<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
ENERGY BIOSYSTEMS CORPORATION
- --------------------------------------------------------------------------------
(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)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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<PAGE>
ENERGY BIOSYSTEMS CORPORATION
4200 RESEARCH FOREST DRIVE
THE WOODLANDS, TEXAS 77381
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 26, 1999
------------------------
The Annual Meeting of the Stockholders of Energy BioSystems Corporation, a
Delaware corporation (the "Company"), will be held at the Company's offices,
4200 Research Forest Drive, The Woodlands, Texas, on May 26, 1999 at 10:00 a.m.,
local time, for the following purposes:
1. To elect eight directors to serve until the annual stockholders' meeting
in 1999 or until their successors have been elected and qualified;
2. To approve an amendment to the Company's 1997 Stock Option Plan to
increase the number of shares available for grant to 1,200,000 shares,
and to eliminate the maximum number of shares that may be issued to any
one individual thereunder;
3. To approve an amendment to the Company's Non-Employee Director Option
Plan to (i) increase the number of shares available for grant to 200,000
shares, (ii) increase the number of shares to be granted to directors on
their election to the Board to 4,000 shares and (iii) eliminate the
provision which prohibits a grant under such plan to any director who
has received stock options to purchase such amounts in the prior twelve
month period;
4. To ratify and approve the appointment of Arthur Andersen LLP as the
Company's independent public accountants for the 1999 fiscal year;
5. To approve the issuance in a private placement of Common Stock of the
Company (and securities exercisable for such Common Stock) representing
20% or more of the number of issued and outstanding shares of such
Common Stock; and
6. To act upon such other business as may properly come before the meeting
or any adjournments thereof.
Only stockholders of record at the close of business on April 19, 1999 are
entitled to receive notice of, and to vote at, the meeting.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING OF
STOCKHOLDERS REGARDLESS OF THE SIZE OF YOUR HOLDINGS OR WHETHER YOU PLAN TO
ATTEND THE MEETING. THEREFORE, PLEASE MARK, SIGN, DATE, AND RETURN THE ENCLOSED
PROXY CARD PROMPTLY. IF YOU ARE PRESENT AT THE MEETING, AND WISH TO DO SO, YOU
MAY REVOKE THE PROXY AND VOTE IN PERSON.
By Order of the Board of Directors
/s/ Paul G. Brown, III
Paul G. Brown, III
SECRETARY
April 26, 1999
The Woodlands, Texas
<PAGE>
ENERGY BIOSYSTEMS CORPORATION
4200 RESEARCH FOREST DRIVE
THE WOODLANDS, TEXAS 77381
------------------------
PROXY STATEMENT
---------------------
SOLICITATION AND REVOCABILITY OF PROXIES
The accompanying proxy is solicited by the Board of Directors of Energy
BioSystems Corporation (the "Company") for use at the 1999 Annual Meeting of
Stockholders to be held on May 26, 1999 and at any adjournments thereof (the
"Annual Meeting"). The Annual Meeting will be held at 10:00 a.m., local time, at
the Company's principal executive offices, 4200 Research Forest Drive, The
Woodlands, Texas. If the accompanying proxy is properly executed and returned,
the shares it represents will be voted at the Annual Meeting in accordance with
the directions noted thereon or, if no direction is indicated, it will be voted
in favor of the proposals described in this Proxy Statement. In addition, the
proxy confers discretionary authority to the persons named in the proxy
authorizing those persons to vote, in their discretion, on any other matters
properly presented at the Annual Meeting. The Board of Directors is not
currently aware of any such other matters.
Each stockholder of the Company has the unconditional right to revoke his
proxy at any time prior to its exercise, either in person at the Annual Meeting
or by written notice to the Company addressed to Secretary, Energy BioSystems
Corporation, 4200 Research Forest Drive, The Woodlands, Texas 77381. No
revocation by written notice will be effective unless such notice has been
received by the Secretary of the Company prior to the day of the Annual Meeting
or by the inspector of election at the Annual Meeting.
The principal executive offices of the Company are located at 4200 Research
Forest Drive, The Woodlands, Texas 77381. This Proxy Statement and the
accompanying Notice of Annual Meeting of Stockholders and proxy are being mailed
to the Company's stockholders on or about April 26, 1999.
QUORUM AND VOTING
The number of voting securities of the Company outstanding on April 19,
1999, the record date for the determination of stockholders of the Company
entitled to receive notice of, and to vote at, the Annual Meeting was (i)
2,180,358 shares of common stock, par value $0.01 per share (the "Common
Stock"), each share being entitled to one vote, and (ii) 696,400 shares of
Series B Convertible Preferred Stock, par value $0.01 per share (the "Preferred
Stock"). Shares of Preferred Stock have voting rights on all matters subject to
a vote of the holders of Common Stock on an as-converted basis. As of the record
date, the shares of Preferred Stock are entitled to an aggregate of 686,108
votes upon each of the matters to be voted on at the Annual Meeting. The total
number of votes that may be cast at the Annual Meeting is 2,866,466.
The presence, either in person or by proxy, of holders of a majority of the
outstanding shares of Common Stock is necessary to constitute a quorum at the
Annual Meeting. Abstentions and broker non-votes which are properly executed and
received by the Company prior to or at the Annual Meeting are counted for
purposes of determining whether a quorum is present. A plurality vote is
required for the election of directors. Accordingly, if a quorum is present at
the Annual Meeting, the eight persons receiving the greatest number of votes
will be elected to serve as directors. Withholding authority to vote for a
director nominee and broker non-votes in the election of directors will not
affect the outcome of the election of directors. All other matters to be voted
on will be decided by the vote of the holders of a majority of the shares
present or represented at the Annual Meeting and entitled to vote on such
matter. On any such matter, an abstention will have the same effect as a
negative vote but, because shares held by brokers will not be considered
entitled to vote on matters as to which the brokers withhold authority, a broker
non-vote will have no effect on such vote.
<PAGE>
All Proxies that are properly completed, signed and returned prior to the
Annual Meeting will be voted. Any Proxy given by a stockholder may be revoked at
any time before it is exercised by the stockholder (i) filing with the Secretary
of the Company an instrument revoking it, (ii) executing and returning a Proxy
bearing a later date or (iii) attending the Annual Meeting and expressing a
desire to vote his shares of Common Stock in person. Votes will be counted by
Harris Trust & Savings Bank, the Company's transfer agent and registrar.
PROPOSAL NUMBER 1:
ELECTION OF DIRECTORS
The Board of Directors has nominated and urges you to vote for the election
of the eight nominees identified below who have been nominated to serve as
directors until the next annual meeting of stockholders or until their
successors are duly elected and qualified. Each of the nominees listed below is
a member of the Company's present Board of Directors. Proxies solicited hereby
will be voted for all eight nominees unless stockholders specify otherwise in
their proxies.
If, at the time of or prior to the Annual Meeting, any of the nominees
should be unable or decline to serve, the discretionary authority provided in
the proxy may be used to vote for a substitute or substitutes designated by the
Board of Directors. The Board of Directors has no reason to believe that any
substitute nominee or nominees will be required.
NOMINEES FOR DIRECTOR
The eight nominees for election as directors and certain additional
information with respect to each of them, are as follows:
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE POSITION WITH THE COMPANY BECAME A DIRECTOR
- --------------------------------- --- --------------------------------------------- ------------------
<S> <C> <C> <C>
William E. Nasser................ 59 Chairman of the Board, President and Chief 1992
Executive Officer
Ramon Lopez...................... 65 Director 1994
R. James Comeaux................. 61 Director 1997
Edward B. Lurier................. 68 Director 1991
Thomas E. Messmore, CFA.......... 53 Director 1992
Daniel J. Monticello, Ph.D....... 43 Director and Vice President, Research and 1994
Development
John S. Patton................... 64 Director 1997
William D. Young................. 54 Director 1994
</TABLE>
WILLIAM E. NASSER. Mr. Nasser has served as Chairman of the Board,
President and Chief Executive Officer since April 1998 and has been a Director
since January 1992. Mr. Nasser formerly served as Chairman of the Board,
President and Chief Executive Officer of Petrolite Corporation from 1992 to 1995
and as President of Petrolite from 1988 to 1992. He retired in November 1995
after over 30 years of service. Mr. Nasser currently is a director of Laclede
Gas Company. He holds a B.S. degree in Chemical Engineering from the University
of Notre Dame and an M.S. degree from the University of Oklahoma.
RAMON LOPEZ. Mr. Lopez has been a Director since 1994 and served as
Chairman of the Board of Directors from April 1997 until April 1998. Mr. Lopez
served as Vice President--Safety, Environment and Technology of Shell Oil
Company from October 1992 until his retirement in October 1993. He started his
career with Shell in 1955 and held senior responsibilities in all areas of
petroleum refining and marketing, including positions as Vice President of
Manufacturing and Technical and General Manager of the
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Western and Eastern Regions for Refining and Marketing. Mr. Lopez holds a B.S.
degree in Chemical Engineering from the University of Florida.
R. JAMES COMEAUX. Mr. Comeaux has been a Director since April 1997. Mr.
Comeaux has been President of Petrochemical Management Incorporated since 1993.
From 1989 to 1993, Mr. Comeaux served as President and Chief Executive Officer
of Arcadian Corporation. He served as Senior Vice President of Fina, Inc. from
1984 to 1989. Prior to joining Fina, Mr. Comeaux spent 17 years at Gulf Oil
Corporation. Mr. Comeaux is a director of Ivex Packaging Corporation. Mr.
Comeaux received a B.S. degree in Chemical Engineering from Lamar University.
EDWARD B. LURIER. Mr. Lurier has been a Director since 1991. Since 1984,
Mr. Lurier has been the Chairman of the Board of Directors of Gryphon Management
Company, Inc. and general partner of Gryphon Financial Partners II, a venture
capital firm which he co-founded. Gryphon Financial Partners II is the general
partner of Gryphon Ventures II, Limited Partnership, a limited partnership of
which Ethyl Corporation is the sole limited partner. Mr. Lurier is a director of
IGEN International Inc.
THOMAS E. MESSMORE, CFA. Mr. Messmore has been a Director since 1992. Mr.
Messmore has been Managing Director of Zurich Centre Resources, Ltd., a
subsidiary of Zurich Insurance Group, since 1997 and currently serves as a
member of the Executive Staff with their parent company Zurich Insurance in
Zurich, Switzerland. Previously, Mr. Messmore served as President and Chief
Executive Officer of UBS Asset Management (New York), Inc. from 1995 until
October 1996. Mr. Messmore served as Senior Vice President of The Travelers
Insurance Company from 1984 until his resignation in January 1994. Prior
thereto, he served as Senior Vice President and Chief Financial Officer of the
Keystone Massachusetts Group, an affiliate of The Travelers Insurance Company.
Mr. Messmore received a B.S. degree in Engineering from West Virginia University
and an M.B.A. from Harvard Business School.
DANIEL J. MONTICELLO, PH.D. Dr. Monticello was the Company's first
employee. He joined the Company in July 1990 as Vice President, Research and
Development and became a Director in 1994. From 1983 to 1990, Dr. Monticello was
employed by Miles Laboratories where he served in various capacities in the
Biotechnology Products Division, including Manager of Biochemistry Research. Dr.
Monticello earned his B.S. degree from the University of Michigan and his M.S.
and Ph.D. in Microbiology from Michigan State University. His post-doctoral
research at the University of Georgia from 1982 to 1984 concerned the microbial
desulfurization of fossil fuels.
JOHN S. PATTON. Mr. Patton has been a Director since January 1997. Since
1997, he has been the Director of Strategic Planning for Ethyl Corporation. He
served as the Director of Investor Relations for Ethyl Corporation from 1989
through 1997. Mr. Patton also serves as chairman of Ethyl Ventures, Inc., a
wholly-owned subsidiary of Ethyl Corporation which invests in early-stage
development companies. Mr. Patton has served in various positions at Ethyl
Corporation since 1974. Mr. Patton joined Sterling Seal Co. in 1957, where he
served in various positions until Sterling Seal was acquired by VCA Corporation
in 1972 and Ethyl Corporation in 1974. Mr. Patton currently is a regional
director of Mellon Bank Corporation. He received a B.A. degree in Economics from
Denison University and an M.B.A. from the University of Richmond.
