock, Series C Convertible Preferred Stock, Series D Convertible
Preferred Stock and Series E Convertible Preferred Stock. Conversions of
each series of Preferred Stock are based on the December 11, 1998 closing
price for the Company's Common Stock on the Nasdaq National Market of $0.4375
per share.
<TABLE>
<CAPTION>
Common Shares Common Shares Common Shares
Or Equivalent Outstanding with Outstanding with
Security Outstanding (12/11/98) 1:4 Reverse Spilt 1:10 Reverse Split
- -------- ---------------------- ----------------- ------------------
<S> <C> <C> <C>
Common Stock, $0.001 par value 27,280,949 6,820,237 2,728,095
Series C Convertible Preferred 1,144,165 286,041 114,417
Stock, $0.001 par value
Series D Convertible Preferred 2,100,074 525,019 210,007
Stock, $0.001 par value
Series E Convertible Preferred 15,873,991 3,968,498 1,587,399
Stock, $0.001 par value
</TABLE>
EFFECT ON STOCK OPTIONS, WARRANTS AND PAR VALUE
The Reverse Split will effect a reduction in the number of shares of
Common Stock available for issuance under the Company's 1990 Stock Option
Plan, as amended, the 1992 Non-Employee Directors' Stock Option Plan, as
amended, the 1996 Equity Incentive Plan, the 1995 Employee Stock Purchase
Plan and the 1998 Non-Officer Equity Incentive Plan (collectively, the "Stock
Plans"), as well as shares of Common Stock issuable on exercise of stock
options outside of the Stock Plans, in proportion to the exchange ratio of
the Reverse Split. The aggregate number of shares of Common Stock currently
authorized and available for issuance under the Stock Plans is approximately
7,200,000 (including shares subject to outstanding options and shares
available for future grants) and 45,000 Common Stock shares are authorized
and available for issuance on exercise of stock options outside of the Stock
Plans, in each case prior to giving effect to the Reverse Split. The
aggregate number of shares authorized and available for issuance on exercise
of options under the Stock Plans and outside of the Stock Plans will reduce,
in aggregate, to 1,811,250 shares with a 1:4 reverse split or to 724,500 with
a 1:10 reverse split. The exercise prices for options outstanding under the
Stock Plans and outside of the Stock Plans will be increased proportionate to
the reverse split ratio.
The Company also has outstanding warrants to purchase approximately
2,000,000 shares of the Company's Common Stock. Under the terms of the
outstanding warrants, the Reverse Split will effect a reduction in the number
of shares of Company Common Stock issuable upon exercise of such warrants in
proportion to the exchange ratio of the Reverse Split and will effect a
proportionate increase in the exercise price of such outstanding warrants.
Shares available for issuance under outstanding warrants will reduce to
500,000 with a 1:4 reverse split, and 200,000 with a 1:10 reverse split.
The par value of the Company's Common Stock and Preferred Stock will
remain at $0.001 per share following the effective time of the Reverse Split,
while the number of shares of Common Stock issued and outstanding will be
reduced. Consequently, the aggregate par value of the issued and outstanding
Common Stock also will be reduced. In addition, although the number of
authorized shares of Common Stock will remain fixed at 75,000,000, the
number of authorized but unissued shares of Common Stock (I.E., shares
available for future issuance) effectively will be increased by the Reverse
Split. The issuance of such additional authorized shares, if such shares
were issued, may have the effect of diluting the
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<PAGE>
earnings per share and book value per share, as well as the stock ownership
and voting rights, of outstanding Common Stock. The effective increase in
the number of authorized but unissued shares of Common Stock may be construed
as having an anti-takeover effect by permitting the issuance of shares to
purchasers who might oppose a hostile takeover bid or oppose any efforts to
amend or repeal certain provisions of the Company's Restated Certificate or
Bylaws.
EFFECTIVE DATE
The Reverse Split would become effective as of the close of business on
the date of filing (the "Effective Date") of a Certificate of Amendment to
the Restated Certificate with the office of the Secretary of State of the
State of Delaware. Except as explained below with respect to fractional
shares, on the Effective Date, each share of Common Stock issued and
outstanding immediately prior thereto (the "Old Common Stock") will be,
automatically and without any action on the part of the stockholders,
converted into between 1/4 and 1/10 of a share of the Company's Common Stock
proposed to be issued in connection with the Reverse Split (the "New Common
Stock").
EXCHANGE OF STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
Shortly after the Effective Date, each holder of an outstanding
certificate theretofore representing shares of Old Common Stock will receive
from American Stock Transfer & Trust Company, as the Company's exchange agent
(the "Exchange Agent") for the Reverse Split, instructions for the surrender
of such certificate to the Exchange Agent. Such instructions will include a
form of Transmittal Letter to be completed and returned to the Exchange
Agent. As soon as practicable after the surrender to the Exchange Agent of
any certificate which prior to the Reverse Split represented shares of Old
Common Stock, together with a duly executed Transmittal Letter and any other
documents the Exchange Agent may specify, the Exchange Agent shall deliver to
the person in whose name such certificate had been issued certificates
registered in the name of such person representing the number of full shares
of New Common Stock into which the shares of Old Common Stock previously
represented by the surrendered certificate shall have been reclassified and a
check for any amounts to be paid in cash in lieu of any fractional share
interest (as discussed in the next paragraph below). Each certificate
representing shares of New Common Stock issued in connection with the Reverse
Split will continue to bear any legends restricting the transfer of such
shares that were borne by the surrendered certificates representing the
shares of Old Common Stock. Until surrendered as contemplated herein, each
certificate which immediately prior to the Reverse Split represented any
shares of Old Common Stock shall be deemed at and after the Reverse Split to
represent the number of full shares of New Common Stock contemplated by the
preceding sentence.
No fractional shares of New Common Stock will be issued as a result of
the Reverse Split. In lieu of any such fractional share interest, each
holder of Old Common Stock who as a result of the Reverse Split would
otherwise receive a fractional share of New Common Stock will be entitled to
receive cash in an amount equal to the product obtained by multiplying (i)
the closing sales price of the Company's Common Stock on the Effective Date
as reported on the Nasdaq National Market by (ii) the number of shares of Old
Common Stock held by such holder that would otherwise have been exchanged for
such fractional share interest. Such amount will be issued to such holder in
the form of a check in accordance with the exchange procedures outlined above.
No service charges, brokerage commissions or transfer taxes will be
payable by any holder of any certificate which prior to approval of the
Reverse Split represented any shares of Old Common Stock, except that if any
certificates of New Common Stock are to be issued in a name other than that
in which the certificates for shares of Old Common Stock surrendered are
registered, it will be a condition of such issuance that (i) the person
requesting such issuance shall pay to the Company any transfer taxes payable
by reason thereof (or prior to transfer of such certificate, if any) or
establish to the satisfaction of the Company that such taxes have been paid
or are not payable, (ii) such transfer must comply with all applicable
federal and state securities laws, and (iii) such surrendered certificate
must be properly endorsed and otherwise be in proper form for transfer.
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<PAGE>
NO APPRAISAL RIGHTS
Under Delaware law, stockholders of the Company are not entitled to
appraisal rights with respect to the proposed Reverse Split.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SPLIT
A summary of the federal income tax consequences of the proposed Reverse
Split to the Company and to individual stockholders is set forth below. The
following discussion is based upon present federal income tax law. The
discussion is not intended to be, nor should it be relied on as, a
comprehensive analysis of the tax issues arising from or relating to the
proposed Reverse Split. In addition, the Company has not and will not seek
an opinion of counsel or a ruling from the Internal Revenue Service regarding
the federal income tax consequences of the proposed Reverse Split.
Accordingly, stockholders are advised to consult their own tax advisors for
more detailed information regarding the effects of the proposed reverse split
on them under applicable federal, state, local and foreign income tax laws.
It is intended that the Reverse Split will constitute a reorganization
(a "Reorganization") within the meaning of Section 368(a)(1)(E) of the
Internal Revenue Code of 1986, as amended. Assuming that the Reverse Split
qualifies as a Reorganization, the following federal income tax consequences
should result:
1. A stockholder will not recognize any gain or loss as a result of
the Reverse Split except to the extent a stockholder receives cash in lieu of
a fractional share. To the extent a stockholder receives cash in lieu of a
fractional share, for tax purposes the stockholder will be deemed to have
sold the fractional share to the Company. Although it is impossible to
predict with certainty the tax consequences to any individual stockholder,
such stockholder will likely recognize a gain or loss as a result of the
repurchase of a fractional share equal to the difference between (i) the
stockholder's proportionate adjusted basis in such fractional share, and (ii)
the cash amount received for such fractional share. Any gain will be treated
as short-term capital gain taxable at a maximum federal income tax rate of
39.6% to a non-corporate stockholder if the stockholder has held his shares
for one year or less prior to the Effective Date or long-term capital gain
taxable at a maximum federal income tax rate of 20% to a non-corporate
stockholder if the stockholder has held his shares for more than one year
prior to the Effective Date.
2. The aggregate tax basis of the shares of New Common Stock received
by the stockholder pursuant to the Reverse Split will equal the aggregate tax
basis of the shares of Old Common Stock held by the stockholder immediately
prior to the Effective Date of the Reverse Split reduced by any basis
allocated to a fractional share for which the stockholder receives cash. The
stockholder will be able to "tack" the holding period of the Old Common Stock
prior to the Reverse Split to the holding period of the New Common Stock
received by the stockholder as a result of the Reverse Split, provided that
the shares of Old Common Stock were capital assets in the hands of the
stockholder.
3. Holders of any series of Preferred Stock of the Company will
recognize no income, gain or loss for federal income tax purposes as a result
of the changes to the conversion ratios for such stock incident to the
Reverse Split. The Company will not recognize gain or loss as a result of the
Reverse Split.
REQUIRED VOTE
The affirmative vote of the holders of a majority of the shares of
Common Stock outstanding and entitled to vote is necessary to approve the
Reverse Split and the amendment to the Restated Certificate to effect the
Reverse Split. As result, broker non-votes will have the same effect as
negative votes.
THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE FOR PROPOSAL 2
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of November 30, 1998 by the
following stockholders: (i) each director; (ii) the Company's Chief
Executive Officer and additional four most highly compensated executive
officers; (iii) all executive officers and directors of the Company as a
group; and (iv) all those known by the Company to be beneficial owners of
more than five percent of the Company's Common Stock.
