UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission file number 2-93826-W
CHEUNG LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1256615
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
10220-I Old Columbia Road
Columbia, Maryland 21046-1705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 290-5390
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
As of November 22, 1996, 25,206,360 shares of the Registrant's Common
Stock were issued and outstanding. As of November 22, 1996, the aggregate market
value of voting stock held by nonaffiliates of the Registrant was approximately
$7,977,252 based on the average of the closing bid and asked prices for the
Registrant's Common Stock as quoted NASD OTC Bulletin Board.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in this
Report on Form 10-K: None.
PART I
ITEM 1. BUSINESS
The Company
Overview
Cheung Laboratories, Inc. ("CLI" or the "Company") was incorporated in
the State of Maryland in 1982 under the name A.Y. Cheung Associates, Inc. The
Company changed its name to Cheung Laboratories, Inc. on June 31, 1984. CLI is
engaged in developing and marketing minimally invasive medical devices and
systems utilized in the treatment of cancer and in the treatment of
genitourinary diseases associated with benign growth of the prostate in older
males, the most common being benign prostatic hyperplasia ("BPH"). The Company
has recently acquired the right to use technologies which the Company believes
have the potential to significantly enhance the capabilities of both its cancer
and BPH treatment systems.
The Company's current cancer treatment system is the Microfocus 1000,
which is designed to increase the efficacy of existing cancer treatment
modalities, including external beam radiation, interstitial radiation,
brachytherapy and chemotherapy. The Microfocus 1000 utilizes proprietary
microwave technology to preferentially heat the cancerous area to a temperature
sufficient to cause cell death in the cancerous cells. Because healthy cells are
not as susceptible to heat as cancerous cells, they can survive the
thermotherapy. The treatment is currently utilized primarily on surface cancers.
The Microfocus 1000 also utilizes licensed patented technology which the Company
calls Direct Coupling Technology ("DCT"). The DCT allows the Microfocus 1000 to
air cool the body surface while applying the heat. The Microfocus 1000 has Food
and Drug Administration ("FDA") premarket approval ("PMA") and has been
marketed by the Company since 1989.
The Company recently acquired an exclusive license to use three patents
involving a technology known as Adaptive Phased Array ("APA") from the
Massachusetts Institute of Technology ("MIT"). APA technology was originally
developed for use in microwave radar systems for the U.S. Department of Defense
to track targets and to nullify the energy beam from enemy jamming equipment.
The Company is incorporating the APA technology into a device based on the
current Microfocus 1000 which is currently designated as the Microfocus APA (the
"Microfocus APA"). Based upon information currently available, the Company
believes the Microfocus APA will allow focusing microwave heat on target tumors
inside the body and will nullify undesired heat induced in healthy tissue. The
current thermotherapy systems, including the Microfocus 1000, are useful only on
superficial cancers. The Microfocus APA will allow thermotherapy treatment to be
administered to malignant tumors deep within the body such as lung, pancreatic,
breast and prostate cancer. It will be minimally invasive in that one or more
thin catheters will be inserted into the tumor and surrounding area to
facilitate the placement of sensors and a temperature probe. The sensor acts as
a guidance center which generates feedback signals to the system to make
adjustment in order to maintain the focus of heat within the tumor even if a
patient moves his or her position. The temperature probe maintains proper
temperature within the tumor and surrounding areas. The Company is in the
engineering stage to develop the commercial applications of the APA technology.
The Company is required to seek an investigational device exemption ("IDE") from
the FDA to begin patient studies in the United States. Data from such studies
will used to seek PMA which must be received prior to commercial distribution of
the Microfocus APA in the United States.
The Company's BPH systems currently include the Microfocus 800, 500C, 100C
and 100 (collectively "Microfocus System") which are all designed to treat BPH.
The Microfocus 800 is the most current design and is targeted for use by private
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urologists in their offices. The procedure utilizes a non-surgical
catheter-based therapy that incorporates proprietary microwave technology and is
designed to preferentially heat diseased areas of the prostate to a temperature
sufficient to cause cell death in those areas. The Company does not have an IDE
or PMA on the Microfocus System and it is therefore not currently available for
commercial distribution in the United States. The Microfocus System is
manufactured in Canada and is approved for export from Canada.
The Microfocus System is a thermotherapy system which utilizes
transurethral and transrectal applicators to deliver heat directly to diseased
portions of the prostate. CLI has conducted preclinical evaluations on its
Microfocus System and is now waiting for protocol from its principal
investigator to obtain data for the filing of an IDE with the FDA to allow
restricted sales of systems to hospitals in the United States. This procedure is
required to place the Microfocus System in hospitals within the United States
and gather clinical data for safety and efficacy demonstrations. Such
demonstrations are necessary to obtain a PMA from the FDA for commercialization
in the United States. The Microfocus System is currently sold outside of the
United States.
The Company has recently acquired by license patented compression
technology from MMTC, Inc. ("MMTC") which is being incorporated into a device to
be utilized with the catheter used in the Microfocus System. The device consists
of a microwave antenna combined with a balloon mechanism which expands to
compress the walls of the urethra as the prostate is heated. The Company is in
the engineering stage to develop a commercial application of the technology. The
device will require the Company to seek an IDE and PMA from the FDA prior to any
commercial sales of the device in the United States.
The Company's objective is to establish itself as a leader in the
design, development, and marketing of clinically effective minimally-invasive
thermotherapy solutions for the treatment of cancer and for urological
disorders. To date, the Company has focused on marketing current products and,
other than for the Microfocus 1000, has not had the capital to seek governmental
approvals and complete commercialization of its technology. The focus will now
be expanded to integrate new technology recently acquired by the Company to
significantly expand the capabilities and market for its products and increase
efforts for FDA approval of all products. Key elements to achieve the broadened
strategy are to (i) develop products for the oncology market, (ii) focus on the
large and growing urology market, (iii) develop new marketing strategies and
relationships based upon selling services and sharing treatment revenue, (iv)
establish strategic partnerships, (v) maintain technological leadership and
protect technology advantages through patents and (vi) seek early regulatory
approvals in target markets.
Targeted Illnesses
The Company's products and potential products seek to treat cancer and
BPH.
a. Cancer. Historically, cancer has been treated by surgical intervention,
chemotherapy or radiation therapy. The Company's equipment for the treatment of
cancer is based upon a microwave thermotherapy system. Thermotherapy (also known
as hyperthermia), or heat therapy, has been used in medicine since antiquity. In
modern thermotherapy, a controlled heat dose is targeted to treatment sites
using microwave and/or other energy for therapeutic benefits. Thermotherapy is
effective in treating malignant tumors because these tumors cannot effectively
withstand the increased temperatures brought about by the thermotherapy
treatment, while normal tissue can withstand the higher temperatures. Because
cancerous tissue has poor blood circulation, its capacity to dissipate heat is
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less than that of normal tissue. As an adjuvant to surgery, thermotherapy is
used to decrease tumor mass and thereby facilitate its removal surgically. As an
adjuvant to radiation therapy, thermotherapy has been shown to be particularly
effective in killing cells which are resistant to radiation therapy.
Thermotherapy has also been shown to enhance the effectiveness of certain forms
of chemotherapy by killing cells in areas poorly served by the tumor's
circulatory system. In the case of both radiation therapy and chemotherapy,
thermotherapy may, in time, permit lower dosages and, therefore, reduced side
effects.
Thermotherapy can be administered to various anatomical sites through
local, regional or whole body administration. Local thermotherapy treatment may
be invasive (internal) or non-invasive (external). Invasive heating techniques,
in turn, may be interstitial (via implants into body tissue) or intracavitary
(via natural bodily orifice). Regional thermotherapy treatment is primarily
non-invasive, via external beam radiation. Whole body thermotherapy has been
effectively employed as an adjuvant to chemotherapy, but only by practitioners
skilled in the complex techniques which minimize the side affects of the
procedure.
Thermotherapy has been the subject of medical investigation and
commercial interest in the United States, Canada, Europe, and Asia for almost 25
years. Because of a well-documented biological rationale for the use of
thermotherapy as a tumor-shrinking agent, it was originally greeted with great
optimism by oncologists. This optimism was founded on many published reports
that thermotherapy enhanced the effectiveness of radiation by killing cells
exponentially as a function of temperature at temperatures greater than 42
degrees celsius maintained for certain minimal time periods, and selectively
killing S-phase and other radiation-resistant cells. Thermotherapy was also
found to enhance the effectiveness of chemotherapeutic agents through a variety
of mechanisms including increase in drug uptake, inhibition of repair
mechanisms, and temperature-dependent increases in drug activity.
The results of early clinical trials in the United States, however,
have been disappointing due to the lack of effective equipment. Most of the
equipment used in the past to heat the tumors was crudely designed. In many
instances, the equipment was thought to be able to heat large deep-seated tumors
when only small superficial tumors could in fact be heated.
Due to the initial hope associated with the use of thermotherapy to
treat cancer, many companies attempted to develop thermotherapy systems. Early
developers of thermotherapy equipment conducted phase III randomized studies in
the United States. These trials became known as the Radiation Therapy Oncology
Group 81-04 study (the "RTOG Study"). The results of the RTOG Study published in
1989 showed no clear treatment benefits when combining thermotherapy and
radiation therapy as compared to the radiation therapy alone. These study
results had a negative effect on thermotherapy use and research. Until the
recent publication of numerous European clinical trials reporting the
effectiveness of the thermotherapy as an adjuvant therapy to radiation, the RTOG
Study proved to be a difficult barrier to companies attempting to win market
acceptance for their FDA- approved thermotherapy devices. Despite the negative
RTOG Study, thermotherapy is currently used on a limited basis at oncology
centers in the United States, primarily for the treatment of superficial cancer.
In contrast to the use of thermotherapy in the United States, the use
of thermotherapy in Europe and Asia is more widespread both commercially and
clinically. Since 1993, numerous randomized clinical trials have reported that:
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o thermotherapy combined with radiation therapy doubles the
tumor complete response compared to radiation therapy alone;
and
o thermotherapy combined with chemotherapy doubles the tumor
complete response compared with chemotherapy alone.
Unlike radiation therapy or chemotherapy, which are highly toxic treatment
modalities, thermotherapy is relatively innocuous. For this reason,
thermoenhanced combination therapies are associated with little or no additional
patient morbidity or side effects. Nevertheless, the fundamental shortcoming of
existing thermotherapy equipment is the same everywhere: the inability to
achieve focused heating of deep tumors while sparing adjacent and intervening
normal tissue and skin. Despite 25 years of effort by engineers and clinicians,
the problem of targeting the cancerous tumor with the therapeutic agent (heat)
has not advanced far beyond what was possible at the beginning of the
thermotherapy "era." For this reason, the Company believes that the combination
of the thermotherapy treatment and the APA focusing technology for heating of
deep tumors constitutes a significant advance in the use of thermotherapy as a
cancer treatment.
b. Benign Prostatic Hyperplasia. BPH is a non-cancerous urological disease in
which the prostate enlarges and constricts the urethra. Symptoms associated with
BPH affect the quality of life of millions of sufferers worldwide and BPH can
lead to irreversible bladder or kidney damage. The prostate is a walnut-size
gland surrounding the male urethra that produces seminal fluid and plays a key
role in sperm preservation and transportation. As the prostate expands, it
compresses or constricts the urethra, thereby restricting the normal passage of
urine. This restriction of the urethra may require a patient to exert excessive
bladder pressure to urinate. Since the urination process is one of the body's
primary means of cleansing impurities, the inability to urinate adequately
increases the possibility of infection and bladder and kidney damage.
Because BPH is an age-related disorder, its incidence increases as the
population ages. As many as 27 million men between the age of 50 and 80 in the
United States alone suffer from BPH. As the population continues to age, the
number will continue to increase dramatically. Current estimates are that by the
age of 55, fifty percent of all men, and by 80, eighty percent of all men will
have BPH.
Like cancer, BPH historically has been treated by surgical intervention
or by drug therapy. As BPH progresses, the urethra passing through the prostate
constricts making urination difficult. The primary surgical treatment for BPH is
transurethral resection of the prostate ("TURP"), a procedure in which the
prostatic urethra and surrounding diseased tissue in the prostate are trimmed,
thereby widening the urethral channel for urine flow. While the TURP procedure
typically has been considered the most effective treatment available, the
procedure has many shortcomings which undermine its value. A significant number
of patients who undergo TURP encounter significant complications. These
complications can include painful urination, infection, impotence, incontinence
and excessive bleeding. Furthermore, the cost of the TURP procedure is also very
high, ranging from $8,000 to $12,000. Medicare alone spent $1 billion to cover
TURP procedures last year. This high cost also fails to reflect the cost of lost
work time and reduction in quality of life. Finally, the TURP procedure is time
consuming, requiring hospitalization for up to three days.
Other less radical surgical procedures are available in addition to the
TURP procedure. Interstitial RF Therapy and Laser Therapies employ concentrated
radiofrequency waves or laser radiation instead of a surgical knife. There is
minimal bleeding and damage to the urethra associated with these procedures.
However, the side effects and costs associated with surgery still remain.
5
Drug therapy has emerged as an alternative to surgery in the last
several years. There are several drugs available for BPH treatment, the two most
widely prescribed drugs being Hytrin and Proscar. Hytrin works by relaxing
certain involuntary muscles surrounding the urethra, thereby easing urinary flow
and Proscar is intended to actually shrink the enlarged gland. Drugs, however,
offer only modest relief and cost hundreds of dollars per year. In short,
neither the surgical nor the medicinal treatments available for BPH provide
satisfactory, cost-effective solutions to BPH.
With the limited effectiveness of BPH drugs and the cost and potential
side effects associated with surgery, the Company believes thermotherapy
provides a better alternative for the treatment of BPH. The Company further
believes the percentage of men with moderate to severe symptoms of the disease
who seek treatment will increase in the future as a result of increased consumer
knowledge of the disease and the development of treatments with less severe
complications and side effects than traditional treatments.
Cheung Laboratories Approach.
Cancer Treatment. The Company has received PMA from FDA for the use of
the Microfocus 1000 as an adjuvant to radiation therapy for surface and
subsurface cancer. The Company's clinical studies submitted to the FDA indicate
a better than 86% positive response rate which is the best among all competing
systems. However, the Microfocus 1000 still suffers from the limitations of
inability to focus deep and surface hot spots at undesirable locations. The
Company intends to utilize the licensed APA technology to improve the
performance of the Microfocus 1000. With added hardware and software, the
Company is in the development stage of a thermotherapy system capable of
focusing accurately and delivering repeatable microwave energy to induce
hyperthermia without undesirable hot spots within surface and subsurface tumors
such as breast tumors. With additional antenna and geometric configuration
design, and frequency modification, the Company hopes to develop thermotherapy
systems for deep seated tumors such as those located in the lung, prostate,
rectum, liver and pancreas. The Company now possesses the technology which it
believes will lead to the capability to develop and commercialize the next
generation of thermotherapy equipment which is capable of overcoming the
previous limitations of current thermotherapy systems, thus allowing the
realization of minimally invasive, non-toxic and side effect free treatment to
cancer.
BPH Treatment. The Microfocus patented technology further enhances the
therapeutic capabilities of the treatment by providing combined therapy of
compression and heat. Preclinical studies in phantoms and animal tissues
indicate the technology will not only provide long term clinical benefits as in
the case of other BPH systems but also immediate symptomatic relief which is
also necessary for most BPH patients.
Business Strategy
The Company's mission is to develop effective and clinically-practical
means of applying heat for therapeutic purposes. The Company's initial objective
will be the design, development and marketing of microwave-based treatments for
urological disorders, cancer and other diseases. The Company believes its depth
of experience and its relationship with third parties in technological,
manufacturing and marketing matters position the Company to exploit this market.
To meet this objective, the Company has identified the following actions upon
which the Company will focus its efforts:
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Enhancement of Benign Prostatic Treatments.
The technology licensed from MMTC allows the design of a catheter which
combines tissue compression with thermotherapy for BPH treatment. Such a
combination therapy is believed to be synergistically beneficial clinically
since compression may provide immediate urine obstruction relief and
thermotherapy produces long term symptom relief control resulting from shrinkage
of the benign growth. With this new technology, the Company believes that it
will be able to offer a new BPH treatment system superior to other commercially
available BPH thermotherapy devices.
Development of Specific Cancer Treatments.
The Microfocus APA is in the design stage and will be a patented breast
cancer thermotherapy system for the purpose of heating both primary ductal
tumors in compressed breast tissue as well as recurrent breast cancer (chest
wall) tumors. The compressed breast tissue geometry is desirable in a
thermotherapy treatment for four primary reasons:
o compressing the breast tissue to the range of 6 to 8
centimeters requires less penetration for microwaves;
o breast compression to a flat geometry allows a single
applicator design to treat a wide range of breast sizes;
o standard x-ray imaging techniques can be used with the breast
compression to accurately locate the tumor; and
o patient motion effects which could degrade the thermotherapy
treatment are minimized.
The amount of breast compression can be varied to accommodate patient
tolerance. When completed, the Company anticipates that the standard
breast-compression thermotherapy system will feature a phased array system using
dual-opposed applicators. If marketing studies determine that compression is
undesirable, the Company can design a somewhat more costly four-channel phased
array system that will deliver deep thermotherapy using an adaptive breast
cradle to immobilize but not compress the breast.
The Microfocus APA will later be modified to incorporate additional
patented technology licensed from MIT. This additional technology allows
deep-heating thermotherapy. A prototype of this system involving a monopole
annular phased array which would surround the patient is presently planned. The
adaptive phased array will be used to treat deep-seated tumors in organs like
prostate, liver, pancreas, rectum, and cervix. Rings of different sizes will
permit thermotherapy for other cancer sites such as the head, neck and limbs.
In addition, the APA technology will also allow the development of an
externally focused minimally invasive treatment system for prostate cancer.
Develop Technological Partnerships.
In addition to collaboration with MIT and MMTC, the Company is working
with, or anticipates working with various international and domestic
institutions to assist in the development and testing of new Microfocus
products. There is no assurance that such partnerships will develop.
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Marketing.
The Company intends to create a marketing and sales strategy to allow
it to become the market leader in the business of microwave thermotherapy
systems for treatment of cancer, BPH and other diseases. The Company will seek
to establish itself as the technology leader in the thermotherapy business and
form strategic marketing alliances with other partners to implement its
marketing and sales plan worldwide.
The Company believes its licensed proprietary technology will allow the
instrumentation of a new line of thermotherapy systems which will provide
significant benefits over existing products. The Company has retained a product
design firm in Chicago to coordinate the engineering of initial prototypes and
manufacturing of the final products. Working closely with clinicians, scientists
and the Company, the product designers will construct working prototypes for
clinical trials. The Company anticipates that such prototypes will result in
enhanced thermotherapy systems for manufacturing and marketing.
The Company further believes that with its licensed technologies, the
Company can develop clinical thermotherapy treatment systems capable of offering
minimally-invasive, effective non-toxic and side effect free treatment which
targets only the tumors in patients suffering from cancer, BPH and other
diseases. The Company is formulating a sale and distribution strategy based on
placements of systems in hospitals and clinics in order to derive profit from
sharing of patient treatment revenue.
In the cancer treatment market, the Company is developing the concept
of thermoenhanced combination treatment procedures which combine thermotherapy
with radiation therapy and/or chemotherapy. Thermotherapy treatment is used to
improve the efficacy of these existing treatments while decreasing system
toxicity. The Company plans to place Microfocus 1000 systems, and when available
Microfocus APA systems, in treatment centers at nominal costs to the centers
themselves and to share in treatment revenue.
The Company intends to re-engineer its Microfocus System to include the
MMTC technology, to create a second generation, versatile and low cost BPH
treatment system with the added capability of balloon compression and
minimally-invasive temperature sensing. With these new technologies, the Company
believes it can obtain governmental approval which will allow it to compete in
the new BPH treatment market recently created as a result of the FDA's approval
of the first microwave BPH treatment device, as well as the growing market of
prostate cancer treatment. The Company plans to market its lines of prostate
treatment systems by forming individual joint ventures with private
entrepreneurs and urologists to operate prostate treatment clinics. The Company
intends to derive most of its revenue from sharing treatment revenue rather than
from the initial sale of the systems.
Cheung Laboratories Product Description and Technology.
Cancer Treatment.
Microfocus 1000
The Company's Microfocus 1000 is manufactured at the Company's
headquarters from various components provided by suppliers. Some of the
components are modified by the Company or by the manufacturer at the Company's
direction. The Company considers there to be proprietary trade secret knowledge
involved in the manufacture of some of the components of the Microfocus 1000 and
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in the assembly of the components to form the Microfocus 1000. The Company has
taken what it considers appropriate steps to safeguard this proprietary
information. Other than its rights to use patents under license, the Company
does not have patents on any of the components of the Microfocus 1000 or on the
complete Microfocus 1000.
Competitors of the Company, particularly BSD Medical Corporation and
Labthermics Technologies, Inc., have obtained a number of patents on
thermotherapy products. The Company does not believe that the Microfocus 1000
infringes on any valid patents granted to others.
The Company expects to rely upon trade secrets, unpatented proprietary
know-how and technological innovation in maintaining the competitive position of
its Microfocus 1000. The Company intends to apply for patent protection for any
patentable product it may develop. The Company believes it possesses significant
proprietary knowledge relating to its hardware and software that are utilized in
connection with the Microfocus 1000. However, there can be no assurance that
competitors may not independently develop similar technology or that the Company
will be able to maintain the secrecy of its proprietary information. There can
also be no assurance that competitors will not claim that the Microfocus 1000 or
another Company product infringes on a patent held by such competitor. If an
owner of a patent were to assert an infringement of its patent(s) against the
Company, and the Company were ultimately determined to be infringing a valid and
enforceable patent, and if a license could not be obtained on a reasonable basis
from such patent owner or such products could not be re-designed so that they no
longer infringed the other patent(s), there could be a material adverse effect
on the Company's business.
The Microfocus 1000 has FDA premarket approval and has been marketed
since 1989. For the year ended September 30, 1996, the Company sold 0 Microfocus
1000 systems. Since obtaining the PMA, the Company has sold over 35 Microfocus
1000 systems worldwide.
Prostatic Treatment.
BPH Systems
CLI designed the Microfocus System for the treatment of BPH
("Microfocus Systems"). The four versions of the Microfocus System are the
Microfocus Models 800, 500C, 100C and 100. The Microfocus System is presently
being manufactured via a joint venture in Canada and sold in Europe and the Far
East. For the year ended September 30, 1996 the Company sold four (4) Microfocus
Systems, with sales from inception of the Company to date totalling over 75
Microfocus Systems.
CLI is conducting preclinical evaluations on its BPH systems to obtain
data for the filing of an IDE (Investigational Device Exemption) with the FDA to
allow restricted sales of systems to hospitals in the USA. The Company is
recently received the protocol from its principal investigator which will allow
the Company to proceed with its FDA approval efforts. This procedure is required
to place the BPH system in United States hospitals and gather clinical data for
safety and efficacy demonstrations. Such demonstrations are necessary to obtain
a PMA from the FDA for commercialization in the United States.
Patents and Proprietary Rights
The Company owns no patents. The Company has under license one U.S. patent
on the Microfocus 1000, three U.S. patents on the technology underlying the
Microfocus APA and one U.S. patent on the technology underlying the improved BPH
9
treatment system. The United States patents licensed to the Company claim
methods and devices which the Company believes are critical to providing safe
and efficacious treatment for cancer and BPH. One of the MIT patents as well as
the BPH patent also have or will have patent protection in a number of foreign
jurisdictions, including Canada and selected European nations.
The patents and the rights under which they are asserted are as
follows:
1. DCT Technology. The Company received an exclusive license to the use
of the DCT technology from Haim Bither Cancer Institute ("H.B.C.I."). The DCT
technology allows the Company to air cool the area being treated with
microwaves. The Company has no further obligations to maintain or preserve its
rights to use this patent. The Patent expires on May 31, 1999.
2. APA Technology. On June 12, 1996, the Company entered into a Patent
License Agreement with the Massachusetts Institute of Technology ("MIT"). The
terms of the license agreement have since been modified. Pursuant to the
license, the Company has the exclusive right to use the technology in breast,
head and neck and deep seated thermotherapy of other organs. Assuming certain
milestone criteria are met, the license will not expire until 10 years after the
first annual sale or use of the licensed technology or June 1, 2008, unless
further extended. The Company is obligated to pay a royalty to MIT based
principally upon treatment revenue.
3. BPH Balloon Therapy. On August 23, 1996 the Company entered into a
License Agreement with MMTC, Inc. ("MMTC"). Pursuant to the license, the Company
has the exclusive worldwide license to use microwave balloon catheters. The
license is perpetual unless certain events of default occur. The Company has
paid and is obligated to pay royalties and licensing fees. Failure to comply
with the payment obligations will allow MMTC to cancel the license.
There can be no assurance, however, that the patents being licensed
will offer any degree of protection from competitors. There can be no assurance
that any of the licensed patents or applications will not be challenged,
invalidated or circumvented in the future. In addition, there can be no
assurance that competitors, many of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell products utilizing the patented technologies in the
United States or in international markets.
Other companies have developed or are in the process of developing
medical methods and devices to treat BPH and cancer with microwave energy.
Several companies have applied for, and in some cases received, patents related
to such medical methods and devices. The Company has not received any notices of
infringement from any other company.
The Company also relies on trade secrets and proprietary know-how,
which it seeks to protect, in part, through proprietary information agreements
with employees, consultants and other parties. The Company's proprietary
information agreements with its employees and most of its consultants contain
industry standard provisions requiring such individuals to assign to the
Company, without additional consideration, any inventions conceived or reduced
to practice while retained by the Company, subject to customary exceptions. The
Company's officers and other key employees also agree not to compete with the
Company for a period following termination. There can be no assurance that
proprietary information or non-compete agreements with employees, consultants
10
and others will not be breached, that the Company would have adequate remedies
for any breach, or that third parties will not nonetheless gain access to the
Company's technology.
Third Party Reimbursement
The Company believes that third party reimbursement will be essential
to commercial acceptance of the Microfocus 1000, the Microfocus APA and
Microfocus System procedures, and that overall cost effectiveness and physician
advocacy will be keys to obtaining such reimbursement. The Company believes that
the procedure can be performed for substantially lower total cost than surgical
treatments for BPH or cancer or continuous drug therapy. Consequently, the
Company believes that third party payers seeking procedures that provide quality
clinical outcomes at lower cost will help drive acceptance of the Company's
products.
The Company's strategy for obtaining reimbursement in the United States
is to obtain appropriate reimbursement codes and perform studies in conjunction
with clinical studies to establish the efficacy and cost effectiveness of the
its procedures as compared to surgical and drug treatments for BPH and cancer.
The Company plans to use this information when approaching health care payers to
obtain reimbursement authorizations. The Company also plans to work closely with
the medical community to establish an attractive relative value and
reimbursement level for the Microfocus procedure.
With the increasing use of managed care and capitation as a means to
control health care costs in the United States, the Company believes that
physicians may view the Company's products as a tool to efficaciously treat BPH
and cancer patients at a lower total cost, thus providing them with a
competitive advantage when negotiating managed care contracts. This is
especially important in the United States, where a significant portion of the
aging Medicare population is moving into a managed care system.
Following regulatory approval, physicians using the Company's Microfocus
1000 or, when completed, the Microfocus APA to treat cancer and the Microfocus
System to treat BPH will submit insurance claims for reimbursement for the
procedure to third party payers, such as Medicare carriers, Medicaid carriers,
Health Maintenance Organizations ("HMOs") and private insurers. In the United
States and in international markets, third party reimbursement is generally
available for existing therapies used to treat cancer and BPH. The availability
and level of reimbursement from such payors for the use of the Company's
Microfocus 1000 and the Microfocus System will be a significant factor in the
Company's ability to commercialize its cancer and BPH systems. The Company
believes that new regulations regarding third party reimbursement for certain
investigational devices in the United States will allow it to pursue early
reimbursement from Medicare with individual clinical sites prior to receiving
FDA approval. However, the Company believes that FDA approval will be necessary
to obtain a national coverage determination from Medicare. The national coverage
determination for third party reimbursement will depend on the determination of
the United States Health Care Financing Administration ("HCFA"), which
establishes national coverage policies for Medicare carriers, including the
amount to be reimbursed, for coverage of claims submitted for reimbursement
related to specific procedures. Private insurance companies and HMOs make their
own determinations regarding coverage and reimbursement based upon "usual and
customary" fees. Reimbursement experience with a particular third party payor
does not reflect a formal reimbursement determination by the third party payor.
There can be no assurance that the Company will receive favorable coding,
11
coverage and reimbursement determinations for its Microfocus System, Microfocus
1000, and when available, Microfocus APA from Medicare and other payers or that
amounts reimbursed to physicians for performing its procedure will be sufficient
to encourage physicians to use the Company's products.
Internationally, reimbursement approvals for the Microfocus procedure
will be sought on an individual country basis. Some international countries
currently have established reimbursement authorizations for transurethral
microwave therapy. Clinical studies and physician advocacy will be used to
support reimbursement requests in countries where there is currently no
reimbursement for such procedures.
Manufacturing
The Microfocus 1000 and the Microfocus System were designed to be
manufactured under FDA approved Good Manufacturing Procedures ("GMP").
Historically, the Company has manufactured and assembled the Microfocus 1000 in
its Columbia, Maryland facility and its Microfocus System at the site of its
joint venture in Canada. While the Microfocus System will continue to be
manufactured at the current location in Canada, the Microfocus 1000 (and
successor products) will be manufactured by third party contractors. The Company
intends to manufacture the Microfocus APA in the same manner as the Microfocus
1000.
The Company's products are designed and manufactured with proprietary
know how the Company has developed over its history. Proprietary know how is
required to manufacture the subassemblies including, but not limited to, the
solid-state microwave generators, cooling units, microwave applicators and
control algorithms that run the systems. All third party contractors will be
required to sign agreements to protect any disclosed proprietary know how.
Research and Development
The Company continues to refine and upgrade the components of its
Microfocus 1000 and Microfocus System and to pursue the use of thermotherapy in
the treatment of various diseases. The Company also has been successful in
developing relationships with outside parties for research and development.
The APA technology recently licensed by the Company was originally
developed for phased array radar applications. MIT and the Company have worked
together over the past two years in the development of a comprehensive phased
array thermotherapy system using prototypes of various array applicators
developed for various tumor sites. Preclinical evaluations in test phantoms have
demonstrated that one configuration of this system is suitable for the heating
of tumors in breast tissue. Further developments will lead to other
configurations most suitable for treatment of prostate, brain, liver, lung and
other deep seated tumors.
The Company intends to initiate clinical evaluations of the APA
technology in the United Kingdom at a cancer research center. The Company is
presently negotiating a clinical study research agreement with the institution.
Clinical trials in the United States will begin after the receipt of an IDE from
the FDA.
The MMTC technology recently licensed by the Company is a bimodal
treatment which the Company believes will yield a better and faster response
rate while using lower and safer amounts of power. Based upon initial review of
the technology, the Company believes the technology can easily be incorporated
into the current Microfocus 800 system. Clinical trials are planned for early
1997.
12
In September 1996, the Company retained the engineering firm of Herbst
LaZar Bell Inc. ("HLB") to assist in the adaptation of the APA technology into
the Microfocus APA. Under the agreement with HLB, the APA technology will be
used to develop a prototype Microfocus APA which will be utilized in treating
breast cancer. The engineering will focus on integrating the Microfocus 1000
with the Microfocus APA and updating software. The Company will pay HLB 55% of
its standard fee rate and the balance of any fees will be paid in shares of
Common Stock at a value of $1.25 per share.
Competition
Thermotherapy For Cancer
The Company believes that there are at least six other domestic firms,
as well as a number of foreign firms, producing, or designing and intending to
produce, thermotherapy systems to treat cancer. Of those firms, at least four
have obtained PMA for their machines and several have obtained IDE for their
machines. Some, and possibly all, of those firms have greater resources than
those which the Company now has or may reasonably be expected to have in the
near future. Other firms not presently in competition with the Company may
decide to produce thermotherapy systems which compete with those of the Company.
At least some of those firms may reasonably be expected to have resources
greater than those of the Company. As acceptance of thermotherapy as a cancer
treatment increases, the Company expects that the competition will also
increase. There can be no assurance that the Company will be able to
successfully meet such competition. In addition, the thermotherapy industry is
one of rapid technological change. There can be no assurance that systems or
technologies superior to that of the Company will not be produced.
The two major competitors of the Company for the Microfocus 1000 are
BSD Medical Corporation in Salt Lake City, Utah ("BSD") and Labthermics
Technology, Inc. in Champaign, Illinois ("Labthermics"), each of which
manufactures thermotherapy machines competitive with the Company's Microfocus
1000. The major factors in competition for sales of thermotherapy equipment are
product performance, product service and product cost. The product performance
of the Company's Microfocus 1000 in PMA clinical trials has been superior to the
performance of competing machines. The system manufactured by BSD uses microwave
technology. Labthermics uses ultrasound technology to heat the cancer site. As
previously mentioned, the Company received PMA approval of its Microfocus 1000
on November 17, 1989.
BSD received its FDA approval in 1983 and was allowed to begin
marketing its system at that time. To date, BSD has sold approximately 200
thermotherapy systems worldwide. As of September 30, 1996 with the Company's
limited marketing efforts, 35 of the Microfocus 1000 have been sold worldwide.
Therefore, BSD has a much larger presence in the thermotherapy market than has
the Company.
As thermotherapy manufacturers penetrate the market, there will be an
increase in price competition. There are signs that price competition is
actively taking place in the current market. The Company feels that its business
strategy and low production costs for its Microfocus 1000 will enable it to be
very price competitive.
Service in the thermotherapy business includes maintenance of the
thermotherapy machines to minimize downtime as well as training for personnel
who will utilize the machines to render treatment to patients. The Company has
warranty and service policies which are competitive within the industry.
13
The Company's warranty for the Microfocus 1000 is for a period of 12 months and
the Company offers a service policy following expiration of the warranty. These
terms are substantially similar to the warranties and service policies offered
by competitors. The Company provides three to four days of training for the
personnel who will be operating each machine that the Company sells. The Company
also provides training programs at its facility in Maryland for doctors who
desire to receive training on the Company's Microfocus 1000. Both training
courses are helpful in marketing the Company's Microfocus 1000, because users
who become familiar with one machine have a reluctance to switch to another
machine which would require additional training. For this reason, the Company
will seek to increase the frequency of its training sessions given at its
facility in Maryland. BSD provides a similar training course on a quarterly
basis at its facility in Salt Lake City.
Thermotherapy For Prostatic Diseases
The thermotherapy industry is highly competitive. Along with
technological developments affecting the equipment, increasing usage of
thermotherapy for other medical purposes is also developing. The latest and
potentially largest market is the use of thermotherapy for the treatment of
prostatic diseases, namely the urethral obstruction caused by Benign Prostatic
Hyperplasia (BPH). Due to the increased potential of this marketplace, there
will be a greater number of domestic and international companies entering this
field. The Company believes there are as many as 10 companies in the USA and as
many as 15 companies worldwide which are planning or already active in this
marketplace.
On May 7, 1996, the FDA for the first time approved a microwave based
BPH treatment device manufactured by EDAP Technomed, Inc. ("Technomed"). This
approval should enhance market acceptance of microwave BPH treatment systems
both in the United States and abroad but gives Technomed a competitive advantage
of being first to the market in the United States. Currently, the Company
manufactures and sells its BPH treatment systems outside of the United States
through its Canadian facility. The Company's BPH systems are not approved by the
FDA for sale in the United States. However, the Company intends to apply for FDA
approval in the near future.
With the increased number of companies in the BPH thermotherapy
treatment market, many of those companies have greater resources than the
companies already in the field of thermotherapy treatment for cancer. Large
global companies such as Dornier, Olympus and EDAP Technomed International
("Technomed") will spend large amounts of resources to market and develop the
BPH industry. In addition to the above companies, the following are companies
offering BPH thermotherapy systems in the worldwide marketplace: BSD, Direx
Medical, Technomatix (Primus), Lund Science, Quantum, GENEMED, Bruker, Urologix,
and Meditherm. There are several other companies which have not yet brought
their products to the international marketplace. Presently, Technomed is
considered the market leader with its system called the Prostatron. The
Prostatron unit is a high cost system which sells for approximately U.S.
$500,000. Other companies are marketing their systems in the range of US
$100,000 to $300,000. The Company is manufacturing its line of Microfocus BPH
Systems at its facility in Canada and is presently offering the systems in the
range of U.S. $50,000 to $150,000. To date, it is believed there are over 600
installed BPH Systems worldwide of which Technomed and Direx have the largest
share of approximately 30% combined. There are approximately 75 Microfocus BPH
Systems installed worldwide.
14
Government Regulation
United States Regulation. In the United States, the FDA regulates the
sale and use of medical devices, which include the Company's thermotherapy
systems for both cancer and BPH. A company introducing a medical device in the
United States must go through a two step process. The company must first obtain
an Investigational Device Exemption ("IDE") permit from the FDA. In IDE is
granted upon the manufacturer adequately demonstrating the safety of the device
for patient use. Receipt of the IDE allows the use of the device on patients for
the purpose of obtaining efficacy confirmation. A PMA is granted upon
compilation of sufficient clinical data to establish efficacy for the indicated
use of the device. This process is not only time consuming but is also
expensive. Obtaining PMA is a significant barrier to entry into the
thermotherapy market. Firms which lack PMA face significant impediments to the
successful marketing of their thermotherapy equipment, because under applicable
regulations customers can obtain reimbursement from Medicare, Medicaid and
health insurers only for treatment with products that have PMA.
CLI has an IDE and PMA for the Microfocus 1000. The Company does not
have an IDE on the Microfocus System.
The Federal Communications Commission (the "FCC") regulates the
frequencies of microwave and radio-frequency emissions from medical and other
types of equipment to prevent interference with commercial and governmental
communications networks. The frequency of 915 MHZ has been approved by the FCC
for medical applications and machines utilizing that frequency do not require
shielding to prevent interference with communications. The Microfocus 1000 and
the Microfocus System utilize the 915 MHZ frequency.
In December 1984, the Health Care Financing Administration ("HCFA")
approved reimbursement under Medicare and Medicaid for thermotherapy treatment
when used in conjunction with radiation therapy for the treatment of surface and
subsurface tumors. At this time, most of the large medical insurance carriers in
the United States have approved reimbursement for such thermotherapy treatment
under their health policies. Thermotherapy treatment administered using
equipment which has received PMA is eligible for such reimbursement.
The Company and its facilities are subject to inspection by the FDA at
any time to insure compliance with FDA regulations in the production and sale of
medical products. Failure to comply or maintain compliance with those
regulations could have a material adverse effect upon the Company's operations.
The Company believes that it is substantially in compliance with FDA regulations
governing the manufacturing and marketing of medical devices.
Foreign Regulation. Sales of medical devices outside of the United
States are subject to United States export requirements and foreign regulatory
requirements. Export sales of investigational devices that are subject to PMA
requirements and have not received FDA marketing approval generally may be
subject to FDA export permit requirements under the Federal Food, Drug and
Cosmetic Act ("FDC Act") depending upon, among other things, the purpose of the
export (investigational or commercial) and on whether the device has valid
marketing authorization in a country listed in the FDA Export Reform and
Enhancement Act of 1996. In order to obtain such a permit, when required, the
Company must provide the FDA with documentation from the medical device
regulatory authority of the country in which the purchaser is located, stating
that the device has the approval of the country. In addition, the FDA must find
that exportation of the device is not contrary to the public health and safety
of the country in order for the Company to obtain the permit.
15
The Company currently sells products in selected countries in Asia and
Europe. The registration requirements within these countries is the sole
responsibility of the distributors in each of these countries. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.
The Company expects to receive approvals for marketing in a number of countries
outside the United States prior to the time that it will be able to market its
products in the United States. The timing for such approvals is not known.
Product Liability and Insurance
The business of the Company entails the risk of product liability
claims. Although the Company has not experienced any product liability claims to
date, any such claims could have an adverse impact on the Company. In the past
and currently, the Company has not maintained product liability insurance. The
Company is currently in the process of securing product liability insurance in
the amount of $5,000,000. The Company evaluates its insurance requirements on an
ongoing basis. There can be no assurance that product liability claims will be
covered by such insurance, will not exceed such insurance coverage limits or
that such insurance will be available on commercially reasonable terms or at
all.
Terminated Business Opportunities
Due to the slow development of the market for thermotherapy products,
the Company sought to develop other business opportunities to provide a quicker
and greater return to the Company's shareholders. With the recent acquisition of
new technology, the Company believes that its best opportunity for long-term
growth is to focus its activities on its core business--thermotherapy products.
Accordingly, the Company has terminated, or is terminating, the joint ventures
and/or business opportunities which do not focus on or enhance the core
business. The following are assets and projects which have been terminated
during 1996:
Aestar Fine Chemical Company. The Company has previously disclosed the
investment in the Company by Mr. Gao Yu Wen of assets valued at approximately
$10,000,000 in exchange for 20,000,000 shares of Common Stock of the Company. As
part of the investment of Mr. Gao in the Company, Mr. Gao transferred to the
Company a 9.5% interest in the Aestar Fine Chemical Incorporation Limited
Company ("Aestar"). Aestar is a corporation organized under the laws of the
People's Republic of China. The Company originally looked to this interest in
Aestar as a significant source of dividend income and as a vehicle to facilitate
joint ventures for the manufacturing and sale of cosmetics in China.
On June 8, 1996, the parties entered into a Redemption Agreement by
which the Company agreed to repurchase from Mr. Gao 16,000,000 shares of the
Company's Common Stock in consideration for the Company's 9.5% interest in
Aestar and to repurchase an additional 4,000,000 shares of Common Stock at a
price of $.55 per shares for a total of $2.2 million. Under the terms of the
Redemption Agreement, the entire 20,000,000 shares were retained by Mr. Gao to
secure the payment of the $2.2 million. On October 23, 1996, the Company and Mr.
Gao, through his representatives, executed an Amendment by which Mr. Gao agreed
(i) to immediately deliver to the Company the 16,000,000 shares of Common Stock;
(ii) to give the Company an additional one month to purchase the remaining
4,000,000 shares; and (iii) to reduce the purchase price to $2,160,000. Pursuant
to the terms of the Amendment, on October 23, 1996, Mr. Gao's representatives
delivered duly executed stock certificates and stock powers for the 16,000,000
16
shares of Common Stock which stock has been cancelled on the records of the
Company. This represents a repurchase by the Company of nearly forty percent
(40%) of its issued and outstanding stock.
Eastwell Management Services Limited. The Company entered into
negotiations to acquire 100% of the outstanding stock of Asia-Pacific
Communication Corporation Limited, formerly known as Novatel, Asia ("APC"), from
Eastwell Management Services Limited ("Eastwell") in exchange for 24 million
shares of the Company's Common Stock and warrants to acquire another five
percent (5%) interest in the Company. The proposed terms of the agreement were
set forth in an Acquisition Agreement, dated March, 1994 (the "Acquisition
Agreement"). APC (which was formerly known as Novatel, Asia) is in the business
of manufacturing telecommunications equipment and providing telecommunications
services. The consummation of the agreement with Eastwell was contingent upon
satisfaction of certain conditions precedent. Because those conditions were not
satisfied, the Company elected not to proceed with the agreement with Eastwell.
There is no written agreement terminating the contemplated transaction with
Eastwell.
Rainbow Ball Development Limited. On October 11, 1993, the Company
entered into an agreement with Mr. Carlton Poon ("Poon") whereby Poon agreed to
provide approximately $125,000 U.S. to fund a joint venture between the Company
and Poon named Rainbow Ball Development Limited ("Rainbow Ball"). Rainbow Ball
was formed to develop, manufacture and market certain medical imaging technology
and a portable x-ray device. After Mr. Poon funded the $125,000 the parties
decided not to proceed with the joint venture. By means of a Termination
Agreement, dated August 28, 1996, the parties terminated the joint venture.
Under the terms of the Termination Agreement, the Company is to deliver to Mr.
Poon 355,757 fully paid and non-assessable shares of Company Common Stock in
full satisfaction of all obligations of the Company and Rainbow Ball to Mr.
Poon.
Unisol. By Purchase Agreement, dated April 26, 1995, the Company
entered into an agreement to purchase a 50% interest in the United Aerosol and
Home Products Company, Ltd. ("Unisol"), located in Zhongshan, China, from Cosmos
Peace Development Corporation, a Hong Kong corporation ("Cosmos"). The Company
was introduced to Unisol through Mr. Gao as part of the joint ventures to be
implemented in China. Unisol is a specialty chemical and fine chemical aerosol
packaging and bottle/can filling business. The purchase price was to be 20% of
the appraised value of Unisol equipment, payable in the Company's Common Stock
based upon the value of the Common Stock at the close of business on April 26,
1996. The Unisol acquisition was executed as part of the Gao transaction. The
intent of the Unisol acquisition was to manufacture and package personal care
and cosmetic products. The agreement was verbally terminated on October 23,
1996, at the same time that the Company executed the Amendment by which the
Company redeemed its stock from Mr. Gao. There is no written agreement
terminating the relationship between the Company and Unisol.
Ardex Equipment, LLC. The Company invested $450,000 (of which $50,000 has
been repaid to the Company) to acquire a 17.1111% interest in Ardex Equipment,
LLC ("Ardex"). The Company originally contracted to acquire a controlling
interest in Ardex. Ardex manufactures industrial plumbing equipment. With the
redemption of the Common Stock from Mr. Gao, the Company is also terminating its
relationship with Ardex. Under the terms of a Binding Letter of Intent, dated
August 2, 1996, agreed to convert the Company's equity interest into a 5 year
negotiable promissory note, to bear interest at the rate of eight percent (8%).
The note is payable on an interest-only basis until the principal becomes due.
Principal becomes due upon the first to happen of the following: (i) a public or
private offering successfully completed by Ardex of $1.5 million in the
aggregate or more; (ii) ninety (90) days following a year end of Ardex in which
17
sales for the year have been $3,000,000 or more; (iii) Ardex having a cash
balance of $800,000 or more from operations; or (iv) five years from the date of
the promissory note.
Employees
As of September 30, 1996, the Company had seven (7) full-time
employees, of whom three (3) are managerial, one (1) is engineering, one (1)
administrative, one (1) is in production in the main office in Maryland and one
(1) employee is in the Hong Kong office.
None of the Company's employees is represented by a collective
bargaining organization. The Company considers its relations with its employees
to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters consist of approximately 5,918
square feet of office, laboratory and production space at 10220-I Old Columbia
Road, Columbia, Maryland 21046-1705. The Company leases the premises from an
unaffiliated party on an oral month-to-month basis.
Monthly rent is $4,172.00.
The Company also leases office space consisting of approximately 500
square feet located at 11/F Flat B, Hanley House 68 Canton Road, T.S.T. Kowloon,
Hong Kong. The property is leased on an oral month-to-month basis from an
unaffiliated party at a monthly lease rate of $1,200 (U.S.).
ITEM 3. LEGAL PROCEEDINGS
The Company presently is not a party to any litigation, and the Company
is not aware of any threat of litigation.
In the normal course of business, the Company may be subject to
warranty and product liability claims on its thermotherapy equipment. The
Company does not have a product liability insurance policy in effect. The
assertion of any product liability claim against the Company, therefore, may
have an adverse affect on its financial condition. As of September 30, 1996, no
liability claims against the Company have been asserted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
calendar year ending 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASD OTC Bulletin Board.
The quotations set forth below reflect inter-dealer prices, do not include
retail markups, markdowns or commissions, and may not necessarily represent
actual transactions. There were approximately 2,600 holders of record of the
Common Stock as of September 30, 1996. The Company has never paid cash dividends
on its stock and does not expect to pay any cash dividends in the foreseeable
future.
18
Year ended September 30
Period 1995 1996
- ------ ---- ----
High Low High Low
---- --- ---- ---
1st Quarter (Oct. 1 to Dec. 31) 19/32 1/4 17/32 1/2
2nd Quarter (Jan. 1 to March 31) 35/64 1/4 5/8 25/64
3rd Quarter (April 1 to June 30) 1 5/8 1-1/16 17/64
4th Quarter (July 1 to Sept. 30) 1-23/32 31/32 1-9/32 21/32
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data for the Company for the
years ended September 30, 1996, 1995, 1994, 1993, and 1992 and is qualified in
its entirety by, and should be read in conjunction with the Financial
Statements, the related Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report.
Fiscal Year Ended
September 30,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues:
Product Sales $2,012,544 $1,811,774 $1,025,651 $157,618 $74,006
Research and development contracts 18,750 40,377 60,742 0 0
------- ------- ------- ------- -------
Total revenues 2,031,114 $1,852,151 $1,086,393 $157,618 $74,006
Cost of product sales 733,111 694,150 494,946 67,350 64,406
------- --------- --------- ------- ------
Gross margin on product sales 1,298,003 1,158,001 591,447 90,268 9,600
Other costs and expenses:
Research and development 152,898 186,916 202,569 18,546 94,012
Selling, general and administrative 574,005 739,595 704,295 1,369,845 1,338,370
Amortization of intangible assets - - - -
Total operating expenses 726,903 926,511 906,864 1,388,391 1,432,382
Profit (Loss) from operations 571,110 231,490 (315,417) (1,298,123) (1,422,782)
Other income (expense) 147,390 (7,244) 170,997 (8,389) (425,183(1))
Interest income (expense) (210,870) (236,847) (184,700) (90,808) (85,506)
Extraordinary Item - Gain or forgiveness
of debt 591,728
Net income (loss) 507,620 (12,601) 390,880 (1,397,317) (1,933,471)
Net loss per share(1) 0.034 ($.001) $.023 ($.060) ($.049)
Weighted average shares outstanding(1) 15,081,378 15,608,490 16,712,978 23,466,070 39,499,650
At September 30,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Working Capital (2,795,328) (2,434,832) (748,193) (1,101,136) (646,754)
Total Assets 1,111,676 998,403 955,456 9,710,742 9,321,600(2)
Long-term debt, less current maturities 26,000 2,000 1,213,000
Redeemable Convertible Preferred
Stock
Accumulated deficit (9,214,607) (9,271,725) (8,880,845) (10,278,162) (12,211,633)
Total stockholders' equity (deficit) (2,716,230) (2,346,021) (666,542) 8,128,768 6,755,874(2)
(1) Includes $17,009 gain on disposition of investment in Ardex Equipment,
L.L.C.