WILLIAM D. YOUNG. Mr. Young has been a Director since 1994. Mr. Young has
been Chief Operating Officer of Genentech, Inc. since March 1997, with
responsibility for overseeing Genentech, Inc.'s operations, business development
and sales and marketing. Prior to joining Genentech, Inc. in 1980, Mr. Young
spent 14 years with Eli Lilly and Company. He received his B.S. degree in
Chemical Engineering from Purdue University and an M.B.A. from Indiana
University. Mr. Young is also a Director of IDEC Pharmaceuticals, Inc. and is a
member of the National Academy of Engineering.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION
OF EACH OF THE ABOVE-NAMED NOMINEES.
3
<PAGE>
All directors hold office until the next annual meeting of the stockholders
of the Company or until their successors have been duly elected and qualified.
The Company's officers are elected annually by, and serve at the pleasure of,
the Board of Directors, subject to the terms of any employment agreements.
The Company's Certificate of Incorporation and Bylaws provide that the
number of directors on the Board shall be fixed from time to time by the Board
of Directors but shall not be less than three nor more than fifteen persons. The
Board in its discretion and in accordance with such authority has currently
fixed its size at eight members. No proxy will be voted for a greater number of
persons than the number of nominees named herein.
DIRECTORS' MEETINGS AND COMPENSATION
During 1998, the Board of Directors met 9 times and took certain additional
actions by unanimous written consent in lieu of meetings. During 1998, no
director of the Company attended fewer than 75 percent of the meetings of the
Board of Directors.
Members of the Board of Directors are reimbursed for out-of-pocket expenses
incurred in attending Board of Directors and committee meetings. During 1998,
each of Messrs. Comeaux, Lopez, Nasser (prior to being elected CEO & President)
and Young received $1,000 for each board meeting attended and Messrs. Comeaux,
Lopez and Nasser (prior to being elected CEO) received $500 for each committee
meeting attended. Directors who are employees of the Company do not receive any
additional compensation for their services as a director.
Under the Company's Non-Employee Director Option Plan, each nonemployee
director (except for directors who received options during the preceding year
for more than 571 shares of Common Stock under any other plan or agreement and
subject to the right of each eligible nonemployee director to decline such
grant) receives an automatic annual grant of non-qualified options to purchase
571 shares of Common Stock at an exercise price per share equal to the fair
market value per share of Common Stock on the date the option is granted.
BOARD COMMITTEES
The Company's Board of Directors has an Executive Committee, an Audit
Committee and a Compensation Committee. The Board of Directors does not have a
Nominating Committee. The Executive Committee exercises all the powers of the
Board in the management of the business and affairs of the Company, except as
limited by Delaware law, when the Board is not in session. The current members
of the Executive Committee are Messrs. Comeaux, Lopez, Lurier and Nasser. The
Audit Committee's functions include making recommendations concerning the
engagement of independent public accountants, reviewing with the independent
public accountants the plan and results of the auditing engagement, approving
professional services provided by the independent public accountants, and
reviewing the adequacy of the Company's internal accounting controls. The
current members of the Audit Committee are Messrs. Lopez, Lurier and Messmore.
The Compensation Committee makes recommendations concerning compensation,
including incentive arrangements, for the Company's officers. The Compensation
Committee also administers the Company's Stock Compensation Plan. The current
members of the Compensation Committee are Messrs. Lopez, Lurier and Messmore.
During 1998, the Executive Committee met three times, the Audit Committee
did not meet and the Compensation Committee met one time and took certain
additional actions by unanimous written consent in lieu of meetings. During
1998, no director of the Company attended fewer than 75 percent of the number of
meetings of committees on which he served.
4
<PAGE>
EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS
Set forth below is certain information concerning the executive officers of
the Company, including the business experience of each during the past five
years.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
William E. Nasser................ 59 Chairman of the Board, President and Chief Executive Officer
Peter P. Policastro, Ph.D........ 45 Executive Vice President and Chief Operating Officer
Daniel J. Monticello, Ph.D....... 43 Vice President, Research and Development
Paul G. Brown, III............... 38 Vice President, Finance and Administration
</TABLE>
Information regarding the business experience of Mr. Nasser and Dr.
Monticello is set forth above under the heading "Proposal Number 1: Election of
Directors--Nominees for Director."
PETER P. POLICASTRO, PH.D. Dr. Policastro joined the Company as Executive
Vice President and Chief Operating Officer in January 1999. Prior to joining the
Company, Dr. Policastro was Senior Vice President Research and Development in
the Melamine Resins and Derivatives Unit, a division of Borden Chemical, Inc.
Dr. Policastro previously served as Senior Vice President of Plastics
Manufacturing Company, a division of Sun Coast Industries, Inc., from 1995 to
1998, as Founder and Chief Executive Officer of Med-Genesis, Inc. from 1992 to
1995 and as President of OctaNova Laboratories Corporation from 1989 to 1992.
Dr. Policastro holds an A.B. degree in Chemistry from Duke University and earned
his Ph.D. in Organic Chemistry from the Massachusetts Institute of Technology in
1983.
PAUL G. BROWN, III. Mr. Brown has served as Vice President, Finance and
Administration of the Company since September 1993. From February 1992 to
September 1993, he served as Corporate Controller of the Company. Mr. Brown
spent 10 years with Arthur Andersen & Co. from 1982 to 1992, serving most
recently as a Tax Manager. Mr. Brown earned his B.S. degree in Accounting from
the University of New Orleans.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee (the "Committee") of the Board of Directors of
the Company currently consists of Ramon Lopez, Edward B. Lurier and Thomas E.
Messmore, neither of whom is an officer or employee of the Company. The
Committee is responsible for evaluating the performance of management,
determining the compensation for certain executive officers of the Company and
administering the Company's stock plans under which grants of stock options and
restricted stock may be made to employees of the Company. The Committee has
furnished the following report on executive compensation for 1998:
Under the supervision of the Committee, the Company has developed a
compensation policy which is designated to attract and retain key executives
responsible for the success of the Company and motivate management to enhance
long-term stockholder value. The annual compensation package for executive
officers primarily consists of (i) a cash salary which reflects the
responsibilities relating to the position and individual performance, (ii)
variable performance awards payable in cash or stock and tied to the achievement
of certain personal or corporate goals or milestones and (iii) long-term stock
based incentive awards which strengthen the mutuality of interests between the
executive officers and the Company's stockholders.
In determining the level and composition of compensation of each of the
Company's executive officers, the Committee takes into account various
qualitative and quantitative indicators of corporate and
5
<PAGE>
individual performance. Although no specific target has been established, the
Committee generally seeks to set salaries at the median to high end of the range
in comparison with peer group companies. In setting such salaries, the Committee
considers its peer group to be certain companies in the biotechnology and
environmental industries with market capitalizations under one billion dollars.
Such competitive group does not necessarily include the companies comprising the
Peer Group Index reflected in the performance graph in this Proxy Statement.
Because the Company is still in the development stage, the use of certain
traditional performance standards (E.G., profitability and return on equity) is
not currently appropriate in evaluating the performance of the Company's
executive officers. Consequently, in evaluating the performance of management
the Committee takes into consideration such factors as the Company's achieving
specified milestones or goals under various research or development programs. In
addition, the Committee recognizes performance and achievements that are more
difficult to quantify, such as the successful supervision of major corporate
projects, demonstrated leadership ability, and contributions to the industry and
community development. For 1998, the Committee included in its evaluation the
significant progress made by the Company, including the continuing advancement
of the Company's research development under existing research and collaboration
agreements.
Base compensation is established through negotiation between the Company and
the executive officer at the time the executive is hired, and then subsequently
adjusted when such officer's base compensation is subject to review or
reconsideration. While the Company has entered into employment agreements with
certain of its executive officers, such agreements provide that base salaries
after the initial year will be determined by the Committee after review. When
establishing or reviewing base compensation levels for each executive officer,
the Committee, in accordance with its general compensation policy, considers
numerous factors, including the responsibilities relating to the position, the
qualifications of the executive and the relevant experience the individual
brings to the Company, strategic goals for which the executive has
responsibility, and compensation levels of companies at a comparable stage of
development who compete with the Company for business, scientific, and executive
talents. As stated above, such comparable companies are generally those with
market capitalizations under one billion dollars and are not necessarily among
the companies comprising the Peer Group Index reflected in the performance graph
in this Proxy Statement. No predetermined weights are given to any one of such
factors. The base salaries for the executive officers for fiscal 1998 were at
the median level in comparison to the Company's peer group companies.
In addition to each executive officer's base compensation, the Committee may
award cash bonuses and/or grant awards under the Company's stock compensation
plans to chosen executive officers depending on the extent to which certain
defined personal and corporate performance goals are achieved. Such corporate
performance goals are the same as discussed above. Because the Company's
technology is still in the early stages of development, the Company has granted
minimal bonuses to its executive officers.
All employees of the Company, including its executive officers, are eligible
to receive long-term stock-based incentive awards under the Company's stock
compensation plans as a means of providing such individuals with a continuing
proprietary interest in the Company. Such grants further the mutuality of
interest between the Company's employees and its stockholders by providing
significant incentives for such employees to achieve and maintain high levels of
performance. The Company's stock compensation plans enhance the Company's
ability to attract and retain the services of qualified individuals. Factors
considered in determining whether such awards are granted to an executive
officer of the Company include the executive's position in the Company, his or
her performance and responsibilities, the amount of stock options and restricted
stock, if any, currently held by the officer, the vesting schedules of any such
options or restricted stock and the executive officer's other compensation.
While the Committee does not adhere to any firmly established formulas or
schedules for the issuance of awards such as options or restricted stock, the
Committee will generally tailor the terms of any such grant to achieve its goal
as a long-term incentive award by providing for a vesting schedule encompassing
several years or tying the vesting dates to particular corporate or personal
milestones. For example, Mr. Brown and Dr. Monticello were granted
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<PAGE>
options to acquire an aggregate of 4,856 shares of Common Stock in 1998 in
recognition of their continuing contributions to the Company, with vesting
contingent on the Company accomplishing specific goals. See "Executive
Compensation--Option Grants in Last Fiscal Year."
COMPENSATION OF CHIEF EXECUTIVE OFFICER
As of April 9, 1998, William E. Nasser was elected as the Company's Chairman
of the Board, President and Chief Executive Officer. Mr. Nasser's employment
agreement with the Company specifies an initial base annual salary of $200,000.
Mr. Nasser's salary remained at $200,000 for 1999, although effective March 16,
1999, Mr. Nasser has elected to defer payment until the financial position of
the Company is improved. In setting this initial base salary for Mr. Nasser, the
Committee evaluated the compensation package for chief executive officers of
peer group companies with similar market capitalizations. The Committee expects
that when it reevaluates Mr. Nasser's base salary level in the future, it will
consider a variety of factors, including Mr. Nasser's responsibilities, his
general background and qualifications, his achievement of various corporate and
personal milestones set by the Committee from time to time, and compensation
levels for executives in Mr. Nasser's position and with his background at peer
group companies. The Committee has not attached any particular relative
weighting to the foregoing factors (or any other factors which the Committee may
also consider in reaching compensation decisions for the Company's executive
officers).
Mr. Nasser will be eligible to receive such bonuses as may be determined by
the Committee. The Committee will retain discretion to determine the amount of
any incentive bonus awards to be paid to Mr. Nasser, and the Committee expects
that it will evaluate a number of factors in reaching this decision, including
the Company's strategic goals for which Mr. Nasser has responsibility, his other
responsibilities, his initiatives and contributions to the Company's achievement
of various corporate and strategic goals, and his own achievement of certain
personal milestones as determined by the Committee from time to time.
In connection with his election as the Company's Chairman of the Board,
President and Chief Executive Officer, Mr. Nasser was granted a stock option to
purchase 17,856 shares of Common Stock at an exercise price of $17.50 per share,
which option grant was negotiated by the Company and Mr. Nasser as part of his
employment agreement. The stock option was vested and exercisable on the date of
grant with respect to 7,142 shares, with the remaining 10,714 shares vesting at
a rate of 893 shares per month. Prior to his election as the Company's Chairman
of the Board, President and Chief Executive Officer, Mr. Nasser was granted a
fully vested stock option in January 1998 to purchase 7,142 shares of Common
Stock at an exercise price of $14.00 per share, and was granted an additional
stock option in January 1998 to purchase 7,142 shares of Common Stock at an
exercise price of $14.00 per share vesting at a rate of 714 shares for each
month in which Mr. Nasser provided consulting services pending the Company's
selection of a new Chief Executive Officer to replace Mr. Webb. The Committee
expects that Mr. Nasser will participate in the Company's stock compensation
plans on the same general terms as other participants in such plans with respect
to future stock option grants that he may be granted from time to time, although
the amount of shares underlying option grants to Mr. Nasser will be potentially
larger than for other employees as a result of his position.
