-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NuNe36meV3UtGIesY2zoZzGl8IVF4PPqcWTuF23OmfdpXKf7D1fhosjDjmtPsr5R SJNOsLEtE+prC9aRTZEkug== 0000950134-99-005408.txt : 19990615 0000950134-99-005408.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950134-99-005408 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990610 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: STAR SCIENTIFIC INC CENTRAL INDEX KEY: 0000776008 STANDARD INDUSTRIAL CLASSIFICATION: OPHTHALMIC GOODS [3851] IRS NUMBER: 521402131 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: SEC FILE NUMBER: 005-38497 FILM NUMBER: 99644355 BUSINESS ADDRESS: STREET 1: 16 SOUTH MARKET STREET CITY: PETERSBURG STATE: VA ZIP: 23803 BUSINESS PHONE: 8048610681 MAIL ADDRESS: STREET 1: 16 SOUTH MARKET STREET CITY: PETERSBURG STATE: VA ZIP: 23803 FORMER COMPANY: FORMER CONFORMED NAME: EYE TECHNOLOGY INC DATE OF NAME CHANGE: 19920703 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PERITO PAUL L CENTRAL INDEX KEY: 0001087905 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: STAR SCIENTIIFC INC STREET 2: 16 SOUTH MARKET STREET CITY: PETERSBURG STATE: VA ZIP: 23803 BUSINESS PHONE: 8048610681 SC 13D/A 1 AMENDMENT NO. 5 TO SCHEDULE 13D 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------ SCHEDULE 13D (RULE 13d-101) UNDER THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )1 Star Scientific, Inc. - -------------------------------------------------------------------------------- (Name of Issuer) Common Stock, $.01 par value - -------------------------------------------------------------------------------- (Title of Class of Securities) 301907 30 9 - -------------------------------------------------------------------------------- (CUSIP Number) James A. McNulty Star Scientific, Inc., 16 South Market Street, Petersburg, Virginia 23803 (804) 861-0681 - -------------------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) April 27, 1999 - -------------------------------------------------------------------------------- (Date of Event Which Requires Filing of This Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Note. Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. (Continued on following pages) - ----------------- (1) The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). (Page 1 of 5 Pages) 2 - ---------------------- --------------------------- CUSIP NO. 301907 30 9 13D PAGE 2 OF 5 PAGES - ---------------------- --------------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSONS S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS Paul L. Perito - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ] (b) [ ] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS* PF - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) or 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION United States of America - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER 3,000,000 SHARES --------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER OWNED BY --------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER 3,000,000 REPORTING --------------------------------------------- PERSON WITH 10 SHARED DISPOSITIVE POWER - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,000,000 - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 5.08% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON* IN - -------------------------------------------------------------------------------- *SEE INSTRUCTIONS BEFORE FILLING OUT! (Page 2 of 5 Pages) 3 SECURITIES AND EXCHANGE COMMISSION SCHEDULE 13D Item 1. Security and Issuer. This statement relates to the Common Stock, $.01 par value ("Common Stock"), of Star Scientific, Inc. (the "Company"). The address of the Company's principal executive offices is 16 South Market Street, Petersburg, Virginia 23803. Item 2. Identity and Background. Set forth below is information required by this Item with respect to each person filing this statement.
Item 2(d) or 2(e) Principal Occupation or Business Convictions, Judgments, Name and Address and Address Decrees, or Orders Citizenship - ---------------- ----------- ------------------ ----------- Executive Vice President, Secretary, and General Counsel Paul L. Perito Star Scientific, Inc. None U.S. 7 Newlands Street 16 South Market Street Chevy Chase, MD 20815 Petersburg, Virginia 23803
Item 3. Source and Amount of Funds or Other Consideration. In connection with the execution of his Executive Employment Agreement ("Executive Employment Agreement") entered into as of April 27, 1999 among the Company, Jonnie R. Williams, and Paul L. Perito, Mr. Perito purchased 2,000,000 shares of Common Stock at the price of $1.00 per share by delivery to the Company of a five-year promissory note in the principal amount of $2,000,000 bearing interest at 7% per annum. Item 4. Purpose of Transaction. In order to encourage Mr. Perito's contribution to the successful performance of the Company as its Executive Vice President, General Counsel and Secretary and as additional consideration to induce Mr. Perito to resign as a partner of Paul, Hastings, Janofsky & Walker, LLP, the Company sold 2,000,000 shares of the Company's Common Stock to Mr. Perito at the price of $1.00 per share as of April 27,1999. The purchase price was paid by Mr. Perito's delivery to the Company of a promissory note (the "Note"), dated as of April 27, 1999, in the principal amount of $2,000,000 bearing interest at 7% per annum. The Note is payable interest only annually in arrears on the anniversary date of the Note with the entire unpaid balance of the Note, if not sooner paid, due and payable in full on the fifth anniversary of the date of the Note. The Note is non-recourse as to Mr. Perito as to accrued interest and as to 85% of the principal amount of the Note. Payments of principal of the Note made by Mr. Perito shall be applied by the Company, when and as received, to pay the full consideration for Mr. Perito's purchase of such of the shares purchased by Mr. Perito equal in number to the dollar amount of any such principal payments. (Page 3 of 5 Pages) 4 As an additional incentive, Mr. Perito was granted as of April 27, 1999 a qualified stock option (the "Option") to purchase 1,000,000 shares of Common Stock at an exercise price of $1-11/16 per share pursuant to the Company's Amended and Restated 1998 Stock Option Plan. The Option is fully vested and will terminate upon the earlier to occur of (A) March 1, 2009, or (B) the effective date of termination by the Company for Cause (as defined in the Executive Employment Agreement) or by Mr. Perito without Good Reason (as defined in the Executive Employment Agreement). On the effective date of termination of Mr. Perito's Executive Employment Agreement by the Company for Cause under Section 4(c) of the Executive Employment Agreement, or by Mr. Perito under Section 4(e) of the Executive Employment Agreement, as the case may be, Mr. Perito's Option will immediately terminate and revert to the Company (including all vested but unexercised shares subject to the Option); and any and all shares issued upon exercise of the Option on or prior to such effective date of termination or date of notice will be subject to a repurchase right in favor of the Company at a purchase price equal to the exercise price of such shares. Item 5. Interest in Securities of the Issuer. (a) The information set forth in items 1, 11, and 13 of the second part of the cover page of this statement is incorporated herein by reference. (b) The information set forth in items 1 and 7-10 of the second part of the cover page of this statement is incorporated herein by reference. (c) Inapplicable (d) Inapplicable (e) Inapplicable Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer. The information set forth in item 4 is incorporated herein by reference. Item 7. Material to Be Filed as Exhibits. (a) Executive Employment Agreement dated as of April 27, 1999 entered into by the Company, Jonnie R. Williams and Paul L. Perito. (b) Qualified Stock Option Agreement dated as of April 27, 1999 between the Company and Paul L. Perito. (c) Promissory Note dated as of April 27, 1999 in the principal amount of $2,000,000 issued by Paul L. Perito to the Company. (Page 4 of 5 Pages) 5 SIGNATURES After reasonable inquiry and to the best of his individual knowledge and belief, the signatory below certifies that the information set forth in this statement is true, complete, and correct. The person whose signature appears below agrees that this statement on Schedule 13D is filed on his behalf. Dated June 10, 1999. /s/ PAUL LOUIS PERITO -------------------------- Paul Louis Perito (Page 5 of 5 Pages) 6 INDEX TO EXHIBITS
Exhibit No. Description ----------- ----------- (a) Executive Employment Agreement dated as of April 27, 1999 entered into by the Company, Jonnie R. Williams and Paul L. Perito. (b) Qualified Stock Option Agreement dated as of April 27, 1999 between the Company and Paul L. Perito. (c) Promissory Note dated as of April 27, 1999 in the principal amount of $2,000,000 issued by Paul L. Perito to the Company.