19
(2) On October 23, 1996, the Company, based on the provisions of an agreement
reached on June 6, 1996, as amended, redeemed 16,000,000 shares of its Common
Stock. The redemption provided for the Company to return its investment in
Aestar Fine Chemical Company (valued at $8,000,000 on the Company's September
30, 1996 balance sheet) and to relinquish its rights to the funds held under an
investment contract ($40,000 at September 30, 1996) in order to affect the
transaction. This transaction has a significant impact on the financial
position, current ratios and stockholder's equity of the Company. If the
foregoing transaction had occurred on or before September 30, 1996, total assets
would have been reduced by $8,040,000 and stockholder's equity would have
reduced by $8,040,000, resulting in a negative stockholder's equity of
($1,284,126).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements regarding the Company's expectations as to demand for its
products and certain other information presented in this Form 10-K constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors which could
cause actual results to differ from expectations include, but are not limited to
the following:
1. Decreasing Sales, Increasing Losses and Undercapitalization. The Company's
product sales have been substantially decreasing over the past three years.
There is no assurance sales will increase with the application of new
technologies being developed by the Company. The Company has had increasing
losses for the last three years which have resulted in an accumulated deficit of
$12,211,633 for the period ending September 30, 1996. Losses will continue until
current and future sales increase substantially. The Company lacks adequate
capital to finance its research and development and marketing. Lack of adequate
capital and governmental regulatory approvals will effect future sales.
Furthermore, hyperthermia has not been widely accepted by the medical community
as an effective cancer treatment.
2. Limited Products. The Company currently has a limited number of products.
Failure to develop new products utilizing current products and newly acquired
technology will effect the profitability of the Company.
3. Lack of a Current Marketing Plan. The Company does not have an active current
marketing plan. It is developing a plan to share revenue from treatment which is
dependant on market acceptance and adequate capitalization.
General
Since inception, the Company has incurred substantial operating losses,
principally from expenses associated with the Company's research and development
programs, the clinical trials conducted in connection with the Company's
thermotherapy systems and the preparation of the related IDE and PMA application
for submission to the FDA. The Company has experienced significant operating
losses and as of September 30, 1996 had an accumulated deficit of $12,211,633.
The Company expects such operating losses to continue and possibly increase in
the near term and for the foreseeable future as it continues its product
development efforts, expands its marketing and sales activities and scales up
its manufacturing operations. The Company's ability to achieve profitability is
dependent upon its ability to successfully obtain governmental approvals,
manufacture, market and sell its new technology and integrate such technology
20
into its thermotherapy systems. The Company has not been able to successfully
market its current thermotherapy system. There can be no assurance that the
Company will be able to successfully commercialize its newly acquired technology
and apply it to its current thermotherapy systems or that profitability will
ever be achieved. The operating results of the Company have fluctuated
significantly in the past on an annual and a quarterly basis. The Company
expects that its operating results will fluctuate significantly from quarter to
quarter in the future and will depend on a number of factors, many of which are
outside the Company's control.
The major obstacles facing the Company over the last several years have
been inadequate funding, a negative net worth, and the slow development of the
thermotherapy market as a sizeable market due to technical shortcomings of the
thermotherapy equipment available commercially. To overcome these problems,
during the past two years the Company embarked upon a diversification program
whereby the Company sought a strategic partner that could provide both capital
and new opportunities for the Company. The result of this effort was the
agreement with Mr. Gao Yu Wen which infused capital and gave the Company the
opportunity to develop through a strategic alliance was to be a cosmetic and
fine chemical business for the sale of these products in China. As set forth
above in "Terminated Business Opportunities," the relationship with Mr. Gao has
been terminated and the Company has redeemed 16 million of the 20 million shares
purchased by Mr. Gao.
The Company has refocused the Company's efforts on the enhancement of
current products through the development of new technology and sale of the
thermotherapy products as the Company's core business. The Company is currently
focused on the enhancement of its thermotherapy equipment and obtaining
governmental approvals. Towards this end the Company has licensed the APA
technology and the MMTC technology.
The Company anticipates that its results of operations will be affected
for the foreseeable future by a number of factors, including its ability to
develop the new technology to enhance its current systems, regulatory matters,
health care cost reimbursements, clinical studies and market acceptance.
Results of Operations
Comparison of Fiscal Year Ended September 30, 1996 to Fiscal Year Ended
September 30, 1995
Product sales decreased to $74,006 in fiscal 1996 from $157,618 in
fiscal 1995. The decrease was due, primarily, to decreased emphasis on sales of
Microfocus products as the Company sought other business opportunities. With the
renewed focus on the development and sale of the Microfocus products, the
Company anticipates that sales of its thermotherapy systems will account for all
sales in the foreseeable future. The Company will focus on developing its new
products. Increased sales of products are not expected until the new
technologies are developed and approved for sale by governmental regulatory
agencies.
Cost of product sales decreased to $64,406 in fiscal 1996 from $67,350
in fiscal 1995 due to decreased sales volume. The Company expects gross margins
to increase in the future due to improved overhead absorption and manufacturing
efficiencies.
Research and development expense increased to $94,012 in fiscal 1996 from
$18,546 in fiscal 1995 due to increased emphasis on technology enhancements. The
Company expects to significantly increase its expenditures for research and
21
development to fund the development or enhancement of products by incorporating
the APA technology and the MMTC technology.
Selling, general and administrative expenses decreased in amount to
$1,338,370 in fiscal 1996 from $1,369,845 in fiscal 1995. The Company expects
selling and marketing expense to increase substantially as it expands its
advertising and promotional activities and increases its marketing and sales
force, principally for the commercialization of its thermotherapy systems.
Interest expense decreased to $85,506 in fiscal 1996 from $90,805 in
fiscal 1995.
Comparison of Fiscal Year Ended September 30, 1995 to Fiscal Year Ended
September 30, 1994
Product sales decreased to $157,618 in fiscal 1995 from $1,086,393 in
fiscal 1994. The decrease was due, primarily, to continued slowing sales in the
thermotherapy market.
Cost of product sales decreased to $67,350 in fiscal 1995 from $494,946
in fiscal 1994 due to decreased sales volume.
Research and development expense decreased to $18,546 in fiscal 1995
from $202,569 in fiscal 1994. Most of the decrease was due a softening of the
marketplace for thermotherapy products and a shift in focus from development
efforts relating to the Company's core technologies to seeking new business
opportunities and partners.
Selling, general and administrative expenses increased to $1,369,845 in
fiscal 1995 from $704,295 in fiscal 1994.
Interest expense decreased to $90,808 in fiscal 1995 from $184,700 in
fiscal 1994 due to conversion of debt to equity.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $12,211,633 at September 30,
1996. The Company has funded its operations primarily through the sale of equity
securities. At September 30, 1996, the Company had cash, cash equivalents and
short-term investments aggregating approximately $246,931. Net cash used in the
Company's operating activities was $1,462,588 for the fiscal year ended
September 30, 1996.
The Company does not have any bank financing arrangements. The
Company's indebtedness consists of two notes payable to Dr. Augustine Cheung
with a total face amount of $121,419; a note payable to Yu Shai Lai in the
amount of $36,041; a note payable to Ada Lam in the amount of $28,502; a note
payable to Ruth Kurz in the amount of $93,750; a note payable to Lake Shu Loon
in the amount of $10,000; an oral agreement to pay Charles Shelton an amount
currently estimated between $35,000 and $50,000; and trade debt totaling
$197,190. In addition, commencing on July 10, 1996, the Company sold $1,205,000
in senior secured convertible notes accruing interest at 8 percent per annum
(the "Senior Notes"). The Senior Notes have priority over payment of any other
indebtedness of the Company. The holders of the Senior Notes can elect to either
convert the notes into Common Stock at an option price of $0.41 per share or be
paid principal and interest upon the earlier to occur of (i) the next private
offering; or (ii) December 31, 1997.
22
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts, including
seeking FDA approval for the domestic sale of the Company's products, expand its
sales and marketing activities and scale up its manufacturing. The Company
expects that its existing capital resources will not be adequate to fund the
Company's operations through the next twelve months. The Company is dependent on
raising additional capital to fund its development of technology and to
implement a marketing plan. Such dependence will continue at least until the
Company begins marketing its new technologies. The Company's future capital
requirements and the adequacy of available funds will depend on numerous
factors, including the successful commercialization of the thermotherapy systems
progress in its product development efforts, the magnitude and scope of such
efforts, progress with preclinical studies and clinical trials, the cost and
timing of manufacturing scale-up, the development of effective sales and
marketing activities, the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights, competing technological
and market developments, and the development of strategic alliances for the
marketing of its products. To the extent that funds generated from the Company's
operations are insufficient to meet current or planned operating requirements,
the Company will be required to obtain additional funds through equity or debt
financing, strategic alliances with corporate partners and others, or through
other sources. The Company does not have any committed sources of additional
financing, and there can be no assurance that additional funding, if necessary,
will be available on acceptable terms, if at all. If adequate funds are not
available, the Company may be required to delay, scale-back or eliminate certain
aspects of its operations or attempt to obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products or potential
markets. If adequate funds are not available, the Company's business, financial
condition and results of operations will be materially and adversely effected.
The Company has agreed to pay Gao Yu Wen $2,160,000 on or before March
31, 1997 to redeem 4,000,000 shares of the Company's Common Stock. The Company
has agreed to pay MIT $10,000 in 1997 and also must develop time table which
requires the expenditure of research and development funds. The Company has also
entered into a Settlement Agreement, dated October 28, 1996, whereby the Company
undertook to use its best efforts to pay to William O. Cave, a former director,
the sum of $194,825 on or before February 28, 1997. The Company has a contingent
liability to MMTC in the amount of $50,000 in 1997 if the Company fails to meet
the milestones identified under "Patents and Proprietary Rights," above; and
must develop criteria which require the expenditure of research and development
funds. The Company is also required to pay HLB certain engineering fees, the
amount of which are presently unknown. The Company is also required to do
clinical trials to prepare for submission of products to the FDA. The amount
required to perform such trials and to prosecute the applications in not
currently known. The Company does not currently have funds available to do such
trials and clinical work. The Company has committed to pay advisors and officers
pursuant to contractual arrangements set forth in "Directors and Executive
Officers of the Registrant" and "Certain Relationships and Related
Transactions." The Company will be dependent on additional capital to be raised
to fulfill all of the above agreements and obligations.
During fiscal year 1996, the Company issued a large number of options and
warrants in connection with its funding activities. Options or warrants to
officers, directors, related parties and five percent (5%) shareholders are
addressed in Part III of this Form 10-K. In addition to those options and
warrants, the Company has issued options and warrants in connection with funding
activities to purchase a total of 4,670,715 shares of Common Stock, with
23
exercise prices ranging from $.25 per share to $.41 per share. Some of the
warrants issued have anti-dilution provisions which may affect the total number
of shares available for purchase under the warrants.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, supplementary data and report of independent
public accountants are filed as part of this report on pages F-1 through F-15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No change of accountants and/or disagreements on any matter of
accounting principles or financial statement disclosures have occurred within
the last two years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Positions with the Company
- -------------------- ----- -----------------------------------
Augustine Y. Cheung 49 Chairman of the Board
Verle D. Blaha 66 Chief Executive Officer, President
and Director
Charles C. Shelton 51 Executive Vice President
and Director
Robert F. Schiffmann 61 Director
Joseph M. Colino 57 Director
John Mon 44 Treasurer/General Manager
Dr. Cheung was the founder of the Company, was President from 1982 to
1986, was Chief Executive Officer from 1982 to 1996 and has been Chairman since
1982. From 1982 to 1985, Dr. Cheung was a Research Associate Professor of the
Department of Electrical Engineering and Computer Science at George Washington
University and from 1975 to 1981 was a Research Associate Professor and
Assistant Professor at the Institute for Physical Science and Technology and the
Department of Radiation Therapy at the University of Maryland. Dr. Cheung holds
a Ph.D. and Masters degree from University of Maryland.
Mr. Blaha has been a director, President and Chief Executive Officer of the
Company since September 6, 1996. Prior to joining the Company, Mr. Blaha
provided consulting services to the microwave industry. From 1986 to 1991, Mr.
Blaha was a director, and the President and Chief Operations Officer for the
Company. From 1982 to 1986, Mr. Blaha was Vice President and General Manager of
Holaday Industries, Inc. From 1957 to 1982, Mr. Blaha held a succession of
senior management positions at Litton Industries, Inc. Mr. Blaha was Senior Vice
President of Technology and Development of Litton's Microwave Cooking Products
Division. Mr. Blaha holds a B.S.B and an MBA degree from University of
Minnesota.
24
Mr. Shelton has served as the Company's in-house counsel from 1993 to 1996,
and as Executive Vice President and a director from 1993. Mr. Shelton has
practiced in the areas of corporate and tax law with Charles C. Shelton, PA,
from 1993 to the present. From 1973 to 1993, he practiced law with Semmes, Bowen
& Semmes. Mr. Shelton is a Vice President and director with HRP Technologies,
Inc. (previously known as Ardex Equipment, LLC), a public company traded on the
Bulletin Board.
Mr. Colino has been a director since 1995. From 1991 to the present, Mr.
Colino has served as the President of HRP Technologies, Inc. (previously known
as Ardex Equipment, LLC) and Parec Enterprises, Inc..
Mr. Schiffmann has served as a director of the Company since September
1986. Since 1991, Mr. Schiffmann has served as President of R. F. Schiffmann
Associates, Inc., a microwave consulting laboratory. He is also Chairman of
Quicklave L.L.C., and Microwave Concepts, Inc., which are independent research
companies specializing in microwave technology. Mr. Schiffmann holds a Bachelor
of Science Degree in Pharmaceutical Science from Columbia University and a
Master of Science degree from Purdue University.
Mr. Mon has served as Treasurer/General Manager of the Company since 1989.
From 1984 to 1988, Mr. Mon was an economist with the U.S. Department of Commerce
in charge of forecasting business sales, inventory and prices for all business
sectors in the estimation of Gross National Product. Mr. Mon holds a B.S. degree
from the University of Maryland.
Mr. Shelton and Mr. Colino have notified the Company that they will not
serve on the Board of Directors after the expiration of their current terms and,
accordingly, they are not seeking re- election to the Board of Directors.
Nominee to the Board of Directors
The following individual has been nominated to serve on the Board of
Directors:
Warren C. Stearns. Mr. Stearns was nominated to serve to on the Board of
Directors on August 14, 1996. Mr. Stearns has been and currently is President of
Stearns Management Company, a capital advisory firm, since 1989. Prior to 1989,
Mr. Stearns acted as vice president of Stearns Management Company. Mr. Stearns
holds an M.B.A. degree from Harvard University and a B.A. degree from Amherst
College.
Advisory Board
The Company is presently organizing an Advisory Board to be comprised
of business and industry professionals and experts. The Company presently
anticipates have as many as six members on the Advisory Board. The purpose of
the Advisory Board will be to assist the management of the Company in
identifying technology trends and new business opportunities within the
industry. The Advisory Board will operate in a consulting fashion and will not
act as managers or directors of the Company. The following persons have been
nominated to serve on the Company's Advisory Board:
Stuart Fuchs. Mr. Fuchs has been nominated to serve as Chairman of the Advisory
Board. He is President of Nace Resources, Inc., a firm providing consulting and
marketing services to companies in the biotechnology and medical device fields.
25
Prior to founding Nace in 1995, Mr. Fuchs was an investment banker in the Fixed
Income Division of Goldman Sachs & Co. in New York and Chicago. Until joining
Goldman Sachs in 1976, he was an attorney practicing securities and tax law with
Barrett Smith Shapiro & Simon in New York, New York. Mr. Fuchs is a graduate of
Harvard College and Harvard Law School.
Michael Davidson, M.D. Dr. Davidson has been nominated to serve as a member of
the Advisory Board. Dr. Davidson is a physician specializing in design of
clinical trials. Dr. Davidson currently practices and is President of the
Chicago Center for Clinical Research. Dr. Davidson holds a B.A., M.S. from
Northwestern University and a M.D. from Ohio State University.
The Company may designate additional individuals to serve on the
Advisory Board as the Company identifies individuals with appropriate
qualifications.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent shareholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company between October 1, 1995 and September 30, 1996, on year-end
reports furnished to the Company after September 30, 1996 and on representations
that no other reports were required, the Company has determined that during the
last fiscal year all applicable 16(a) filing requirements were met except as
follows:
Dr. Augustine Y. Cheung, Chairman of the Board of Directors, acquired 2,000
shares of Common Stock on January 17, 1994; acquired 1,2000,000 shares of Common
Stock on June 30, 1994; acquired 2000 shares of Common Stock on December 31,
1994; acquired 249,058 shares of Common Stock on June 30, 1995; acquired 52,000
shares of Common Stock on September 30, 1996; and disposed of 195,000 shares of
Common Stock on March 7, 1995. Dr. Cheung also received an option to acquire
50,000 shares of Common Stock on December 31, 1996 and an option to acquire
400,000 shares of Common Stock on May 16, 1996. Each of these transactions
should have been reported on Form 3 and Forms 4. The transactions were instead
disclosed on a Form 5 filed on or about November 10, 1996.
John Mon, Treasurer/General Manager, and a former director of the Company,
acquired 2,000 shares of Common Stock on January 17, 1994; acquired 49,800
shares of Common Stock on January 17, 1994; acquired 2,000 shares of Common
Stock on December 31, 1994; and acquired 58,505 shares of Common Stock on June
30, 1995. Mr. Mon also received an option to acquire 400,000 shares of Common
Stock on May 16, 1996. These transactions should have been reported on Form 3
and Form 4. The transactions were instead disclosed on a Form 5 filed on or
about November 10, 1996.
Robert F. Schiffman, a director, acquired 62,000 shares of Common Stock on
September 30, 1996 and received an option to purchase 100,000 shares of Common
Stock on May 16, 1996. These transactions should have been disclosed on Forms 4.
The transactions were instead disclosed on a Form 5 filed on or about November
13, 1996.
26
Charles C. Shelton, a director and Executive Vice President, acquired 103,000
shares of Common Stock on December 20, 1993; acquired 2,000 shares of Common
Stock on January 17, 1994; acquired 150,000 shares of Common Stock on September
9, 1994; acquired 2,000 shares of Common Stock on January 17, 1996; and received
an option to acquire 400,000 shares of Common Stock on May 16, 1996. These
transactions should have been reported on Form 3 and Form 4. The transactions
were instead disclosed on a Form 5 filed on or about November 16, 1996.
Joseph M. Colino, a director, acquired 2800 shares of Common Stock on June 30,
1995. This transaction should have been reported on Form 3. The transaction was
instead disclosed on a Form 5 filed on or about November 15, 1996.
ITEM 11. Executive Compensation
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company in all capacities during the last three fiscal
years to the Company's Chief Executive Officer and to each of the Company's
other executive officers where annual salary and bonus for the most recent
fiscal year exceeded $100,000.
Summary Compensation Table
Annual Compensation Long-Term All Other
Compensation Awards Compensation
($)
Other Annual Restricted Stock
Name and Salary Bonus Compensation Stock Awards Options
Principal Position Year ($) ($) ($) ($) (#)
Augustine Y. Cheung, Chairman 1996 $125,000 2,000(1) 400,000(2)
of the Board of Directors 1995 $125,000 2,000 -
1994 $114,480 2,000 50,000(3)
=============================== ======== ============ ========== ============= ============= =========== ===============
(1) In each of 1994, 1995 and 1996, Dr. Cheung received 2,000 shares of
Common Stock for his services as a director.
(2) In 1996, Dr. Cheung received an option to purchase 400,000 shares at
$0.35 per share, exercisable on or before May 16, 2001
(3) In 1994, Dr. Cheung received and option to purchase 50,000 shares at
$0.125 per share, which he exercised on September 30, 1996.
There are no option, retirement, pension, or profit sharing plans for
the benefit of the Company's officers, directors and employees. The Company does
provide health insurance coverage for its employees. The Board of Directors may
recommend and adopt additional programs in the future for the benefit of
officers, directors and employees.
Option Grants in 1996
Information concerning 1996 grants to named executive officers is reflected
in the table below. The amounts shown for each of the named executive officers
as potential realizable values are based on arbitrarily assumed annualized rates
of stock price appreciation of five percent and ten percent over the full five
(and in one case eight) year term of the options. These potential realizable
values are based solely on arbitrarily assumed rates of price appreciation
required by applicable SEC regulations. Actual gains, if any, on option
exercises and Common Stockholdings are dependent on the future performance of
27
the Company and overall stock market conditions. There can be no assurance that
the potential realizable values shown in this table will be achieved.
Option Grants in 1996
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
% of Total
Options
Options Granted to
Granted Employees in Exercise Expiration
Name (#) 1996 Price Date (5%) (10%)
Augustine Y. Cheung 400,000 16.53% $0.35 5/16/2001 $38,679 $ 85,471
Verle D. Blaha 400,000 16.53% $0.41 8/13/2004 $78,302 $187,548
John Mon 400,000 16.53% $0.35 5/16/2001 $38,679 $ 85,471
Charles C. Shelton 400,000 16.53% $0.35 5/16/2001 $38,679 $ 85,471
========================== ============== ================ ============ ============= ================ ================
Aggregated Option Exercises and Year-End Option Values in 1996
The following table summarizes for each of the named executive officers
of the Company the number of stock options, if any, exercised during 1996, the
aggregate dollar value realized upon exercise, the total number of unexercised
options held at September 30, 1996 and the aggregate dollar value of the
in-the-money unexercised options, if any, held at September 30, 1996. Value
realized upon exercise is the difference between the fair market value of the
underlying stock on the exercise date and the exercise price of the option. The
value of unexercised, in-the-money options at September 30, 1996 is the
difference between its exercise price and the fair market value of the
underlying stock on September 30, 1996, which was $1.03 per share based on the
closing bid price of the Common Stock on September 30, 1996. The underlying
options have not been and may never be exercised; and actual gains, if any, on
exercise will depend on the value of the Common Stock on the actual date of
exercise. There can be no assurance that these values will be realized.
28
Aggregated Option Exercises in 1996 and Year-End Option Values
Value of Unexercised
In-the-Money Options
Number of Unexercised Options at 9/30/96 at 9/30/96
Shares
Acquired on Value Realized
Name Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
Augustine Y. Cheung 50,000 $45,310 400,000 0 $272,480 0
Verle D. Blaha 50,000 $45,310 400,000 0 $272,480 0
John Mon 0 0 400,000 0 $272,480 0
Charles C. Shelton 0 0 400,000 0 $272,480 0
Robert F. Schiffman 0 0 100,000 0 $ 68,120 0
=========================== =============== =============== ============== ============== ============== ===============
Long-Term Incentive Plan Awards in 1996
The registrant has no "long-term incentive plan".
Future Benefits or Pension Plan Disclosure in 1996
The Company has no such benefit plans.
Director Compensation
During 1996, the Company paid to each outside board member $500 per
year. Each director receives an automatic grant of 2,000 shares of Common Stock
for each year served.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
Verle D. Blaha. On August 15, 1996, the Company entered into a letter
agreement with New Opportunities, Ltd. ("NOL") a company controlled by Mr.
Blaha. Pursuant to the Agreement, Mr. Blaha agreed to become a director,
President and Chief Executive Officer of the Company in exchange for the Company
paying NOL the following:
1. Payment of $25,000.
2. Payment of $175.00 per hour, to a maximum of 8 hours per day,
40 hours per week regardless of actual time spent.
3. Reimbursement of business expenses and providing residential
accommodations in Maryland and all utilities.
4. Options to acquire 400,000 shares of the Company's Common
Stock for a term ending August 13, 2004 at a price of $.41.
5. Full indemnity by the Company.
6. The Agreement terminates January 27, 1997, but the Company and
Mr. Blaha anticipate that the employment relationship will
continue on similar terms.
Other
29
Stock Option Plans
The Company does not currently have any Stock Option Plans. The Company
anticipates adopting such a plan during fiscal year 1997.
Report of the Compensation Committee on Executive Compensation
The Company does not presently have a Compensation Committee, but the
Company contemplates formation of a Compensation Committee during the fiscal
year 1997.
The Compensation Committee of the Board of Directors will be composed
of two non-employee directors. The Committee will be responsible for
establishing and administering the compensation policies applicable to the
Company's officers and key personnel.
Stockholder Return Performance Graph
Federal regulation requires that inclusion of a line graph comparing
cumulative total shareholder return on Common Stock with the cumulative total
return of (1) NASDAQ Combined Index and (2) a published industry or
line-of-business index. The performance comparison appears below. The Board of
Directors and its Compensation Committee recognize that the market price of
stock is influenced by many factors, only one of which is Company performance.
The stock price performance shown on the graph is not necessarily indicative of
future price performance.
[GRAPHIC OMITTED]
30
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding shares of voting
securities of the Company beneficially owned as of September 30, 1996 by: (i)
each person known by the Company to beneficially own 5% or more of the
outstanding voting securities, (ii) by each director or nominee for director,
(iii) by each person named in the summary compensation table and (iv) by all
officers and directors as a group.
Name and Addresses Percentage
of Officers, Directors and Amount of of Voting
Principal Shareholders Common Stock* Securities*(1)
- ----------------------------- --------------- ---------------
Augustine Y. Cheung(2)(3)
10220-I Old Columbia Road
Columbia, MD 21046-1705 6,669,408 26.46
Verle D. Blaha(2)(5)(6)
14 Sunset Lane
North Oaks, MN 55127 1,053,186 4.18
John Mon(2)(7)
10220-I Old Columbia Road
Columbia, MD 21046-1705 566,418 2.25
Robert F. Schiffmann(2)(8)
149 West 88th Street
New York, NY 10024 310,684 1.23
Joseph M. Colino(2)
1952 Cardinal Lake Drive
Cherry Hill, NJ 08003 5,500 **
Charles C. Shelton(2)(3)
9160 Rumsey Road, Suite B-1
Columbia, Maryland 21045-1928 665,250 2.64
Revlon Group, Incorporated
and its wholly-owned subsidiary
PPI Four Corp.
767 Fifth Avenue
New York, New York 10153 1,500,000 5.95
Yue Soon Limited
287-291 Des Vouex Rd. Central,
21st Floor
Hong Kong 1,600,000 6.34
Gao Yu Wen
Zhongshan Economic Committee
Sun Wen Road
E. Shigizhongshan
Guangdong, China 4,030,000(3) 15.99
Executive Officers and
Directors as a group (6 individuals) 9,270,446 36.78
===================================== ================= ================
* Assumes exercise of all exercisable options held by listed security holders
which can be exercised within 60 days from September 30, 1996.
** Less than 1%.
31
(1) Except as noted, the above table does not give effect to an aggregate of
approximately 4,670,715 shares of Common Stock underlying outstanding stock
options and warrants held by persons not reflected in this table. Outstanding
options and warrants entitle the holders thereof to no voting rights.
(2) Director or Executive Officer.
(3) Includes 400,000 shares underlying an option exercisable commencing
May 16, 1995 through May 16, 2001 at $.35 per share.
(4) Since the end of the Fiscal Year, the Company has repurchased from Mr.
Gao 16,000,000 shares in exchange for the Company's 9.5% interest in
Aestar. Accordingly, Mr. Gao presently owns only 4,030,000 shares.
(5) Does not include 42,000 Common Shares owned by Luveral Blaha, Mr.
Blaha's wife. Mr. Blaha disclaims any beneficial ownership with respect
to said Common Shares. The Company believes Luveral Blaha owns 42,000
Common Shares.
(6) Includes 400,000 shares underlying an option to New Opportunities, Ltd,
an affiliate of Mr. Blaha's. The option exercisable commencing August
15, 1996 through August 14, 2004 at $.41 per share.
(7) Includes 400,000 shares underlying an option to Mr. Mon exercisable
commencing May 16, 1996 through May 16, 2001 at $.35 per share.
(8) Includes 100,000 shares underlying an option to Mr. Schiffmann
exercisable commencing May 16, 1996 through May 16, 2001 at $.35 per
share. Also includes 1,500 shares held by Marilyn T. Schiffmann, his
wife; 725 shares held as custodian for Erica M. Payne, UGMA NY; and 725
shares held as custodian for Robert F. Schiffmann Jr. UGMA NY.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SMC Contract. On May 28, 1996, the Company entered into a consulting
agreement with Stearns Management Company ("SMC"). Warren C. Stearns, a nominee
to the Board of Directors, is President of SMC. Pursuant to the Agreement, SMC
has an exclusive arrangement to render services involving solicitation of
outside capital, restructuring the Company, business plans, marketing, election
of advisory personnel, adding additional directors and sale of stock by
insiders. The agreement is terminable upon 10 days written notice or otherwise
stays in effect for one year or until a registration statement covering a public
offering of the Company's securities is declared effective by the SEC.
In exchange for such services, SMC was paid $57,000 and the Company (i)
granted to SMC a transferable warrant to purchase 168,292 shares of Common Stock
(which have been assigned to Amalgam and (ii) agreed to grant to assignees of
SMC a warrant to purchase, in the aggregate, a five percent (5%) interest in the
equity of the Company as of the next registered public offering of Common Stock
of the Company. The warrants, all of which are exercisable at $0.41 per share,
contain anti-dilution provisions and are exercisable for five years and
renewable for an additional five years. Mr. Stearns is paid a per diem expense
of $1,500 per day or $190 per hour and reimbursement for expenses at cost plus
20%.
Nace Resources Contract. On August 1, 1996, the Company entered into a
Consulting Agreement with Nace Resources, Inc. ("NRI"), an affiliate of Mr.
Fuchs, chairman of the Advisory Board. The agreement requires Mr. Fuchs, as
designated consultant, to consult and advise the Company with respect to the
development and application of the Company's products and proprietary
32
technology. The term of the agreement is for a one year period with an
additional renewal period. The Company paid $75,000 to NRI and commencing August
1, 1996, shall pay $20,000 per month. NRI has agreed to defer $5,000 per month
until the Company receives $5,000,000 of gross proceeds from an offering of the
Company's stock. In addition, the Company will reimburse NRI for expenses.
In addition to the compensation due under the terms of the consulting
agreement, the Company has agreed to grant to NRI warrants to purchase 397,619
shares of Common Stock, subject to adjustment, at an exercise price of $0.41 per
share for consulting services. In addition, the Company has granted to NRI
warrants to purchase approximately 195,122 shares of Common Stock at an exercise
price of $0.41 per share in exchange for providing certain financial advisory
services to the Company in 1996. Finally, Mr. Fuchs will be entitled to
additional warrants to purchase shares of Common Stock after completion of the
next offering. The number of shares granted will depend on the offering price of
the Common Stock.
Promissory Notes. From 1987 through 1995, the Company borrowed money
from related parties. In 1996, the Company formalized such borrowings by
executing promissory notes to the following related parties:
An unsecured term note, dated June 30, 1994, payable to Dr. Augustine
Cheung, accruing interest at the rate of ten percent (10%) per annum, in the
amount of $42,669. The principal and accrued interest shall be due and payable
on its maturity date on June 30, 1998.
An unsecured term note, dated January 26, 1987, payable to Dr.
Augustine Cheung, accruing interest at the rate of twelve percent (12%) per
annum, in the amount of $78,750. The principal and accrued interest shall be due
and payable on its maturity date on January 26, 1998.
A demand note, dated May 16, 1988, payable to Yu Shai Lai, a relative
of Dr. Cheung, accruing interest at the rate of twelve percent (12%) per annum,
in the amount of $36,041.
A demand note, dated October 2, 1990, payable to Ada Lam, a former
employee, accruing interest at the rate of twelve percent (12%) per annum, in
the amount of $28,502.
The Company also may have the obligation to execute a promissory note
payable to Charles C. Shelton in the face amount of $50,000. The Company has
certain offsets available against Mr. Shelton so the final amount to be due
under this promissory note is still under negotiation.
Settlement Agreement. On October 28, 1996, the Company entered into a
Settlement Agreement with William O. Cave, a former director of the Company.
Under the terms of the Settlement Agreement, the Company paid $30,000 to Mr.
Cave and agrees to pay an additional $194,825. The Company is to use its best
efforts to pay this sum on or before February 28, 1997. If the balance owing is
not paid on or before February 28, 1997, then the outstanding balance shall
accrue interest at the rate of 15% per annum. In addition, the Company agreed to
grant to Mr. Cave warrants to purchase 56,340 shares of Common Stock at an
exercise price of $.50 per share.
Rescission Agreement. On February 16, 1995, Gao Yu Wen executed a
subscription agreement with the Company to purchase 20,000,000 shares of Common
Stock at $.50 per share or $10,000,000. The price was paid by paying $2,000,000
cash and property transferring to the Company 9.5% of the outstanding equity of
Aestar Fine Chemical Company ("Aestar"). On June 6, 1996 the Company and Gao
entered a Redemption Agreement wherein the Company renounced any interest in
Aestar and Gao agreed that upon the Company delivery $2,200,000 to Gao he would
return
33
return the 20,000,000 shares of the Company. The promise to pay $2,200,000 by
November 30, 1996 was secured by all 20,000,000 shares. On October 23, 1996, the
Company and Mr. Gao executed a Amendment by which the terms of the Redemption
Agreement were modified. Under the terms of the First Amendment, Mr. Gao agreed
to immediately convey to the Company certificates representing 16 million shares
of Common Stock. The $2,200,000 payment was reduced to $2,160,000 and the timing
was extended until December 31, 1996, with an additional three months period at
a penalty of 3/4% per month. On October 23, 1996, Mr. Gao conveyed the 16
million shares to the Company.
On April 26, 1995, the Company entered into an Investment Agreement
with Gao whereby the Company transferred $700,000 to Gao to invest as agent of
the Company at the rate of no less than 17% per annum. Gao repaid $190,000 by
September 30, 1996. The remaining amount has been forgiven as part of the
Redemption Agreement.
Rescission of Ardex Acquisition. On or about March 31, 1995, the
Company invested $400,000 in Ardex Equipment, LLC ("Ardex") and paid $50,000 to
Charles C. Shelton and Joseph Colino, who were then directors of the Company, in
exchange for a 17.1111% interest in Ardex. In 1996, the Company received $50,000
distribution from Ardex. On August 2, 1996, the Company and Ardex entered into a
binding Letter of Intent rescinding the Company's investment in Ardex (the
"Rescission"). Pursuant to the Rescission, the Company was to receive a 5-year
negotiable promissory note for $350,000 bearing interest at 8% per annum.
Interest only is paid until the principal becomes due. Principal is due upon the
first of the following events to occur: (i) completion of a public or private
offering by Ardex of $1,500,000 or more; (ii) 90 days following the year end in
sales have been or exceed $3,000,000; (iii) Ardex having a cash balance of
$800,000 or more from operations; or (iv) five years from the date of the note.
The note is to be secured by a limited guarantee of Charles C. Shelton, Joseph
Colino and John Kohlman only to the extent of their interest in Ardex and their
options in the Company. In addition, Mr. Shelton is to execute a promissory note
for $15,000; Mr. Colino is to execute a note for $22,500; and Mr. Kohlman is to
execute a note for $12,000. These notes will be secured by the same security as
the Ardex note. Under the terms of the Rescission, all of the previously
mentioned notes and ancillary documents were to have been executed on or before
August 31, 1996, but none have been delivered to the Company as of the date
hereof. The Company is continuing with its efforts to obtain the documents
contemplated by the Rescission.
Legal Fees. Charles C. Shelton, Esq. rendered legal services to the Company
throughout the year ended September 30, 1996. Mr. Shelton billed the Company
fees totalling $118,204, $92,052 of which was billed by Charles C. Shelton,
$10,000 of which was for services as an employee of Company, and $16,152 for
expenses.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Index to Financial Statements and Supplemental Schedules
Title of Documents Page No.
Independent Auditors' Report F-1
34
Balance Sheet F-2
Statements of Operations F-4
Statements of Changes in Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-8
(a)(2) No schedules are provided because of the absence of conditions under
which they are required.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
On August 28, 1996, the Company filed a report on Form 8-K announcing
the execution of the an exclusive license agreement with MMTC.
On September 6, 1996, the Company filed a report on Form 8-K announcing
the appointment of Verle D. Blaha as acting President and Chief Executive
Officer of the Company.
On October 23, 1996, the Company filed a report on Form 8-K announcing
the redemption of 16,000,000 shares of the Company's Common Stock from Mr. Gao
Yu Wen.
The Company filed no other reports on Form 8-K during the fourth
quarter of its fiscal year ended December 31, 1996.
(c) Exhibits.
The following documents are included as exhibits to this report:
Exhibit Description
Number
3.1 Articles of Incorporation of the Company as filed May 19,
1982 with the State of Maryland Department of Assignments
and Taxation.(1)
3.1.1 Articles of Amendment and Restatement to the Articles of
Incorporation of the Company as filed June 21, 1984 with
the State of Maryland Department of Assignments and
Taxation.*
3.1.2 Articles of Amendment to the Aritcles of Incorporation of
the Company as filed December 14, 1994 with the State of
Maryland Department of Assignments and Taxation*
3.2.1 Amendment to the By-laws of the Company adopted December 9,
1994*
35
Exhibit Description
Number
9.1 Irrevocable Proxy between Augustine Y. Cheung, as
representative of the Company and Gao Yu Wen regarding
20,000,000 shares of Common Stock dated June 6, 1996
(pursuant to the Redemption Agreement, the number of
shares governed by the proxy has been reduced to
4,000,000)*
10.1 Patent License Agreement between the Company and
Massachusetts Institute of Technology dated June 1, 1996
(Confidential Treatment Requested)*
10.2 License Agreement between the Company and MMTC, Inc. dated
August 23, 1996 (Confidential Treatment Requested)*
10.3 Letter Agreement between the Company and H.B.C.I., Inc.
dated September 17, 1996*
10.4 Letter Agreement between the Company and Herbst, Lazar,
Bell, Inc. dated october 4, 1996*
10.5 Agreement between the Company and Stearns Management
Company dated May 28, 1996*
10.6 Consulting Agreement between the Company and NACE
Resources, Inc. dated August 1, 1996*
10.7 Settlement Agreement between the Company and William O.
Cave, dated October 28, 1996*
10.8 Redemption Agreement between the Company and Mr. Sun Shou
Y. representative of Mr. Gao Yu Wen, dated June 6, 1996 and
Letter of Intent between the parties dated May 27, 1996*
10.9 Amendment among the Company, Sun Shau Yi, Ou Yang An, Gao
Yu Wen, dated October 23, 1996*
10.10 Binding Letter of Intent Concerning Rescission of Cheung
Laboratories, Inc. Investment in Ardex Equipment, LLC
between the Company and Ardex dated August 2, 1996*
10.11 Letter Agreement between the Company and New Opportunities,
Ltd., an affiliate of Verle D. Blaha, dated August 15,
1996*
10.12 Unsecured Promissory Note, dated June 30, 1994, in the
amount of $42,669 and bearing interest at ten percent
per annum, payable to Augustine Cheung*
10.13 Unsecured Promissory Note, dated January 26, 1987, in the
amount of $78,750 and bearing interest at the rate of
twelve percent, payable to Augustine Cheung*
10.14 Demand Promissory Note, dated October 2, 1990, in the
amount of $28,502 and bearing interest at the rate of
twelve percent, payable to Ada Lam*
10.15 8% Senior Secured Convertible Note*
10.16 Registration Rights Agreement*
10.17 Warrant to Purchase Shares of Common Stock of Cheung
Laboratories, Inc.*
10.18 Certificate of Warrant to Purchase Common Stock of Cheung
Laboratories, Inc. dated June 1, 1996*
10.19 Certificate of Warrant to Purchase Common Stock of Cheung
Laboratories, Inc. dated May 28, 1996*
21.1 Subsidiaries of the Registrant
23.1 Consent of Stegman & Company, independent public
accountants of the Company*
27.1 Financial Data Schedule
- ------------------
* Filed herewith
(1) Pursuant to Rule 12b-32, this exhibit is incorporated herein by
reference to the exhibits filed with respect to the Company's
Registration Statement on Form S-1, as amended, originally filed on
October 17, 1984, Registration No. 2-93826-W.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHEUNG LABORATORIES, INC.
December __, 1996 By /s/ Verle D. Blaha
---------------------
Verle D. Blaha
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ Verle D. Blaha Chief Executive Officer, December __, 1996
- -------------------- President and Director
Verle D. Blaha
/s/ John Mon General Manager, Treasurer December __, 1996
- ---------------------
John Mon
/s/ Dr. Augustine Y. Cheung Chairman December __, 1996
- ----------------------------
Dr. Augustine Y. Cheung
/s/ Robert F. Schiffmann Director December __, 1996
- -------------------------
Robert F. Schiffmann
/s/ Charles C. Shelton Director December __, 1996
- -------------------------
Charles C. Shelton
/s/ Joseph M. Colino Director December _, 1996
- -------------------------
Joseph M. Colino
37
CHEUNG LABORATORIES, INC.
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 1996, 1995 AND 1994
No extracts from this report may be published without our written consent
Stegman & Company
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS Page
Balance Sheets 1 - 2
Statements of Operations 3
Statements of Changes in Stockholders' Equity 4
Statements of Cash Flows 5 - 6
NOTES TO FINANCIAL STATEMENTS 7 - 15
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cheung Laboratories, Inc.
Columbia, Maryland
We have audited the accompanying balance sheets of Cheung
Laboratories, Inc., as of September 30, 1996 and 1995, and the related
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Cheung
Laboratories, Inc., as of September 30, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 of the financial statements, the Company has suffered recurring losses from
operations, which raise substantial doubt about its ability to continue as a
going concern. Management's plans regarding those matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Towson, Maryland
November 1, 1996
F-1
CHEUNG LABORATORIES, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
ASSETS
1996 1995
---------------------------------
CURRENT ASSETS:
Cash $ 246,931 $ 7,238
Accounts receivable (net of an allowance for
doubtful accounts of $20,770 and $56,659 in
1996 and 1995, respectively) 154,335 137,101
Interest receivable - related parties 5,333 -
Inventories 270,952 301,279
Prepaid expenses 1,669 7,669
Other current assets 26,755 25,551
----------- -----------
Total current assets 705,975 478,838
----------- -----------
PROPERTY AND EQUIPMENT - at cost:
Furniture and office equipment 176,541 168,777
Laboratory and shop equipment 62,228 74,733
----------- ------------
238,769 243,510
Less accumulated depreciation 205,766 197,897
----------- -----------
Net value of property and equipment 33,003 45,613
----------- ------------
OTHER ASSETS:
Investment in Aestar Fine Chemical Company - at cost 8,000,000 8,000,000
Investment in Ardex Equipment, L.L.C. - at equity - 482,991
Funds held under investment contract 40,000 650,000
Notes receivable - Ardex Equipment, L.L.C. 400,000 -
Patent licenses (net of accumulated amortization
of $37,328 and $26,650 in 1996 and 1995,
respectively) 142,622 53,300
----------- ------------
Total other assets 8,582,622 9,186,291
----------- -----------
TOTAL ASSETS $9,321,600 $9,710,742
========== ==========
See accompanying notes.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
--------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 197,190 $ 228,360
Notes payable - related parties, current portion 331,712 463,685
Accrued interest payable - related parties 339,660 343,265
Accrued interest payable - other 8,417 5,264
Accrued compensation 186,459 352,498
Accrued professional fees 76,352 1,500
Other accrued liabilities 100,905 69,871
Deferred revenues 112,031 115,531
------------- ------------
Total current liabilities 1,352,726 1,579,974
------------ ------------
LONG-TERM LIABILITIES:
Note payable - related party, due after one year 8,000 2,000
Notes payable - private placement 1,205,000 -
------------ ----------
Total long-term liabilities 1,213,000 2,000
------------ --------------
Total liabilities 2,565,726 1,581,974
------------ ------------
STOCKHOLDERS' EQUITY:
Capital stock - $.01 par value; 51,000,000 shares
authorized, 41,206,360 and 39,207,664 issued and
outstanding for 1996 and 1995, respectively 412,063 392,076
Additional paid-in capital 18,555,444 18,014,854
Accumulated deficit (12,211,633) (10,278,162)
------------ ------------
Total stockholders' equity 6,755,874 8,128,768
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 9,321,600 $ 9,710,742
=========== ===========
F-3
CHEUNG LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994
--------------------------------------------------------------
REVENUES:
Hyperthermia sales and parts $ 134,006 $ 157,618 $1,025,651
Consulting service and repairs - - 60,742
Returns and allowances (60,000) - -
----------- -------------- ----------
Total revenues 74,006 157,618 1,086,393
COST OF SALES 64,406 67,350 494,946
----------- ------------ -----------
GROSS PROFIT 9,600 90,268 591,447
----------- ------------ -----------
OPERATING EXPENSES:
Selling, general and administrative 1,338,370 1,369,845 704,295
Research and development 94,012 18,546 202,569
----------- ------------ -----------
Total operating expenses 1,432,382 1,388,391 906,864
----------- ------------ -----------
(LOSS) INCOME FROM OPERATIONS (1,422,782) (1,298,123) (315,417)
COSTS INCURRED IN DEVELOPING
COSMETICS DIVISION (471,000) - -
EQUITY IN LOSS OF ARDEX EQUIPMENT,
L.L.C. - (17,009) -
GAIN ON DISPOSITION OF INVESTMENT
IN ARDEX EQUIPMENT, L.L.C. 17,009 - -
OTHER INCOME 28,808 8,620 170,997
INTEREST EXPENSE (85,506) (90,805) (184,700)
----------- ------------ -----------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (1,933,471) (1,397,317) (329,120)
INCOME TAXES - - (128,272)
-------------- -------------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (1,933,471) (1,397,317) (200,848)
EXTRAORDINARY ITEM - Gain due
to forgiveness of debt (net of tax of
$128,272 for 1995) - - 591,728
-------------- ------------- -----------
NET (LOSS) INCOME $(1,933,471) $(1,397,317) $ 390,880
=========== =========== ==========
EARNINGS PER COMMON SHARE:
Loss before extraordinary item $(.049) $(.060) $(.012)
Extraordinary item .000 .000 .035
------- ------- -------
Net (loss) income $(.049) $(.060) $ .023
====== ====== ======
See accompanying notes.
F-4
CHEUNG LABORATORIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
-------------------------------------------------------------------------------
Balances at October 1, 1993 15,900,000 $159,000 $ 6,766,704 $ (9,271,725) $(2,346,021)
Reissuance of retired shares 219,251 2,192 - - 2,192
Issuance of 2,504,400 shares of
common stock as payment of
indebtedness and expenses 2,504,400 25,044 1,261,363 - 1,286,407
Net income - - - 390,880 390,880
--------------- ------------ --------------- ------------- -------------
Balances at September 30, 1994 18,623,651 186,236 8,028,067 (8,880,845) (666,542)
Sale of common stock 20,003,000 200,030 9,801,470 - 10,001,500
Issuance of 581,013 shares of
common stock as payment of
indebtedness and expenses 581,013 5,810 185,317 - 191,127
Net loss - - - (1,397,317) (1,397,317)
-------------- ----------- --------------- -------------- -------------
Balances at September 30, 1995 39,207,664 392,076 18,014,854 (10,278,162) 8,128,768
Sale of common stock 1,299,711 12,997 406,513 - 419,510
Issuance of 698,985 shares of
common stock as payment of
indebtedness and expenses 698,985 6,990 134,077 - 141,067
Net loss - - - (1,933,471) (1,933,471)
-------------- ------------ --------------- ------------- ------------
Balances at September 30, 1996 41,206,360 $412,063 $18,555,444 $(12,211,633) $ 6,755,874
========== ======== =========== ============= ===========
See accompanying notes.
F-5
CHEUNG LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1996 1995 1994
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,933,471) $(1,397,317) $390,880
Noncash items included in net (loss) income:
Funds held under investment contract used
for cosmetic division expenses 471,000 - -
Depreciation and amortization 18,545 13,922 13,043
Bad debt expense 51,397 180,539 11,114
Gain on disposition of investment in Ardex
Equipment, L.L.C. (17,009) - -
Equity in loss of Ardex Equipment, L.L.C. - 17,009 -
Forgiveness of debt - - (720,000)
Common stock issued for operating expenses 9,000 108,926 21,320
Net changes in:
Accounts receivable (68,631) 208,680 (80,423)
Inventories 45,327 (80,478) 167,783
Accrued interest receivable (5,333) - -
Prepaid expenses 6,000 (5,875) 5,875
Other current assets (1,204) (25,551) -
Accounts payable - trade (31,170) 15,299 30,842
Accrued interest payable - related parties 53,462 84,889 163,609
Accrued interest payable - other 3,153 (41,163) (13,133)
Accrued compensation (166,039) 51,423 174,802
Accrued professional fees 74,852 (174,606) 6,848
Other accrued liabilities 31,033 24,803 (124,497)
Deferred revenues (3,500) 105,531 (2,117)
------------ ------------ ----------
Net cash (used) provided by operating activities (1,462,588) (913,969) 45,946
----------- ------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rescission of investment in Ardex Equipment, L.L.C. 100,000 - -
Purchases of patent licenses (100,000) - -
Investment in Ardex Equipment, L.L.C. - (500,000) -
Purchase of property and equipment (10,256) (5,183) (3,384)
Funds invested - investment contract - (700,000) -
Funds returned - investment contract 139,000 50,000 -
------------ ------------ ---------
Net cash provided (used) by investing activities 128,744 (1,155,183) (3,384)
------------ ------------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,205,000 - -
Payment on notes payable - related parties (48,973) - -
Payment on notes payable (2,000) (24,000) -
Proceeds of stock issuances 419,510 2,001,500 -
------------ ------------ -----------
Net cash provided by financing activities 1,573,537 1,977,500 -
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH 239,693 (91,652) 42,562
CASH AT BEGINNING OF YEAR 7,238 98,890 56,328
------------- ------------ ---------
CASH AT END OF YEAR $ 246,931 $ 7,238 $ 98,890
=========== ============ ========
See accompanying notes
F-6
Cheung Laboratories, Inc.
Statements of Cash Flows (Continued)
For the Years Ended September 30, 1996, 1995 and 1994
1996 1995 1994
--------------------------------------------
Schedule of noncash investing and financing transactions:
Stock issued as debt and accrued interest repayment:
Notes payable $75,000 $50,000 $959,230
======= ======= ========
Accounts payable $ - $ - $ 24,000
========== ========= ========
Accrued interest $57,067 $32,200 $291,666
======= ======= ========
Schedule of noncash investing and financing activities:
Proceeds of notes payable:
Increase in notes payable $ - $25,223 $ 50,000
Offset of accounts payable - (25,223) (50,000)
--------- -------- ---------
Net cash received $ - $ - $ -
========== ========= ===========
Payment on notes payable:
Decrease in notes payable $25,223 $24,000 $ -
Offset of accounts receivable (25,223) - -
--------- ---------- ----------
Net cash paid $ - $24,000 $ -
========== ======= ==========
Acquisition of a 9.5% interest in the Aestar Fine
Chemical Company in exchange for
16,000,000 shares of common stock $ - $8,000,000 $ -
========== ========== =========
Rescission of investment in Ardex Equipment,
L.L.C. in exchange for notes receivable $400,000 $ - $ -
======== ========= =========
Cash paid during the year for:
Interest $45,000 $47,079 $33,991
======= ======= =======
Income taxes $ - $ - $ -
========= ========= =========
See accompanying notes.