In 1998, the Company reimbursed Mr. Nasser for commuting, temporary living
expenses, meals and other travel related expenses in the amount of $49,378.
The Company's former President and Chief Executive Officer, John H. Webb,
left the Company's employment as of October 1, 1997. Mr. Webb's severance
agreement obligated the Company to pay Mr. Webb a lump-sum cash payment of
$187,500 on January 15, 1998. Such payment was made. The Company also agreed to
continue certain employee benefits for Mr. Webb and his dependents through
October 1998. The Committee also approved the extension of the vesting period
of, and the exercisability
7
<PAGE>
period for, all of Mr. Webb's outstanding stock options through October 31, 1998
as part of his severance package.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), added by the Revenue Reconciliation Act of 1993, places a $1 million
cap per executive on the deductible compensation that can be paid to certain
executives of publicly-traded corporations. Amounts that qualify as "performance
based" compensation under Section 162(m)(4)(c) of the Code are exempt from the
cap and do not count toward the $1 million limit. Generally, stock options will
qualify as performance based compensation. The Committee has discussed and
considered and will continue to evaluate the potential impact of Section 162(m)
on the Company in making compensation determinations, but has not established a
set policy with respect to future compensation determinations.
The foregoing report is given by the following members of the Compensation
Committee:
RAMON LOPEZ
EDWARD B. LURIER
THOMAS E. MESSMORE
The report of the Compensation Committee shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933, as amended, or under
the Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such acts.
8
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes certain information regarding aggregate cash
compensation, stock option and restricted stock awards and other compensation
earned by the Company's President and Chief Executive Officer and each of the
Company's other executive officers as of December 31, 1998 who earned in excess
of $100,000 during 1998.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION --------------------------
SECURITIES
--------------------- RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS OPTIONS (#) COMPENSATION(1)
- ------------------------------------------ --------- ---------- --------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
William E. Nasser ........................ 1998 $ 146,282 -- -- 17,856 $ 53,378(2)
President and Chief Executive Officer
Daniel J. Monticello, Ph.D. .............. 1998 $ 169,000 $ 155 -- 1,714 $ 12,800
Vice President, Research and Development 1997 $ 161,000 $ 1,442 -- 1,428 $ 12,800
1996 $ 161,000 -- -- 1,857 $ 13,673
Paul G. Brown, III ....................... 1998 $ 131,313 -- -- 3,142 $ 10,005
Vice President, Finance and 1997 $ 126,600 -- -- 2,857 $ 10,080
Administration 1996 $ 124,203 -- -- 2,142 $ 9,936
Michael A. Pacheco(3) .................... 1998 $ 141,417 $ 155 -- 2,142 $ 11,313
1997 $ 91,564 $ 311 -- 12,856 $ 32,667(4)
</TABLE>
- ------------------------
(1) During each of the three years ended December 31, 1998, perquisites for each
individual named in the Summary Compensation Table aggregated less than 10%
of the total annual salary and bonus reported for such individuals in the
Summary Compensation Table. Accordingly, no such amounts are included in the
Summary Compensation Table. All amounts listed below represent Company
contributions to the Company's Simplified Employee Pension Plan ("SEP")
unless otherwise indicated.
(2) Represents (i) $49,378 in reimbursement of expenses incurred for temporary
housing and other travel-related expenses while Mr. Nasser commuted to the
Company's offices, and (ii) $4,000 in Company contributions to the SEP. Mr.
Nasser became a full-time employee in April, 1998.
(3) Mr. Pacheco resigned from the Company effective March 31, 1999. Pursuant to
his employment agreement, the Company is obligated to pay his monthly salary
of $12,375 and certain benefits until December 31, 1999.
(4) Represents $30,000 in moving expenses and $2,667 in Company contributions to
the SEP.
9
<PAGE>
STOCK OPTIONS
The following table sets forth information concerning the grant of stock
options under the Company's Stock Compensation Plan during 1998 to the executive
officers named in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
PERCENTAGE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES
OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(2)
OPTIONS IN PRICE PER EXPIRATION --------------------
NAME GRANTED(1) FISCAL 1998 SHARE DATE 5% 10%
- ------------------------------ ----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William E. Nasser............. 17,856 35.8% $ 17.50 02/08/08 $ 509,075 $ 810,484
Daniel J. Monticello, Ph.D.... 1,714 3.4% $ 20.13 01/04/08 $ 56,202 $ 89,488
Paul G. Brown, III............ 1,714 3.4% $ 20.13 01/04/08 $ 56,202 $ 89,488
1,428 2.9% $ 17.50 01/18/08 $ 40,712 $ 64,817
Michael A. Pacheco............ 2,142 4.3% $ 20.13 01/04/08 $ 70,236 $ 111,834
</TABLE>
- ------------------------
(1) No stock appreciation rights ("SARs") or other instruments were granted in
tandem with the options reflected in this table.
(2) The Securities and Exchange Commission requires disclosure of the potential
realizable value or present value of each grant. The disclosure assumes the
options will be held for the full ten-year term prior to exercise. Such
options may be exercised prior to the end of such ten-year term. The actual
value, if any, an executive officer may realize will depend upon the excess
of the stock price over the exercise price on the date the option is
exercised. There is no assurance that the stock price will appreciate at the
rates shown in the table. If the assumed annual rate of stock price
appreciation of 5% or 10% per year should occur, the market value per share
of Common Stock at the end of the ten-year option term would be (i) $28.51
and $45.39, respectively, for the options granted at $17.50 to Messrs.
Nasser and Brown and (ii) $32.79 and $52.21, respectively, for the options
granted at $20.13 to Messrs. Brown and Pacheco and Dr. Monticello.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option exercises and
the value of unexercised options held by the executive officers of the Company
named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN 1998
AND OPTION VALUES AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT DECEMBER 31, OPTIONS HELD AT
SHARES 1998(#) DECEMBER 31, 1998(1)($)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------- ----------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
William E. Nasser............... -- -- 29,462 2,679 -- --
Daniel J. Monticello, Ph.D...... -- -- 33,980 3,804 -- --
Paul G. Brown, III.............. -- -- 10,451 5,976 -- --
Michael A. Pacheco.............. -- -- 5,246 9,752 -- --
</TABLE>
- ------------------------
(1) Computed based on the difference between aggregate fair market value and
aggregate exercise price. The fair market value of the Company's Common
Stock on December 31, 1998, was $2.00 based on the average of the high and
low prices on the Nasdaq National Market on December 31, 1998.
10
<PAGE>
SIMPLIFIED EMPLOYEE PENSION PLAN
In April 1992, the Company adopted a Simplified Employee Pension Plan (the
"SEP") for all employees. Under the terms of the SEP, employees are eligible to
participate after completion of six months of service. The Company has the
discretion to determine how much, if anything, it will contribute to the
employee's accounts in the SEP each year. Currently, the Company contributes an
amount equal to eight percent of the employees' monthly compensation to the SEP.
Employees are vested immediately and there is at present no employee
contribution. Total expense under the SEP was approximately $262,000 for the
year ended December 31, 1998.
PERFORMANCE GRAPH
The following performance graph compares the performance of the Company's
Common Stock to the Nasdaq Combined Composite Index and an index of Peer Group
companies for the period beginning December 31, 1993 and ending December 31,
1998. The "Peer Group" is composed of companies in the environmental services
industry (Air and Water Technologies, American Ecology Corp., Catalytica Inc.,
Environmental Elements Corp., Gundle/SLT Environmental Inc., Layne Christensen
Co, Philip Services Corp. and Wahlco Environmental Systems). The index of Peer
Group companies is weighted according to the respective market capitalization of
its component companies as of December 31, 1998. The graph assumes that the
value of the investment in the Company's Common Stock and each index was $100 at
December 31, 1993, and that all dividends were reinvested.
[Performance graph will be filed via hardcopy with the SEC]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ENERGY BIOSYSTEMS NASDAQ COMBINED STANDARD & POOR'S
POLLUTION CONTROL
DOLLARS CORPORATION COMPOSITE INDEX INDEX
<S> <C> <C> <C>
12/31/93 $100.00 $100.00 $100.00
12/30/94 54 98 75
12/29/95 61 138 138
12/31/96 52 170 138
12/31/97 28 209 143
12/31/98 3 293 183
</TABLE>
11
<PAGE>
The Company is using the Peer Group Index for purposes of the performance
graph because of the discontinuation of the Standard & Poor's Pollution Control
Index used in its performance graphs in prior years.
The foregoing stock price performance comparisons shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
incorporates such comparisons by reference, and shall not otherwise be deemed
filed under such acts.
There can be no assurance that the Company's stock performance will continue
into the future with the same or similar trends depicted in the graph above. The
Company will not make or endorse any predictions as to future stock performance.
EMPLOYMENT AGREEMENTS
In January 1996, the Company entered into an employment agreement with Dr.
Daniel J. Monticello providing for an initial annual salary of $161,000, which
is to be reviewed no less than annually by the Board of Directors. The agreement
expires in April 2002. If Dr. Monticello is terminated without cause, as that
term is defined in the agreement, the Company is obligated to pay Dr. Monticello
an amount not greater than one year of his salary at the time of termination.
Dr. Monticello's current annual salary is $169,000.
In December 1998, Dr. Peter P. Policastro entered into a three-year
employment agreement with the Company as Executive Vice President and Chief
Operating Officer, providing for an initial annual salary of $185,000,
increasing to $200,000 after six months subject to satisfactory completion of
certain milestones. Salary is to be reviewed no less than annually by the Board
of Directors. If he is terminated without cause, as that term is defined in the
agreement, the Company is obligated to pay him an amount not greater than one
year of his salary at the time of termination.
In July 1995, Mr. Brown entered into a five-year employment agreement with
the Company providing for an initial annual salary of $119,840, which is to be
reviewed no less than annually by the Board of Directors. If he is terminated
without cause, as that term is defined in the agreement, the Company is
obligated to pay him an amount not greater than six months of his salary at the
time of termination. Mr. Brown's current annual salary is $133,500.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company
currently consists of Messrs. Lopez, Lurier and Messmore. No member of the
Compensation Committee of the Board of Directors of the Company was, during
1998, an officer or employee of the Company, or was formerly an officer of the
Company or had any relationships requiring disclosure by the Company under Item
404 of Regulation S-K.
During fiscal 1998, no executive officer of the Company served as (i) a
member of the compensation committee (or other board committee performing
equivalent functions) of another entity, one of whose executive officers served
on the Compensation Committee of the Board of Directors, (ii) a director of
another entity, one of whose executive officers served on the Compensation
Committee of the Board of Directors of the Company or (iii) a member of the
compensation committee (or other board committee performing equivalent
functions) of another entity, one of whose executive officers served as a
director of the Company.
12
<PAGE>
PROPOSAL NUMBER 2:
APPROVAL OF AMENDMENT TO 1997 STOCK OPTION PLAN
The Board has approved, subject to stockholder approval, an amendment to the
Company's 1997 Stock Option Plan (as amended, the "Plan") to (i) increase the
number of shares available for issuance thereunder from 14,286 shares to
1,200,000 shares, and (ii) to eliminate the provision contained in Section 5(e)
of the Plan limiting the maximum number of shares which may be issued under the
Plan to a person in a three year period to 100,000 shares. The Board believes
that such amendments are necessary to allow the Board to continue to attract and
retain talented employees and consultants.
When the Plan was originally approved, there were 100,000 shares available
for issuance. In December 1998 the stockholders of the Company approved a
1-for-7 reverse stock split. As a result, the number of shares available for
issuance was reduced to 14,286. The proposed amendments will afford the Board a
sufficient amount of shares to continue providing equity incentives to current
and potential employees and consultants. Options to purchase a total of 6,612
shares are granted and outstanding under the Plan, as adjusted for the reverse
split.
The terms of the Plan are summarized below. In addition, the full text of
the Plan, as amended, is set forth in Appendix A to this Proxy Statement. The
following summary is qualified in its entirety by reference to the text of the
Plan.