EX-99.A 2 EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT A STAR SCIENTIFIC, INC. EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of April 27, 1999, by and among STAR SCIENTIFIC, INC., a Delaware corporation (the "Company"), JONNIE R. WILLIAMS ("Williams"), and PAUL L. PERITO ("Executive"). Recitals A. The Company is engaged in the research, development and commercialization of smoking cessation products and reduced-risk smoking products, and the manufacture and sale of discount cigarettes with activated charcoal filters and low TSNA Star-Cured tobacco to be phased in over the next three years. B. Williams is a substantial shareholder (actual and/or beneficial), and/or officer and/or director of the Company. C. Executive is an attorney and partner in the law firm of Paul, Hastings, Janofsky & Walker, LLP ("PHJW") and Chair of the Washington, D.C., litigation practice of PHJW. D. The Company wishes to employ Executive and to have the benefit of his skills and services, and Executive wishes to be employed by the Company, as Executive Vice President, General Counsel and Secretary of the Company, on the terms and subject to the conditions set forth herein. E. Executive, as a condition to his resigning his partnership with PHJW and entering into this Agreement requires that Williams pledge 1,500,000 of the Company's shares owned by Williams to secure the payment and performance of the Company's obligations hereunder, and Williams is willing to pledge such shares in order to induce Executive to forgo his partnership and join the senior management of the Company. Agreement NOW, THEREFORE, in consideration of these premises, the mutual covenants and agreements of the parties hereunder, and for other good and valuable consideration the sufficiency and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Employment and Duties. a. Position. The Company hereby employs Executive, and Executive hereby accepts employment with the Company, as Executive Vice President, General Counsel and Secretary of the Company. 2 b. Duties. Executive agrees to devote his best efforts, and shall have primary responsibility within the Company, to oversee and manage (i) the legal affairs of the Company, including all matters concerning the Company's corporate governance and structure, securities laws and other regulatory compliance, employment laws compliance and counseling, contract negotiation and dispute resolution, and litigation involving the Company, (ii) government relations and lobbying concerning the Company's business and affairs, (iii) public relations concerning the Company's business and affairs, and (iv) such other duties, including management and oversight functions, consistent with the foregoing, assigned to him by the Board of Directors of the Company (the "Board of Directors"). Executive shall perform his duties in a trustworthy, businesslike and loyal manner. c. Authority to Select Counsel and Government and Public Relations Professionals. Executive shall have sole authority, subject only to confirmation and ratification by the Board of Directors, to select all outside counsel, lobbyists and other government relations professionals, and public relations professionals as Executive deems necessary and appropriate in the performance of his duties hereunder. d. Reporting. Executive shall report to the Board of Directors. e. Place of Employment. The Company shall establish and pay all costs associated with an office for Executive as well as for the scientific and regulatory functions of the company, at a location selected by Executive. Executive shall perform the services required by this Agreement at such office except that Executive shall perform the services required by this Agreement at the Company's Petersburg, VA offices at least one day each week. f. Change of Duties. The duties of Executive may be modified from time to time by the mutual consent of the Company and Executive without resulting in a rescission of this Agreement. The mutual written consent of the Company and Executive shall constitute execution of that modification. Notwithstanding any such change, the employment of Executive shall be construed as continuing under this Agreement as so modified. g. Devotion of Time to Company's Business. During the Term of this Agreement (as such term is defined in Section 1.i. hereof), Executive agrees (i) to devote seventy percent (70%) of his entire productive time, ability and attention to the business of the Company during normal working hours, the Company acknowledging and agreeing that Executive may devote up to thirty percent (30%) of his time to his duties as Senior Counsel with PHJW, (ii) not to engage in any other business duties or business pursuits whatsoever, other than as Senior Counsel with PHJW or such other law firm as Executive may become affiliated with in a capacity substantially similar to that of Senior Counsel with PHJW, (iii) whether directly or indirectly, not to render any services of a commercial or professional nature to any individual, trust, partnership, company, corporation, business, organization, group or other entity (each, a "Person"), other than as Senior Counsel with PHJW or such other law firm as Executive may become affiliated with in a capacity substantially similar to that of Senior Counsel with PHJW, -2- 3 whether for compensation or otherwise, without the prior written consent of the Board of Directors, and (iv) whether directly or indirectly, not to acquire, hold or retain more than a one percent (1%) interest in any business competing with or similar in nature to the business of the Company or any of its Affiliates (as such term is defined below); provided, however, the expenditure of reasonable amounts of time for litigation support, book project, charitable, professional educational or professional activities or, subject to the foregoing, the making of passive personal investments shall not be deemed a breach of this Agreement or require the prior written consent of the Company if those activities do not materially interfere with the services required of Executive under this Agreement. For purposes of this Agreement, "Affiliates" shall mean any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Company. h. Executive's Continuing Relationship With PHJW. The Company acknowledges that Executive will continue to have a business relationship with PHJW as Senior Counsel with PHJW or such other law firm as Executive may become affiliated with in a capacity substantially similar to that of Senior Counsel with PHJW, and that in such capacity as Senior Counsel to PHJW, Executive will devote up to thirty percent (30%) of his entire productive time, ability and attention to the business of PHJW and its clients. The Company expressly consents to such continuing business relationship and acknowledges that Executive will be compensated by PHJW for his thirty percent (30%) commitment, none of which compensation will be related to any fees paid by the Company to PHJW for professional services performed by other lawyers and paraprofessionals. i. Term. Unless sooner terminated as provided in Section 4 hereof the term of this Agreement shall commence on June 15, 1999, or such later date Executive actually commences work hereunder by mutual agreement of the parties, and shall continue until June 15, 2002 (the "Initial Term"), and shall be renewable for successive one (1) year terms (each, a "Renewal Term") at the option of the Company. Notice of renewal or, if applicable, the Company's option not to renew, shall be given to Executive in writing at least one hundred twenty (120) days prior to the end of the Initial Term or the applicable Renewal Term, as the case may be. The Initial Term, together with any Renewal Terms shall be referred to in this Agreement as the "Term of this Agreement." j. Observance of Company Rules, Regulations and Policies. Executive shall duly, punctually and faithfully perform and observe any and all rules, regulations and policies which the Company may now or hereafter reasonably establish governing the conduct of its business or its employees to the extent such rules, regulations and policies are not in conflict with this Agreement. Executive shall promptly provide written notice to the Board of Directors of any such apparent conflict of which Executive becomes aware. -3- 4 2. Compensation. a. Base Salary. During the Term of this Agreement, the Company shall pay to Executive a base salary of Six Hundred Thousand Dollars ($600,000) per year (the "Base Salary"), subject to increase from time to time in the good faith discretion of the Board of Directors, payable in arrears on a monthly or semi-monthly basis in accordance with the Company's standard payroll procedures in effect at the time of payment. b. Signing Bonus. In order to induce Executive to enter into this Agreement and resign his partnership with PHJW, Executive shall be paid a signing bonus in the amount of Two Hundred Fifty Thousand Dollars ($250,000) which shall be paid to Executive in four installments as follows: (i) $100,000 shall be paid upon execution and delivery of this Agreement, (ii) $50,000 shall be paid on or before the date one month after the date of this Agreement, (iii) $50,000 shall be paid on or before the date two months after the date of this Agreement, and (iv) the final $50,000 shall be paid on or before the date three months after the date of this Agreement. c. Annual Bonus. In addition to the Base Salary, the Company shall pay to Executive, on or before March 31 of each year, annual bonuses based on the Company's financial performance, and/or the increase in the fair market value of the Company's stock, and/or Executive's performance as follows: i. For the period April 27, 1999, through December 31, 1999, the Company shall pay Executive a bonus in an amount to be determined by the Board of Directors but not less than the sum of Two Hundred Fifty Thousand Dollars ($250,000), based upon (A) the performance of the Company as reflected by increases in the Company's stock price