F-7
CHEUNG LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. DESCRIPTION OF BUSINESS
Cheung Laboratories, Inc. (the "Company") is in the business of providing
hyperthermia products for medical applications. The Company markets its products
internationally and was classified as a development stage company until October
1, 1989.
In an effort to diversify the Company's operations and investments,
the Company acquired an interest in the Aestar Fine Chemical Company ("Aestar")
in 1995. Aestar is located in the City of Zhongshan, China, and operates in the
cosmetic and fine chemicals business. The Company's previous business plan
relating to this investment was to use the dividend income it anticipated to
receive from Aestar for development of cosmetics and fine chemical joint
ventures. Subsequently, in 1996 the Company has reached an agreement with Aestar
to rescind this agreement.
Additionally, the Company has rescinded its interest in Ardex
Equipment, L.L.C., (Ardex) which operates in the industrial plumbing equipment
business.
2. GOING CONCERN UNCERTAINTY
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
sustained substantial operating losses in recent years. In addition, the Company
has used substantial amounts of working capital in its operations.
Further, at September 30, 1996, current liabilities exceed current
assets by $646,754. The Company has defaulted on a substantial majority of its
loan agreements because cash flow is insufficient to make principal and interest
payments on a timely basis. In view of these matters, realization of a major
portion of the assets in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is dependent upon the
Company's ability to meet its financing requirements and the success of its
future operations.
During 1996, in an attempt to focus its resources on its core
business, the Company rescinded its investment in Ardex and entered into an
agreement to rescind its investment in Aestar. The rescission of Aestar has been
disclosed in the notes to the financial statements as a subsequent event and it
had a significant impact on the Company's financial condition and stockholder's
equity. See note 14 for a further impact of the rescission.
Despite these efforts, working capital deficits continue as the
majority of cash funds raised during 1996 was in the form of the issuance of
capital stock and deft financing through private placement.
F-8
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable
Accounts receivable consist of the following:
1996 1995
--------------------------
Trade receivables $138,465 $192,444
Related party receivables:
Microfocus 1,910 1,316
Ardex Equipment, L.L.C. 34,730 -
Allowance for doubtful accounts (20,770) (56,659)
--------- ---------
$154,335 $137,101
======== ========
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the average cost matters. Inventories are comprised of the
following at September 30:
1996 1995
-----------------------------
Materials $169,752 $220,553
Work-in-process 46,062 52,449
Finished products 55,138 28,277
--------- ---------
$270,952 $301,279
======== ========
Property and Equipment
Depreciation is computed using the straight-line method for
financial reporting and accelerated methods for tax reporting purposes.
Depreciation is computed over the estimated useful lives of the assets as
follows:
Furniture and office equipment 5 years
Laboratory and shop equipment 5 years
Depreciation expense for the years ended September 30, 1996,
1995 and 1994 was $7,868, $7,259 and $6,380 respectively. Major renewals and
betterments are capitalized at cost, and ordinary repairs and maintenance are
charged against operations as incurred. Related costs and accumulated
depreciation are eliminated from the accounts upon disposition of an asset and
the resulting gain or loss is reflected in the statement of operations and
accumulated deficit.
F-9
Investments - at Equity
Investments in which the Company has a 20% to 50% interest or
otherwise exercises significant influence are carried at cost, adjusted for the
Company's proportionate share of their undistributed earnings or losses.
Otherwise, investments are carried at cost and dividend income is recognized as
earned in other income.
Patent Licenses
The Company has purchased several licenses to use the rights
to patented technologies. Patent licenses are amortized straight-line over the
remaining patent life. Amortization expense for the years ended September 30,
1996, 1995 and 1994 was $10,678, $6,663 and $6,663, respectively.
Revenue Recognition
Revenue is recognized when systems, products or components
are shipped and when consulting services are rendered. Deferred revenue includes
customer deposits received on contingent sale agreements.
Research and Development
Research and development costs are expensed as incurred.
Equipment and facilities acquired for research and development activities which
have alternative future uses are capitalized and charged to expense over their
estimated useful lives.
Net Income (Loss) Per Share
Net income (loss) per share is computed based upon common
shares outstanding during the periods after giving retroactive effect to all
stock splits and conversions. Net income (loss) is based on the actual weighted
average number of common shares outstanding during the period of 39,499,650 for
1996, 23,466,070 for 1995, and 16,912,978 for 1994.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
4. PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
Accounting for the Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, (SFAS No. 121).
SFAS No. 121 requires that assets to be held and used be evaluated for
impairment whenever events or circumstances indicate that the carrying value may
not be recoverable. SFAS No. 121 also requires that assets to be disposed of be
reported at the lower of cost or fair value less selling costs. Implementation
of SFAS No. 121 is not expected to have a material impact on the results of
operations or financial position. SFAS No. 121 is effective for the Company as
of October 1, 1996.
Accounting for Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS No. 123), which is effective for the Company's year ending
September 30, 1997. SFAS No. 123 allows companies either to continue to account
for stock-based employee compensation plans under existing accounting standards
or to adopt a fair-value-based method of accounting as defined in the new
standard. The Company will follow the existing accounting standards for these
plans, but will provide pro forma disclosure of net income and earnings per
share as if the expense provisions of SFAS No. 123 had been adopted.
Implementation of SFAS No. 123 is not expected to have a material impact on
results of operations or financial condition.
5. RELATED PARTY TRANSACTIONS
Notes Receivable - Related Parties
Notes receivable due from related parties consist of the
following:
1996 1995
------------------------
Term note due August 31, 2001 from Ardex
Equipment, L.L.C., accruing interest at
8% per annum. $350,000 $ -
Term note due August 31, 2001 from the
principals of Ardex Equipment, L.L.C.,
accruing interest at 8% per annum. 50,000 -
--------- ------
$400,000 $ -
======== =====
F-11
Notes Payable - Related Parties
Notes payable to related parties as of September 30 are
comprised of the following:
1996 1995
----------------------------
Term note payable to an officer and stockholder of
the Company, accruing interest at 10% per annum. $ 42,669 $42,669
Term notes payable to an officer and stockholder of
the Company, accruing interest at 12% per annum. 78,750 85,000
Demand note payable to relative of an officer and
stockholder of the Company, accruing interest at
12% per annum. 36,041 36,041
Demand note payable to related party of remainder
of funds borrowed for discontinued project, note
bears interest at 12% per annum. 28,502 28,502
Term notes payable to interested parties of the
Company accruing interest at 9 to 12%
per annum. 103,750 223,473
Term note payable to stockholder of the Company
accruing interest at 10% per annum payable in
monthly payments of $2,000 for 25 months. The
note is secured by all accounts receivable and
general intangibles of the Company. 50,000 50,000
--------- ---------
339,712 465,685
Less current portion 331,712 463,685
--------- ---------
Long-term portion - due in 1997 $ 8,000 $ 2,000
======== =========
Interest accrued on these notes amounted to $339,660 and
$343,265 at September 30, 1996 and 1995, respectively.
Notes Payable - Private Placement
During the year ended September 30, 1996, the Company issued
$1,205,000 in senior secured convertible notes accruing interest at 8% per
annum. The notes and accrued interest have priority over payment of any other
indebtedness of the Company. On or after the next private offering, or upon
maturity, whichever shall first occur, the holder may elect to convert the
principal amount and any accrued interest into common stock at an option price
of $.41 per share or can elect to be repaid from the proceeds of the private
offering. The notes mature and become due the earlier of the next private
offering or December 31, 1997. Interest accrued on these notes amounted to
$1,262 at September 30, 1996.
F-12
6. INVESTMENT IN AESTAR FINE CHEMICAL COMPANY - AT COST
During 1995, the Company acquired a 9.5% equity interest in Aestar
Fine Chemical Company (Aestar) in exchange for 16,000,000 shares of its common
stock. The investment is carried at cost, as measured by the $.50 per share fair
market value of the 16,000,000 shares of the Company's common stock. There were
no dividends received during the years ended September 30, 1996 and 1995. The
common stock of Aestar is not actively traded, therefore the market value of
this investment is not readily determinable. The Company has subsequently
entered into an agreement to rescind this investment. See note 14 to the
financial statements.
7. INVESTMENT IN ARDEX EQUIPMENT, L.L.C. - AT EQUITY
The Company purchased a 19.25% equity interest in Ardex Equipment,
L.L.C. (Ardex) in 1995. The investment is carried at cost, adjusted for the
Company's proportionate share of Ardex's loss from the purchase date through
September 30, 1995. Ardex is not actively traded, therefore the market value of
this investment is not readily determinable. During 1996, the Company entered
into an agreement to rescind its investment in Ardex, the effects of which are
reflected in these financial statements.
8. FUNDS HELD UNDER INVESTMENT CONTRACT
During 1995, the issuance of 20,000,000 shares of common stock to
Mr. Gao Yu Wen enabled Mr. Gao to obtain a majority interest in the Company. Mr.
Gao has essentially recapitalized the Company through this investment of
$2,000,000 in cash and an $8,000,000 interest in Aestar. Pursuant to the terms
of an investment agreement between the Company and Mr. Gao, the Company has
invested surplus working capital funds in Hong Kong and China. At September 30,
1995, the Company had drawn $50,000 from the account, reducing the balance to
$650,000. The balance as of September 30, 1996 has been further reduced to
$40,000 to reflect $471,000 in costs incurred by Mr. Gao while developing a
cosmetic division in Hong Kong on behalf of the Company, per an agreement,
subsequently entered into to rescind the investment in Aestar Fine Chemical
Company.
9. INCOME TAXES
Income tax expense on (loss) income before extraordinary item
differs from that computed at the federal income tax rate as follows:
1996 1995 1994
------------------------------------
Income tax (benefit) at statutory rate
(34%) $(657,380) $(475,088) $(128,272)
Tax benefits not recognized 657,380 475,088 -
--------- --------- --------
Income tax (benefit) expense $ - $ - $(128,272)
=========== ========= =========
F-13
The tax benefit of net operating losses has been completely offset
by a valuation allowance until the Company demonstrates earnings that would
utilize the net operating loss carryforwards. The 1994 tax benefit resulted from
utilizing net operating loss carryforwards as a result of a gain from the
forgiveness of debt. At September 30, 1996, the Company has net operating loss
carryforwards exceeding $10,000,000. These carryovers expire in various amounts
through the period 1997 to 2011. Due to the sale of stock to the majority
stockholder, the use of the net operating losses will be subject to an annual
limitation.
10. COMMON STOCK
During the year ended September 30, 1996, the Company issued
1,299,711 shares of common stock for $419,510, 689,985 shares were issued to
extinguish debt, and 9,000 shares were issued as payments for various operating
expenses.
During the year ended September 30, 1995, the Company issued
20,000,000 shares of common stock in exchange for $2,000,000 in cash and
$8,000,000 as a 9.5% interest in the Aestar from an investor. This transaction
enabled the investor to obtain a majority interest in the Company's common
stock. Additionally, the Company issued 3,000 shares of common stock for $1,500,
360,000 shares were issued to extinguish debt, and 221,000 shares were issued as
payments for various operating expenses.
During the year ended September 30, 1994, the Board of Directors and
stockholders authorized the issuance of 35,100,000 additional shares of common
stock. In addition 219,251 of retired shares were reissued, 2,174,800 shares
were issued to extinguish debt and 329,600 shares were issued as employee wages.
11. STOCK OPTIONS AND WARRANTS
The Company has granted stock options to certain employees on a
periodic basis at the discretion of the Board of Directors. Options are granted
at market value at the date of the grant and are immediately exercisable.
Following is a summary of stock options as of and for the year ended September
30, 1996:
For the year ended September 30, 1996:
Share options granted 2,420,000
Price range of share options granted $.35 to $.41
Options exercised 100,000
Price range of shares exercised $.35 to $.41
As of September 30, 1996:
Unexercised options outstanding 2,850,000
Weighted average exercise price $.34
Price range of outstanding options $.25 to $.41
F-14
As of September 30, 1996 there were warrants outstanding to purchase
3,320,715 shares of the Company's stock at a price of $.41 per share. The
Company is also obligated to sell additional shares to certain individuals at a
price based on future stock sales by the Company.
12. COMMITMENTS AND CONTINGENCIES
Potential Liability and Insurance
In the normal course of business, the Company may be subject to
warranty and product liability claims on its hyperthermia equipment. Currently,
the Company does not have a product liability insurance policy in effect
although management does anticipate obtaining such coverage when adequate
financial resources are available. The assertion of any product liability claim
against the Company, therefore, may have an adverse effect on its financial
condition. As of September 30, 1996, no product, warranty claims or other
liabilities against the Company have been asserted.
Warranty Reserve
The Company warrants its hyperthermia units to be free from
defects in material and workmanship under normal use and service for the period
of one year from the date of shipment. Claims have been confined to basic
repairs. Given the one year limitation of the warranty, management has elected
to not set up a warranty reserve but, instead, to expense repairs as costs are
incurred.
13. GAIN ON EXTINGUISHMENT OF DEBT
The 1994 extraordinary gain of $591,728 (net of income taxes)
results from the forgiveness of notes payable and accrued interest.
14. SUBSEQUENT EVENT - STOCK REDEMPTION
On October 23, 1996, the Company, based on the provisions of an
agreement reached on June 6, 1996, redeemed 16,000,000 shares of its common
stock.
The redemption provided for the Company to return its investment in
Aestar Fine Chemical Company (valued at $8,000,000 on the Company's September
30, 1996 balance sheet) and to relinquish its rights to the funds held under
investment contract ($40,000 at September 30, 1996) in order to affect the
transaction. This transaction has a significant impact on the financial
position, current ratios and stockholders' equity of the Company. If the
foregoing transaction had occurred on or before September 30, 1996, total assets
would have been reduced by $8,040,000, and stockholders' equity would have
decreased by $8,040,000, resulting in a total negative stockholders' equity of
$(1,284,126).
As part of this agreement, the Company has the option to redeem an
additional 4,000,000 shares owned by the Gao Group if a payment of $2,160,000 is
made on or before December 31, 1996. This deadline may be extended until March
31, 1997 with the payment of an .75% monthly interest factor.
F-15
15. SUBSEQUENT EVENT - PURCHASE OF PORTABLE X-RAY TECHNOLOGY
On August 28, 1996, the Company entered into a termination agreement
with Carlton Poor, a representative of Rainbow Ball Development Limited
("Rainbow Ball"). This agreement terminated a previous agreement with Rainbow
Ball under which the Company was to share its portable x-ray business line. The
termination agreement returns all rights to the portable x-ray business line to
the Company in exchange for 355,757 shares of the Company's common stock to be
issued in October 1996.
16. SUBSEQUENT EVENT - TERMINATION OF PURCHASE OPTION
On April 26, 1995, the Company entered into an agreement to purchase
a 50% interest in the United Aerosol and Home Products Company, LTD ("Unisol"),
located in Zhongshan, China. Unisol is a specialty chemical and fine chemical
aerosol packaging and bottle/can filling business. The purchase price was to be
20% of the appraised value of Unisol equipment, payable in the Company's common
stock at the close of business on April 26, 1996. The Unisol acquisition was
executed as part of the Gao transaction. This agreement was verbally terminated
on October 23, 1996, at the same time that the Company executed the agreement by
which the Company redeemed its stock from Mr. Gao.
F-16
A.Y. CHEUNG ASSOCIATES, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
A.Y. CHEUNG ASSOCIATES, INC., a Maryland corporation, having its
principal office at 5026 Herzel Place, Suite 101, Beltsville, Maryland 20705
(hereinafter referred to as the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation desires to amend and restate its Charter as
currently in effect as hereinafter provided. The provisions set forth in these
Articles of Amendment and Restatement are all the provisions of the Charter of
the Corporation as currently in effect.
SECOND: The Charter of the Corporation is hereby amended by striking
in their entirety Articles FIRST through EIGHTH, inclusive, and by substituting
in lieu thereof the following:
FIRST: The name of the corporation (which is hereinafter called the
"Corporation") is:
CHEUNG LABORATORIES, INC.
SECOND: The purposes for which the Corporation is formed are as follows:
(a) To carry on the business of a system engineering company specializing
in the application of electromagnetic energy for scientific, industrial, and
medical markets and, without limiting the generality of the foregoing, to
manufacture, prepare for market, buy or otherwise acquire, sell, or otherwise
deal in or with, import, export and transport, at wholesale or retail or
otherwise, devices relating thereto; and to engage in any other lawful business
or activity.
(b) To do anything permitted by Section 2-103 of the Corporations and
Associations Article of the Annotated Code of Maryland, as amended from time to
time.
The foregoing enumerated purposes shall be in no way limited or restricted by
reference to, or inference from, the terms of any other clause of this or any
other Article of the Charter of the Corporation, and each shall be regarded as
independent; and they are intended to be and shall be construed as powers as
well as purposes and shall be in addition to and not in limitation of the powers
of corporations under the laws of the State of Maryland.
THIRD: The current post office address of the principal office of the
Corporation in this State is 5026 Herzel Place, Suite 101, Beltsville, Maryland
20705. The name and address of the current resident agent of the Corporation is
Michael J. Cromwell, III, 10 Light Street, Baltimore, Maryland 21202. Said
resident agent is a citizen of the State of Maryland and actually resides
therein.
FOURTH: The total number of shares of stock of all classes which the Corporation
has authority to issue is 15,900,000 shares of common stock, with a par value of
$.01 per share, amounting in the aggregate to $159,000.
FIFTH: The number of directors of the Corporation shall be three (3), which
number may be increased or decreased pursuant to the By-Laws of the Corporation,
but shall never be less than three (3). The names of the current directors, who
shall act until their successors are duly chosen and qualified, are: Augustine
Y. Cheung; Fee-Wah Cheung; Vance Y. Hum.
320459.001(B&F) 2 12/10/96
SIXTH: The Board of Directors shall manage the business and affairs of the
Corporation and may exercise all the powers of the Corporation except those
conferred upon or reserved to the stockholders by law, including but not limited
to the following:
(a) The Board of Directors shall have the power from time to time and in
its sole discretion: (1) to determine, in accordance with sound accounting
practice, what constitutes annual or other net profits, earnings, surplus or net
assets in excess of capital; (2) to fix and vary from time to time the amount to
be reserved as working capital, or determine that retained earnings or surplus
shall remain in the hands of the Corporation; (3) to set apart any funds of the
Corporation for the establishment of such reserves in such amounts and for such
proper purposes as it shall determine and to abolish or redesignate any such
reserves or any part thereof; (4) to determine whether there shall be declared,
distributed or paid any distribution or dividend in stock, cash or other
securities or property, out of surplus or any other funds or amounts legally
available therefor, and to declare, distribute and pay the same at such times
and to the stockholders of record on such dates as it may from time to time deem
appropriate; and (5) to determine whether, to what extent, at what times and
places, and under what conditions and regulations the books, accounts and
documents of the Corporation, or any of them, shall be open to the inspection of
stockholders, except as otherwise provided by statute or by the By-Laws, and,
except as so provided, no stockholder shall have the right to inspect any book,
account or document of the Corporation unless authorized to do so by resolution
of the Board of Directors.
(b) The Board of Directors of the Corporation shall have the power in its
sole discretion and without limitation, subject only to any restrictions imposed
320459.001(B&F) 3 12/10/96
by law, to authorize the issuance from time to time of shares of the
Corporation's stock, with or without par value, of any class, whether now or
hereafter authorized, and of securities convertible into shares of the
Corporation's stock, with or without par value, of any class, whether now or
hereafter authorized, for such consideration (regardless of the value or amount
of such consideration) and in such manner and by such means as the Board of
Directors may deem advisable.
(c) The Board of Directors shall have the power in its sole discretion and
without limitation, subject only to any restrictions imposed by law, to classify
or reclassify any unissued shares of stock, whether now or hereafter authorized,
by setting, altering or eliminating in any one or more respects, from time to
time before the issuance of such shares, any feature of such shares, including
but not limited to the designation, par value, preferences, conversion or other
rights, voting powers, qualifications, and terms and conditions of redemption
of, and limitations as to dividends and any restrictions on, such shares.
The enumeration and definition of particular powers of the Board of
Directors included in the foregoing provisions of this Article SIXTH shall in no
way be limited or restricted by reference to or inference from the terms of any
other clause of this or any other Article of the Charter of the Corporation, or
construed as or deemed by inference or otherwise in any manner to exclude or
limit any powers conferred upon the Board of Directors under applicable law now
or hereafter in force.
SEVENTH: No holders of any shares of the stock of the Corporation of any class
shall have any preemptive right to purchase, subscribe for or otherwise acquire
any shares of stock of the Corporation of any class now or hereafter authorized,
or any securities exchangeable for or convertible into such shares, or any
warrants or other instruments evidencing rights or options to subscribe for,
purchase or otherwise acquire such shares, other than such, if any, as the Board
of Directors in its discretion may fix.
320459.001(B&F) 4 12/10/96
EIGHTH: The Corporation reserves the right from time to time to make any
amendments of its Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in its Charter, of any of its outstanding stock by classification,
reclassification or otherwise, and any objecting stockholder whose rights may or
shall be substantially adversely affected shall not be entitled to the same
rights as an objecting stockholder in the case of a consolidation, merger, share
exchange or sale, lease, exchange or transfer of all or substantially all of the
assets of the Corporation.
NINTH: The duration of the Corporation shall be perpetual.
THIRD: By written informal action unanimously taken by the Board of
Directors of the Corporation, pursuant to and in accordance with Section
2-408(c) of the Corporations and Associations Article of the Annotated Code of
Maryland, the Board of Directors of the Corporation duly advised the foregoing
Articles of Amendment and Restatement and, by written informal action
unanimously taken by the stockholders of the Corporation, in accordance with
Section 2-505 of the Corporations and Associations Article of the Annotated Code
of Maryland, the stockholders of the Corporation duly approved said Articles of
Amendment and Restatement.
FOURTH: (a) The total number of shares of all classes of stock of the
Corporation heretofore authorized is 5,000 shares of common stock all of one
class. Such shares are without par value.
320459.001(B&F) 5 12/10/96
(b) The total number of shares of all classes of stock of the Corporation
as increased is 15,900,000 shares of common stock all of one class. Such shares
have a par value of $.01 per share, amounting in the aggregate to $159,000.
FIFTH: Upon the effectiveness of these Articles of Amendment and
Restatement with the State Department of Assessments and Taxation of Maryland,
each of the authorized shares of common stock without par value shall be changed
and split on the basis of three thousand one hundred eighty (3,180) shares of
common stock with a par value of $.01 per share for each share without par
value, provided that any fractional interest shall be eliminated by being
rounded off to a full share of stock.
IN WITNESS WHEREOF, A.Y. CHEUNG ASSOCIATES, INC. has caused these presents
to be signed in its name and on its behalf by its President and its corporate
seal to be hereunder affixed and attested by its Assistant Secretary on this
_____ day of June, 1996, and its President acknowledges that these Articles of
Amendment and Restatement are the act and deed of A.Y. CHEUNG ASSOCIATES, INC.
and, under the penalties of perjury, that the matters and facts set forth herein
with respect to authorization and approval are true in all material respects to
the best of his knowledge, information and belief.
ATTEST: A.Y. CHEUNG ASSOCIATES, INC.
_______________________________ By: _________________________________
Vance Y. Hum, Assistant Secretary Augustine Y. Cheung, President
[SEAL]
320459.001(B&F) 6 12/10/96
CHEUNG LABORATORIES, INC.
ARTICLES OF AMENDMENT
CHEUNG LABORATORIES, INC., a Maryland corporation, having its principal
office at 10220 Old Columbia Road, Suite I, Columbia, MD 21046-1705 (hereinafter
referred to as the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended by striking in
their entirety Articles THIRD, FOURTH and FIFTH, and by substituting in lieu
thereof the following:
THIRD: The current post office address of the principal office
of the Corporation in this State is 10220 Old Columbia Road, Suite I,
Columbia, MD 21046-1705. The name and address of the current resident
agent of the Corporation is Charles C. Shelton, 210 West Pennsylvania
Avenue, Suite 520, Baltimore, Maryland 21204-5325. Said resident is a
citizen of the State of Maryland and actually resides therein.
FOURTH: The total number of shares of stock of all classes
which the Corporation has authority to issue is 51,000,000 shares of
common stock, with a par value of $.01 per share, amounting in the
aggregate to $510,000.
FIFTH: The number of directors of the Corporation shall be
eight (8), which number may be increased or decreased pursuant to the
ByLaws of the Corporation, but shall never be less than three (3). The
names of the current directors, who shall act until their successors
are duly chosen and qualified are:
Augustine Y. Cheung, Chairman
Robert F. Schiffmann
John J. Kohlman
William O. Cave, Sr.
Dennis Smith
John Mon
Charles C. Shelton, Esquire
Shiu Ming (Tom) Hong
320459.001(B&F) 1 12/10/96
SECOND: The Articles of Incorporation are hereby amended by adding thereto
the following new Article TENTH:
TENTH: The Directors and Officers of the Corporation shall not be liable
for any money damages whatsoever, except to the extent provided by Md. Code
Ann., Corps. & Assn's. ss.2-405.2 and Md. Code Ann., Cts. & Jud. Pro. ss.5-349,
or any successor or later-adopted provisions of law with similar import.
Any amendment, modification, or repeal of the foregoing sentence by the
Board of Directors or stockholders of the Corporation shall be
prospective in operation and effect only, and shall not adversely
affect any right or protection of a Director or Officer of the
Corporation in respect of any act or omission occurring prior to the
time of such amendment, modification, or repeal.
THIRD: By written informal action unanimously taken by the Board of
Directors of the corporation, pursuant to and in accordance with Section
2-408(c) of the Corporations and Associations Article of the Annotated Code of
Maryland, the Board of Directors of the Corporation duly advised the foregoing
Articles of Amendment and, by action taken by the stockholders of the
Corporation pursuant to a stockholders meeting held April 15, 1994, and proxy
statement dated March 25, 1994, the stockholder of the Corporation duly approved
said Articles of Amendment.
IN WITNESS WHEREOF, CHEUNG LABORATORIES, INC. has caused these presents
to be signed in its name and on behalf by its President and its corporate seal
to be hereunder affixed and attested to by its Secretary on this ____ day of
December, 1994, and its President acknowledges that these Articles of Amendment
are the act and deed of CHEUNG LABORATORIES, INC. and, under the penalties of
perjury, that the matters and facts set forth herein with respect to
authorization and approval are true in all material respects to the best of his
knowledge, information and belief.
ATTEST: CHEUNG LABORATORIES,INC.
/s/ By: /s/
- ------------------------------ -----------------------------
Charles C. Shelton, Secretary Augustine Y. Cheung, President
320459.001(B&F) 2 12/10/96
CHEUNG LABORATORIES, INC.
BY-LAWS
ARTICLE I.
STOCKHOLDERS
Section 1. ANNUAL MEETING
The annual meeting of the stockholders of the Corporation
shall be held during the month of January of each year at such time as the Board
of Directors shall, in their discretion, fix. The business to be transacted at
the annual meeting shall include the election of directors, consideration and
action upon the report of the President, and any other business within the power
of the Corporation.
Section 2. SPECIAL MEETING
At any time in the intervals between annual meetings, a
special meeting of the stockholders may be called by the President or by the
Board of Directors.
Section 3. NOTICE OF MEETING
Not less than ten (10) days nor more than ninety (90) days
before the date of every stockholders' meeting, the Secretary shall give to each
stockholder entitled to vote at such meeting, written or printed notice stating
the time and place of the meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, either by presenting it to
him personally, by leaving it at his residence or usual place of business, or by
mailing it to him at his address as it appears on the records of the
Corporation.
No business shall be transacted at a special meeting save that
specially named in the notice.
Notwithstanding the foregoing provisions, each person entitled
to notice waives notice if he before or after the meeting signs a waiver of the
notice which is filed with the records of stockholders meetings, or is present
at the meeting in person or by proxy.
Section 4. QUORUM
At any meeting of stockholders the presence in person or by
proxy of stockholders entitled to cast a majority of the votes thereat shall
constitute a quorum. A majority of the votes cast at a meeting of stockholders,
duly called and at which a quorum is present shall be sufficient to take or
authorize action upon any matter which may properly come before the meeting
unless more than a majority of votes is required by statute, by the Charter of
the Corporation, or by these By-Laws.
In the absence of a quorum, a majority of the shares
represented in person or by proxy may adjourn the meeting from time to time not
exceeding a total of sixty (60) days without further notice other than by
announcement at such meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting originally called. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum. In the event that
at any meeting a quorum exists for the transaction of some business but does not
exist for the transaction of other business, the business as to which a quorum
is present may be transacted by the holders of stock present in person or by
proxy who are entitled to vote thereon.
Section 5. VOTING
Each share of common stock will be entitled to one vote,
unless the Charter of the Corporation provides for a greater or lesser number of
votes per share or limits or denies voting rights.
Section 6. PROXIES
At all meetings of stockholders, a stockholder may vote the
shares owned of record by him either in person of by proxy executed in writing
by the stockholder or by his duly authorized attorney-in-fact. Such proxy shall
be filed with the Secretary of the Corporation before or at the time of the
meeting. No proxy shall be valid after eleven (11) months from the date of its
execution, unless otherwise provided in the proxy.
Section 7. PLACE OF MEETING
319999.001(B&F) 2
The Board of Directors may designate any place, either within
or without the State of Maryland, as the place of meeting for any annual or
special meeting of stockholders.
Section 8. CONDUCT OF MEETINGS
Meetings of stockholders shall be presided over by the
Chairman of the Board, if one be elected and is present at the meeting or, if
not, by the President of the Corporation or, if he is not present, by a Vice
President of the Corporation or, if he is not present, by a Vice President, or,
if no Vice President is present, by a chairman to be elected at the meeting. The
Secretary of the Corporation, or if he is not present, any Assistant Secretary,
shall act as secretary of such meetings. In the absence of the Secretary and any
Assistant Secretary, the presiding officer may appoint a person to act as
secretary of the meeting.
Section 9. INFORMAL ACTION BY STOCKHOLDERS
Any action required or permitted to be taken at a meeting of
stockholders may be taken without a meeting if there is filed with the records
of stockholders' meetings a unanimous written consent which sets forth the
action and is signed by each stockholder entitled to vote on the matter and a
written waiver of any right to dissent signed by each stockholder entitled to
notice of the meeting but not entitled to vote at it.
ARTICLE II.
DIRECTORS
Section 1. POWERS
The business and affairs of the Corporation shall be managed
by its Board of Directors, which may exercise all of the powers of the
Corporation, except such as are by statute, by the Charter of the Corporation,
or by these By-Laws expressly conferred upon or reserved to the stockholders.
Section 2. NUMBER AND TENURE
319999.001(B&F) 3
The number of Directors shall be three (3), which number may
be altered by a majority of the entire Board of Directors, provided that it
shall never be less than three (3) nor more than nine (9). Each Director shall
hold office until the next annual meeting of stockholders or until his successor
shall have been elected and shall have qualified. The number of Directors may be
increased or decreased by the affirmative bote of not less than two-thirds (2/3)
of the entire Board of Directors, but the action may not affect the tenure of
office of any Director.
Section 3. VACANCIES
Any vacancy occurring in the Board of Directors, other than
one occurring because of an increase in the number of Directors, may be filled
by the affirmative bote of a majority of the remaining Directors. Any vacancy
occurring in the Board of Directors due to an increase in the number of
Directors may be filled by a majority of the entire Board of Directors. A
Director elected to fill a vacancy shall serve until the next annual meeting of
stockholders and until his successor is elected and qualifies.
Section 4. REGULAR MEETING
The Board of Directors shall meet for the purpose of
organization, the election of Officers, and the transaction of other business as
soon as practicable after each annual meeting of stockholders. Other regular
meetings of the Board of Directors shall be held at such times and such places,
either within or without the State of Maryland, as may be designated from time
to time by the Board of Directors.
Section 5. SPECIAL MEETING
Special meetings of the Board of Directors may be called by
the President or by any two Directors. The person or persons authorized to call
special meetings of the Board of Directors may fix any time and place, either
within or without the State of Maryland, as the time and place for holding the
special meeting of the Board of Directors called by them.
Section 6. NOTICE
Notice of every regular or special meeting of the Board shall
be given to each Director by written notice stating the time and place of the
319999.001(B&F) 4
meeting. Notice is given to a Director when it is delivered personally to him,
left at his residence of usual place of business, or sent by telegraph, at least
twenty-four (24) hours before the time of the meeting or, in the alternative, be
mailed to his address as it appears on the records of the Corporation at least
seventy-two (72) hours before the time of the meeting. Any Director may waive
notice of any meeting by written waiver filed with the records of the meeting,
either before or after the holding thereof. The attendance of a Director at a
meeting shall constitute a waiver of notice of such meeting, except where a
Director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
Section 7. QUORUM
Unless otherwise provided by statute, by the Charter of the
Corporation, or by these By-Laws, a majority of the Board of Directors shall
constitute a quorum for the transaction of business, but if less than such
quorum is present at a meeting, a majority of the Directors present may adjourn
the meeting from time to time without further notice.
Section 8. MANNER OF ACTING
The action of a majority of the Directors present at a meeting
at which a quorum is present shall be the action of the Board of Directors
unless the concurrence of a greater proportion is required for such action by
statute, by the Charter of the Corporation, or by these By-Laws.
Section 9. COMPENSATION
By resolution of the Board of Directors a fixed sum and
expenses of attendance, if any, may be paid to the Directors for attendance at
meetings of the Board of Directors or of committees thereof. Other compensation
for their services as such or on committees of the Board of Directors may also
be paid to Directors. No such payment shall preclude any Director from serving
the Corporation in any other capacity and receiving compensation therefor.
Section 10. INFORMAL ACTION
319999.001(B&F) 5
Any action required or permitted to be taken at any meeting of
the Board of Directors may be taken without a meeting if a written consent to
such action is signed by all members of the Board of Directors and such written
consent is filed with the minutes of proceedings of the Board of Directors.
Section 11. MEETING BY CONFERENCE TELEPHONE
Members of the Board of Directors may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participating in a meeting by these means constitutes presence in person at a
meeting.
ARTICLE III.
COMMITTEES
Section 1. COMMITTEES
The Board of Directors may appoint from among its members an
Executive Committee and other committees composed of two or more Directors and
delegate to these committees in the intervals between meetings of the Board of
Directors any of the powers of the Board of Directors, except the power to
declare dividends or distributions on stock approve any merger or share exchange
which does not require stockholder approval, amend the By-Laws, issue stock
other than as permitted by statute, or recommend to the stockholders any action
which requires stockholder approval. Each committee may fix rules of procedure
for its business. A majority of the members of a committee shall constitute a
quorum for the transaction of business and the act of a majority od those
present at a meeting at which a quorum is present shall be the act of the
committee. The members of a committee present at any meeting, whether or not
they constitute a quorum, may appoint a Director to act in place of an absent
member. The members of a committee may conduct any meeting thereof by conference
telephone in accordance with the provisions of Article II, Section 11.
Section 2. MINUTES
Each committee shall keep minutes of its proceedings and
report the same to the Board of Directors as and when required by the Board.
319999.001(B&F) 6
Section 3. EMERGENCY
In the event of a state of disaster of sufficient severity to
prevent the conduct and management of the affairs and business of the
Corporation under the direction of its Directors and Officers as contemplated by
its Charter and By-Laws, any two or more available members of the then incumbent
Executive Committee shall constitute a quorum of that Committee for the full
conduct and management of the affairs and business of the Corporation in
accordance with the provisions of Article III, Section 1. In the event of the
unavailability, at such time, of a minimum of two members of the then incumbent
Executive Committee, the available directors shall elect an Executive Committee
consisting of any two members of the Board of Directors, whether or not they be
Officers of the Corporation, which two members shall constitute the Executive
Committee for the full conduct and management of the affairs of the Corporation
in accordance with the foregoing provisions of this Section 3. This Section
shall be subject to implementation by resolution of the Board of Directors
passed from time to time for that purpose, and any provisions of the By-Laws
(other than this Section 3) and any resolutions which are contrary to the
provisions of this Section 3 or to the provisions of any such implementary
resolutions shall be suspended until it shall be determined by any interim
Executive Committee acting under this Section 3 that it shall be to the
advantage of the Corporation to resume the conduct and management of its affairs
and business under all the other provisions of the By-Laws.
ARTICLE IV.
OFFICERS
Section 1. EXECUTIVE OFFICERS
The Corporation shall have a President, who shall be a
Director of the Corporation, a Secretary, and a Treasurer. It may also have a
Chairman of the Board, who shall be a Director of the Corporation, one or more
Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant
Secretaries, one or more Assistant Treasurers, and such other officers as the
Board of Directors may elect. Any two offices may be held by the same person,
except those of President and Vice President, but no Officer shall execute,
acknowledge or verify any instrument in more than one capacity if such
instrument is required to be executed, acknowledged or verified by any two or
more Officers.
319999.001(B&F) 7
Section 2. ELECTION AND TENURE
The Officers of the Corporation shall be elected by the Board
of Directors at the first meeting of the Board of Directors held after each
annual meeting of the stockholders, or as soon after such first meeting as may
be convenient. Each Officer shall hold office for such period, not to exceed one
(1) year, as the Board of Directors may fix or until his successor shall have
been duly elected and shall have qualified.
The Board of Directors may, at any time, and from time to
time, authorize the making or adoption by the Corporation of special contracts
with an Officer for services of such Officer for a fixed period and on such
terms and conditions, and with such powers, duties and compensation, as may be
fixed by such contract, and may elect such Officer for such term or terms,
whether exceeding one (1) year or not, as may be specified by such contract.
Section 3. REMOVAL
Any Officer or agent of the Corporation may be removed by the
Board of Directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed.
Section 4. VACANCIES
A vacancy in any office may be filled by the Board of
Directors for the unexpired portion of the term.
Section 5. CHAIRMAN OF THE BOARD
The Chairman of the Board, if one be elected, shall preside at
all meetings of the Board of Directors and of the stockholders at which he shall
be present. He shall have and may exercise such powers as are, from time to
time, assigned to him by the Board of Directors.
Section 6. PRESIDENT
319999.001(B&F) 8
The President shall be elected from the Board of Directors and
shall, in the absence of the Chairman of the Board, preside at all meetings of
the Board and of the stockholders at which he is present. He shall be the chief
executive office of the Corporation and, subject to the control of the Board of
Directors, shall, in general, supervise and administer all of the business and
affairs of the Corporation. In general, the President shall have all powers and
shall perform all duties incident to the office of President and such as may
from time to time be prescribed by the Board of Directors.
Section 7. VICE PRESIDENTS
The Vice President or Vice Presidents, at the request of the
President or in his absence or during his inability to act, shall perform the
duties and exercise the functions of the President, and when so acting shall
have the powers of the President. If there be more than one Vice President, the
Board of Directors may determine which one or more of the Vice Presidents shall
perform any of such duties or exercise any of such functions, or if such
determination is not made by the Board of Directors, the President may make such
determination; otherwise any of the Vice Presidents may perform any of such
duties, and have such additional descriptive designations (if any) in their
titles as may be assigned by the Board of Directors or the President.
Section 8. THE SECRETARY
The Secretary shall in general have all powers and perform all
duties incident to the office of Secretary and such as may from time to time be
prescribed by the Board of Directors or by the President.
Section 9. THE TREASURER
The Treasurer shall have general charge of the financial
affairs of the Corporation. He shall in general have all powers and perform all
duties incident to the office of Treasurer and such as may from time to time be
prescribed by the Board of Directors or by the President.
Section 10. ASSISTANT OFFICERS
The Assistant Vice Presidents shall have such duties as may
from time to time be assigned to them by the Board of Directors or the
319999.001(B&F) 9
President. The Assistant Secretaries shall have such duties as may from time to
time be assigned to them by the Board of Directors or the Secretary. The
Assistant Treasurers shall have such duties as may from time to time be assigned
to them by the Board of Directors of the Treasurer.
Section 11. OTHER OFFICERS
Such other officers as may be elected by the Board of
Directors shall have such powers and perform such duties as the Board may from
time to time prescribe.
Section 12. SALARIES
The salaries of the Officers shall be fixed from time to time
by the Board of Directors, and no Officer shall be prevented from receiving such
salary by reason of the fact that he is also a Director of the Corporation.
Section 13. SPECIAL APPOINTMENTS
In the absence or incapacity of any Officer, or in the event
of a vacancy in any office, the Board of Directors may designate any person to
fill any such office pro tempore or for any particular purpose.
ARTICLE V.
SEAL
The seal of the Corporation shall be circular in form with the
words "CHEUNG LABORATORIES, INC." in the periphery and the words and figures
"INCORPORATED 1982 MARYLAND" in the center.
ARTICLE VI.
STOCK
Section 1. CERTIFICATES OF STOCK
Certificates representing shares of the Corporation shall be
in such form as shall be determined by the Board of Directors. Each certificate
shall be signed,
319999.001(B&F) 10
manually or by facsimile, by the President or a Vice President and countersigned
by the Secretary or the Treasurer and shall be sealed with the corporate seal or
a facsimile of it. All certificates surrendered to the Corporation for transfer
shall be cancelled, and no new certificates shall be issued until the former
certificate for a like number of shares shall have been surrendered and
cancelled, except that in case of a lost, stolen, destroyed or mutilated
certificate, a new one may be issued therefor upon such terms and indemnity to
the Corporation as the Board of Directors may prescribe.
Section 2. TRANSFER OF SHARES
Transfer of shares of the Corporation shall be made only on
its stock transfer books by the holder of record thereof, or by his attorney
thereunto authorized by power of attorney duly executed and filed with the
Secretary of the Corporation, and on surrender for cancellation of the
certificate for such shares. The person in whose name shares stand on the books
of the Corporation shall be deemed to be the owner thereof for all purposes. The
Board of Directors shall have power and authority to make such other rules and
regulations as it may deem necessary or appropriate concerning the issue,
transfer and registration of certificates of stock; and may appoint transfer
agents and registrars thereof. The duties of transfer agent and registrar may be
combined.
Section 3. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS'
RIGHTS
The Board of Directors may fix, in advance, a date as the
record date for the purpose of determining the stockholders entitled to notice
of, or to vote at, any meeting of stockholders, or the stockholders entitled to
receive payment of any dividend or the allotment of any rights, or in order to
make a determination of stockholders for any other proper purpose. Only
stockholders of record on such date shall be entitled to notice of, and to vote
at, such meeting or to receive such dividends or rights, as the case may be,
notwithstanding any transfer of any stock on the books of the Corporation after
such record date fixed as aforesaid.
319999.001(B&F) 11
ARTICLE VII.
AMENDMENTS
The By-Laws may be altered, amended or repealed, and new
By-Laws may be adopted, by a majority of the entire Board of Directors.
ARTICLE VIII.
FISCAL YEAR
The fiscal year of the Corporation shall end on September 30
of each year.
ARTICLE IX.
INDEMNIFICATION
Section 1. DEFINITIONS
As used in this Article IX, any word or words defined in
Section 2-418 of the Corporations and Associations Article of the Annotated Code
of Maryland, as amended from time to time (the "Indemnification Section"), shall
have the same meaning as provided in the Indemnification Section.
Section 2. DIRECTORS AND OFFICERS
The Corporation shall indemnify and advance expenses to a
Director or Officer of the Corporation in connection with a proceeding to the
fullest extent permitted by and in accordance with the Indemnification Section.
Section 3. OTHER EMPLOYEES AND AGENTS
With respect to an employee or agent, other than a Director of
Officer, of the Corporation, the Corporation may, as determined by the Board of
Directors of the Corporation, indemnify and advance expenses to such employee or
agent in connection with a proceeding to the extent permitted by and in
accordance with the Indemnification Section.
319999.001(B&F) 12
ARTICLE X.
WAIVER OF NOTICE
Unless otherwise provided by law, whenever any notice is
required to be given to any stockholder or director of the Corporation under the
provisions of these ByLaws or under the provisions of the Articles of
Incorporation, a waiver thereof in writing, sighed by the person or persons
entitled to such notice, whether before of after the time stated therein, shall
be deemed equivalent to the giving of such notice.
ARTICLE XI.
AMENDMENTS
These By-Laws may be altered, amended or repealed and new
By-Laws may be adopted by a vote of the stockholders representing a majority of
all shares issued and outstanding, at any annual stockholders' meeting or at any
special stockholders' meeting when the proposed amendment has been set out in
the notice of such meeting.
319999.001(B&F) 13
CHEUNG LABORATORIES, INC.
AMENDMENT TO BY-LAWS
ARTICLE II
DIRECTORS
Section 6 - NOTICE
Notice of every regular or special meeting of the Board of Directors
shall be given to each Director by written notice stating the time and place of
the meeting. Notice is given to a Director when it is delivered personally to
him, left at his last known business or residence address, sent by telecopier or
facsimile transmission to the Director's last known telephone or telecopier
number, or by overnight delivery, including, but not limited to, Federal
Express, as least 24 hours before the time of the meeting or, in the alternative
be mailed to his last known business or residence address as it appears on the
records of the Corporation at least 72 hours before the time of the meeting. Any
Director may waive notice of any meeting by written waiver filed with the
records of the meeting, either before or after the holding thereof. The
attendance of a Director at a meeting shall constitute a waiver of notice of
such meeting, except where a Director attends a meeting for the express purpose
of objecting to the transacting of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need to be
specified in the notice or waiver of such meeting.
The Board of Directors may exclude from deliberations of the Board, and
also from participation at a meeting of the Board (such exclusion from
participation including lack of notice of the Board meeting as well as actual
participation in the Board meeting) any Director or Directors which the Board of
Directors has a bona fide reason to believe has a conflict of interest in
receiving and evaluating sensitive information dealing with business
opportunities or business of the Corporation such that the imparting of such
knowledge to the affected Director or Directors could cause serious injury to
the Corporation's business or business opportunities. This provision shall take
effect immediately upon approval by the Board of Directors.
IRREVOCABLE PROXY
In consideration of the terms of a Redemption Agreement between Cheung
Laboratories, Inc. (the "Corporation") and the undersigned, dated June 6, 1996,
the undersigned holder of 20,000,000 shares of the common stock of the
Corporation (hereinafter referred to as the "Common Stock") hereby appoints Dr.
Augustine Y. Cheung as agent and proxy of the undersigned, and representative of
the Corporation, with full power of substitution, to vote all shares of Common
Stock which the undersigned would be entitled to vote, with all power which the
undersigned would possess, upon all matters that may properly come before the
shareholders of the Corporation.
This proxy shall be irrevocable for the period June 6, 1996 through
February 28, 1997 and the undersigned hereby revokes any proxy or proxies
heretofore given to vote such shares of Common Stock.
WITNESS: STOCKHOLDER:
/S/ Gao Yu Wen
Gao Yu Wen
[Portions of this document are subject to requests of confidential treatment
filed with the Securities and Exchange Commission]
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
and
CHEUNG LABORATORIES, INC.
PATENT LICENSE AGREEMENT
M.I.T.'S OFFER TO CHEUNG LABORATORIES, INC. TO
ENTER INTO THIS LICENSE AGREEMENT SHALL EXTEND UNTIL
NO LATER THAN JUNE 1, 1996.
(EXCLUSIVE)
319999.001(B&F) 2
TABLE OF CONTENTS
WITNESSETH............................................................... 1
1. DEFINITIONS.......................................................... 2
2. GRANT................................................................ 5
3. DUE DILIGENCE........................................................ 7
4. ROYALTIES............................................................ 8
5. REPORTS AND RECORDS.................................................. 10
6. PATENT PROSECUTION................................................... 12
7. INFRINGEMENT......................................................... 12
8. PRODUCT LIABILITY.................................................... 14
9. EXPORT CONTROLS...................................................... 15
10. NON-USE OF NAMES.................................................... 15
11. ASSIGNMENT.......................................................... 15
12. DISPUTE RESOLUTION.................................................. 16
13. TERMINATION......................................................... 16
14. PAYMENTS, NOTICES
AND OTHER COMMUNICATIONS................................................. 18
15. MISCELLANEOUS PROVISIONS............................................ 18
APPENDIX A............................................................... 20
APPENDIX B............................................................... 21
APPENDIX C............................................................... 22
ii
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
and
CHEUNG LABORATORIES, INC.
PATENT LICENSE AGREEMENT
This Agreement is made and entered into this ____ day of __________,
1996, (the "Effective Date") by and between MASSACHUSETTS INSTITUTE OF
TECHNOLOGY, a corporation duly organized and existing under the laws of the
Commonwealth of Massachusetts and having its principal office at 77
Massachusetts Avenue, Cambridge, Massachusetts 02139 (hereinafter referred to as
"M.I.T."), and CHEUNG LABORATORIES, INC., a corporation duly organized under the
laws of Maryland and having its principal office at 10220-I Old Columbia Road,
Columbia, MD 21046-1705 (hereinafter referred to as "Licensee").
W I T N E S S E T H
WHEREAS, M.I.T. is the owner of certain Intellectual Property Rights (as
later defined herein) relating to M.I.T. Case No. 5493L, U.S. Patent No.
5,251-645, "Adaptive Hyperthermia System" by Alan Fenn, and M.I.T. Case No.
5672L, "Non- Invasive Monopole Hyperthermia Array for Brain Tumor Heating" by
Alan Fenn, and M.I.T. Case No. 6512L "Minimally Invasive Monopole Phased Array
Hyperthermia Applicators for Treating Carcinoma" by Alan Fenn and has the right
to grant licenses under said Patent Rights (as later defined herein), subject
only to a royalty-free, nonexclusive license heretofore granted to the United
States Government;
WHEREAS, M.I.T. desires to have the Patent Rights developed and
commercialized to benefit the public and is willing to grant a license
thereunder;
WHEREAS, M.I.T. is the owner of certain rights, title and interest in the
Program (as later defined herein) relating to M.I.T. Case No. 7299LS, "NULLGSC,"
by Alan J. Fenn and M.I.T. Case No. 7928LS, "FOCUSGSC," by Alan J. Fenn subject
only to the royalty-free, nonexclusive license rights of the United States
301650.001(BF) 1
Government pursuant to 48 CFR 52.227-14 (Civilian Agencies) or DFARS
252.227-7013 (Defense Agencies), and has the right to grant licenses thereunder;
WHEREAS, M.I.T. desires to have the Program developed and commercialized to
benefit the public and is willing to grant a license thereunder;
WHEREAS, Licensee has represented to M.I.T., to induce M.I.T. to enter
into this Agreement, that Licensee is experienced in the development,
production, manufacture, marketing and sale of products similar to the Licensed
Product(s) (as later defined herein) and/or the use of the Licenses Process(es)
(as later defined herein) and that it shall commit itself to a thorough,
vigorous and diligent program of exploiting the Patent Rights, and to a
thorough, vigorous and diligent program of exploiting the Patent Rights, and to
a thorough, vigorous and diligent program of exploiting the Program, so that
public utilization shall result therefrom, all in the manner provided herein;
and
WHEREAS, Licensee desires to obtain a license under the Patent Rights
and also desires to obtain a license to the Program, upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual terms,
conditions and covenants contained herein, the parties hereto agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following words and phrases shall
have the following meanings:
1.1. "Licensee" shall include a related company of Cheung Laboratories,
Inc., the voting stock of which is directly or indirectly at least fifty percent
(50%) owned or controlled by Cheung Laboratories, Inc., an organization which
directly or indirectly controls more than fifty percent (50%) of the voting
stock of Cheung Laboratories, Inc. and an organization, the majority ownership
of which is directly or indirectly common to the ownership of Cheung
Laboratories, Inc.