SUMMARY OF THE PLAN
PURPOSE. The purpose of the Plan is to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to employees and consultants of the Company and to promote
the success of the Company's business.
EFFECTIVE DATE OF PLAN. The Plan was effective as of January 14, 1997. No
Option shall be granted pursuant to the Plan after January 14, 2007.
ELIGIBILITY. The individuals eligible to receive Incentive Options and
Nonqualified Options (together, the "Options") are those key employees and
consultants of the Company as the Compensation Committee of the Board of
Directors or such other committee that the Board of Directors may designate to
administer the Plan (the "Committee") determines from time to time. "Incentive
Option" means an Option granted under the Plan which is designated as an
"Incentive Option" and satisfies the requirements of Section 422 of the Code.
"Nonqualified Option" means an Option granted under the Plan other than an
Incentive Option.
ADMINISTRATION. The Plan provides that the Committee is constituted in such
a manner as to permit the Plan to comply with Rule 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), with respect to a plan intended to qualify thereunder as a discretionary
plan. All questions of interpretation and application of the Plan and Options
shall be subject to the determination of the Committee. The Plan shall be
administered in such a manner as to permit the Options granted under it which
are designated to be Incentive Options to qualify as Incentive Options. To
comply with Section 162(m) of the Code, it is the Company's intent that the
Committee shall be constituted solely of two or more Directors who are "outside
directors" within the meaning of the Treasury Regulations promulgated under
Section 162(m) of the Code. The Committee has complete authority to construe,
interpret and administer provisions of the Plan, to determine which persons are
to be granted Options, the terms and conditions of Options, and to make all
other determinations necessary or deemed advisable in the administration of the
Plan.
RESERVED SHARES. The total number of shares of Common Stock with respect to
which Options may be granted under the Plan is 14,286 shares, subject to
adjustment as provided in the Plan. In the event the stockholders approve this
Proposal Number 2, the maximum number of shares of Common Stock subject
13
<PAGE>
to the Plan will be increased to 1,200,000. The shares may be treasury shares or
authorized but unissued shares. The Plan presently provides that the maximum
number of shares subject to Options which may be issued to any person who is
granted an Option under the Plan ("Optionee") during any period of three
consecutive years is 100,000 shares. The proposed amendment to the Plan would
eliminate this provision.
TERMS OF OPTIONS. The price at which Common Stock may be purchased under an
Option shall be established by the Committee, provided that the price at which
Common Stock may be purchased under an Option that is intended to qualify as an
Incentive Option shall not be less than 100 percent of the fair market value of
the Common Stock on the date the Incentive Option is granted. In the case of any
10 percent holder of Common Stock, the price at which shares of Common Stock may
be purchased under an Incentive Option shall not be less than 110 percent of the
fair market value of the Common Stock on the date the Incentive Option is
granted. The expiration date of an Option shall be established by the Committee,
provided that no Incentive Option shall be exercisable after the expiration of
10 years from the date the Incentive Option is granted. In the case of a 10
percent holder of Common Stock, no Incentive Option shall be exercisable after
the expiration of five years from the date the Incentive Option is granted. To
the extent that the aggregate fair market value (determined as of the time an
Incentive Option is granted) of the Common Stock with respect to which Incentive
Options first become exercisable by the Optionee during any calendar year (under
the Plan and any other incentive stock option plan(s) of the Company or any
affiliate) exceeds $100,000, the Incentive Options shall be treated as
Nonqualified Options. In making this determination, Incentive Options shall be
taken into account in the order in which they were granted.
EXERCISE OF OPTIONS. Each Option may be exercised from time to time, in
whole or in part, in the manner and subject to the conditions the Committee, in
its sole discretion, may provide in the written option agreement, as long as the
Option is valid and outstanding. The consideration to be paid for the shares to
be issued upon exercise of an Option, including the method of payment, shall be
determined by the Committee and may consist entirely of (i) cash, (ii) a
promissory note or notes, (iii) other shares of the Company's capital stock,
(iv) authorization for the Company to retain from the total number of shares as
to which the Option is exercised that number of shares having a fair market
value on the date of exercise equal to the exercise price for the total number
of shares as to which the Option is exercised, (v) delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds required to
pay the exercise price or (vi) any combination of the foregoing methods of
payment. The Committee will determine the period over which individual Options
become exercisable.
NON-TRANSFERABILITY AND NO RIGHTS AS STOCKHOLDER. Options shall not be
transferable by the Optionee otherwise than by will or under the laws of descent
and distribution, and shall be exercisable, during the Optionee's lifetime, only
by him. No Optionee shall have any rights as a stockholder with respect to
Common Stock covered by his Option until the date a stock certificate is issued
for the Common Stock.
CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. If the Company shall effect a
subdivision or consolidation of shares or other capital readjustment, the
payment of a stock dividend, or other increase or reduction of the number of
shares of the Common Stock outstanding, without receiving compensation therefor
in money, services or property, then (i) the number, class, and per share price
of shares of Common Stock subject to outstanding Options shall be appropriately
adjusted in such a manner as to entitle an Optionee to receive upon exercise of
an Option, for the same aggregate cash consideration, the same total number and
class of shares as he would have received had he exercised his Option in full
immediately prior to the event requiring the adjustment; and (ii) the number and
class of shares of Common Stock then reserved for issuance under the Plan shall
be adjusted by substituting for the total number and class of shares of Common
Stock then reserved that number and class of shares of stock that would have
been received by the owner of an equal number of outstanding shares of each
class of Common Stock as the result of the event requiring the adjustment.
14
<PAGE>
If the Company shall be a party to a merger or a similar reorganization
after which the Company is not the surviving corporation, or if there is a sale
of all or substantially all the Common Stock or a sale of all or substantially
all of the assets of the Company, or if the Company is to be liquidated or
dissolved (any of which events shall constitute a "Significant Transaction"),
then, subject to the provisions hereof, the Committee, in its discretion, may
accelerate the vesting of all outstanding Options or take such other action with
respect to outstanding Options as it deems appropriate, including, without
limitation, canceling such outstanding Options and paying the Optionees an
amount equal to the value of such Options, as determined by the Board.
Notwithstanding the foregoing, if a Significant Transaction shall occur in
connection with or following a Change in Control (as defined in the Plan), in
connection with which Significant Transaction the holder of any Option that is
not fully vested shall not receive, in respect of such Option, a substitute
award of stock options containing substantially similar terms to and having an
equal or greater fair market value than such Option, then the Committee shall
either (i) accelerate the vesting of such Option within a reasonable time prior
to the completion of such Significant Transaction (such that the holder of such
Option would have the opportunity to participate in the Significant Transaction
on the same basis as holders of Common Stock, subject to such holder's exercise
of such Option) or (ii) cancel such Option in consideration of the payment to
the holder thereof of an amount (in cash) equal to the fair market value of such
Option. For purposes of the foregoing, the fair market value attributable to
Options shall be determined by the Committee either, at its election, (x) in
accordance with the Black-Scholes method (for purposes of which volatility shall
be measured over the preceding one year period and the risk-free interest rate
shall be the rate of U.S. treasury bills with a maturity corresponding to the
remaining term of such Option) or (y) to be an amount equal to the fair market
value of the Common Stock subject to such Option less the exercise price thereof
and (ii) the fair market value of (A) any Options shall be determined as of the
date, either of the Change in Control or of the Significant Transaction, that
results in the greater fair market value of such Options, and (B) any substitute
award shall be determined as of the date of the Significant Transaction.
AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the Company
may amend, terminate or suspend the Plan at any time, in its sole and absolute
discretion; provided, however, that to the extent required to maintain the
status of any Incentive Option under the Code, no amendment that would (i)
change the aggregate number of shares of Common Stock which may be issued under
Incentive Options, (ii) change the class of employees eligible to receive
Incentive Options, or (iii) decrease the exercise price for Incentive Options
below the fair market value of the Common Stock at the time it is granted, shall
be made without the approval of the Company's stockholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
INCENTIVE OPTIONS. An employee who has been granted an Incentive Option
will not realize taxable income at the time of the grant or exercise (but in
some circumstances may be subject to an alternative minimum tax as a result of
the exercise) of such Option and the Company will not be entitled to a deduction
at either such time. If the employee makes no disposition of the shares acquired
pursuant to an Incentive Option within two years from the date of the grant of
such option, or within one year of the transfer of such shares to him or her,
any gain or loss realized on a subsequent disposition of such shares will be
treated as a long-term capital gain or loss. Under such circumstances, the
Company will not be entitled to any deduction for federal income tax purposes.
If the foregoing holding period requirements are not satisfied, a portion of any
gain in the year of disposition will be taxable to the employee as ordinary
income, and the Company will be entitled to a corresponding deduction. The
Company will not be entitled to any deduction in connection with any loss to the
employee or the portion of any gain that is taxable to the employee as
short-term or long-term capital gain.
NONQUALIFIED OPTIONS. Nonqualified Options will not qualify for special
federal income tax treatment. No tax is imposed on the optionee upon the grant
of a Nonqualified Option. Upon exercise of a
15
<PAGE>
Nonqualified Option, the employee will realize ordinary income in an amount
measured by the excess, if any, of the fair market value of the shares on the
date of exercise over the Option exercise price, and the Company will be
entitled to a corresponding deduction, provided the Company withholds income tax
with respect to such amount and provided that such amount is not limited by
Section 162(m) of the Code with respect to Options with an exercise price that
was less than the fair market value of the Common Stock on the date of grant.
However, if the shares received upon the exercise of a Nonqualified Option are
transferred to the Optionee subject to certain restrictions, then the taxable
income realized by the Optionee, unless the Optionee elects otherwise, and the
Company's tax deduction (assuming any federal income tax withholding
requirements are satisfied) should be deferred and should be measured based upon
the fair market value of the shares at the time the restrictions lapse. The
restrictions imposed on officers, directors and 10 percent stockholders by
Section 16(b) of the Exchange Act is such a restriction during the period
prescribed thereby if other shares have been purchased by such individual within
six months of the exercise of a Nonqualified Option. Ordinary income realized
upon the exercise of a Nonqualified Option is not an adjustment for alternative
minimum tax purposes.
TAX WITHHOLDING. The Company shall be entitled to deduct from other
compensation payable to each Optionee any sums required by federal law to be
withheld with respect to the grant or exercise of an Option. In the alternative,
the Company may require the Optionee to pay the sum to the Company. The Plan
also permits the Committee, in its discretion, to permit the Optionee to satisfy
the withholding tax obligation by electing to have the Company withhold from the
shares to be issued on exercise that number of shares having a fair market value
equal to the amount required to be withheld.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL
OF THE AMENDMENT TO THE COMPANY'S 1997 STOCK OPTION PLAN, AND PROXIES EXECUTED
AND RETURNED WILL BE SO VOTED UNLESS CONTRARY INSTRUCTIONS ARE INDICATED
THEREON.
PROPOSAL NUMBER 3:
APPROVAL OF AMENDMENT TO THE NON-EMPLOYEE DIRECTOR OPTION PLAN
The Board has approved, subject to stockholder approval, an amendment to the
Company's Non-Employee Director Option Plan (as amended, the "Director Plan") to
(i) increase the number of shares available for issuance thereunder from 25,000
shares to 200,000 shares, (ii) re-establish the number of shares that will be
subject to options automatically upon a director's election or re-election to
the Board at 4,000 shares, and (iii) eliminate the provision which prohibits
such annual grant to any director who have received stock options to purchase
such amount in the prior twelve month period. The Board believes that such
amendments are necessary to allow the Board to continue to attract and retain
talented individuals to serve on the Company's Board of Directors.
When the Plan was originally approved, there were 175,000 shares available
for issuance. In December 1998, the stockholders of the Company approved a
1-for-7 reverse stock split. As a result, the number of shares available for
issuance was reduced to 25,000. The proposed amendment will afford the Board a
sufficient amount of shares to continue providing equity incentives to current
and potential directors.
The terms of the Director Plan are summarized below. In addition, the full
text of the Director Plan, as amended, is set forth in Appendix B to this Proxy
Statement. The following summary is qualified in its entirety by reference to
the text of the Director Plan.
SUMMARY OF THE DIRECTOR PLAN
The Director Plan is a "formula" plan for purposes of Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended, pursuant to which options
for shares of Common Stock are automatically granted to certain eligible
non-employee directors of the Company as of specified dates. No person exercises
any discretion with respect to persons eligible to receive formula grants of
options under the Director Plan or the amount of formula grants thereunder.