<TABLE>
<CAPTION>
NUMBER PERCENT
BENEFICIAL OWNER(1) OF SHARES OF TOTAL
- -------------------- --------- --------
<S> <C> <C>
Entities Affiliated with Sanderling Ventures(2)
2730 Sand Hill Road, Suite 200
Menlo Park, California 94025 . . . . . . . . . . . 2,113,673 7.7
Novartis AG(3)
Schwarzwaldallee 215
CH402 Basel, Switzerland . . . . . . . . . . . . . 2,543,902 9.3
Robert G. McNeil, Ph.D.(2)
c/o Sanderling Ventures, above . . . . . . . . . . 2,214,021 8.1
James C. Blair, Ph.D.(4) . . . . . . . . . . . . . . 1,295,931 4.7
Joann L. Data, M.D., Ph.D.(5). . . . . . . . . . . . . .87,862 *
Kelvin W. Gee, Ph.D.(6). . . . . . . . . . . . . . . . 473,686 1.7
Robert R. Holmen (7) . . . . . . . . . . . . . . . . . .14,583 *
Nancy C. Lan, Ph.D.(8) . . . . . . . . . . . . . . . . 274,263 1.0
Alan C. Mendelson(9) . . . . . . . . . . . . . . . . . .81,082 *
F. Richard Nichol, Ph.D.(10) . . . . . . . . . . . . . 276,317 1.0
Timothy J. Rink, M.D.(11). . . . . . . . . . . . . . . .64,000 *
Robert L. Roe, M.D.. . . . . . . . . . . . . . . . . . . 5,000 *
Lowell E. Sears(12). . . . . . . . . . . . . . . . . . 235,416 *
Eckard Weber, M.D.(13) . . . . . . . . . . . . . . . . 487,070 1.8
All executive officers and directors
as a group (12 persons)(14). . . . . . . . . . . . 3,295,210 11.5
</TABLE>
- -------------------
* Less than one percent.
(1) The table is based on information supplied by officers, directors and
principal stockholders and on Schedules 13D and 13G filed with the
Securities and Exchange Commission ("SEC"). Applicable percentages are
based on 27,280,949 shares outstanding on November 30, 1998, adjusted as
required by SEC rules and regulations. Unless otherwise indicated in the
footnotes to this table, and subject to community property laws were
applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the
shares indicated as beneficially owned.
(2) Shares held by entities affiliated with Sanderling Ventures consist of
the following: (i) 178,512 shares held by Sanderling Venture Partners
II, L.P.; (ii) 143,286 shares held by Sanderling Ventures Limited, L.P.;
(iii) 866,095 shares held by Sanderling Venture Partners III, L.P. ("SVP
III") and 69,834 shares issuable to SVP III on exercise of warrants; (iv)
179,601 shares held by Sanderling III Biomedical, L.P. ("SB III") and
12,036 shares issuable to SB III on exercise of warrants; (v) 442,658
shares held by Sanderling III Limited, L.P. ("Sanderling III") and 36,175
shares issuable to Sanderling III on exercise of warrants; and (vi)
180,444 shares held by Sanderling Ventures Management ("SVM") and 5,032
shares issuable to SVM on exercise of warrants. Shares held by Dr.
McNeil include all of the shares held by the entities affiliated with
Sanderling Ventures (the "Sanderling Shares"), plus 100,348 shares held
directly by Dr. McNeil. Dr. McNeil is a general partner or principal of
each of the entities affiliated with Sanderling Ventures, has voting and
investment power with respect to the Sanderling Shares and may be deemed
beneficial owner of such Shares. Dr. McNeil disclaims beneficial
ownership of the Sanderling Shares except to the extent of his
partnership interest in each entity affiliated with Sanderling Ventures.
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(3) Consists of the following shares: (i) 2,378,192 shares held by Novartis
Produkte AG, a subsidiary of Novartis AG; (ii) 80,297 shares held by
Sanderling Ventures Limited, L.P., over which Novartis AG has shared
voting and investment power; and (iii) 85,413 shares held by Sanderling
III Limited, L.P., over which Novartis AG has shared voting and
investment power.
(4) Dr. Blair is a director of the Company. Shares held by Dr. Blair include
17,267 shares held directly by Dr. Blair and 28,000 shares subject to
stock options exercisable within 60 days following November 30, 1998,
plus the shares held by the following entities affiliated with Domain
Associates (the "Domain Shares"): (i) 5,664 shares held by Domain
Associates ("Domain"); (ii) 846,154 shares held by Domain Partners III,
L.P. ("Domain III") and 338,462 shares issuable to Domain III on exercise
of warrants; (iii) 29,615 shares held by DP III Associates, L.P. ("DP
III") and 11,846 shares issuable to DP III on exercise of warrants; and
(iv) 18,923 shares issuable to Domain Partners II, L.P. ("Domain II") on
exercise of warrants. Dr. Blair is a general partner of Domain, and is a
general partner in the general partner of each of Domain II, Domain III
and DP III. Dr. Blair has voting and investment power with respect to,
and may be deemed beneficial owner of, the Domain Shares. Dr. Blair
disclaims beneficial ownership of the Domain Shares, and any proceeds
thereof, that exceed his pecuniary interest therein and/or that are not
actually distributed to him.
(5) Dr. Data is the Company's Executive Vice President, Product Development
and Regulatory Affairs. Shares listed include 81,666 shares subject to
stock options exercisable within 60 days following November 30, 1998.
(6) Dr. Gee is the Company's Chief Scientific Officer and a director. Shares
listed include 28,000 shares subject to stock options exercisable within
60 days following November 30, 1998, 16,800 shares held by members of Dr.
Gee's immediate family and 61,039 shares held in the Kelvin & Kay Gee
Living Trust.
(7) Mr. Holmen is the Company's Vice President, General Counsel and
Secretary. Shares listed include 14,583 shares subject to stock options
exercisable within 60 days of November 30, 1998.
(8) Dr. Lan is the Company's Vice President, Scientific Affairs and
Intellectual Property. Shares listed include 20,000 shares held by Dr.
Lan as Custodian for a family member and 194,828 shares subject to stock
options exercisable within 60 days following November 30, 1998.
(9) Mr. Mendelson is a director of the Company. Shares listed include the
following: (i) 60,000 shares subject to stock options exercisable within
60 days following November 30, 1998; (ii) 400 shares held in trust for
the benefit of Mr. Mendelson's children, for which Mr. Mendelson's spouse
is trustee; (iii) 13,385 shares held by CGCH&T Profit Sharing Trust FBO
Mr. Mendelson (the "Mendelson Trust"); (vi) 5,143 shares held by Cooley
Godward LLP, of which Mr. Mendelson is a partner; and (v) 2,154 shares
issuable pursuant to warrants held in the Mendelson Trust. Mr. Mendelson
disclaims beneficial ownership of shares held in trust for the benefit of
his children. Mr. Mendelson also disclaims beneficial ownership of
shares held by Cooley Godward LLP, except to the extent of his pecuniary
interest therein.
(10) Dr. Nichol is President, Chief Executive Officer and Chairman of the
Board of the Company. Shares listed include 257,500 shares subject to
stock options exercisable within 60 days following November 30, 1998.
(11) Dr. Rink is a director of the Company. Shares listed include 64,000
shares subject to stock options exercisable within 60 days following
November 30, 1998.
(12) Mr. Sears is a director of the Company. Shares listed include the
following: (i) 145,500 shares held in The Sears Living Trust dated March
11, 1991 (the "Sears Trust"); (ii) 85,916 shares subject to stock options
exercisable within 60 days following November 30, 1998; and (iii) 4,000
shares issuable pursuant to warrants held in the Sears Trust.
(13) Dr. Weber is a director of the Company. Shares listed include 173,799
shares subject to stock options exercisable within 60 days following
November 30, 1998.
(14) Includes 988,292 shares subject to stock options exercisable within 60
days following November 30, 1998 and 375,385 shares issuable pursuant to
warrants held by directors or entities affiliated with such directors.
See Notes (4) through (13) above.
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OTHER MATTERS
The Board of Directors knows of no other matters that will be presented
for consideration at the Special Meeting. If any other matters are properly
brought before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors,
ROBERT R. HOLMEN
Secretary
December 30, 1998
A COPY OF THE COMPANY'S ANNUAL REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 IS AVAILABLE
WITHOUT CHARGE UPON WRITTEN REQUEST TO INVESTOR RELATIONS, COCENSYS, INC.,
201 TECHNOLOGY DRIVE, IRVINE, CA 92618.
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APPENDIX A
CERTIFICATE OF POWERS,
DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS
OF
SERIES E CONVERTIBLE PREFERRED STOCK
OF
COCENSYS, INC.
(Pursuant to Section 151 of the
General Corporation Law
of the State of Delaware)
CoCensys, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that the following resolutions were adopted by the Board of
Directors of the Corporation on April 20, 1998 pursuant to authority of the
Board of Directors as required by Section 151(g) of the General Corporation
Law of the State of Delaware:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the
"Board") in accordance with the provisions of its Amended and Restated
Certificate of Incorporation, the Board of Directors hereby authorizes and
creates a series of the Corporation's previously authorized Preferred Stock,
par value $.001 per share (the "Preferred Stock"), and hereby states the
designation and number of shares, and fixes the relative rights, preferences,
privileges, powers and restrictions thereof (in addition to the provisions
set forth in the Amended and Restated Certificate of Incorporation of the
Corporation, which are applicable to the Preferred Stock of all classes and
series), as follows:
Series E Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
Ten thousand (10,000) shares of Preferred Stock, $.001 par value are
designated "Series E Convertible Preferred Stock" (the "Series E Preferred
Stock") with the rights, preferences, privileges and restrictions specified
in this Certificate of Powers, Designation, Preferences, Rights and
Limitations (this "Certificate of Designation"). The stated value of the
Series E Preferred Stock shall be One Thousand Dollars ($1,000) per share
(the "Stated Value"). Subject to the provisions hereof, if the Second Closing
(as defined in the Securities Purchase Agreement date as of June 8, 1998, by
and between the Corporation and the other signatories thereto (the "Purchase
Agreement")) does not occur, such number of shares of Preferred Stock
designated Series E Preferred Stock may be decreased to eight thousand
(8,000) by resolution of the Board of Directors.
II. RANK
The Series E Preferred Stock shall rank (i) prior to the Corporation's
common stock, par value $.001 per share (the "Common Stock"); (ii) prior to
the Corporation's Series A Junior Participating Preferred Stock (the "Series
A Preferred Stock"); (iii) prior to any class or series of capital stock of
the Corporation hereafter created (unless, with the consent of the holders of
Series E Preferred Stock obtained in accordance with Article IX hereof, such
class or series of capital stock specifically, by its terms, ranks senior to
or PARI PASSU with the Series E Preferred Stock) (collectively, with the
Common Stock and the Series A Preferred Stock, "Junior Securities"); (iv)
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PARI PASSU with the Corporations' Series C Convertible Preferred Stock (the
"Series C Preferred Stock") and Series D Convertible Preferred Stock (the
"Series D Preferred Stock"); (v) PARI PASSU with any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series E Preferred Stock obtained in accordance with Article IX
hereof, unless the average Closing Bid Price (as defined below) for the ten
(10) Trading Days (as defined below) ended one (1) Trading Day prior to the
date on which the Board of Directors approves the issuance of such class or
series of capital stock is above $4.00, in which case such consent will not
be required) specifically ranking, by its terms, on parity with the Series E
Preferred Stock (collectively, with the Series C Preferred Stock and Series D
Preferred Stock, "PARI PASSU Securities"); and (vi) junior to any class or
series of capital stock of the Corporation hereafter created (with the
consent of the holders of Series E Preferred Stock obtained in accordance
with Article IX hereof) specifically ranking, by its terms, senior to the
Series E Preferred Stock ("Senior Securities"), in each case both as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary.