1.2. "Patent Rights" shall mean all of the following M.I.T.
intellectual property:
301650.001(BF) 2
(a) the United States patents listed in Appendix A;
(b) the United States patent applications listed in
Appendix A, and divisionals, continuations and claims
of continuation-in-part applications which shall be
directed to subject matter specifically described in
such patent applications, and the resulting patents;
(c) any patents resulting from reissues or reexaminations
of the United States patents described in (a) and (b)
above;
(d) the Foreign patents listed in Appendix A;
(e) the Foreign patent applications listed in Appendix A,
and divisionals, continuations and claims of
continuation-in-part applications which shall be
directed to subject matter specifically described in
such Foreign patent applications, and the resulting
patents;
(f) Foreign patent applications filed after the Effective
Date in the countries listed in Appendix B and
divisionals, continuations and claims of
continuation-in-part applications which shall be
directed to subject matter specifically described in
such patent applications, and the resulting patents;
and
(g) any Foreign patents, resulting from equivalent
Foreign procedures to United States reissues and
reexaminations, of the Foreign patents described in
(d), (e) and (f) above.
1.3. "Copyright" shall mean M.I.T.'s copyrights in the Program.
1.4. "Program" shall mean the computer program(s), "NULLGSC" and
"FOCUSGSC" and related documentation, if any described in Appendix C
(hereinafter the "M.I.T. Copyrighted Program"), and shall also include
Adaptations, Derivative Works and Translations. Program shall also include any
additional computer programs, including but not limited to acceleration
software, developed for use with any of the Intellectual Property Rights.
Program may be protected by both Patent Rights and Copyrights.
301650.001(BF) 3
1.5. "Adaptations" shall mean the Program as it may be adapted by
Licensee for hardware other than the original M.I.T. Cray computer.
1.6. "Derivative Works" shall mean a program that uses the M.I.T.
Copyrighted Program and/or Adaptation, but which has enhanced and new features
or fewer features. Licensee shall be entitled to establish all proprietary
rights for itself in the intellectual property represented by Licensee-created
enhancements and new features, whether in the nature of trade secrets,
copyrights or patent rights or other rights. M.I.T. shall be entitled to
establish all proprietary rights for itself in the intellectual property
represented by M.I.T.-created enhancements and new features, whether in the
nature of copyrights or patent rights or other rights.
1.7. "Translation" shall mean a translation of the Program into another
language.
1.8. "Intellectual Property Rights" shall mean all of the Patent Rights
and Copyright.
1.9. A "Licensed Product" shall mean Licensee's hyperthermia machine
and accessories, or part thereof which:
(a) is covered in whole or in part by an issued,
unexpired claim or a pending claim contained in the
Patent Rights in the country in which any such
Licensed Product or part thereof is made, used or
sold; or
(b) is manufactured by using a process or is employed to
practice a process which is covered in whole or in
part by an issued, unexpired claim or a pending claim
contained in the Patent Rights in the county in which
any Licensed Process is used or in which such product
or part thereof is used or sold.
(c) is covered by the Copyright.
1.10. A "Licensed Process" shall mean any process which is covered in
whole or in part by an issued, unexpired claim or a pending claim contained in
the Patent Rights, or is covered by the Copyright.
301650.001(BF) 4
1.11. "Net Sales" shall mean Licensee's and its sublicensees' billings,
including Treatment Revenue, for Licensed Products and Licensed Processes less
the sum of the following items, providing that these items are payable by
Licensee or deductible from Licensee's billings within sixty (60) days of
receiving payments from Licensee's customer(s):
(a) discounts allowed in amounts customary in the trade
for quantity purchases, cash payments, prompt
payments, wholesalers and distributors;
(b) sales, tariff duties and/or use taxes directly
imposed and with reference to particular sales;
(c) outbound transportation prepaid or allowed;
(d) amounts allowed or credited on returns; and
(e) allowance for bad debt, not to exceed Five Percent
(5%) of Net Sales per calendar year.
No other deductions shall be made for commissions paid to individuals
whether they be with independent sales agencies or regularly employed by
Licensee and on its payroll, or for the cost of collections. Licensed Products
shall be considered "sold" ninety (90) days after billing or invoicing, or upon
receipt of payment, whichever comes first, provided, however, that Licensed
Products are actually shipped to customers. If a Licensed Product or Licensed
Process shall be distributed or invoiced for a discounted price substantially
lower than customary in the trade or distributed at no cost to affiliates or
otherwise, Net Sales shall be based on the customary amount billed for such
Licensed Products or Licensed Processes.
1.12. "Field of Use One" shall mean Breast Hyperthermia.
1.13. "Field of Use Two" shall mean Head and Neck Hyperthermia.
1.14. "Field of Use Three" shall mean Deep Seated Hyperthermia of
other organs, including, but not limited to, liver, lung and prostate.
301650.001(BF) 5
1.15. On the Effective Date, "Exclusive Fields of Use" shall mean,
Field of Use One, Field of Use Two, and Field of Use Three. This definition may
be modified according to paragraphs 3.3(b), 3.4(b) and 3.5(b).
1.16. "Other Revenue" shall mean Licensee's gross revenues from the
sale of services, including but not limited to, fees for consulting, research
and development, and training in connection with:
a. the sublicensing of the Intellectual Property Rights
and/or;
b. the use of sale, lease or other transfer of Licensed
Products or Licensed Processes.
1.17. "End User" shall mean a customer authorized to use a single
copy of the Licensed Product for internal purposes only and not for further
distribution.
2. GRANT
2.1. M.I.T. hereby grants to Licensee the right and license for Field
of Use One, Field of Use Two, and Field of Use Three to practice under the
Patent Rights and, to the extent not prohibited by other patents, to make, have
made, use, lease, sell and import Licenses Products and to practice the Licensed
Processes, until the expiration of the last to expire of the Patent Rights,
unless this Agreement shall be sooner terminated according to the terms hereof.
2.2. M.I.T. hereby grants to Licensee the following rights and
licenses for the Exclusive Fields of Use to the end of the term for which the
Copyright shall be granted, unless this Agreement shall be sooner terminated:
(a) to use and reproduce the Program;
(b) to create Derivatives;
(c) to lease, transfer and sublicense Licensed Products
to End-Users through the normal channels of
distribution; and
301650.001(BF) 6
(d) to grant any or all of the above rights and licenses
to Sublicensees.
2.3. In order to establish a period of exclusivity for Licensee, M.I.T.
hereby agrees that it shall not grant any other license to the Patent Rights for
the Exclusive Fields of Use, and also that it shall not grant any other license
to the Copyright for the Exclusive Fields of Use, subject only to Paragraph 2.6
and to the royalty-free, nonexclusive license rights of the United States
Government pursuant to 48 CFR 52.227- 14 (Civilian Agencies) or DFARS
252.227-7013 (Defense Agencies) during the period of time commencing with the
Effective Date and terminating with the first to occur of:
(a) the expiration of ten (10) years after the first
commercial sale of a Licensed Product or first
commercial use of a Licensed Process; or
(b) the expiration of twelve (12) years after the
Effective Date of this Agreement.
2.4. At the end of the exclusive period, the license granted hereunder
shall become nonexclusive and shall extend to the end of the term or terms for
which any Patent Rights are issued, unless sooner terminated as hereinafter
provided. The period of exclusivity may be extended with the written consent of
M.I.T., on a field of use basis, which consent shall not unreasonably be
withheld, provided that Licensee is a licensee in good standing, owing no fees,
royalties or any other monies to M.I.T., and having met all the diligence
milestones pertaining to the particular field of use in which an extension of
the period of exclusivity is under consideration.
2.5. M.I.T. reserves the right to practice under the Patent Rights
for its own noncommercial research purposes.
2.6. M.I.T. reserves the right to use the Program, to use and
create derivatives of the Program and to distribute the Program and M.I.T.-
created derivatives to third parties for noncommercial research purposes.
2.7. Licensee agrees that Licensed Products leased or sold in the
United States shall be manufactured substantially in the United States.
301650.001(BF) 7
2.8. In order to encourage and facilitate the development of
Licensed Products, M.I.T. agrees to perform the work described in the Technology
Transfer Agreement attached to this license as Addendum A.
2.9. Licensee shall have the right to enter into sublicensing
agreements for the rights, privileges and licenses granted hereunder only during
the exclusive period of this Agreement. Such sublicenses may extend past the
expiration date of the exclusive period of this Agreement, but any exclusivity
of such sublicenses shall expire upon the expiration of Licensee's exclusivity.
Upon any termination of this Agreement, sublicensees' rights shall also
terminate, subject to Paragraph 13.6 hereof.
2.10. Licensee agrees that any sublicenses granted by it shall provide
that the obligations to M.I.T. of Articles 2, 5, 7, 8, 9, 10, 12, 13, and 15 of
this Agreement shall be binding upon the sublicensee as if it were a party to
this Agreement. Licensee further agrees to attach copies of these Articles to
sublicense agreements.
2.11. Licensee agrees to forward to M.I.T. a copy of any and all
sublicense agreements promptly upon execution by the parties.
2.12. Licensee shall not receive from sublicensees anything of value in
lieu of cash payments in consideration for any sublicense under this Agreement,
without the express prior written permission of M.I.T.
2.13. The license granted hereunder shall not be construed to confer
any rights upon Licensee by implication, estoppel or otherwise as to any
technology not specifically set forth in Appendix A hereof.
3. DUE DILIGENCE
3.1. Licensee shall use its best efforts to bring one or more Licensed
Products or Licenses Processes to market through a thorough, vigorous and
diligent program for exploitation of the Intellectual Property Rights and to
continue active, diligent marketing efforts for one or more Licensed Products or
Licensed Processes throughout the life of this Agreement.
301650.001(BF) 8
3.2. (a) In addition, pertaining to Field of Use One, Licensee
shall adhere to the following milestones.
(i) On or before December 31, 1996, Licensee
shall deliver a Licensed Product to one site
suitable for clinical testing in Field of
Use One.
(ii) On or before June 30, 1997, Licensee shall
deliver to M.I.T. clinical data obtained
from at least ten (10) patients enrolled in
the clinical trials referred to in 3.2(a)(i)
above.
(iii) As soon as possible, but in all events on or
before June 30, 1999, Licensee shall apply
for FDA approval for commercial sales of a
Licensed Product in Field of Use One.
(iv) Licensee shall make sales of Licensed
Products in Field of Use One according to
the following schedule:
1998 at least 1 unit
1999 at least 5 units
2000 at least 10 units
2001 and each year thereafter at least 25
units
(b) In addition, pertaining to Field of Use Two, Licensee
shall develop a business plan for commercialization
of the Intellectual Property Rights in Field of Use
Two and submit it to M.I.T. on or before June 30,
1997.
(c) In addition, pertaining to Field of Use Three,
Licensee shall seek to include in the protocols for
the clinical trials to be conducted pursuant to
Section 3.2(a), clinical testing directed toward the
commercialization of the Intellectual Property Rights
in Field of Use Three. On or before September 30,
1996, Licensee shall provide M.I.T. a definitive
business plan for such commercialization of the
Intellectual Property Rights in Field of Use Three.
301650.001(BF) 9
3.3. (a) Failure to comply with paragraphs 3.2(a)(i), (ii), or
(iii), shall be grounds for M.I.T. to terminate this
license pursuant to paragraph 13.3 hereof.
(b) Failure to comply with paragraph 3.2(a)(iv) shall be
grounds to remove Field of Use One from the
definition of "Exclusive Fields of Use", thereby
terminating Licensee's exclusive rights to Field of
Use One.
3.4. Failure to comply with paragraphs 3.2(b) shall be grounds for
M.I.T. to terminate the grant in paragraph 2.1 of rights to Field of Use Two
pursuant to paragraph 13.3 hereof.
3.5. Failure to comply with paragraphs 3.2(c) shall be grounds for
M.I.T. to terminate the grant in paragraph 2.1 of rights to Field of Use Three
pursuant to paragraph 13.3 hereof.
4. ROYALTIES
4.1. For the rights, privileges and license granted hereunder,
Licensee shall pay royalties to M.I.T. in the manner hereinafter provided to the
end of the term of the Patent Rights or until this Agreement shall be
terminated:
(a) License Issue Fee of [Confidential Treatment
Requested], which said License Issue Fee shall be
deemed earned and due according to the following
schedule:
(i) [Confidential Treatment Requested] shall be
due on the Effective Date.
(ii) [Confidential Treatment Requested] shall be
due June 15, 1996.
(iii) [Confidential Treatment Requested] shall be
due upon Licensee's raising the first One
Hundred Thousand Dollars
301650.001(BF) 10
of investment capital directly related to
the commercialization of the Intellectual
Property Rights.
(b) License Maintenance Fees of [Confidential Treatment
Requested] per year payable on January 1, 1997,
January 1, 1998 and on January 1, 1999; provided,
however, that Running Royalties subsequently due on
Net Sales for each paid year, if any, shall be
creditable against the License Maintenance Fee for
said year. License Maintenance Fees paid in excess of
Running Royalties shall not be creditable to Running
Royalties for future years.
(c) License Maintenance Fees of [Confidential Treatment
Requested] per year payable on January 1, 2000 and on
January 1, 2001 provided, however, that Running
Royalties subsequently due on Net Sales for each said
year, if any, shall be creditable against the License
Maintenance Fee for said year. License Maintenance
Fees paid in excess of Running Royalties shall not be
creditable to Running Royalties for future years.
(d) License Maintenance Fees of [Confidential Treatment
Requested] per year payable on January 1, 2002 and on
January 1 of each year thereafter; provided, however,
License Maintenance Fees may be credited to Running
Royalties subsequently due on Net Sales for each said
year, if any. License Maintenance Fees paid in excess
of Running Royalties shall not be creditable to
Running Royalties for future years.
(e) Running Royalties in an amount equal to [Confidential
Treatment Requested] percent (__%) of Net Sales of
the Licensed Products and Licenses Processes used,
leased or sold by and/or for Licensee and/or its
sublicensees for Licensed Products which are both
made and leased or sold and for Licensed Processes
which are both used and leased or sold in a country
in which there is a valid, issued claim of a patent
described in either Appendices A or B.
301650.001(BF) 11
(f) Running Royalties in an amount equal to [Confidential
Treatment Requested] percent (__%) of Net Sales of
the Licensed Products and Licensed Processes used,
leased or sold by and/or for Licensee and/or its
sublicensees for Licensed Products which are either
made or leased or sold and for Licensed Processes
which are either used or leased or sold in a country
in which there is a valid, issued claim of a patent
described in either Appendices A or B, or in a
country in which there is a pending claim pertaining
to M.I.T. Case 6521L, providing that such country is
Canada.
(g) Running Royalties in an amount equal to [Confidential
Treatment Requested] percent (__%) of Net Sales of
the Licensed Products and Licensed Processes used,
leased or sold by and/or for Licensee and/or
its sublicensees for Licensed Products which are
neither made nor leased nor sold in a country in
which there is a valid, issued claim of a patent
described in either Appendices A or B, but which
utilize the Copyright and/or practice of run the
Program, as described in Appendix C and for Licensed
Processes which are neither used nor leased nor sold
in a country in which, but which utilize the
Copyright and/or practice or run the Program as
described in Appendix C.
(h) Running Royalties in an amount equal to [Confidential
Treatment Requested] percent (__%) of Net Sales of
the Program delivered to End-Users if the Program is
sold separately from the Licensed Products.
(i) If Other Revenue is greater than Net Sales, then
Running Royalties in an amount equal to [Confidential
Treatment Requested] (__%) of Other Revenue;
(j) If Other Revenue is less than Net Sales, then Running
Royalties in an amount equal to [Confidential
Treatment Requested] (__%) of Other Revenue.
301650.001(BF) 12
4.2. All payments due hereunder shall be paid in full, without
deduction of taxes or other fees which may be imposed by any government and
which shall be paid by Licensee.
4.3. No multiple royalties shall be payable because any Licensed
Product, its manufacture, use, lease or sale are or shall be covered by more
than one Intellectual Property Rights patent application of Intellectual
Property Rights patent licensed under this Agreement.
4.4. Royalty payments shall be paid in United States dollars in
Cambridge, Massachusetts, or at such other place as M.I.T. may reasonably
designate consistent with the laws and regulations controlling in any foreign
country. If any currency conversion shall be required in connection with the
payment of royalties hereunder, such conversion shall be made by using the
exchange rate prevailing at the Chase Manhattan Bank (N.A.) on the last business
day of the calendar quarterly reporting period to which such royalty payments
relate.
5. REPORTS AND RECORDS
5.1. Licensee shall keep full, true and accurate books of account
containing all particulars that may be necessary for the purpose of showing the
amounts payable to M.I.T. hereunder. Said books of account shall be left at
Licensee's principal place of business or the principal place of business of the
appropriate division of Licensee to which this Agreement relates. Said books and
the supporting data shall be open at all reasonable times for five (5) years
following the end of the calendar year to which they pertain, to the inspection
of M.I.T. or its agents for the purpose of verifying Licensee's royalty
statement or compliance in other respects with this Agreement. Should such
inspection lead to the discovery of a greater than Ten Percent (10%) discrepancy
in reporting to M.I.T.'s detriment, Licensee agrees to pay the reasonable cost
of such inspection.
5.2. Licensee shall deliver to M.I.T. true and accurate reports, giving
such particulars of the business conducted by Licensee and its sublicensees
under this Agreement as shall be pertinent to diligence under Article 3 and
royalty accounting hereunder:
301650.001(BF) 13
(a) before the first commercial sale of a Licensed
Product or Licensed Process, annually, on January 31
or each year; and
(b) after the first commercial sale of a Licensed Product
or Licensed Process, quarterly, within sixty (60)
days after March 31, June 30, September 30 and
December 31, of each year.
These reports shall include at least the following:
(a) number of Licensed Products manufactured, leased and
sold by and/or for Licensee and all sublicensees;
(b) accounting for all Licensed Processes used or sold by
and/or for Licensee and all sublicensees;
(c) accounting for Net Sales, noting the deductions and
credits applicable as provided in Paragraphs 1.11 and
6.3, accounting for Other Revenue;
(d) Running Royalties due under Paragraph 4.1(e) and (f);
(e) Running Royalties due under Paragraph 4.1(g) and (h);
(f) total royalties due; and
(g) names and addresses of all sublicensees of Licensee.
5.3. With each such report submitted, Licensee shall pay to M.I.T.
the royalties due and payable under this Agreement. If no royalties shall be
due, Licensee shall so report.
5.4. On or before the ninetieth (90th) day following the close of
Licensee's fiscal year, Licensee shall provide M.I.T. with Licensee's certified
financial statements for the preceding fiscal year including, at a minimum, a
Balance Sheet and an Operating Statement.
301650.001(BF) 14
5.5. The royalty payments set forth in this Agreement and amounts due
under Article 6 shall, if overdue, bear interest until payment at a per annum
rate two percent (2%) above the prime rate in effect at the Chase Manhattan Bank
(N.A.) on the due date. The payment of such interest shall not foreclose M.I.T.
from exercising any other rights it may have as a consequence of the lateness of
any payment.
6. PATENT PROSECUTION
6.1. M.I.T. shall have the administrative responsibility to apply for,
see, prompt issuance of, and maintain during the term of this Agreement the
Patent Rights in the United States and in the foreign countries listed in
Appendices A and B hereto. Appendix B may be amended by verbal agreement of both
parties, such agreement to be confirmed in writing within ten (10) days. The
prosecution, filing and maintenance of all Patent Rights patens and applications
shall be the primary responsibility of M.I.T.; provided, however, Licensee shall
have reasonable opportunities to advise M.I.T. and shall cooperate with M.I.T.
ion such prosecution, filing and maintenance.
6.2. Payment of all fees and costs relating to the filing,
prosecution, and maintenance of the Patent Rights incurred after the date of
this Agreement shall be the responsibility of Licensee. M.I.T. is not
financially obliged to maintain and prosecute patents.
6.3. M.I.T. agrees that Licensee may take a cumulative life
of license credit for expenditures on the Patent Rights, such credit not to
exceed [Confidential Treatment Requested] and to be taken according to the
following schedule:
(a) Licensee may credit their above referenced patent
prosecution and maintenance expenditures incurred in
a given calendar year against up to one half of
License Maintenance Fees due the following January 1
under paragraphs 4.1(b), (c), and (d).
(b) In the event that Running Royalties exceed the
License Maintenance Fee for a given year, and
Licensee owes M.I.T. Running Royalties in addition to
the License Maintenance Fee already paid, then
Licensee may use their patent prosecution and
301650.001(BF) 15
maintenance credit against up to one half of the
Running Royalties due paragraphs 4.1(e), (f) and (g).
7. INFRINGEMENT
7.1. Licensee shall inform M.I.T. promptly in writing of any alleged
infringement of the Intellectual Property Rights by a third party of which it
becomes aware and of any available evidence thereof. M.I.T. shall inform
Licensee promptly in writing of any alleged infringement of the Intellectual
Property Rights by a third party of which it becomes aware and of any available
evidence thereof. Within ten (10) business days of such notice the parties shall
confer to determine how best to proceed.
7.2. During the term of this Agreement, M.I.T. shall have the right, but
shall not be obligated, to prosecute at its own expense all infringements of the
Intellectual Property Rights and, in furtherance of such right, Licensee hereby
agrees that M.I.T. may include Licensee as a party plaintiff in any such suit,
without expense to Licensee. The total cost of any such infringement action
commenced or defended solely by M.I.T. shall be borne by M.I.T. and M.I.T. shall
keep any recovery or damages for past infringement derived therefrom.
7.3. If within six (6) months after having been notified of any alleged
infringement, M.I.T. shall have been unsuccessful in persuading the alleged
infringer to desist and shall not have brought and shall not be diligently
prosecuting an infringement action, or if M.I.T. shall notify Licensee at any
time prior thereto of its intention not to bring suit against any alleged
infringer for the Field of Use, then, and in those events only, Licensee shall
have the right, but shall not be obligated, to prosecute at its own expense any
infringement of the Intellectual Property Rights for the Field of Use, and
Licensee may, for such purposes, use the name of M.I.T. as party plaintiff;
provided, however, that such right to bring such an infringement action shall
remain in effect only for so long as the license granted herein remains
exclusive. No settlement, consent judgment or other voluntary final disposition
of the suit may be entered into without the consent of M.I.T., which consent
shall not unreasonably be withheld. Licensee shall indemnify M.I.T. against any
order for costs that may be made against M.I.T. in such proceedings.
301650.001(BF) 16
7.4. In the event that Licensee shall undertake the enforcement and/or
defense of the Intellectual Property Rights by litigation, Licensee may withhold
up to fifty percent (50%) of the payments otherwise thereafter due M.I.T. under
Article 4 hereunder and apply the same toward reimbursement of up to half of
Licensee's expenses, including reasonable attorneys' fees, in connection
therewith. Any recovery of damages by Licensee for each such suit shall be
applied first in satisfaction of any unreimbursed expenses and legal fees of
Licensee relating to such suit, and next toward reimbursement of M.I.T. for any
payments under Article 4 past due or withheld and applied pursuant to this
Article 7. The balance remaining from any such recovery shall be divided so that
the percentage of the recovery due M.I.T. is calculated by creating a fraction,
the numerator of which is the amount of royalties withheld, and denominator of
which is the cost of litigation paid by Licensee, but in no event shall such sum
be less than Ten Percent (10%) of the net recovery.
7.5. In the event that a declaratory judgment action alleging
invalidity or noninfringement of any of the Intellectual Property Rights shall
be brought against Licensee, M.I.T., at its option, shall have the right, within
thirty (30) days after commencement of such action, to intervene and take over
the sole defense of the action at its own expense.
7.6. In any infringement suit as either party may institute to enforce
the Patent Rights pursuant to this Agreement, the other party hereto shall, at
the request and expense of the party initiating such suit, cooperate in all
respects and, to the extent possible, have its employees testify when requested
and make available relevant records, papers, information, samples, specimens,
and the like.
7.7. Licensee, during the exclusive period of this Agreement, shall
have the sole right in accordance with the terms and conditions herein to
sublicense any alleged infringer for the Field of Use for future use of the
Intellectual Property Rights. Any upfront fees as part of such a sublicense
shall be shared equally between Licensee and M.I.T.; other royalties shall be
treated per Article 4.
8. PRODUCT LIABILITY
8.1. Licensee shall at all times during the term of this Agreement and
thereafter, indemnify, defend and hold M.I.T., its trustees, directors,
officers, employees
301650.001(BF) 17
and affiliates, harmless against all claims, proceedings, demands and
liabilities of any kind whatsoever, including legal expenses and reasonable
attorneys' fees, arising out of the death of or injury to any person or persons
or out of any damage to property, resulting from the production, manufacture,
sale, use, lease, consumption or advertisement of the Licensed Product(s) and/or
Licensed Process(es) or arising from any obligation of Licensee hereunder.
8.2. Licensee shall obtain and carry in full force and effect
commercial, general liability insurance which shall protect Licensee and M.I.T.
with respect to events covered by Paragraph 8.1 above. Such insurance shall be
written by a reputable insurance company authorized to do business in the
Commonwealth of Massachusetts, shall list M.I.T. as an additional named insured
thereunder, shall be endorsed to include product liability coverage and shall
require thirty (30) days written notice to be given to M.I.T. prior to any
cancellation or material change thereof. The limits of such insurance shall not
be less than One Million Dollars ($1,000,000) per occurrence with an aggregate
of Three Million Dollars ($3,000,000) for personal injury or death, and One
Million Dollars ($1,000,000) per occurrence with an aggregate of Three Million
Dollars ($3,000,000) for property damage. Licensee shall provide M.I.T. with
Certificates of Insurance evidencing the same.
8.3. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, M.I.T.,
ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES, AND AFFILIATES MAKE NO
REPRESENTATIONS AND EXTENT NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR PENDING, AND TO
THE COPYRIGHT AND THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT
DISCOVERABLE. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION
MADE OR WARRANTY GIVEN BY M.I.T. THAT THE PRACTICE BY LICENSEE OF THE LICENSE
GRANTED HEREUNDER SHALL NOT INFRINGE THE PATENT RIGHTS OR THE COPYRIGHT OF ANY
THIRD PARTY. IN NO EVENT SHALL M.I.T., ITS TRUSTEES, DIRECTORS, OFFICERS,
EMPLOYEES AND AFFILIATES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF
ANY KIND, INCLUDING ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS,
REGARDLESS OF WHETHER M.I.T. SHALL BE ADVISED, SHALL
301650.001(BF) 18
HAVE OTHER REASON TO KNOW, OR IN FACT SHALL KNOW OF THE POSSIBILITY OF THE
FOREGOING.
9. EXPORT CONTROLS
Licensee acknowledges that it is subject to United States laws and
regulations controlling the export of technical data, computer software,
laboratory prototypes and other commodities (including the Arms Export Control
Act, as amended and the United States Department of Commerce Export
Administration Regulations). The transfer of such items may require a license
from the cognizant agency of the United States Government and/or written
assurances by Licensee that Licensee shall not export data or commodities to
certain foreign countries without prior approval of such agency. M.I.T. neither
represents that a license shall not be required nor that, if required, it shall
be issued.
10. NON-USE OF NAMES
Licensee shall not use the names or trademarks of the Massachusetts
Institute of Technology or Lincoln Laboratory, nor any adaption thereof, nor the
names of any of their employees, in any advertising, promotional or sales
literature without prior written consent obtained from M.I.T., or said employee,
in each case, except that Licensee may state that it is licensed by M.I.T. under
one or more of the patents and/or applications comprising the Patent Rights, and
that it has a license to the Copyright.
11. ASSIGNMENT
This Agreement is not assignable and any attempt to do so shall be
void.
12. DISPUTE RESOLUTION
12.1. Except for the right of either party to apply to a court of
competent jurisdiction for a temporary restraining order, a preliminary
injunction, or other equitable relief to preserve the status quo or prevent
irreparable harm, any and all claims, disputes
301650.001(BF) 19
or controversies arising under, out of, on in connection with the Agreement,
including any dispute relating to patent validity or infringement, which the
parties shall be unable to resolve within sixty (60) days shall be mediated in
good faith. The party raising such dispute shall promptly advise the other party
of such claim, dispute or controversy in a writing which describes in reasonable
detail the nature of such dispute. By not later than five (5) business days
after the recipient has received such notice of dispute, each party shall have
selected for itself a representative who shall have the authority to bind such
party, and shall additionally have advised the other party in writing of the
name and title of such representative. By not later than ten (10) business days
after the date of such notice of dispute, the party against whom the dispute
shall be raised shall select a mediation firm in the Boston area and such
representatives shall schedule a date with such firm for a mediation hearing.
The parties shall enter into good faith mediation and shall share the costs
equally. If the representatives of the parties have not been able to resolve the
dispute within fifteen (15) business days after such mediation hearing, then any
and all claims, disputes or controversies arising under, out of, or in
connection with this Agreement, including any dispute relating to patent
validity or infringement, shall be resolved by final and binding arbitration in
Boston, Massachusetts under the rules of the American Arbitration Association,
or the Patent Arbitration Rules if applicable, then obtaining. The arbitrators
shall have no power to add to, subtract from or modify any of the terms or
conditions of this Agreement, not to award punitive damages. Any award rendered
in such arbitration may be enforced by either party in either the courts of the
Commonwealth of Massachusetts or in the United States District Court for the
District of Massachusetts, to whose jurisdiction for such purposes M.I.T. and
Licensee each hereby irrevocably consents and submits.
12.2. Notwithstanding the foregoing, nothing in this Article shall be
construed to waive any rights or timely performance of any obligations existing
under this Agreement.
13. TERMINATION
13.1. If Licensee shall cease to carry on its business, this Agreement
shall terminate upon notice by M.I.T.
13.2. Should Licensee fail to make any payment whatsoever due and
payable to M.I.T. hereunder, M.I.T. shall have the right to terminate this
301650.001(BF) 20
Agreement effective on thirty (30) days' notice, unless Licensee shall make all
such payments to M.I.T. within said thirty (30) day period. Upon the expiration
of the thirty (30) day period, if Licensee shall not have made all such payments
to M.I.T., the rights, privileges and license granted hereunder shall
automatically terminate.
13.3. Upon any material breach or default of this Agreement by Licensee
(including, but not limited to, breach or default under Paragraph 3.3), other
than those occurrences set out in Paragraphs 13.1 and 13.2 hereinabove, which
shall always take precedence in that order over any material breach or default
referred to in this Paragraph 13.3, M.I.T. shall have the right to terminate
this Agreement and the rights, privileges and license granted hereunder
effective on ninety (90) days' notice to Licensee. Such termination shall become
automatically effective unless Licensee shall have cured any such material
breach or default prior to the expiration of the ninety (90) days period.
13.4. Licensee shall have the right to terminate this Agreement at
any time on six (6) months' notice to M.I.T., and upon payment of all amounts
due M.I.T. through the effective date of the termination.
13.5. Upon termination of this Agreement for any reason, nothing herein
shall be construed to release either party from any obligation that matured
prior to the effective date of such termination; and Articles 1, 8, 9, 10, 12,
13.5, 13.6, and 15 shall survive any such termination. Licensee and any
sublicensee thereof may, however, after the effective date of such termination,
sell all Licensed Products, and complete Licensed Products in the process of
manufacture at the time of such termination and sell the same, provided that
Licensee shall make the payments to M.I.T. as required by Article 4 of this
Agreement and shall submit the reports required by Article 5 hereof.
13.6. Upon termination of this Agreement for any reason:
(a) Licensee shall provide M.I.T. with written assurance
that the original and all copies of the Program and
Derivatives, have been destroyed, except that, upon
prior written authorization from M.I.T. Licensee may
retain a copy for archival purposes; and
(b) the rights of End-Users to the use and enjoyment of
the Licensed Products shall not be abridged or
diminished in any way, except that any End-User
leasing or sublicensing the Licensed Products and not
301650.001(BF) 21
then in default shall have the right to obtain a
lease or sublicense directly from M.I.T. under
reasonable terms and conditions.
13.7. Upon termination of this Agreement for any reason, any sublicensee
not then in default shall have the right to seek a license from M.I.T. M.I.T.
agrees to negotiate such licenses in good faith under reasonable terms and
conditions.
14. PAYMENTS, NOTICES
AND OTHER COMMUNICATIONS
Any payment, notice or other communication pursuant to this Agreement
shall be sufficiently made or given on the date of mailing if sent to such party
by certified first class mail, return receipt requested, postage prepaid,
addressed to it at its address below or as it shall designate by written notice
given to the other party:
In the case of M.I.T.:
Director
Technology Licensing Office
Massachusetts Institute of Technology
Room E32-300
Cambridge, Massachusetts 02139
In the case of Licensee:
Augustine Y. Cheung
Chairman and CEO
Cheung Laboratories, Inc.
10220-I Old Columbia Road
Columbia, MD 21046-1705
15. MISCELLANEOUS PROVISIONS
301650.001(BF) 22
15.1. All disputes arising out of or related to this Agreement, or the
performance, enforcement, breach or termination hereof, and any remedies
relating thereto, shall be construed, governed, interpreted and applied in
accordance with the laws of the Commonwealth of Massachusetts, U.S.A., except
that questions affecting the construction and effect of any patent shall be
determined by the law of the country in which the patent shall have been
granted.
15.2. The parties hereto acknowledge that this Agreement sets forth the
entire Agreement and understanding of the parties hereto as to the subject
matter hereof, and shall not be subject to any change or modification except by
the execution of a written instrument signed by the parties.
15.3. The provisions of this Agreement are severable, and in the event
that any provisions of this Agreement shall be determined to be invalid or
unenforceable under any controlling body of the law, such invalidity or
unenforceability shall not in any way affect the validity of enforceability of
the remaining provisions hereof.
15.4. Licensee agrees to mark the Licensed Products sold in the United
States with all applicable United States patent numbers. All Licensed Products
shipped to or sold in other countries shall be marked in such a manner as to
conform with the patent laws and practice of the country of manufacture or sale.
15.5. The failure of either party to assert a right hereunder or to
insist upon compliance with any term or condition of this Agreement shall not
constitute a waiver of that right or excuse a similar subsequent failure to
perform any such term or condition by the other party.
IN WITNESS WHEREOF, the parties have duly executed this Agreement the
day and year set forth below.
MASSACHUSETTS INSTITUTE OF CHEUNG LABORATORIES, INC.
TECHNOLOGY
By:/s/______________________________
By:/s/_______________________________
Name:_______________________________ Name:______________________________
Title:_______________________________ Title:_____________________________
Date: Date:
APPENDIX A
301650.001(BF) 23
PATENT RIGHTS ON THE EFFECTIVE DATE
UNITED STATES PATENT RIGHTS
M.I.T. Case No. 5493L
U.S. Patent No. 5,251,645
"Adaptive Nulling Hyperthermia Array:
By Alan Fenn
M.I.T. Case No. 6512L
U.S. Serial Number 157,928
"Minimally Invasive Monopole Phased Array Hyperthermia Applicators
For Treating Breast Carcinomas"
By Alan Fenn
FOREIGN PATENT RIGHTS
M.I.T. Case No. 6512L
PCT Application designating EPO, Canada and Japan
"Minimally Invasive Monopole Phased Hyperthermia Applicators
For Treating Breast Carcinomas"
By Alan Fenn
301650.001(BF) 24
APPENDIX B
1. Foreign patent applications and patents within the Patent Rights as of
Effective Date:
M.I.T. Case No. 6512L
PCT Application designating EPO, Canada and Japan
"Minimally Invasive Monopole Phased Hyperthermia Applicators
For Treating Breast Carcinomas"
By Alan Fenn
2. Foreign countries in which Patent Rights shall be filed, prosecuted and
maintained in accordance with Article 6.
No additional instructions as of February 23, 1996.
301650.001(BF) 25
APPENDIX C
M.I.T. COPYRIGHTED SOFTWARE
M.I.T. Case No. 7299LS
"NULLGSC"
By Alan Fenn
M.I.T. Case No. 7298LS
"FOCUSGSC"
By Alan Fenn
301650.001(BF) 26
[Portions of this document are subject to requests of confidential treatment
filed with the Securities and Exchange Commission]
LICENSE AGREEMENT
AGREEMENT, dated August , 1996, by and between MMTC, INC. ("MMTC") a
Delaware corporation having its principal executive offices at 12 Roszel Road,
Suite A-203, Princeton, New Jersey 08450, and CHEUNG LABORATORIES, INC. ("CLI"),
a Maryland corporation having its principal executive offices at 10220-I Old
Columbia Rd. Columbia, MD 21046.
WHEREAS, MMTC owns or controls certain patents relating to a microwave
balloon catheter which may have application for treatment of diseases of the
prostate;
WHEREAS, CLI desires to acquire a perpetual, exclusive, and worldwide
license under said patents for use in the Field (as defined below);
WHEREAS, MMTC is willing to grant CLI said license for use in the
Field.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
provided herein, MMTC and CLI hereby agree as follows:
SECTION 1 - DEFINITIONS
For purposes of this Agreement the following definitions shall be
applicable:
1.1 "Affiliate" shall mean, with respect to any party, a person, firm,
partnership, trust, company or other entity which, directly or indirectly, ( i )
owns or controls said party, or (ii) is owned or controlled by such party or by
any person, firm, partnership, trust, company or other entity which owns or
controls, directly or indirectly, said party. For purposes of this Section 1.1,
"owned" or "owns" shall mean the legal or beneficial ownership of fifty percent
(50 %) or more of the issued and voting capital or other share participation,
and "controls" or "controlled" shall mean the power to vote or direct fifty
percent (50 %) or more of the voting power or otherwise to direct the affairs
thereof, but only for so long as said ownership or control shall continue.
301650.001(BF) 1
1.2 "Field" shall mean the treatment of prostatic disease in humans,
excepting the treatment of cancer of the prostate.
1.3 "Licensed Patents" shall mean only all patents listed in Appendix
I, annexed hereto and made a part hereof and any patents which may issue from
applications listed on Appendix I, together with all divisionals,
continuations-in-part, patents of additions and extensions and reissues thereof.
1.4 "Licensed Products" shall mean anything the manufacture, use or
sale of which would, in the absence of a license, infringe any of the Licensed
Patents and is used in the Field.
1.5 "Net Sales" shall mean gross sales of Licensed Products sold by
CLI, its Affiliates and sublicensees to third parties, less the total of ( i )
ordinary and customary cash and trade discounts, ( ii ) returns, ( iii )
allowances, ( iv ) commissions to independent sales agents, and (v ) excise,
sales or use taxes, other consumption taxes, customs duties and compulsory
payments to governmental authorities actually paid or deducted which are related
to gross sales of Licensed Products sold by CLI, its Affiliates and sublicensees
to their distributors but shall not include sales by such distributors to third
parties. In the event that any component or item within the definition of
"Licensed Product" hereunder is separately sold and is also sold as part of or
in conjunction with another significant component which is not within the
definition of "Licensed Product", then Net Sales thereof shall be determined as
if such item or component had been sold separately.
1.6 "Nonpatent Countries" shall mean those countries where the
manufacture, use or sale of the Licensed Products does not infringe an unexpired
Licensed Patent applicable to that country.
1.7 "Patent Countries" shall mean those countries where the
manufacture, use or sale of the Licensed Products would, in the absence of a
license, infringe an unexpired Licensed Patent applicable to that country.
1.8 "Payment Computation Period" shall mean each fiscal quarter, or any
portion thereof, ending on the last day of the third, sixth, ninth, and twelfth
accounting periods of a given CLI fiscal year. In the event CLI should change
its fiscal year end so that CLI has a transitional fiscal year which is longer
301650.001(BF) 2
or shorter than twelve months, the Payment Computation Periods for such
transitional fiscal year shall be in accordance with generally accepted
accounting principles and approximately equal to the length of three (3) fiscal
accounting periods in a fiscal year consisting of twelve months.
SECTION 2 - GRANT OF LICENSE
2.1 Subject to the terms of this Agreement, MMTC hereby grants to CLI,
and CLI hereby accepts, a perpetual, exclusive and worldwide license, to make,
have made, use and sell the Licensed Products in the Field. It is understood
that the foregoing exclusive license grants to CLI the rights enumerated to the
exclusion of all other parties in the Field, including MMTC and its Affiliates.
SECTION 3 - LICENSE FEES AND ROYALTIES
3.1 In consideration of the patent licenses, CLI shall pay to MMTC a
license fee in the total amount of [Confidential Treatment Requested] which
shall be payable within thirty (30) days after execution of this Agreement. The
foregoing license fee paid to MMTC shall be creditable against future royalties
due under Section 3.3 hereof.
3.2 CLI shall pay MMTC an additional license fee ("Additional License
Fee") of [Confidential Treatment Requested] for each failure by CLI to meet any
of the following development milestones by the specified date:
( i ) to commence a clinical safety trial with not less than ten
(10) patients by March 31, 1997;
( ii ) to file IDE within 6 months after signing of agreement; or
( iii ) to commence clinical efficacy immediately upon receipt of IDE
approval.
CLI shall pay any required Additional License Fee to MMTC within sixty (60) days
after the applicable date set forth in Section 3.2 ( i ), ( ii ), or ( iii )
above. CLI shall
301650.001(BF) 3
provide MMTC with written notification that it has met each of the development
milestones set forth above in Section 3.2 ( i ) , ( ii ), and ( iii ) within
sixty (60) days of meeting such milestone. Notwithstanding the provisions of
this Section 3.2 , if CLI should fail to meet any of the development milestones
set forth above in Section 3.2 ( i ), ( ii ), or ( iii ), in lieu of paying the
required Additional License Fee , CLI, at its option, may terminate this
Agreement and relinquish all its rights under this Agreement to the Licensed
Patents. If CLI should fail to meet any of the development milestones set forth
above in Section 3.2 ( i ), ( ii ), or ( iii ) and should fail to pay the
required Additional License Fee, MMTC, at its option, may terminate this
Agreement as provided in Section 12.2 hereof. All Additional License Fees paid
by CLI to MMTC shall be creditable against future royalties due under Section
3.3 hereof.
3.3 In consideration of the license granted to CLI under Section 2.1
hereof , CLI shall pay to MMTC royalties based on Net Sales of Licensed Products
in Patent Countries as follows:
( i ) At the rate of [Confidential Treatment Requested] of annual
Net Sales.
The royalties payable under this Section 3.3 shall only be payable on Net Sales
in Patent Countries and shall not be payable on Net Sales in Nonpatent
Countries, regardless of the country of manufacture of the Licensed Product. The
duration of royalty payments under this section 3.3 shall be determined on a
county-by-country basis and, subject to the provisions of Sections 6.1 and 8.3
hereof, shall continue in each country until the expiration of the last to
expire of the Licensed Patents in such country with claims directed to the
Licensed Product sold in such country by CLI, its Affiliates and sublicensees.
3.4 CLI shall pay MMTC minimum annual royalties of [confidential
treatment requested] for a period of seven (7) years commencing with the earlier
of (i) the first full CLI fiscal year following the first commercial sale of a
Licensed Product in the United States and ( ii ) CLI's 2000 fiscal year (the
fiscal year beginning after December 31, 1999). In the event the royalties
payable pursuant to Section 3.3 hereof for any CLI fiscal year should be less
than the minimum annual royalties payable for such fiscal year pursuant to this
section 3.4, then CLI, within sixty (60) days after the end of such fiscal year,
shall pay to MMTC an additional royalty for such fiscal year which shall be
301650.001(BF) 4
equal to the difference between the minimum annual royalty payable pursuant to
this Section 3.4 and the royalty payable pursuant to Section 3.3. for such
fiscal year. Any additional royalties paid by CLI pursuant to this Section 3.4
shall be creditable against future royalties due under Section 3.3 hereof. If
CLI should fail to pay MMTC the additional royalties under this Section 3.4
hereof for any CLI fiscal year, MMTC shall have the right, at its option, to
terminate this Agreement pursuant to Section 12.2 hereof. If CLI terminates this
Agreement pursuant to Sections 12.1 or 12.3, CLI obligations to pay annual
minimum royalties pursuant to this Section 3.4 shall cease as of the effective
date of termination.
SECTION 4 - PAYMENT PROCEDURES, REPORTS,
RECORDS, TAXES, AND AUDITING
4.1 Sales between or among CLI, its Affiliates and sublicensees shall
not be subject to royalties under Section 3.3 hereof, but in such cases
royalties shall be calculated upon Net Sales by such persons to independent
third parties, including distributors. CLI shall be responsible for payment of
any royalties accrued on sales of Licensed Products to such independent third
parties through its Affiliates or sublicensees.
4.2 CLI shall pay to MMTC royalties on Net Sales in Patent Countries
during each Payment Computation Period within sixty (60) days after the end of
each such Payment Computation Period, and each payment shall be accompanied by a
report identifying the Licensed Product, the Net Sales in Patent Countries, and
the royalties payable to MMTC, as well as computation thereof. Said reports
shall be certified as true and correct by the Controller of CLI. Said reports
shall be kept confidential by MMTC and not disclosed to any party (other than
accountants under Section 4.3 hereof and MMTC's attorneys who shall all be
subject to the same obligations of confidentiality as those imposed on MMTC
hereunder) And shall only be used for the purposes of this Agreement.
4.3 CLI shall, and shall cause its Affiliates and sublicensees to, keep
full and accurate books and records setting forth gross sales of Licensed
Products and Net Sales in Patent Countries and amounts payable to MMTC
hereunder. CLI shall permit MMTC, at MMTC's expense, by independent certified
public accountants employed by MMTC and acceptable to CLI, to examine such books
and records at any reasonable time, but not later than two (2) years following
the rendering of any
301650.001(BF) 5
such reports, accountings, and payments. Such independent accountants shall not
disclose to MMTC any of CLI's cost data. The opinion of said independent
accountants regarding such reports, accountings, and payments shall be binding
on the parties hereto.
SECTION 5 - CONFIDENTIALITY
5.1 During the term of this Agreement and for a period of ten (10)
years after expiration or termination hereof (except in case of termination by
MMTC under Sections 12.2 and 12.3 hereof), MMTC shall keep confidential and not
disclose to others or use for any purpose, other than as authorized herein, and
know-how, data or information directed to Licensed Products which is disclosed
to MMTC or its Affiliates by CLI; provided, however, the foregoing obligations
of confidentiality and non-use shall not apply to the extent that such know-how,
data and information is:
( i ) already known to MMTC at the time of disclosure hereunder of
hereafter developed by MMTC independent of any disclosure
hereunder as MMTC can demonstrate by competent proof; or
( ii ) publicly known prior to or after disclosure hereunder other
than through acts or omissions of MMTC, its Affiliates, or its
Affiliates' employees.
5.2 During the term of this Agreement and for the period of ten (10)
years after expiration of termination hereof, CLI shall keep confidential and
not disclose to others or use for any purpose, other than as authorized herein,
and know-how, data or information directed to the Licensed Products or Licensed
Patents which is disclosed to CLI or its Affiliates by MMTC; provided, however,
the foregoing obligations or confidentiality and non-use shall not apply to the
extent that such know-how, data and information is:
( i ) already known to CLI at the time of disclosure hereunder or
hereafter developed by CLI independent of any disclosure
hereunder as CLI can demonstrate by competent proof; or
301650.001(BF) 6
( ii ) publicly known prior to or after disclosure hereunder other
than through acts or omissions of CLI, its Affiliates, or its
Affiliates employees; or
( iii ) disclosed in good faith to CLI by a third party under a
reasonable claim of right; or
( iv ) disclosed to third parties under a secrecy agreement with
essentially the same confidentiality provisions provided
herein for use solely in connection with CLI's exercise of its
rights under this Agreement.
Disclosure may be made by CLI to governmental agencies to the extent required or
desirable to secure governmental approval for marketing of Licensed Products and
to preclinical and clinical investigators where necessary or desirable for their
information to the extent normal and usual in the custom of the trade and under
a secrecy agreement with confidentiality provisions which are similar to those
contained herein. Nothing herein shall be deemed to limit the right of clinical
investigators from publishing the results of their work.
SECTION 6 - REDUCTION OF ROYALTIES
6.1 Royalties payable by CLI to MMTC under Section 3.3 hereof shall be
reduced as follows:
( i ) If CLI or its Affiliates or sublicensees reasonably determine
in good faith with respect to any Patent Country that, in
order to avoid infringement of any patent not licensed
hereunder, it is reasonably necessary to obtain a license
regarding Licensed Products under any patent not licensed
hereunder in order to make, use or sell Licensed Products in
such country and to pay a royalty under such license, CLI
shall notify MMTC, and CLI's obligations to pay royalties
under Section 3.3 hereof shall be reduced with respect to Net
Sales in such Patent Country by an amount equal to fifty
percent (50%) of the royalty payable by CLI under such
additional license. CLI shall, however, make a good faith
attempt to negotiate the royalty rate and calculation
301650.001(BF) 7
of royalties payable to such third parties with a view to
minimizing the royalty to be deducted under this Section 6.1
(i).
( ii ) If a third party obtains, by order, decree or grant from a
competent governmental authority in any Patent Country, a
compulsory license under the Licensed Patents authorizing such
third party to manufacture, use or sell any Licensed Product
in such country, MMTC shall give prompt notice to CLI. During
the period of time sales are made pursuant to such compulsory
license, CLI's obligations to pay royalties under Section 3.3
hereof with respect to sales in such country shall be reduced
to the rate payable to MMTC by said third party.
SECTION 7 - COMMERCIALIZATION
7.1 Subject to the provisions of Sections 3.3. and 3.4, CLI will use
reasonable efforts to market Licensed Products in such countries where such
marketing will be commercially reasonable to CLI under the circumstances
pertaining from time to time. Notwithstanding the foregoing , but subject to the
provisions of Section 3.3 and 3.4, nothing in this Agreement shall require CLI
to maximize sales of Licensed Products nor prevent CLI, its Affiliates or
sublicensees from manufacturing, using or selling in any country any products
similar to or competitive with the Licensed Products. MMTC also agrees that
nothing in this Agreement shall in any way limit CLI's sole and exclusive right
to determine, in its discretion, the timing or manner of marketing,
manufacturing or advertising Licensed Products, provided such marketing,
manufacturing, or advertising is in compliance with applicable laws and
regulations.