16
<PAGE>
ELIGIBILITY. Persons who are non-employee directors ("Non-Employee
Directors") of the Company are eligible to participate in the Director Plan.
Options granted under the Director Plan are transferable only at the death of a
Non-Employee Director or pursuant to a qualified domestic relations order as
defined by the Code or the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
STOCK SUBJECT TO DIRECTOR PLAN. The maximum number of shares of Common
Stock in respect of which options may be granted under the Director Plan as
currently in effect is 25,000, subject to appropriate adjustment upon a
reorganization, stock split, recapitalization or other change in the Company's
capital structure. In the event that the stockholders approve this Proposal
Number 3, the maximum number of shares of Common Stock subject to the Director
Plan will be increased to 200,000. Options to purchase a total of 17,143 shares
are currently outstanding under the Director Plan, as adjusted for the reverse
split.
OPTION PERIOD. Options granted to Non-Employee Directors under the Director
Plan have a term of ten years from the date of grant. The right to exercise
options granted to a Non-Employee Director under the Director Plan expires 12
months after the termination, for any reason, of his service as a director of
the Company, if earlier than the expiration of the term of the option.
AMENDMENT. The Board may amend or discontinue the Director Plan, except
that (i) no amendment may be made without stockholder approval that would cause
the Director Plan to cease to satisfy the requirements of Rule 16b-3 of the
Exchange Act or for which such approval is otherwise required by law and (ii) no
amendment or termination may be made that would impair an optionee's rights
under outstanding options without the optionee's consent, unless required to
comply with Rule 16b-3. The Board may not amend provisions in the Director Plan
regarding eligibility and automatic grants of options more than once every six
months, except to the extent necessary to comply with applicable provisions of
the Code or ERISA.
NON-QUALIFIED OPTIONS. Options issued under the Director Plan constitute
non-qualified stock options.
ANNUAL GRANT OF STOCK OPTIONS. Each Non-Employee Director (except for a
Non-Employee Director who received options during the preceding year for more
than 571 (as adjusted by the reverse split) shares of Common Stock under any
other plan or agreement) receives annually on each July 1 during the life of the
Director Plan, non-qualified options to purchase 571 shares of Common Stock.
Such number of shares will be proportionately adjusted in the event of a split
of or stock dividend on the Common Stock. Options granted under the Director
Plan shall have an exercise price per share equal to the fair market value per
share of Common Stock on the date the option is granted. Non-Employee Directors
shall have the right to decline grants of options under the Director Plan by
giving notice to the Company prior to the date of grant. The proposed amendment
to the Director Plan will reestablish the number of shares subject to the annual
grant at 4,000 shares for each Non-Employee Director elected to the Board, and
will delete the above-referenced exception for annual grants to directors who
has received stock options for such amount in the prior twelve month period.
CHANGE IN CAPITAL STRUCTURE. Upon a change in the Company's capital
structure as a result of a stock split, dividend or recapitalization, the number
of shares subject to outstanding options and reserved under the Director Plan
and the exercise price of outstanding options shall be appropriately adjusted to
reflect the number and class of shares that would have been issuable if such
shares had been outstanding immediately prior to such event.
FEDERAL INCOME TAX CONSEQUENCES OF THE DIRECTOR PLAN
GENERAL. A Non-Employee Director will not recognize any taxable income at
the time an option is granted. Ordinary income will be recognized by a
Non-Employee Director at the time of exercise in an
17
<PAGE>
amount equal to the excess of the fair market value of the shares of Common
Stock received over the option price for such shares. However, if other shares
of Common Stock have been purchased by a Non-Employee Director within six months
of the exercise of an option, recognition of the income attributable to such
exercise may under certain circumstances be postponed for a period of up to six
months from the date of such purchase of such other shares of Common Stock due
to liability to suit under Section 16(b) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"). If applicable, one effect of any such
postponement would be to measure the amount of the Non-Employee Director's
taxable income by reference to the fair market value of such shares at the time
such liability to suit under Section 16(b) of the Exchange Act no longer exists
(rather than at the earlier date of the exercise of the option). The
Non-Employee Director will generally recognize a capital gain or loss upon a
subsequent sale of the shares of Common Stock.
DEDUCTIBILITY. Upon a Non-Employee Director's exercise of an option granted
under the Director Plan, the Company may claim a deduction for compensation paid
at the same time and in the same amount as ordinary income is recognized by the
Non-Employee Director.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL
OF THE AMENDMENT TO THE COMPANY'S NON-EMPLOYEE DIRECTOR OPTION PLAN, AND PROXIES
EXECUTED AND RETURNED WILL BE SO VOTED UNLESS CONTRARY INSTRUCTIONS ARE
INDICATED THEREON.
PROPOSAL NUMBER 4:
APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has appointed the firm of Arthur Andersen LLP as the
Company's independent public accountants to make an examination of the accounts
of the Company for the fiscal year ending December 31, 1999, subject to
ratification by the Company's stockholders. Representatives of Arthur Andersen
LLP will be present at the Annual Meeting and will have an opportunity to make a
statement, if they desire to do so. They will also be available to respond to
appropriate questions from stockholders attending the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" RATIFICATION
OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999, AND PROXIES EXECUTED
AND RETURNED WILL BE SO VOTED UNLESS CONTRARY INSTRUCTIONS ARE INDICATED
THEREON.
PROPOSAL NUMBER 5:
APPROVAL OF PRIVATE PLACEMENT OF SHARES
As indicated in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, the Company is in need of additional financing to fund the
Company's operations. As of December 31, 1998, the Company had $2,488,000 of
working capital and $2,795,000 of cash and cash equivalents. The Company
currently estimates that cash on hand together with cash generated from
operations will be sufficient to satisfy the Company's cash requirements until
June 1999. In order to conserve its capital resources, the Company conducted a
reduction in force of 20 persons effective March 31, 1999. The Board of
Directors of the Company has considered various means of procuring additional
financing and has determined that a private offering of the Company's securities
(the "Private Placement") would be in the best interests of the Company. The net
proceeds of the Private Placement will be used to fund continuing operations,
including sales and marketing, research and development and general working
capital purposes.
18
<PAGE>
The Company has had preliminary discussions with a number of its existing
stockholders regarding the Private Placement, which is currently anticipated to
consist of up to 7,500,000 shares of the Company's Common Stock and may include
warrants (the "Warrants") exercisable for shares of the Company's Common Stock.
The Company has engaged SAMCO Capital Markets, Inc. ("SAMCO") of Dallas, Texas
as its Placement Agent to assist in the Private Placement. Based upon these
initial discussions, the Company and SAMCO believe that there is significant
interest in the Private Placement among existing institutional investors as well
as potential new investors. The purchase price for the shares of Common Stock
sold in the Private Placement will be determined through negotiations between
the Company and SAMCO, based upon the demand for the Company's Common Stock and
its closing price or prices on the Nasdaq National Market prior to the closing
of the Private Placement. Due to the fact that the shares sold in the Private
Placement will not be immediately freely tradeable by the purchasers until such
time as a registration statement registering such shares is filed and becomes
effective under the Securities Act of 1933, as amended, it is anticipated that
the shares will be sold at a discount from the closing price or prices of the
Company's Common Stock on the Nasdaq National Market prior to closing. The
actual amount of such discount is not known at this time, but is not expected to
exceed 20%, which is not uncommon for offerings of restricted shares by public
companies in similar transactions.
Pursuant to Rule 4460(i)(1)(D) ("Rule 4460(i)(1)(D)") of the Nasdaq Stock
Market, Inc. ("Nasdaq"), the Company is required to obtain stockholder approval
in connection with any transaction, other than a public offering, that involves
the issuance by the Company of Common Stock (or securities convertible into or
exercisable or exchangeable for Common Stock) that equals 20% or more of the
Common Stock of the Company outstanding before the issuance of such securities
at a price below market value (the "20% Limitation"). On April 5, 1999, the
closing sale price of the Company's Common Stock as reported on the Nasdaq
National Market was $2.9375 per share. The Company currently expects it would
require $15 million to fund operations through 2001. As of the date of this
proxy statement, there are 2,180,358 shares of Common Stock outstanding and
686,108 shares of Common Stock issuable upon the conversion of outstanding
shares of Series B Preferred Stock. Thus, if the Company closes when
subscriptions for 1,000,000 shares have been received, which is the minimum
number of shares offered in the Private Placement, the 20% Limitation would be
exceeded, based on the market value of the Company's Common Stock as of the date
of this Proxy Statement. If the stockholders approve this Proposal Number 5, the
Board of Directors of the Company will be authorized to determine (i) the number
of shares of Common Stock that will be issued in the Private Placement, even if
in excess of 20% or more of the Common Stock outstanding; (ii) the purchase
price of such shares of Common Stock and (iii) whether Warrants will be issued
in the Private Placement and, if so, the terms and conditions of the Warrants.
The stockholders will be requested to approve this proposal by adopting the
following resolutions:
RESOLVED, that this Corporation be authorized to consummate a private
placement of its securities (the "Private Placement"), the proceeds of which
would be utilized for sales and marketing, research and development and
working capital and general corporate purposes (including the expenses of
the Private Placement), and that in connection therewith this Corporation is
hereby authorized to issue shares of its Common Stock, $.01 par value (the
"Common Stock"), and securities exercisable for Common Stock, that together
equal 20% or more of the Common Stock outstanding prior to the issuance
thereof; and it is further
RESOLVED, that the Board of Directors of this Corporation (and/or an
appropriate committee thereof) is hereby authorized to determine the terms
and conditions of the Private Placement, including without limitation, (i)
the number of shares of Common Stock that will be issued in the Private
Placement (which may exceed 20% or more of the Common Stock outstanding and
securities exercisable for Common Stock) (ii) the purchase price of such
shares of Common Stock and (iii) whether Warrants will be issued in the
Private Placement, and if so, the terms and conditions of the Warrants
issued in the Private Placement.
19
<PAGE>
The Board of Directors of the Company has decided to seek stockholder
approval of the Private Placement in order to avoid a possible conflict with
Rule 4460(i)(1)(D), which conflict could result in the removal of the Company's
Common Stock from inclusion on the Nasdaq National Market. In the event the
Company fails to obtain approval by the stockholders for the Private Placement,
the Company will be required to seek alternative means of financing. Such
financing would likely be in the form of short term bridge loans. There can be
no assurance that such financing can be obtained on a timely basis on
commercially reasonable terms, or at all. Further, even if such short term loans
were obtained, the Company would be required within a short time thereafter to
seek additional financing to repay such loans and to finance its operations.
There can be no assurance that such additional financing could be obtained and
that the Company would not again be required to seek stockholder approval for
such financing.
The Company's Common Stock is quoted on the Nasdaq National Market. In order
to maintain quotation of the Common Stock on the Nasdaq National Market, the
Company must maintain certain asset, capitalization or income tests and stock
price tests. Among other requirements, the Company must maintain either (i) net
tangible assets in excess of $4.0 million and a bid price of at least $1.00 per
share, or (ii) a market capitalization of at least $50.0 million or total assets
and total revenues of $50.0 million each, and a bid price of at least $5.00 per
share. While the Company currently satisfies the Nasdaq National Market Listing
and Maintenance Standards, if the Company is unable to obtain additional
financing either through the Private Placement or otherwise, the Company may
fail to meet the maintenance criteria in the future, which may result in the
Common Stock no longer being eligible for quotation on the Nasdaq National
Market. If the Common Stock is delisted from quotation on the Nasdaq National
Market, then there would be material adverse consequences for the Company, its
results of operations and its financial condition. These consequences include,
but are not limited to:
- limited availability of market quotations for the Company's Common Stock;
- limited news and analyst coverage of the Company;
- adverse affect on the trading market for and market price of the Company's
Common Stock; and
- adverse affect on the Company's ability to issue additional securities or
secure additional financing in the future.