III. DIVIDENDS
A. PAYMENT OF DIVIDENDS. The Series E Preferred Stock shall be
entitled to cumulative dividends at the Applicable Dividend Rate (as defined
below) from the date of issuance of the Series E Preferred Stock (the "Issue
Date"), payable quarterly on March 31, June 30, September 30 and December 31
(except that if any such date is a Saturday, Sunday or legal holiday, then
such dividend shall be payable on the next succeeding day that is not a
Saturday, Sunday or legal holiday) (each, a "Dividend Payment Date") to the
holders of record of the Series E Preferred Stock. Dividends shall accrue
daily without interest from the Issue Date whether or not such dividends are
declared by the Board of Directors and actually paid to the holders of Series
E Preferred Stock as they appear on the stock books of the Corporation on
such record dates, not more than twenty (20) nor less than ten (10) days
preceding the Dividend Payment Dates for such dividends, as shall be fixed by
the Board. Accrued and unpaid dividends shall be payable to each holder of
Series E Preferred Stock in cash, in whole but not in part, on the applicable
Dividend Payment Date or, subject to the limitations of Article VI.A(c) and
Article VI.E, at the sole option of the Corporation, shall be added to the
Conversion Amount (as defined in Article VI.A) in accordance with Article
VI.A; PROVIDED, HOWEVER, if the Corporation fails to timely pay all accrued
and unpaid dividends in cash on the applicable Dividend Payment Date, the
unpaid amount shall be automatically added to the Conversion Amount effective
on the day following the applicable Dividend Payment Date.
B. DIVIDENDS ON JUNIOR SECURITIES. In no event, so long as any Series
E Preferred Stock shall remain outstanding, shall any dividend whatsoever be
declared or paid upon, nor shall any distribution be made upon, any Junior
Securities, nor shall any shares of Junior Securities be purchased or
redeemed by the Corporation (other than the Series A Preferred Stock in
accordance with Section 23 of the Rights Agreement dated May 15, 1995 between
the Corporation and American Stock Transfer & Trust Company) nor shall any
moneys be paid to or made available for a sinking fund for the purchase or
redemption of any Junior Securities (other than a distribution of Junior
Securities), without, in each such case, the written consent of the holders
of a majority of the outstanding shares of Series E Preferred Stock, voting
together as a class.
C. APPLICABLE DIVIDEND RATE. The "Applicable Dividend Rate" shall
mean 7.5%; PROVIDED, HOWEVER that if the Closing Price (as defined below) of
the Common Stock is greater than or equal to (i) $4.05 for ten (10)
consecutive Trading Days (as defined below), the Applicable Dividend Rate
shall mean 5.5%, (ii) if the Closing Price of the Common Stock is greater
than or equal to $4.95 for ten (10) consecutive Trading Days, the Applicable
Dividend Rate shall mean 3.5% and (iii) if the Closing Price is greater than
or equal to $6.00 for ten (10) consecutive Trading Days, the Applicable
Dividend Rate shall mean 1.5%, in each case from and after the Trading Day on
which, but only so long as, such price threshold is met. Dividends shall
accrue at the then Applicable Dividend Rate until such time as the condition
thereto is no longer met (i.e., the price drops below the applicable
threshold for ten (10) consecutive Trading Days) or at such time as a new
Applicable Dividend Rate becomes effective, at which time dividends will
begin to accrue at the new Applicable Dividend Rate.
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D. LIQUIDATION EVENTS. Any reference to "distribution" contained in
this Article IV shall not be deemed to include distributions made in
connection with any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary.
IV. LIQUIDATION PREFERENCE
A. LIQUIDATION EVENTS. In the event of any liquidation, dissolution
or winding up of the Corporation, either voluntary or involuntary (each such
event being considered a "Liquidation Event"), the holders of the Series E
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of Junior Securities, the Liquidation Preference (as defined below)
per share of Series E Preferred Stock and no more; provided, however, that
such rights shall accrue to the holders of Series E Preferred Stock only in
the event that the Corporation's payments with respect to the liquidation
preference of the holders of any Senior Securities are fully met. After the
liquidation preferences of any Senior Securities are fully met, the entire
assets of the Corporation available for distribution shall be distributed
ratably among the holders of the Series E Preferred Stock and Pari Passu
Securities in proportion to the respective preferential amounts to which each
is entitled (but only to the extent of such preferential amounts). If upon
the occurrence of a Liquidation Event, the assets and funds available for
distribution among the holders of the Series E Preferred Stock and holders of
PARI PASSU Securities shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amounts payable thereon, then the
entire assets and funds of the Corporation legally available for distribution
to the Series E Preferred Stock and the PARI PASSU Securities shall be
distributed ratably among such shares in proportion to the ratio that the
Liquidation Preference payable on each such share bears to the aggregate
liquidation preference payable on all such shares. After payment in full of
the Liquidation Preference on the shares of Series E Preferred Stock and the
liquidation preference on the PARI PASSU Securities, the holders of such
shares shall not be entitled to any further participation in any distribution
of assets by the Corporation.
B. EVENTS DEEMED LIQUIDATION EVENTS. At the option of any holder of
Series E Preferred Stock, the sale, conveyance or disposition of all or
substantially all of the assets of the Corporation, the effectuation by the
Corporation of a transaction or series of related transactions in which more
than 50% of the voting power of the Corporation is disposed of, or the
consolidation, merger or other business combination of the Corporation with
or into any other Person (as defined below) or Persons when the Corporation
is not the survivor (a "Change of Control Transaction") shall either: (i) be
deemed to be a liquidation, dissolution or winding up of the Corporation
pursuant to which the Corporation shall be required to distribute upon
consummation of such transaction an amount equal to 125% of the Liquidation
Preference with respect to each outstanding share of Series E Preferred Stock
in accordance with and subject to the terms of this Article IV or (ii) be
treated pursuant to Article VI.C(b) hereof; PROVIDED, HOWEVER, that the
Corporation shall have the option, on at least fifteen (15) days prior
written notice to the holders of the Series E Preferred Stock (during which
time the holders of the Series E Preferred Stock shall maintain the right to
convert any or all of the Series E Preferred Stock in accordance with Article
VI), to redeem the Series E Preferred Stock immediately prior to the
consummation of any Change in Control Transaction at the Mandatory Redemption
Amount (as defined below); and PROVIDED, FURTHER, HOWEVER, that where the
Corporation undertakes such an event and plans to account for such event as a
"pooling of interests" in accordance with generally accepted accounting
principles, (a) no such distribution pursuant to clause (i) above will be
available and such event will be treated pursuant to clause (ii) above where
the value of the distribution that would have been received pursuant to
clause (i) above would be less than the value of the Common Stock that would
be received upon conversion of the Series E Preferred Stock in accordance
with Article VI below treating the Trading Day (as defined below) immediately
preceding the date of such distribution as the "Conversion Date" (as defined
in Article VI.D(d)) and (b) no such distribution pursuant to clause (ii)
above will be available and such event will be treated pursuant to clause (i)
above where the value of the distribution that would have been received
pursuant to clause (i) above would be more than the value of the Common Stock
that would be received upon conversion of the Series E Preferred Stock in
accordance with Article VI below treating the Trading Day (as defined below)
immediately preceding the date of such distribution as the "Conversion Date"
(as defined in Article VI.D(d)). "Person" shall mean any individual,
corporation, limited liability company, partnership, association, trust or
other entity or organization.
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C. LIQUIDATION PREFERENCE. For purposes hereof, the "Liquidation
Preference" with respect to a share of the Series E Preferred Stock shall
mean an amount equal to the sum of (i) the Stated Value thereof plus (ii) all
accrued and unpaid dividends for the period beginning on the Issue Date and
ending on the date of final distribution to the holder thereof (prorated for
any portion of such period). The liquidation preference with respect to any
PARI PASSU Securities shall be as set forth in the Certificate of Designation
filed in respect thereof.