SECTION 8 - PATENTS
8.1 MMTC and CLI shall cooperate in connection with the continued
prosecution by MMTC of the patent applications listed on Appendix I. If CLI
desires that MMTC file any application for a patent in specific countries other
than those enumerated on Appendix I or file any patent application on
improvements and variations upon inventions disclosed in the Licensed Patents
for use in the Field, CLI shall advise MMTC of such countries or improvements,
variations or inventions, as the case may be. Provided that MMTC has no
301650.001(BF) 8
reasonable objection thereto, MMTC shall thereupon file patent applications as
requested. So long as this Agreement is in effect, CLI shall pay the reasonable
expenses incurred after the date of this Agreement , including reasonable fees
for patent counsel, for filing and prosecuting the patent applications listed on
Appendix I and such other patent application filing requested by CLI pursuant to
this Section 8.1. In addition, MMTC shall take all necessary steps and pay all
expenses necessary to maintain for the full life thereof all Licensed Patents,
and, so long as this Agreement is in effect, CLI shall reimburse MMTC its
reasonable expenses in connection therewith. MMTC agrees to sign such further
authorizations and instruments and take such further action as may be requested
by CLI to implement the foregoing. In connection with any patent filing and
prosecution pursuant to this Section 8.1, the cooperation between the parties
shall include, without limitation:
( i ) CLI having full access to all documentation, filings and
communications to or from the respective patent offices, and
shall be kept fully advised as to the status of all pending
applications;
( ii ) MMTC and its agents and attorneys consulting with CLI prior to
taking any action or making any filing or submission in
connection with such patent prosecutions; and
( iii ) MMTC and its agents and attorneys giving due
consideration to all suggestions and comments of CLI regarding
any aspect of such patent prosecutions.
8.2 If any claim relating to Licensed Patents becomes, within any
Patent Country, the subject of a judgment, decree or decision of a court,
tribunal, or other authority of competent jurisdiction , which judgement,
decree, or decision is or becomes final (there being no further right of review)
and adjudicates the validity, enforceability, scope, or infringement of the
same, the construction of such claim in such judgment, decree or decision shall
be followed thereafter in such country in determining whether a product is
licensed hereunder, not only as to such claim but also as to all other claims to
which such construction reasonably applies. If at any time there are two or more
conflicting final judgments, decrees, or decisions with respect to the same
claim, the decision of the higher tribunal shall thereafter control, but if the
tribunal be of equal rank, then the final judgment, decree, or decision more
favorable to such claim shall control unless and until the majority of such
tribunals of
301650.001(BF) 9
equal rank adopt or follow a less favorable final judgment, decree, or decision,
in which event the latter shall control.
8.3 In the event any infringement action shall be brought within any
Patent Country against CLI or any of its Affiliates or sublicensees because of
the manufacture, use or sale of Licensed Products, CLI shall promptly notify
MMTC thereof. CLI shall continue to pay royalties hereunder during the
continuance of such infringement action and all appeals thereof, provided that
CLI or MMTC shall defend such action. If neither CLI nor MMTC shall assume the
defense of such infringement action, upon request by CLI to MMTC, then during
the pendency of such infringement action, CLI's obligations to pay royalties
under Section 3.3 with respect to sales in such country shall cease.
8.4 If any third party shall, in the reasonable opinion of CLI, within
any Patent Country, infringe any of the Licensed Patents, CLI shall promptly
notify MMTC. CLI shall have the right to bring suit and to take action in its
own name or in the name of MMTC where necessary. CLI and MMTC shall, at the
other's request, take all action necessary to assist in such suits (including
joining as a party). If MMTC is required or requested by CLI to join in any suit
brought by CLI, MMTC may be represented at CLI's expense by counsel of MMTC's
choice, provided that the expense is reasonable and the hourly rates charged by
MMTC's counsel are not greater than those of CLI's counsel on the same suit. Any
monetary recovery in connection with such infringement action shall be applied
to reimburse MMTC and CLI for their out-of-pocket expenses (including reasonable
attorneys' fees and any amounts paid hereunder by CLI to MMTC for employees or
counsel fees) in prosecuting such infringement. Any balance shall be shared
equally between CLI and MMTC. If such recovery is less than the out-of-pocket
expenses, reimbursement shall be on a pro-rated basis. CLI's obligations to pay
royalties to MMTC pursuant to Sections 3.3 and 3.4 shall not be reduced or
diminished because of the pendency of any infringement action.
8.5 MMTC will cooperate with CLI in the defense of any suit, action or
proceeding against CLI alleging the infringement of a patent or other
intellectual property right owned by a third party by reason of the use by CLI
of the Licensed Patents in the manufacture, use or sale of the Licensed Products
or in the exercise of any other right granted hereunder to CLI. CLI shall give
MMTC prompt notice of the commencement of any such suit, action or proceeding or
claim of infringement.
301650.001(BF) 10
MMTC shall give to CLI all authority (including the right to exclusive control
of the defense of any such suit, action or proceeding and the exclusive right to
compromise, litigate, settle or otherwise dispose of any suit, action or
proceeding), information and assistance necessary to defend or settle any such
suit, action or proceeding. CLI may join MMTC as a defendant, if necessary or
desirable, and MMTC shall execute all documents and take all other actions,
including giving testimony, which may be reasonably required in connection with
the defense of such suit, action or proceeding. CLI agrees to reimburse MMTC for
any costs and expenses to the extent such costs and expenses are approved in
advance by CLI.
8.6 CLI shall mark all Licensed Products made, used or sold under the
terms of this Agreement, or their containers, in accordance with the patent laws
of the country where made, used or sold.
8.7 Anything to the contrary notwithstanding in this Section 8
(including use of the word "reimburse") , CLI shall pay MMTC in advance for all
costs and expenses, other than legal fees and expenses, which will be incurred
by MMTC in connection with Section 8. With respect to reimbursement by CLI of
legal fees and expenses incurred by MMTC pursuant to Section 8, CLI shall pay
such legal fees and expenses directly to MMTC's legal counsel promptly upon
MMTC's submission to CLI of bills for such legal fees and expenses and MMTC
shall not be required to first pay such legal fees and expenses in order to seek
reimbursement from CLI.
SECTION 9 - REPRESENTATION AND WARRANTIES
9.1 MMTC hereby represents and warrants to CLI as follows:
( i ) MMTC has the corporate power and authority to execute and
deliver this Agreement and to perform its obligations
hereunder, and the execution, delivery and performance of this
Agreement by MMTC have been duly and validly authorized and
approved by proper corporate action on the part of MMTC and
MMTC has taken all other action required by law, its
corporate statutes, certificate of incorporation or by-laws or
any agreement to which it is a party or to which it may be
subject required to authorize such execution, delivery and
performance. Assuming due authorization, execution and
delivery on the part of CLI, this Agreement constitutes a
legal, valid and binding obligation of MMTC enforceable
301650.001(BF) 11
against MMTC in accordance with its terms, except as the
enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization or other similar laws
of general application relating to creditors' rights.
( ii ) To the best of MMTC's knowledge, the execution and delivery of
this Agreement by MMTC and the performance by MMTC
contemplated hereunder will not violate any ordinance, law,
decree or government regulation or any order of any court or
other governmental department, authority, agency or
instrumentality thereof.
( iii) Except as set forth in that certain letter dated May 14, 1992,
from MMTC to CLI, a copy of which is attached hereto as
Appendix II, to the best of MMTC's knowledge, as of the date
hereof, the issued Licensed Patents are valid and enforceable
patents and MMTC has no knowledge that any third party is
infringing such Licensed Patents or that the manufacture, use
and sale by CLI of Licensed Products will infringe any other
patents of MMTC or its Affiliates or patents of third parties.
Appendix I lists all patents and patent applications related
to the Licensed Product beneficially owned by MMTC or its
Affiliates. In addition , MMTC is the legal and beneficial
owner of all of the Licensed Patents, and no other person,
firm, corporation or other entity, has any right, interest or
claim in or to the Licensed Patents.
( iv ) Neither the execution and delivery of this Agreement nor the
performance hereof by MMTC requires MMTC to obtain any
permits, authorizations or consents from any governmental body
or from any other person, firm or corporation, and such
execution, delivery and performance will not result in the
breach of or give rise to any termination of any agreement or
contract to which MMTC may be a party or which otherwise
relates to the Licensed Patents or the Licensed Products.
( v ) Upon execution of this Agreement, MMTC will disclose to
technical personnel of CLI all data and material information,
known to it or its Affiliates, with respect to the safety and
efficacy of the Licensed Products.
301650.001(BF) 12
9.2 CLI hereby represents and warrants to MMTC as follows:
( i ) CLI has the corporate power and authority to execute and
deliver this Agreement and to perform its obligations
hereunder, and the execution, delivery and performance of this
Agreement by CLI have been duly and validly authorized
and approved by proper corporate action on the part of CLI and
. and CLI has taken all other action required by law, its
certificate of incorporation or by-laws or any agreement to
which it is a party or to which it may be subject required to
authorize such execution and delivery. Assuming due
authorization, execution and delivery on the part of MMTC,
this Agreement constitutes a legal, valid and binding
obligation of CLI, enforceable against CLI in accordance with
its terms, except as the enforceability thereof may be limited
by applicable bankruptcy, insolvency, reorganization or other
similar laws of general application relating to creditors'
rights.
( ii ) To the best of CLI's knowledge, the execution and delivery of
this Agreement and the performance by CLI contemplated
hereunder will not violate any state, federal or other statute
or regulation or any order of any court or other governmental
department, authority, agency or instrumentality of the United
States.
(ii) CLI shall purchase product liability that is satisfactory to MMTC
in the amount of not less than $5,000,000 for product liability.
SECTION 10 - INDEMNIFICATION
10.1 CLI agrees to indemnify and hold MMTC, its directors, officers,
agents and employees harmless from all loss, damage, liability, claim of loss,
lawsuit, action, cost, fees (including reasonable attorneys' fees) , expenses,
and other claims asserted against them or any of them for damage, injury, or
death arising directly or indirectly as a result of the clinical testing or
use,, manufacturing, processing, packaging, marketing, sale or distribution of
Licensed Products, in each case by CLI, its Affiliates or sublicensees. CLI
shall have no obligation to indemnify MMTC or its directors, officers, agents or
employees under this Section 10.1 in the event a judge or jury makes a specific
finding or verdict, which is sustained through final appeal of gross negligence
that is willful or wanton or of intentional and conscious wrongdoing.
301650.001(BF) 13
MMTC shall give CLI notice as soon as practicable of any such claim or action
and CLI shall have the right to participate in any compromise, settlement or
defense thereof.
SECTION 11 - TERM
11.1 This Agreement shall commence as of the effective date hereof and
shall continue in perpetuity unless terminated earlier in accordance with
Section 12.
11.2 The term of CLI's royalty obligations under Section 3.3 of this
Agreement shall be for the life of any patent included within the Licensed
Patents and licensed to CLI pursuant to Section 2.1.
11.3 CLI's obligation to pay royalties pursuant to Sections 3.3 and 3.4
hereof shall cease and CLI shall be deemed to have a fully paid-up license upon
the earlier of ( i ) the expiration of all patents within the Licensed Patents
or ( ii ) respecting the Patent Country or Patent Countries in question, the
termination of CLI's obligation to pay royalties pursuant to Section 8.
SECTION 12 - TERMINATION
12.1 If at any time CLI shall, in its reasonable judgment, determine
that it is not reasonably practicable to sell or continue to sell Licensed
Products, CLI, upon sixty (60) days notice to MMTC, shall have the right, as CLI
may elect, to terminate this Agreement, whereupon this Agreement shall terminate
sixty (60) days after the date of such notice.
12.2 If CLI fails to pay MMTC any required Additional License Fee
required by Section 3.2 hereof, royalties required by Section 3.3 hereof, or
minimum annual royalties required by Section 3.4 hereof, and such breach or
default as not cured within thirty (30) days after the giving of notice by MMTC
specifying such breach or default, MMTC shall have the right to terminate this
Agreement immediately upon expiration of such thirty (30) day period and to
institute arbitration proceedings to recover any unpaid royalties accrued on or
before termination.
301650.001(BF) 14
12.3 Subject to the provisions of Section 12.2, if either CLI or MMTC
breaches or defaults in the performance or observance of any of the provisions
of this Agreement and such breach of default is not cured within ninety (90)
days after the giving of notice by the other party specifying such breach or
default, the other party shall have the right to terminate this Agreement upon a
further thirty (30) days notice. If any representation or warranty of any party
as contained in this Agreement shall be materially incorrect or inaccurate, such
shall be deemed to be a material breach or default of this Agreement by such
party.
12.4 Termination of this Agreement for any reason shall be without
prejudice to:
( i ) the rights and obligations of the parties as provided in
Sections 5.1, 5.2 and 10.1 hereof;
( ii ) MMTC's right to receive all payments accrued under Sections
3.3 and 3.4 hereof prior to the effective date of such
termination; and
( iii ) any other remedies which either party may otherwise have.
12.5 Upon any termination by CLI under Section 12.1 hereof, or
termination by MMTC under Section 12.2 or 12.3 hereof, all rights granted to CLI
pursuant to this Agreement shall terminate.
12.6 CLI shal raise $5,000,000 in funds by March 31, 1997. If CLI
does not secure the $5,000,000 in funds by said date, MMTC shall at its option,
terminate this agreement and shall be allowed to retain any and all funds
received by MMTC from CLI.
SECTION 13 - DISPOSITION OF LICENSED PRODUCTS
13.1 Upon termination of this Agreement in its entirety by either
party, CLI shall provide MMTC with a written inventory of all Licensed Products
in the process of manufacture or in stock and shall dispose of such Licensed
Products within a period of one (1) year following such termination; provided,
however, that all such Licensed Products shall be subject to the terms of this
Agreement.
301650.001(BF) 15
SECTION 14 - FORCE MAJEURE
14.1 No party shall be liable for failure of or delay in performing
obligations set forth in this Agreement, and no party shall be deemed in breach
of its obligations, if such failure or delay is due to natural disasters or any
causes reasonably beyond the control of such party.
SECTION 15 - ASSIGNMENT / SUBLICENSE
15.1 This Agreement is binding upon and shall inure to the benefit of
MMTC and its legal representatives, successors and assigns. Any sublicense by
CLI shall not operate to relieve CLI of any obligations or liabilities under
this Agreement, including, without limitation, the obligation of CLI to pay
license fees and royalties under Section 3. This Agreement shall not otherwise
be assignable by MMTC or CLI or sublicensed by CLI except with the prior written
consent of the respective other party, which consent shall not be unreasonably
withheld; provided, however, that either party shall have the right to:
( i ) Assign its rights and obligations under this Agreement to any
successor (including the surviving entity in any consolidation
or merger) to all or substantially all of its business,
provided, that such successor assumes all of such party's
obligations under this Agreement; or
( ii ) Transfer its interest or any part thereof under this Agreement
to any Affiliate, or designate and cause any Affiliate to
perform all or part of its obligations under this Agreement or
to have the benefit of all or part of its rights hereunder. In
the event of any such transfer, the transferee Affiliate shall
assume and be bound by the provisions of this Agreement, and
its performance under this Agreement shall be guaranteed by
the transferring party.
301650.001(BF) 16
SECTION 16 - MISCELLANEOUS
16.1 Governing Law and Arbitration - This Agreement shall be governed
by and construed under the laws of the State of New York, regardless of the
choice of law principles of New York or any other jurisdiction. Except as
otherwise provided in Sections 4.3 hereof, any claim or controversy arising out
of or relating to this Agreement shall be settled by final and binding
arbitration by three (3) arbitrators, in accordance with the then-existing rules
of the American Arbitration Association, and judgement upon the award rendered
by the arbitrators may be entered in any court having jurisdiction thereof. The
parties shall each select one arbitrator and the arbitrators selected by the
parties shall mutually agree on a third arbitrator. Such arbitration shall be
held in New York, New York.
16.2 Entire Agreement- This agreement sets forth the entire agreement
and understanding among the parties hereto as to the subject matter hereof and
has priority over all documents, verbal consents or understandings made among
MMTC and CLI and their respective Affiliates before the conclusion of this
Agreement with respect to the subject matter hereof; none of the terms of this
Agreement shall be amended or modified except in writing signed by the parties
hereto.
16.3 Waivers - A waiver by any party of any term or condition of this
Agreement in any one instance shall not be deemed or construed to be a waiver of
such term or condition for any similar instance in the future or of any
subsequent breach hereof. All rights, remedies, undertakings, obligations and
agreements contained in this Agreement shall be cumulative and none of them
shall be a limitation of any other remedy, right, undertaking, obligation or
agreement of any party.
16.4 Public Statements - Neither party shall make any public statement
or make any press release expressly or implicitly identifying this Agreement or
the other party without first obtaining the consent of the other party (which
consent shall not be unreasonably withheld) , except that consent of the other
party shall not be required as to any public statement or other
301650.001(BF) 17
communication ( i ) which is reasonably believed to be required by law, or (ii)
which has already been publicly disclosed and is still accurate.
16.5 Severability - If and solely to the extent that any provision of
this Agreement shall be invalid or unenforceable, or shall render this entire
Agreement to be unenforceable or invalid, such offering provision shall be of no
effect and shall not effect the validity of the remainder of this Agreement or
any of its provisions; provided, however, the parties shall use their respective
reasonable efforts to renegotiate the offending provisions to best accomplish
the original intentions of the parties.
301650.001(BF) 18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above by their duly authorized officers.
MMTC, INC.
By:/s/___________________________
Its:___________________________
Dated:__________________________
CHEUNG LABORATORIES, INC.
By:/s/___________________________
Its:___________________________
Dated:__________________________
301650.001(BF) 19
Appendix I
Licensed Patents
1. Patents
Patent Issue
Country Number Date Title
U.S. 5, 007, 937 April 16, 1991 Catheters for Treating
Prostate Disease
2. Applications
Application Filing
Country Number Date Title
European Countries PCT/0591/02509 April 12, 1991 Catheters for
Canada Treating Prostate
Japan Disease
3. All other patents and applications in any country, now owned or
hereafter acquired by MMTC, based on or related to the patents and
patent applications listed in paragraph 1 of this Appendix I.
4. All divisionals, continuations, continuations-in-part, patents of
addition, extensions and reissues of any patents or applications within
the foregoing paragraphs 1 and 2 of this Appendix I.
301650.001(BF) 20
CHEUNG LABORATORIES, INC.
[LETTERHEAD]
September 17, 1990
Dr. Haim I. Bicher
H.B.C.I., Inc.
12099 W. Washington Blvd., Suite 304
Los Angeles, CA 90066
RE: Cheung Laboratories, Inc. proposal to H.B.C.I.
The following proposal is to set forth certain understanding between Cheung
Laboratories, Inc. (hereafter referred to as CLI) located at 9140-Guilford Road,
Columbia, MD 21046 and H.B.C.I., Inc. located 12099 Washington Blvd., Suite 304,
Los Angeles, CA 90066. Specifically, this proposal outlines the terms and
conditions of the sales of CLI's Hyperthermia System 100A, with consideration
given to H.B.C.I., Inc., for exclusive assignments of certain patents,
technology transfer and manufacturing rights.
1. CLI will sell H.B.C.I., Inc. one System 100A as specified at the sales price
of $149,950 F.O.B., Columbia, MD. This System 100A comes with on-site training
and installation, free software update and CLI's limited one full year warranty
on parts and labor.
2. CLI will credit H.B.C.I., Inc. $79,950 for the following:
(i) H.B.C.I., Inc. will fully and exclusively license without royalties,
the patent rights of its microwave air cooled applicators patent #4332260 to
CLI. CLI will have the right to defend the validity and content of said patent
with H.B.C.I. technical help. H.B.C.I. will retain full rights to manufacture
and sell under said patent.
(ii) H.B.C.I., Inc. will fully and exclusively license without royalties
its patent rights of its thermocouple probes patent #4369795 to CLI. CLI will
have the right to defend the validity and content of said patent with H.B.C.I.
technical help. CLI will consider purchase of H.B.C.I.'s thermocouples. H.B.C.I.
will retain full rights to manufacture and sell under said patent.
301650.001(BF) 21
(iii) CLI will explore the possibility of jointly developing and marketing
the POPAS System.
(iv) Upon acceptance of this proposal, H.B.C.I., Inc. shall Federal Express
a deposit of U.S. $30,000 to CLI. September 24, 1990.
(v) CLI, on a best effort, shall have the System 100A delivered to
H.B.C.I., Inc. and installed the first week of October 1990. Upon satisfaction
of installation and training, H.B.C.I., Inc. shall immediately make us the
second payment, U.S. $30,000, plus delivery, crating if needed, and insurance.
(vi) The balance of $10,000 shall be paid to CLI by H.B.C.I., Inc. no later
than 90 days after delivery of System 100A. H.B.C.I., Inc. at its option can
submit the payment of the balance or return the Luxtron 3000 Thermometry unit
inclusive of extensions and probes in the same condition as received.
H.B.C.I., Inc. shall finalize license agreements of patent rights to CLI of the
patents contained in a. and b. above no later than 60 days after signing this
agreement.
If the foregoing is in accordance with your understanding of the terms and
conditions agreed upon between the two parties, please sign and date below, fax
and send back to CLI. CLI shall verify and send back to you a copy of this
agreement, whereupon this shall become the agreement between the parties, and
shall not be modified except by writing agreed to and executed by both parties
hereto.
CHEUNG LABORATORIES, INC.
By /s/
---------------------------
John Mon, Marketing Manager
Agreed and Accepted this ____ day of ___________, 1990.
H.B.C.I., Inc.
301650.001(BF) 22
By /s/
----------------------
Haim I. Bicher, M.D.
H.B.C.I. President
301650.001(BF) 23
CHEUNG LABORATORIES, INC.
[LETTERHEAD]
October 4, 1996
Mr. Lorin M. Spak
Herbst LaZar Bell, Inc.
355 North Canal Street
Chicago, Illinois 60606
Dear Mr. Spak:
Please consider this letter in substitution of an earlier letter faxed
to you on September 27, 1996.
Following verbal discussions, as recently as this morning, with Warren
Stearns, Stuart Fuchs, Verle Blaha, and others, your proposal, your letter of
September 5th, and Walter's letter of the 9th; this letter is to express our
intent (mutually, if executed in the space provided below) to enter into a
business relationship between Herbst LaZar Bell, Inc. ("HLB") and Cheung
Laboratories, Inc. ("CLI") pursuant to which CLI undertakes to engage HLB for
certain tasks (essentially outlined in your proposal, but most probably subject
to modest modification over time) under the terms and conditions as are set
forth herein.
While your letter outlines a well thought out and comprehensive program
that we intend to implement, Verle Blaha has explained to Walter Herbst that we
underestimated the work necessary to get our next financing underway and are
consequently delayed. The investors are there and our paperwork isn't. While
this situation is both frustrating and a bit embarrassing, I know that Verle has
told Walter that it also would not be fair to you to enter into the full program
you proposed on a formally binding basis until we can assure you that we have in
hand the funds to pay the cash portion of your charges on a timely basis. We are
nevertheless very pleased that you think enough of the potential of the
technology array we now possess that you are willing to work with us and I
assure you that we want to add HLB to our growing term of top flight experts.
In this regard we agree with the arrangements set forth in principle in
your proposal and letter of the 5th as to the tasks to be accomplished and cash
compensation rates to be paid to you (55% of normal billing rates). The
remaining 45% will be paid to HLB in CLI common stock at $1.25 per share. Prior
to the delivery of any of such shares, you will be required to execute
documentation relating to the issuance of these securities, all of which shall
be consistent with the documentation required of any similarly situated
accredited investor. As part of this documentation, you will be asked to
acknowledge receipt, review and understanding of information to be contained in
Form 10-K covering the year ending September 30, 1996.
As indicated in our conversation earlier today, and as a completely
separate subject, we have an urgent need to deliver a "breadbox" alpha prototype
to Oxford University not later than December 31, 1996. This prototype,
incorporating the MIT technology in a CLI microwave hyperthermia system but
lacking the LORAD table, will be used initially to conduct preclinical trials on
healthy pigs. These large animal tests must be completed in advance of the
clinicals to be performed at Hammersmith.
The CLI prototype will then be attached to a LORAD table, and the
complete system for treating cancer in intact human breasts delivered to
Hammersmith by April 1, 1997. CLI will supply HLB with one Microfocus 1000
System and one LORAD table or equivalent. HLB's task would be limited to
upgrading the software, designing the "marriage" of the LORAD and CLI subunits,
and completing the construction of the "animal" and "human" configurations.
Stuart Fuchs, assisted by Alan Fenn, will be our project manager. We are
currently reviewing a Statement of Work prepared by Alan Fenn to make sure it
conforms to this revised plan.
Upon reviewing your rates and the Statement of Work mentioned above, we
estimate that this separate year-end project would run to approximately $50,000
and have budgeted this amount, including the enclosed check for an advance of
five thousand dollars ($5,000), as discussed between Verle and Walter. If you
feel we are correct in our estimate and are in agreement with the spirit and
intent expressed in this letter, please execute a copy of this letter in the
space provided and return it for our files. If you have additional comments,
questions or remarks, please call me.
We want to work with you.
Sincerely, Accepted:
/s/_______________________ /s/_______________________
Augustine Y. Cheung Lorin M. Spak
301650.001(BF) 2
STEARNS MANAGEMENT COMPANY
[LETTERHEAD]
May 28, 1996
Cheung Laboratories, Inc.
10220-1 Old Columbia Road
Columbia, MD 21046-1705
Attention: Messrs: Augustine Cheung, President
Charles C. Shelton, Executive Vice President
Letter of Agreement
Dear Messrs. Cheung and Shelton:
We have held meetings held at the offices of Cheung Laboratories, Inc.
(the "Company") on May 24th and have participated in several phone conversations
between May 25th and today's date to get acquainted with you and with the
Company and to discuss various alternative strategies by which the Company can
finance the implementation of its business plans. Pursuant to our verbal
agreement for us to undertake a consulting engagement for the Company reached
during our meetings and confirmed by Mr. Shelton's letter of today's date, you
have forwarded substantial additional information which we have reviewed in
detail.
Accordingly, this Letter Agreement is to confirm and document the prior
agreements reached whereby the Company, a Maryland corporation, seeks to secure
the advice and services of Stearns Management Company, an Illinois corporation,
("Stearns") to render financial advisory services to it regarding its near and
long-term business strategy particularly with regard to its need to secure
outside capital to sustain its anticipated growth. Stearns has agreed to render
such advice and services on the terms and conditions set forth below.
1. The Company hereby engages Stearns to render consulting advice
to the Company, on an exclusive basis, with regard to all
matters involving the solicitation of outside capital,
restructuring the Company in a manner most conducive to
solicitation and acceptance of such capital, and other matters
relative thereto including, but not limited to, the matters
outlined in paragraph hereof.
2. Stearns will consult with the Company's management at their
request to study the Company's business plans and to provide
specific recommendations concerning financial and related
matters, including, but not limited to, the following:
A Changes in the capitalization of the Company;
B Changes in the Company's corporate structure;
C Redistribution of shareholdings of the Company's
stock;
D Obtaining working capital financing for the Company
initially
and on an on-going basis;
E Offerings of securities in private transactions;
F Offerings of securities in public transactions
including selection of financial public relations
alternatives, budgeting and implementation of
follow-on strategy;
G Selection of professionals as special consultants in
connection with such offerings;
H Alternative uses of corporate assets;
I Alternative marketing approaches for expansion;
J Selection of advisory personnel and/or additional
directors;
K Sale of stock by insiders pursuant to Rule 144 or
otherwise.
3. Stearns will recommend and, upon request of the Company, use
its best efforts to implement a plan(s) which will provide
capital to the Company from outside sources on a timely basis,
both privately and publicly, utilizing its knowledge and
contacts within the financial and investment banking
communities.
4. As part of its duties hereunder and material to its
recommendations to the Company, Stearns will undertake an
analysis of:
(a) The current valuation of similarly situated
public companies in an effort to assure the Company
of fair valuation upon marketing of its securities.
(b) The Company's short term sales and manufacturing
plans in order to determine the need for interim
capital and to assist the Company in selecting its
best strategy for maximizing the intrinsic worth of
its shares.
301650.001(BF) 2
5. Upon request of the Company, Stearns will undertake consulting
assignments on such other matters as the Company may deem
appropriate.
6. In order to induce Stearns to enter into this relationship
with the Company and to discount its normal fees for services,
the Company shall:
(a) Grant to such assignees as Stearns shall
designate to the Company a transferable Common Stock
Purchase Warrant (the "Warrant"), in the form
attached hereto as Exhibit 1, entitling such
assignees to purchase, for a five year period
commencing on the date hereof and renewable for an
additional five year period, the number of shares
which, when added to the existing common shares and
any securities convertible into or exercisable for
the purchase of (options, warrants and the like)
common shares, would represent, in aggregate, a five
percent (5%) interest in the equity of the Company as
of the completion of the next registered public
offering of common shares of the Company. Said
Warrant, when reduced to certificate form, shall
allow said assignees of Stearns, in aggregate, to
invest a total sum of money to be derived by
multiplying $0.41 per share by that number of shares
which shall constitute said five percent (5%)
interest (on a fully diluted basis as is more fully
covered in the Warrant) and the Warrant shall contain
certain anti-dilution features (see form of Warrant
attached as Exhibit 1) which shall protect all
assignees of Stearns from percentage or price
dilution until the Company's next public offering (a
defined term in the Warrant) shall have been
completed, whereupon, in subsequent issues of equity,
assignees of Stearns shall accept dilution of their
interest pro-rata with other holders of common shares
or securities convertible or exercisable into same.
The warrants issuable upon execution of this
Agreement shall be fully vested in the hands of their
holders and shall not be cancelable regardless of the
termination, for any reason or for
301650.001(BF) 3
any cause, of this Agreement. Within three (3) months
from the date hereof, any and all Warrants issued in
accordance with this Agreement, shall be converted
into Warrants bearing the actual number of shares
into which each such Warrant certificate is
exercisable instead of the percentage of shares
currently defined in the Warrant to be issued
concurrently with the execution of this Agreement.
(b) Make the representation and warranties contained
in paragraphs and hereof. When made to Stearns
herein, all such representations, warranties and
indemnifications shall apply equally to Stearns
officers, directors, affiliates, heirs, successors
and assigns.
7. In consideration for the services rendered to the Company by
Stearns, Stearns shall charge the Company for services
rendered, commencing with the date of this Agreement, by its
personnel at the following per diem rates which represent a
substantial reduction from its normal charges:
An initial fee of $34,000 as additional inducement, together
with the issuance of a warrant to purchase 168,292 shares of
CLI Common Stocks on the same terms and conditions as may
hereafter be issued to investors in the contemplated Bridge
Financing undertaken shortly, and covering investigatory
efforts by Stearns to the date hereof.
The following fees and expense rates shall apply hereafter:
Per Diem
Warren C. Stearns $1500*
Others Cost plus 20%
Expenses Cost plus 20%
* Or $190.00/hr for partial days (primarily Chicago area). Per
diem rates shall apply regardless of the length of the working
day (providing the working day shall have been at least eight
(8) hours) and no charges
301650.001(BF) 4
shall be made for travel time unless same is during normal
working hours during the normal Monday-Friday work week.
Payment of fees and expenses may be delayed by the Company
pending first receipt of proceeds from outside financing;
thereafter, fees and expenses shall be billed monthly in
arrears and payable net, 10 days.
Statements from Stearns shall be submitted monthly to the
Company accompanied by receipts or other documentation as the
Company shall reasonably request.
8. Stearns shall have the right to rely on verbal instructions or
approvals of the Chief Executive, other designated officer, or
General Counsel to the Company with respect to initiating or
continuing to incur fees or expenses.
Similarly, the parties hereto have agreed that most of the
communication between the Company and Stearns shall be verbal
so as to minimize the amount of time actually billable by
Stearns to the Company. However, Stearns stands ready at any
time to communicate its reports, recommendations, or comments
on any matter in writing if requested to do so by the Company.
9. The Company acknowledges that all of the compensation due
Stearns as a result of its performance hereunder and all of
the inducements granted by the Company to Stearns to enter
into the relationship created hereby are accepted by Stearns
based on its continued reliance on the Company's
representations and warranties contained in this paragraph
and, upon execution of this Agreement, delivered hereby to
Stearns.
The Company represents that it has agreed in principle to
engage in one or more private securities offerings (more or
less, immediately) and to seek a next public offering of its
common stock at an early date (expected to be not later than
the end of 1997) to raise needed capital and, also, to aid in
liquefying existing investment. The Company also represents
and warrants to Stearns that:
301650.001(BF) 5
Except as already disclosed to Stearns, it is a
corporation in good standing, has correctly and
timely filed all reports and notices and has done all
such other things as it is required to do and to be
so filed by all the various state and federal laws,
rules, regulations and statutes to which the Company
is subject, is not in litigation or subjected to
threatened litigation, has good title to all of its
assets including but not limited to its patents
(whether owned or licensed), and is in compliance
with each and every contract or agreement which is
binding upon it.
It will engage competent securities counsel
reasonably acceptable to Stearns to prepare offering
material for each offering contemplated by this
agreement.
It will begin to substantially revise its Business
Plan, in an expeditious manner, along the lines and
in accordance with the suggestions made by Stearns
concurrent with the execution of this Agreement. As
well, it will furnish Stearns with adequate copies of
same as well as such further documentation as Stearns
may, from time to time, reasonably request.
It will prepare or cause to be prepare or cause to be
prepared a written, taped, and verbal "technical
presentation" and will use its best efforts to attend
meetings with security analysts to expose a variety
of financial institutions of its technical
achievements.
It will engage the services of an experienced
businessman to act as interim CEO who will be
competent to attend to the coordination of all
contemplated activities particularly attendant to the
preparation of the Company to financial institutions
and investment bankers.
It will engage an accounting firm reasonably
acceptable to Stearns to prepare audited financial
statements reflecting the Company's financial history
for the last three (3) fiscal years. Said statements
shall be prepared in accordance with generally
301650.001(BF) 6
accepted accounting principles but shall capitalize,
to the extent possible, the Company's investment in
its patents, prototypes, research and development.
That there are no existing agreements with any party
which would act to mitigate or prohibit the Company
from performance of all actions contemplated by this
Agreement and that it has full authority to enter
into this Agreement. Additionally, that the Company
is unaware of any potential claim or payment for
services in the nature of a finder's fee or any other
arrangements, agreements, payments, issuances or
understandings that would operate to affect Stearns'
compensation (including the issuance of the Warrant)
hereunder.
It does, hereby, indemnify Stearns against any
liability whatsoever (including legal fees and
expenses) arising from claims made by others based
upon misstatements or omissions of material fact
whether in offering material prepared by the Company
or in statements made or alleged to be made by
employees, agents, or consultants to the Company
(other than Stearns). In this connection, Stearns
shall rely upon the Company's assurance, made herein,
that, upon notice, the Company shall promptly engage
competent counsel to defend Stearns or failing to do
so for a period of thirty (30) days after receipt of
notice, shall, immediately upon receipt, reimburse
Stearns for any fees or expenses Stearns, in its sole
discretion, deems necessary for its defense.
It shall cooperate fully with Stearns in its efforts
to secure outside capital for the Company and shall
not unreasonably delay approval or delivery of
information or documentation (including executed
documentation) necessary to conclude financing
originated by Stearns and approved by the Company.
It recognizes and confirms that, in advising the
Company and in fulfilling its engagement hereunder,
Stearns will use and rely on data, material and other
information furnished to Stearns by the
301650.001(BF) 7
Company. The Company acknowledges and agrees that in
performing its services under this Agreement, Stearns
may rely upon the data, material and other
information supplied by the Company without in each
and every case being obligated to independently
verify the accuracy, completeness or veracity of
same.
In the event of any dispute between the parties
hereto, at the sole option of Stearns, the Company
will submit same to arbitration in accordance with
the rules of the American Arbitration Association and
that the prevailing party in any such arbitration or
litigation, as the case may be, shall be paid its
reasonably attorneys' fees and expenses arising from
such proceeding by the other party.
10. The term of this Agreement is for a period of one (1) year
from the date hereof or for a period ending on the date on
which a Registration Statement covering a public offering of
the Company's securities is declared effective by the
Securities and Exchange Commission, whichever date lasts
occurs. Notwithstanding anything to the contrary in this
paragraph, this Agreement may be terminated by either party
to this Agreement at any time in its discretion, upon ten (10)
days written notice to the other party.
In the event that this Agreement is terminated by the Company
for any reason prior to the termination date provided in the
first sentence of this paragraph , the rights under the
Warrant or Warrants, of even date herewith, by and between the
Company and assignees of sterns shall continue in full force
and effect according to its terms. Additionally, in the event
the Company terminates this Agreement prior to the termination
date set forth in the first sentence of this paragraph , the
Company shall, immediately upon submission of a final
statement by Stearns, pay all the fees and expenses accrued to
Stearns through the date of termination.
In the event that this Agreement is terminated by Stearns, it
shall be terminated only by Stearns' declaration of a breach
on the Company's
301650.001(BF) 8
party of this Agreement (particularly pursuant to the
provisions of paragraph hereof) or because the Company has
elected to materially delay or change its financing strategy
in such a fashion that the financing(s) contemplated herein
are no longer feasible within the term frame originally
contemplated. In such event, the Company and Stearns agree to
work out some mutually agreeable means by which the Company's
obligations to Stearns may be paid without undue burden on
either party.
11. Stearns will execute and agrees hereby to abide by (to the
extent its provisions are not in conflict with the performance
of duties expected of Stearns to this Agreement) an "Agreement
For The Protection Of Confidential Information") with the
Company.
If the foregoing correctly documents the understandings and agreements
reached between us, please execute this letter agreement in the space provided
below and return a copy of it for our files.
Very truly yours, Read, Understood and Agree:
Stearns Management Company Cheung Laboratories, Inc.
By: /s/ ____________________ By: /s/_______________________
Warren C. Stearns Augustine Y. Cheung
President President
301650.001(BF) 9
CONSULTING AGREEMENT
This CONSULTING AGREEMENT, dated as of August 1, 1996, with an
effective date of June 1, 1996 (the "Effective Date"), is between Cheung
Laboratories, Inc., a Maryland corporation (the "Company"), and NACE Resources,
Inc., a Delaware corporation (the "Consulting Firm").
WITNESSETH
WHEREAS, since the Effective Date, the Consulting Firm has provided
consulting services to the Company with respect to the development and
application of the Company's products and proprietary technology (the "Prior
Consulting Services");
WHEREAS, the Company desires to compensate the Consulting Firm for the
Prior Consulting Services and to engage the Consulting Firm to provide
consulting services in the future in accordance with the terms of this
Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the Company and the Consulting Firm hereby agree as
follows:
1. Term.
The Company hereby engages the Consulting Firm, and the
Consulting Firm hereby agrees to perform services for the Company, in accordance
with this Agreement, for an initial term of one (1) year commencing on the
Effective Date (the "Initial Term"), unless terminated earlier in accordance
with Section 5 hereof. The term of this Agreement shall be automatically
extended for an unlimited number of one year renewal terms (each, a "Renewal
Term"), unless terminated in accordance with Section 5 hereof or by either party
upon written notice given thirty (30) days prior to the end of the Initial Term
or any Renewal Term.
2. Duties of the Consulting Firm.
(a) The Consulting Firm hereby agrees to cause Stuart Fuchs
(the "Designated Consultant") to provide such advisory and consulting services
to the Company and its Affiliates as may be requested from time to time by the
Board of Directors or the President of the Company with respect to the
development and application of the Company's products and proprietary
technology. In addition, to the extent requested from time to time by the Board
of Directors or President of the Company, the Consulting Firm will coordinate
the activities of an advisory committee of scientific and medical professionals
to assist in the development of and application of the Company's products and
301650.001(BF) 1
proprietary technology. The Consulting Firm shall not change, substitute or
replace the Designated Consultant without the express written consent of the
Company. As used in this Agreement, the term "Affiliate" means any corporation
or other business organization that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with the
Company.
(b) The Consulting Firm shall cause the Designated Consultant
to devote such time as shall be necessary to the performance of the Consulting
Firm's duties and responsibilities hereunder, but in no event less than 32 hours
in each of 48 weeks per year during the term of this Agreement. Commencing
January 1, 1997, Designated Consultant shall provide to the Company a monthly
report detailing the time spent working on behalf of the Company during the
previous month.
(c) Nothing contained herein shall constitute the Designated
Consultant an employee or agent of the Company or any of its Affiliates but the
relationship of the Consulting Firm to the Company shall be one of an
independent contractor. Any other provision of this Agreement to the contrary
notwithstanding, neither the Consulting Firm nor the Designated Consultant shall
not have the authority to enter into any agreement on behalf of, or otherwise
bind, the Company or any of its Affiliates, without the prior written consent of
the Company.
3. Compensation.
(a) For the Prior Consulting Services, the Company shall pay
to the Consulting Firm an aggregate of $75,000, all of which has been paid by
the Company to the Consulting Firm on or prior to the date of this Agreement.
(b) For its services under Section , the Company shall pay the
Consulting Firm compensation in an amount equal to $20,000 per month (the
"Current Compensation"), commencing August 1, 1996, of which $5,000 per month
(the "Deferred Compensation") shall be deferred until the completion after the
date of this Agreement of any debt or equity financings providing in the
aggregate gross proceeds to the Company of at least $5,000,000, whereupon the
aggregate Deferred Compensation shall be immediately payable to the Consulting
Firm in full. The Current Compensation shall be payable in arrears on the first
business day of each calendar month during the term of this Agreement.
(c) The Company shall pay the Consulting Firm eight percent
(8%) of any direct or indirect cash contributions or cash payments to the
company, resulting from the Consulting Firm or the Designated Consultant
introducing the Company and the contributor, and that are deductible by the
contributor or payor under 501(c)(3) of the Internal Revenue Code of 1986, as
amended (the "Contingent Compensation"), payable
301650.001(BF) 2
promptly upon the direct or indirect receipt by the Company of such cash
contributions or cash payments.
4. Reimbursement of Expenses.
The Company shall pay the Consulting Firm for its reasonable
out-of-pocket expenses incurred in the performance of the Consulting Firm's
duties hereunder, upon submission of an adequate accounting for such expenses in
accordance with the Company's policies form time to time in effect.
5. Termination.
This Agreement shall terminate upon the first to occur of the
following:
(a) Commencing June 1, 1997, either party may terminate
this Agreement, without cause or penalty, by delivering to other party written
notice of the termination thirty (30) days prior to the termination.
(b) The Designated Consultant's death or, at the Company's
election, the Designated Consultant's disability. For purposes of this
Agreement, the Designated Consultant shall be deemed to be "disabled" if (1) for
medical (including psychological) reasons he has been unable to perform his
duties hereunder for 30 consecutive days or 60 days in any 12 month period and
(2) it shall have been certified to the Company, by a medical doctor or other
expert approved by the Company in writing, that the disability will
substantially impair the Designated Consultant's abilities to perform his duties
as contemplated hereby for the remainder of the term of this Agreement. The
Company, in its sole discretion, shall be entitled to require the Designated
Consultant to submit to an examination by a medical doctor or expert to
determine disability. Failure of the Designated Consultant to submit to such an
examination shall constitute a default hereunder.
(c) Termination of this Agreement "for cause" by the Board of
Directors of the Company. Termination "for cause" shall be limited solely to
termination by action of the Board of Directors of the Company because of: (i)
the negligence, willful misconduct or malfeasance of the Consulting Firm in the
performance of its obligations under this Agreement; (ii) breach of the
Agreement; (iii) the perpetration by the Consulting Firm or the Designated
Consultant of a fraud against the Company or any of its Affiliates; (iv) the
filing of a bankruptcy petition or assignment for the benefit of creditors by
the Consulting Firm or the Designated Consultant; or (iv) the conviction of the
Consulting Firm or the Designated Consultant for any felony. Termination for
cause shall occur upon delivery to the consulting firm of a notice of such
action by the Board of Directors of the company, which notice shall specify the
grounds for such termination.
301650.001(BF) 3
(d) Upon any termination under Section 5(a), the Company's
obligation to make payments under Section 3 shall terminate 30 days after such
notice is given and the Company thereupon shall have no further obligations to
Consulting Firm whatsoever, other than reimbursement of expenses under Section 4
for expenses incurred prior to such termination and payment of any accrued and
payable Current Compensation, Deferred Compensation and Contingent Compensation.
Upon any termination under Section 5(b), the Company's obligation to make
payments under Section 3 shall terminate upon the death or disability of the
Designated Consultant and the Company thereupon shall have no further
obligations to Consulting Firm whatsoever, other than reimbursement of expenses
under Section 4 for expenses incurred prior to such termination and payment of
any accrued and payable Current Compensation, Deferred Compensation and
Contingent Compensation. Upon any termination under Section 5(c), the Company's
obligation to make payments under Section 3 shall terminate immediately upon
giving notice to Consulting Firm and the Company thereupon shall have no further
obligations to Consulting Firm whatsoever, other than reimbursement of expenses
under Section 4 for expenses incurred prior to such termination and payment of
any accrued and payable Current Compensation, Deferred Compensation and
Contingent Compensation.
6. Withholding of Taxes.
Payment of all taxes on compensation paid under this Agreement
shall be the sole liability and responsibility of the Consulting Firm, provided,
however, if any tax or other laws or regulations require the Company to withhold
any amounts from compensation paid under this Agreement to the Consulting firm,
or its assignee, such amounts may be so withheld.
7. Records and Reports.
The Consulting Firm hereby agrees to render to the Company
such reports of the activities undertaken by it or conducted under its direction
during the term of this Agreement as the Company may reasonably request.
8. Covenant Not to Compete.
(a) The Consulting Firm covenants and agrees that during the
term of this Agreement it will not, directly or indirectly, whether as
principal, agent, officer, director, partner, employee, independent contractor,
consultant, stockholder, licensor or otherwise, alone or in association with any
other person, firm, corporation or other business organization, carry on, or be
engaged, concerned or take part in, or render services or advice to, or own,
share in the earnings of or invest in the stock, bonds or other securities of
any person, firm, corporation or other business organization engaged in the
United States of America in the business of designing, assembling and marketing
hyperthermia treatment systems for cancer, other tumors, and prostate disorders,
except
301650.001(BF) 4
for any joint venture partner of the Company; provided, however, that each of
the Consulting Firm and the Designated Consultant may invest in stocks, bonds or
other securities of any business organization which is in competition with the
Company or any of its Affiliate (but without otherwise participating in such
business) if (i) such investment would not in any way limit the transaction of
business by the Company or any of its Affiliates by virtue of any law,
regulation, or administrative practice and (ii) such stock, bonds or other
securities are listed on a national or regional securities exchange or have been
registered under Section 12(g) of the Securities Exchange Act of 1934 and such
investment in any class of such securities does not exceed 1% of the outstanding
shares of such class or 1% of the aggregate principal amount of such class
outstanding, as the case may be.
(b) The Consulting Firm hereby agrees that the covenants
contained in Section are reasonable and valid. If for any reason any court of
competent jurisdiction shall have deemed the provisions of Section unreasonable
in duration or in geographic scope or otherwise unenforceable, the prohibitions
herein contained shall be restricted to such time and geographic areas or shall
otherwise be reformed in such manner as the curt determines to be reasonable.
9. Confidential Information.
The Consulting Firm and the Designated Consultant agree to
execute and be bound by a confidentiality agreement substantially similar to
that executed by employees of the Company.
10. Ownership of Trade Secrets.
If, during the term of this Agreement, the Consulting Firm or
any of its employees conceives, devises or develops any trade secret, invention,
improvement, formula, design, process, patent, patent application or writing, or
any program, system, or novel technique based upon technology or information
derived from the Company (whether or not capable of being trademarked,
copyrights or patented) ("Proprietary Information"), such Proprietary
Information shall be and remain the property of the Company. Provided, however,
Proprietary Information shall not include U.S. Patent Application Serial No.
08/703648 and any other proprietary information developed by Consulting Firm or
Designated Consultant with Vladislav Oleynik and/or Vladimir Popov, so long as
on or before December 31, 1997, the parties achieve a satisfactory resolution of
the Company's $40,000 investment in the patent and related technology.
11. Compliance with other Agreements.
The Consulting Firm hereby represents and warrants to the
Company that the execution and delivery of this Agreement by the Consulting Firm
and the performance of its obligations hereunder will not, with or without the
giving of notice
301650.001(BF) 5
or the passage of time, (a) violate any judgment, writ, injunction or order of
any court, arbitrator or governmental agency applicable to the Consulting Firm
or (b) conflict with, result in the breach of any provision of, or the
termination of, or constitute a default under, any agreement to which the
Consulting Firm is a party or by which the Consulting Firm is or may be bound.
12. Remedies.
In the event that any action shall be brought by the Company
or the Consulting Firm to restrain any breach or threatened breach of any
provision of this Agreement, the Company and the Consulting Firm hereby agree
that the prevailing party shall be reimbursed by the non-prevailing party for
all costs and expenses, including reasonable lawyers' fees, incurred by the
prevailing party by reason of such breach or threatened breach.
13. Binding Effect; Assignment.
This Agreement shall inure to the benefit of, and shall be
binding upon, the Company and the Consulting Firm and their respective
successors, assigns, heirs and legal representatives, including any firm,
corporation or other business organization with which the Company or the
Consulting Firm may merge or consolidate or to which it may transfer
substantially all of its assets.
14. Severability.
The provisions of this Agreement are severable and if any
provision of this Agreement shall be invalid or unenforceable to any extent or
in any application, then the remainder of such provision and this Agreement,
except to such extent or in such application, shall not be affected thereby, and
each and every provision of this Agreement shall be valid and enforceable to the
fullest extent and in the broadest application permitted by law.
15. Amendments and Waivers.
This Agreement may not be modified or amended except by an
instrument or instruments in writing signed by the party against whom
enforcement of any such modification or amendment is sought. Either the Company
or the Consulting Firm may, by an instrument in writing, waive compliance by the
other party with any term or provision of this Agreement on the part of such
other party hereto to be performed or complied with. The waiver by any party
hereto of a breach of any term or provision of this Agreement shall not be
construed as a waiver of any subsequent breach.
16. Notice.
Any notice, demand, approval or other communication which may
be or is required to be given under this Agreement shall be in writing and shall
be deemed to have been given on the earlier of the day actually received or on
the close of business
301650.001(BF) 6
on the fifth business day next following the day when deposited in the United
States mail, postage prepaid, registered or certified, addressed to the Company
or the Consulting Firm at their respective address set forth below or such other
address as such party may specify by notice given pursuant to this Section :
If to the Consulting Firm:
NACE Resources, Inc.
2323 Sheridan Road
Highland Park, IL 60035
Attn: Stuart Fuchs
with a copy (which shall not constitute notice)
to:
Altheimer & Gray
10 South Wacker Drive
Chicago, IL 60606
Attn: Norman M. Gold
If to the Company:
Cheung Laboratories, Inc.