during such period, and/or (B) the Company maintaining positive earnings for such period, and/or (C) the performance of Executive during such period. ii. For the period January 1, 2000, through December 31, 2000, the Company shall pay Executive a bonus in an amount to be determined by the Board of Directors but not less than the sum of Two Hundred Fifty Thousand Dollars ($250,000) if either (A) the Company's gross revenues for the year ending December 31, 2000, increase by fifty percent (50%) or more over the year ending December 31, 1999, and/or (B) if the price of the Company's common stock, determined based on the average daily bid price on the NASDAQ for the Company's stock during either (1) the thirty (30) day period ending on December 31, 2000, and/or (2) any ninety (90) day period during the period January 1, 2000, through December 31, 2000, increases by fifty percent (50%) or more over such price for the thirty (30) day period ending on December 31, 1999. iii. For the period January 1, 2001, through December 31, 2001, the Company shall pay Executive a bonus in an amount to be determined by the Board of Directors but not less than the sum of Two Hundred Fifty Thousand Dollars ($250,000) if either (A) the -4- 5 Company's gross revenues for the year ending December 31, 2001, increase by twenty-five percent (25%) or more over the year ending December 31, 2000, and/or (B) if the price of the Company's common stock, determined based on the average daily bid price on the NASDAQ for the Company's stock during either (1) the thirty (30) day period ending on December 31, 2001, and/or (2) any ninety (90) day period during the period January 1, 2001, through December 31, 2001, increases by twenty-five percent (25%) or more over such price for the thirty (30) day period ending on December 31, 2000. iv. For each calendar year of this Agreement after December 31, 2001, or partial year if this Agreement terminates prior to the end of such year, the Company shall pay Executive a bonus in an amount to be determined by the Board of Directors but not less than the sum of Two Hundred Fifty Thousand Dollars ($250,000) based upon (A) the performance of the Company as reflected by increases in the Company's stock price during such year, and/or (B) the Company maintaining positive earnings for such year, and/or (C) the performance of Executive during such year. If this Agreement terminates prior to the end of such a year, then the bonus shall be payable to Executive on the date this Agreement terminates. d. Stock Sale. In order to encourage Executive's contribution to the successful performance of the Company and as additional consideration to induce Executive to resign his Partnership with PHJW, the Company shall sell Two Million shares of the Company's common stock to Executive for One Dollar ($1.00) per share. The purchase price shall be payable by Executive's execution and delivery to the Company of a promissory note (the "Purchase Note"), to be dated as of even date herewith, in the original principal amount of Two Million Dollars ($2,000,000.00), payable to the order of the Company, bearing interest at seven percent (7%) per annum. The Note shall be payable interest only annually in arrears on the anniversary date of the Note with the entire unpaid balance of the Note, if not sooner paid, due and payable in full on the fifth (5th) anniversary of the date of the Note. The Note shall be non-recourse as to Executive as to accrued interest and as eighty-five percent (85%) of the principal amount of the Note. e. Stock Option. i. Qualified Stock Option. The parties acknowledge and agree that, as additional incentive to Executive, Executive shall be granted, immediately upon execution of this Agreement, a qualified stock option (the "Option") to purchase one million (1,000,000) shares of Common Stock of the Company at an exercise price of One and Eleven-Sixteenths Dollars ($1-11/16) per share pursuant to an option agreement on the Company's standard form under its 1998 Stock Option Plan (the "Plan"). Subject to the forfeiture provision and repurchase right of the Company described below, the option agreement shall provide that: ii. Vesting. Upon execution and delivery of this Agreement, the Option shall be fully vested. -5- 6 iii. Termination. The Option shall immediately terminate upon the earlier to occur of (A) March 1, 2009, or (B) the effective date of termination of this Agreement by the Company for Cause (as such term in defined in Section 4(c) hereof) or by the Executive without Good Reason (as such term in defined in Section 4(f) hereof). iv. Accelerated Termination and Forfeiture of Option; Company Repurchase Right. On the effective date of termination of this Agreement by the Company for Cause under Section 4(c) of this Agreement, or by the Executive under Section 4(e), as the case may be, (A) the Option shall immediately terminate and revert to the Company (including all vested but unexercised shares subject to the Option); and (B) any and all shares issued upon exercise of the Option on or prior to such effective date of termination or date of notice shall be subject to a repurchase right in favor of the Company at a purchase price equal to the exercise price of such shares. v. Disposition Transaction. Upon the occurrence of a Disposition Transaction, as defined below, Executive shall be entitled to receive for each share of common stock then owned by Executive and for each vested but unexercised share subject to the Option, consideration per share of not less than, and payable on the same terms as, the consideration per share received by Francis O'Donnell, Jr., M.D., Williams, and/or Regent Court Technologies, L.L.C., as a result of the Disposition Transaction, and/or to participate on terms no less favorable than terms available to Francis O'Donnell, Jr., M.D., Williams, and/or Regent Court Technologies, L.L.C., in the case of a Deposition Transaction involving issuance by the Company of shares of its stock in an offering pursuant to a registration statement filed with the Securities Exchange Commission. A "Disposition Transaction" shall occur if at any time after the date hereof, the Company, Francis O'Donnell, Jr., M.D., Williams, or Regent Court Technologies, L.L.C., or any combination thereof (1) accepts any offer to purchase thirty percent (30%) or more of the aggregate shares of capital stock of the Company actually or beneficially owned by Francis O'Donnell, Jr., M.D., Williams, and/or Regent Court Technologies, L.L.C., and/or (2) accepts any offer to purchase shares of the capital stock of the Company constituting at least fifty percent (50%) of all of the then outstanding shares of the Company, and/or (3) accepts any offer to merge or consolidate the Company, or enter into a share exchange, with another corporation or entity, and/or (4) accepts any offer to sell all or substantially all of the assets of the Company, and/or (5) accepts any other offer to enter into a transaction the result of which will be to transfer voting control of the Company to any party other than Francis O'Donnell, Jr., M.D., Williams, and/or Regent Court Technologies, L.L.C., and/or (6) enters into any agreements in connection with, or undertakes, the issuance of shares of the Company's stock in an offering pursuant to a registration statement filed with the Securities Exchange Commission. The Company and Williams each covenant and agree not to enter into any Disposition Transaction that does not expressly recognize and give effect to the terms of this Section 2.e.v. f. Incentive Plans. In addition to all other benefits and compensation provided by this Agreement, Executive shall be eligible to participate in such of the Company's equity, compensation and incentive plans as are generally available to any of the management -6- 7 executives of the Company, including without limitation any executive and performance bonus or incentive plans. g. Vacation. Executive shall be entitled to such annual vacation time with full pay as the Company may provide in its standard policies and practices for any other management executives; provided, however, that in any event Executive shall be entitled to a minimum of twenty (20) days annual paid vacation time. h. Directors and Officers Liability Insurance; Professional Liability Insurance. Executive shall be entitled to participation in, and have the benefit of directors and officers liability insurance providing coverage in an amount of less than that provided by the Company for its Chief Executive Officer and/or Chairman of the Board. The Company shall acquire and maintain professional liability insurance for Executive insuring against any claims against Executive arising from his performance of legal services to the Company while acting in his capacity as an officer and employee of the Company. i. Term Life Insurance. The Company shall acquire a term life insurance policy in the amount of $1,500,000 substantially similar to the policy maintained by PHJW with the Perito 1995 Family Trust U/A/D 53195, Robin Crawford Perito, Trustee, as beneficiary thereunder, and shall pay the premiums due on such policy and maintain such policy in full force and effect during the Term of this Agreement. j. Disability Insurance. The disability insurance policy maintained by PHJW for Executive providing disability benefits in the amount of $35,000 per month, will be assumed by the Company, or replaced with a substantially similar policy if such policy is not assumable, and the Company shall pay the premiums due on such policy