V. REDEMPTION
A. MANDATORY REDEMPTION. If any of the following events (each, a
"Mandatory Redemption Event") shall occur:
(i) The Corporation fails to issue shares of Common Stock to the
holders of Series E Preferred Stock upon exercise by the holders of their
conversion rights in accordance with the terms of this Certificate of
Designation (for a period of at least sixty (60) days if such failure is
solely as a result of the circumstances governed by the second paragraph of
Article VI.F below and the Corporation is using all commercially reasonable
efforts to authorize a sufficient number of shares of Common Stock as soon as
practicable), fails to transfer or to cause its transfer agent to transfer
(electronically or in certificated form) any certificate for shares of Common
Stock issued to the holders upon conversion of the Series E Preferred Stock
as and when required by this Certificate of Designation or the Registration
Rights Agreement, dated as of June 8, 1998, by and among the Corporation and
the other signatories thereto (the "Registration Rights Agreement"), fails to
remove any restrictive legend (or to withdraw any stop transfer instructions
in respect thereof) on any certificate or any shares of Common Stock issued
to the holders of Series E Preferred Stock upon conversion of the Series E
Preferred Stock as and when required by this Certificate of Designation, the
Purchase Agreement or the Registration Rights Agreement, or fails to fulfill
its obligations pursuant to Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the
Purchase Agreement (or makes any announcement, statement or threat that it
does not intend to honor the obligations described in this paragraph) and any
of the foregoing failures shall continue uncured (or any announcement,
statement or threat not to honor its obligations shall not be rescinded in
writing) for ten (10) business days;
(ii) The Corporation fails to obtain effectiveness with the
Securities and Exchange Commission (the "SEC") of the Registration Statement
(as defined in the Registration Rights Agreement) prior to December 8, 1998
or such Registration Statement lapses in effect (or sales otherwise cannot be
made thereunder, whether by reason of the Corporation's failure to amend or
supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) for more than forty-five (45)
consecutive Trading Days (as defined below) or more than ninety (90) Trading
Days in any twelve (12) month period or more than one hundred twenty (120)
Trading Days during the Registration Period (as defined in the Registration
Rights Agreement) after such Registration Statement becomes effective;
(iii) The Corporation shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for it or for all or substantially all of its property or business;
or such a receiver or trustee shall otherwise be appointed;
(iv) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any
law for the relief of debtors shall be instituted by or against the
Corporation or any subsidiary of the Corporation; PROVIDED, HOWEVER, that in
the case of any involuntary bankruptcy, such involuntary bankruptcy shall
continue undischarged or undismissed for a period of sixty (60) days;
(v) The Corporation shall fail to maintain the listing of the Common
Stock on the Nasdaq National Market ("Nasdaq"), the Nasdaq SmallCap Market, the
New York Stock Exchange or the American Stock Exchange, then, upon the
occurrence and during the continuation of any Mandatory Redemption Event
specified in subparagraphs (i), (ii) or (v) at the option of each holder of the
then outstanding shares of Series E Preferred Stock by written notice (the
"Mandatory Redemption Notice") to the Corporation of such Mandatory Redemption
Event, or upon the occurrence of any Mandatory Redemption Event specified in
subparagraphs (iii) or (iv), the Corporation shall purchase such holder's shares
of Series E Preferred Stock for an amount per share equal to the greater of (1)
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130% multiplied by the sum of (a) the Stated Value of the shares to be
redeemed plus (b) all accrued and unpaid dividends for the period beginning
on the Issue Date and ending on the date of payment of the Mandatory
Redemption Amount (the "Mandatory Redemption Date"), and (2) the "parity
value" of the shares to be redeemed, where parity value means the product of
(a) the highest number of shares of Common Stock issuable upon conversion of
such shares in accordance with Article VI below (without giving any effect to
any limitations on conversions of shares set forth in Article VI.A(b) below,
and treating the Trading Day (as defined in Article VI.B) immediately
preceding the Mandatory Redemption Date as the "Conversion Date" (as defined
in Article VI.B(a)) for purposes of determining the lowest applicable
Conversion Price), unless the Mandatory Redemption Event arises as a result
of a breach in respect of a specific Conversion Date in which case such
Conversion Date shall be the Conversion Date), multiplied by (b) the Closing
Price (as defined in Article VI.A(b)) for the Common Stock on such
"Conversion Date" (the greater of such amounts being referred to as the
"Mandatory Redemption Amount"). If there is a Mandatory Redemption Event
specified in subparagraph (ii) and the holders of the Series E Preferred
Stock do not elect to send a Mandatory Redemption Notice to the Corporation,
then (i) the Automatic Conversion Date (as defined in Article VII) shall be
extended for a period equal to 1.5 times the total number of days the
Registration Statement lapsed in effect (or sales could not be made
thereunder, whether by reason of the Corporation's failure to amend or
supplement the prospectus included therein in accordance with the
Registration Rights Agreement or otherwise) and (ii) the Applicable
Percentage shall be reduced by 1% for each month in excess of the Allowed
Delay (as defined in Section 3(f) of the Registration Rights Agreement) that
the holders of Series E Preferred Stock are not permitted to sell the Common
Stock pursuant to the Registration Statement in accordance with Section 2(c)
of the Registration Rights Agreement.
In the case of a Mandatory Redemption Event, if the Corporation fails to
pay the Mandatory Redemption Amount for each share within five (5) business
days of written notice that such amount is due and payable, then (assuming
there are sufficient authorized shares) in addition to all other available
remedies, each holder of Series E Preferred Stock shall have the right at any
time, so long as the Mandatory Redemption Event continues, to require the
Corporation, upon written notice, to immediately issue (in accordance with
and subject to the terms of Article VI below), in lieu of the Mandatory
Redemption Amount, with respect to each outstanding share of Series E
Preferred Stock held by such holder, the number of shares of Common Stock of
the Corporation equal to the Mandatory Redemption Amount divided by the
average Closing Price of the Common Stock for the two (2) Trading Days prior
to the date the holder provides notice to the Corporation of its election to
receive Common Stock in lieu of the Mandatory Redemption Amount in accordance
with this paragraph.
B. 19.99% REDEMPTION. If the Series E Preferred Stock ceases to be
convertible as a result of the limitations described in Article VI.A(c) below
(a "19.99% Redemption Event"), and the Corporation has not prior to, or
within thirty (30) days of, the date that such 19.99% Redemption Event
arises, (i) obtained approval of the issuance of the additional shares of
Common Stock by the requisite vote of the holders of the then-outstanding
Common Stock (not including any shares of Common Stock held by present or
former holders of Series E Preferred Stock that were issued upon conversion
of Series E Preferred Stock) or (ii) received other permission pursuant to
Nasdaq Rule 4460(i) allowing the Corporation to resume issuances of shares of
Common Stock upon conversion of Series E Preferred Stock, then the
Corporation shall be obligated to redeem immediately all of the then
outstanding Series E Preferred Stock, in accordance with this Article V.B.
An irrevocable redemption notice (the "Redemption Notice") shall be delivered
promptly to the holders of Series E Preferred Stock at their registered
address appearing on the records of the Corporation and shall state (1) that
19.99% of the Outstanding Common Amount (as defined in Article VI.A) has been
issued upon exercise of the Series E Preferred Stock, (2) that the
Corporation is obligated to redeem all of the outstanding Series E Preferred
Stock and (3) the Mandatory Redemption Date, which shall be a date within
five (5) business days of the earlier of (i) the date of the Redemption
Notice or (ii) the date on which the holders of the Series A Preferred Stock
notify the Corporation of the occurrence of a 19.99% Redemption Event. On
the Mandatory Redemption Date, the Corporation shall make payment in cash of
an amount equal to 110% times the product of (a) the number of shares of
Common Stock issuable upon conversion of the shares of Series E Preferred
Stock being redeemed pursuant to this Article V.B and as determined in
accordance with Article VI below (without giving any effect to any
limitations on conversions of shares set forth in Article VI.A(b) below, and
treating the Trading Day (as defined in Article VI.B) immediately preceding
the Mandatory Redemption Date as the "Conversion Date" (as defined in Article
VI.B(a)) multiplied by (b) the Closing Price (as defined in Article VI.A(b))
of the Common Stock on such Conversion Date.
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VI. CONVERSION AT THE OPTION OF THE HOLDER
A. OPTIONAL CONVERSION
(a) CONVERSION AMOUNT. Subject to the conversion restrictions set
forth in Article VI.A(b) below, each holder of shares of Series E Preferred
Stock may, at its option at any time and from time to time, upon surrender of
the certificates therefor, convert any or all of its shares of Series E
Preferred Stock into Common Stock as follows (an "Optional Conversion"). A
minimum of (10) shares of Series E Preferred Stock shall be surrendered for
each Optional Conversion (or such lesser amount if a holder of Series E
Preferred Stock owns less than ten (10) shares of Series E Preferred Stock).
Each share of Series E Preferred Stock shall be convertible into such number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing (1) the Conversion Amount (as defined below), by (2) the then
effective Conversion Price (as defined below); PROVIDED, HOWEVER, that,
unless the holder delivers a waiver in accordance with the immediately
following sentence, in no event (other than pursuant to the Automatic
Conversion (as defined herein)) shall a holder of shares of Series E
Preferred Stock be entitled to convert any such shares in excess of that
number of shares upon conversion of which the sum of (x) the number of shares
of Common Stock beneficially owned by the holder and its affiliates (other
than shares of Common Stock which may be deemed beneficially owned through
the ownership of the unconverted portion of the shares of Series E Preferred
Stock) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series E Preferred Stock with respect to which
the determination of this proviso is being made, would result in beneficial
ownership by a holder and such holder's affiliates of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, (i) beneficial ownership shall be determined
in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in
clause (x) of such proviso and (ii) a holder may waive the limitations set
forth therein by written notice to the Corporation upon not less than
sixty-one (61) days prior written notice (with such waiver taking effect only
upon the expiration of such sixty-one (61) day notice period). The
"Conversion Amount" means the sum of (a) the Stated Value of the shares of
Series E Preferred Stock issued for conversion plus (b) the Unpaid Dividend
Amount where the "Unpaid Dividend Amount" means the Applicable Dividend Rate
TIMES the Stated Value of the shares of Series E Preferred Stock issued for
conversion times N/365 where N equals the number of days since the later of
(x) the Issue Date or (y) the last Dividend Payment Date on which the
Corporation paid the then accrued and unpaid dividends in cash; PROVIDED,
HOWEVER that the Corporation shall have the option to pay the Unpaid Dividend
Amount in cash, in whole but not in part, by wire transfer to the account of
the holder of Series E Preferred Stock issued for conversion simultaneously
with the delivery of the shares of Common Stock issued upon such conversion,
in which event the Conversion Amount shall equal the Stated Value of the
shares of Series E Preferred Stock issued for conversion.
(b) CONVERSION RESTRICTIONS.
(i) CONVERSION RESTRICTION PERIOD. For the period beginning
on the Issue Date and ending on October 8, 1998, (the "Conversion Restriction
Period"), if the Common Stock trades on Nasdaq or the principal trading
market on which the Common Stock is then listed is less than $4.00 per share
for ten (10) consecutive Trading Days, the holders of Series E Preferred
Stock thereafter during the reminder of the Conversion Restriction Period
shall only be permitted to convert, in the aggregate, into a number of shares
of Common Stock that is less than or equal to the greater of (a) 15% of the
trading volume for the calendar month in which conversions are taking place
or (b) 15% of the trading volume for the calendar month prior to the calendar
month in which the conversions are taking place (such lesser amount is
hereinafter referred to as the "Conversion Restriction Amount").
Notwithstanding the preceding sentence, if the Common Stock thereafter trades
on Nasdaq or the principal trading market on which the Common Stock is then
listed above $4.00 per share for ten (10) consecutive Trading Days during the
Conversion Restriction Period, the conversion limitations set forth in the
preceding sentence shall forever cease to be applicable. The Conversion
Restriction Amount (i) shall be allocated pro rata in accordance with Article
X below and (ii) shall not include shares issued upon conversions taking
place prior to the trigger date of the restriction.
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(ii) ADJUSTMENT PERIOD. By written notice to the holders
delivered by 4:30 p.m. on any Trading Day, the Corporation shall be permitted
to suspend the right to convert shares of Series E Preferred Stock on the
next Trading Day after any Trading Day that the Closing Price of the Common
Stock on Nasdaq or the principal trading market on which the Common Stock is
then listed is less than $2.00 per share unless on such next Trading Day, the
Common Stock trades on Nasdaq or the principal trading market on which the
Common Stock is then listed above $2.00 prior to 12:00 noon on such Trading
Day. If the Closing Price of the Common Stock remains below $2.00 per share
for twenty (20) consecutive Trading Days (the "Adjustment Period"), whether
or not the Corporation has restricted conversions for some or all of such
days, the Corporation shall either: (i) forever waive the foregoing right to
restrict conversions and allow the holders of the Series E Preferred Stock to
convert their shares of Series E Preferred Stock; (ii) purchase each holder's
shares of Series E Preferred Stock for an amount (the "Optional Redemption
Amount") per share equal to 125% multiplied by the sum of (a) the Stated
Value of the shares to be redeemed plus (b) all accrued and unpaid dividends
for the period beginning on the Issue Date and ending on the date of payment
of the Optional Redemption Amount; or (iii) adjust the exercise price of
one-half of the warrants issued pursuant to the Securities Purchase Agreement
(the "Warrants") that have not been exercised prior to the last day of the
Adjustment Period to the lowest trading price during the Adjustment Period.