10220-1 Old Columbia Road
Columbia, MD 21046-1705
Attn: Dr. Augustine Cheung
with a copy (which shall not constitute notice)
to:
Ballard Spahr Andrews & Ingersoll
201 S. Main Suite 1200
Salt Lake City, UT 84111
Attn: Richard Beard
17. Section and Other Headings.
The section and other headings contained in this Agreement are
for reference purposes only and shall not be deemed to be a part of this
Agreement or to affect the meaning or interpretation of this Agreement.
301650.001(BF) 7
18. Entire Agreement.
This Agreement contains the entire agreement between the
Company and the Consulting Firm pertaining to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, between the
Company and the Consulting Firm with respect to the subject matter hereof.
19. Governing Law.
This Agreement shall be construed and governed in accordance
with the law of the State of Illinois, without giving effect to the conflict of
laws principles thereof.
20. Counterparts.
This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the Company and the Consulting Firm have executed
this Agreement as of the date first above written.
CHEUNG LABORATORIES, INC.
By:____________________________
Name:______________________
Title:_____________________
DESIGNATED CONSULTANT NACE RESOURCES, INC.
By:____________________ By:____________________
Stuart Fuchs Stuart Fuchs, President
301650.001(BF) 8
SETTLEMENT AGREEMENT
This Settlement Agreement, containing payment terms, is entered into
this 28th day of October, 1996 by and between William O. Cave, an individual
residing in New York ("WOC"), and Cheung Laboratories, Inc., a Maryland
corporation ("CLI").
WHEREAS, after much discussion, the parties hereto agree that WOC is
owed the total sum of $224,825 by CLI; and
WHEREAS, CLI is unable to promptly pay this sum as of the date hereof
but wishes to establish the total amount owed and is willing to make every good
faith effort to retire the balance in the shortest possible time; and
WHEREAS, the parties hereto have also reached an agreement that CLI
will issue 56,340 Common Stock Purchase warrants entitling the holder to
purchase common shares of CLI for a price of $.50 per share, for a period of two
years from the date hereof; and
WHEREAS, the parties desire to bring the relationship between them to a
mutually satisfactory settlement regarding all previous agreements and
relationships and fully and finally settle all claims which the parties now
have, will have, or could have, arising from or related in any way to any
previous dealing between the parties;
NOW, THEREFORE, in consideration of the premises and mutual promises
herein contained, it is agreed as follows:
1. Concurrent with the execution of this Agreement, CLI will deliver a
check to WOC in the amount of $30,000 as an initial payment, thereby reducing
the total amount owed by CLI to WOC to the sum of $194,825.
2. CLI shall also issue to WOC a certificate, of even date with this
Agreement, evidencing WOC's ownership of 56,340 warrants to purchase common
shares of CLI upon the terms and for the period first mentioned above. This
certificate shall be prepared by counsel to CLI and will be issued to WOC within
thirty days of the date hereof.
3. CLI shall use its best efforts to pay the remaining balance at an
early date. It is anticipated by both parties that this will occur not later
than the end of February, 1997. Unpaid balances shall accrue interest at the
annual rate of 15%.
4. In order to induce CLI to pay the initial payment and to issue the
warrants, WOC, individually and on behalf of his heirs, successors and assigns,
represents and warrants to CLI that the sums mentioned herein are accurate as of
the date hereof, and grants to CLI his unconditional and total release from all
claims of whatever description that he, his heirs, successors or assigns might
otherwise assert against CLI for additional amounts.
5. As further consideration, WOC, individually and on behalf of his
heirs, successors and assigns, hereby releases all officers, directors,
employees, agents or representatives of CLI, past, present or future from any
and all claims which might arise from any past relationship, agreement,
representation or warranty that any of them might have had with WOC or might be
alleged to have had with WOC.
6. This Settlement Agreement sets forth the entire agreement between
the parties hereto, and fully supersedes any and all prior agreements and
understandings between the parties.
IN WITNESS WHEREOF, and including to be legally bound hereby, the
parties have executed this Agreement.
CHEUNG LABORATORIES, INC. WILLIAM O. CAVE
____________________________ ____________________________
301650.001(BF) 2
LETTER OF INTENT
This Letter of Intent is made this 27th day of May, 1996 in Columbia,
Maryland between Mr. Sun Shou Yi ("Mr. Sun"), representative of Mr. Gao Yu Wen
("Mr. Gao") and Cheung Laboratories, Inc., a public company incorporated in
Maryland ("CLI").
RECITALS
WHEREAS, in February 1995, Mr. Gao subscribed to purchase 20,000,000 shares
of the common stock of CLI, 4,000,000 shares for $2,000,000 US cash (the "Cash
Shares") and 16,000,000 shares for a 9.6% interest in Aester Fine Chemical
Company (the "Aster Shares") and has purchased both the Cash Shares and the
Aester Shares;
WHEREAS, the purpose of the transaction with Mr. Gao was to utilize the
facilities to Aester to create a cosmetic business in China with joint venture
partners that would be beneficial to CLI and Mr. Gao;
WHEREAS on May 10, 1995, CLI deposited $700,000 US cash with Mr. Gao in an
investment account for Mr. Gao to manage and return an annual interest rate of
17% and $190,000 US of the account has been returned to CLI, leaving a balance
owing of $510,000 plus interest;
WHEREAS, despite significant efforts by Mr. Gao and CLI, the cosmetic
business objectives are unlikely to be achieved due to the impaired health of
Mr. Gao;
WHEREAS, Mr. Gao has incurred expenses in operating an Hong Kong office to
pursue the cosmetic business objectives and other business for CLI and has not
been reimbursed for such expenses;
WHEREAS, Mr. Sun has taken over, as a principal, the Aester Shares from
Mr.Gao, and represents Mr. Gao with regard to the Cash Shares and the investment
account; and
WHEREAS, Mr. Gao is not in a position to pursue the cosmetic business plan
due to his impaired health and CLI is not in a position to pursue the cosmetic
business plan, as it will utilize its resources to pursue its hyperthermia
business:
NOW, THEREFORE, in consideration of furthering their respective business
interests, Mr. Sun, as the representative of Mr. Gao, and CLI do hereby agree as
follows, with the intention that this Letter of Intent will be binding and be
implemented under the terms of a definitive contract to be prepared in Hong Kong
and executed by the parties on or before June 8, 1996, which shall serve to
provide the details for closing the transaction, but shall not vary the terms of
this Letter of Intent.
1. The above recitals are hereby incorporated in and made a part of
this Agreement.
2. CLI agrees to purchase all of the Cash Shares and pay Mr. Gao or his
designated recipient on or before November 30, 1996, a sum total of US
$2,200,000 (four million shares at $0.55/share).
3. Upon signing of the definitive contract on or before June 8, 1996,
the transactions pertinent to the Aester Shares and Cash Shares are considered
rescinded. Mr. Gao (or his representative) will deposit both the CLI Cash Shares
and the Aester Shares in an escrow account held by a mutually agreeable third
party. The Aester Shares and Cash Shares are held in escrow as collateral for
full payment of the $2,200,000 mentioned in paragraph above. The Cash Shares and
the Aester Shares shall be returned immediately to CLI once the full payment of
$2,200,000 has been made.
4. The closing of the transaction contemplated by paragraphs and shall
occur on or before November 30 in Hong Kong under the procedures agreed to in
the definitive contract. At closing, Mr. Gao (or his representative) shall
deliver the Cash Shares and the Aester Shares free and clear of any liens or
encumbrances and CLI will deliver a cash sum total of US $2,200,000.
5. Mr. Gao will provide an expense accounting promptly to CLI for the
expenses incurred in work on the cosmetic business and other businesses of CLI
and, following review of the accounting by CLI, will be reimbursed from the
investment account for the expenses approved by CLI. CLI is to exercise its
reasonable business judgment. This expenses accounting shall be completed by
both parties by June 15, 1996 and the investment account balance fully resolved
by such date.
6. This the full agreement of the parties concerning the subject matter
and is to be implemented by the definitive contract described above. This Letter
of Intent shall be interpreted and enforced under the internal law of Maryland
319383.001(B&F) 2
the English version of this Letter of Intent shall control its terms. The terms
and conditions defined in the definitive contract to be signed on or before June
8, 1996 shall govern.
IN WITNESS WHEREOF, intending to be bound, the parties do hereby
execute this Letter of Intent.
CHEUNG LABORATORIES, INC.
By:/s/__________________________
MR. GAO'S REPRESENTATIVE
By:/s/__________________________
319383.001(B&F) 3
REDEMPTION AGREEMENT
THIS REDEMPTION AGREEMENT (the "Agreement") is made this 6th day of
June, 1996 in Hong Kong between Mr. Sun Shou Yi ("Mr. Sun"), representative of
Mr. Gao Yu Wen ("Mr. Gao") and Cheung Laboratories, Inc., a public company
incorporated in Maryland, USA ("CLI" and/or the "Company").
RECITALS
WHEREAS, on the 27th day of May, 1996, the parties entered into a
binding Letter of Intent for CLI to redeem 20,000,000 shares of the common stock
of CLI from Mr. Gao under the terms and conditions set forth in the Letter of
Intent, such terms and conditions to be fully implemented by this Redemption
Agreement.
NOW, THEREFORE, in consideration of furthering their respective
business interests, Mr. Sun, as the representative of Mr. Gao, and CLI do hereby
agree as follows:
1. The Letter of Intent dated May 27, 1996, is hereby
incorporated in and made a part of this Agreement.
2. Mr. Sun and CLI do hereby jointly appoint Leung To Kwan
Pauline, solicitor, as the escrow agent ("Escrow Agent") to carry forth those
responsibilities set forth in this Agreement to be executed by the Escrow Agent.
The attached Escrow Agreement shall be executed by Mr. Sun, CLI and the Escrow
Agent.
3. CLI does hereby rescind and renounce the 9.6% interest it has
held in Aester Fine Chemical Incorporated Limited, a corporation incorporated
under the laws of China ("Aester") and Mr. Sun does hereby rescind and renounce
the 20,000,000 share interest which Mr. Gao has held in CLI. The books and
records of CLI shall show that the 20,000,000 CLI shares previously held by Mr.
Gao have been rescinded and the books and records of Aester shall reflect that
the 9.6% interest previously held by CLI has been rescinded, all as of the date
that CLI delivers US $2,200,000 to Mr. Sun as described in this Agreement.
4. Mr. Sun shall deliver to the Escrow Agent, within ten (10) days
of execution of this Agreement, the 20,000,000 CLI shares previously held by Mr.
Gao and such shares shall serve as security for the obligations of CLI to be
performed under this Agreement (as described in paragraph below). If CLI shall
fail to perform its obligations under this Agreement by November 30, 1996 (as
set forth in paragraph below), a penalty of 3/4% per month shall be added to the
amount payable by CLI, it being the intention of the parties that the payment be
made and the CLI stock be released to CLI. If CLI fails to perform its
obligations after three months past November 30, 1996, the Escrow Agent will
return the 20,000,000 shares to Mr. Sun for his disposition.
5. Within ten (10) days of the execution of this Agreement, CLI shall
deliver to the Escrow Agent all evidence of CLI's 9.6% interest in Aester
previously held by CLI. The Escrow Agent shall mark such documentation as
rescinded and cancelled under this Agreement and transmit such documentation to
Mr. Sun.
6. On or before the close of business on November 29, 1996 in Columbia,
Maryland, USA, CLI shall wire transfer $2.2 million (US) pursuant to
instructions provided by Mr. Sun. Upon confirmation by CLI's bank that such wire
transfer has been initiated by the bank, CLI shall have fully performed its
obligations under this Agreement. CLI's bank shall send by facsimile
transmission to the Escrow Agent evidence of having initiated such wire
transfer. Upon receipt by such notice, the Escrow Agent shall release the
20,000,000 shares of CLI stock to CLI.
7. Mr. Gao has given notice to the Company that he will not be able to
serve on the Board of Directors and CLI shall accept this notice as Mr. Gao's
resignation from the Board of Directors of CLI, effective the date of this
Agreement. Mr. Gao will provide an expense accounting promptly to CLI for the
expenses incurred in work on the cosmetic business and other businesses of CLI
and, following review of the accounting by CLI, will be reimbursed from the
investment account for the expenses approved by CLI. CLI is to exercise its
reasonable business judgment. This expenses accounting shall be completed by
both parties by June 15, 1996, and the investment account balance fully resolved
by such date. After signing this Agreement, Mr. Gao will transfer the voting
power of his shares to Dr. A. Cheung, the representative of CLI. It is further
acknowledged that upon signing this Agreement, Mr. Gao and his representative
will no longer be financially and legally responsible to the operation of CLI
business.
This Agreement reflects the full understanding of the parties and shall
be interpreted and enforced under the internal laws of the State of Maryland,
USA, and the English version of this Agreement shall control its terms.
319383.001(B&F) 2
IN WITNESS WHEREOF, the parties, intending to be bound, do hereby
execute this Agreement as of the date above written.
WITNESS CHEUNG LABORATORIES, INC.
/s/_________________________ By: /s/_______________________
MR. SUN SHOU YI, AS
REPRESENTATIVE OF MR. GAO
YU WEN
/s/_________________________ By: /s/_______________________
Mr. Sun Shou Yi
319383.001(B&F) 3
278178.001(B&F)
AMENDMENT
This Amendment ("Amendment") dated October 23, 1996 by and among Mr.
Sun Shou Yi ("Sun"), Mr. Ou Yang An ("Ou"), Mr. Gao Yu Wen ("Gao") (collectively
the "Gao Group") and Cheung Laboratories, Inc., a Maryland corporation ("CLI"),
amends that certain Redemption Agreement dated June 6, 1996 between Sun as Gao's
representative and CLI (the "Redemption Agreement"); that certain Letter of
Intent dated May 27, 1996 between Sun as Gao's representative and CLI (the
"Letter); that certain Escrow Agreement dated June __, 1996 by and among Sun as
Gao's representative, CLI and Ms. Leung To Kwan, Solicitor, S.H. Leung & Company
("Leung") (the "Escrow"); that certain Agreement to Settle Investment Account
dated June 8, 1996 between Ou and CLI ("Agreement to Settle"); and that
Irrevocable Proxy dated June 6, 1996 from Gao ("Proxy"). The Redemption
Agreement, the Letter, the Escrow, the Agreement to Settle and the Proxy are
collectively referred to as the "Settlement Agreements."
Witnesseth:
Whereas, various members of the Gao Group entered into the Settlement
Agreements with CLI; and
Whereas, CLI and the Gao Group desire to clarify that all parties in
the Gao Group agree to the terms and conditions of the Settlement Agreements and
this Amendment; and
Whereas, the parties desire to amend the Settlement Agreements as set
forth below.
Now Therefore, in exchange for ten dollars ($10) and other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged the Gao Group and CLI agree as follows:
1. Contemporaneous with the execution of this Amendment, Leung
as the Escrow Agent pursuant to this Amendment is instructed to deliver
certificates representing 16,000,000 shares of CLI ("Amended Shares") to Verle
Blaha, President of CLI without any restrictions, liens or encumbrances. The Gao
Group represents and warrants to CLI that the Amended Shares are free and clear
of all encumbrances and restrictions.
2. The Proxy is amended to cover only the 4,000,000 shares of
CLI remaining in escrow ("Common Shares") and the period of the Proxy is
extended to the time at which the Common Shares are released to CLI or March 31,
1997 whichever event occurs first.
3. The amount payable to the Gao Group for the Common Shares
is reduced from $2,200,000 to $2,160,000 which reflects the agreed on credit for
funds remaining in the Agreement to Settle ("Cash Amount"). Notwithstanding the
Settlement Agreements, the period of time to pay the Cash Amount is extended to
December 31, 1996 and may be extended for an additional 3 month period upon the
payment of 3/4% per month interest for the period January 1, 1997 through March
31, 1997.
4. The Cash Amount shall be wired or hand delivered to Leung's
trust account. The Escrow Agent shall release such Cash Amount to Ou as the Gao
Group's representative contemporaneous with sending the Common Shares to CLI by
hand delivery or DHL as follows:
Verle Blaha
Cheung Laboratories, Inc.
10220-I Old Columbia Road
Columbia, Maryland 21046-1705
5. Other than the Settlement Agreements as modified by this
Amendment, all agreements (whether written or oral), understandings and
covenants between the parties are null and void. Other than as modified in this
Amendment all of the terms and conditions of the Settlement Agreements shall
remain in full force and effect.
6. This Amendment is not and shall not in any way be construed
as an admission by any party, or any of their respective affiliates,
subsidiaries, shareholders, directors, partners, agents, officers, employees,
representatives, or attorneys of any illegal acts whatsoever, but constitutes
the good faith settlement of all potential claims against the parties, or their
respective affiliates, subsidiaries, successors, shareholders, directors,
partners, agents, officers, employees, representatives or attorneys. The parties
have entered into this Amendment in order to bring the relationship between CLI
and the Gao Group to a final conclusion, to resolve all potential claims which
might be brought by any of the respective affiliates, subsidiaries, successors,
shareholders, directors, partners, agents, officers, employees, representatives
or attorneys, and in order to avoid the burden, expense, delay, and
uncertainties of litigation.
7. The Gao Group irrevocably and unconditionally remises,
releases and forever discharges CLI and each of its past, present, and future
affiliates, subsidiaries, shareholders, partners, agents, directors, officers,
employees, representatives, attorneys, successors, heirs, executors,
administrators, and assigns, and all persons acting by, through, under or in
concert with any of them (collectively "Assigns"), or any of them, of and from
any and all actions, causes of actions, suits, charges, complaints, claims,
liabilities, obligations, promises, agreements, controversies, demands, damages,
judgments, and expenses (including attorney's fees and costs actually incurred)
and all other liabilities of any nature whatsoever, in law or equity, which
either party ever had, now has or their respective heirs, executors,
278178.001(B&F) 12/11/96
2
administrators, successors, or assigns hereafter may have, particularly, against
each or any of the Assigns, arising from or related in any way to any dealings
the parties have had through the date of this Amendment and each party does
hereby covenant not to file a lawsuit to assert any such claims.
8. CLI irrevocably and unconditionally remises, releases, and
forever discharges the Gao Group and each of their respective heirs, executors
and administrators (collectively "Assigns"), or any of them, of and from any and
all actions, causes of actions, suits, charges, complaints, claims, liabilities,
obligations, promises, agreements, controversies, demands, damages, judgments,
and expenses (including attorney's fees and costs actually incurred) and all
other liabilities of any nature whatsoever, in law or equity, which either party
ever had, now has or their respective heirs, executors, administrators,
successors, or assigns hereafter may have, particularly, against each or any of
the Assigns, arising from or related in any way to any dealings the parties have
had through the date of this Amendment and each party does hereby covenant not
to file a lawsuit to assert any such claims.
9. The parties expressly acknowledge that this Amendment is
intended to include in its effect, without limitation, all claims which have
arisen and of which the parties know or do not know, should have known, had
reason to know or suspect to exist in their respective favor at the time of
execution hereof, and that this Amendment contemplates the extinguishment of any
such claim or claims.
10. The parties represent and certify that each is voluntarily
entering into this Amendment; that the other parties and their respective
agents, representatives, and attorneys have made no representations concerning
the terms or effects of this Amendment other than those contained herein; and
they have reviewed the Amendment with legal counsel of choice.
11. The parties represent and certify that they have not
assigned or otherwise conveyed any rights or obligations that they have in
connection with transactions contemplated by or within the scope of the
Settlement Agreements or this Amendment.
12. Notwithstanding the releases set forth above, each party
agrees that it will cooperate fully with all reasonable requests by the other
party, or any of their respective successors, subsidiaries or affiliates, to
participate in the preparation for, responses to, or prosecution or defense of
any pending or threatened litigation or governmental proceeding or investigation
by or against or involving CLI, or any of their successors, subsidiaries, or
affiliates, relating to any events which occurred during or as a result of the
relationship of the parties. Furthermore, in the event governmental or third
parties assert claims against CLI which involve any relationship between CLI and
the Gao Group, CLI may assert cross claims and other claims against the Gao
Group. In the event such claims are successful, the Gao Group agrees to
indemnify and hold harmless CLI and its affiliates.
278178.001(B&F) 12/11/96
3
13. This Amendment is made and entered into in the State of
Maryland, and shall in all respects be interpreted, enforced and governed under
the laws of said State. The federal district court of Baltimore, Maryland shall
have jurisdiction over the parties. The language of all parts of this Amendment
shall in all cases be construed as a whole, according to its fair meaning.
14. The parties acknowledge the termination of all previous
agreements other than the Settlement Agreements and this Amendment between them
by their mutual consent.
15. Should any provision of this Amendment be declared or
determined by a court of competent jurisdiction to be illegal or invalid, the
validity of the remaining parts, terms and provisions shall not be affected
thereby, and said illegal or invalid part, term, or provision shall be deemed
not to be a part of the Settlement Agreements and this Amendment.
16. The Settlement Agreements and this Amendment set forth the
entire agreement between the parties hereto, and fully supersedes any and all
prior agreements or understandings between the parties hereto pertaining to the
subject matter hereof.
17. CLI shall file its Form 10-K for the period ended
September 30, 1996 with the United States Securities and Exchange Commission
disclosing this Amendment and the release of any interest in the Aestar shares.
18. CLI covenants that it will utilize a portion of theuse of
proceeds on a first priority basis from a public or private offering to be
conducted for the purpose of purchasing the Common Shares or in the alternative
will assign its right to repurchase the Common Shares to private investors to
purchase such shares directly from the Gao Group.
IN WITNESS WHEREOF, and intending to be legally bound hereby,
the Gao Group and CLI have executed the foregoing Amendment.
CHEUNG LABORATORIES, INC.
By:________________________________
Name:
Title:
278178.001(B&F) 12/11/96
4
________________________________________
Gao Yu Wen, by and through his attorney
in fact, Ou Yang An
________________________________________
Sun Shou Yi, in his
individual capacity and as
representative of Gao Yu
Wen by and through his
attorney in fact, Ou Yang
An
________________________________________
Ou Yang An, in his individual capacity
and as representative of Gao Yu Wen
278178.001(B&F) 12/11/96
5
ARDEX EQUIPMENT, LLC
[LETTERHEAD]
August 2, 1996
Dr. Augustine Y. Cheung, President
Cheung Laboratories, Inc.
10220 Old Columbia Road, Suite I
Columbia, MD 21046-1705
RE: Binding Letter of Intent
Rescission of Cheung Laboratories, Inc. Investment In Ardex Equipment,
LLC
Dear Dr. Cheung:
This letter will serve to set forth the background and confirm our discussions
to proceed in the following manner to rescind the transaction in which Cheung
Laboratories, Inc. ("CLI") invested $450,000 in Ardex Equipment, LLC ("Ardex")
stock ($400,000 purchased from Ardex and $50,000 from the principals of Ardex),
$50,000 of which has been repaid from Ardex and $400,000 of which remains as an
investment in Ardex in the form of 17.1111% of the present equity of Ardex.
1. CLI contracted to acquire a controlling interest in Ardex and provide
substantial funding to Ardex as part of implementing a business plan
for CLI's Industrial Division, which business plan involved a
significant investment in CLI by Mr. Gao Yu Wen. Mr. Gao has become
seriously ill, the Industrial Division is being closed and CLI has
entered into an agreement to redeem Mr. Gao's investment in CLI.
2. CLI desires to rescind the remaining $350,000 transaction with Ardex
and the $50,000 transaction with the principals as part of its general
restructuring pertaining to closing its Industrial Division. CLI
desires to cancel its contract to acquire a controlling interest in and
provide substantial funding to Ardex and be repaid its investment in
Ardex, all without prejudice to the business or opportunities of Ardex.
319383.001(B&F) 2
3. $350,000 of the equity interest of CLI will be converted to a 5-year
negotiable promissory note payable by Ardex under the following terms
and conditions:
a. Interest to be paid at the rate of 8%.
b. The note is payable on an interest-only basis until principal
becomes due.
c. Principal becomes due and payable upon the first to occur of
any of the following:
(i) Public or private offerings successfully completed by
Ardex of $1.5 million in the aggregate or more;
(ii) Ninety (90) days following a year end of Ardex in
which sales for the year have been $3,000,000 or
more;
(iii) Ardex having a cash balance of $800,000 or more from
operations; or
(iv) A date 5 years from the date of the promissory note.
d. The promissory note to be the subject of a limited guaranty by
the three principals of Ardex in which each principal provides
a limited guaranty of one-third of the principal balance of
the note, the limited guaranty to be secured solely by the
interest each principal has in Ardex and the interest each
principal has in options to purchase CLI stock.
e. The principals will provide promissory notes of $50,000 in the
aggregate on the same terms and conditions as the Ardex
promissory notes, $22,500 payable by Joseph Colino
(representing the interest of Joseph Colino and Daniel
Alfieri), $12,500 payable by John Kohlman, and $15,000 payable
by Charles Shelton.
4. This transaction is to be implemented on or before August 31, 1996 by
the execution of detailed documents containing standard terms and
conditions and appropriate detailed terms and conditions to implement
this binding letter of intent.
Very truly yours,
/s/______________________
Joseph M. Colino
President
cc: Charles C. Shelton
John J. Kohlman
The above terms and conditions are agreed this 2nd day of August, 1996.
CHEUNG LABORATORIES, INC.
By: /s/ ______________________________
Dr. Augustine Y. Cheung, President
319383.001(B&F) 3
NEW OPPORTUNITIES, LTD.
[LETTERHEAD]
August 15, 1996
Cheung Laboratories, Inc.
10220-1 Old Columbia Road
Columbia, MD 21046-1705
Attention: Board of Directors
Dr. Augustine Cheung had requested (he asked nicely) if I would provide him
assistance in restructuring Cheung Laboratories, Inc. In a meeting on July 8, 9,
and 10, 1996 it became very clear from the "Financial Advisor, Mr. Warren
Stearns, that the "assistance" Warren had in mind was that of a full time CEO
and President. Further, that the individual selected must be "an experienced
businessman, competent to attend to the coordination of all contemplated
activities particularly attendant to the preparation of the Company to financial
institutions and investment bankers." After interviewing with Mr. Stearns, I
believe I have his full recommendation and support.
The past two weeks, starting on July 27, I have had the opportunity to work with
Dr. Cheung and all other employees, review extensive correspondence files, and
meet with recommended special attorneys, a marketing consultant, our financial
advisor, and the leader of our technical advisory board. My conclusion, with no
reservations, is: we now have the greatest opportunity for success that this
Company has ever had.
With that said, and if the Board of Directors approves, I would accept the full
responsibility of CEO and President of Cheung Laboratories, Inc. The "By Laws"
of CLI requires that the President be a member of the Board of Directors.
Therefore, I would accept that responsibility also.
I propose that the agreement and compensation be through my consulting company,
New Opportunities, Ltd (NOL). I would agree to suspend most of my current
activities with NOL and Trans Pacific Alliance of America (TPA). I do have a
consulting commitment to Maytag at a fee of U.S. $300 per hour that I must
honor. This should require only about one week of my time. In addition, I have a
"religious holiday" the first week of October and the first week of November
that I also must honor.
I propose the following agreement:
5. That the agreement be a consulting contract between CLI and NOL for
the specific services of Blaha.
319383.001(B&F)
1
As an inducement for me to suspend my third retirement, reduce my
participation in the activities of NOL and TPA, and to reduce my consulting fee
from U.S. $300 per hour, I propose the following compensation schedule:
6. Payment of an initial fee of U.S. $25,000 upon the Board of
Directors approval of Blaha as the CEO and President. This fee to cover costs
and expenses of reducing activity in NOL and TPA.
7. Payment of a consulting fee of U.S. $175 per hour. Maximum
charge of 8 hours per day and 40 hours per week regardless of the length of the
day or week.
8. Reimbursement of all normal business expenses while conducting
CLI business. The Company shall provide a suitable residence including all
utilities in Columbia, Maryland at no charge.
9. Grant a fully vested, transferable and divisible Warrant to
purchase 400,000 shares of CLI common stock at a strike price of U.S. $0.41 at
any time after August 14, 1996 and eight years thereafter.
10. CLI shall fully indemnify NOL and Blaha against any liability
whatsoever (including legal fees and expenses) arising from claims in connection
with conducting CLI business.
11. The term of this agreement shall be for six months starting
and effective as of July 27, 1996 and ending on January 27, 1997.
12. This agreement is written in casual business language and if the
Board of Directors so desires it may be translated into a formal legal language
by CLI council.
By:/s/_____________________ By:/s/____________________ President
Director
New Opportunities, Ltd.
____________________
Director
____________________
Director
____________________
Director
319383.001(B&F)
2
PROMISSORY NOTE
FOR VALUE RECEIVED, Cheung Laboratories, Inc. (the "Company") hereby
ratifies and confirms its promise of June 30, 1994 to pay to the order of
Augustine Y. Cheung, the sum of Fourty-Two Thousand Six Hundred Sixty-Nine And
00/100 ($42,669.00) Dollars, together with interest thereon at the rate of 10%
per annum on the unpaid balance.
Said principal and interest shall be due and payable December 31, 1999.
The Company may prepay this note without penalty. In the event any
payment due hereunder is not paid when due, the entire balance shall be
immediately due upon demand of any holder. Upon default, the company shall pay
all reasonable attorney fees and costs necessary for the collection of this
note.
Signed this 9th day of December, 1996.
For the Company:
/s/Verle D. Blaha
Verle D. Blaha, President
Cheung Laboratories, Inc.
319383.001(B&F)
1
PROMISSORY NOTE
FOR VALUE RECEIVED, Cheung Laboratories, Inc. (the "Company") hereby
ratifies and confirms its promise of January 26, 1987 to pay to the order of of
Augustine Y. Cheung, the sum of Seventy-Eight Thousand Seven Hundred and Fifty
And 00/100 ($78,750.00) Dollars, together with interest thereon at the rate of
10% per annum on the unpaid balance.
Said principal and interest shall be due and payable December 31, 1999.
The Company may prepay this note without penalty. In the event any
payment due hereunder is not paid when due, the entire balance shall be
immediately due upon demand of any holder. Upon default, the company shall pay
all reasonable attorney fees and costs necessary for the collection of this
note.
Signed this 9th day of December, 1996.
For the Company:
/s/ A.Y. Cheung
A.Y. Cheung, President
Cheung Laboratories, Inc.
DEMAND NOTE
FOR VALUE RECEIVED, Cheung Laboratories, Inc. (the "Borrower") hereby
ratifies and confirms its promise of October 2, 1990 to pay to the order of Ada
Lam (the "Holder") the sum of TWENTY-EIGHT THOUSAND FIVE HUNDRED AND TWO DOLLARS
($3,000.00), together with interest thereon at the rate of 12% per annum on the
unpaid balance, on demand.
In the event of default, the Borrower shall pay all reasonable
attorney's fees and costs necessary for the collection of this obligation.
The effective date of this Demand Note is October 2, 1990.
IN WITNESS WHEREOF, the undersigned has ratified the above-described
obligation on this 9th day of December, 1996.
CHEUNG LABORATORIES, INC.
By: ___________________________
Verle D. Blaha, President
318350.002(B&F) 12/10/96
1
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER THE SECURITIES
LAW OF ANY STATE AND MAY NOT BE SOLD OR
TRANSFERRED UNLESS REGISTERED UNDER THAT ACT
AND ANY APPLICABLE STATE SECURITIES LAWS
OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
CHEUNG LABORATORIES, INC.
8% SENIOR SECURED CONVERTIBLE NOTE
Baltimore, Maryland
July ___, 1996
FOR VALUE RECEIVED, CHEUNG LABORATORIES, INC., a Maryland corporation
(the "Corporation") promises to pay to __________________, or registered
assigns, (the "Holder") the principal amount of ________________________ Dollars
($________) (the "Principal Amount") on or before December 31, 1997, with
accrued interest as provided below, all subject to the following terms and
conditions.
Interest (computed on the basis of a 360-day year of twelve 30-day
months) on the unpaid Principal Amount shall accrue at the rate of 8% per annum
from the date hereof.
All payments of principal of and interest on this 8% Senior Secured
Convertible Note (the "Note") are secured pursuant to a Loan Agreement, and a
Pledge Agreement, both dated July 1, 1996 which apply to this series of bridge
financing notes (the "Notes"), and shall be made in currency of the United
States of America as at the time of payment shall be legal tender for payment of
public and private debts. Should an Event of Default occur under the Loan
Agreement, this Note shall be accelerated and be immediately due and payable
This Note and the Notes shall be senior indebtedness of CLI and have a
priority over payment of any other indebtedness of CLI, such other indebtedness
of CLI to be repaid only after the full repayment of the Principal Amount, and
accrued interest, due hereunder and under the other Notes. This Note shall
mature and the entire Principal Amount thereof and all accrued interest thereon
shall become due and payable on December 31, 1997; provided that, at the option
of the Holder this Note may be paid by the Holder electing:
A. To be repaid from the proceeds of a private offering by the
Corporation, or a series of private offerings, which aggregate $8,000,000.00
(U.S.) or more prior to December 31, 1997, and involve the sale of the
Corporation's common stock, preferred stock, long-term debt, convertible debt
(other than this Note), or other similar security or financial instrument (the
"Private Offering"); or
318350.002(B&F) 12/10/96
2
B. On the date of maturity to convert the Principal Amount and any
unpaid accrued interest into common stock of the Corporation. If the Holder
shall elect to so convert the Note, the number of shares of common stock to be
received by the Holder shall be the greater of:
(i) the number of shares determined by pricing the common
stock of the Corporation at $.41 per share
(representing the closing price of the common stock
of the Corporation as quoted on NASDAQ (Bulletin
Board) on May 31, 1996); or
(ii) the lowest price per share in the Corporation's
Private Offering on the same terms as other
participants in such Private Offering (on a common
stock equivalency basis if the Private Offering is
other than common stock).
If any payment of interest is not made on the date when due for any
reason, or the Principal Amount shall not be paid when payable, whether at
maturity or by acceleration or otherwise, interest shall accrue on any amount
overdue more than 30 days at a rate equal to 18% per annum (computed based on a
360-day year applied to twelve 30-day months) until such overdue amount is paid
in full.
This Note shall be governed by and construed in accordance with the
internal laws of the State of Maryland.
IN WITNESS WHEREOF, Cheung Laboratories, Inc. has executed this Note
under seal as of the date and year first above written.
CHEUNG LABORATORIES, INC.
By: ___________________________
Dr. Augustine Y. Cheung, President
[CORPORATE SEAL]
Attest
_____________________________
Secretary:
c:\wpwin\bridgcli\convnot.8%
318350.002(B&F) 12/10/96
3
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made by Cheung
Laboratories, Inc., a Maryland corporation (the "Company"), for the benefit of
the undersigned investor ("Investor", collectively, the "Investors"). This
Agreement shall become effective upon acceptance and closing in respect of the
related subscription for the Senior Secured Convertible Promissory Notes
("Notes") and the shares of common stock underlying the Notes, and the
associated warrants to purchase common stock of the Company ("Warrants"). The
Notes and the Warrants are collectively referred to herein as the "Securities."
The common stock of the Company into which the Notes are convertible and the
common stock issuable upon exercise of the Warrants shall be referred to herein
collectively as the "Underlying Stock."
R E C I T A L S
A. The Investors desire to purchase from the Company, and the Company
desires to issue and sell to the Investors, up to an aggregate of $1,200,000 in
face amount of Notes and associated Warrants as described in the Confidential
Offering Memorandum dated July 1, 1996 and all of the Exhibits thereto (the
"Offering Memorandum").
B. As further inducement for the Investors to purchase the Notes and
Warrants from the Company, the Company desires to undertake to register under
the Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively, the "Securities Act"), the Underlying Stock six months after the
Company effects a registration, on any applicable form, of newly issued common
stock at any time while the Investor holds the Notes, the Warrants, some or all
of the Underlying Stock. This Agreement sets forth the terms and conditions of
such undertaking.
The Company and the Investor agree as follows:
1. Definitions. For purposes of this Agreement:
(a) The terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement or statements or similar documents in compliance with the Securities
Act and pursuant to Rule 415 under the Securities Act or any successor rule
providing for offering securities on a continuous basis ("Rule 415"), and the
declaration or ordering of effectiveness of such registration statement or
document by the Securities and Exchange Commission (the "SEC");
(b) The term "Registerable Securities" means (i) the
Underlying Stock, and (ii) any common stock of the Company issued as (or
issuable upon the conversion or exercise of any convertible security, warrant,
right or other security which is issued as) a dividend or
other distribution with respect to, or in exchange for or in replacement of any
Note, Warrant, or any Underlying Stock, excluding in all cases, however, any
Registerable Securities sold by a holder of such Registerable Securities in a
transaction in which its registration rights under this Agreement are not
assigned.
(c) The Investors and assignees with registration rights
assigned to them pursuant to Section 8 of this Agreement may be referred to
herein collectively as "Holders" of Registerable Securities and each may be
referred to herein as a "Holder" of Registerable Securities.
2. Registration.
(a) Automatic Registration Right - (i) Subject to the
provisions of Section 3(a), below, not earlier than six months after the final
closing date (the "Closing Date") of a registered offering of the common stock
of the Company to the general public covered by a registration statement under
the Securities Act, the Company shall use its best efforts to effect the
registration under the Securities Act of all Registerable Securities; provided,
however, that a Holder of Registerable Securities may inform the Company in
writing that it wishes to exclude all or a portion of its Registerable
Securities from such registration and upon such notice, such Registerable
Securities shall be excluded from such registration.
(i) The holders of a majority in interest of the Registerable
Securities shall have the right to select the managing underwriters, if any, and
to approve the terms of the underwriting agreement in respect of such
registration, subject to the approval of the Company, which shall not be
unreasonably withheld.
(iii) The Company is obligated to use its best efforts to
effect only one such registration pursuant to this Section 2(a) of this
Agreement.
(b) Piggyback Registration - (i) On an unlimited number of
occasions, and subject to the terms of this Agreement, in the event the Company
decides to register any of its common stock (either for its own account or the
account of a security holder or holders, other than in connection with a
registration being effected pursuant to Section 2(a) above) on an SEC form
(other than S-4 or S-8) that would be suitable for a registration involving
Registerable Securities, the Company will: (x) promptly give each Holder of
Registerable Securities written notice thereof (which shall include a list of
jurisdictions in which the Company intends to qualify such securities under the
applicable Blue Sky or other state securities laws) and (y) include in such
registration (and in any related qualification under the Blue Sky laws or other
state securities laws), and in any underwriting involved therein, all the
Registerable Securities specified in a written request delivered to the Company
by any Holder of Registerable Securities within 20 days after delivery of such
written notice from
- 2 -
the Company. Nothing contained in this Section 2(b) shall limit the ability of
the Company to withdraw a Registration Statement it has filed either before or
after effectiveness.
(ii) If the registration of which the Company gives notice
pursuant to Section 2(b)(i) is for a registered public offering involving an
underwriting, the Company shall so advise the Holders of Registerable Securities
as a part of the written notice given pursuant to Section 2(b)(i). In such event
the right of any Holder of Registerable Securities to registration shall be
conditioned upon such underwriting and the inclusion of such Holders'
Registerable Securities in such underwriting to the extent provided in this
Section 2(b). All Holders of Registerable Securities proposing to distribute
their securities through such an underwriting shall (together with the Company
and the other holders distributing their securities through such underwriting)
enter into an underwriting agreement with the Underwriter's representative for
such offering; provided that such holders shall have no right to participate in
the selection of the underwriters for an offering pursuant to this Section 2(b).
(iii) In the event the Underwriters' representative advises
the Holders of Registerable Securities seeking registration of Registerable
Securities pursuant to this Section 2(b) in writing that market factors
(including, without limitation, the aggregate number of shares of common stock
requested to be registered, the general condition of the market, and the status
of the persons proposing to sell securities pursuant to this registration)
require a limitation of the number of shares to be underwritten, the
Underwriter's representative may exclude some or all Registerable Securities
from such registration and underwriting. In such event, the Underwriters'
representative shall so advise all Holders of Registerable Securities of the
number of shares of Registerable Securities that may be included in such
registration and underwriting (if any), and the number of shares of Registerable
Securities that may be included in such registration and underwriting (if any)
shall be allocated among all holders seeking registration in proportion, as
nearly as practicable, to the number of shares proposed to be included in the
registration by the Holder. The number of shares of Registerable Securities to
be included in such underwriting shall not be reduced unless all other
securities (other than those sold by the Company) are similarly limited from the
underwriting. No Registerable Securities or other securities excluded from the
underwriting by reason of this Section 2(b) shall be included in such
Registration Statement.
(iv) If any Holder of Registerable Securities, or a holder of
other securities entitled (upon request) to be included in such registration,
disapproves of the terms of any underwriting, such Holder may elect to withdraw
therefrom by written notice to the Company delivered at least 20 days prior to
the effective date of the Registration Statement.
3. Obligations of the Company. When required under this Agreement
to effect the registration of the Registerable Securities, the Company shall, as
expeditiously as reasonably possible, use its best efforts to:
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(a) Prepare and file with the SEC a registration statement or
statements or similar documents (the "Registration Statement") with respect to
all Registerable Securities, other than any Registerable Securities excluded by
Holders of Registerable Securities pursuant to Section 2(a), cause the
Registration Statement to become effective not later than six months after the
closing date of the Company's Next Public Offering of common stock and keep the
Registration Statement effective pursuant to Rule 415 at all times until the
earlier of (i) the third anniversary of the final closing date of the Company's
offering of Notes and Warrants to the Investors, or (ii) the date on which all
Investors can sell any of the Registerable Securities pursuant to Rule 144 of
the Securities Act without restriction under Rule 144(e) thereof; provided,
however, that if a public offering of common stock by the Company is closed on a
date that is more than two years following the first date each Holder of
Registerable Securities held such Registerable Securities, the Company shall
have no obligation to file a Registration Statement in respect of such
registerable securities pursuant to this Agreement, except pursuant to Section
2(b).
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
Prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times until the
earlier of (i) the third anniversary of the final closing date of the Company's
offering of the Notes and Warrants, or (ii) the date on which all Investors can
sell their respective shares of Registerable Securities pursuant to Rule 144 of
the Securities Act without restriction under Rule 144(e) thereof, and to comply
with the provisions of the Securities Act with respect to the disposition of all
securities covered by the Registration Statement.
(c) Furnish promptly to the Holders of Registerable Securities
such numbers of copies of a prospectus, including a preliminary prospectus, and
all amendments and supplements thereto, in conformity with the requirements of
the Securities Act, and such other documents as the Holders of Registerable
Securities may reasonably request in order to facilitate the disposition of
Registerable Securities.
(d) Register and qualify the securities covered by the
Registration Statement under such other securities or Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Investors and prepare and
file in those jurisdictions such amendments (including post-effective
amendments) and supplements and to take such other actions as may be necessary
to maintain such registration and qualification in effect at all times until the
earlier of (i) the third anniversary of the final closing date of the Company
offering of the Notes and Warrants, or (ii) the date on which all Investors can
sell their respective shares of Registerable Securities pursuant to Rule 144 of
the Securities Act with out restriction under Rule 144(e) thereof, and to take
all other actions necessary or advisable to enable the disposition of such
securities in such jurisdictions, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
- 4 -
business or to file a general consent to service of process in any such states
or jurisdictions or to provide any undertaking or make any change in its charter
or bylaws which the Board of Directors determines to be contrary to the best
interest of the Company and its stockholders.
(e) In the event the holders of a majority in interest of the
Registerable Securities select underwriters for the offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering. The Investors shall
also enter into and perform their customary obligations under any such agreement
including, without limitation, customary indemnification and contribution
obligations.
(f) Notify the Holders of Registerable Securities, at any time
when a prospectus relating to Registerable Securities covered by the
Registration Statement is required to be delivered under the Securities Act, of
the happening of any event as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing. The Company shall promptly amend or supplement the
Registration Statement to correct any such untrue statement or omission.
(g) Notify the Holders of Registerable Securities of the
issuance by the SEC of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for the purposes.
The Company will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof at
the earliest possible time.
(h) Permit a single firm of counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registerable Securities commencing at a reasonable period of time prior to their
filing, to review the Registration Statement and all amendments and supplements
thereto and shall not file any document in a form to which such counsel
reasonably objects.
(i) Make generally available to its security holders as soon
as practicable, but not later than 90 days after the close of the period covered
thereby, an earnings statement (in form complying with the provisions of Rule
158 under the Securities Act) covering a 12- month period beginning not later
than the first day of the Company's fiscal quarter next following the effective
date of the Registration Statement.
(j) At the request of the Holders of Registerable Securities,
furnish to the underwriters on the date that Registerable Securities are
delivered to the underwriters for sale
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in connection with a registration pursuant to this Agreement (i) an opinion,
dated such date, of the counsel representing the Company for the purposes of
such registration, in form and substance as is customarily given to underwriters
in an underwritten public offering, addressed to the underwriters, and (ii) a
letter dated such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering, addressed
to the underwriters.
(k) Make available for inspection by the Holders of
Registerable Securities, any underwriters participating in the offering pursuant
to the registration and the counsel, accountants or other agents retained by the
Investors, all pertinent financial and other records, corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the Investors in
connection with the registration.
(l) If the Common Stock is then listed on a national
securities exchange, cause the Registerable Securities to be listed on such
exchange. If the Common Stock is not then listed on a national securities
exchange, facilitate the reporting of the Common Stock on NASDAQ.
(m) Provide a transfer agent and registrar, which may be a
single entity, for the Registerable Securities not later than the effective date
of the Registration Statement.
(n) Take all actions necessary to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registerable Securities to be sold pursuant to the Registration
Statement and to enable such certificates to be in such denominations and
registered in such names as the Holders of such Registerable Securities or any
underwriters may reasonably request.
(o) Take all other reasonable actions necessary to expedite
and facilitate disposition by the Investors of the Registerable Securities
pursuant to the Registration Statement.
4. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to each Investor that such Investor shall furnish to the Company such
information regarding itself, the Registerable Securities held by it, and the
intended method of disposition of such securities as shall be reasonably
required to effect the registration of the Registerable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.
5. Expenses of Registration. All expenses incurred in connection
with registration, filings or qualifications pursuant to Sections 2 and 3,
including without
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limitation, all registration, listing, filing and qualification fees, printers
and accounting fees, the fees and disbursements of counsel for the Company and
the reasonable fees and disbursements of one form of counsel for the Investors
shall be borne by the Company (except in the case of the automatic registration
pursuant to Section 2(a) for which underwriter discounts and commissions shall
not be borne by the Company).
6. Indemnification. In the event any Registerable Securities are
included in a Registration Statement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Investor, the directors, employees, agents and the
officers of the Company, each person who signs the Registration Statement, and
each person, if any, who controls any of them, any underwriter (as defined in
the Securities Act) for such Holders of Registerable Securities and each person,
if any, who controls any such underwriter within the meaning of the Securities
Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against
any losses, claims, damages, expenses or liabilities (or actions or proceedings,
whether commenced or threatened, in respect thereof) arising out of or based
upon any of the following statements, omissions or violations (collectively, a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or (iii) any violation or alleged violation by the Company of the Securities
Act, the 1934 Act, any state securities laws or any rule or regulation
promulgated under the Securities Act, the 1934 Act or any state securities laws;
and the Company will reimburse the Investors and each such underwriter or
controlling person, promptly as such expenses are incurred, for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that the indemnity agreement contained in this Section 6(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability, or
action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by the Investors or any
such underwriter or controlling person, as the case may be. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Investors or any such underwriter or controlling person and shall
survive the transfer of the Registerable Securities by the Holders of
Registerable Securities.
- 7 -
(b) To the extent permitted by law, each Holder of
Registerable Securities, severally and not jointly, will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, each person, if any, who controls the Company
within the meaning of the Securities Act or the 1934 Act, any underwriter and
any other stockholder selling securities pursuant to the Registration Statement
of any of its directors or officers or any person who controls such holder or
underwriter, against any losses, claims, damages of liabilities (joint or
several) to which any of them may become subject, under the Securities Act, the
1934 Act of other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder of Registerable Securities expressly for use in
connection with such registration; and such Holder of Registerable Securities
will reimburse any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 6(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of such Holder of Registerable Securities, which consent shall not
be unreasonably withheld; and provided, further, that the Investor shall be
liable under this paragraph for only that amount of losses, claims, damages and
liabilities as does not exceed the proceeds to such Investor as a result of the
sale of Registerable Securities pursuant to such registration.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the parties; provided, however, than an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
for the indemnifying party, representation of such indemnified party by the
counsel retained by the indemnifying party, would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Section 6 only to the extent
prejudicial to its ability to defend such action, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 6.
The indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during
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the course of the investigation or defense, promptly as such expense, loss,
damage or liability is incurred.
(d) To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under this Section 6 to the extent permitted by law, provided that (i) no
contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in this
Section 6, (ii) no seller of Registerable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registerable Securities who
was not guilty of such fraudulent misrepresentation, and (iii) contribution by
any seller of Registerable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registerable
Securities.
7. Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders of Registerable Securities the benefits of SEC Rule 144
promulgated under the Securities Act and any other rule or regulation of the SEC
that may at any time permit the Investors to sell securities of the Company to
the public without registration, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the 1934
Act; and
(c) furnish to each Holder of Registerable Securities, so long
as such Holder of Registerable Securities owns any Registerable Securities,
forthwith upon request (i) a written statement by the Company that it has
complied with the reporting requirements of SEC Rule 144, the Securities Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and )iii)
such other information as may be reasonably requested in availing the Investors
of any rule or regulation of the SEC which permits the selling of any such
securities without registration.
8. Assignment of Registration Rights. The rights to have the Company
register Registerable Securities pursuant to this Agreement may be assigned by
the Holders of Registerable Securities, subject to the Holders of such
Registerable Securities and such assignment being in compliance with the terms
of this Agreement and any agreements incorporated herein, and subject to such
assignment being in conformity with federal and state securities law, rules and
regulations, unless exempt therefrom; to transferees or
- 9 -
assignees, of such securities provided such transferee or assignee within a
reasonable time after such transfer, furnishes the Company written notice of the
name and address of such transferee or assignee and the securities with respect
to which such registration rights are being assigned; provided, further, that
such assignment shall be effective only if immediately following such transfer
the further disposition of such securities by the transferee or assignee is
restricted under the Securities Act. The term "Investor" as used in this
Agreement shall include permitted assignees.
9. Miscellaneous.
(a) Notices required or permitted to be given hereunder shall
be in writing and shall be deemed to be sufficiently given when personally
delivered or sent by registered mail, return-receipt request, addressed (i) if
to the Company at Cheung Laboratories, Inc. c/o Augustine Cheung, PhD., Chairman
of the Board and Chief Executive Office at 10220-I Old Columbia Road, Columbia,
Maryland 21046-1705, and (ii) if to an Investor, at the address set forth under
his name in the Subscription Agreement, or at such other address as each such
party shall furnish by notice given in accordance with this Section 9(a).