If the Company's Common Stock is no longer eligible for quotation on Nasdaq,
then trading, if any, of the Common Stock would thereafter be conducted in the
over-the-counter market. As a result of Nasdaq delisting, it would likely be
more difficult for stockholders to dispose of or to obtain accurate quotations
as to the market value of their Common Stock. Furthermore, the regulations of
the Commission promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), require additional disclosure relating to the market for
penny stocks. Commission regulations generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. A disclosure schedule explaining the penny stock market and
the risks associated with such securities is required to be delivered to a
purchaser and various sales practice requirements are imposed on broker-dealers
who sell penny stocks to persons other than to established customers and
accredited investors (generally institutional investors). In addition, the
broker-dealer must provide the customer with current bid and offer quotations
for the penny stock, the compensation of the broker-dealer and its salesperson
in the transaction and monthly account statements showing the market value of
each penny stock held in the customer's account. If the Company's securities
were to become subject to the regulations applicable to penny stocks, the market
liquidity for the Company's securities could be severely affected. In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the Company's securities and thus the ability of purchasers of the
Company's securities to sell their securities in the secondary market.
The Company believes that notwithstanding the consummation of the Private
Placement, it will be required to seek additional financing in the future to
fund its operations and to continue to develop its
20
<PAGE>
products. If the minimum amounts proposed to be offered is sold, the Company
anticipates that it cash requirements should be satisfied through November 1999.
Should additional shares be sold, such cash requirement should be satisfied for
a longer period.
CAPITALIZATION
The following table sets forth the short-term debt and the total
capitalization of the Company (i) as of March 31, 1999, (ii) pro forma to give
effect to the sale of the minimum and maximum number of shares of Common Stock
in the Private Placement at an assumed offering price of $2.00 per share and the
application of the estimated net proceeds therefrom, after deducting offering
expenses estimated at $600,000. The table should be read in conjunction with the
financial statements, including the notes thereto, attached to the Company's
report on Form 10-K for 1998 enclosed with this Proxy Statement.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------------
PRO FORMA(1)
----------------------------
OFFERING MAXIMUM
MINIMUM OFFERING
(1,000,000 (7,500,000
ACTUAL SHARES) SHARES)
----------- ------------- -------------
<S> <C> <C> <C>
Short-term debt, including current portion of
capital lease obligations..................... $ 96,522 $ 96,522 $ 96,522
Long-term debt, including capital lease
obligations................................... -- -- --
Stockholders' equity:
Preferred Stock--$.001 par value, 760,000 shares
authorized 696,400 shares issued and
outstanding................................... 34,842,604 34,842,604 34,842,604
Common Stock, $.001 par value; 30,000,000 shares
authorized; 2,180,358 shares issued and
outstanding, actual; 3,180,358 shares issued
and outstanding, pro forma, assuming the
minimum number of shares; 9,680,358 shares
issued and outstanding, pro forma assuming the
maximum number of shares...................... 21,804 31,804 96,804
Additional paid-in capital...................... 38,425,108 39,815,108 52,750,108
Accumulated deficit............................. (69,460,138) (69,460,138) (69,460,138)
Receivable from shareholder..................... -- -- --
Total stockholders' equity...................... 3,829,378 5,229,378 18,229,378
Total capitalization............................ $ 3,925,900 $ 5,325,900 $18,325,900
</TABLE>
- ------------------------
(1) The pro forma balance sheet data as of March 31, 1999, give effect to the
issuance of 1,000,000 and 7,500,000 shares of Common Stock, respectively,
which is the minimum and maximum number of shares of Common Stock that may
be issued pursuant to the Private Placement, and the receipt of the net
proceeds therefrom.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Certain directors and executive officers of the Company have expressed a
preliminary interest in purchasing securities in the Private Placement. Such
directors and executive officers will not make a decision regarding investing in
the Private Placement until the terms of the Private Placement have been
finalized. Should such directors and executive officers choose to invest in the
Private Placement, their investment would be on the same terms and conditions as
are available to other investors in the Private Placement.
21
<PAGE>
DILUTIVE EFFECT OF PRIVATE PLACEMENT ON SERIES B PREFERRED STOCK
Holders of the Company's Series B Convertible Preferred Stock (the
"Preferred Stock") have the right to convert their shares of Preferred Stock
into shares of the Company's Common Stock based upon a formula as set forth in
the Company's Certificate of the Powers, Designations, Preferences and Rights of
the Series B Convertible Preferred Stock (the "Certificate of Designations")
filed as part of the Company's Certificate of Incorporation. Prior to the
completion of the proposed Private Placement, the 696,400 shares of Preferred
Stock outstanding would convert into an aggregate of 686,108 shares of Common
Stock, as adjusted for the Company's 1 for 7 reverse split of Common Stock
effected in December 1998. Assuming the sale of all 7.5 million shares of Common
Stock contemplated under the Private Placement at a price of $2.00 per share,
the aggregate number of shares of Common Stock issuable upon conversion of
Preferred Stock would increase by 1,552,954 shares to an aggregate of 2,249,354
shares. In the event that the minimum number of shares (1,000,000) contemplated
under the Private Placement are sold at a price of $2.00 per share, the number
of shares of Common Stock that would be issuable upon conversion of the
Preferred Stock would increase by 216,074 shares to an aggregate of 912,474
shares.
The adoption of the proposal to approve the issuance by the Company in a
private placement of a number of shares of Common Stock in excess of the 20%
Limitation, requires the approval by affirmative vote of not less than a
majority of the votes present in person or by proxy at the Annual Meeting,
provided that a quorum is present at the Annual Meeting. An abstention or a
broker non-vote will have no effect on the vote on the proposal provided that a
quorum is present at the Annual Meeting. Unless otherwise specified, all proxies
received will be voted in favor of Proposal Number 3.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE PROPOSAL
TO ISSUE SHARES OF COMMON STOCK AND WARRANTS EXERCISABLE FOR COMMON STOCK IN A
PRIVATE PLACEMENT IN EXCESS OF 20% OF THE OUTSTANDING NUMBER OF SHARES OF COMMON
STOCK, AND PROXIES EXECUTED AND RETURNED WILL BE SO VOTED UNLESS CONTRARY
INSTRUCTIONS ARE INDICATED THEREON.
22
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 26, 1999, certain information
with respect to the shares of Common Stock and Series B Preferred Stock
beneficially owned by (i) each person known by the Company to be the beneficial
owner of more than five percent of the Common Stock or the Series B Preferred
Stock, (ii) each director of the Company, (iii) each of the executive officers
of the Company named in "Executive Compensation" and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
AMOUNT AND NATURE OF BENEFICIAL
OF BENEFICIAL OWNERSHIP OF
OWNERSHIP OF PERCENT SERIES B PERCENT
NAME OF BENEFICIAL OWNER COMMON STOCK(1) OF CLASS PREFERRED STOCK(1) OF CLASS
- -------------------------------------------------------- ------------------ --------- ------------------ ---------
<S> <C> <C> <C> <C>
Zesiger Capital Group LLC .............................. 417,696(2) 17.9% 160,100 23.0%
320 Park Avenue, 30th Floor
New York, New York 10022
Gryphon Ventures II, Limited Partnership ............... 305,154(3) 14.0% -- --
222 Berkeley Street, Suite 1600
Boston, Massachusetts 02116
Ethyl Corporation ...................................... 300,995(4) 12.9% 160,000 22.9%
300 South Fourth Street
Richmond, Virginia 23217
Pecks Management Partners Ltd. ......................... 206,521(5) 8.8% 175,000 24.9%
One Rockefeller Plaza, Suite 900
New York, New York 10020
General Motors Employees ............................... 145,582(6) 6.3% 135,000 19.2%
Domestic Group Trust
c/o Pecks Management
One Rockefeller Plaza
New York, New York 10020
Farmers Insurance Group of Companies ................... 82,723(7) 3.7% 80,000 11.5%
4680 Wilshire Boulevard
Los Angeles, California 90010
Keystone, Inc. ......................................... 65,286(8) 2.9% 40,000 5.7%
c/o Alex.Brown & Sons Incorporated
200 Crescent Court, Suite 500
Dallas, Texas 75201
William E. Nasser ...................................... 40,312(9) 1.2% -- --
Ramon Lopez ............................................ 9,250(10) * -- --
R. James Comeaux ....................................... 7,569(11) * -- --
Edward B. Lurier ....................................... 312,581(12) 14.3% -- --
Thomas E. Messmore ..................................... 9,285(13) * -- --
Peter Policastro ....................................... 7,145(14) *
Daniel J. Monticello, Ph.D. ............................ 38,498(15) 1.5% -- --
William D. Young ....................................... 6,571(16) * -- --
John S. Patton ......................................... 1,143(17) * -- --
Paul G. Brown, III ..................................... 11,372(18) * -- --
Michael A. Pacheco ..................................... 6,031(19) *
All directors and executive officers as a group
(11 persons) ......................................... 449,757(20) 17.9% -- --
</TABLE>
- --------------------------
* Represents less than 1% of the class.
(1) Unless otherwise indicated, each of the stockholders designated above has
sole voting and investment power with respect to the securities shown to be
owned by such stockholder.
23
<PAGE>
(2) Based upon information provided in a Schedule 13G/A filed on January 21,
1999. Includes 157,7331 shares issuable upon conversion of Series B
Preferred Stock.
(3) Based upon information provided in a Schedule 13G/A filed on January 21,
1999.
(4) Based upon information provided in a Schedule 13D filed by Ethyl with the
Securities and Exchange Commission on November 7, 1994, as amended.
Includes 157,635 shares issuable upon conversion of Series B Preferred
Stock owned by Ethyl Corporation ("Ethyl"). Excludes 305,154 shares of
Common Stock beneficially owned by Gryphon Ventures II, Limited Partnership
("Gryphon"), a limited partnership of which a wholly-owned subsidiary of
Ethyl is the sole limited partner, and as to which Ethyl has no voting or
dispositive power.
(5) Includes 172,413 shares of Common Stock issuable upon conversion of Series
B Preferred Stock.
(6) Includes 133,004 shares of Common Stock issuable upon conversion of Series
B Preferred Stock.
(7) Includes 78,817 shares of Common Stock issuable upon conversion of Series B
Preferred Stock.
(8) Includes 39,408 shares of Common Stock issuable upon conversion of Series B
Preferred Stock.
(9) Includes 36,027 shares of Common Stock subject to stock options that are
exercisable within 60 days of March 31, 1999.
(10) Includes 9,250 shares of Common Stock subject to stock options that are
exercisable within 60 days of March 31, 1999.
(11) Includes 4,142 shares of Common Stock subject to stock options that are
exercisable within 60 days of March 31, 1999.
(12) Includes 305,154 shares of Common Stock held by Gryphon, which Mr. Lurier
may be deemed to beneficially own due to his status as an affiliate of the
general partner of Gryphon. Includes 1,714 shares of Common Stock subject
to stock options exercisable within 60 days of March 31, 1999.
(13) Includes 2,857 shares of Common Stock subject to stock options exercisable
within 60 days of March 31, 1999.
(14) Includes 7,145 shares of Common Stock subject to stock options that are
exercisable within 60 days of March 31, 1999.
(15) Includes 37,784 shares of Common Stock subject to stock options that are
exercisable within 60 days of March 31, 1999.
(16) Includes 6,571 shares of Common Stock subject to stock options that are
exercisable within 60 days of March 31, 1999.
(17) Includes 1,143 shares of Common Stock subject to stock options that are
exercisable within 60 days of March 31, 1999.
(18) Includes 10,872 shares of Common Stock subject to stock options that are
exercisable within 60 days of March 31, 1999.
(19) Includes 6,031 shares of Common Stock subject to stock options that are
exercisable within 60 days of March 31, 1999.
(20) Includes an aggregate of 123,536 shares of Common Stock subject to stock
options that are exercisable within 60 days of March 31, 1999. Includes
305,154 shares of Common Stock held by Gryphon which Mr. Lurier may be
deemed to beneficially own due to his status as an affiliate of the
general partner of Gryphon.
24
<PAGE>
COMPLIANCE WITH SECTION 16(a)
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers, and persons who own more than ten percent
of the Common Stock, to file initial reports of ownership and reports of changes
in ownership (Forms 3, 4, and 5) of Common Stock with the Securities and
Exchange Commission (the "SEC") and The Nasdaq Stock Market. Officers, directors
and greater than ten percent stockholders are required by SEC regulation to
furnish to Company with copies of all such forms that they file.
To the Company's knowledge, based solely on the Company's review of the
copies of such reports received by the Company and on written representations by
certain reporting persons that no reports on Form 5 were required, the Company
believes that during the fiscal year ended December 31, 1998, all Section 16(a)
filing requirements applicable to its officers, directors and ten percent
stockholders were complied with.