In the event that the Corporation elects to adjust the exercise price of the
Warrants pursuant to clause (iii) of the preceding sentence, (x) the holders
of Series E Preferred Stock thereafter shall not be permitted to convert
shares of Series E Preferred Stock thereafter on any Trading Day that the
Common Stock trades below the average Closing Price of the Common Stock
during the Adjustment Period (the "New Floor") and (y) if after such
election, the Common Stock trades below the New Floor for twenty (20)
consecutive Trading Days (the "Second Adjustment Period"), the Corporation
shall either (i) adjust the Exercise Price of the remaining half of the
Warrants to the lowest trading price of the Common Stock during the Second
Adjustment Period or (ii) select either of the options set forth in clauses
(i) and (ii) of the second sentence of this paragraph. In the event that the
Corporation elects to adjust the exercise price of the Warrants pursuant to
clause (i) of the preceding sentence, the holders of Series E Preferred Stock
thereafter shall not be permitted to convert shares of Series E Preferred
Stock on any Trading Day in which the Common Stock trades below the average
Closing Price of the Common Stock during the Second Adjustment Period;
PROVIDED, HOWEVER, that this prohibition shall terminate when the number of
Trading Days during which it applies, together with the number of Trading
Days during which conversions have otherwise been restricted under this
Article VI.A(b)(ii) equals forty (40) Trading Days in any twelve (12) month
period. "Closing Price," as of any date, means the last sale price of the
Common Stock on the Nasdaq as reported by Bloomberg Financial Markets or an
equivalent reliable reporting service mutually acceptable to and hereafter
designated by the holders of a majority in interest of the shares of Series E
Preferred Stock and the Corporation ("Bloomberg") or, if Nasdaq is not the
principal trading market for such security, the last sale price of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last sale price of such security in the over-the-counter
market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no last sale price of such security is available in the
over-the-counter market on the electronic bulletin board for such security or
in any of the foregoing manners the average of the bid prices of any market
makers for such security that are listed in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Price cannot be calculated for such
security on such date in the manner provided above, the Closing Price shall
be the fair market value as mutually determined by the Corporation and the
holders of a majority in interest of shares of Series E Preferred Stock being
converted for which the calculation of the Closing Price is required in order
to determine the Conversion Price of such Series E Preferred Stock.
(iii) INAPPLICABILITY OF CONVERSION RESTRICTIONS. The
restrictions on conversion set forth in this Article VI.A(b) shall not apply
to conversions taking place on any Conversion Date (i) occurring on or after
the date the Corporation makes a public announcement that it intends to merge
or consolidate with any other corporation or sell or transfer substantially
all of the assets of the Corporation or (ii) occurring on or after the date
any person, group or entity (including the Corporation) publicly announces a
tender offer to purchase 50% or more of the Corporation's Common Stock or
otherwise publicly announces an intention to replace a majority of the
Corporation's Board of Directors by waging a proxy battle or otherwise or
(iii) occurring on or after there is a material adverse change in the
business, operation, assets, financial condition or prospects of the
Corporation or its subsidiaries, taken as a whole.
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(c) NASDAQ LIMITATIONS ON CONVERSION. So long as the Common Stock
is listed for trading on Nasdaq or an exchange or quotation system with a
rule substantially similar to Rule 4460(i) then, notwithstanding anything to
the contrary contained herein if, at any time, the aggregate number of shares
of Common Stock then issued upon conversion of the Series E Preferred Stock
(including any shares of capital stock or rights to acquire shares of capital
stock issued by the Corporation which are aggregated or integrated with the
Common Stock issued or issuable upon conversion of the Series E Preferred
Stock for purposes of such rule) equals 19.99% of the "Outstanding Common
Amount" (as hereinafter defined), the Series E Preferred Stock shall, from
that time forward, cease to be convertible into Common Stock in accordance
with the terms of this Article VI and Article VII below, unless the
Corporation (i) has obtained approval of the issuance of the Common Stock
upon conversion of the Series E Preferred Stock by a majority of the total
votes cast on such proposal, in person or by proxy, by the holders of the
then-outstanding Common Stock (not including any shares of Common Stock held
by present or former holders of Series E Preferred Stock that were issued
upon conversion of Series E Preferred Stock) (the "Stockholder Approval"), or
(ii) shall have otherwise obtained permission to allow such issuances from
Nasdaq in accordance with Nasdaq Rule 4460(i). If the Corporation's Common
Stock is not then listed on Nasdaq or an exchange or quotation system that
has a rule substantially similar to Rule 4460(i) then the limitations set
forth herein shall be inapplicable and of no force and effect. For purposes
of this paragraph, "Outstanding Common Amount" means (i) the number of shares
of the Common Stock outstanding on the date of issuance of the Series E
Preferred Stock pursuant to the Purchase Agreement plus (ii) any additional
shares of Common Stock issued thereafter in respect of such shares pursuant
to a stock dividend, stock split or similar event. The maximum number of
shares of Common Stock issuable as a result of the 19.99% limitation set
forth herein is hereinafter referred to as the "Maximum Share Amount." With
respect to each holder of Series E Preferred Stock, the Maximum Share Amount
shall refer to such holder's PRO RATA share thereof determined in accordance
with Article X below. In the event that Corporation obtains Stockholder
Approval or the approval of Nasdaq, by reason of the inapplicability of the
rules of Nasdaq or otherwise and concludes that it is able to increase the
number of shares to be issued above the Maximum Share Amount (such increased
number being the "New Maximum Share Amount"), the references to Maximum Share
Amount, above, shall be deemed to be, instead, references to the greater New
Maximum Share Amount. In the event that Stockholder Approval is obtained but
there are insufficient reserved or authorized shares or a registration
statement covering the additional shares of Common Stock which constitute the
New Maximum Share Amount is not effective prior to the Maximum Share Amount
being issued (if such registration statement is necessary to allow for the
public resale of such securities), the Maximum Share Amount shall remain
unchanged; PROVIDED, HOWEVER, that the holders of the Series E Preferred
Stock may grant an extension of the redemption required pursuant to Article
V.B to allow the Corporation to obtain a sufficient reserved or authorized
amount of shares or of the effective date of such registration statement. In
the event that (a) the aggregate number of shares of Common Stock actually
issued upon conversion of the Series E Preferred Stock represents at least
twenty percent (20%) of the Maximum Share Amount and (b) the sum of (x) the
aggregate number of shares of Common Stock actually issued upon conversion of
the outstanding Series E Preferred Stock PLUS (y) the aggregate number of
shares of Common Stock that remain issuable upon conversion of Series E
Preferred Stock, represents at least one hundred percent (100%) of the
Maximum Share Amount (the "Triggering Event"), the Corporation will use its
best efforts to seek and obtain Stockholder Approval (or obtain such other
relief as will allow conversions hereunder in excess of the Maximum Share
Amount) as soon as practicable following the Triggering Event and before the
Mandatory Redemption Date.
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B. CONVERSION PRICE.
(a) CALCULATION OF CONVERSION PRICE. Subject to subparagraph (b)
below, the "Conversion Price" shall be the lesser of the Market Price (as
defined herein) and the Fixed Conversion Price (as defined herein), subject
to adjustments pursuant to the provisions of Article VI.C below. "Market
Price" shall mean the Applicable Percentage (as defined below) times the
average of the three (3) Lowest Trading Prices (as defined below) during the
fifteen (15) Trading Day period ending one (1) Trading Day prior to the date
(the "Conversion Date") the Notice of Conversion (as defined in Article VI.E)
is sent by a holder to the Corporation via facsimile (the "Pricing Period").
"Fixed Conversion Price" shall mean $3.93. "Lowest Trading Price" means, for
any security as of any date, the low trade price on Nasdaq as reported by
Bloomberg or, if Nasdaq is not the principal trading market for such
security, the low trade price of such security on the principal securities
exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the low trade price
of such security can be determined in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if
no trade price of such security is available in the over-the-counter market
on the electronic bulletin board for such security or in any of the foregoing
manners, the average of the lowest bid prices of any market makers for such
security that are listed in the "pink sheets" by the National Quotation
Bureau, Inc. If the Lowest Trading Price cannot be calculated for such
security on such date in the manner provided above, the Lowest Trade Price
shall be the low range of the fair market value as mutually determined by the
Corporation and the holders of a majority in interest of shares of Series E
Preferred Stock being converted for which the calculation of the Lowest Trade
Price is required in order to determine the Conversion Price of such Series E
Preferred Stock. "Applicable Percentage" shall mean 100% from the Issue Date
until October 8, 1998 and 90% thereafter, subject to adjustment pursuant to
Section 2(c) of the Registration Rights Agreement. "Trading Day" shall mean
any day on which the Common Stock is traded for any period on Nasdaq, or on
the principal securities exchange or other securities market on which the
Common Stock is then being traded.
(b) Notwithstanding anything contained in subparagraph (a) of this
Paragraph B to the contrary, in the event the Corporation (i) makes a public
announcement that it intends to consolidate or merge with any other
corporation (other than a merger in which the Corporation is the surviving or
continuing corporation and its capital stock is unchanged) or sell or
transfer all or substantially all of the assets of the Corporation or (ii)
any person, group or entity (including the Corporation) publicly announces a
tender offer to purchase 50% or more of the Corporation's Common Stock or
otherwise publicly announces an intention to replace a majority of the
corporation's Board of Directors by waging a proxy battle or otherwise (the
date of the announcement referred to in clause (i) or (ii) is hereinafter
referred to as the "Announcement Date"), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the Adjusted
Conversion Price Termination Date (as defined below), be equal to the lower
of (x) the Conversion Price which would have been applicable for an Optional
Conversion occurring on the Announcement Date and (y) the Conversion Price
that would otherwise be in effect. From and after the Adjusted Conversion
Price Termination Date, the Conversion Price shall be determined as set forth
in subparagraph (a) of this Article VI.B. For purposes hereof, "Adjusted
Conversion Price Termination Date" shall mean, with respect to any proposed
transaction, tender offer or removal of the majority of the Board of
Directors which a public announcement as contemplated by this subparagraph
(b) has been made, the date upon which the Corporation (in the case of clause
(i) above) or the person, group or entity (in the case of clause (ii) above)
consummates or publicly announces the termination or abandonment of the
proposed transaction or tender offer which caused this subparagraph (b) to
become operative.
C. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be
subject to adjustment from time to time as follows:
(a) ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK
DIVIDEND, ETC. If at any time when Series E Preferred Stock is issued and
outstanding, the number of outstanding shares of Common Stock is increased or
decreased by a stock split, stock dividend, combination, reclassification,
rights offering below the Adjustment Trading Price (as defined below) to all
holders of Common Stock or other similar event, which event shall have taken
place during the reference period for determination of the Conversion Price
for any Optional Conversion or Automatic Conversion of the Series E Preferred
Stock, then the Conversion Price shall be calculated giving appropriate
effect to the stock split, stock dividend, combination, reclassification or
other similar event. In
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such event, the Corporation shall notify its Transfer Agent of such change on
or before the effective date thereof. "Adjustment Trading Price," which
shall be measured as of the record date in respect of the rights offering,
means (i) the average of the last reported sale prices for the shares of
Common Stock on Nasdaq as reported by Bloomberg, as applicable, for the five
(5) Trading Days immediately preceding such date, or (ii) if Nasdaq is not
the principal trading market for the shares of Common Stock, the average of
the last reported sale prices on the principal trading market for the Common
Stock during the same period as reported by Bloomberg, or (iii) if market
value cannot be calculated as of such date on any of the foregoing bases, the
Adjustment Trading Price shall be the fair market value as reasonably
determined in good faith by (a) the Board of Directors of the Corporation or,
(b) at the option of a majority-in-interest of the holders of the outstanding
Series E Preferred Stock by an independent investment bank of nationally
recognized standing in the valuation of businesses similar to the business of
the Corporation.
(b) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time
when Series E Preferred Stock is issued and outstanding and prior to the
conversion of all Series E Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Corporation
shall be changed into the same or a different number of shares of another
class or classes of stock or securities of the Corporation or another entity,
or in case of any sale or conveyance of all or substantially all of the
assets of the Corporation other than in connection with a plan of complete
liquidation of the Corporation, then the holders of Series E Preferred Stock
shall thereafter have the right to receive upon conversion of the Series E
Preferred Stock, upon the bases and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities or assets which the holders
of Series E Preferred Stock would have been entitled to receive in such
transaction had the Series E Preferred Stock been converted in full (without
regard to any limitations on conversion contained herein) immediately prior
to such transaction, and in any such case appropriate provisions shall be
made with respect to the rights and interests of the holders of Series E
Preferred Stock to the end that the provisions hereof (including, without
limitation, provisions for adjustment of the Conversion Price and of the
number of shares of Common Stock issuable upon conversion of the Series E
Preferred Stock) shall thereafter be applicable, as nearly as may be
practicable in relation to any securities or assets thereafter deliverable
upon the conversion of Series E Preferred Stock. The Corporation shall not
effect any transaction described in this subsection (b) unless (a) it first
gives, to the extent practical, twenty (20) days' prior written notice (but
in any event at least ten (10) business days prior written notice) of such
merger, consolidation, exchange of shares, recapitalization, reorganization
or other similar event or sale of assets (during which time the holders of
Series E Preferred Stock shall be entitled to convert the Series E Preferred
Stock) and (b) the resulting successor or acquiring entity (if not the
Corporation) assumes by written instrument the obligations of this subsection
(b). The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers or share exchanges.
(c) OTHER SECURITIES OFFERINGS. If, at any time after the Issue
Date and prior to June 8, 1999, the Corporation sells Common Stock or
securities convertible into, or exchangeable for, Common Stock, other than
(i) a sale pursuant to a bona fide firm commitment underwritten public
offering of Common Stock by the Corporation (not including a continuous
offering pursuant to Rule 415 under the Securities Act of 1933, as amended),
(ii) a sale as consideration for a merger, consolidation or purchase of
assets, (iii) a sale in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital) or (iv)
a sale to Sanderling Ventures and its affiliates, Domain Associates and its
affiliates, Innocal, Abingworth Bioventures and its affiliates, Rothchild
Asset Management, Dimensional Fund Advisors, Inc.or New York Life Insurance
(collectively, the "Other Common Stock"), then, if the effective or maximum
sales price of the Common Stock with respect to such transaction (including
the effective or maximum conversion, or exchange price) ("Other Price") is
less than the effective Conversion Price of the Series E Preferred Stock at
such time, the Corporation shall adjust the Conversion Price applicable to
the Series E Preferred Stock not yet converted in form and substance
reasonably satisfactory to the holders of Series E Preferred Stock so that
the Conversion Price applicable to the Series E Preferred Stock shall not, in
any event, be greater, after giving effect to all other adjustments contained
herein, than the Other Price.
(d) ADJUSTMENT DUE TO DISTRIBUTION. Subject to Article III, if
the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a dividend, stock
repurchase, by way of return of capital or otherwise (including any dividend
or distribution to the Corporation's
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stockholders in cash or shares (or rights to acquire shares) of capital stock
of a subsidiary (i.e., a spin-off)) (a "Distribution"), then the holders of
Series E Preferred Stock shall be entitled, upon any conversion of shares of
Series E Preferred Stock after the date of record for determining
stockholders entitled to such Distribution, to receive the amount of such
assets which would have been payable to the holder with respect to the shares
of Common Stock issuable upon such conversion had such holder been the holder
of such shares of Common Stock on the record date for the determination of
stockholders entitled to such Distribution.
(e) PURCHASE RIGHTS. Subject to Article III, if at any time when
any Series E Preferred Stock is issued and outstanding, the Corporation
issues any convertible securities or rights to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the record
holders of any class of Common Stock, then the holders of Series E Preferred
Stock will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired
if such holder had held the number of shares of Common Stock acquirable upon
complete conversion of the Series E Preferred Stock (without regard to any
limitations on conversion contained herein) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record
holders of Common Stock are to be determined for the grant, issue or sale of
such Purchase Rights.
(f) ADJUSTMENT FOR RESTRICTED PERIODS. In the event that (1) the
Corporation fails to obtain effectiveness with the Securities and Exchange
Commission of the Registration Statement (as defined in the Registration
Rights Agreement) on or prior to ninety (90) days following the Issue Date,
or (2) such Registration Statement lapses in effect, or sales otherwise
cannot be made thereunder, whether by reason of the Corporation's failure or
inability to amend or supplement the prospectus (the "Prospectus") included
therein in accordance with the Registration Rights Agreement or otherwise,
after such Registration Statement becomes effective (including, without
limitation, during an Allowed Delay (as defined in Section 3(f) of the
Registration Rights Agreement) or a Permitted Offering Delay (as defined in
Section 3(g) of the Registration Rights Agreement)), then the Pricing Period
shall be comprised of, (i) in the case of an event described in clause (1),
the fifteen (15) Trading Days preceding the 90th day following the Issue Date
plus all Trading Days through and including the third Trading Day following
the date of effectiveness of the Registration Statement; and (ii) in the case
of an event described in clause (2), the fifteen (15) Trading Days preceding
the date on which the holder of the Series E Preferred Stock is first
notified that sales may not be made under the Prospectus, plus all Trading
Days through and including the third Trading Day following the date on which
the Holder is first notified that such sales may again be made under the
Prospectus. If a holder of Series E Preferred Stock determines that sales
may not be made pursuant to the Prospectus (whether by reason of the
Corporation's failure or inability to amend or supplement the Prospectus or
otherwise) it shall so notify the Corporation in writing and, unless the
Corporation provides such holder with a written opinion of the Corporation's
counsel to the contrary, such determination shall be binding for purposes of
this paragraph.
(g) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment
or readjustment of the Conversion Price pursuant to this Article VI.C, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series E Preferred
Stock a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of
Series E Preferred Stock, furnish to such holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price at the
time in effect and (iii) the number of shares of Common Stock and the amount,
if any, of other securities or property which at the time would be received
upon conversion of a share of Series E Preferred Stock.
D. MECHANICS OF CONVERSION. In order to convert Series E Preferred
Stock into full shares of Common Stock, a holder of Series E Preferred Stock
shall: (i) submit a copy of the fully executed notice of conversion in the
form attached hereto as Exhibit A ("Notice of Conversion") to the Corporation
by facsimile dispatched on the Conversion Date (or by other means resulting
in, or reasonably expected to result in, notice to the Corporation on the
Conversion Date) at the office of the Corporation or its designated Transfer
Agent for the Series E Preferred Stock that the holder elects to convert the
same, which notice shall specify the number of shares of Series E Preferred
Stock to be converted, the applicable Conversion Price and a calculation of
the number of shares of Common Stock issuable upon such conversion (together
with a copy of the first page of each certificate to be
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converted) prior to Midnight, New York City time (the "Conversion Notice
Deadline") on the date of conversion specified on the Notice of Conversion;
and (ii) surrender the original certificates representing the Series E
Preferred Stock being converted (the "Preferred Stock Certificates"), duly
endorsed, along with a copy of the Notice of Conversion to the office of the
Corporation or the Transfer Agent for the Series E Preferred Stock as soon as
practicable thereafter. The Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion, unless either the Preferred Stock Certificates are delivered to
the Corporation or its Transfer Agent as provided above, or the holder
notifies the Corporation or its Transfer Agent that such certificates have
been lost, stolen or destroyed (subject to the requirements of subparagraph
(a) below). In the case of a dispute as to the calculation of the Conversion
Price, the Corporation shall promptly issue such number of shares of Common
Stock that are not disputed in accordance with subparagraph (b) below. The
Corporation shall submit the disputed calculations to its outside accountant
via facsimile within two (2) business days of receipt of the Notice of
Conversion. The accountant shall audit the calculations and notify the
Corporation and the holder of the results no later than 48 hours from the
time it receives the disputed calculations. The accountant's calculation
shall be deemed conclusive absent manifest error.
(a) LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation
of evidence of the loss, theft, destruction or mutilation of any Preferred
Stock Certificates representing shares of Series E Preferred Stock, and (in
the case of loss, theft or destruction) of indemnity reasonably satisfactory
to the Corporation, and upon surrender and cancellation of the Preferred
Stock Certificate(s), if mutilated, the Corporation shall execute and deliver
new Preferred Stock Certificate(s) of like tenor and date.