(b) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right to
remedy, will not operate as a waiver thereof. No waiver will be effective unless
and until it is in writing and signed by the party giving the waiver.
(c) The Agreement shall be enforced, governed and construed in
all respects in accordance with the laws of the State of Maryland, as such laws
are applied by Maryland courts to agreements entered into and to be performed in
Maryland by and between residents of Maryland. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
(d) The Company will not, after the date of this Agreement,
enter into any agreement with respect to its securities which is inconsistent
with the rights granted to the Holders of Registerable Securities in this
Agreement or otherwise conflicts with the provisions hereof.
(e) The provisions of this Agreement, including the provisions
of this sentence, may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given unless the
Company has obtained the written consent of holders of at least a majority of
shares of the Registerable Securities.
- 10 -
Notwithstanding the foregoing, a waiver or consent to departure from the
provisions hereof with respect to a matter which relates exclusively to the
rights of Holders of Registerable Securities whose securities are being sold
pursuant to a Registration Statement and which does not directly or indirectly
affect the rights of other Holders of Registerable Securities may be given by
the holders of a majority of the shares of the Registerable Securities being
sold by such holders, provided that the provisions of this sentence may not be
amended, modified, or supplemented except in accordance with the provisions of
the immediately preceding sentence.
(f) Subject to Section 8 hereof, this Agreement shall inure to
the benefit of and be binding upon the successors and permitted assigns of each
of the parties, including without limitation and without the need for an express
assignment, subsequent holders of Registerable Securities.
(g) This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts and by facsimile
signatures, each of which when so executed shall be deemed to be an original and
all of which taken together shall constitute one and the same agreement.
(h) This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the securities sold in connection with the Offering. This Agreement supersedes
all prior agreements and understanding between the parties with respect to such
subject matters.
Dated this ____ day of July, 1996.
INVESTOR: CHEUNG LABORATORIES, INC.
______________________________ By: ____________________________
Signature
______________________________ Title: ____________________________
Printed Name
- 11 -
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS WHICH, IN THE
OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
July ___, 1996
WARRANT TO PURCHASE SHARES OF COMMON
STOCK OF CHEUNG LABORATORIES, INC.
This certifies that _____________ (the "Holder"), for a value received,
is entitled, subject to the adjustment and to the other terms set forth below,
to purchase from Cheung Laboratories, Inc., a Maryland corporation (the
"Company), at the Stock Purchase Price (as defined below) that number of fully
paid and nonassessable shares of the Company's $0.01 par value Common Stock (the
"Stock") as equals $________________ divided by the Stock Purchase Price, which
shall be the common stock equivalent price of the private placement to be sold
by the Company in the Fall of 1996 in an aggregate offering of not less than
$8,000,000 (anticipated to be at the price of $4.00 to $5.00 per share of common
stock equivalent and hereinafter referred to as the "Private Offering"). This
Warrant shall be exercisable at any time on and after six months from the date
of the next public stock offering ("Next Public Offering") of the Company (the
"Commencement Date") but not later than 5:00 P.M. (New York Time) on the
Expiration Date (as defined below), upon surrender to the Company at its
principle office at 10220-I Old Columbia Road, Columbia, Maryland 21046-1705,
Attention: Dr. Augustine Cheung, Chairman of the Board of Directors and Chief
Executive Officer (or at such other location as the Company may advise Holder in
writing) of this Warrant properly endorsed with the form of Subscription
Agreement attached hereto duly filled in and signed and upon payment in cash or
cashier's check of the aggregate Stock Purchase Price for the number of shares
for which this Warrant is being exercised determined in accordance with the
provisions hereof. The Stock Purchase Price and, in some cases, the number of
shares purchasable hereunder are subject to adjustment as provided in Section 3
of this Warrant. This Warrant and all rights hereunder, to the extent not
exercised in the manner set forth herein shall terminate and become null and
void on the Expiration Date. "Expiration Date" means 5:00 P.M. (New York Time)
on the fifth anniversary of the
- 1 -
Commencement Date. In the event that the Holder does not exercise this Warrant
pursuant to the terms of this Warrant, then this Warrant shall expire, be
cancelled, and be null and void. This Warrant is issued pursuant to the
subscription agreement dated the same date as this Warrant and executed by the
Holder, for the Purchase of a secured convertible promissory note in the
principal amount of $___________.
This Warrant is subject to the Following terms and conditions:
1. Exercise: Issuance of Certificates; Payment for Shares; Conversion Right.
1.1 Duration of Exercise of Warrant. This Warrant is exercisable at the
option of the Holder at any time or from time to time but not earlier than on
the Commencement Date or later than 5:00 P.M. (New York Time) on the Expiration
Date for all or a portion of the shares of Stock which may be purchased
hereunder. The Company agrees that the shares of Stock purchased under this
Warrant shall be and are deemed to be issued to Holder as the record owner of
such shares at the close of business on the date on which this Warrant shall
have been surrendered and payment made for such shares. Subject to the
provisions of Section 2, certificates for the shares of Stock so purchased,
together with any other securities or property to which Holder is entitled upon
such exercise, shall be delivered to Holder by the Company or its transfer agent
at the Company's expense within a reasonable time after the rights represented
by this Warrant have been exercised. Each stock certificate so delivered shall
be in such denominations of Stock as may be requested by Holder and shall be
registered in the name of Holder or such other name as shall be designated by
Holder. If, upon exercise of this Warrant, fewer than all of the shares of Stock
evidenced by this Warrant are purchased prior to the Expiration Date of this
Warrant, one or more new warrants substantially in the form of, and on the terms
in, this Warrant will be issued for the remaining number of shares of Stock not
purchased upon exercise of this Warrant.
2. Shares to Be Fully Paid: Reservation of Shares. The Company covenants and
agrees that all shares of Stock which may be issued upon the exercise of this
Warrant (the "Warrant Shares") shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable and free from all preemptive rights of any
stockholder and free of all taxes, liens, and charges with respect to the
issuance thereof. The Company believes it has sufficient shares both at the date
of this Warrant and following the Private Offering to provide for the exercise
of this Warrant, but shall take such action as may be required following the
Private Offering and the redemption of Stock for Mr. Gao to reserve and keep
available a sufficient number of shares of its authorized but unissued Stock for
such exercise. The Company will take all such reasonable actions as may be
necessary to assure that such shares of Stock may be issued as provided herein
without violation of any applicable law or regulation, or of any requirements of
any domestic securities exchange or automated quotation system upon which the
Stock may be listed.
- 2 -
3. Adjustment of Stock Purchase Price and Number of Shares. The Stock Purchase
Price and, in some cases, the number of shares purchasable upon the exercise of
this Warrant shall be subject to adjustment from time to time upon the
occurrence of certain events described in this Section 3.
3.1 Split or Combination of Stock and Stock Dividend: In case the
Company shall at any time subdivide its outstanding shares of Stock into a
greater number of shares or declare a dividend upon its Stock payable solely in
shares of Stock, the Stock Purchase Price in effect immediately prior to such
subdivision or declaration shall be proportionally reduced, and the number of
shares issuable upon exercise of the Warrant shall be proportionately increased.
Conversely, in case the outstanding shares of Stock of the Company shall be
combined into a smaller number of shares (such as a reverse stock split, but not
to include the anticipated redemption of 20,000,000 shares of stock from Mr. Gao
pursuant to a Redemption Agreement now in effect with Mr. Gao) the Stock
Purchase Price in effect immediately prior to such combination shall be
proportionately increased, and the number of shares issuable upon exercise of
the Warrant shall be proportionately reduced.
3.2 Dilutive Issuances. If prior to completion of the Company's Next
Public Offering, the Company shall sell or issue at any time after the date of
this Warrant and prior to its termination shares of Stock (other than Excluded
Stock, as defined in Section 3.2.5) at a consideration per share less than the
Stock Exercise Price in effect immediately prior to the time of such issue or
sale, then, upon such sale or issuance, the Stock Purchase Price shall be
reduced to the lower of the prices (calculated to the nearest cent) determined
as follows: by dividing (i) the sum of (A) the total number of shares of Stock
Outstanding (as defined in Section 3.2.1) below and subject to adjustment in the
manner set forth in Section 3.1) immediately prior to such issuance or sale
multiplied by the then-existing Stock Purchase Price, plus (B) the aggregate of
the amount of all consideration, if any, received by the Company upon such
issuance or sale, by (ii) the total number of shares of Stock Outstanding
immediately after such issuance or sale.
3.2.1 Definitions. For purposes of this Section 3.2, the
following definitions shall apply:
(a) "Convertible Securities" shall mean any
indebtedness or equity securities convertible into or exchangeable for Stock.
(b) "Options" shall mean any rights, warrants or
options to subscribe for or purchase Stock or Convertible Securities.
(c) "Stock Outstanding: shall mean the aggregate
of all Stock of the Company outstanding and all Stock issuable upon exercise of
all outstanding Options and conversion of all outstanding Convertible
Securities.
- 3 -
(d) "Market Price" shall mean: (i) if there is
a ready public market of registered stock, the Market Price shall be the "Stock
Price" (as defined in this Section 3.2.1) obtained by taking the average over a
period of 30 days consecutive trading days ending on the second trading day
prior to the date of determination; and (ii) if there is no ready public market,
Market price shall be the highest of the last bona fide sale made by the Company
and the fair market value of the Stock as determined by the Board of Directors
in its good faith judgment.
(e) "Stock Price" shall mean (i) the mean, on
each such trading day, between the high and low sale price of a share of Stock,
or if no such sale takes place on any such trading day, the mean of the highest
closing bid and lowest closing asked prices therefor on any such trading day, in
each case as officially reported on all national securities exchanges on which
the Stock is then listed or admitted to trading, or (ii) if the Stock is not
then listed or admitted to trading on any national securities exchange, the
closing price of the Stock on such date, or (iii) if no closing price is
available on any such trading date, the mean between the highest closing bid and
the lowest closing asked prices thereof on any such trading date, in the
over-the-counter market as reported by The National Association of Securities
Dealers Automated Quotation System, or (iv) if the Stock is not then quoted in
such system, the mean between the highest closing bid and lowest closing asked
prices reported by market makers and dealers for the Stock listed as such with
the National Quotation Bureau, Incorporated, or any similar successor
organization, or (v) it there is no ready public market, then the Stock Price
shall be the Market Price.
3.2.2 For the purposes of this Section 3.2, the following
provisions shall also be applicable:
3.2.2.1 Cash Consideration. In the case of the
issuance or sale of additional Stock for cash, the consideration received by the
Company therefor shall be deemed to be the amount of cash received by the
Company for such shares (or, if such shares are offered by the Company for
subscription, the subscription price, or, if such shares are sold to
underwriters or dealers for public offering without a subscription offering, the
public offering price), without deducting therefrom any compensation or discount
paid or allowed to underwriters or dealers or others performing similar services
or for any expenses incurred in connection therewith.
3.2.2.2 Non-Cash Consideration. In case of the
issuance (other than upon conversion or exchange of Convertible Securities) or
sale of additional Stock, Options or Convertible Securities for a consideration
other than cash or a consideration a part of which shall be other than cash, the
fair market value of such consideration as determined by the Board of Directors
of the Company in the good faith exercise of its business judgment, irrespective
of the accounting treatment thereof, shall be deemed to be the value, for
purposes of this Section 3, of the consideration other than cash received by the
Company for such securities.
- 4 -
3.2.2.3 Options and Convertible Securities. In case
the Company shall in any manner issue or grant any Options or any Convertible
Securities, the total maximum number of shares of Stock issuable upon the
exercise of such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities at the time such Convertible Securities
first become convertible or exchangeable shall (as of the date of issue or grant
of such Options or, in the case of the issue or sale of Convertible Securities
other than where the same are issuable upon the exercise of Options, as of the
date of such issue or sale) be deemed to be issued and to be outstanding for the
purpose of this Section 3.2 and to have been issued for the sum of the amount
(if any) paid for such Options or Convertible Securities plus the amount (if
any) payable upon the exercise of such Options or upon conversion or exchange of
such Convertible Securities at the time such Convertible Securities first become
convertible or exchangeable; provided that, subject to the provisions of Section
3.2.3, no further adjustment of the Stock Purchase Price shall be made upon the
actual issuance of any such Stock or Convertible Securities or upon the
conversion or exchange of any such Convertible Securities.
3.2.3 Change in Option Price or Conversion. In the event that
the purchase price provided for in any Option referred to in subsection 3.2.2.3,
or the rate at which any Convertible Securities referred to in subsection
3.2.2.3 are convertible into or exchangeable for shares of Stock shall change at
any time or any additional consideration shall be payable in connection with the
exercise of any Option or the conversion or exchange of any Convertible Security
(other than under or by reason of provisions designed to protect against
dilution upon the occurrence of events of the type described in this Section 3),
then, for purposes of any adjustment required by Section 3.2, the Stock Purchase
Price in effect at the time of such event shall forthwith be readjusted to the
Stock Purchase Price that would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such changed
purchase price, conversion rate or additional consideration, as the case may be,
at the time initially granted, issued or sold, provided that if such
readjustment is an increase in the Stock Purchase Price, such readjustment shall
not exceed the amount (as adjusted by Sections 3.2 and 3.2) by which the Stock
Purchase Price was decreased pursuant to Section 3.2 upon the issuance of the
Option or Convertible Security.
3.2.4 Termination of Option or Conversion Rights. In the event
of the termination or expiration of any right to purchase Stock under any Option
granted after the date of this Warrant or of any right to convert or exchange
Convertible Securities issued after the date of this Warrant, the Stock Purchase
Price shall, upon such termination, be readjusted after the Stock Purchase Price
that would have been in effect at the time of such expiration or termination had
such Option or Convertible Security, to the extent outstanding immediately prior
to such expiration or termination, never been issued, and the shares of
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Stock issuable thereunder shall not longer be deemed to be Stock Outstanding,
provided that if such readjustment is an increase in the Stock Purchase Price,
such readjustment shall not exceed the amount (as adjusted by Sections 3.1 and
3.2) by which the Stock Purchase Price was decreased pursuant to Section 3.2
upon the issuance of the Option or Convertible Security. The termination or
expiration of any right to purchase Stock under any Option granted prior to the
date of this Warrant or of any right to convert or exchange Convertible
Securities issued prior to the date of this Warrant shall not trigger any
adjustment to the Stock Purchase Price, but the shares of Stock issuable under
such Options or Convertible Securities shall not longer be counted in
determining the number of shares of Stock Outstanding on the date of issuance of
this Warrant for purposes of subsequent calculations under this Section 3.2
3.2.5 Excluded Stock. Notwithstanding anything herein to the
contrary, the Stock Purchase Price shall not be adjusted pursuant to this
Section 3.2 by virtue of the issuance and/or sale of Excluded Stock, which shall
mean the following: (a) Stock, Options or Convertible Securities representing up
to 2,000,000 shares of Stock (or such greater number of shares of Stock as
authorized by the Board of Directors) in the aggregate to be issued and/or sold
to employees, advisors, directors or officers of, or consultants to, the Company
or any of its subsidiaries pursuant to a stock grant, stock option plan,
restricted stock agreements, stock purchase plan, pension or profit sharing plan
or other stock agreement or arrangement approved by the Company's Board of
Directors, (b) the issuance of shares of Stock, Options and/or Convertible
Securities pursuant to Options and/or Convertible Securities outstanding as of
the date of this Warrant; (c) issuance of shares of Stock and/or Convertible
Securities to the Placement Agent in respect of the transaction represented by
the subscription agreement related to the issuance of this Warrant; and (d) the
issuance of shares of Stock, Options or Convertible Securities as a stock
dividend or upon any split or combination of shares of Stock or Convertible
Securities. For all purposes of this Section 3.2, all shares of Excluded Stock
shall be deemed to have been issued for an amount of consideration per share
equal to the initial Stock Purchase Price (subject to adjustment in the manner
set forth in Section 3.1).
3.3 Notice of Adjustment. Promptly after adjustment of the Stock
Purchase Price or any increase or decrease in the number of shares purchasable
upon the exercise of this Warrant, the Company shall give written notice
thereof, by first-class mail, postage prepaid, addressed to the registered
Holder of this Warrant at the address of such Holder as shown on the books of
the Company. The notice shall be signed by the Company's President or Chief
Executive Officer and shall state the effective date of the adjustment and the
Stock Purchase Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
3.4 Notices. If at any time:
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(a) the Company shall declare any cash dividend upon its Stock;
(b) the Company shall declare any dividend upon its Stock payable in stock
(other than a dividend payable solely in shares of Stock) or make any special
dividend or other distribution to the Holder of its Stock;
(c) there shall be any consolidation or merger of the Company with another
corporation, or a sale of all or substantially all of the Company's assets to
another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company
then, in any one or more of said cases, the Company shall give, by certified or
registered mail, postage prepaid, addressed to the registered Holder of this
Warrant at the address of such Holder as shown on the books of the Company, (i)
at least 30 days prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights or for determining rights to vote in respect of any such
dissolution, liquidation or winding-up; (ii) at least 10 days prior written
notice of the date on which the books of the Company shall close or a record
shall be taken for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger or sale, and (iii) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up, at least 30 days written notice of
the date when the same shall take place. Any notice given in accordance with
clause (i) above shall also specify, in the case of any such dividend,
distribution or option rights, the date on which the Holder of Stock shall be
entitled thereto. Any notice given in accordance with clause (iii) above shall
also specify the date on which the Holder(s) of Stock shall be entitled to
exchange their Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, as the case may be. If the Holder of the Warrant does
not exercise this Warrant prior to the occurrence of an event described above,
except as provided in Sections 3.1 and 3.5, the Holder shall not be entitled to
receive the benefits accruing to existing holders of the Stock in such event.
Notwithstanding anything herein to the contrary, if and to the extent the Holder
chooses to exercise this Warrant within the 10- day period following receipt of
the notice specified in clause (ii) above, the Holder may elect to pay the
aggregate Stock Purchase Price by delivering to the Company cash or a cashier's
check in the amount of the aggregate par value of the shares of Stock to be
purchased and the Holder's full recourse Promissory Note in the amount of the
balance of the aggregate Stock Purchase Price, which Note shall be payable to
the order of the Company in a single sum on the 30th day following the date of
receipt of such notice and shall bear interest at the lowest applicable federal
short-term rate (using monthly compounding) as established pursuant to Section
1274(d) of the Internal Revenue Code of 1986, as amended, or any successor
provision; provided, however, that if the Holder elects to deliver such a
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Promissory Note to the Company, the Holder will pledge to the Company all Stock
issued in connection with the exercise of this Warrant, and the Company shall
retain possession of the certificates evidencing such Stock, until such time as
the Note is paid in full.
3.5 Changes in Stock. In case at any time following the Commencement
Date hereof, the Company shall be a party to any transaction (including, without
limitation, a merger, consolidation, sale of all or substantially all of the
Company's assets or recapitalization of the Stock) in which the previously
outstanding Stock shall be changed into or exchanged for different securities of
the Company or common stock or other securities of another corporation or
interests in a noncorporate entity or other property (including cash) or any
combination of any of the foregoing (each such transaction being herein called
the "Transaction" and the date of consummation of the Transaction being herein
called the "Consummation Date"), then as a condition of the consummation of the
Transaction, lawful and adequate provisions shall be made so that each Holder,
upon the exercise hereof on or before the Consummation Date, shall be entitled
to receive, and this Warrant shall thereafter represent the right to receive, in
lieu of the Stock issuable upon such exercise prior to the Consummation Date,
the highest amount of securities or other property to which such Holder would
actually have been entitled as a stockholder upon the consummation of the
Transaction if such Holder had exercised such Warrant immediately prior thereto.
The provisions of this Section 3.5 shall similarly apply to successive
Transactions.
3.6 Termination of Dilutive Protection. Immediately following the
Next Public Offering all antidilution provisions of this Section 3 shall become
null, void and of no further force or effect.
4. Issue Tax. The issuance of certificates for shares of Stock upon the exercise
of the Warrant shall be made without charge to the Holder of the Warrant for any
issue tax in respect thereof, provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of any certificates in a name other than that of
the then Holder of the Warrant being exercised.
5. No Voting or Dividend Rights; Limitation of Liability. Nothing contained in
this Warrant shall be construed as conferring upon the Holder hereof the right
to vote or to consent or to receive notice as a stockholder in respect of
meetings of stockholders for the election of directors of the Company or any
other matters or any rights whatsoever as a stockholder of the Company. Except
for the adjustment to the Stock Purchase Price pursuant to Section 3.1 in the
event of a dividend on the Stock payable in shares of Stock, no dividends or
interest shall be payable or accrued in respect of this Warrant or the interest
represented hereby or the shares purchasable hereunder until, and only to the
extent that, this Warrant shall have been exercised. No provisions hereof, in
the absence of affirmative action by the Holder to purchase shares of Stock, and
no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such Holder for
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the Stock Purchase Price or as a stockholder of the Company whether such
liability is asserted by the Company or by its creditors.
6. Restrictions on Transferability of Securities; Compliance with
Securities Act.
6.1 Restrictions on Transferability. This Warrant and the Warrant
Shares (the "Securities") shall not be transferable in the absence of
Registration under the Act (as defined below) or an exemption therefrom under
said Act.
6.2 Restrictive Legend. Each certificate representing the Securities or
any other securities issued in respect of the Securities upon any stock split,
stock dividend, recapitalization, merger, consolidation or similar event, shall
be stamped or otherwise imprinted with a legend substantially in the following
form (in addition to any legend required under applicable state securities
laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND
NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS WHICH, IN THE
OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS COMPANY, IS AVAILABLE.
7. Registration Rights. The Common Stock underlying this Warrant is
subject to a Registration Rights Agreement entered into by Holder of even date
herewith and which is incorporated herein by reference and attached hereto as
Exhibit A.
8. Modification and Waiver. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought,
9. Notices. Any notice, request or other document required or permitted to be
given or delivered to the Holder hereof or the Company shall be delivered or
shall be sent by certified or registered mail, postage prepaid, to each such
Holder at its address as shown on the books of the Company or to the Company at
the address indicated therefor in the first paragraph of this Warrant.
10. Description Headings and Governing Law. The descriptive headings of the
several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the internal laws of the State of Maryland.
- 9 -
11. Lost Warrants or Stock Certificates. The Company represents and warrants to
Holder the upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of any Warrant or stock certificate
and, in the case of any such loss, theft or destruction, and if requested, upon
receipt of an indemnity bond reasonably satisfactory to the Company, or in the
case of any such mutilation, upon surrender and cancellation of such Warrant or
stock certificate, the Company at its expense will make and deliver a new
Warrant or stock certificate, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant or stock certificate.
12. Fractional Shares. No fractional shares shall be issued upon exercise of
this Warrant. The Company shall, in lieu of issuing any fractional share pay the
Holder entitled to such fraction a sum in cash equal to the fair market value of
any such fractional interest as it shall appear on the public market, or if
there is no public market for such shares, then as shall be reasonably
determined by the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer, thereunto duly authorized as of this ____ day of July, 1996.
CHEUNG LABORATORIES, INC.
By: ___________________________
Signature
By: ___________________________
Print Name
Title: ___________________________
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FORM OF SUBSCRIPTION AGREEMENT
(To be signed and delivered upon exercise of Warrant)
[DATE]
Attention: _______________
Cheung Laboratories, Inc.
10220-I Old Columbia Road
Columbia, Maryland 21046-1705
Dear __________:
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase rights represented by such Warrant for, and to
purchase thereunder, _______ shares of Common Stock, par value $0.01 per share
(the "Common Stock") of Cheung Laboratories, Inc. (the "Company") and subject to
the following paragraph, herewith makes payment of _______________ Dollars
($________) therefor and requests that the certificates for such shares be
issued in the name of, and delivered to, _________________________________ whose
address is
.
If the shares issuable upon the exercise of this Warrant are not
covered by a registration statement effective under the Securities Act of 1933,
as amended, (the "Securities Act"), the undersigned represents as of the date
hereof that:
(i) the undersigned is acquiring such Common Stock for
investment for his own account, not as nominee or agent, and not with a view to
the distribution thereof and the undersigned has not signed or otherwise
arranged for the selling, granting any participation in, or otherwise
distributing the same,
(ii) the undersigned has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of the undersigned's investment in the Common Stock,
(iii) the undersigned has received all of the information the
undersigned has requested from the Company and considers necessary or
appropriate for deciding whether to purchase the shares of Common Stock,
(iv) the undersigned has the ability to bear the economic risk
of his prospective investment,
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(v) the undersigned is able, without materially impairing his
financial condition, to hold the shares of Common Stock for an indefinite period
of time and to suffer complete loss on his investment,
(vi) the undersigned understands and agrees that (A) he may be
unable to readily liquidate his investment in the shares of Common Stock and
that the shares must be held indefinitely unless a subsequent disposition
thereof is registered or qualified under the Securities Act and applicable state
securities or Blue Sky laws or is exempt from such registration or
qualification, and that the Company is not required to register the same or to
take any action or make such an exemption available except to the extent
provided in the within Warrant, and (B) the exemption from registration under
the Securities Act afforded by Rule 144 promulgated by the Securities and
Exchange Commission ("Rule 144") depends upon the satisfaction of various
conditions by the undersigned and the Company and that, if applicable, Rule 144
affords the basis for sales under certain circumstances in limited amounts, and
that if such exemption is utilized by the undersigned, such conditions must be
fully complied with by the undersigned and the Company, as required by Rule 144,
(vii) the undersigned is (A) familiar with the definition of
and the undersigned is an "accredited investor" within the meaning of such term
under Rule 501 of Regulation D promulgated under the Securities Act, or (B) is
providing representations and warranties reasonably satisfactory to the Company
and its counsel, to the effect that the sale and issuance of Common Stock upon
exercise of such Warrant may be made without registration under the Securities
Act or any applicable state securities and Blue Sky laws, and
(viii) the address set forth below is the true and correct
address of the undersigned's residence.
Dated: ________________
________________________
Signature
Signature must conform in all respects to the name of Holder as specified on the
face of the Warrant)
Address: _______________________
_______________________
_______________________
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Exhibit 10.18
Serial Number [0300]
Void after 5:00 p.m., Chicago Time, on May 31, 2001 (unless
extended as provided below)
Warrant to Purchase certain
Shares of Common Stock,
dated June 1, 1996.
CERTIFICATE OF
WARRANT TO PURCHASE COMMON STOCK
OF
CHEUNG LABORATORIES, INC.
This Is To Certify That, FOR CASH AND OTHER VALUE RECEIVED, NACE RESOURCES,
INC., a Delaware corporation ("NACE"), its nominees, or assigns (hereinafter,
the "Holder(s)") are entitled to purchase, subject to the provisions of this
Warrant (its successors, divisions or additions), from Cheung Laboratories,
Inc., a corporation duly organized, in good standing within its domicile, and
whose offices as of the date hereof are at 10220-1 Old Columbia Road, Columbia,
MD 21046 (hereinafter, the "Company"), restricted and legended shares of common
stock of the Company ("Common Stock") at a purchase price equal to Forty One
Cents ($00.41 U.S.) per share in such amounts and at such times as are provided
herein.
The number of shares of Common Stock to be received upon the exercise of this
Warrant and the price to be paid for a share of Common Stock may be adjusted
from time to time as hereinafter set forth.
Supplementing, notwithstanding, and in support of the foregoing, the Company and
the original Holder hereof ("Nace"), intend that the number of shares issuable
hereunder shall be 396,719, which represents 1.875% of the issued and
outstanding Common Stock. In the event the Company fails to redeem an additional
4,000,000 shares of the Common Stock from Gao Yu Wen on or before June 30, 1997,
the original Holder hereof shall be entitled to a warrant on identical terms to
purchase an additional 75,000 shares.
The shares of Common Stock deliverable upon such exercise, and as adjusted from
time to time, are hereinafter referred to as "Warrant Stock" and the exercise
price for a share of Common Stock in effect at any time and as adjusted from
time to time is hereinafter sometimes referred to as the "Exercise Price".
- 1 -
The term "Warrant" used above and throughout this Certificate shall mean this
Warrant or successor Warrants issued in exchange for it for any reason pursuant
to the terms and condition contained herein.
(i) Exercise of Warrant. Subject to the provisions of paragraphs 6 and
7 hereof, this Warrant may be exercised in whole or in part at any time or from
time to time on or after June 1, 1996 but not later than 5:00 p.m., Chicago
Time, on June 1, 2001 or if June 1, 2001 is a day on which U.S. banking
institutions are authorized by law to close, then on the next succeeding day
which shall not be such a day, by presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, with a copy of the
Purchase Form attached hereto duly executed and accompanied by payment of the
Exercise Price for the number of shares specified in such form, together with
all federal and state taxes applicable upon such exercise, if any, and the
Company shall promptly issue and deliver stock certificates for the number of
shares purchased to the Holder hereof within two (2) business days in conformity
with industry practice. The Company may unilaterally extend the time within
which this Warrant may be exercised but is not obligated to do so.
If this Warrant should be exercised in part only or all or a portion of it
renewed as provided for in paragraph 7 hereof or otherwise, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant, containing terms and conditions identical to this Warrant except as
provided for herein, evidencing the right of the Holder(s) to purchase the
balance of the shares purchasable hereunder.
Upon receipt of this Warrant, the executed Purchase Form and the Exercise Price
by the Company or, if then applicable, by its stock transfer agent, the
Holder(s) shall be deemed to be the holder(s) of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder(s),
their agents or designees. The Company shall keep detailed records of the
disposition of this, successor Warrants, and any Warrant issuable hereunder,
each bearing a serial number, and shall make such records available to Holder(s)
or their agents upon request.
(ii) Reservation of Shares. The Company hereby represents and warrants
that at all times subsequent hereto there shall be reserved for issuance and/or
delivery upon exercise of this Warrant such number of shares of its Common Stock
as shall be required for issuance or delivery upon exercise of this Warrant or
any Warrant issuable hereunder.
(iii) Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon exercise of this Warrant. With respect to
any fraction of a share called for upon any exercises hereof, the Company shall
pay to the Holder(s) an amount in cash
- 2 -
equal to such fraction multiplied by the current market value of such fractional
share, determined as follows:
(a) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange, the
current value shall be the last reported sale price of the Common Stock on such
exchange on the last business day prior to the date of exercise of this Warrant
or if no such sale is made on such day on such exchange; or
(b) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current value shall be the mean of the last
reported bid and asked prices reported by the National Association of Securities
Dealers Automated Quotation System (or, if not so quoted on NASDQ), by the
National Quotation Bureau, Inc.) on the last business day prior to the day of
the exercise of this Warrant; or
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current fair market value shall be an amount, not less than book value or the
last known price paid by a purchaser for said Common Stock, determined in a
reasonable manner as may be prescribed by the Board of Directors of the Company.
(iv) Exchange, Assignment or Loss of Warrant. Subject to applicable
securities laws and the terms of the legend set forth in paragraph 11(b) hereof,
this Warrant certificate is fully exchangeable and (by definition) assignable,
without expense, at the option of the Holder(s), upon presentation and surrender
hereof to the Company or at the office of its stock transfer agent, if any, for
other Warrant certificates of different denominations entitling the Holder(s)
hereof to purchase in the aggregate the same number of shares of Common Stock
purchasable hereunder.
Any assignment hereof shall be made by surrender of this Warrant to the Company
or at the office of its stock transfer agent, if any, with a written, executed
assignment, instructions and funds sufficient to pay transfer tax (if any);
whereupon the Company shall, without charge, execute and deliver a new Warrant
certificate in the name of the assignee(s) named in such instrument of
assignment and this Warrant certificate shall promptly be cancelled. This
Warrant may be divided upon presentation hereof at the office of the Company or
at the office of its stock transfer agent, if any, together with a written
notice, specifying the names and denominations in which new Warrants are to be
issued, and signed by the Holder hereof. The terms "Warrant" and "Warrants" as
used herein include any Warrants issued in substitution for or replacement of
this Warrant, or into which this Warrant may be divided or exchanged.
- 3 -
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and, in the case of
loss, theft or destruction, of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenure and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant so lost, stolen, destroyed
or mutilated shall be at any time enforceable by anyone. Nevertheless, neither
the Company or the Holder(s) anticipate that this Warrant or any successor
Warrant shall itself be registered (rather that the underlying shares shall be
registered), the Company shall not impose unreasonable burdens on the Holder(s)
with respect to indemnification if same becomes necessary.
(v) Rights of the Holders. The Holder(s) shall not, by virtue hereof,
be entitled to any rights of a shareholder in the Company, either at law or
equity, and the rights of the Holder(s) are limited to those expressed in the
Warrant and are not enforceable against the Company except to the extent set
forth herein, PROVIDED HOWEVER, that the Company shall, in a timely manner,
provide Holder(s) with a copy of each and every press release, mailing to
shareholders and periodic filing with the U.S. Securities and Exchange
Commission made by the Company, and provided that the Company shall be, at all
times during the tenure of this Warrant or its successors, in compliance with
all of its contractual obligations to Riker and its affiliates.
(vi) Adjustments to Exercise Price and Number of Shares.
(a) The Company shall not be required to give effect to any
adjustment in the Exercise Price unless and until the net effect of one or more
adjustments, determined as above provided, shall have required a change of the
Exercise Price by at least one cent, ($00.01 U.S.) but when the cumulative net
effect of more than one adjustment so determined shall be to change the actual
Exercise Price by at least one cent, such change in the Exercise Price shall
thereupon be given effect.
Notwithstanding anything else in this paragraph which might be interpreted to
the contrary, should at any time subsequent to the issuance of this Warrant but
during the tenure of this Warrant and any renewals or extensions as are provided
for herein, any person or entity shall be issued an option or warrant
exercisable to purchase stock of the Company or stock of the Company is sold to
such person or entity at a price per share less than the then relevant Exercise
Price as determined as provided herein, an immediate adjustment in the Exercise
Price for this Warrant (and successor Warrants to this Warrant) shall be made.
The effect of this adjustment shall be to make the Exercise Price under this
Warrant equal to the lesser exercise, option or sale price referenced above.
However, this adjustment shall not have the effect of increasing the number of
shares purchasable hereunder. Rather it shall reduce the aggregate amount paid,
assuming full exercise of this Warrant, to an amount equal to the
- 4 -
number of shares otherwise then purchasable hereunder multiplied by the newly
adjusted Exercise Price pursuant to this adjustment.
(b) The 396,719 shares issuable hereunder shall be adjusted so
that number of shares issuable hereunder shall be equal, at all times after
issuance of this Warrant, to 1.875% of the total issued and outstanding Common
Stock of the Company until the Company completes its next public offering of
securities.
(c) Whenever reference is made in this paragraph 6 to the
issue or sale of shares of Common Stock, the term "Common Stock" shall mean the
Common Stock of the Company of the class authorized as of the date hereof and
any other classes of stock ranking on a parity with or convertible into such
Common Stock providing, as is contemplated, it is the Common Stock of the
Company which is to be offered and sold at the next public offering of
registered Common Shares of the Company. However, as of the date of grant and
sale of this Warrant and subject to the provisions of paragraph 10 hereof,
shares issuable upon exercise hereof shall include only shares of the class
designated as Common Stock of the Company as of the date hereof.
(vii) Renewal of Exercise Rights. If, while this Warrant or any portion
of it remains in effect, Holder(s) wish to extend their rights to exercise all
or a portion of this Warrant which would otherwise expire and be lost to them,
they may do so by paying to the Company, a sum equal to five percent (5%) of the
then relevant Exercise Price pertaining to that portion of the Warrant which
would otherwise expire (the "Renewal Fee") and the Company shall extend that
portion of the Warrant for a further period of five (5) years from the date of
receipt of the Renewal Fee but, in no case, beyond 5:00 p.m., Chicago Time, on
June 1, 2006, and shall issue a new Warrant, identical in every respect to this
Warrant, except that such new Warrant shall reflect the fact that Holder(s)
shall have an additional five (5) years to exercise their rights to purchase
that portion of the Warrant Stock for which they have paid a Renewal Fee. This
provision extends to this Warrant and all successor Warrants issuable hereunder.
This provision is included partially to permit Holder(s) to coordinate their
exercise of this Warrant and sale of Warrant Stock so as to minimize the Costs
and Expenses and time of the Company's management in complying with the
provisions of this Warrant. Payment of the Renewal Fee will confirm no new
rights upon the Holder(s) except to extend and renew the time period during
which Holder(s) may exercise existing rights under this Warrant.
(viii) Officer's Certificate. Whenever the Exercise Price shall be
adjusted as required by the provisions of paragraph 6 hereof, the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office, and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided
and setting forth in reasonable detail the facts requiring such adjustment.
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Each such officer's certificate shall be made available at all reasonable times
for inspection by the Holder(s) and the Company shall, forthwith after each such
adjustment, deliver a copy of such certificate to the Holder(s) and each of
them. Unless disputed in writing by the Holder hereof within thirty (30) days,
such certificate shall be conclusive as to the correctness of such adjustment.
(ix) General Notices to Warrant Holders. So long as any portion of this
Warrant (or any successor Warrant) shall be outstanding and unexercised (a) if
the Company shall pay any dividend or make any distribution upon the Common
Stock or (b) if the Company shall offer to the holders of Common Stock for
subscription or purchase by them any shares of stock of any class or any other
rights or (c) if any capital reorganization of the Company, reclassification of
the capital stock of the Company, consolidation or merger of the Company with or
into another corporation, sale, lease or transfer of all or substantially all of
the property and assets of the Company to another corporation or engage in
voluntary or involuntary dissolution, liquidation or winding up of the company,
then the Company shall cause to be delivered to the Holder(s), at least thirty
(30) days prior to the relevant date, a notice containing a brief description of
the proposed action and stating the date of which a record is to be taken for
the purpose of such dividend, distribution of rights, or such reclassification,
reorganization, consolidation, merger, conveyance, lease, dissolution,
liquidation or winding up is to take place and the date, if any, is to be fixed
as of which the holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock of record for securities or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up.
(x) Reclassification, Reorganization or Merger. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company (other than a change in par value, or from par
value to no par value, or from no par value to par value) or as a result of an
issuance of Common Stock by way of dividend or other distribution or of a
subdivision or combination, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety
(collectively, a "Triggering Event"), the Company shall use good faith efforts
to cause effective provision to be made so that the Holder(s) shall have the
right thereafter (and shall have said right for the same period of time
remaining on any unexercised portion of this Warrant), without immediately
exercising this Warrant, to purchase the kind and amount of shares of stock and
other securities and property receivable upon such reclassification, capital
reorganization or other change, consolidation, merger, sale or conveyance.
- 6 -
Any such provision shall include provision for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Warrant. However, in the event that the Company, using its good faith efforts,
is unable to negotiate with the acquiring entity the assumption of the Warrants
as provided in the preceding portion of this paragraph, then and in such event
this Warrant shall terminate, to the extent not previously exercised, as of the
record date for such transaction upon and only upon payment of a "Retirement
Fee" to the Holder(s) hereof.
This Retirement Fee shall consist of the same kind of property (including cash,
if any) to be received by the Company's stockholders pursuant to the Triggering
Event (and, at parity with holders of Common Stock, treated in accordance with
all the other terms and conditions, including timing and manner of payment for
the purchase) and the Company herein agrees that said Retirement Fee may be
arrived at by private negotiation between the Company and the Holder(s) or may
be arbitrated in accordance with the provisions herein provided.
However, the Company now and specifically agrees that, in the event of such
private negotiation, it shall accept an amount to be paid to the Holder(s) (as a
senior obligation of the company in any such transaction) in arbitration or
negotiation which is not less than the lowest sum per Warrant which shall result
from application of any then applicable Warrant Valuation Techniques (such as
the Black-Scholes Model) which may be applied to publicly traded warrants
covering publicly traded common stock, it being intended by the Company and the
Holder(s) that the Retirement Fee should reflect: (a) the difference between the
purchase and exercise price per share plus (b) a warrant premium factor commonly
determinable by the aforementioned models. Said Retirement Fee shall be a senior
obligation of the Company and shall be paid to Holder(s) from first proceeds of
any sale or merger in cash unless otherwise negotiated between the Company and
Nace (the original Holder).
All subsequent Holders shall agree, by acceptance of assignment of any portion
of the Warrant covered by this certificate, to be bound by this provision. All
costs and expenses directly attributable to the determination of the Retirement
Fee (including but not limited to the costs of outside appraisal(s)) shall be at
the expense of the Company.
The foregoing provisions of this section 10 shall similarly apply to successive
reclassification, consolidations, mergers, sales, or conveyances. In the event
that in any such capital reorganization or reclassification, consolidation,
merger, sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for or of a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of paragraphs 3, 6, and 9
hereof, with the amount of the consideration received upon the issue thereof
being determined by the Board of Directors of the Company in consultation with
the Company's auditors, such determination to be final and binding on the
Holder(s).
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(xi) Transfer to Comply with the Securities Act of 1933.
(a) This Warrant or the Warrant Stock or any
other security issued or issuable upon exercise of this Warrant may not be sold,
transferred or otherwise disposed of except to a person who, in the opinion of
counsel reasonably satisfactory to the Company, is a person to whom this Warrant
or such Warrant Stock may legally be transferred pursuant to paragraph 4 hereof
without registration and without the delivery of a current prospectus under the
Securities Act with respect thereto; and then only against receipt by the
Company of an agreement from such person to comply with the provisions of this
paragraph 11 with respect to any resale or other disposition of such securities.
(b) The Company may cause the following legend
to be set forth on each certificate representing Warrant Stock or any other
security issued or issuable upon exercise of this Warrant not theretofore
distributed to the public pursuant to paragraphs 12, 13, or 14 hereof, unless
counsel for the Company is of the opinion as to any such certificate that such
legend is unnecessary.
"The securities represented by this certificate may
not be offered for sale, sold or otherwise transferred except pursuant to an
effective registration statement under the Securities Act of 1933 (the "Act"),
or pursuant to an exemption from registration under the Act."
(xii) Demand Registration. If at any time, after the next public
offering of registered Common Shares of the Company (as previously covered and
defined herein) Nace shall decide to sell or otherwise dispose of Warrant Stock
then owned or to be owned upon intended exercise of this Warrant by Nace, then
Nace and only Nace may give written notice to the Company of the proposed
disposition, specifying the number of shares of Warrant Stock to be sold or
disposed of and requesting that the Company prepare and file a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
covering such Warrant Stock.
The Company shall within 10 days thereafter give written notice to the other
Holders of Warrants or Warrant Stock of such request and each of the other
Holders shall have the option for a period of 30 days after receipt by it (them)
of notice from the Company to include its (their) Warrant Stock in such
registration statement. The Company shall use its best efforts to cause an
appropriate registration statement (the "Registration Statement") covering such
Warrant Stock to be filed with the Securities and Exchange Commission (the
"Commission") and to become effective as soon as reasonably practicable and to
remain effective until the completion of the distribution of the Warrant Stock
to be offered or sold; provided, however, that not more than once in any twelve
month period the Company shall have the right to postpone for a period of up to
60 days any demand made pursuant to this
- 8 -
Warrant if the underwriters for such offering advise the Company in writing that
market conditions make such a postponement advisable to the Company.
The Holder(s) whose Warrant Stock is (are) included in a Registration Statement
is (are) hereinafter referred to as the "Selling Shareholder(s)".
Each notice delivered by a Selling Shareholder(s) to the Company pursuant to
this paragraph 12 shall specify the Warrant Stock intended to be offered and
sold by such Selling Shareholder(s), express such Selling Shareholder(s) present
intent to offer such Common Shares for distribution, and contain the undertaking
of such Selling Shareholder(s) to provide all information and materials and to
take all action as may be required in order to permit the Company to comply with
all applicable requirements of the Securities Act, and any rules and regulations
promulgated thereunder, and to obtain acceleration of the effective date of such
Registration Statement.
The Company shall not be obligated to file more than three Registration
Statements pursuant to the foregoing provisions of this paragraph 12. The
Company shall bear all of the Costs and Expenses (as hereinafter defined in
paragraph 20 hereof) of the first such registration. The Selling Shareholder(s)
shall bear the costs and expenses of all further registrations pursuant to this
paragraph 12. A demand for registration under this paragraph 12 will not count
as such until the Registration Statement has become effective.
(xiii) Shelf Registration By Original Holder. At any time and from time
to time during the term of this Warrant or its successors (including renewals
and extensions as provided for herein) Nace Resources, Inc. and only Nace
Resources, Inc. (as the original Holder hereof), may demand (and actually
expects) that the Company will file a Registration Statement with the Commission
for the registration of underlying shares issuable upon exercise of this Warrant
or any part thereof, whether or not said Warrant has, in the interim been
assigned or re-assigned to other parties.
In this event, the Company shall pay all of the Costs and Expenses of said
Registration for each such demand except that the Holder shall be responsible,
if such demand is made by the Holder during a period in which the Company is
unable or unqualified to file a "short form" S-3 Statement (or its then relevant
equivalent) for paying all of the Costs and Expenses of said Registration which
are estimated to exceed costs for a similar Registration assuming the Company
had been, as of the date of the demand, a reporting Company for three (3) years
and could file a "short form" statement. In this case, the costs payable by the
Holder shall be determinable by securities counsel to the Company and both the
Company and the Holder are entitled to rely on such an estimate.
Once filed, the Company shall be obligated to continue this "shelf registration"
for the maximum time allowable under the then relevant regulations, at its sole
expense.
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(xiv) Procedure for Demand Registration. In connection with the
filing of a Registration Statement pursuant to paragraph 12 hereof, and in
supplementation and not in limitation of the provisions thereof, the Company
shall:
(a) Notify the Selling Shareholder(s) as to the filing of the
Registration Statement and of all amendments or supplements thereto filed thirty
(30) days prior to the effective date of said Registration Statement;
(b) Notify the Selling Shareholder(s), promptly after the
Company shall receive notice thereof, of the time when said Registration
Statement became effective or when any amendment or supplement to any prospectus
forming a part of said Registration Statement has been filed;
(c) Notify the Selling Shareholder(s) promptly of any requestby the Commission
for the amending or supplementing of such Registration Statement or prospectus
or for additional information;
(d) Prepare and promptly file with the Commission, and
promptly notify the Selling Shareholder(s) of the filing of, and amendments or
supplements to such Registration Statement or prospectus as may be necessary to
correct any statements or omissions if, at any time when a prospectus relating
to the Warrant Stock is required to be delivered under the Securities Act, any
event with respect to the Company shall have occurred as a result of which any
such prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein not misleading; and, in prepare and file with the
Commission, promptly upon the Selling Shareholder(s)' written request, any
amendments or supplements to such Registration Statement or prospectus which may
be reasonably necessary or advisable in connection with the distribution of the
Warrant Stock;
(e) Prepare promptly upon request of the Selling
Shareholder(s) or any underwriters for the Selling Shareholder(s) such amendment
or amendments to such Registration Statement and such prospectus or prospectuses
as may be reasonably necessary to permit compliance with the requirements of
Section 10 (a) (3) of the Securities Act;
(f) Advise the Selling Shareholders promptly after the Company
shall receive notice or obtain knowledge of the issuance of any stop order by
the Commission suspending the effectiveness of any such Registration Statement
or amendment thereto or of the initiation or threatening of any proceeding for
that purpose, and promptly use its best efforts to prevent the issuance of any
stop order or obtain its withdrawal promptly if such stop order would be issued;
- 10 -
(g) Use its best efforts to qualify as soon as reasonably
practicable the Warrant Stock for sale under the securities or blue-sky laws of
such states and jurisdictions within the United States as shall be reasonably
requested by the Selling Shareholder(s); provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business, to become subject to taxation or to file a consent to service of
process generally in any of the aforesaid states or jurisdiction;
(h) Furnish the Selling Shareholder(s), as soon as available,
copies of any Registration Statement and each preliminary or final prospectus,
or supplement or amendment required to be prepared pursuant thereto, all in such
quantities as the Selling Shareholder(s) may from time to time reasonably
request, and;
(i) If requested by the Selling Shareholder(s), enter into an
agreement with the underwriters of the Warrant Stock being registered containing
customary provisions and reflecting the foregoing.
(xv) Incidental Registration. Other than as covering in paragraph 13
hereof, if at any time the Company subsequent to the next public offering of
registered Common Shares of the Company, shall propose the filing of a
Registration Statement on an appropriate form under the Securities Act for the
registration of any securities of the Company, other than a registration
statement on Form S-4 or S-8 or any equivalent form of registration statement
then in effect, then the Company shall give the Holder(s) notice of such
proposed registration and shall include in any Registration Statement relating
to such securities all or a portion of the Warrant Stock then owned or to be
owned by such Holder(s), which such Holder(s) shall request (such Holder(s) to
be considered "Selling Shareholder(s)"), by notice given by such Selling
Shareholder(s) to the Company within 15 business days after the giving of such
notice by the Company, within 15 business days after the giving of such notice
by the Company, to be so included. In the event of the inclusion of Warrant
Stock pursuant to this paragraph 15, the Company shall bear the Costs and
Expenses of such registration; provided, however that the Selling Shareholder(s)
shall pay the fees and disbursements of their own counsel and, pro-rata based
upon the number of shares of Warrant Stock included therein as these relate to
the total number of Common Shares to be offered or sold, the Securities Act
registration fees and underwriters discounts and compensation attributable to
the inclusion of such Warrant Stock; and, provided further, however, that
amounts to which any person or entity shall become entitled pursuant to this
sentence shall not include amounts which may become payable pursuant to
paragraphs 16 or 17 hereof. Nothing in this paragraph 15 shall require the
registration of Warrant Stock in a Registration Statement relating solely to (a)
securities to be issued by the Company in connection with the acquisition of the
stock or the assets of another corporation, or the merger or consolidation of
any other corporation by or with the Company or any of its subsidiaries, or an
exchange offer with any corporation, (b) securities to be offered to the then
existing security holders of the Company, or (c) securities to be offered to
employees of the Company. In the event the
- 11 -
distribution of securities of the Company covered by a Registration Statement
referred to in this paragraph 15 is to be underwritten, then the Company's
obligation to include Warrant Stock in such a Registration Statement shall be
subject, at the option of the Company, to the following further conditions:
(a) The distribution for the account of the Selling
Shareholders shall be underwritten by the same underwriters who are underwriting
the distribution of the securities for the account of the Company and/or any
other persons whose securities are covered by such Registration Statement and
the Selling Shareholder(s) shall enter into an agreement with such underwriters
containing customary provisions.
(b) If the Selling Shareholders are included in the
Registration Statement and if the underwriting agreement entered into with the
aforesaid underwriters contains restrictions upon the sale of securities of the
Company, other than the securities which are to be included in the proposed
distribution, for a period not exceeding 90 days from the effective date of the
Registration Statement, then such restrictions shall be binding upon the Selling
Shareholder(s) with respect to any Warrant Stock not covered by the Registration
Statement and, if requested by the underwriter, the Selling Shareholder(s) shall
enter into a written agreement to that effect.