PROPOSALS OF STOCKHOLDERS
Any proposal of a stockholder intended to be presented at the next annual
meeting must be received at the Company's principal executive offices no later
than December 31, 1999, if the proposal is to be considered for inclusion in the
Company's Proxy Statement relating to such meeting.
FINANCIAL INFORMATION
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING ANY FINANCIAL
STATEMENTS AND SCHEDULES AND EXHIBITS THERETO, MAY BE OBTAINED WITHOUT CHARGE BY
WRITTEN REQUEST TO PAUL G. BROWN, III, VICE PRESIDENT OF FINANCE AND
ADMINISTRATION, ENERGY BIOSYSTEMS CORPORATION, 4200 RESEARCH FOREST DRIVE, THE
WOODLANDS, TEXAS 77381.
OTHER MATTERS
The Company will bear the cost of preparing and mailing proxy materials as
well as the cost of solicitation of proxies. The Company will reimburse banks,
brokerage firms, custodians, nominees, and fiduciaries for their expenses in
sending proxy materials to the beneficial owners of Common Stock and Preferred
Stock. The Company has retained Corporate Communications Center, Inc.
("Corporate Communications") to assist in the solicitation of proxies and will
pay approximately $800 for certain brokerage searches and proxy solicitations
performed by Corporate Communications. In addition to solicitation by mail,
certain directors, officers and regular employees of the Company and Corporate
Communications may solicit proxies by fax, telex, telephone and personal
interview.
By Order of the Board of Directors
/s/ Paul G. Brown, III
Paul G. Brown, III
VICE PRESIDENT, FINANCE AND
ADMINISTRATION
April 26, 1999
The Woodlands, Texas
25
<PAGE>
EXHIBIT A
ENERGY BIOSYSTEMS CORPORATION
1997 STOCK OPTION PLAN
(AS AMENDED)
1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under this Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonqualified stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. No Incentive Stock Options may be granted
under this Plan unless this Plan has been approved by the stockholders of the
Company.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees, as
applicable, that is administering the Plan pursuant to Section 4 of the
Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the Committee appointed by the Board of Directors
in accordance with paragraph (a) of Section 4 of the Plan.
(e) "COMPANY" means Energy BioSystems Corporation, a Delaware
corporation.
(f) "CONSULTANT" means any consultant or advisor to the Company or any
Parent or Subsidiary.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of any
interruption or termination of the employment relationship by the Company or
any Subsidiary. Continuous Status as an Employee shall not be considered
interrupted in the case of: (i) any leave of absence approved by the Board,
including sick leave, military leave, or any other personal leave; provided,
however, that for purposes of Incentive Stock Options, such leave is for a
period of not more than ninety (90) days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or
(ii) in the case of transfers between locations of the Company or between
the Company, its Subsidiaries or its successor.
(h) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(j) "FAIR MARKET VALUE" means, as of any date, the value of Stock
determined as follows:
(i) If the Stock is listed on any established stock exchange or a
national market system, including without limitation The Nasdaq National
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported, as quoted on such
system or exchange or the exchange with the greatest volume of trading in
Stock for the last market trading day prior to the time of determination)
as reported in the Wall Street Journal or such other source as the
Administrator deems reliable;
A-1
<PAGE>
(ii) If the Stock is quoted on The Nasdaq Stock Market (but not on
The Nasdaq National Market) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high and low asked prices for the
Stock; or
(iii) In the absence of an established market for the Stock, the Fair
Market Value thereof shall be determined in good faith by the
Administrator.
(k) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(l) "NONQUALIFIED STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(m) "OPTION" means a stock option granted pursuant to the Plan.
(n) "OPTIONED STOCK" means the Stock subject to an Option.
(o) "OPTIONEE" means an Employee or Consultant who receives an Option.
(p) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(q) "PLAN" means this 1997 Stock Option Plan.
(r) "SHARE" means a share of the Stock, as adjusted in accordance with
Section 12 of the Plan.
(s) "STOCK" means the Common Stock, par value $.01 per share, of the
Company;
(t) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of
the Plan, the maximum number of shares of Stock which may be optioned and sold
under the Plan is 1,200,000 shares. The shares may be authorized, but unissued,
or reacquired Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS. With
respect to grants of Options to Employees who are also officers or
directors of the Company, the Plan shall be administered by (A) the Board
or (B) a Committee designated by the Board to administer the Plan, which
Committee shall be constituted in such a manner as to permit the Plan to
comply with Rule 16b-3 promulgated under the Exchange Act or any
successor thereto ("Rule 16b-3") with respect to a plan intended to
qualify thereunder as a discretionary plan. Once appointed, such
Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board may increase
the size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by Rule 16b-3 with respect to a plan intended to qualify
thereunder as a discretionary plan. Notwithstanding the foregoing, the
Plan shall not be administered by the Board if (a) the Company and its
officers and directors are then subject to the requirements of Section 16
of the Exchange Act and (b) the Board's administration of the Plan would
prevent the Plan from complying with Rule 16b-3.
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(ii) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3,
the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees who are neither directors
nor officers.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options to Employees or Consultants
who are neither directors nor officers of the Company, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board,
which Committee shall be constituted in such a manner as to satisfy the
legal requirements relating to the administration of incentive stock
option plans, if any, of corporate and securities laws applicable to the
Company and of the Code (the "Applicable Laws"). Once appointed, such
Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board may increase
the size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan
and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Stock, in accordance
with Section 2(j) of the Plan;
(ii) to select the officers, Consultants and Employees to whom
Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Stock to be covered by
each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, the per share exercise price for the Shares to be issued
pursuant to the exercise of an Option and any restriction or limitation,
or any vesting acceleration or waiver of forfeiture restrictions
regarding any Option or other award and/or the shares of Stock relating
thereto, based in each case on such factors as the Administrator shall
determine, in its sole discretion);
(vii) to determine whether and under what circumstances an Option may
be bought-out for cash under subsection 9(f);
(viii) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election
of the participant (including providing for and determining the amount,
if any, of any deemed earnings on any deferred amount during any deferral
period); and
(ix) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Stock covered by such
Option shall have declined since the date the Option was granted.
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options. Neither the Board, the
Committee nor any member thereof shall be liable for any act, omission,
interpretation, construction or determination made in connection with the
Plan in good faith, and the
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members of the Board and of the Committee shall be entitled to
indemnification and reimbursement by the Company in respect of any claim,
loss, damage or expense (including counsel fees) arising therefrom to the
full extent permitted by law.
5. ELIGIBILITY.
(a) Nonqualified Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonqualified Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonqualified Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be taken
into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with
respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company,
nor shall it interfere in any way with his right or the Company's right to
terminate his employment or consulting relationship at any time, with or
without cause, unless otherwise agreed in writing by the Company and such
Optionee.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by the
Board of Directors. It shall continue in effect until January 14, 2007, unless
extended by the Board or sooner terminated under Section 14 of the Plan. No
grants of Options will be made pursuant to the Plan after January 14, 2007.
7. TERM OF OPTION. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Incentive Stock Option granted to an Optionee who, at
the time the Option is granted, owns Stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the
Administrator, provided that, in the case of an Incentive Stock Option:
(i) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(ii) granted to any Employee, the per Share exercise price shall be
no less than 100% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall
be determined at the time of grant) and may consist entirely of (1) cash,
(2) check, (3) promissory note, (4) other shares of the Company's capital
stock which (x) in the case of shares of the Company's capital stock
acquired upon exercise of an Option either have been owned by
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the Optionee for more than six months on the date of surrender or were not
acquired, directly or indirectly, from the Company, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price
of the Shares as to which said Option shall be exercised, (5) authorization
for the Company to retain from the total number of Shares as to which the
Option is exercised that number of Shares having a Fair Market Value on the
date of exercise equal to the exercise price for the total number of Shares
as to which the Option is exercised, (6) delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds required
to pay the exercise price, (7) any combination of the foregoing methods of
payment, or (8) such other consideration and method of payment for the
issuance of Shares to the extent permitted under applicable laws.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance
criteria with respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan. An Option may not be exercised for
a fraction of a Share.
An Option shall be deemed to be exercised, and the Optionee deemed to be
a stockholder of the Shares being purchased upon exercise, when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has
been received by the Company. Full payment may, as authorized by the Board,
consist of any consideration and method of payment allowable under Section
8(b) of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF EMPLOYMENT. In the event of termination of an
Optionee's relationship as a Consultant (unless such termination is for
purposes of becoming an Employee of the Company) or Continuous Status as an
Employee with the Company (as the case may be), such Optionee may, but only
within ninety (90) days (or such other period of time as is determined by
the Board, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option and not exceeding ninety (90)
days) after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his Option to the extent that Optionee was entitled to
exercise it at the date of such termination. To the extent that Optionee was
not entitled to exercise the Option at the date of such termination, or if
Optionee does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate.
(c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section
9(b) above, in the event of termination of an Optionee's relationship as a
Consultant or Continuous Status as an Employee as a result of his total and
permanent disability (as defined in Section 22(e)(3) of the Code), Optionee
may, but only within twelve (12) months from the date of such termination
(but in no event later than the expiration date of the term of such Option
as set forth in the Option Agreement), exercise the Option to the extent
otherwise entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the
Option may be exercised, at any time within twelve (12) months following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), by the Optionee's
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estate or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent the Optionee was entitled to
exercise the Option at the date of death. To the extent that Optionee was
not entitled to exercise the Option at the date of termination, or if the
Optionee's estate (or such other person who acquired the right to exercise
the Option) does not exercise such Option to the extent so entitled within
the time specified herein, the Option shall terminate.
(e) RULE 16B-3. Options granted to persons subject to Section 16(b) of
the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose shall
be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of the
Administrator; and
(d) if the Optionee is subject to Rule 16b-3, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
In the event the election to have Shares withheld is made by an Optionee and
the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such Optionee
shall be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.
12. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Stock or the rights thereof, or the dissolution or
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liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of the Stock outstanding, without receiving
compensation therefor in money, services or property, then (a) the number,
class, and per share price of shares of Stock subject to outstanding Options
hereunder shall be appropriately adjusted in such a manner as to entitle an
Optionee to receive upon exercise of an Option, for the same aggregate cash
consideration, the same total number and class of shares as he would have
received had he exercised his Option in full immediately prior to the event
requiring the adjustment; and (b) the number and class of shares of Stock then
reserved for issuance under the Plan shall be adjusted by substituting for the
total number and class of shares of Stock then reserved that number and class of
shares of stock that would have been received by the owner of an equal number of
outstanding shares of each class of Stock as the result of the event requiring
the adjustment.
If the Company shall be a party to a merger or a similar reorganization
after which the Company is not the surviving corporation, or if there is a sale
of all or substantially all the Common Stock or a sale of all or substantially
all of the assets of the Company, or if the Company is to be liquidated or
dissolved (any of which events shall constitute a "Significant Transaction"),
then, subject to the provisions hereof, the Administrator, in its discretion,
may accelerate the vesting of all outstanding Options or take such other action
with respect to outstanding Options as it deems appropriate, including, without
limitation, canceling such outstanding Options and paying the Optionees an
amount equal to the value of such Options, as determined by the Board.