and maintain such policy in full force and effect during the Term of this Agreement. k. Automobile. The Company will furnish Executive with an automobile equipped with a car telephone and will reimburse Executive all reasonable costs and expenses relating to Executive's use of such automobile and car telephone, including without limitation, amounts incurred for insurance, gas and general maintenance and repairs. l. Mobile Telephone. Executive shall have use of a wireless mobile telephone of his choice and the Company will be responsible for payment of all business usage charges and all usual operational and maintenance expenses associated with the use by Executive of such telephone. m. Club Dues. The Company shall reimburse Executive for monthly and/or annual dues related to Executives membership in the City Club, Georgetown Club, University Club and Kenwood Golf Club. -7- 8 n. Outside Counsel for Executive. In order for Executive to have the benefit of counsel independent of PHJW to advise and counsel Executive with respect to the employment issues relating to terms of this Agreement, the Company shall pay the reasonable attorneys' fees and expenses incurred by Executive in connection with such advise and counsel and the drafting and execution of this Agreement. o. Other Benefits. Executive shall participate in and have the benefits of all present and future vacation, holiday, paid leave, unpaid leave, life, accident, disability, dental, vision and health insurance plans, pension, profit-sharing and savings plans and all other plans and benefits which the Company now or in the future from time to time makes available to any of its management executives. i. Withholding. The parties shall comply with all applicable legal withholding requirements in connection with all regular monthly and/or bi-monthly compensation payable to Executive hereunder. 3. Expense Reimbursement. a. General Business Expenses. The Company shall reimburse Executive for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the course of performing his duties hereunder this Agreement. All reimbursable expenses shall be appropriately documented and shall be in reasonable detail and in a format and manner consistent with the Company's expense reporting policy, as well as applicable federal and state tax record keeping requirements. b. Professional Educational Expenses and Fees. In addition, the Company shall reimburse Executive for (i) all reasonable expenses incurred for continuing education courses required to maintain Executive's professional status and bar membership as an attorney, and (ii) all reasonable professional fees, licenses, and dues associated with Executive's professional status and bar membership as an attorney. 4. Termination and Rights on Termination. This Agreement shall terminate upon the occurrence of any of the following events: a. Death. Upon the death of Executive, in which event the Company shall, within thirty (30) days of receiving notice of such death, pay Executive's estate all salary and other compensation hereunder, then due and payable and all accrued vacation pay and bonuses, if any, in each case payable or accrued through the date of death. In addition, the Company shall pay Executive's estate, at the time or times otherwise payable under the terms of this Agreement, all salary, benefits, bonuses, and other compensation that would have been payable hereunder by the Company to Executive during the one year period immediately following Executive's death. -8- 9 b. Disability. Upon the mental or physical Disability (as such term is defined below) of Executive, in which event the Company shall, within thirty (30) days following the determination of Disability, pay Executive all salary then due and payable and all accrued vacation pay and bonuses, if any, in each case payable or accrued through the date of determination. In addition, the Company shall pay all salary, benefits, bonuses, and other compensation that would have been payable hereunder by the Company to Executive during the one year period immediately following Executive's disability. For purposes of this Agreement, "Disability" shall mean a physical or mental condition, verified by a physician designated by the Company, which prevents Executive from carrying out one or more of the material aspects of his assigned duties for at least ninety (90) consecutive days, or for a total of ninety (90) days in any six (6) month period. c. Termination by the Company For Cause. Upon delivery by the Company to Executive of a written notice terminating this Agreement for Cause (as such term is defined below), which notice shall be supported by a reasonably detailed statement of the relevant facts and reasons for termination, in which event the Company shall, within thirty (30) days following such termination, pay Executive all salary then due and payable through the date of termination. Executive shall not be entitled to any severance compensation or any accrued vacation pay or bonuses. For purposes of this Agreement, "Cause" shall mean: i. Executive shall have committed an act of dishonesty, fraud, embezzlement or theft with respect to the property, business or affairs of the Company, in any such event in such a manner as to cause material loss, damage or injury to the Company; ii. Executive shall have materially breached this Agreement and such breach shall have continued for a period of twenty (20) days after receipt of written notice from the Company specifying such breach; iii. Executive shall have been grossly negligent in the performance of his duties hereunder, intentionally not performed or misperformed any of such duties, or refused to abide by or comply with the directives of the Board of Directors, which action shall have continued for a period of twenty (20) days after receipt of written notice from the Company demanding such action cease or be cured; iv. Executive shall have been found guilty of, or has plead nolo contendere to, the commission of a felony offense or other crime involving moral turpitude; or v. Executive shall have abused alcohol or drugs (legal or illegal) that, in the reasonable judgment of the Board of Directors, materially impairs Executive's ability to perform his duties hereunder. d. Termination by the Company Without Cause. Thirty (30) days after delivery by the Company to Executive of a written notice terminating Executive's employment -9- 10 under this Agreement for any reason without cause, in which event the Company shall continue to pay Executive all salary, benefits, bonuses and other compensation that would be due hereunder through the end of the Term of this Agreement had the Company not terminated Executive's employment. e. Voluntary Termination by Executive. Thirty (30) days after delivery by Executive to the Company of a written notice terminating this Agreement for any reason without cause, in which event the Company shall, within thirty (30) days following the effective date of termination, pay Executive all salary then due and payable through the date of termination. Executive shall not be entitled to any severance compensation or any accrued vacation pay or bonuses. f. Termination by Executive for Good Reason. Thirty (30) days after delivery by Executive to the Company of a written notice terminating this Agreement for Good Reason (as such term is defined below), in which event the Company shall pay Executive such amounts in such manner as provided for in Section 4.d. hereof. For purposes of this Agreement, "Good Reason" shall mean: i. The assignment of Executive to any duties inconsistent with, or any adverse change in, Executive's positions, duties, responsibilities, functions or status with the Company, or the removal of Executive from, or failure to reelect Executive to, any of such positions; provided, however, that a change in Executive's positions, duties, responsibilities, functions or status that Executive shall agree to in writing shall not be an event of Good Reason or give rise to termination under this Section 4.f.; ii. A reduction by the Company of Executive's Base Salary without his written consent; iii. The failure by the Company to continue in effect for Executive any material benefit provided herein or otherwise available to any of the management executives of the Company, including without limitation, any retirement, pension or incentive plans, life, accident, disability or health insurance plans, equity or cash bonus plans or savings and profit sharing plans, or any action by the Company which would adversely affect Executive's participation in or reduce Executive's benefits under any of such plans or deprive Executive of any fringe benefit enjoyed by Executive; or iv. Any other material breach by the Company of this Agreement which is not cured within twenty (20) days of delivery of written notice thereof by Executive to the Company. g. Termination by Executive upon Disposition Transaction and/or Certain Change of Management. Thirty (30) days after delivery by Executive to the Company of a written notice terminating this Agreement upon (i) the consummation of a Disposition -10- 11 Transaction, other than a Disposition Transaction described in Section 2.e.v.