(c) If the underwriters shall state in writing that they are
unwilling to include any or all of the Selling Shareholder(s) Warrant Stock in
the proposed underwriting because such inclusion would materially interfere with
the orderly sale and distribution of the securities being offered by the
Company, then the number of the Selling Shareholder(s)' shares of Warrant Stock
to be included shall be reduced pro rata on the basis of the number of shares of
Warrant Stock originally requested to be included by such Selling
Shareholder(s), or there shall be no inclusion of the shares of the Selling
Shareholder(s) in the Registration Statement not proposed distribution, in
accordance with such statement by the underwriters.
However, if in such an event, the Holder(s) hereof shall not
be able to include at least fifty percent (50%) of the Warrant Stock originally
requested to be included, then the Company shall agree to pay all of the Costs
and Expenses of a Shelf Registration to be filed at a later date.
(xvi) Indemnification by the Company. The Company shall indemnify and
hold harmless each Selling Shareholder, any underwriter (as defined in the
Securities Act) for the Selling Shareholder, and each person, if any, who
controls the Selling Shareholder or such underwriter within the meaning of the
Securities Act (but, in the case of an underwriter or a controlling person, only
if such under writer or controlling person indemnifies the persons mentioned in
paragraph 17(b) hereof in the manner set forth therein) against any losses,
claims, damages or liabilities, joint or several, to which the Selling
Shareholder or any such
- 12 -
underwriter or controlling person becomes subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) are caused by any untrue statement or alleged untrue statement
of any material fact contained in any preliminary prospectus (if used prior to
the effective date of the Registration Statement), or contained, on the
effective date thereof, in any Registration Statement under which the Selling
Shareholder(s)' shares of Warrant Stock were registered under the Securities
Act, the prospectus contained therein, or any amendment or supplement thereto,
arising out of or based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; the Company shall reimburse the Selling Shareholder, or
any such underwriter or controlling person, in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable to any such person in any such case to the
extent that any such loss, claim, damage, liability or action arises out of or
is based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with information
furnished in writing to the Company by such person expressly for inclusion in
any of the foregoing documents.
(xvii) Indemnification by Selling Shareholders. Each individual Selling
Shareholder shall:
(a) Furnish to the Company in writing all information
concerning it and it's holdings of securities of the Company as shall be
required in connection with the preparation and filing of any Registration
Statement covering any Shares of Warrant Stock.
(b) Indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed a Registration Statement, each
person, if any, who controls the Company within the meaning of the Securities
Act and any underwriter (as defined in the Securities Act) for the Company,
against any losses, claims, damages or liabilities to which any such director,
officer, controlling person or underwriter may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect therefor) are caused by any untrue statement
of any material fact contained in any preliminary prospectus (if used prior to
the effective date of the Registration Statement) or contained, on the effective
date thereof, in any Registration Statement under which the Selling
Shareholder's securities were registered under the Securities Act, the
prospectus contained therein, or any amendment or supplement thereto, or arising
out of or based upon the omission to state therein a material fact required to
be stated therein or necessary to make the statement therein not misleading; in
each case to the extent, but only to the extent, that such untrue statement or
omission was made in reliance upon and in conformity with information furnished
to the Company in writing by the Selling Shareholder expressly for inclusion in
any of the foregoing documents, and the Selling Shareholder shall reimburse the
Company and any such director, officer, controlling person or underwriter for
any legal or other expenses reasonably incurred by the Company or any such
director, officer, controlling
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person or underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action.
(xviii) Notification by Selling Shareholders. The Selling
Shareholder(s) and each other person indemnified pursuant to paragraph 16 hereof
shall, in the event it receives notice of the commencement of any action against
it which is based upon an alleged act or omission which, if proven, would result
in the Company having to indemnify it pursuant to paragraph 16 hereof, promptly
notify the Company, in writing, of the commencement of such action and permit
the Company, if the Company so notifies the Selling Shareholder(s) within 10
days after receipt by the Company of notice of the commencement of the action,
to participate in and to assume the defense of such action with counsel
reasonably satisfactory to the Selling Shareholder(s) or such other indemnified
person, as the case may be. The omission to notify the Company promptly of the
commencement of any such action shall not relieve the Company of any liability
to indemnify the Selling Shareholder(s) or such other indemnified person, as the
case may be, under paragraph 16 hereof, except to the extent that the Company
shall suffer any loss by reason of such failure to give notice which it may have
pursuant to the rights conveyed to the Holders) in this Warrant.
(xix) Notification by the Company to Selling Shareholders. The Company
agrees that, in the event it receives notice of the commencement of any action
against it which is based upon an alleged act or omission which, if proven,
would result in a Selling Shareholder having to indemnify the Company pursuant
to paragraph 17(b) hereof, the Company will promptly notify the Selling
Shareholder in writing of the commencement of such action and permit the Selling
Shareholder, if the Selling Shareholder so notifies the Company within 10 days
after receipt by the Selling Shareholder of notice of the commencement of the
action, to participate in and assume the defense of such action with counsel
reasonably satisfactory to the Company. The omission to notify the Selling
Shareholder promptly of the commencement of any such action shall not relieve
the Selling Shareholder of liability to indemnify the Company under paragraph
17(b) hereof, except to the extent that the Selling Shareholder shall suffer any
loss by reason of such failure to give notice, and shall not relieve the Selling
Shareholder of any other liabilities which it may have under this or any other
agreement then in effect between the Company and the Selling Shareholder.
(xx) Costs and Expenses. As used in this Warrant, "Costs and Expenses"
shall include all of the costs and expenses relating to the respective
Registration Statement(s) involved, including but not limited to, registration
fees, filing and qualification fees, blue-sky expenses, printing and mailing
expenses, fees and expenses of Company's counsel and, if/when appropriate, fees
and expenses of counsel designated by the Selling Shareholder(s) (provided,
however, that no more than one such counsel for the Selling Shareholder(s) shall
be designated on any occasion).
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(xxi) Addresses. All notices, certificates, waiver and other
communications required or permitted to be given hereunder to any of the parties
by any other party shall be in writing and shall be delivered personally or sent
by next day delivery service or registered or certified mail, postage prepaid,
as follows:
(a) If to the Company, addressed to:
Cheung Laboratories, Inc.
10220-I Old Columbia Road
Columbia, MD 21046-1705
Attention: Mr. John Mon, General Manager
(b) If to a Holder, addressed to the address of
each such Holder as shall, from time to
time, appear on the records of the Company
or those of the Company's transfer agent as
may be the case.
Any notice delivered personally or sent by next day delivery service shall be
deemed to have been given on the date so delivered, and any notice delivered by
registered or certified mail shall be deemed to have been given on the date it
is received. Any party may change the address to which notices hereunder are to
be sent by giving written notice of such change of address in the manner
provided for giving notice.
(xxii) Waiver. No waiver by a Holder of any right hereunder shall be
effective unless it is in writing which specifically refers to the provision
hereof under which such right arises, and no such waiver shall operate or be
construed as a waiver of any subsequent breach, whether of a similar or
dissimilar nature.
(xxiii) Entire Warrant. This Warrant may be amended, supplemented or
modified only by a written instrument executed by the Company and the Holder(s).
While separate executed letters proposing and/or accepting amendment(s) sent to
the Company by the Holder(s) or to the Holder(s) by the Company shall, for the
purposes of this paragraph 23, constitute a valid agreement as to the
relationship then created by and between the Company and the individual Holder
in question, only Nace (as the original Holder) may, by agreement with the
Company, bind all subsequent Holders to one single written instrument which
shall serve to amend the terms and conditions hereof, and to which by their
acceptance of an assignment of any portion of this Warrant, they implicitly
agree to be bound by.
(xxiv) Applicable Law. This Warrant and the legal relations among the
parties hereto shall be governed by and construed in accordance with the
substantive laws of the State of Illinois applicable to contracts made and to be
performed therein without giving effect to the principles of conflict of laws
thereof.
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(xxv) Appraisal Rights. In the event that the Company's board of
directors has not approved and the Company has not executed the next public
offering of the Company's Common Stock prior to the second anniversary of the
issuance of this Warrant, a majority in interest of the Holder(s) may, in their
sole discretion and at any time thereafter, give notice to the Company that they
wish to avail themselves of Appraisal Rights rather than force the Company into
filing a Registration Statement against its will by demanding registration
hereunder.
Should this event occur, the Company and the Holder(s) shall meet together to
appraise the value of the Warrant(s) and shall proceed to do so in the same
fashion and spirit as is provided for in the first paragraph of section 10
hereof in determining a Retirement Fee to be paid the Holders upon termination
of the Warrant(s).
(xxvi) Binding Effect. The provisions contained in this Warrant shall
be binding upon and inure to the benefit of the Company and the Holders and
their respective successors, permitted assigns, heirs and legal representatives.
Any person to whom all or a part of a Holder's rights and obligations hereunder
are assigned shall fulfill such of the assigning Holder's obligations hereunder
as have been assigned, and shall be entitled to all of the rights and benefits
hereunder to the extent that such person has assumed such Holder's obligations.
The rights and powers of each successive Holder hereunder are granted to such
Holder as an owner of Warrants or Warrant Stock as the case may be. Any
subsequent Holder whether becoming such by transfer, assignment, operation of
law or otherwise, shall have the same rights and powers which a Holder owning
the same number of Warrants and/or Warrant Stock has hereunder, and shall be
entitled to exercise such rights and powers until such Holder or subsequent
Holder no longer owns any Warrants or Warrant Stock. Except as provided in this
paragraph 26, this Warrant does not create, and shall not be construed as
creating, any rights enforceable by any person not a Holder.
(xxvii) Validity. If any term, provision, covenant or restriction of
this Warrant is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the Company agrees that such term, provision, covenant or
restriction shall be reformed to the extent possible consistent with such
judicial holding to reflect the intent of the Company and the original Holder as
stated herein and the remainder of the terms, provisions, covenants and
restrictions of this Warrant shall remain in full force and effect and shall in
no way be affected, impaired or invalidated. It is hereby stipulated and
declared to be the intention of the Company that it would have executed this
Warrant including the remaining terms, provisions, covenants and restrictions
without including any of such provision of term which may be hereafter declared
invalid, void or unenforceable.
This Warrant (Serial Number: 0300) is granted and sold on this 1st day of June,
1996.
- 16 -
Cheung Laboratories, Inc.
By:______________________________
Augustine Cheung, President
- 17 -
PURCHASE FORM
Dated: __________
Cheung Laboratories, Inc.
10220-1 Old Columbia Road
Columbia, MD 21046-1705
Attention: Mr. John Mon, General Manager
Attached herewith is Cheung Laboratories, Inc.'s Common Stock Purchase Warrant,
Serial Number: __________, giving the Holder the right to purchase __________
shares.
I/We hereby notify you that I/we are exercising my/our right to purchase
__________ shares and have enclosed herewith my/our check in the amount of
$__________, representing the aggregate exercise price of said shares. If
transfer taxes (federal or state) are applicable to this transaction, I/we
understand that you will be billing me/us for said taxes, which I/we agree will
be promptly remitted to you within ten (10) days of my/our receipt of
notification.
I/We hereby state that the shares being purchased are to be held by me/us for
investment purposes and not with a view to sale, except pursuant to an effective
registration statement or an exemption therefrom.
Please cancel the enclosed Warrant and, if applicable, send me/us a Warrant, in
partial substitution on identical terms, for the remaining shares not being
purchased pursuant to this notification.
Yours very truly,
Holder of Warrant, Serial Number __________
_______________________
_______________________
_______________________
_______________________
- 18 -
Serial Number 0100
Void after 5:00 p.m., Chicago Time, on June 1, 2001 (unless extended as provided
below).
Warrant to Purchase
certain Shares of
Common Stock, dated
June 1, 1996.
CERTIFICATE OF
WARRANT TO PURCHASE COMMON STOCK
OF
CHEUNG LABORATORIES, INC.
This Is To Certify That, FOR CASH AND OTHER VALUE RECEIVED, ANTHONY RIKER, LTD.,
an Illinois corporation ("ARL" or "Riker"), its nominees, or assigns
(hereinafter, the "Holder(s)") are entitled to purchase, subject to the
provisions of this Warrant (its successors, divisions or additions), from Cheung
Laboratories, Inc., a corporation duly organized, in good standing within its
domicile, and whose offices as of the date hereof are at 10220-I Old Columbia
Road, Columbia, MD 21046 (hereinafter, the "Company"), at any time on or after
June 1, 1996, and not later than 5:00 p.m., Chicago Time, on June 1, 2001,
unless extended or renewed as provided in paragraphs 1 and 7 below, restricted
and legended shares of common stock of the Company ("Common Stock") at a
purchase price equal to Forty One Cents ($0.41 U.S.) per share which is the
current bid price as is publicly quoted on NASDAQ Bulletin Board as of the date
hereof (and as further adjusted by subsequent events between the preparation and
execution of this Warrant Certificate).
The number of shares of Common Stock to be received upon the exercise of this
Warrant and the price to be paid for a share of Common Stock may be adjusted
from time to time as hereinafter set forth.
Supplementing, notwithstanding, and in support of the foregoing, the Company and
the original Holder hereof ("Riker"), intend that the number of shares issuable
hereunder shall be 92,318.
The shares of Common Stock deliverable upon such exercise, and as adjusted from
time to time, are hereinafter referred to as "Warrant Stock" and the exercise
price for a share of Common Stock in effect at any time and as adjusted from
time to time is hereinafter sometimes referred to as the "Exercise Price".
- 1 -
The term "Warrant" used above and throughout this Certificate shall mean this
Warrant or successor Warrants issued in exchange for it for any reason pursuant
to the terms and conditions contained herein.
13. Exercise of Warrant. Subject to the provisions of paragraphs 6 and
7 hereof, this Warrant may be exercised in whole or in part at any time or from
time to time on or after June 1, 1996 but not later than 5:00 p.m., Chicago
Time, on June 1, 2001 or if June 1, 2001 is a day on which U.S. banking
institutions are authorized by law to close, then on the next succeeding day
which shall not be such a day, by presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, with a copy of the
Purchase Form attached hereto duly executed and accompanied by payment of the
Exercise Price for the number of shares specified in such form, together with
all federal and state taxes applicable upon such exercise, if any, and the
Company shall promptly issue and deliver stock certificates for the number of
shares purchased to the Holder hereof within two (2) business days in conformity
with industry practice. The Company may unilaterally extend the time within
which this Warrant may be exercised but is not obligated to do so.
If this Warrant should be exercised in part only or all or a portion of it
renewed as provided for in paragraph 7 hereof or otherwise, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant, containing terms and conditions identical to this Warrant except as
provided for herein, evidencing the right of the Holder(s) to purchase the
balance of the shares purchasable hereunder.
Upon receipt of this Warrant, the executed Purchase Form and the Exercise Price
by the Company or, if then applicable, by its stock transfer agent, the
Holder(s) shall be deemed to be the holder(s) of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or that certificates representing such
shares of Common Stock shall not then be actually delivered to the Holder(s),
their agents or designees. The Company shall keep detailed records of the
disposition of this, successor Warrants, and any Warrant issuable hereunder,
each bearing a serial number, and shall make such records available to Holder(s)
or their agents upon request.
14. Reservation of Shares. The Company hereby represents and warrants
that at all times subsequent hereto there shall be reserved for issuance and/or
delivery upon exercise of this Warrant such number of shares of its Common Stock
as shall be required for issuance or delivery upon exercise of this Warrant or
any Warrant issuable hereunder.
15. Fractional Shares. No fractional shares or scrip representing
fractional share shall be issued upon exercise of this Warrant. With respect to
any fraction of a share called for upon any exercises hereof, the Company shall
pay to the Holder(s) an amount in cash equal to such fraction multiplied by the
current market value of such fractional share, determined as follows:
- 2 -
(a) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange, the
current value shall be the last reported sale price of the Common Stock on such
exchange on the last business day prior to the date of exercise of this Warrant
or if no such sale is made on such day on such exchange; or
(b) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current value shall be the mean of the last
reported bid and asked prices reported by the National Association of Securities
Dealers Automated Quotation System (or, if not so quoted on NASDAQ, by the
National Quotation Bureau, Inc.) on the last business day prior to the day of
the exercise of this Warrant; or
(c) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current fair market value shall be an amount, not less than book value or the
last known price paid by a purchaser for said Common Stock, determined in a
reasonable manner as may be prescribed by the Board of Directors of the Company.
16. Exchange, Assignment of Loss of Warrant. Subject to applicable
securities laws and the terms of the legend set forth in paragraph 11(b) hereof,
this Warrant certificate is fully exchangeable and (by definition) assignable,
without expense, at the option of the Holder(s), upon presentation and surrender
hereof to the Company or at the office of its stock transfer agent, if any, for
other Warrant certificates of different denominations entitling the Holder(s)
thereof to purchase in the aggregate the same number of shares of Common Stock
purchasable hereunder.
Any assignment hereof shall be made by surrender of this Warrant to the Company
or at the office of its stock transfer agent, if any, with a written, executed
assignment, instructions and funds sufficient to pay transfer tax (if any);
whereupon the Company shall, without charge, execute and deliver a new Warrant
certificate in the name of the assignee(s) named in such instrument of
assignment and this Warrant certificate shall promptly be canceled. This Warrant
may be divided upon presentation hereof at the office of the Company or at the
office of its stock transfer agent, if any, together with a written notice,
specifying the names and denominations in which new Warrants are to be issued,
and signed by the Holder thereof. The terms "Warrant" and "Warrants" as used
herein include any Warrants issued in substitution for or replacement of this
Warrant, or into which this Warrant may be divided or exchanged.
Upon receipt of the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and, in the case of
loss, theft or destruction, of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenure and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant so lost, stolen, destroyed
or mutilated
- 3 -
shall be at any time enforceable by anyone. Nevertheless, neither the Company or
the Holder(s) anticipate that this Warrant or any successor Warrant shall itself
be registered (rather that the underlying shares shall be registered), the
Company shall not impose unreasonable burdens on the Holder(s) with respect to
indemnification if same becomes necessary.
17. Rights of the Holders. The Holder(s) shall not, by virtue hereof,
be entitled to any rights of a shareholder in the Company, either at law or
equity, and the rights of the Holder(s) are limited to those expressed in the
Warrant and are not enforceable against the Company except to the extent set
forth herein, PROVIDED HOWEVER, that the Company shall, in a timely manner,
provide Holder(s) with a copy of each and every press release, mailing to
shareholders and periodic filing with the U.S. Securities and Exchange
Commission made by the Company, and provided that the Company shall be, at all
times during the tenure of this Warrant or its successors, in compliance with
all its contractual obligations to Riker and its affiliates.
18. Adjustments to Exercise Price and Number of Shares.
(a) In the case of a dividend or other distribution on any
stock of the Company or subdivision or combination of the outstanding shares of
Common Stock, the exercise price and the number of shares issuable hereunder
shall be adjusted as follows: the Exercise Price shall be proportionately
decreased in the case of each such issuance (on the day following the date fixed
for determining shareholders entitled to receive such dividend or distribution)
or proportionately decreased in the case of each such subdivision or
proportionally increased in the case of each such combination (on the date that
such subdivision or combination shall become effective). Notwithstanding
anything in this document to the contrary, it is the intention of the Company
and the Holder hereof that the number of shares of the Warrant Stock granted
hereunder are based upon the assumption that the Company will redeem from Mr.
Gao Yu Wen 20,000,000 shares of Common Stock and retire these shares of Common
Stock from the books of the Company. In the event that less than all 20,000,000
shares of Common Stock are redeemed from Mr. Gao, then the number of shares
granted hereunder shall be adjusted proportionately.
Upon any adjustment of the Exercise Price, the Holder(s) of
this Warrant shall thereafter (until another such adjustment) be entitled to
purchase, at the new Exercise Price, the number of shares, calculated to the
nearest full share, obtained by multiplying the number of shares of Common Stock
initially issuable upon exercise of this Warrant by the Exercise Price in effect
on the date hereof and dividing the product so obtained by the new Exercise
Price.
(b) Anything in this paragraph 6 to the contrary
notwithstanding, the Company shall not be required to give effect to any
adjustment in the Exercise Price unless and until the net effect of one or more
adjustments, determined as above provided, shall have required a change of the
Exercise Price by at least one cent, ($0.01 U.S.) but when the cumulative net
- 4 -
effect of more than one adjustment so determined shall be to change the actual
Exercise Price by at least one cent, such change in the Exercise Price shall
thereupon be given effect.
(c) Anything in this paragraph 6 to the contrary
notwithstanding, if, subsequent to the grant and sale of this Warrant and for a
period ending the day after the date that the Company's next public offering is
completed [a public offering being defined as one in which the Company is in
receipt of funds of not less than Five Million Dollars ($5,000,000.00 U.S.)
raised by an underwriter pursuant to a Registration Statement (the Form of which
shall then be applicable) declared effective by the Securities and Exchange
Commission (the "SEC"), and funds received in full by the Company], covering the
issuance and sale of said shares to the public, the Company shall issue Common
Stock or securities convertible or exercisable into Common Stock by way of sale
for cash or cash equivalent proceeds or by grant of options to retain
management, consultants, employees, or for services or value of any kind, then;
immediately upon consummation of such sale, issuance, or grant, an adjustment
shall be made in the Exercise Price and the number of shares issuable under this
Warrant such that the Holder(s) hereof, after such sale, issuance, or grant,
shall be entitled to purchase shares sufficient so that Holder(s) shall maintain
the right to acquire the same percentage of the Company's outstanding shares (on
a fully diluted basis), for the same total investment upon complete exercise of
this Warrant prior to such issuance or grant, the same percentage of the
Company's Common Stock as the Holder(s) were entitled to purchase prior to such
sale, issuance, or grant (the "Anti-Dilution Feature").
Further, such adjustment to the Exercise Price and number of shares of Common
Stock issuable hereunder shall be determined by assuming that all convertible or
exercisable securities issued during the period in which this Anti-Dilution
Feature is operative (defined above) have been converted or exercised upon
issuance whether or not such securities shall actually have been converted or
exercised as of the date at which the adjustment is made (date of issuance).
Notwithstanding anything else in this paragraph which might be interpreted to
the contrary, should at any time subsequent to the issuance of this Warrant but
during the tenure of this Warrant and any renewals or extensions as are provided
for herein, any person or entity shall be issued an option or warrant
exercisable to purchase stock of the Company or stock of the Company is sold to
such person or entity at a price per share less than the then relevant Exercise
Price as determined as provided herein, an immediate adjustment in the Exercise
Price for this Warrant (and successor Warrants to this Warrant) shall be made.
The effect of this adjustment shall be to make the Exercise Price under this
Warrant equal to the lesser exercise option or sale price referenced above.
However, this adjustment shall not have the effect of increasing the number of
shares purchasable hereunder. Rather it shall reduce the aggregate amount paid,
assuming full exercise of this Warrant, to an amount equal to the number of
shares otherwise then purchasable hereunder multiplied by the newly adjusted
Exercise Price pursuant to this adjustment.
- 5 -
(d) Whenever reference is made in this paragraph 6 to the
issue or sale of shares of Common Stock, the term "Common Stock" shall mean the
Common Stock of the Company of the class authorized as of the date hereof and
any other classes of stock ranking on a parity with or convertible into such
Common Stock providing, as is contemplated, it is the Common Stock of the
Company which is to be offered and sold at the next public offering of
registered Common Shares of the Company. However, as of the date of grant and
sale of this Warrant and subject to the provisions of paragraph 10 hereof,
shares issuable upon exercise hereof shall include only shares of the class
designated as Common Stock of the Company as of the date hereof.
19. Renewal of Exercise Rights. If, while this Warrant or any portion
of it remains in effect, Holder(s) wish to extend their rights to exercise all
or a portion of this Warrant which would otherwise expire and be lost to them,
they may do so by paying to the Company, a sum equal to five percent (5%) of the
then relevant Exercise Price pertaining to that portion of the Warrant which
would otherwise expire (the "Renewal Fee") and the Company shall extend that
portion of the Warrant for a further period of five (5) years from the date of
receipt of the Renewal Fee but, in no case, beyond 5:00 p.m., Chicago Time, on
June 1, 2006, and shall issue a new Warrant, identical in every respect to this
Warrant, except that such new Warrant shall reflect the fact that Holder(s)
shall have an additional five (5) years to exercise their rights to purchase
that portion of the Warrant Stock for which they have paid a Renewal Fee. This
provision extends to this Warrant and all successor Warrants issuable hereunder.
This provision is included partially to permit Holder(s) to coordinate their
exercise of this Warrant and sale of Warrant Stock so as to minimize the Costs
and Expenses and time of the Company's management in complying with the
provisions of this Warrant. Payment of the Renewal Fee will confirm no new
rights upon the Holder(s) except to extend and renew the time period during
which Holder(s) may exercise existing rights under this Warrant.
20. Officer's Certificate. Whenever the Exercise Price shall be
adjusted as required by the provisions of paragraph 6 hereof, the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office, and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided
and setting forth in reasonable detail the facts requiring such adjustment. Each
such officer's certificate shall be made available at all reasonable times for
inspection by the Holder(s) and the Company shall, forthwith after each such
adjustment, deliver a copy of such certificate to the Holder(s) and each of
them. Unless disputed in writing by the Holder hereof within thirty (30) days,
such certificate shall be conclusive as to the correctness of such adjustment.
21. General Notices to Warrant Holders. So long as any portion of
this Warrant (or any successor Warrant) shall be outstanding and unexercised (a)
if the Company shall pay any dividend or make any distribution upon the Common
Stock or (b) if the Company shall offer to the holders of Common Stock for
subscription or purchase by them any shares of stock of any
- 6 -
class or any other rights or (c) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation or engage in voluntary or involuntary dissolution, liquidation or
winding up of the company, then the Company shall cause to be delivered to the
Holder(s), at least thirty (30) days prior to the relevant date, a notice
containing a brief description of the proposed action and stating the date of
which a record is to be taken for the purpose of such dividend, distribution of
rights, or such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any, is to be fixed as of which the holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock of record for
securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
22. Reclassification, Reorganization or Merger. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company (other than a change in par value, or from par
value to no par value, or from no par value to par value) or as a result of an
issuance of Common Stock by way of dividend or other distribution or of a
subdivision or combination, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety
(collectively, a "Triggering Event"), the Company shall use good faith efforts
to cause effective provision to be made so that the Holder(s) shall have the
right thereafter (and shall have said right for the same period of time
remaining on any unexercised portion of this Warrant), without immediately
exercising this Warrant, to purchase the kind and amount of shares of stock and
other securities and property receivable upon such reclassification, capital
reorganization or other change, consolidation, merger, sale or conveyance.
Any such provision shall include provision for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Warrant. However, in the event that the Company, using its good faith efforts,
is unable to negotiate with the acquiring entity the assumption of the Warrants
as provided in the preceding portion of this paragraph, then and in such event
this Warrant shall terminate, to the extent not previously exercised, as of the
record date for such transaction upon and only upon payment of a "Retirement
Fee" to the Holder(s) hereof.
This Retirement Fee shall consist of the same kind of property (including cash,
if any) to be received by the Company's stockholders pursuant to the Triggering
Event (and, at parity with holders of Common Stock, treated in accordance with
all the other terms and conditions,
- 7 -
including timing and manner of payment for the purchase) and the Company herein
agrees that said Retirement Fee may be arrived at by private negotiation between
the Company and the Holder(s) or may be arbitrated in accordance with the
provisions herein provided.
However, the Company now and specifically agrees that, in the event of such
private negotiation, it shall accept an amount to be paid to the Holder(s) (as a
senior obligation of the company in any such transaction) in arbitration or
negotiation which is not less than the lowest sum per Warrant which shall result
from application of any then applicable Warrant Valuation Techniques (such as
the Black-Scholes Model) which may be applied to publicly traded warrants
covering publicly traded common stock, it being intended by the Company and the
Holder(s) that the Retirement Fee should reflect: (a) the difference between the
purchase and exercise price per share plus (b) a warrant premium factor commonly
determinable by the aforementioned models. Said Retirement Fee shall be a senior
obligation of the Company and shall be paid to Holder(s) from first proceeds of
any sale or merger in cash unless otherwise negotiated between the Company and
Riker (the original Holder).
All subsequent Holders shall agree, by acceptance of assignment of any portion
of the Warrant covered by this certificate, to be bound by this provision. All
costs and expenses directly attributable to the determination of the Retirement
Fee (including but not limited to the costs of outside appraisal(s)) shall be at
the expense of the Company.
The foregoing provisions of this section 10 shall similarly apply to successive
reclassification, consolidations, mergers, sales, or conveyances. In the event
that in any such capital reorganization or reclassification, consolidation,
merger, sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for or of a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of paragraphs 3, 6, and 9
hereof, with the amount of the consideration received upon the issue thereof
being determined by the Board of Directors of the Company in consultation with
the Company's auditors, such determination to be final and binding on the
Holder(s).
23. Transfer to Comply with the Securities Act of 1933.
(a) This Warrant or the Warrant Stock or any other
security issued or issuable upon exercise of this Warrant may not be sold,
transferred or otherwise disposed of except to a person who, in the opinion of
counsel reasonably satisfactory to the Company, is a person to whom this Warrant
or such Warrant Stock may legally be transferred pursuant to paragraph 4 hereof
without registration and without the delivery of a current prospectus under the
Securities Act with respect thereto; and then only against receipt by the
Company of an agreement from such person to comply with the provisions of this
paragraph 11 with respect to any resale or other disposition of such securities.
- 8 -
(b) The Company may cause the following legend to
be set forth on each certificate representing Warrant Stock or any other
security issued or issuable upon exercise of this Warrant not theretofore
distributed to the public pursuant to paragraphs 12, 13, or 14 hereof, unless
counsel for the Company is of the opinion as to any such certificate that such
legend is unnecessary.
"The securities represented by this certificate may
not be offered for sale, sold or otherwise transferred except pursuant to an
effective registration statement under the Securities Act of 1933 (the "Act"),
or pursuant to an exemption from registration under the Act."
24. Demand Registration. If at any time, after the next public offering
of registered Common Shares of the Company (as previously covered and defined
herein) the Holder(s), or any of them, shall decide to sell or otherwise dispose
of Warrant Stock then owned or to be owned upon intended exercise of this
Warrant by such Holder(s), such Holder(s) may give written notice to the Company
of the proposed disposition (but, if other than Riker, must simultaneously
notice Riker), specifying the number of shares of Warrant Stock to be sold or
disposed of and requesting that the Company prepare and file a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
covering such Warrant Stock.
The Company shall within 10 days thereafter give written notice to the other
Holders of Warrants or Warrant Stock of such request and each of the other
Holders shall have the option for a period of 30 days after receipt by it (them)
of notice from the Company to include its (their) Warrant Stock in such
registration statement. The Company shall use its best efforts to cause an
appropriate registration statement (the "Registration Statement") covering such
Warrant Stock to be filed with the Securities and Exchange Commission (the
"Commission") and to become effective as soon as reasonably practicable and to
remain effective until the completion of the distribution of the Warrant Stock
to be offered or sold; provided, however, that not more than once in any twelve
month period the Company shall have the right to postpone for a period of up to
60 days any demand made pursuant to this Warrant if the underwriters for such
offering advise the Company in writing that market conditions make such a
postponement advisable to the Company.
The Holder(s) whose Warrant Stock is (are) included in a Registration Statement
is (are) hereinafter referred to as the "Selling Shareholder(s)".
Each notice delivered by a Selling Shareholder(s) to the Company pursuant to
this paragraph 12 shall specify the Warrant Stock intended to be offered and
sold by such Selling Shareholder(s), express such Selling Shareholder(s) present
intent to offer such Common Shares for distribution, and contain the undertaking
of such Selling Shareholder(s) to provide all information and materials and to
take all action as may be required in order to permit the
- 9 -
Company to comply with all applicable requirements of the Securities Act, and
any rules and regulations promulgated thereunder, and to obtain acceleration of
the effective date of such Registration Statement.
The Company shall not be obligated to file more than three Registration
Statements pursuant to the foregoing provisions of this paragraph 12. The
Company shall bear all of the Costs and Expenses (as hereinafter defined in
paragraph 20 hereof) of the first such registration. The Selling Shareholder(s)
shall bear the costs and expenses of all further registrations pursuant to this
paragraph 12. A demand for registration under this paragraph 12 will not count
as such until the Registration Statement has become effective.
25. Shelf Registration By Original Holder. At any time and from time to
time during the term of this Warrant or its successors (including renewals and
extensions as provided for herein) Anthony Riker, Ltd. and only Anthony Riker,
Ltd. (as the original Holder hereof), may demand (and actually expects) that the
Company will file a Registration Statement with the Commission for the
registration of underlying shares issuable upon exercise of this Warrant or any
part thereof, whether or not said Warrant has, in the interim been assigned or
re-assigned to other parties. In this event, the Company shall pay all of the
Costs and Expenses of said Registration for each such demand.
Once filed, the Company shall be obligated to continue this "shelf registration"
for the maximum time allowable under the then relevant regulations, at its sole
expense.
26. Procedure for Demand Registration. In connection with the
filing of a Registration Statement pursuant to paragraph 12 hereof, and in
supplementation and not in limitation of the provisions thereof, the Company
shall:
(a) Notify the Selling Shareholder(s) as to the filing of the
Registration Statement and of all amendments or supplements thereto filed thirty
(30) days prior to the effective date of said Registration Statement;
(b) Notify the Selling Shareholder(s), promptly after the
Company shall receive notice thereof, of the time when said Registration
Statement became effective or when any amendment or supplement to any prospectus
forming a part of said Registration Statement has been filed;
(c) Notify the Selling Shareholder(s) promptly of any
request by the Commission for the amending or supplementing of such Registration
Statement or prospectus or for additional information;
(d) Prepare and promptly file with the Commission, and
promptly notify the Selling Shareholder(s) of the filing of, and amendments or
supplements to such Registration
- 10 -
Statement or prospectus as may be necessary to correct any statements or
omissions if, at any time when a prospectus relating to the Warrant Stock is
required to be delivered under the Securities Act, any event with respect to the
Company shall have occurred as a result of which any such prospectus or any
other prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading; and, in prepare and file with the Commission,
promptly upon the Selling Shareholder(s)' written request, any amendments or
supplements to such Registration Statement or prospectus which may be reasonably
necessary or advisable in connection with the distribution of the Warrant Stock;
(e) Prepare promptly upon request of the Selling
Shareholder(s) or any underwriters for the Selling Shareholder(s) such amendment
or amendments to such Registration Statement and such prospectus or prospectuses
as may be reasonably necessary to permit compliance with the requirements of
Section 10 (a) (3) of the Securities Act;
(f) Advise the Selling Shareholders promptly after the Company
shall receive notice or obtain knowledge of the issuance of any stop order by
the Commission suspending the effectiveness of any such Registration Statement
or amendment thereto or of the initiation or threatening of any proceeding for
that purpose, and promptly use its best efforts to prevent the issuance of any
stop order or obtain its withdrawal promptly if such stop order would be issued;
(g) Use its best efforts to qualify as soon as reasonably
practicable the Warrant Stock for sale under the securities or blue-sky laws of
such states and jurisdictions within the United States as shall be reasonably
requested by the Selling Shareholder(s); provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business, to become subject to taxation or to file a consent to service of
process generally in any of the aforesaid states or jurisdiction;
(h) Furnish the Selling Shareholder(s), as soon as available,
copies of any Registration Statement and each preliminary or final prospectus,
or supplement or amendment required to be prepared pursuant thereto, all in such
quantities as the Selling Shareholder(s) may from time to time reasonably
request, and;
(i) If requested by the Selling Shareholder(s), enter into an
agreement with the underwriters of the Warrant Stock being registered containing
customary provisions and reflecting the foregoing.
27. Incidental Registration. Other than as covering in paragraph 13
hereof, if at any time the Company subsequent to the next public offering of
registered Common Shares of the Company, shall propose the filing of a
Registration Statement on an appropriate form under the Securities Act for the
registration of any securities of the Company, other than a registration
statement on Form S-4 or S-8 or any equivalent form of registration statement
then in effect,
- 11 -
then the Company shall give the Holder(s) notice of such proposed registration
and shall include in any Registration Statement relating to such securities all
or a portion of the Warrant Stock then owned or to be owned by such Holder(s),
which such Holder(s) shall request (such Holder(s) to be considered "Selling
Shareholder(s)"), by notice given by such Selling Shareholder(s) to the Company
within 15 business days after the giving of such notice by the Company, within
15 business days after the giving of such notice by the Company, to be so
included. In the event of the inclusion of Warrant Stock pursuant to this
paragraph 15, the Company shall bear the Costs and Expenses of such
registration; provided, however that the Selling Shareholder(s) shall pay the
fees and disbursements of their own counsel and, pro-rata based upon the number
of shares of Warrant Stock included therein as these relate to the total number
of Common Shares to be offered or sold, the Securities Act registration fees and
underwriters discounts and compensation attributable to the inclusion of such
Warrant Stock; and, provided further, however, that amounts to which any person
or entity shall become entitled pursuant to this sentence shall not include
amounts which may become payable pursuant to paragraphs 16 or 17 hereof. Nothing
in this paragraph 15 shall require the registration of Warrant Stock in a
Registration Statement relating solely to (a) securities to be issued by the
Company in connection with the acquisition of the stock or the assets of another
corporation, or the merger or consolidation of any other corporation by or with
the Company or any of its subsidiaries, or an exchange offer with any
corporation, (b) securities to be offered to the then existing security holders
of the Company, or (c) securities to be offered to employees of the Company. In
the event the distribution of securities of the Company covered by a
Registration Statement referred to in this paragraph 15 is to be underwritten,
then the Company's obligation to include Warrant Stock in such a Registration
Statement shall be subject, at the option of the Company, to the following
further conditions:
(a) The distribution for the account of the Selling
Shareholders shall be underwritten by the same underwriters who are underwriting
the distribution of the securities for the account of the Company and/or any
other persons whose securities are covered by such Registration Statement and
the Selling Shareholder(s) shall enter into an agreement with such underwriters
containing customary provisions.
(b) If the Selling Shareholders are included in the
Registration Statement and if the underwriting agreement entered into with the
aforesaid underwriters contains restrictions upon the sale of securities of the
Company, other than the securities which are to be included in the proposed
distribution, for a period not exceeding 90 days from the effective date of the
Registration Statement, then such restrictions shall be binding upon the Selling
Shareholder(s) with respect to any Warrant Stock not covered by the Registration
Statement and, if requested by the underwriter, the Selling Shareholder(s) shall
enter into a written agreement to that effect.
(c) If the underwriters shall state in writing that they are
unwilling to include any or all of the Selling Shareholder(s) Warrant Stock in
the proposed underwriting because such inclusion would materially interfere with
the orderly sale and distribution of the securities being
- 12 -
offered by the Company, then the number of the Selling Shareholder(s)' shares of
Warrant Stock to be included shall be reduced pro rata on the basis of the
number of shares of Warrant Stock originally requested to be included by such
Selling Shareholder(s), or there shall be no inclusion of the shares of the
Selling Shareholder(s) in the Registration Statement not proposed distribution,
in accordance with such statement by the underwriters.
However, if in such an event, the Holder(s) hereof shall not
be able to include at least fifty percent (50%) of the Warrant Stock originally
requested to be included, then the Company shall agree to pay all of the Costs
and Expenses of a Shelf Registration to be filed at a later date.
28. Indemnification by the Company. The Company shall indemnify and
hold harmless each Selling Shareholder, any underwriter (as defined in the
Securities Act) for the Selling Shareholder, and each person, if any, who
controls the Selling Shareholder or such underwriter within the meaning of the
Securities Act (but, in the case of an underwriter or a controlling person, only
if such under writer or controlling person indemnifies the persons mentioned in
paragraph 17(b) hereof in the manner set forth therein) against any losses,
claims, damages or liabilities, joint or several, to which the Selling
Shareholder or any such underwriter or controlling person becomes subject, under
the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) are caused by any untrue statement
or alleged untrue statement of any material fact contained in any preliminary
prospectus (if used prior to the effective date of the Registration Statement),
or contained, on the effective date thereof, in any Registration Statement under
which the Selling Shareholder(s)' shares of Warrant Stock were registered under
the Securities Act, the prospectus contained therein, or any amendment or
supplement thereto, arising out of or based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; the Company shall
reimburse the Selling Shareholder, or any such underwriter or controlling
person, in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable to any such person in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with information furnished in writing to the
Company by such person expressly for inclusion in any of the foregoing
documents.
29. Indemnification by Selling Shareholders. Each individual Selling
Shareholder shall:
(a) Furnish to the Company in writing all information
concerning it and it's holdings of securities of the Company as shall be
required in connection with the preparation and filing of any Registration
Statement covering any Shares of Warrant Stock.
- 13 -
(b) Indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed a Registration Statement, each
person, if any, who controls the Company within the meaning of the Securities
Act and any underwriter (as defined in the Securities Act) for the Company,
against any losses, claims, damages or liabilities to which any such director,
officer, controlling person or underwriter may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect therefor) are caused by any untrue statement
of any material fact contained in any preliminary prospectus (if used prior to
the effective date of the Registration Statement) or contained, on the effective
date thereof, in any Registration Statement under which the Selling
Shareholder's securities were registered under the Securities Act, the
prospectus contained therein, or any amendment or supplement thereto, or arising
out of or based upon the omission to state therein a material fact required to
be stated therein or necessary to make the statement therein not misleading; in
each case to the extent, but only to the extent, that such untrue statement or
omission was made in reliance upon and in conformity with information furnished
to the Company in writing by the Selling Shareholder expressly for inclusion in
any of the foregoing documents, and the Selling Shareholder shall reimburse the
Company and any such director, officer, controlling person or underwriter for
any legal or other expenses reasonably incurred by the Company or any such
director, officer, controlling person or underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action.
30. Notification by Selling Shareholders. The Selling Shareholder(s)
and each other person indemnified pursuant to paragraph 16 hereof shall, in the
event it receives notice of the commencement of any action against it which is
based upon an alleged act or omission which, if proven, would result in the
Company having to indemnify it pursuant to paragraph 16 hereof, promptly notify
the Company, in writing, of the commencement of such action and permit the
Company, if the Company so notifies the Selling Shareholder(s) within 10 days
after receipt by the Company of notice of the commencement of the action, to
participate in and to assume the defense of such action with counsel reasonably
satisfactory to the Selling Shareholder(s) or such other indemnified person, as
the case may be. The omission to notify the Company promptly of the commencement
of any such action shall not relieve the Company of any liability to indemnify
the Selling Shareholder(s) or such other indemnified person, as the case may be,
under paragraph 16 hereof, except to the extent that the Company shall suffer
any loss by reason of such failure to give notice which it may have pursuant to
the rights conveyed to the Holders) in this Warrant.
31. Notification by the Company to Selling Shareholders. The Company
agrees that, in the event it receives notice of the commencement of any action
against it which is based upon an alleged act or omission which, if proven,
would result in a Selling Shareholder having to indemnify the Company pursuant
to paragraph 17(b) hereof, the Company will promptly notify the Selling
Shareholder in writing of the commencement of such action and permit the Selling
Shareholder, if the Selling Shareholder so notifies the Company within 10 days
after receipt by the Selling Shareholder of notice of the commencement of the
action, to participate
- 14 -
in and assume the defense of such action with counsel reasonably satisfactory to
the Company. The omission to notify the Selling Shareholder promptly of the
commencement of any such action shall not relieve the Selling Shareholder of
liability to indemnify the Company under paragraph 17(b) hereof, except to the
extent that the Selling Shareholder shall suffer any loss by reason of such
failure to give notice, and shall not relieve the Selling Shareholder of any
other liabilities which it may have under this or any other agreement then in
effect between the Company and the Selling Shareholder.
32. Costs and Expenses. As used in this Warrant, "Costs and Expenses"
shall include all of the costs and expenses relating to the respective
Registration Statement(s) involved, including but not limited to, registration
fees, filing and qualification fees, blue-sky expenses, printing and mailing
expenses, fees and expenses of Company's counsel and, if/when appropriate, fees
and expenses of counsel designated by the Selling Shareholder(s) (provided,
however, that no more than one such counsel for the Selling Shareholder(s) shall
be designated on any occasion).
33. Addresses. All notices, certificates, waiver and other
communications required or permitted to be given hereunder to any of the parties
by any other party shall be in writing and shall be delivered personally or sent
by next day delivery service or registered or certified mail, postage prepaid,
as follows:
(a) If to the Company, addressed to:
Cheung Laboratories, Inc.
10220-I Old Columbia Road
Columbia, MD 21046-1705
Attention: Mr. John Mon, General Manager
(b) If to a Holder, addressed to the address of
each such Holder as shall, from time to
time, appear on the records of the Company
or those of the Company's transfer agent as
may be the case.
Any notice delivered personally or sent by next day delivery service shall be
deemed to have been given on the date so delivered, and any notice delivered by
registered or certified mail shall be deemed to have been given on the date it
is received. Any party may change the address to which notices hereunder are to
be sent by giving written notice of such change of address in the manner
provided for giving notice.
34. Waiver. No waiver by a Holder of any right hereunder shall be
effective unless it is in writing which specifically refers to the provision
hereof under which such right arises, and no such waiver shall operate or be
construed as a waiver of any subsequent breach, whether of a similar or
dissimilar nature.
- 15 -
35. Entire Warrant. This Warrant may be amended, supplemented or
modified only by a written instrument executed by the Company and the Holder(s).
While separate executed letters proposing and/or accepting amendment(s) sent to
the Company by the Holder(s) or to the Holder(s) by the Company shall, for the
purposes of this paragraph 23, constitute a valid agreement as to the
relationship then created by and between the Company and the individual Holder
in question, only Anthony Riker, Ltd. (as the original Holder) may, by agreement
with the Company, bind all subsequent Holders to one single written instrument
which shall serve to amend the terms and conditions hereof, and to which by
their acceptance of an assignment of any portion of this Warrant, they
implicitly agree to be bound by.
36. Applicable Law. This Warrant and the legal relations among the
parties hereto shall be governed by and construed in accordance with the
substantive laws of the State of Illinois applicable to contracts made and to be
performed therein without giving effect to the principles of conflict of laws
thereof.
37. Appraisal Rights. In the event that the Company's board of
directors has not approved and the Company has not executed the next public
offering of the Company's Common Stock prior to the second anniversary of the
issuance of this Warrant, a majority in interest of the Holder(s) may, in their
sole discretion and at any time thereafter, give notice to the Company that they
wish to avail themselves of Appraisal Rights rather than force the Company into
filing a Registration Statement against its will by demanding registration
hereunder.
Should this event occur, the Company and the Holder(s) shall meet together to
appraise the value of the Warrant(s) and shall proceed to do so in the same
fashion and spirit as is provided for in the first paragraph of section 10
hereof in determining a Retirement Fee to be paid the Holders upon termination
of the Warrant(s).
38. Binding Effect. The provisions contained in this Warrant shall be
binding upon and inure to the benefit of the Company and the Holders and their
respective successors, permitted assigns, heirs and legal representatives. Any
person to whom all or a part of a Holder's rights and obligations hereunder are
assigned shall fulfill such of the assigning Holder's obligations hereunder as
have been assigned, and shall be entitled to all of the rights and benefits
hereunder to the extent that such person has assumed such Holder's obligations.
The rights and powers of each successive Holder hereunder are granted to such
Holder as an owner of Warrants or Warrant Stock as the case may be. Any
subsequent Holder whether becoming such by transfer, assignment, operation of
law or otherwise, shall have the same rights and powers which a Holder owning
the same number of Warrants and/or Warrant Stock has hereunder, and shall be
entitled to exercise such rights and powers until such Holder or subsequent
Holder no longer owns any Warrants or Warrant Stock. Except as provided in this
paragraph 26, this Warrant does not create, and shall not be construed as
creating, any rights enforceable by any person not a Holder.
- 16 -
39. Validity. If any term, provision, covenant or restriction of this
Warrant is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the Company agrees that such term, provision, covenant or
restriction shall be reformed to the extent possible consistent with such
judicial holding to reflect the intent of the Company and the original Holder as
stated herein and the remainder of the terms, provisions, covenants and
restrictions of this Warrant shall remain in full force and effect and shall in
no way be affected, impaired or invalidated. It is hereby stipulated and
declared to be the intention of the Company that it would have executed this
Warrant including the remaining terms, provisions, covenants and restrictions
without including any of such provision of term which may be hereafter declared
invalid, void or unenforceable. This Warrant (Serial Number: 0100) is granted
and sold on this 1st day of June, 1996.
Cheung Laboratories, Inc.
By:______________________________
Augustine Cheung, President
PURCHASE FORM
Dated: __________
Cheung Laboratories, Inc.
10220-1 Old Columbia Road
Columbia, MD 21046-1705
Attention: Mr. John Mon, General Manager
Attached herewith is Cheung Laboratories, Inc.'s Common Stock Purchase Warrant,
Serial Number: __________, giving the Holder the right to purchase __________
shares.
I/We hereby notify you that I/we are exercising my/our right to purchase
__________ shares and have enclosed herewith my/our check in the amount of
$__________, representing the aggregate exercise price of said shares. If
transfer taxes (federal or state) are applicable to this transaction, I/we
understand that you will be billing me/us for said taxes, which I/we agree will
be promptly remitted to you within ten (10) days of my/our receipt of
notification.
I/We hereby state that the shares being purchased are to be held by me/us for
investment purposes and not with a view to sale, except pursuant to an effective
registration statement or an exemption therefrom.
- 17 -
Please cancel the enclosed Warrant and, if applicable, send me/us a Warrant, in
partial substitution on identical terms, for the remaining shares not being
purchased pursuant to this notification.
Yours very truly,
Holder of Warrant, Serial Number __________
_______________________
_______________________
_______________________
_______________________
- 18 -
Microfocus Medical Technologies Canada Inc., formed pursuant to the Ontario
Business Corporations Act June 16, 1993.
Cheung Laboratories International, Ltd., was formed under the laws of Hong Kong
in 1985.
We hereby consent to the inclusion in Form 10-K for fiscal year ended September
30, 1996 of our report dated November 1, 1996 relating to the financial
statements of Cheung Laboratories, Inc.
STEGMAN & COMPANY
December 9, 1996
Towson, Maryland
5
YEAR
SEP-30-1996
OCT-30-1996
SEP-30-1996
246931
0
175105
20770
270952
705957
238769
205766
9321600
1352726
0
0
0
412063
6343811
9321600
74006
74006
64406
64406
1432382
0
85506
(19334711)
0
(1933471)
0
0
0
(1933471)
(0.049)
(0.049)