(b) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the surrender
of certificates as described above together with a Notice of Conversion, the
Corporation shall issue and, within two (2) business days after such
surrender (or, in the case of lost, stolen or destroyed certificates, after
provision of agreement and indemnification pursuant to subparagraph (a)
above) (the "Delivery Period"), deliver (or cause its Transfer Agent to so
issue and deliver) to or upon the order of the holder (i) that number of
shares of Common Stock for the portion of the shares of Series E Preferred
Stock converted as shall be determined in accordance herewith and (ii) a
certificate representing the balance of the shares of Series E Preferred
Stock not converted, if any. In addition to any other remedies available to
the holder, including actual damages and/or equitable relief, the Corporation
shall pay to a holder $1,000 per day in cash for each day beyond a two (2)
day grace period following the Delivery Period that the Corporation fails to
deliver Common Stock (a "Conversion Default") issuable upon surrender of
shares of Series E Preferred Stock with a Notice of Conversion until such
time as the Corporation has delivered all such Common Stock (the "Conversion
Default Payments"). Such cash amount shall be paid to such holder by the
fifth day of the month following the month in which it has accrued or, at the
option of the holder (by written notice to the Corporation by the first day
of the month following the month in which it has accrued), shall be
convertible into Common Stock in accordance with the terms of this Article
VI. In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Corporation's Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the holder and its
compliance with the provisions contained in Article VI. and in this Article
VI.E, the Corporation shall use commercially reasonable efforts to cause its
Transfer Agent to electronically transmit the Common Stock issuable upon
conversion to the holder by crediting the account of holder's Prime Broker
with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system.
The time periods for delivery and penalties described in the immediately
preceding paragraph shall apply to the electronic transmittals described
herein.
(c) NO FRACTIONAL SHARES. No fractional share shall be issued upon
the conversion of any share or shares of Series E Preferred Stock. All
shares of Common Stock (including fractions thereof) issuable upon conversion
of Series E Preferred Stock as of a Conversion Date to a holder of Series E
Preferred Stock shall be aggregated for purposes of determining whether the
conversion would result in the issuance of any fractional share to such
holder of Series E Preferred Stock. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction of a
share of Common Stock to such holder of Series E Preferred Stock, the
Corporation shall, in lieu of issuing any fractional share, pay such holder
otherwise entitled to such fraction a sum in cash equal to the Closing Price
of the Common Stock on the Conversion Date, multiplied by such fraction.
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(d) CONVERSION DATE. The "Conversion Date" shall be the date
specified in the Notice of Conversion, provided that the Notice of Conversion
is submitted by facsimile (or by other means resulting in, or reasonably
expected to result in, notice) to the Corporation or its Transfer Agent
before Midnight, New York City time, on the Conversion Date. The person or
persons entitled to receive the shares of Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders
of such securities as of the Conversion Date and all rights with respect to
the shares of Series E Preferred Stock surrendered shall forthwith terminate
except the right to receive the shares of Common Stock or other securities or
property issuable on such conversion and except that the holders preferential
rights as a holder of Series E Preferred Stock shall survive to the extent
the Corporation fails to deliver such securities.
E. RESERVATION OF SHARES. A number of shares of the authorized but
unissued Common Stock sufficient to provide for the conversion of the Series
E Preferred Stock outstanding at the then current Conversion Price shall at
all times be reserved by the Corporation, free from preemptive rights, for
such conversion or exercise. As of the date of issuance of the Series E
Preferred Stock, 6,550,000 authorized and unissued shares of Common Stock
have been duly reserved for issuance upon conversion of the Series E
Preferred Stock (the "Reserved Amount"). The Reserved Amount shall be
increased from time to time in accordance with the Corporation's obligations
pursuant to Section 4(h) of the Purchase Agreement. In addition, if the
Corporation shall issue any securities or make any change in its capital
structure which would change the number of shares of Common Stock into which
each share of the Series E Preferred Stock shall be convertible at the then
current Conversion Price, the Corporation shall at the same time also make
proper provision so that thereafter there shall be a sufficient number of
shares of Common Stock authorized and reserved, free from preemptive rights,
for conversion of the outstanding Series E Preferred Stock.
If at any time a holder of shares of Series E Preferred Stock submits a
Notice of Conversion, and the Corporation does not have sufficient authorized
but unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Article VI (a "Conversion Default"),
the Corporation shall issue to the holder (or holders, if more than one
holder submits a Notice of Conversion in respect of the same Conversion Date,
pro rata based on the ratio that the number of shares of Series E Preferred
Stock then held by each such holder bears to the aggregate number of such
shares held by such holders) all of the shares of Common Stock which are
available to effect such conversion. The number of shares of Series E
Preferred Stock included in the Notice of Conversion which exceeds the amount
which is then convertible into available shares of Common Stock (the "Excess
Amount") shall, notwithstanding anything to the contrary contained herein,
not be convertible into Common Stock in accordance with the terms hereof
until (and at the holder's option at any time after) the date additional
shares of Common Stock are authorized by the Corporation to permit such
conversion, at which time the Conversion Price in respect thereof shall be
the lesser of (i) the Conversion Price on the Conversion Default Date (as
defined below) and (ii) the Conversion Price on the Conversion Date elected
by the holder in respect thereof. The Corporation shall use its best efforts
to effect an increase in the authorized number of shares of Common Stock as
soon as possible following a Conversion Default. In addition, the
Corporation shall pay to the holder payments ("Conversion Default Payments")
for a Conversion Default in the amount of (a) (N/365), multiplied by (b) the
sum of the Stated Value plus the Premium Amount per share of Series E
Preferred Stock through the Authorization Date (as defined below), multiplied
by (c) the Excess Amount on the day the holder submits a Notice of Conversion
giving rise to a Conversion Default (the "Conversion Default Date"),
multiplied by (d) .24, where (i) N = the number of days from the Conversion
Default Date to the date (the "Authorization Date") that the Corporation
authorizes a sufficient number of shares of Common Stock to effect conversion
of the full number of shares of Series E Preferred Stock. The Corporation
shall send notice to the holder of the authorization of additional shares of
Common Stock, the Authorization Date and the amount of holder's accrued
Conversion Default Payments. The accrued Conversion Default Payment for each
calendar month shall be paid in cash or shall be convertible into Common
Stock at the Conversion Price, at the holder's option, as follows:
(a) In the event the holder elects to take such payment in cash,
cash payment shall be made to holder by the fifth day of the month following
the month in which it has accrued; and
(b) In the event the holder elects to take such payment in Common
Stock, the holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the time of Conversion) at
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any time after the fifth day of the month following the month in which it has
accrued in accordance with the terms of this Article VI (so long as there is
then a sufficient number of authorized shares).
Nothing herein shall limit the holder's right to pursue actual damages
for the Corporation's failure to maintain a sufficient number of authorized
shares of Common Stock, and each holder shall have the right to pursue all
remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
F. NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price pursuant to this
Article VI, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare
and furnish to each holder of Series E Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of Series E Preferred Stock,
furnish or cause to be furnished to such holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price at the
time in effect and (iii) the number of shares of Common Stock and the amount,
if any, of other securities or property which at the time would be received
upon conversion of a share of Series E Preferred Stock.
G. STATUS AS STOCKHOLDERS. Upon submission of a Notice of Conversion
by a holder of Series E Preferred Stock, (i) the shares covered thereby
(other than the shares, if any, which cannot be issued because their issuance
would exceed such holder's allocated portion of the Reserved Amount) shall be
deemed converted into shares of Common Stock and (ii) the holder's rights as
a holder of such converted shares of Series E Preferred Stock shall cease and
terminate, excepting only the right to receive certificates for such shares
of Common Stock and to any remedies provided herein or otherwise available at
law or in equity to such holder because of a failure by the Corporation to
comply with the terms of this Certificate of Designation. Notwithstanding
the foregoing, if a holder has not received certificates for all shares of
Common Stock prior to the tenth (10th) business day after the expiration of
the Delivery Period with respect to a conversion of shares of Series E
Preferred Stock for any reason, then (unless the holder otherwise elects to
retain its status as a holder of Common Stock by so notifying the
Corporation) the holder shall regain the rights of a holder of such shares of
Series E Preferred Stock with respect to such unconverted shares of Series E
Preferred Stock and the Corporation shall, as soon as practicable, return
such unconverted shares of Series E Preferred Stock to the holder or, if such
shares of Series E Preferred Stock have not been surrendered, adjust its
records to reflect that such shares of Series E Preferred Stock have not been
converted. In all cases, the holder shall retain all of its rights and
remedies (including, without limitation, the right to receive Conversion
Default Payments pursuant to Article IV.D to the extent required thereby for
such Conversion Default and any subsequent Conversion Default).
VII. AUTOMATIC CONVERSION
So long as the Registration Statement is effective and there is not then
a continuing Mandatory Redemption Event, each share of Series E Preferred
Stock issued and outstanding on June 8, 2001 (the "Automatic Conversion
Date"), automatically shall be converted into shares of Common Stock on such
date at the then effective Conversion Price in accordance with, and subject
to, the provisions of Article VI hereof (the "Automatic Conversion"). The
Automatic Conversion Date shall be delayed by one (1) Trading Day each for
each Trading Day occurring prior thereto and prior to the full conversion of
the Series E Preferred Stock that (i) sales cannot be made pursuant to the
Registration Statement (whether by reason of the Corporation's failure to
properly supplement or amend the prospectus included therein in accordance
with the terms of the Registration Rights Agreement or otherwise including
any Allowed Delays (as defined in Section 3(f) of the Registration Rights
Agreement) and any Permitted Offering Delays as defined in Section 3(g) of
the Registration Rights Agreement)), (ii) any Mandatory Redemption Event (as
defined in Article V.A) exists, without regard to whether any cure periods
shall have run or (iii) pursuant to Article V.A with respect to a Mandatory
Redemption Event described in Article V.A(ii). The Automatic Conversion Date
shall be the Conversion Date for purposes of determining the Conversion Price
and the time within which certificates representing the Common Stock must be
delivered to the holder.
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VIII. VOTING RIGHTS
A. GENERALLY. Except as set forth herein, or as otherwise provided by
the Delaware General Corporation Law ("DGCL"), the holders of the Series E
Preferred Stock shall have no voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
B. NOTICE OF MEETINGS. Notwithstanding the above, the Corporation
shall provide each holder of Series E Preferred Stock with prior notification
of any meeting of the stockholders (and copies of proxy materials and other
information sent to stockholders at the time such materials are provided to
the stockholders of the Corporation entitled to vote). In the event of any
taking by the Corporation of a record of its stockholders for the purpose of
determining stockholders who are entitled to receive payment of any dividend
or other distribution, any right to subscribe for, purchase or otherwise
acquire (including by way of merger, consolidation or recapitalization) any
share of any class or any other securities or property, or to receive any
other right, or for the purpose of determining stockholders who are entitled
to vote in connection with any proposed sale, lease or conveyance of all or
substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation
shall mail a notice to each holder, at least ten (10) days prior to the
record date specified therein (or twenty (20) days prior to the consummation
of the transaction or event, whichever is earlier), of the date on which any
such record is to be taken for the purpose of such dividend, distribution,
right or other event, and a brief statement regarding the amount and
character of such dividend, distribution, right or other event to the extent
known at such time.