Notwithstanding the foregoing, if a Significant Transaction shall occur in
connection with or following a Change in Control (as defined below), in
connection with which Significant Transaction the holder of any Option that is
not fully vested shall not receive, in respect of such Option, a substitute
award of stock options containing substantially similar terms to and having an
equal or greater fair market value than such Option, then the Administrator
shall either (i) accelerate the vesting of such Option within a reasonable time
prior to the completion of such Significant Transaction (such that the holder of
such Option would have the opportunity to participate in the Significant
Transaction on the same basis as holders of Stock, subject to such holder's
exercise of such Option) or (ii) cancel such Option in consideration of the
payment to the holder thereof of an amount (in cash) equal to the fair market
value of such Option. For purposes of the foregoing, the fair market value
attributable to Options shall be determined by the Administrator either, at its
election, (x) in accordance with the Black-Scholes method (for purposes of which
volatility shall be measured over the preceding one year period and the
risk-free interest rate shall be the rate of U.S. treasury bills with a maturity
corresponding to the remaining term of such Option) or (y) to be an amount equal
to the fair market value of the Stock subject to such Option less the exercise
price thereof and (ii) the fair market value of (A) any Options shall be
determined as of the date, either of the Change in Control or of the Significant
Transaction, that results in the greater fair market value of such Options, and
(B) any substitute award shall be determined as of the date of the Significant
Transaction. A "Change in Control" shall be deemed to occur if:
(i) any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended)
shall become (directly or indirectly) the beneficial owner (within the
meaning of Rule 13d-3 promulgated under such Act) of more than 50% of the
combined voting power of the then outstanding voting securities of EBC
entitled to vote generally in the election of directors ("Voting Power"); or
(ii) EBC's stockholders shall approve a merger or consolidation, sale or
disposition of all or substantially all of EBC's assets or a plan of
liquidation or dissolution of EBC, other than (A) a merger or consolidation
in which the voting securities of EBC outstanding immediately prior thereto
will become (by operation of law), or are to be converted into voting
securities of the surviving
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corporation or its parent corporation that, immediately after such merger or
consolidation, (x) are owned by the same person or entity or persons or
entities that owned the voting securities of EBC immediately prior thereto
and (y) possess at least 75% of the Voting Power held by the voting
securities of the surviving corporation or its parent corporation, or (B) a
merger or consolidation effected to implement a recapitalization of EBC (or
similar transaction) in which no person acquires more than 50% of the Voting
Power.
Except as expressly provided herein, the issue by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
for cash or property, or for labor or services either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number, class, or price of shares of Stock then subject to
outstanding Options.
13. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition,
to the extent necessary and desirable to comply with Rule 16b-3 under the
Exchange Act or with Section 422 of the Code (or any other applicable law or
regulation, including the applicable requirements of The Nasdaq Stock Market
or an established stock exchange), the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee
and the Board, which agreement must be in writing and signed by the Optionee
and the Company.
15. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
16. RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
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17. AGREEMENTS. Options shall be evidenced by written agreements ("Option
Agreement') in such form as the applicable Administrator shall approve from time
to time.
18. INFORMATION TO OPTIONEES. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are generally provided
to all stockholders of the Company. The Company shall not be required to provide
such information to persons whose duties in connection with the Company assure
their access to equivalent information.
19. GOVERNING LAW; CONSTRUCTION. All rights and obligations under the Plan
shall be governed by, and the Plan shall be construed in accordance with, the
laws of the State of Delaware without regard to the principles of conflicts of
laws. Titles and headings to Sections herein are for purposes of reference only,
and shall in no way limit, define or otherwise affect the meaning or
interpretation of any provisions of the Plan.
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EXHIBIT B
ENERGY BIOSYSTEMS CORPORATION
NON-EMPLOYEE DIRECTOR OPTION PLAN
(AS AMENDED)
SECTION 1. PURPOSE; DEFINITIONS.
(a) The purpose of the Plan is to provide compensation to Non-Employee
Directors in the form of Stock Options.
(b) For purposes of the Plan, the following terms are defined as set forth
below:
"BOARD" means the Board of Directors of the Company.
"COMMON STOCK" means the common stock, par value $0.01 per share, of the
Company.
"COMPANY" means Energy BioSystems Corporation, a Delaware corporation.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
"FAIR MARKET VALUE" means as of any given date, the mean between the
highest and lowest sales prices of the Common Stock reported by The Nasdaq
National Market on such date or, if the Common Stock is listed on a national
securities exchange, reported on the stock exchange composite tape on such
date; or, in either case, if there are no reported sales on such date, on
the last day immediately preceding such date on which sales were reported.
If the Common Stock is traded over the counter, Fair Market Value shall mean
the average of the reported high and low or closing bid and asked prices of
the Common Stock on the most recent date on which the Common Stock was
traded. If there is no regular public trading market for the Common Stock,
the Fair Market Value of the Common Stock shall be determined by the Board
in good faith.
"NON-EMPLOYEE DIRECTOR" means a person who as of any applicable date is
a member of the Board and is not an officer or employee of the Company or
any subsidiary of the Company.
"PARTICIPANT" means a Non-Employee Director who is granted a Stock
Option hereunder.
"PLAN" means the Energy BioSystems Corporation Non-Employee Director
Option Plan as set forth herein and as hereinafter amended from time to
time.
"STOCK OPTION" means a non-qualified option to purchase shares of Common
Stock.
"TERMINATION OF DIRECTORSHIP" means the date upon which any Participant
ceases to be a member of the Board for any reason whatsoever.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
SECTION 2. OPTION AGREEMENTS.
Each Stock Option shall be evidenced by a written agreement in substantially
the form attached to the Plan.
SECTION 3. STOCK SUBJECT TO PLAN.
Subject to adjustment as provided herein, the total number of shares of
Common Stock of the Company available for grant under the Plan while it is in
effect shall be 200,000. The shares of Common Stock shall be presently
authorized but unissued shares or shares subsequently acquired by the Company
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and shall include shares representing the unexercised portion of any Stock
Option granted under the Plan which expires or terminates without being
exercised in full.
In the event of any merger, reorganization, consolidation, recapitalization,
stock dividend, stock split, extraordinary distribution with respect to the
Common Stock or other change in corporate structure affecting the Common Stock
(a "recapitalization"), the aggregate number of shares of Common Stock reserved
for issuance under the Plan shall be appropriately adjusted by the Board and the
number and option exercise price of shares of Common Stock subject to
outstanding Stock Options shall be adjusted so that each such Stock Option shall
thereafter cover the number and class of shares of stock and securities to which
the optionee would have been entitled pursuant to the terms of such
capitalization, if, immediately prior to the recapitalization, the optionee had
been the record holder of the number of shares of Common Stock then covered by
such Stock Option; provided, however, that the number of shares subject to any
Stock Option shall always be a whole number.
SECTION 4. ELIGIBILITY.
Only individuals who are Non-Employee Directors are eligible to be granted
Stock Options under the Plan.
SECTION 5. STOCK OPTIONS.
(a) Commencing on July 1, 1994, and on each subsequent July 1 during the
term of this Plan, each Non-Employee Director shall automatically be granted
Stock Options on such July 1 to purchase 4,000 shares of Common Stock.
The selection of the Non-Employee Directors to whom Stock Options are to be
granted, the timing of such grants, the number of shares subject to any Stock
Option, the exercise price of any Stock Option, the periods during which any
Stock Option may be exercised and the term of any Stock Option shall be as
provided herein, and the Board shall have no discretion as to such matters.
(b) In the event of any stock split or stock dividend the number of shares
of Common Stock to be granted on any date thereafter shall be adjusted by
multiplying the applicable grant number in paragraph (a) above by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such stock split or stock dividend, and the denominator of
which is the number of such shares of Common Stock outstanding immediately prior
to such event.
(c) In the event that the number of shares of Common Stock available for a
future grant under the Plan is insufficient to make all automatic grants
required to be made on the given date, then all Non-Employee Directors entitled
to a grant on such date shall share ratably in the number of Stock Options on
shares of Common Stock available for grant under the Plan.
(d) Stock Options granted under the Plan shall be subject to the following
terms and conditions in addition to those set forth above:
(i) Option Term. The term of each Stock Option shall be 10 years from
the date the Stock Option is granted, subject to earlier termination as
provided herein.
(ii) Option Price. The exercise price of each Stock Option shall be
equal to 100% of the Fair Market Value of a share of Common Stock on the
date of grant, subject to adjustment pursuant to Section 3.
(iii) Exercisability. All Stock Options shall be exercisable in full
immediately upon the date of grant.
(iv) Method of Exercise. Subject to the provisions of this Section 5,
Stock Options may be exercised, in whole or in part, at any time during the
option term by giving written notice of exercise to the Company specifying
the number of shares of Common Stock subject to the Stock Option to be
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purchased. Such notice shall be accompanied by payment in full of the
purchase price by certified or bank check or such other instrument as may be
acceptable to the Company. Payment in full or in part may also be made (1)
by tendering to the Company shares of Common Stock owned by such person
having an aggregate Fair Market Value as of the date of exercise and tender
that is not greater than the full option purchase price for the shares with
respect to which the Stock Option is being exercised and by paying any
remaining amount of the option purchase price as first provided above
(however, the Board may, upon confirming that such person owns the number of
additional shares of Common Stock being tendered, authorize the issuance of
a new certificate for the number of shares of Common Stock being acquired
pursuant to the exercise of the Stock Option less the number of shares of
Common Stock being tendered upon the exercise and return to such person (or
not require surrender of) the certificate for the shares of Common Stock
being tendered upon the exercise) or (2) by delivering to the Company a
properly executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company cash or a check payable and
acceptable to the Company to pay the option purchase price; provided that in
the event such person chooses to pay the option purchase price as provided
above, such person and the broker shall comply with such procedures and
enter into such agreements of indemnity and other agreements as the Board
shall prescribe as a condition of such payment procedure.
No shares of Common Stock shall be issued until full payment therefor
has been made. An optionee shall have all of the rights of a stockholder of
the Company holding Common Stock (including the right to vote the shares and
the right to receive dividends), when the optionee has given written notice
of exercise, had paid in full for such shares and has given the
representation described in Section 7(a), if applicable.
(v) Non-transferability of Stock Options. Except as provided below, no
Stock Option shall be transferable by the optionee other than by will or by
the laws of descent and distribution or pursuant to a qualified domestic
relations order (as defined in Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder). Any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of any Stock
Option under the Plan or of any right or privilege conferred thereby,
contrary to the provisions of the Plan, or the sale or levy or any
attachment or similar process upon the rights and privileges conferred
thereby, shall be null and void.
All Stock Options shall be exercisable, during the optionee's lifetime,
only by the optionee or by the guardian or legal representative of the
optionee, it being understood that the terms "holder" and "optionee" include
the guardian and legal representative of the optionee named in the option
agreement, or by any person to whom an option is transferred by will or the
laws of descent and distribution or pursuant to a qualified domestic
relations order.
(vi) Termination of Directorship. Upon a Participant's Termination of
Directorship, any Stock Option then held by such Participant (or family
transferee) may thereafter be exercised for a period of 12 months from the
date of such Termination of Directorship or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.
(e) Any Non-Employee Director shall have the right to elect (i) to decline
the grant of a Stock Option under the Plan or (ii) to revoke a previous election
to decline the grant of a Stock Option under the Plan, in either event at any
time prior to the date such Stock Option would otherwise be granted. A
Non-Employee Director who has elected to decline the grant of a Stock Option
under the Plan shall not be entitled to any compensation in lieu of such Stock
Option.
SECTION 6. TERM, AMENDMENT AND TERMINATION.
(a) The Plan will terminate on December 31, 2004. Under the Plan, Stock
Options outstanding as of December 31, 2004 shall not be affected or impaired by
the termination of the Plan.
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(b) The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would (i) impair the rights of
an optionee under a Stock Option without the optionee's or recipient's consent,
except such an amendment made to cause the Plan to qualify for the exemption
provided by Rule 16b-3 promulgated under the Exchange Act, or (ii) disqualify
the Plan from the exemption provided by Rule 16b-3. In addition, no amendment
shall be made without the approval of the Company's stockholders to the extent
such approval is required by law, and the provisions of Section 5 of the Plan
not be materially amended more often than once every six months except to
comport with changes in ERISA or the Internal Revenue Code of 1986, as amended.
SECTION 7. GENERAL PROVISIONS.
(a) Unless the shares have been registered under the Securities Act of 1933,
as amended, each person purchasing or receiving shares of Common Stock pursuant
to a Stock Option shall represent to and agree with the Company in writing that
such person is acquiring the shares of Common Stock without a view to the
distribution thereof. The certificates for such shares of Common Stock shall
include an appropriate legend to reflect the restrictions on transfer.
(b) Nothing contained in the Plan shall prevent the Company from adopting
other or additional compensation arrangements for Non-Employee Directors.
(c) The Plan and all Stock Options awarded and actions taken with respect
thereto shall be governed by and construed in accordance with the laws of the
State of Delaware.
SECTION 8. EFFECTIVE DATE OF PLAN.
The Plan was adopted by the Compensation Committee of the Board at its
meeting on July 1, 1994 and ratified by the Board at its meeting on April 28,
1995, subject to approval by the stockholders of the Company. Stock Options
granted pursuant to this Plan may not be exercised prior to such stockholder
approval being obtained. If such approval is not obtained prior to July 1, 1995,
all Stock Options then outstanding under the Plan shall be automatically
canceled.
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