(6) above, entered into prior to the later of June 15, 2000, or the date one year after Executive's actual commencement of employment hereunder, or (ii) a change in the senior management of the Company resulting from the death or disability of Jonnie R. Williams, in which event the Company shall, within thirty (30) days following the effective date of termination, pay Executive the sum of $2,500,000. Although the parties have been advised that 26 U.S.C. 280G is not applicable to any payment that may become due Executive hereunder, if 26 U.S.C. 280G is found to be applicable, then the Company shall pay any tax due by Executive under Section 280G as a result of any payment to Executive under this Section 4.g.. It is anticipated by the parties that payment that may become due under (ii) above will be funded by one or more policies of life and/or disability insurance to be purchased by the Company prior to June 15, 1999, which provide for a benefit in the amount of $2,500,000 payable to Executive as beneficiary under such policy or policies. In the event the Company purchases such policy or policies by June 15, 1999, and thereafter maintains such policy or policies in continuous and full force and effect during the term hereof, then Executive agrees to look solely to such policy or policies for payment of any amount due under (ii) above; provided, however, that in the event the Company does not purchase such policy or policies and thereafter maintain such policy or policies in continuous and full force and effect during the term hereof, then the Company shall be directly and fully obligated to Executive for such payment. h. Effect of Termination; Options. All rights and obligations of the Company and Executive under this Agreement shall cease as of the effective date of termination, except that the obligations of the Company under this Section 4 and Executive's obligations under Sections 5 and 6 hereof shall survive such termination in accordance with their respective terms. In addition, notwithstanding anything to the contrary contained herein or in any agreement with respect thereto, (i) upon termination of Executive's employment pursuant to Section 4.c., all equity options, restricted equity grants and similar rights held by Executive with respect to securities of the Company, including without limitation the Option, shall, to the extent not then fully vested, immediately terminate and revert to the Company, (ii) upon termination of Executive's employment pursuant to Section 4.e., all equity options, restricted equity grants and similar rights held by Executive with respect to securities of the Company, including without limitation the Option, shall, remain in full force and effect and shall not be affected by such termination, and (iii) upon termination of Executive's employment pursuant to any other provision of this Section 4, all equity options, restricted equity grants and similar rights held by Executive with respect to securities of the Company, including without limitation the Option, shall, to the extent not then fully vested, immediately become fully vested. i. No Termination by Merger; Transfer of Assets or Dissolution. This Agreement shall not be terminated by any dissolution of the Company resulting from either merger or consolidation in which the Company is not the consolidated or surviving corporation or other entity or transfer of all or substantially all of the assets of the Company. In such event, the rights, benefits and obligations herein shall automatically be deemed to be assigned to the -11- 12 surviving or resulting corporation or other entity or to the transferee of the assets, as the case may be, with the consent of Executive. 5. Restriction on Competition. a. Covenant Not to Compete. During the Term of this Agreement and for a period of twelve (12) months from the termination of this Agreement, Executive shall not, without the prior written consent of the Company, either directly or indirectly, for himself or on behalf of or in conjunction with any other Person (i) own, manage, operate, control, be employed by, participate in, render services to, or be associated in any manner with the ownership, management, operation or control of, any business similar to the type of business conducted by the Company or any of its Affiliates within any of the geographic territories in which the Company or any of its Affiliates conducts business, (ii) solicit business of the same or similar type being carried on by the Company or any of its Affiliates from any Person known by Executive to be a customer of the Company or any of its Affiliates, whether or not Executive had personal contact with such Person during and by reason of Executive's employment with the Company, or (iii) endeavor or attempt in any way to interfere with or induce a breach of any contractual relationship that the Company or any of its Affiliates may have with any employee, customer, contractor, supplier, representative or distributor. b. No Breach for Activities Deemed Not Competitive. It is further agreed that, in the event that Executive shall cease to be employed by the Company and enter into a business or pursue other activities that, at such time, are not in competition with the Company or any of its Affiliates, Executive shall not be chargeable with a violation of this Section 5 if the Company subsequently enters the same (or a similar) competitive business or activity. In addition, if Executive has no actual knowledge that his actions violate the terms of this Section 5, Executive shall not be deemed to have breached the restrictive covenants contained herein if, promptly after being notified by the Company of such breach, Executive ceases the prohibited actions. c. Severability. The covenants in this Section 5 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. If any provision of this Section 5 relating to the time period or geographic area of the restrictive covenants shall be declared by a court of competent jurisdiction to exceed the maximum time period or geographic area, as applicable, that such court deems reasonable and enforceable, such time period or geographic area shall be deemed to be, and thereafter shall become, the maximum time period or largest geographic area that such court deems reasonable and enforceable and this Agreement shall automatically be considered to have been amended and rensed~to reflect such determination. d. Fair and Reasonable. Executive has carefully read and considered the provisions of this Section 5 and, having done so, agrees that the restrictive covenants in this Section 5 impose a fair and reasonable restraint on Executive and are reasonably required to -12- 13 protect the interests of the Company, its Affiliates and their respective officers, directors, employees and stockholders. It is further agreed that the Company and Executive intend that such covenants be construed and enforced in accordance with the changing activities, business and locations of the Company throughout the term of these covenants. 6. Confidential Information. a. Confidential Information. Executive hereby agrees to hold in strict confidence and not to disclose to any third party, other than employees and agents of the Company or persons retained by the Company to represent its interests, any of the valuable, confidential and proprietary business, financial, technical, economic, sales and/or other types of proprietary business information relating to the Company or any of its Affiliates (including all trade secrets) in whatever form, whether oral, written, or electronic (collectively, the "Confidential Information"), to which Executive has, or is given (or has had or been given), access during the course of his employment with the Company. It is agreed that the Confidential Information is confidential and proprietary to the Company because such Confidential Information encompasses technical know-how, trade secrets, or technical, financial, organizational, sales or other valuable aspects of the business and trade of the Company or its Affiliates, including without limitation, technologies, products, processes, plans, clients, personnel, operations and business activities. This restriction shall not apply to any Confidential Information that (a) becomes known generally to the public through no fault of the Executive, (b) is required by applicable law, legal process, or any order or mandate of a court or other governmental authority to be disclosed, or (c) is reasonably believed by Executive, based upon the advice of legal counsel, to be required to be disclosed in defense of a lawsuit or other legal or administrative action brought against Executive; provided, however, that in the case of clause (b) or (c), Executive shall give the Company reasonable advance written notice of the Confidential Information intended to be disclosed and the reasons and circumstances surrounding such disclosure, in order to permit the Company to seek a protective order or other appropriate request for confidential treatment of the applicable Confidential Information. b. Return of Company Property. In the event of termination of Executive's employment with the Company for whatever reason or no reason, (a) Executive agrees not to copy, make known, disclose or use, any of the Confidential Information without the Company's prior written consent, and (b) Executive or Executive's personal representative shall return to the Company (i) all Confidential Information, (ii) all other records, designs, patents, business plans, financial statements, manuals, memoranda, lists, correspondence, reports, records, charts, advertising materials and other data or property delivered to or compiled by Executive by or on behalf of the Company or its respective representatives, vendors or customers that pertain to the business of the Company or any of its Affiliates, whether in paper, electronic or other form, and (iii) all keys, credit cards, vehicles and other property of the Company. Executive shall not retain or cause to be retained any copies of the foregoing. Executive hereby agrees that all of the foregoing shall be and remain the property of the Company and the applicable Affiliates and be subject at all times to their discretion and control. -13- 14 7. Corporate Opportunities. a. Duty to Notify. During the Term of this Agreement, in the event that Executive shall become aware of any business opportunity related to the business of the Company, Executive shall promptly notify the Board of Directors of such opportunity. Executive shall not appropriate for himself or for any other Person other than the Company (or any Affiliate) any such opportunity unless, as to any particular opportunity, the Board of Directors fails to take appropriate action within thirty (30) days. Executive's duty to notify the Board of Directors and to refrain from appropriating all such opportunities for thirty (30) days shall neither be limited by, nor shall such duty limit, the application of the general laws relating to the fiduciary duties of an agent or employee. b. Failure to Notify. In the event that Executive fails to notify the Board of Directors or so appropriates any such opportunity without the express written consent of the Board of Directors, Executive shall be deemed to have violated the provisions of this Section notwithstanding the following: i. The capacity in which Executive shall have acquired such opportunity; or ii. The probable success in the hands of the Company of such opportunity. 8. Williams Stock Pledge. Williams shall pledge and grant Executive a security interest and lien on 1,500,000 shares of the Company's common stock to secure the full and timely payment and performance of all obligations, agreements, covenants, conditions and liabilities of the Company to Executive arising under this Agreement, such pledge to be evidenced by a pledge agreement in form and substance satisfactory to Executive, which will be prepared and which Williams shall execute and deliver as soon hereafter as is reasonably practical. Williams shall take such actions and shall deliver such stock certificates, stock powers and/or other documents to Harvey B. Cohen, Esquire, to be held as agent of Executive, as reasonably may be necessary to perfect the security interest and lien to be granted in favor of Executive by Williams pursuant to this Section 8. 9. No Prior Agreements. Executive hereby represents and warrants to the Company that the execution of this Agreement by Executive, his employment by the Company, and the performance of his duties hereunder will not violate or be a breach of any agreement with a former employer or any other Person. Further, Executive agrees to indemnify and hold harmless the Company and its officers, directors and representatives for any claim, including, but not limited to, reasonable attorneys' fees and expenses of investigation, of any such third party that such third party may now have or may hereafter come to have against the Company or such other persons, based upon or arising out of any noncompetition agreement, invention, secrecy or other agreement between Executive and such third party that was in existence as of the effective date -14- 15 of this Agreement. To the extent that Executive had any oral or written employment agreement or understanding with the Company, this Agreement shall automatically supersede such agreement or understanding, and upon execution of this Agreement by Executive and the Company, such prior agreement or understanding automatically shall be deemed to have been terminated and shall be null and void. 10. Representation. Executive acknowledges that he (a) has reviewed this Agreement in its entirety, (b) has had an opportunity to obtain the advice of separate legal counsel prior to executing this Agreement, and (c) fully understands all provisions of this Agreement. 11. Assignment: Binding Effect. Executive understands that he has been selected for employment by the Company on the basis of his personal qualifications, experience and skills. Executive agrees, therefore, that he cannot assign or delegate all or any portion of his performance under this Agreement. This Agreement may not be assigned or transferred by the Company without the prior written consent of Executive. Subject to the preceding two sentences, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties hereto and their respective heirs, legal representatives, successors, and assigns. Notwithstanding the foregoing, if Executive accepts employment with an Affiliate, unless Executive and his new employer agree otherwise in writing, this Agreement shall automatically be deemed to have been assigned to such new employer (which shall thereafter be an additional or substitute beneficiary of the covenants contained herein, as appropriate), with the consent of Executive, such assignment shall be considered a condition of employment by such new employer, and references to the "Company" in this Agreement shall be deemed to refer to such new employer. 12. Complete Agreement: Waiver: Amendment. Executive has no oral representations, understandings or agreements with the Company or any of its officers, directors or representatives covering the same subject matter as this Agreement. This Agreement is the final, complete and exclusive statement and expression of the agreement between the Company and Executive with respect to the subject matter hereof and thereof, and cannot be varied, contradicted, or supplemented by evidence of any prior or contemporaneous oral or written agreements. This Agreement may not be later modified except by a further writing signed by a duly authorized officer of the Company and Executive, and no term of this Agreement may be waived except by writing signed by the party waiving the benefit of such term. 13. Notice. All notices, requests, demands and other communications required or permitted to be given under this Agreement shall be in writing and shall be given or made by personally delivering the same to or sending the same by prepaid certified or registered mail, return receipt requested, or by reputable overnight courier, or by facsimile machine to the party to which it is directed at the address set out on the signature page to this Agreement, with copies to counsel as indicated, or at such other address as such party shall have specified by written notice to the other party as provided in this Section, and shall be deemed to be given if delivered personally at the time of delivery, or if sent by certified or registered mail as herein provided three (3) days after the same shall have been posted, or if sent by reputable overnight courier -15- 16 upon receipt, or if sent by facsimile machine as soon as the sender receives written or telephonic confirmation that the facsimile was received by the recipient and such facsimile is followed the same day by mailing by prepaid first class mail. 14. Severability: Headings. If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held invalid and inoperative. This severability provision shall be in addition to, and not in place of, the provisions of Section 5(c) above. The Sections headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of this Agreement or of any part hereof. 15. Equitable Remedy. Because of the difficulty of measuring economic losses to the Company as a result of a breach of the restrictive covenants set forth in Sections 5 and 6 hereof, and because of the immediate and irreparable damage that would be caused to the Company for which monetary damages would not be a sufficient remedy, it is hereby agreed that in addition to all other remedies that may be available to the Company or Executive at law or in equity, the Company or Executive shall be entitled to specific performance and any injunctive or other equitable relief as a remedy for any breach or threatened breach of the aforementioned restrictive covenants. 16. Arbitration. Any unresolved dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration conducted in accordance with the rules of the American Arbitration Association then in effect. The arbitrators shall not have the authority to add to, detract from, or modify any provision hereof nor to award punitive damages to any injured party. A decision by a majority of the arbitration panel shall be final and binding. Judgment may be entered on the arbitrators' award in any court having jurisdiction. Notwithstanding the foregoing, the Company shall be entitled to seek injunctive or other equitable relief, as contemplated by Section 15 hereof, from any court of competent jurisdiction, without the need to resort to arbitration. Should judicial proceedings be commenced to enforce or carry out this provision or any arbitration award, the prevailing party in such proceedings shall be entitled to reasonable attorneys' fees and costs in addition to other relief. 17. Governing Law. This Agreement shall in all respects be construed according to the laws of the Commonwealth of Virginia, without regard to its conflict of laws principles. 18. Counterparts. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the parties to this Agreement, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 19. Signatures. The parties shall be entitled to rely upon and enforce a facsimile of any authorized signatures as if it were the original. -16- 17 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY: STAR SCIENTIFIC, INC. By: /s/ ROBERT J. DELORENZO [SEAL] ------------------------- Robert J. DeLorenzo, M.D., Ph.D. Chief Executive Officer Address for Notices: 16 South Market Street Petersburg, Virginia 23803 Attention: Mr. Jonnie R. Williams WILLIAMS: /s/ JONNIE R. WILLIAMS [SEAL] ---------------------------- Jonnie R. Williams Address for Notices: ---------------------------- ---------------------------- EXECUTIVE: /s/ PAUL L. PERITO [SEAL] ---------------------------- Paul L. Perito Address for Notices: 7 Newlands Street Chevy Chase, Maryland 20815 with a copy to: Harvey B. Cohen, Esquire Cohen, Gettings & Dunham, P.C. 2200 Wilson Boulevard, Suite 800 Arlington, Virginia 22201 -17- EX-99.B 3 QUALIFIED STOCK OPTION AGREEMENT 1 EXHIBIT B NEITHER THIS AGREEMENT NOR THE SECURITIES REPRESENTED HEREBY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND THE QUALIFICATION REQUIREMENTS UNDER STATE LAW. THE SHARES ISSUABLE HEREUNDER ARE SUBJECT TO RESTRICTIONS ON TRANSFER AS SET FORTH IN THE AMENDED AND RESTATED 1998 STOCK OPTION PLAN, A COPY OF WHICH MAY BE INSPECTED AT THE OFFICES OF THE COMPANY. STAR SCIENTIFIC, INC. AMENDED AND RESTATED 1998 STOCK OPTION PLAN QUALIFIED STOCK OPTION AGREEMENT NOTICE OF QUALIFIED STOCK OPTION GRANT Optionee's Name and Address: Paul L. Perito 7 Newlands Street Chevy Chase, Maryland 20815 You have been granted an option to purchase shares of Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number: 1 Date of Grant: April 27, 1999 Vesting Commencement Date: April 27, 1999 Exercise Price per Share: $1 11/16 Total Number of Shares Granted: 1,000,000 Total Exercise Price: $1,687,500 Type of Option: Qualified Stock Option Term/Expiration Date: March 1, 2009 GRANT OF OPTION: Star Scientific, Inc., a Delaware corporation (the "Company"), hereby grants to Paul L. Perito (the "Optionee") named in the Notice of Stock Option Grant (the "Notice"), an option (this "Option") to purchase the total number of shares of Common Stock (the "Shares") set forth in the Notice, at the exercise price per share set forth in the Notice (the "Exercise Price") subject to stockholder approval of the Plan (as such term is defined below) and the terms, definitions and provisions of the Company's Amended and Restated 1998 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined 2 herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement and Notice. VESTING. This Option shall be fully vested. TERMINATION. This Option shall immediately terminate upon the earlier to occur of (A) March 1, 2009, or (B) the effective date of termination of the Executive Employment Agreement entered into as of April 27, 1999 among the Company, Jonnie R. Williams and Optionee (the "Executive Employment Agreement") by the Company for Cause (as such term is defined in Section 4(c) of the Executive Employment Agreement) or by the Optionee without Good Reason (as such term is defined in Section 4(f) of the Executive Employment Agreement). ACCELERATED TERMINATION AND FORFEITURE OF OPTION; COMPANY PURCHASE RIGHT. On the effective date of termination of the Executive Employment Agreement by the Company for Cause under Section 4(c) of the Executive Employment Agreement or by the Optionee upon voluntary termination under Section 4(e) of the Executive Employment Agreement, as the case may be, (A) this Option shall immediately terminate and revert to the Company (including all vested but unexercised shares subject to this Option); and (B) any and all shares issued upon exercise of this Option on or prior to such effective date of termination or date of notice shall be subject to a repurchase right in favor of the Company at a purchase price equal to the exercise price of such shares. 1. EXERCISE OF OPTION. a. RIGHT TO EXERCISE. This Option shall be exercisable at any time during its term in accordance with the applicable provisions of the Plan and this Option Agreement. In the event of termination of Optionee's status as an Employee, this Option shall be exercisable in accordance with the applicable provisions of the Plan and this Option Agreement. This Option shall be subject to the provisions of Section 6(j) of the Plan relating to the exercisability or termination of this Option in the event of a Change in Control. b. METHOD OF EXERCISE. This Option shall be exercisable only by delivery of an Exercise Notice (attached as Exhibit A) which shall state the election to exercise this Option, the whole number of Shares in respect of which this Option is being exercised, such other representations and agreements as to the holder's investment intent with respect to such Shares and such other provisions as may be required by the Compensation Committee. Such Exercise Notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon receipt by the Company of such written notice accompanied by the Exercise Price. No Shares will be issued pursuant to the exercise of this Option unless such issuance and such exercise shall comply with all Applicable Laws. Assuming such compliance, for income tax purposes, the Shares shall be considered transferred to the Optionee on the date on which this Option is exercised with respect to such Shares. 2 3 c. TAXES. No Shares will be issued to the Optionee or other person pursuant to the exercise of this Option, until the Optionee or other person has made arrangements acceptable to the Compensation Committee for the satisfaction of federal, state and local income and employment tax withholding obligations. 2. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee; provided, however, that such exercise method does not then violate an Applicable Law: a. cash; b. check; c. surrender of shares of Common Stock of the Company (including withholding of Shares otherwise deliverable upon exercise of this Option) which have a Fair Market Value on the date of surrender equal to the Exercise Price of the Shares as to which this Option is being exercised (but only to the extent that such exercise of this Option would not result in an accounting compensation charge with respect to the shares used to pay the exercise price unless otherwise determined by the Compensation Committee); d. delivery of a properly executed Exercise Notice together with such other documentation as the Compensation Committee and the broker, if applicable, shall require to effect an exercise of this Option and delivery to the Company of the Exercise Price; or e. application of such amount of the Optionee's accrued and unpaid salary then outstanding that is equal to the Exercise Price of the Shares as to which this Option is being exercised. 3. RETIREMENT OF OPTIONEE. In the event the Optionee's status as an Employee terminates as a result of the Optionee's retirement but not due to disability, the Optionee may, to the extent otherwise so entitled on the Termination Date, exercise this Option at any time prior to the Term/Expiration Date. 4. DISABILITY OF OPTIONEE. In the event the Optionee's status as an Employee terminates as a result of the Optionee's disability, the Optionee may exercise this Option at any time prior to the Term/Expiration Date. 5. DEATH OF OPTIONEE. In the event the Optionee's status as an Employee terminates as a result of the Optionee's death, this Option may be exercised at any time prior to the Term/Expiration Date. This Option may be exercised by the Optionee's estate or by a person who acquired the right to exercise this Option by bequest or inheritance. 6. TRANSFERABILITY OF OPTION. This Option shall not be transferred by the Optionee otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended (the "Code"), or Title I of the Employee Retirement Income Security Act, as amended, and this Option may be exercised 3 4 during the lifetime of the Optionee only by the Optionee or such Optionee's guardian or legal representative. The terms of this Option shall be binding upon the executors, administrators, heirs and successors of the Optionee. 7. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 8. OPTIONEE'S REPRESENTATIONS. By receipt of this Option, by its execution, and by its exercise in whole or in part, the Optionee represents to the Company that: a. The Optionee acknowledges that both this Option and any Shares purchased upon its exercise are securities, the issuance by the Company of which requires compliance with federal and state securities laws; b. The Optionee acknowledges that these securities are made available to the Optionee only on the condition that the Optionee makes the representations contained in this Section to the Company; c. The Optionee has made a reasonable investigation of the affairs of the Company sufficient to be well informed as to the rights and the value of these securities; d. The Optionee understands that to the extent that the securities have not been registered under the Securities Act of 1933, as amended (the "Act"), or any applicable state law, such securities have been made available to the Optionee in reliance upon one or more specific exemptions contained in the Act and any applicable state law, which may include reliance on Rule 701 promulgated under the Act, if available, or which may depend upon (i) the Optionee's bona fide investment intention in acquiring these securities; (ii) the Optionee's intention with respect to these securities in compliance with federal and state securities laws; (iii) the Optionee having no present intention of selling or transferring any part thereof (recognizing that this Option is not transferable) in violation of applicable federal and state securities laws; and (iv) there being certain restrictions on transfer of the Shares subject to this Option; e. The Optionee understands that, to the extent that the Shares are not registered under the Act, the Shares subject to this Option, in addition to other restrictions on transfer, must be held indefinitely unless subsequently registered under the Act and any applicable state law, or unless an exemption from registration is available; that Rule 144, the usual exemption from registration under the Act, is only available after the satisfaction of certain holding periods and in the presence of a public market for the Shares; that there is no certainty that a public market for the Shares will exist, and that otherwise it will be necessary that the Shares be sold pursuant to another exemption from registration which may be difficult to satisfy; and 4 5 f. The Optionee understands that the certificate representing the Shares will bear a legend prohibiting their transfer in the absence of their registration or an opinion of counsel for the Company that registration is not required. g. The Optionee acknowledges that this Option may not qualify for incentive stock option treatment under the Code or the rules and regulations thereunder and that he has consulted with his own tax counsel regarding the tax treatment of this Option and any Shares issued upon exercise of this Option. 9. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and the Optionee. This Option Agreement is governed by the internal laws of the State of Delaware. 10. HEADINGS. The captions used in this Option are inserted for convenience and shall not be deemed a part of this Option for construction or interpretation. 11. INTERPRETATION. Any dispute regarding the interpretation of this Option Agreement shall be submitted by the Optionee or by the Company forthwith to the Board or the Compensation Committee which administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such dispute by the Board or the Compensation Committee shall be final and binding on all persons. STAR SCIENTIFIC, INC. a Delaware corporation By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- 5 6 The Optionee acknowledges receipt of a copy of the Plan and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option Agreement subject to all of the terms and provisions thereof. The Optionee (i) has reviewed the Plan and this Option Agreement in their entirety, (ii) has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement, (iii) is not relying on the Company for tax advice in connection with the receipt and exercise of this Option, and (iv) fully understands all provisions of this Option Agreement. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Compensation Committee upon any questions arising under the Plan or this Option Agreement. The Optionee further agrees to notify the Company upon any change in the residence address indicated below. Dated as of April 27, 1999 Signed: ------------------------------ PAUL L. PERITO Residence Address: 7 Newlands Street Chevy Chase, Maryland 20815 6 7 EXHIBIT A STAR SCIENTIFIC, INC. AMENDED AND RESTATED 1998 STOCK OPTION PLAN EXERCISE NOTICE Star Scientific, Inc. 16 South Market Street Petersburg, Virginia 23803 Attention: Secretary 1. EXERCISE OF OPTION. Effective as of today, the undersigned (the "Optionee") hereby elects to exercise the Optionee's option to purchase ____________ (_________) shares of the Common Stock (the "Shares") of Star Scientific, Inc. (the "Company") under and pursuant to the Company's Amended and Restated 1998 Stock Option Plan (the "Plan") and the Qualified Stock Option Agreement between the Company and the undersigned dated as of April 27, 1999 (the "Option Agreement"). 2. REPRESENTATIONS OF THE OPTIONEE. The Optionee acknowledges that the Optionee has received, read and understood the Plan and this Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Common Stock subject to this Option, notwithstanding the exercise of this Option. The Company shall issue (or cause to be issued) such stock certificate promptly after this Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 7 of the Plan. 4. DELIVERY OF PAYMENT. The Optionee herewith delivers to the Company the full Exercise Price for the Shares. 5. TAX CONSULTATION. The Optionee understands that the Optionee may suffer adverse tax consequences as a result of the Optionee's purchase or disposition of the Shares. The Optionee represents that the Optionee has consulted with any tax consultants the Optionee deems advisable in connection with the purchase or disposition of the Shares and that the Optionee is not relying on the Company for any tax advice. 6. TAXES. The Optionee agrees to satisfy all applicable federal, state and local income and employment tax withholding obligations and herewith delivers to the Company the full amount of such obligations. 7. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Exercise Notice to single or multiple assignees, and this Exercise Notice shall inure to the benefit of 8 the successors and assigns of the Company. This Exercise Notice shall be binding upon the Optionee and his or her heirs, executors, administrators, successors and assigns. 8. HEADINGS. The captions used in this Exercise Notice are inserted for convenience and shall not be deemed a part of this Exercise Notice for construction or interpretation. 9. INTERPRETATION. Any dispute regarding the interpretation of this Exercise Notice shall be submitted by the Optionee or by the Company forthwith to the Company's Board of Directors or the Compensation Committee which administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board or the Compensation Committee shall be final and binding on all persons. 10. GOVERNING LAW; SEVERABILITY. This Exercise Notice shall be governed by and construed in accordance with the laws of the State of Delaware, excluding that body of law pertaining to conflicts of law. Should any provision of this Exercise Notice be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. 11. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 12. FURTHER INSTRUMENTS. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Exercise Notice. 13. ENTIRE AGREEMENT. The Plan and this Option Agreement are incorporated herein by reference. This Exercise Notice, the Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and the Optionee. Submitted by: Accepted by: OPTIONEE STAR SCIENTIFIC, INC. - ------------------------------ By: PAUL L. PERITO ------------------------------------- 7 Newlands Street Name: Chevy Chase, Maryland 20815 ----------------------------------- Title: ---------------------------------- 16 South Market Street Petersburg, Virginia 23803 2 EX-99.C 4 PROMISSORY NOTE DATED AS OF APRIL 27, 1999 1 EXHIBIT C NOTE $2,000,000.00 Arlington, Virginia April 27, 1999 FOR VALUE RECEIVED, PAUL L. PERITO (the "Maker"), promises to pay to the order of STAR SCIENTIFIC, INC. ("SSI"), at 16 South Market Street, Petersburg, Virginia 23803, or at such other place as the holder hereof may in writing designate, without offset, in immediately available funds, the principal sum of Two Million Dollars and No Cents ($2,000,000.00), plus accrued interest on the unpaid principal balance of this Note at the rate of seven percent (7%) per annum. This Note shall be payable interest only annually on the 27th day of each and every April beginning on April 27, 2000, and continuing until April 27, 2004, when the unpaid principal balance of this Note, plus all accrued interest, charges and fees shall be due and payable in full. Interest shall be calculated on the basis of a 365-day year for the actual number of days outstanding. This Note may be prepaid in full, or in part, at any time without penalty or premium. Maker's liability for repayment of amounts due under this Note shall be limited to fifteen percent (15%) of the original principal balance of this Note. The failure of Maker to make when due any installment or other payment described herein, whether of principal, interest, late charges or other authorized charges due under this Note, which continues for a period of ten (10) days after receipt by Maker of notice thereof from SSI shall be an event of default under this Note and upon such an event of default, the entire unpaid balance of this Note shall, at the option of the holder, become immediately due and payable without notice or demand. The remedies provided in this Note and by any other agreement between the holder and any party are cumulative and not exclusive of any remedies provided by law. No failure or delay on the part of SSI to exercise any right, power or remedy under this Note shall be construed as a waiver of the right to exercise the same or any other right at any time. Maker agrees to pay all costs and expenses, including reasonable attorneys' fees which the holder incurs in collecting this Note. Maker waives presentment, demand, protest and notice of dishonor and all exemptions, whether homestead or otherwise, as to the obligations evidenced by this Note. SSI and any and each of its successors and assigns which holds this Note is herein referred to as the "holder." This Note shall apply to and bind each party's heirs, personal representatives, successors, and assigns and shall inure to the benefit of the holder, its successors and assigns. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to its conflict of laws principles. 2 IN WITNESS WHEREOF, the Maker has executed and delivered this Note as of the date first above written. /s/ PAUL LOUIS PERITO [SEAL] ---------------------------- Paul L. Perito - 2 - -----END PRIVACY-ENHANCED MESSAGE-----