C. VOTE REQUIRED. To the extent that under the DGCL the vote of the
holders of the Series E Preferred Stock, voting separately as a class or
series as applicable, is required to authorize a given action of the
Corporation, the affirmative vote or consent of the holders of at least a
majority of the shares of the Series E Preferred Stock represented at a duly
held meeting at which a quorum is present or by written consent of a majority
of the shares of Series E Preferred Stock (except as otherwise may be
required under the DGCL) shall constitute the approval of such action by the
class. To the extent that under the DGCL holders of the Series E Preferred
Stock are entitled to vote on a matter with holders of Common Stock, voting
together as one class, each share of Series E Preferred Stock shall be
entitled to a number of votes equal to the number of shares of Common Stock
into which it is then convertible using the record date for the taking of
such vote of stockholders as the date as of which the Conversion Price is
calculated. Holders of the Series E Preferred Stock shall be entitled to
notice of all shareholder meetings or written consents (and copies of proxy
materials and other information sent to stockholders at the time such
materials are provided to the stockholders of the Corporation entitled to
vote) with respect to which they would be entitled to vote, which notice
would be provided pursuant to the Corporation's bylaws and the DGCL.
IX. PROTECTIVE PROVISIONS
So long as shares of Series E Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the DGCL) of the holders of at least a
majority of the then outstanding shares of Series E Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series E Preferred Stock or any Senior Securities so as to affect adversely
the rights, preferences and privileges of the Series E Preferred Stock;
PROVIDED, HOWEVER, that any increase in the authorized preferred stock of the
Corporation (other than an increase in the authorized number of shares of
Series E Preferred Stock) or the creation and issuance of any Junior
Securities or any PARI PASSU Securities as permitted pursuant to the terms
hereof shall not be deemed to affect adversely the right, preferences and
privileges of the Series E Preferred Stock.
(b) create any new class or series of Senior Securities;
(c) create any new class or series of PARI PASSU Securities,
unless the average Closing bid Price for the ten (10) Trading Days ending one
(1) Trading Day prior to the date on which the Board of Directors
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<PAGE>
approve the issuance of such class or series of capital stock is above $4.00,
in which case such consent will not be required;
(d) increase the authorized number of shares of Series E Preferred
Stock; or
(e) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series E Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the Internal
Revenue Code as hereafter from time to time amended).
In the event holders of at least a majority of the then outstanding
shares of Series E Preferred Stock agree to allow the Corporation to alter or
change the rights, preferences or privileges of the shares of Series E
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series
E Preferred Stock, then the Corporation will deliver notice of such approved
change to the holders of the Series E Preferred Stock that did not agree to
such alteration or change (the "Dissenting Holders") and Dissenting Holders
shall have the right for a period of thirty (30) days to convert pursuant to
the terms of this Certificate of Designation as they exist prior to such
alteration or change or continue to hold their shares of Series E Preferred
Stock.
X. PRO RATA ALLOCATIONS
The Maximum Share Amount and the Reserved Amount (including any
increases thereto) shall be allocated by the Corporation pro rata among the
holders of Series E Preferred Stock based on the number of shares of Series E
Preferred Stock then held by each holder relative to the total aggregate
number of shares of Series E Preferred Stock then outstanding.
IN WITNESS WHEREOF, this Certificate of Designation is executed on
behalf of the Corporation this 8th day of June, 1998.
COCENSYS, INC.
By: /s/ F. RICHARD NICHOL
-------------------------
F. Richard Nichol, Ph.D.
President and Chief Executive Officer
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<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series E Preferred Stock)
The undersigned hereby irrevocably elects to convert ____ shares of
Series E Preferred Stock, represented by stock certificate No(s). __________
(the "Preferred Stock Certificates") into shares of common stock ("Common
Stock") of CoCensys, Inc. (the "Corporation") according to the conditions of
the Certificate of Designation of Series E Preferred Stock, as of the date
written below. If securities are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates. No fee
will be charged to the Holder for any conversion, except for transfer taxes,
if any. A copy of each Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of
the Series E Preferred Stock shall be made pursuant to registration of the
securities under the Securities Act of 1933, as amended (the "Act"), or
pursuant to an exemption from registration under the Act.
Date of Conversion:___________________________
Three Lowest Trade Prices:_____________________
Applicable Conversion Price:____________________
Number of Shares of
Common Stock to be Issued:_____________________
Signature:____________________________________
Name:_______________________________________
Address:______________________________________
*The Corporation is not required to issue shares of Common Stock until the
original Series E Preferred Stock Certificate(s) (or evidence of loss, theft
or destruction thereof) to be converted are received by the Corporation or
its Transfer Agent. The Corporation shall issue and deliver shares of Common
Stock to an overnight courier not later than two (2) business days following
receipt of the original Preferred Stock Certificate(s) to be converted, and
shall make payments pursuant to the Certificate of Designation for the
number of business days such issuance and delivery is late.
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<PAGE>
APPENDIX B
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION,
AS AMENDED, OF COCENSYS, INC.
CoCensys, Inc., (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: The name of the Corporation is CoCensys, Inc.
SECOND: The date on which the Amended and Restated Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware
(the "Delaware Secretary of State) is February 5, 1993. A Certificate of
Retirement of Series A, Series B and Series C Preferred stock was filed with
the Delaware Secretary of State on February 5, 1993. A Certificate of
Designation of Series A Junior Participating Preferred Stock was filed with
the Delaware Secretary of State on May 15, 1995. A Certificate of Powers,
Designation, Preferences, Rights and Limitations of Series B Convertible
Preferred Stock was filed with the Delaware Secretary of State on May 17,
1996. A Certificate of Amendment of Amended and Restated Certificate of
Incorporation of CoCensys, Inc. was filed with the Delaware Secretary of
State on June 19, 1996. A Certificate of Powers, Designation, Preferences,
Rights and Limitations of Series C Convertible Preferred Stock was filed with
the Delaware Secretary of State on May 12, 1997. A Certificate of Powers,
Designation, Preferences, Rights and Limitations of Series D Convertible
Preferred Stock was filed with the Delaware Secretary of State on October 14,
1997. A Certificate of Powers, Designation, Preferences, Rights and
Limitations of Series E Convertible Preferred Stock was filed with the
Delaware Secretary of State on June 8, 1998.
THIRD: The Board of Directors of the Corporation, acting in
accordance with the provision of Sections 141 and 242 of the General
Corporation Law of the State of Delaware, adopted resolutions at a meeting
held on September 16, 1998 to amend the first paragraph of Article IV of the
Amended and Restated Certificate of Incorporation, as amended, of the
Corporation to read in its entirety as follows:
"IV.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
numbers of shares which the Corporation is authorized to issue is eighty
million (80,000,000) shares. Seventy-five million (75,000,000) shares shall
be Common Stock, each having a par value of one-tenth of one cent ($0.001).
Five million (5,000,000) shares shall be Preferred Stock, each having a par
value of one-tenth of one cent ($0.001). Effective at the time of filing
with the Secretary of State of the State of Delaware of this Certificate of
Amendment of Amended and Restated Certificate of Incorporation, as amended
(the "Effective Time"), each _____ (__) shares of the Corporation's Common
Stock issued and outstanding shall, automatically and without any action on
the part of the respective holders thereof, be converted into one (1) share
of Common Stock of the Corporation. No fractional shares shall be issued and,
in lieu thereof, any holder of less than one share of Common Stock shall be
entitled to receive cash for such holder's fractional share based upon the
closing sales price of the Corporation's Common Stock as reported on the
Nasdaq National Market as of the date of the Effective Time."
FOURTH: Pursuant to a resolution of the Board of Directors, this
Certificate of Amendment of Amended and Restated Certificate of
Incorporation, as amended, was submitted to the stockholders of the
Corporation and was duly approved by the required vote of stockholders of the
Corporation in accordance with Sections 228 and 242 of the Delaware General
Corporation Law. The total number of outstanding shares entitled to vote or
consent to this Amendment was 27,280,949 shares of Common Stock. A majority
of the outstanding shares of Common Stock voted in favor of this Certificate
of Amendment of Amended and Restated Certificate of Incorporation, as amended.
B-1
<PAGE>
IN WITNESS WHEREOF, CoCensys, Inc. has caused this Certificate of
Amendment to be signed by its President and attested to by its Secretary this
___ day of ________, 1999.
COCENSYS, INC.
---------------------------------------------
F. Richard Nichol, Ph.D.
President, Chief Executive Officer and Chairman of
the Board
ATTEST:
- --------------------------------------
Robert R. Holmen
Vice President, General Counsel and Secretary
B-2
<PAGE>
COCENSYS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 27, 1999
The undersigned hereby appoints LOWELL E. SEARS and F. RICHARD NICHOL, PH.D.,
and each of them, as attorneys and proxies of the undersigned, with full
power of substitution, to vote all of the shares of stock of CoCensys, Inc.
which the undersigned may be entitled to vote at the Special Meeting of
Stockholders of CoCensys, Inc. to be held at the offices of CoCensys, 201
Technology Drive, Irvine, California on Wednesday, January 27, 1999, at 2:00
p.m. local time, and at any and all continuations and adjournments thereof,
with all powers that the undersigned would possess if personally present,
upon and in respect of the following matters and in accordance with the
following instructions, with discretionary authority as to any and all other
matters that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR
APPROVAL OF PROPOSALS 1 AND 2 AS MORE SPECIFICALLY DESCRIBED IN THE PROXY
STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED
IN ACCORDANCE THEREWITH. THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A
VOTE FOR APPROVAL OF PROPOSALS 1 AND 2.
(CONTINUED ON OTHER SIDE)
- --------------------------------------------------------------------------------
/X/ Please mark your vote as in this example.
PROPOSAL 1: To approve the issuance by the Company from time to time of
shares of its Common Stock on conversion of shares of the
Company's Series E Convertible Preferred Stock and exercise of
warrants issued in connection with such Series E Convertible
Preferred Stock.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL 2: To approve a proposal to provide the Board of Directors the
authority to amend the Company's Amended and Restated
Certificate of Incorporation, as amended, to effect, at any time
prior to the 1999 Annual Meeting of Stockholders, a reverse
stock split, whereby the Company would issue one new share of
Common Stock in exchange for between four and ten shares of
outstanding Common Stock.
/ / FOR / / AGAINST / / ABSTAIN
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE, WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES. THANK YOU.
Signature(s): Date:
-------------------------------------- --------------------
Note: Please sign exactly as your name appears hereon. If the stock is
registered in the names of two or more persons, each should sign.
Executors, administrators, trustees, guardians and attorneys-in-fact
should add their titles. If signer is a corporation, please give full
corporate name and have a duly authorized officer sign, stating title.
If signer is a partnership, please sign in partnership name by
authorized person.
